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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________
Commission file number 000-23667
----------------------------
HOPFED BANCORP, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 61-1322555
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2700 Fort Campbell Boulevard, Hopkinsville, KY 42240
- ----------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (270) 885-1171.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The registrant's voting stock is traded on the Nasdaq Stock Market. The
aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the price ($11.25 per share) at which the
stock was sold on March 31, 2000, was approximately $41,614,819. For purposes of
this calculation, the term "affiliate" refers to all executive officers and
directors of the registrant and all stockholders beneficially owning more than
10% of the registrant's Common Stock.
As of the close of business on March 31, 2000, 3,993,592 shares of the
registrant's Common Stock were outstanding.
Documents Incorporated By Reference
Part II:
Annual Report to Stockholders for the year ended December 31, 1999.
Part III:
Portions of the definitive proxy statement for the 2000 Annual Meeting of
Stockholders.
PART I
ITEM 1. BUSINESS
In February 1998, HopFed Bancorp, Inc. ( the "Company") issued and sold
4,033,625 shares of common stock, par value $.01 per share (the "Common Stock"),
in connection with the conversion of Hopkinsville Federal Savings Bank (the
"Bank") from a federal mutual savings bank to a federal stock savings bank and
the issuance of the Bank's capital stock to HopFed Bancorp, Inc. (the
"Company"). The conversion of the Bank, the acquisition of all of the
outstanding capital stock of the Bank by the Company and the issuance and sale
of the Common Stock are collectively referred to herein as the "Conversion."
HOPFED BANCORP, INC.
HopFed Bancorp, Inc. was incorporated under the laws of the State of
Delaware in May 1997 at the direction of the Board of Directors of the Bank for
the purpose of serving as a savings and loan holding company of the Bank upon
the acquisition of all of the capital stock issued by the Bank in the
Conversion. The Company's assets primarily consist of the outstanding capital
stock of the Bank and a portion of the net proceeds of the Conversion. The
Company's principal business is overseeing the business of the Bank and
investing the portion of the net Conversion proceeds retained by it. The Company
has registered with the Office of Thrift Supervision ("OTS") as a savings and
loan holding company. See "Regulation - Regulation of the Company."
As a holding company, the Company has greater flexibility than the Bank to
diversify its business activities through existing or newly formed subsidiaries
or through acquisition or merger with other financial institutions, although the
Company currently does not have any plans, agreements, arrangements or
understandings with respect to any such acquisitions or mergers. The Company is
classified as a unitary savings and loan holding company and is subject to
regulation by the OTS.
The Company's executive offices are located at 2700 Fort Campbell
Boulevard, Hopkinsville, Kentucky 42240, and its main telephone number is (270)
885-1171.
HOPKINSVILLE FEDERAL SAVINGS BANK
The Bank is a federally chartered stock savings bank headquartered in
Hopkinsville, Kentucky, with branch offices in Hopkinsville, Murray, Cadiz and
Elkton, Kentucky. The Bank was incorporated by the Commonwealth of Kentucky in
1879 under the name Hopkinsville Building and Loan Association. In 1940, the
Bank converted to a federal mutual savings association and received federal
insurance of its deposit accounts. In 1983, the Bank became a federal mutual
savings bank and adopted its current corporate title.
The business of the Bank primarily consists of attracting deposits from the
general public and investing such deposits in loans secured by single family
residential real estate and investment securities, including U.S. Government and
agency securities and mortgage-backed securities. The Bank also originates
single-family residential/construction loans and multi-family and commercial
real estate loans, as well as loans secured by deposits and other consumer
loans. The Bank emphasizes the origination of residential real estate loans with
adjustable interest rates and other assets which are responsive to changes in
interest rates and allow the Bank to more closely match the interest rate
maturation of its assets and liabilities.
The primary market area of the Bank consists of the adjacent counties of
Calloway, Christian, Todd and Trigg located in southwestern Kentucky.
LENDING ACTIVITIES
General. The total gross loan portfolio totaled $115.7 million at December
31, 1999, representing 55.7% of total assets at that date. Substantially all
loans are originated in the Bank's market area. At December 31, 1999, $88.2
million, or 76.3% of the loan portfolio, consisted of one-to-four family,
residential mortgage loans. Other loans secured by real estate include
non-residential real estate loans, which amounted to $12.4 million, or 10.7% of
the loan portfolio at December 31, 1999, and multi-family residential loans,
which were $2.2 million, or 1.9% of the loan portfolio at December 31, 1999. At
December 31, 1999, construction loans were $5.7 million, or 4.9% of the loan
portfolio, and consumer loans totaled $7.2 million, or 6.2% of the loan
portfolio.
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of the loan portfolio by type of loan at the dates indicated. At
December 31, 1999, there were no concentrations of loans exceeding 10% of total
loans other than as disclosed below.
At December 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loan:
- ------------
Real estate loans:
One-to-four family
residential........ $ 88,248 76.3% $ 88,954 80.6% $ 83,229 78.7% $77,318 79.6% $70,417 81.5%
Multi-family
residential........ 2,165 1.9% 1,539 1.4% 2,359 2.2% 1,466 1.5% 492 0.6%
Construction......... 5,706 4.9% 4,626 4.2% 5,166 4.9% 5,389 5.6% 4,062 4.7%
Non-residential (1).. 12,398 10.7% 8,260 7.5% 7,593 7.2% 5,467 5.6% 5,107 5.9%
--------- ------ -------- ------ -------- ------ ------- ------ ------- ------
Total real estate
loans........... 108,517 93.8% 103,379 93.7% 98,347 93.0% 89,640 92.3% 80,078 92.7%
========= ====== ======== ======= ======== ====== ======= ======= ====== =======
Consumer loans:
Secured by deposits.. 2,525 2.2% 2,280 2.1% 3,081 2.9% 3,484 3.6% 3,324 3.8%
Other consumer loans. 4,670 4.0% 4,586 4.2% 4,298 4.1% 4,004 4.1% 3,016 3.5%
--------- ------ -------- ------ -------- ------ ------- ------ ------- ------
Total consumer loans 7,195 6.2% 6,866 6.3% 7,379 7.0% 7,488 7.7% 6,340 7.3%
--------- ------ -------- ------ -------- ------ ------- ------ ------- ------
115,712 100.0% 110,245 100.0% 105,726 100.0% 97,128 100.0% 86,418 100.0%
====== ====== ====== ====== ======
Less:.Loans in process. 1,902 1,180 2,019 1,415 1,541
Allowance for loan
losses........... 278 258 237 217(2) 122
--------- -------- -------- ------- -------
Total................ $ 113,532 $108,807 $103,470 $95,496 $84,755
========= ======== ======== ======= =======
- ---------------------------
(1) Consists of loans secured by first liens on residential lots and loans
secured by first mortgages on commercial real property.
(2) Increase in allowance for loan loss reflects $100,000 provision in 1996
based upon management's assessment of risks associated with increased loan
growth and increased emphasis on consumer lending. See "--Nonperforming
Loans and Other Assets."
Loan Maturity Schedule. The following table sets forth certain information
at December 31, 1999 regarding the dollar amount of loans maturing in the
portfolio based on their contractual maturity, dates. Demand loans, loans having
no stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less.
Due after Due after 5 Due after
3 through 5 through 10 10 through Due after
Due during the year ending years after years after 15 years 15 years
December 31, December 31, December 31, after after
------------------------------- ------------ ------------ December 31, December 31,
------------ ------------
2000 2001 2002 1999 1999 1999 1999 Total
---- ---- ---- ---- ---- ---- ---- -----
(In thousands)
One-to-four family
residential............... $2,705 $1,215 $1,201 $2,124 $ 9,665 $22,495 $48,398 $ 87,803
Multi-family residential.. -- -- -- -- -- 790 1,375 2,165
Construction.............. 4,077 -- -- -- -- -- -- 4,077
Non-residential........... 614 55 -- 649 888 4,250 5,836 12,292
Consumer.................. 2,399 526 1,214 2,615 441 -- -- 7,195
------ ------ ------ ------ -------- ------- ------- ---------
Total.................. $9,795 $1,796 $2,415 $5,388 $ 10,994 $27,535 $55,609 $ 113,532
====== ====== ====== ====== ======== ======= ======= =========
2
The following table sets forth at December 31, 1999, the dollar amount of
all loans due one year or more after December 31, 1999 which had predetermined
interest rates and have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rate
----------------- ----------------
(In thousands)
One-to-four family residential..... $15,579 $69,519
Multi-family residential........... -- 2,165
Construction....................... -- --
Non-residential.................... -- 11,678
Consumer........................... 4,796 --
------- -------
Total........................... $20,375 $83,362
======= =======
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the lender the right to declare a loan immediately due
and payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
Originations, Purchases and Sales of Loans. The Bank generally has
authority to originate and purchase loans secured by real estate located
throughout the United States. Consistent with its emphasis on being a
community-oriented financial institution, the Bank conducts substantially all of
its lending activities in its market area.
The following table sets forth certain information with respect to loan
origination activity for the periods indicated. The Bank has not purchased or
sold any loans in the periods presented.
Year Ended December 31,
--------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Loan originations:
One-to-four family residential $ 16,474 $ 24,406 $ 14,578
Multi-family residential...... 686 204 1,115
Construction.................. 2,470 1,749 6,302
Non-residential............... 4,970 1,056 372
Consumer...................... 5,922 5,324 7,472
--------- --------- --------
Total loans originated...... 30,522 32,739 29,839
--------- --------- --------
Loan principal reductions:
Loan principal repayments..... 25,797 27,403 21,865
--------- --------- --------
Net increase in loan portfolio... $ 4,725 $ 5,336 $ 7,974
========= ========= ========
Loan originations are derived from a number of sources, including existing
customers, referrals by real estate agents, depositors and borrowers and
advertising, as well as walk-in customers. Solicitation programs consist of
advertisements in local media, in addition to occasional participation in
various community organizations and events. Real estate loans are originated by
the Bank's loan personnel. All of the loan personnel are salaried, and are not
compensated on a commission basis for loans originated. Loan applications are
accepted at any of the Bank's branches.
Loan Underwriting Policies. Lending activities are subject to written,
non-discriminatory underwriting standards and to loan origination procedures
prescribed by the Board of Directors and its management. Detailed loan
applications are obtained to determine the ability of borrowers to repay, and
the more significant items on these applications are verified through the use of
credit reports, financial statements and confirmations. All loans must be
reviewed by the loan committee, which is comprised of lending officers and
branch managers. Exceptions to the
3
underwriting standards must be approved by the loan committee. In addition, the
full Board of Directors reviews all loans on a monthly basis.
Generally, upon receipt of a loan application from a prospective borrower,
a credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income and credit standing. If a
proposed loan is to be secured by a mortgage on real estate, an appraisal of the
real estate is undertaken by an appraiser approved by the Board of Directors and
licensed or certified (as necessary) by the Commonwealth of Kentucky. In the
case of one-to-four family residential mortgage loans, except when the Bank
becomes aware of a particular risk of environmental contamination, the Bank
generally does not obtain a formal environmental report on the real estate at
the time a loan is made. A formal environmental report may be required in
connection with nonresidential real estate loans.
It is the Bank's policy to record a lien on the real estate securing a loan
and to obtain a title opinion from Kentucky counsel which provides that the
property is free of prior encumbrances and other possible title defects.
Borrowers must also obtain hazard insurance policies prior to closing and, when
the property is in a flood hazard area, pay flood insurance policy premiums.
Applications for real estate loans are underwritten and closed in
accordance with the Bank's own lending guidelines, which generally do not
conform to Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
Mortgage Association ("FNMA") guidelines. Although such loans may not be readily
saleable in the secondary market, management believes that, if necessary, such
loans may be sold to private investors.
The Bank is permitted to lend up to 100% of the appraised value of the real
property securing a mortgage loan. The Bank is required by federal regulations
to obtain private mortgage insurance on that portion of the principal amount of
any loan that is greater than 90% of the appraised value of the property. Under
its lending policies, the Bank will originate a one-to-four family residential
mortgage loan for owner-occupied property with a loan-to-value ratio of up to
95%. For residential properties that are not owner-occupied, the Bank generally
does not lend more than 80% of the appraised value. For all residential mortgage
loans, the Bank may increase its lending level on a case-by-case basis, provided
that the excess amount is insured with private mortgage insurance.
Under applicable law, with certain limited exceptions, loans and extensions
of credit outstanding by a savings institution to a person at one time shall not
exceed 15% of the institution's unimpaired capital and surplus. Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of unimpaired capital and surplus. Applicable law additionally
authorizes savings institutions to make loans to one borrower, for any purpose,
in an amount not to exceed the lesser of $30.0 million or 30% of unimpaired
capital and surplus to develop residential housing, provided certain
requirements are satisfied. Under these limits, the Bank's loans to one borrower
were limited to $6.6 million at December 31, 1999. At that date, the Bank had no
lending relationships in excess of the loans-to-one-borrower limit. At December
31,1999, the Bank's largest lending relationship was $2.6 million. The loans are
to a local real estate developer and his business associate and are primarily
for the development of apartments, the purchase of lots for residential
construction, and construction of one-to-four residential housing. All loans
within this relationship were current and performing in accordance with their
terms at December 31, 1999.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.
One-to-four Family Residential Lending. The Bank historically has been and
continues to be an originator of one-to-four family residential real estate
loans in its market area. At December 31, 1999, one-to-four family residential
mortgage loans, totaled approximately $88.2 million, or 76.3% of the Bank's loan
portfolio. All loans originated by the Bank are maintained in its portfolio
rather than sold in the secondary market.
4
The Bank primarily originates residential mortgage loans with adjustable
rates. As of December 31, 1999, 81.7% of one-to-four family mortgage loans in
the Bank's loan portfolio carried adjustable rates. Such loans are primarily for
terms of 25 years, although the Bank does occasionally originate adjustable rate
mortgages for 15, 20 and 30 year terms, in each case amortized on a monthly
basis with principal and interest due each month. The interest rates on these
mortgages are adjusted once per year, with a maximum adjustment of 1% per
adjustment period and a maximum aggregate adjustment of 5% over the life of the
loan. A borrower may also obtain a loan in which the maximum annual adjustment
is 0.5% with a higher initial rate. Prior to August 1, 1997, rate adjustments on
the Bank's adjustable rate loans were indexed to a rate which adjusted annually
based upon changes in an index based on the National Monthly Median Cost of
Funds, plus a margin of 2.75%. Because the National Monthly Median Cost of Funds
is a lagging index, which results in rates changing at a slower pace than rates
generally in the marketplace, the Bank has changed to a one-year Treasury bill
constant maturity, which the Bank believes reflects more current market
information and thus allows the Bank to react more quickly to changes in the
interest rate environment. The adjustable rate mortgage loans offered by the
Bank also provide for initial rates of interest below the rates that would
prevail when the index used for repricing is applied. Such initial rates, also
referred to as "teaser rates," often reflect a discount from the prevailing rate
greater than the 1.0-% maximum adjustment allowed each year. As a result, the
Bank may not be able to restore the interest rate of a loan with a teaser rate
to its otherwise initial loan rate until at least the second adjustment period
that occurs at the beginning of the third year of the loan. Further, in a rising
interest rate environment, the Bank may not be able to adjust the interest rate
of the loan to the prevailing market rate until an even later period because of
the combination of the teaser discount and the 1% limitation on annual
adjustments.
The retention of adjustable rate loans in the Bank's portfolio helps reduce
the Bank's exposure to increases in prevailing market interest rates. However,
there are unquantifiable credit risks resulting from potential increases in
costs to borrowers in the event of upward repricing of adjustable-rate loans. It
is possible that during periods of rising interest rates, the risk of default on
adjustable rate loans may increase due to increases in interest costs to
borrowers. Further, although adjustable rate loans allow the Bank to increase
the sensitivity of its interest-earning assets to changes in interest rates, the
extent of this interest sensitivity is limited by the initial fixed-rate period
before the first adjustment and the lifetime interest rate adjustment
limitations. This risk is heightened by the Bank's practice of offering its
adjustable rate mortgages with a discount to its initial interest rate that is
greater than the annual increase in interest rates allowed under the terms of
the loan. Accordingly, there can be no assurance that yields on the Bank's
adjustable rate loans will fully adjust to compensate for increases in the
Bank's cost of funds. Finally, adjustable rate loans increase the Bank's
exposure to decreases in prevailing market interest rates, although the 1%
limitation on annual decreases in the loans' interest rates tend to offset this
effect.
The Bank also originates, to a limited extent, fixed-rate loans for terms
of 15 years. Such loans are secured by first mortgages on one-to-four family,
owner-occupied residential real property located in the Bank's market area.
Because of the Bank's policy to mitigate its exposure to interest rate risk
through the use of adjustable rate rather than fixed rate products, the Bank
does not emphasize fixed-rate mortgage loans. At December 31, 1999, only $15.6
million, or 13.7%, of the Bank's loan portfolio, consisted of fixed-rate
mortgage loans. To further reduce its interest rate risk associated with such
loans, the Bank may rely upon FHLB advances with similar maturities to fund such
loans. See "-- Deposit Activity and Other Sources of Funds -- Borrowing."
Neither the fixed rate or the adjustable rate residential mortgage loans of
the Bank are originated in conformity with secondary market guidelines issued by
FHLMC or FNMA. As a result, such loans may not be readily saleable in the
secondary market to institutional purchasers. However, such loans may still be
sold to private investors whose investment strategies do not depend upon loans
that satisfy FHLMC or FNMA criteria. Further, given its high liquidity, the Bank
does not currently view loan sales as a necessary funding source.
Construction Lending. The Bank engages in construction lending involving
loans to individuals for construction of one-to four- family residential housing
located within the Bank's market area, with such loans converting to permanent
financing upon completion of construction. Such loans are generally made to
individuals for construction primarily in established subdivisions within the
Bank's market area. The Bank mitigates its risk with construction loans by
imposing a maximum loan-to-value ratio of 95% for homes that will be
owner-occupied and 80% for homes being built on a speculative basis. At December
31, 1999, the Bank's loan portfolio included $5.7 million of loans secured by
properties under construction, including construction/permanent loans structured
to
5
become permanent loans upon the completion of construction and interim
construction loans structured to be repaid in full upon completion of
construction and receipt of permanent financing.
The Bank also makes loans to qualified builders for the construction of
one-to-four family residential housing located in established subdivisions in
the Bank's market area. Because such homes are intended for resale, such loans
are generally not converted to permanent financing at the Bank. All construction
loans are secured by a first lien on the property under construction.
Loan proceeds are disbursed in increments as construction progresses and as
inspections warrant. Construction/permanent loans may have adjustable or fixed
interest rates and are underwritten in accordance with the same terms and
requirements as the Bank's permanent mortgages. Such loans generally provide for
disbursement in stages during a construction period of up to six months, during
which period the borrower is required to make payments of interest only. The
permanent loans are typically 30-year adjustable rate loans, with the same terms
and conditions otherwise offered by the Bank. Monthly payments of principal and
interest commence the month following the date the loan is converted to
permanent financing. Borrowers must satisfy all credit requirements that would
apply to the Bank's permanent mortgage loan financing prior to receiving
construction financing for the subject property.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be confronted at or prior to the maturity of the loan, with a project
having a value which is insufficient to assure full repayment. The ability of a
developer to sell developed lots or completed dwelling units will depend on,
among other things, demand, pricing, availability of comparable properties and
economic conditions. The Bank has sought to minimize this risk by limiting
construction lending to qualified borrowers in the Bank's market area, by
requiring the involvement of qualified builders, and by limiting the aggregate
amount of outstanding construction loans.
Multi-Family Residential and Non-Residential Real Estate Lending. The
Bank's multi-family residential loan portfolio consists of adjustable rate loans
secured by real estate. At December 31,1999 the Bank had $2.2 million of
multi-family residential loans, which amounted to 1.9% of the Bank's loan
portfolio at such date. The Bank's non-residential real estate portfolio
generally consists of adjustable rate loans secured by first mortgages on
residential lots and rental property. In each case, such property is located in
the Bank's market area. At December 31, 1999, the Bank had approximately $12.4
million of such loans, which comprised 10.7% of its loan portfolio. Multi-family
residential real estate loans are underwritten with loan-to-value ratios up to
80% of the appraised value of the property. Non-residential real estate loans
are underwritten with loan-to-value ratios up to 65% of the appraised value for
raw land and 75% for land development loans. The Bank currently does not intend
to significantly expand multi-family residential or non-residential real estate
lending, but may do so if opportunities arise in the future.
Multi-family residential and non-residential real estate lending entails
significant additional risks as compared with one-to-four family residential
property lending. Multi-family residential and commercial real estate loans
typically involve larger loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans typically is dependent on the
successful operation of the real estate project, retail establishment or
business. These risks can be significantly impacted by supply and demand
conditions in the market for the office, retail and residential space, and, as
such, may be subject to a greater extent to adverse conditions in the economy
generally. To minimize these risks, the Bank generally limits itself to its
market area or to borrowers with which it has prior experience or who are
otherwise known to the Bank. It has been the Bank's policy to obtain annual
financial statements of the business of the borrower or the project for which
multi-family residential real estate or commercial real estate loans are made.
Consumer and Other Lending. The consumer loans currently in the Bank's loan
portfolio consist of loans secured by savings deposits and other consumer loans.
Savings deposit loans are usually made for up to 90% of the depositor's savings
account balance. The interest rate is approximately 2.0% above the rate paid on
such deposit
6
account serving as collateral, and the account must be pledged as collateral to
secure the loan. Interest generally is billed on a quarterly basis. At December
31, 1999, loans on deposit accounts totaled $2.5 million, or 2.2% of the Bank's
loan portfolio. Other consumer loans include automobile loans, the amount and
terms of which are determined by the loan committee, and home equity and home
improvement loans, which are made for up to 95% of the value of the property but
require private mortgage insurance on 100% of the value of the property. The
Bank is attempting to grow its portfolio of consumer loans.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or are
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
therefore are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At December 31, 1999, there were approximately $7,000 of consumer
loans delinquent 90 days or more. There can be no assurance that delinquencies
will not increase in the future, particularly in light of the Bank's decision to
increase its efforts to originate a higher volume and greater variety of
consumer loans.
NON-PERFORMING LOANS AND OTHER PROBLEM ASSETS
The Bank's non-performing loans totaled .05% of total assets at December
31, 1999. Loans are placed on a non-accrual status when the loan is past due in
excess of 90 days and collection of principal and interest is doubtful. The Bank
places a high priority on contacting customers by telephone as a primary method
of determining the status of delinquent loans and the action necessary to
resolve any payment problem. The Bank's management performs quality reviews of
problem assets to determine the necessity of establishing additional loss
reserves.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. The Bank generally tries to
sell the property at a price no less than its net book value, however, it will
consider slight discounts to the appraised value to expedite the return of the
funds to an earning status. When such property is acquired, it is recorded at
its fair value less estimated costs of sale. Any required write-down of the loan
to its appraised fair market value upon foreclosure is charged against the
allowance for loan losses. Subsequent to foreclosure, in accordance with
generally accepted accounting principles, a valuation allowance is established
if the carrying value of the property exceeds its fair value net of related
selling expenses.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of SFAS No. 15 at the dates indicated.
At December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Accruing loans which are
contractually past due 90
days or more:
Residential real estate... $ 51 $ 268 $ 140 $ 266 $ 133
Consumer.................. 7 19 23 -- 1
-------- -------- -------- -------- -------
Total................... $ 58 $ 287 $ 163 $ 266 $ 134
-------- -------- -------- -------- -------
Total non-performing
loans................. $ 58 $ 287 $ 163 $ 266 $ 134
======== ======== ======== ======== =======
Percentage of total loans.... 0.05% 0.26% 0.16% 0.28% 0.16%
======== ========= ========= ======== =======
At December 31, 1999, the Bank had no loans accounted for on a non-accrual
basis, no other non-performing assets and no real estate owned.
7
At December 31, 1999, the Bank had no loans outstanding which were
classified as nonaccrual, 90 days past due or restructured but where known
information about possible credit problems of borrowers caused management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as nonaccrual, 90 days past
due or restructured. Also, the Bank had no impaired loans under SFAS 114/118. As
such, the impact of adopting these statements was not significant to the Bank.
Federal regulations require savings institutions to classify their assets
on the basis of quality on a regular basis. An asset meeting one of the
classification definitions set forth below may be classified and still be a
performing loan. An asset is classified as substandard if it is determined to be
inadequately protected by the current retained earnings and paying capacity of
the obligor or of the collateral pledged, if any. An asset is classified as
doubtful if full collection is highly questionable or improbable. An asset is
classified as loss if it is considered uncollectible, even if a partial recovery
could be expected in the future. The regulations also provide for a special
mention designation, described as assets which do not currently expose a savings
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Such assets designated as special mention may include non-performing
loans consistent with the above definition. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings institution
must either establish a specific allowance for loss in the amount of the portion
of the asset classified loss, or charge off such amount. Federal examiners may
disagree with a savings institution's classifications. If a savings institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. The Bank regularly reviews its
assets to determine whether any assets require classification or
re-classification. At December 31, 1999, the Bank had $9,922 in assets
classified as special mention, $58,026 in assets classified as substandard, no
assets classified as doubtful and no assets classified as loss. Special mention
assets consist primarily of residential real estate loans secured by first
mortgages. This classification is primarily used by management as a "watch list"
to monitor loans that exhibit any potential deviation in performance from the
contractual terms of the loan.
Allowance for Loan Losses. In originating loans, the Bank recognizes that
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan. It is management's
policy to maintain an adequate allowance for loan losses based on, among other
things, the Bank's and the industry's historical loan loss experience,
evaluation of economic conditions, regular reviews of delinquencies and loan
portfolio quality and evolving standards imposed by federal bank examiners. The
Bank increases its allowance for loan losses by charging provisions for possible
loan losses against the Bank's income.
Management will continue to actively monitor the Bank's asset quality and
allowance for loan losses. Management will charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and will provide specific loss allowances
when necessary. Although management believes it uses the best information
available to make determinations with respect to the allowances for losses and
believes such allowances are adequate, future adjustments may be necessary if
economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
The Bank's methodology for establishing the allowance for loan losses takes
into consideration probable losses that have been identified in connection with
specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of the Bank's assets and
evaluates the need to establish allowances on the basis of this review.
Allowances are established by the Board of Directors on a quarterly basis based
on an assessment of risk in the Bank's assets taking into consideration the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience, loan concentrations, the state of the real estate market,
regulatory reviews conducted in the regulatory examination process and economic
conditions generally. Specific reserves will be provided for individual assets,
or portions of assets, when ultimate collection is considered improbable by
management based on the current payment status of the assets and the fair value
of the
8
security. At the date of foreclosure or other repossession, the Bank would
transfer the property to real estate acquired in settlement of loans initially
at the lower of cost or estimated fair value and subsequently at the lower of
book value or fair value less estimated selling costs. Any portion of the
outstanding loan balance in excess of fair value less estimated selling costs
would be charged off against the allowance for loan losses. If, upon ultimate
disposition of the property, net sales proceeds exceed the net carrying value of
the property, a gain on sale of real estate would be recorded.
Banking regulatory agencies, including the OTS, have adopted a policy
statement regarding maintenance of an adequate allowance for loan and lease
losses and an effective loan review system. This policy includes an arithmetic
formula for determining the reasonableness of an institution's allowance for
loan loss estimate compared to the average loss experience of the industry as a
whole. Examiners will review an institution's allowance for loan losses and
compare it against the sum of: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii)
for the portions of the portfolio that have not been classified (including those
loans designated as special mention), estimated credit losses over the upcoming
12 months given the facts and circumstances as of the evaluation date. This
amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period .......... $ 258 $ 237 $ 217 $ 122 $ 122
Loans charged off:
Real estate mortgage:
Residential .......................... -- -- -- (5) --
----- ----- ----- ----- -----
Total charge-offs ....................... -- -- -- (5) --
----- ----- ----- ----- -----
Recoveries .............................. -- -- -- -- --
----- ----- ----- ----- -----
Net loans charged off ................... -- -- -- (5) --
----- ----- ----- ----- -----
Provision for loan losses ............... $ 20 $ 21 20 100 --
----- ----- ----- ----- -----
Balance at end of period ................ $ 278 $ 258 $ 237 $ 217 $ 122
===== ===== ===== ===== =====
Ratio of net charge-offs to average loans
outstanding during the period ........ 0% 0% 0% 0.0053% 0%
===== ===== ===== ====== =====
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
9
At December 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
----------------------- ----------------------- ------------------------ -----------------------
Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in
Each Each Each Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
One-to-four family... $ 130 76.3% $ 136 80.6% $ 186 78.7% $ 163 79.6%
Construction......... 5 4.9% 7 4.2% 6 4.9% 11 5.6%
Multi-family residential 8 1.9% 6 1.4% 12 2.2% 3 1.5%
Non-residential...... 85 10.7% 71 7.5% 19 7.2% 23 5.6%
Secured by deposits.. -- 2.2% -- 2.1% -- 2.9% -- 3.6%
Other consumer loans. 50 4.0% 38 4.2% 14 4.1% 17 4.1%
------ ------ ------ ------ ------ ------- ------- ------
Total allowance for
loan losses..... $ 278 100.0% $ 258 100.0% $ 237 100.0% $ 217 100.0%
====== ====== ====== ====== ====== ======= ======= ======
10
At December 31, 1995
---------------------------------------
Percent of Loans in Each
Amount Category to Total Loans
------ -----------------------
(In thousands)
One-to-four family.......... $ 94 81.5%
Construction................ 5 4.7%
Multi-family residential.... 1 0.6%
Non-residential............. 14 5.9%
Secured by deposits......... -- 3.8%
Other consumer loans........ 8 3.5%
------- ------
Total allowance for
loan losses............ $ 122 100.0%
======= =====
INVESTMENT ACTIVITIES
The Bank makes investments in order to maintain the levels of liquid assets
required by regulatory authorities and manage cash flow, diversify its assets,
obtain yield and to satisfy certain requirements for favorable tax treatment.
The investment activities of the Company and the Bank consist primarily of
investments in Agency Securities and Mortgage-Backed Securities. Typical
investments include federally sponsored agency mortgage pass-through and
federally sponsored agency and mortgage-related securities. Investment and
aggregate investment limitations and credit quality parameters of each class of
investment are prescribed in the Bank's investment policy. The Company and the
Bank perform analyses on mortgage-related securities prior to purchase and on an
ongoing basis to determine the impact on earnings and market value under various
interest rate and prepayment conditions. Securities purchases must be approved
by the Bank's President. The Board of Directors reviews all securities
transactions on a monthly basis.
The principal objective of the investment policy is to earn as high a rate
of return as possible, but to consider also financial or credit risk, liquidity
risk and interest rate risk.
At December 31, 1999, securities with an amortized cost of $72.8 million
and an approximate market value of $71.4 million were classified as available
for sale. Management presently does not intend to sell such securities and,
based on the current liquidity level and the access to borrowings through the
FHLB of Cincinnati, management currently does not anticipate that the Company or
the Bank will be placed in a position of having to sell securities with material
unrealized losses.
Securities designated as "held to maturity" are those assets which the
Company or the Bank has both the ability and the intent to hold to maturity.
Upon acquisition, securities are classified as to the Company's or the Bank's
intent, and a sale would only be effected due to deteriorating investment
quality. The held to maturity investment portfolio is not used for speculative
purposes and is carried at amortized cost. In the event securities are sold from
this portfolio for other than credit quality reasons, all securities within the
investment portfolio with matching characteristics may be reclassified as assets
available for sale. Securities designated as "available for sale" are those
assets which the Company or the Bank may not hold to maturity and thus are
carried at market value with unrealized gains or losses, net of tax effect,
recognized in other comprehensive income.
Mortgage-Backed and Related Securities. Mortgage-backed securities
represent a participation interest in a pool of one-to-four family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators through intermediaries that pool and repackage the
participation interest in the form of securities to investors such as the Bank.
Such intermediaries may include quasi-governmental agencies such as FHLMC, FNMA
and the Government National Mortgage Association ("GNMA") which guarantee the
payment of principal and interest to investors. Of the $43.3 million
mortgage-backed security portfolio at December 31, 1999, approximately $22.5
million were originated through GNMA, approximately $11.0 million were
originated through FNMA and approximately $9.8 million were originated through
FHLMC. Mortgage-backed securities generally increase the quality of the assets
by virtue of the guarantees that back them, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Bank.
11
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities generally are
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.
The following table sets forth the carrying value of the investment
securities at the dates indicated.
At December 31,
----------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Securities available for sale:
FHLB and FHLMC stock ........ $ 1,987 $ 9,845 $ 6,895
U. S. government and agency
securities (1) ............ 36,120 23,065 13,000
Mortgage-backed securities .. 33,301 35,214 6,789
Other ....................... 15 15 15
Securities held to maturity:
U.S. government and agency
securities (1) ............ -- 13,997 31,988
Mortgage-backed securities .. 9,958 13,357 19,578
------- ------- -------
Total investment securities $81,381 $95,493 $78,265
======= ======= =======
- ---------------------------
(1) Primarily reflects debt securities purchased from the FHLB of Cincinnati.
The following table sets forth information in the scheduled maturities,
amortized cost, market values and average yields for U.S. government and agency
securities in the investment portfolio at December 31, 1999. At such date, all
of these securities were callable and/or due on or before December 15, 2000.
One Year or Less One to Five Years Five to Ten Years After Ten Years Total Investment Portfolio
---------------- ----------------- ----------------- --------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield value Yield Yield Value Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
U.S. government and
agency securities $ -- --% $ 15,997 6.29% $ 7,206 6.92% $ 14,209 7.96% $37,412 $36,120 7.04%
======== ======= ======== ===== ======== ===== ======== ===== ======= ======= =====
12
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending,
investment activities and general operational purposes. In addition to deposits,
the Bank derives funds from loan principal and interest repayments, maturities
of investment securities and mortgage-backed securities and interest payments
thereon. Although loan repayments are a relatively stable source of funds,
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds, or on a longer term
basis for general corporate purposes. The Bank has access to borrow from the
FHLB of Cincinnati, and the Bank will continue to have access to FHLB of
Cincinnati advances. The Bank may rely upon retail deposits rather than
borrowings as its primary source of funding for future asset growth.
DEPOSITS. The Bank attracts deposits principally from within its market
area by offering competitive rates on its deposit instruments, including money
market accounts, passbook savings accounts, Individual Retirement Accounts, and
certificates of deposit which range in maturity from three months to five years.
Deposit terms vary according to the minimum balance required, the length of time
the funds must remain on deposit and the interest rate. Maturities, terms,
service fees and withdrawal penalties for its deposit accounts are established
by the Bank on a periodic basis. The Bank reviews its deposit mix and pricing on
a weekly basis. In determining the characteristics of its deposit accounts, the
Bank considers the rates offered by competing institutions, lending and
liquidity requirements, growth goals and federal regulations. The Bank does not
accept brokered deposits.
The Bank attempts to compete for deposits with other institutions in its
market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Bank seeks to meet
customers' needs by providing convenient customer service to the community.
Substantially all of the Bank's depositors are Kentucky residents who reside in
the Bank's market area.
Savings deposits in the Bank at December 31, 1999 were represented by the
various types of savings programs described below.
Percentage
Interest Minimum Minimum of Total
Rate* Term Category Amount Balance Deposits
- ------------ ------------------- ------------------------------ ------------- ------------- ------------
(In thousands)
-- % None Non-interest bearing $ 100 $2,943 1.8%
2.5%* None Demand/NOW accounts 1.500 9,017 5.6
2.8% None Passbook accounts 10 9,803 6.1
3.9%* None Money market deposit accounts 2,500 30,063 18.7
-------- -----
51,826 32.2
-------- -----
Certificates of Deposit
------------------------------
5.2% 3 months or less Fixed-term, fixed rate 500 19,216 11.9
5.3% Over 3 to 12-months Fixed-term, fixed-rate 500 44,572 27.7
5.7% Over 12 to 24-months Fixed-term, fixed-rate 500 35,294 21.9
5.6% Over 24 to 36-months Fixed-term, fixed-rate 500 4,388 2.8
5.7% Over 36 to 48-months Fixed-term, fixed-rate 500 2,995 1.9
5.6% Over 48 to 60-months Fixed-term, fixed rate 500 2,614 1.6
-------- -----
109,079 67.8
-------- -----
$160,905 100.0%
======== ======
- -----------------
* Represents weighted average interest rate.
13
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,
--------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- -------------------------------- ---------------------------------
Interest-bearing Time Interest-bearing Time Interest-bearing Time
demand deposits deposits demand deposits deposits demand deposits deposits
--------------- -------- --------------- -------- --------------- --------
(Dollars in thousands)
Average
balance........ $ 49,365 $103,880 $ 62,414 $ 109,508 $ 71,590 $ 123,429
Average
rate........... 3.14% 5.37% 3.36% 5.39% 3.51% 5.52%
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.
Increase Increase
Balance at (Decrease) from Balance at (Decrease) from
December 31, % of December 31, December 31, % of December 31,
1999 Deposits 1998 1998 Deposits 1997
---- -------- ---- ---- -------- ----
(Dollars in thousands)
Non-interest bearing..... $ 2,943 1.8% $ 212 $ 2,731 1.8% $ 768
Demand and NOW
accounts.............. 9,017 5.6% 393 8,624 5.6% (860)
Money market............. 30,063 18.7% (709) 30,772 19.9% (11,292)
Passbook savings......... 9,803 6.1% (391) 10,194 6.6% (137,886)
Other time deposits...... 109,079 67.8% 6,584 102,495 66.1% (16,547)
---------- ------ --------- ---------- -------- ----------
Total................. $ 160,905 100.0% $ 6,089 $ 154,816 100.0% $ (165,817)
========== ====== ========= ========== ======== ==========
(continued)
Balance at Increase Balance at
December 31, % of (Decrease) from December 31, % of
1997 Deposits December 31, 1996 1996 Deposits
---- -------- ----------------- ---- --------
(Dollars in thousands)
Non-interest bearing..... $ 1,963 0.6% $ 179 $ 1,784 1.0%
Demand and NOW
accounts.............. 9,484 3.0% 1,881 7,603 4.1%
Money market............. 42,064 13.1% 5,124 36,940 20.1%
Passbook savings......... 148,080 46.2% 137,448 10,632 5.8%
Other time deposits...... 119,042 37.1% (7,826) 126,868 69.0%
---------- -------- --------- --------- ------
Total................. $ 320,633 100.0% $ 136,806 $ 183,827 100.0%
========== ======== ========= ========= ======
The following table sets forth the time deposits in the Bank classified by
rates at the dates indicated.
14
At December 31,
-----------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
2.01 - 4.00%....... $ 211 $ 212 $ 39
4.01 - 6.00%....... 94,719 92,870 102,474
6.01 - 8.00%....... 14,149 9,413 16,529
--------------- ------------- ---------
Total............. $ 109,079 $ 102,495 $ 119,042
=============== ============= =========
The following table sets forth the amount and maturities of time deposits
at December 31, 1999.
Amount Due
----------------------------------------------------------------------------------------
Less Than One Year 1-2 Years 2-3 Years After 3 Years Total
------------------ --------- --------- ------------- -----
(In thousands)
2.01 - 4.00%.................. $ 211 $ -- $ -- $ -- $ 211
4.01 - 6.00%.................. 56,911 28,210 3,989 5,609 94,719
6.01 - 8.00%.................. 6,666 7,084 399 -- 14,149
------------- ------------- ----------- ------------- -------------
Total....................... $ 63,788 $ 35,294 $ 4,388 $ 5,609 $ 109,079
============= ============= =========== ============= =============
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1999.
Maturity Period Certificates of Deposit
- ------------------------------------- --------------------------
(In thousands)
Three months or less................. $ 1,166
Over three through six months........ 1,953
Over six through 12 months........... 2,742
Over 12 months....................... 4,518
--------
Total............................. $ 10,379
========
Certificates of deposit at December 31, 1999 included approximately $10.4
million of deposits with balances of $100,000 or more, compared to $7.2 million
and $8.1 million at December 31, 1998 and 1997, respectively. Such time deposits
may be risky because their continued presence in the Bank is dependent partially
upon the rates paid by the Bank rather than any customer relationship and,
therefore, may be withdrawn upon maturity if another institution offers higher
interest rates. The Bank may be required to resort to other funding sources such
as borrowings or sales of its securities held available for sale if the Bank
believes that increasing its rates to maintain such deposits would adversely
affect its operating results. At this time, the Bank does not believe that it
will need to significantly increase its deposit rates to maintain such
certificates of deposit and, therefore, does not anticipate resorting to
alternative funding sources. See Note 5 of Notes to Financial Statements.
The following table sets forth the deposit activities of the Bank for the
periods indicated.
Year Ended December 31,
------------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Deposits............................... $ 314,635 $ 211,652 $ 430,943
Withdrawals............................ (314,279) (383,743) (301,475)
---------- ---------- -----------
Net increase (decrease) before
interest credited................... 356 (172,091) 129,468
Interest credited...................... 5,733 6,274 7,338
---------- ---------- -----------
Net increase (decrease) in savings
deposits............................ $ 6,089 $ (165,817) $ 136,806
========== =========== ===========
In the unlikely event the Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the sole stockholder of the Bank, which is the
Company.
15
BORROWINGS. Savings deposits historically have been the primary source of
funds for the Bank's lending, investments and general operating activities. The
Bank is authorized, however, to use advances from the FHLB of Cincinnati to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Cincinnati functions as a central reserve bank
providing credit for savings institutions and certain other member
16
financial institutions. As a member of the FHLB System, the Bank is required to
own stock in the FHLB of Cincinnati and is authorized to apply for advances.
Advances are pursuant to several different programs, each of which has its own
interest rate and range of maturities. The Bank has entered into a Cash
Management Advance program with FHLB. See Note 6 of Notes to Financial
Statements. Advances from the FHLB of Cincinnati are secured by FHLB investment
securities.
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, the Bank is permitted to invest an
amount equal to 2% of its assets in subsidiaries, with an additional investment
of 1% of assets where such investment serves primarily community, inner-city and
community development purposes. The Bank does not have any subsidiaries.
COMPETITION
The Bank faces significant competition both in originating mortgage and
other loans and in attracting deposits. The Bank competes for loans principally
on the basis of interest rates, the types of loans it originates, the deposit
products it offers and the quality of services it provides to borrowers. The
Bank also competes by offering products which are tailored to the local
community. Its competition in originating real estate loans comes primarily from
other savings institutions, commercial banks and mortgage bankers making loans
secured by real estate located in the Bank's market area. Commercial banks,
credit unions and finance companies provide vigorous competition in consumer
lending. Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.
The Bank attracts its deposits through its five offices primarily from the
local community. Consequently, competition for deposits is principally from
other savings institutions, commercial banks and brokers in the local community
as well as from credit unions. The Bank competes for deposits and loans by
offering what it believes to be a variety of deposit accounts at competitive
rates, convenient business hours, a commitment to outstanding customer service
and a well-trained staff. The Bank believes it has developed strong
relationships with local realtors and the community in general.
The Bank is a community and retail-oriented financial institution.
Management considers the Bank's branch network and reputation for financial
strength and quality customer service as its major competitive advantage in
attracting and retaining customers in its market area. A number of the Bank's
competitors have been acquired by statewide/nationwide banking organizations.
While the Bank is subject to competition from other financial institutions which
may have greater financial and marketing resources, management believes the Bank
benefits by its community orientation and its long-standing relationship with
many of its customers.
EMPLOYEES
As of December 31, 1999, the Company and the Bank had 29 full-time and 5
part-time employees, none of whom were represented by a collective bargaining
agreement. Management considers the Bank's relationships with its employees to
be good.
REGULATION
GENERAL. The Bank is chartered as a federal savings bank under the Home
Owners' Loan Act, as amended (the "HOLA"), which is implemented by regulations
adopted and administered by the OTS. As a federal savings bank, the Bank is
subject to regulation, supervision and regular examination by the OTS. The OTS
also has extensive enforcement authority over all savings institutions and their
holding companies, including the Bank and the Company. Federal banking laws and
regulations control, among other things, the Bank's required reserves,
investments, loans, mergers and consolidations, payment of dividends and other
aspects of the Bank's operations. The deposits of the Bank are insured by the
SAIF administered by the FDIC to the maximum extent provided by law. In
addition, the FDIC has certain regulatory and examination authority over
OTS-regulated savings institutions and may recommend enforcement actions against
savings institutions to the OTS. The supervision and regulation of the Bank is
intended primarily for the protection of the deposit insurance fund and the
Bank's depositors rather than for holders of the Company's stock or for the
Company as the holder of the stock of the Bank.
17
As a savings and loan holding company, the Company is registered with the
OTS and subject to OTS regulation and supervision under the HOLA. The Company
also is required to file certain reports with, and otherwise comply with the
rules and regulations of, the Commission under the federal securities laws.
The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting the Bank and the Company. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to such statutes and regulations.
FINANCIAL MODERNIZATION LEGISLATION. On November 12, 1999, the
Gramm-Leach-Bliley Act of 1999 (the "GLB Act") was enacted into law. The GLB Act
makes sweeping changes in the authorized activities of banks and their holding
companies. In particular, the GLBA Act repealed the Glass-Steagall Act, which
had generally prevented banks from affiliating with securities firms, and also
permitted bank holding companies for the first time to affiliate with insurance
companies. A new "financial holding company," which owns only well capitalized
and well-managed banks, will be permitted to engage in a variety of financial
activities, including insurance and securities underwriting and insurance agency
activities. The financial holding company provisions of the GLB Act are not
expected to have a material effect on the Company or the Bank.
The GLB Act also places substantial restrictions on the activities of
companies that apply to become savings and loan holding companies after May 4,
1999. However, the GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including the Company, to continue to engage in all
activities that they were permitted to engage in prior to the enactment of the
Act. Under such authority, the Company's business powers are essentially
unlimited, provided that the Bank remains a qualified thrift lender. However,
the GLB Act further provides that a unitary thrift holding company in existence
on May 4, 1999, will lose its exempt status if it or its subsidiary thrift is
sold to any unaffiliated company other than another grandfathered unitary thrift
holding company. The GLB Act is not expected to have a material effect on the
activities in which the Company and the Bank currently engage, except to the
extent that competition with banks and bank holding companies may increase as
they engage in activities not permitted prior to enactment of the GLB Act.
In addition, the GLB Act adopts a number of consumer protections, including
provisions intended to protect privacy of bank customers' financial information
and new requirements for the disclosure of ATM fees imposed by banks on
customers of other banks. Most of the GLB Act's provisions have delayed
effective dates and require the adoption of implementing regulations to
implement the statutory provisions. Accordingly, at this time the Bank is unable
to predict the eventual impact of the Act on its operations.
REGULATION OF THE BANK
BUSINESS ACTIVITIES. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. These investment powers are subject to
various limitations.
BRANCHING. Subject to certain limitations, OTS regulations currently permit
a federally chartered savings institution like the Bank to establish branches in
any state of the United States, provided that the federal savings institution
qualifies as a "domestic building and loan association" under the Internal
Revenue Code. See "-- Qualified Thrift Lender Test." The authority for a federal
savings institution to establish an interstate branch network would facilitate a
geographic diversification of the institution's activities.
REGULATORY CAPITAL. The OTS' capital adequacy regulations require savings
institutions such as the Bank to meet three minimum capital standards: a "core"
capital requirement of 4% of adjusted total assets (or 3% if the institution is
rated Composite 1 under the CAMELS examination rating system), a "tangible"
capital requirement of
18
1.5% of adjusted total assets, and a "risk-based" capital requirement of 8% of
total risk-based capital to total risk-weighted assets. In addition, the OTS has
adopted regulations imposing certain restrictions on savings institutions that
have a total risk-based capital ratio of less than 8%, a ratio of Tier 1 capital
to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total
assets of less than 4%. See "-- Prompt Corrective Regulatory Action."
The core capital, or "leverage ratio," requirement mandates that most
savings institutions maintain core capital equal to at least 3% of adjusted
total assets. "Core capital" includes common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries and
certain nonwithdrawable accounts and pledged deposits and is generally reduced
by the amount of the savings institution's intangible assets, with limited
exceptions for permissible mortgage servicing rights ("MSRs") and purchased
credit card relationships. Core capital is further reduced by the amount of a
savings institution's investments in and loans to subsidiaries engaged in
activities not permissible for national banks. At December 31, 1999, the Bank
had no such investments.
The risk-based capital standards of the OTS require maintenance of core
capital equal to at least 4% of risk-weighted assets and total capital equal to
at least 8% of risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" includes core capital plus supplementary capital,
provided that the amount of supplementary capital does not exceed the amount of
core capital. Supplementary capital includes preferred stock that does not
qualify as core capital, nonwithdrawable accounts and pledged deposits to the
extent not included in core capital, perpetual and mandatory convertible
subordinated debt and maturing capital instruments meeting specified
requirements and a portion of the institution's loan and lease loss allowance.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight,
which range from 0% to 100% as assigned by the OTS capital regulations based on
the risks the OTS believes are inherent in the type of asset. Comparable risk
weights are assigned to off-balance sheet assets.
The OTS risk-based capital regulation also includes an interest rate risk
("IRR") component that requires savings institutions with greater than normal
IRR, when determining compliance with the risk-based capital requirements, to
maintain additional total capital. The OTS has, however, indefinitely deferred
enforcement of its IRR requirements.
The following table sets forth the Bank's compliance with its regulatory
capital requirements at December 31, 1999.
The Bank's Capital Capital Requirements Excess Capital
----------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Tangible capital.............. $ 44,971 21.6% $ 3,123 1.5% $ 41,848 20.1%
Core capital.................. $ 44,971 21.6% $ 8,327 4.0% $ 36,644 17.6%
Total risk-based capital...... $ 45,249 58.6% $ 6,177 8.0% $ 39,072 50.6%
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective action
regulations, the federal banking regulators are required to take prompt
corrective action in respect of depository institutions that do not meet certain
minimum capital requirements, including a leverage limit and a risk-based
capital requirement. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. The federal banking
regulators, including the OTS, have issued regulations that classify insured
depository institutions by capital levels and provide that the applicable agency
will take various prompt corrective actions to resolve the problems of any
institution that fails to satisfy the capital standards.
19
Under the joint prompt corrective action regulations, a "well-capitalized"
institution is one that is not subject to any regulatory order or directive to
meet any specific capital level and that has or exceeds the following capital
levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital
ratio of 6%, and a ratio of Tier 1 capital to total assets ("leverage ratio") of
5%. An "adequately capitalized" institution is one that does not qualify as
"well capitalized" but meets or exceeds the following capital requirements: a
total risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a
leverage ratio of either (i) 4% or (ii) 3% if the institution has the highest
composite examination rating. An institution not meeting these criteria is
treated as "undercapitalized," "significantly undercapitalized," or "critically
undercapitalized" depending on the extent to which its capital levels are below
these standards. An institution that fails within any of the three
"undercapitalized" categories will be subject to certain severe regulatory
sanctions required by OTS regulations. As of December 31, 1999, the Bank was
"well-capitalized" as defined by the regulations.
FEDERAL DEPOSIT INSURANCE. The FDIC has adopted a risk-based insurance
assessment system for determining the deposit insurance assessments to be paid
by insured depository institutions. The FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period,
consisting of (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. Assessment rates for SAIF-member institutions like the Bank depend on the
capital category and supervisory category to which they are assigned and
currently range from 0 basis points to 27 basis points. In addition, all
FDIC-insured institutions are required to pay assessments to the FDIC to help
fund interest payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to recapitalize the
predecessor to the SAIF. The assessment rate for FICO bond servicing is
approximately .0216% of insured deposits for the year 2000.
The Federal Deposit Insurance Act also provides that the FDIC may not
assess regular insurance assessments for the SAIF unless required to maintain or
to achieve the designated reserve ratio of 1.25%, except for such assessments on
those institutions that are not classified as "well-capitalized" or that have
been found to have "moderately severe" or "unsatisfactory" financial,
operational or compliance weaknesses. The Bank is classified as
"well-capitalized" and has not been found by the OTS to have such supervisory
weaknesses.
QUALIFIED THRIFT LENDER TEST. The HOLA and OTS regulations require all
savings institutions to satisfy one of two Qualified Thrift Lender ("QTL") tests
or to suffer a number of sanctions, including restrictions on activities. To
qualify as a QTL, a savings institution must either (i) be deemed a "domestic
building and loan association" under the Internal Revenue Code (the "Code") by
maintaining at least 60% of its total assets in specified types of assets,
including cash, certain government securities, loans secured by and other assets
related to residential real property, educational loans, and investments in
premises of the institution or (ii) satisfy the HOLA's QTL test by maintaining
at least 65% of "portfolio assets" in certain "Qualified Thrift Investments."
For purposes of the HOLA's QTL test, portfolio assets are defined as total
assets less intangibles, property used by a savings institution in its business
and liquidity investments in an amount not exceeding 20% of assets. Qualified
Thrift Investments consist of (a) loans, equity positions or securities related
to domestic, residential real estate or manufactured housing, (b) 50% of the
dollar amount of residential mortgage loans subject to sale under certain
conditions, and (c) loans to small businesses, student loans and credit card
loans. In addition, subject to a 20% of portfolio assets limit, savings
institutions are able to treat as Qualified Thrift Investments 200% of their
investments in loans to finance "starter homes" and loans for construction,
development or improvement of housing and community service facilities or for
financing small business in "credit needy" areas.
A savings institution must maintain its status as a QTL on a monthly basis
in at least nine out of every 12 months. An initial failure to qualify as a QTL
results in a number of sanctions, including the imposition of certain operating
restrictions and a restriction on obtaining additional advances from its Federal
Home Loan Bank. If a savings institution does not requalify under the QTL test
within the three-year period after it fails the QTL test, it would be required
to terminate any activity not permissible for a national bank and repay as
promptly as possible any outstanding advances from its Federal Home Loan Bank.
In addition, the holding company of such an institution, such as the Company,
would similarly be required to register as a bank holding company with the
Federal Reserve Board. At December 31, 1999, the Bank qualified as a QTL.
20
SAFETY AND SOUNDNESS STANDARDS. The FDI Act requires the federal banking
agencies, including the OTS, to prescribe for all insured depository
institutions standards relating to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, asset quality and compensation, fees
and benefits and such other operational and managerial standards as the agencies
deem appropriate. The federal banking agencies have adopted final regulations
and Interagency Guidelines Establishing Standards for Safety and Soundness
("Guidelines") to implement safety and soundness standards pursuant to the
statute. The Guidelines set forth the safety and soundness standards that the
federal
21
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The Guidelines address internal
controls and information systems; internal audit system; credit underwriting;
loan documentation; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. A savings institution must give notice to the OTS at least 30
days before declaration of a proposed capital distribution to its holding
company, and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. Under the OTS capital
distribution regulations, a savings institution that (i) qualifies for expedited
treatment of applications by maintaining one of the two highest supervisory
examination ratings, (ii) will be at least adequately capitalized after the
proposed capital distribution and (iii) and is not otherwise restricted by
applicable law in making capital distributions may, without prior approval by
the OTS, make capital distributions during a calendar year equal to its net
income for such year plus its retained net income for the preceding two years.
Capital distributions in excess of such amount would require prior OTS approval.
Under OTS regulations, the Bank would not be permitted to pay dividends on
its capital stock if its regulatory capital would thereby be reduced below the
amount then required for the liquidation account established for the benefit of
certain depositors of the Bank at the time of the Conversion. In addition, under
the prompt corrective action regulations of the OTS, the Bank would be
prohibited from paying dividends if the Bank were classified as
"undercapitalized" under such rules. See "-- Prompt Corrective Regulatory
Action."
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of dividends or other distributions to the Company without payment of
taxes at the then current tax rate by the Bank on the amount of earnings removed
from the reserves for such distributions. See "Taxation."
TRANSACTIONS WITH AFFILIATES. The Bank is subject to restrictions imposed
by Sections 23A and 23B of the Federal Reserve Act on extensions of credit to,
and certain other transactions with, the Company and other affiliates, and on
investments in the stock or other securities thereof. Such restrictions prevent
the Company and such other affiliates from borrowing from the Bank unless the
loans are secured by specified collateral, and require such transactions to have
terms comparable to terms of arms-length transactions with third persons.
Further, such secured loans and other transactions and investments by the Bank
are generally limited in amount as to the Company and as to any other affiliate
to 10% of the Bank's capital and surplus and as to the Company and all other
affiliates to an aggregate of 20% of the Bank's capital and surplus. These
restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for acquisitions and for payment of dividends,
interest and operating expenses.
RESERVE REQUIREMENTS. Pursuant to regulations of the Federal Reserve Board
(the "FRB"), all FDIC-insured depository institutions must maintain average
daily reserves against their transaction accounts. No reserves are required to
be maintained on the first $5.0 million of transaction accounts, and reserves
equal to 3% must be maintained on the next $44.3 million of transaction
accounts, plus reserves equal to 10% on the remainder. These percentages are
subject to adjustment by the FRB. Because required reserves must be maintained
in the form of vault cash or in a non-interest-bearing account at a Federal
Reserve Bank, the effect of the reserve requirement is to reduce the amount of
the institution's interest-earning assets. As of December 31, 1999, the Bank met
its reserve requirements.
LIQUIDITY REQUIREMENTS. The Bank is required by OTS regulation to maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, qualifying
mortgage-related securities and mortgage loans, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
22
percentage (currently 4%) of its net withdrawable accounts plus short-term
borrowings. The average daily liquidity ratio of the Bank for the month ended
December 31, 1999 was 58.0%.
FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank System consists
of 12 district Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide
a central credit facility primarily for member institutions. As a member of the
FHLB, the Bank is required to acquire and hold shares of capital stock in the
FHLB in an amount at least equal to 1% of the aggregate unpaid principal of its
home mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. The Bank was in compliance with this requirement, with an
investment in FHLB stock at December 31, 1999 of $2.0 million. Banks and savings
associations generally may obtain long-term FHLB advances only for the purpose
of providing funds for residential housing finance; however, depository
institutions with less than $500 million in assets may also obtain such
financing for use in small business and small farm lending. At December 31,
1999, the Bank had no advances outstanding from the FHLB.
REGULATION OF THE COMPANY
The Company is a savings and loan holding company under the HOLA and, as
such, is subject to OTS regulation, supervision and examination. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries and may restrict or prohibit activities that are
determined to represent a serious risk to the safety, soundness or stability of
the Bank or any other subsidiary savings institution.
Under the HOLA, a savings and loan holding company is required to obtain
the prior approval of the OTS before acquiring another savings institution or
savings and loan holding company. A savings and loan holding company may not (i)
acquire, with certain exceptions, more than 5% of a non-subsidiary savings
institution or a non-subsidiary savings and loan holding company; or (ii)
acquire or retain control of a depository institution that is not insured by the
FDIC. In addition, while the Bank generally may acquire a savings institution by
merger in any state without restriction by state law, the Company could acquire
control of an additional savings institution in a state other than Kentucky only
if such acquisition is permitted under the laws of the target institution's home
state.
As a unitary savings and loan holding company, grandfathered under the GLB
Act, the Company generally is not subject to any restriction as to the types of
business activities in which it may engage, provided that the Bank continues to
satisfy the QTL test. See "Regulation - Financial Modernization Legislation" and
"-- Regulation and Supervision of the Bank -- Qualified Thrift Lender Test."
Upon any non-supervisory acquisition by the Company of another savings
institution that is held as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to limitations on
the types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for financial
holding companies under the Bank Holding Company Act, subject to the prior
approval of the OTS, and to other activities authorized by OTS regulation.
23
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including all documents incorporated
herein by reference, contains forward-looking statements. Additional written or
oral forward-looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. The words
"believe," "expect," "seek," and "intend" and similar expressions identify
forward-looking statements, which speak only as of the date the statement is
made. Such forward-looking statements are within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements may include, but
are not limited to, projections of income or loss, expenditures, acquisitions,
plans for future operations, financing needs or plans relating to services of
the Company, as well as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Future events and actual results could differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements.
The Company does not undertake, and specifically disclaims, any obligation
to publicly release the results of revisions which may be made to
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
24
ITEM 2. PROPERTIES
The following table sets forth information regarding the Bank's offices at
December 31, 1999.
Approximate
Year Opened Owned or Leased Book Value (1) Square Footage of Office
----------- --------------- -------------- ------------------------
MAIN OFFICE: (In thousands)
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky 42240..... 1995 Owned $ 1,764 16,575
BRANCH OFFICES:
Downtown Branch Office
605 South Virginia Street
Hopkinsville, Kentucky ....... 1997 Owned $ 165 756
Murray Branch Office
7th and Main Streets
Murray, Kentucky............... 1969 Owned $ 64 4,800
Cadiz Branch Office
352 Main Street
Cadiz, Kentucky .............. 1998 Owned $ 422 2,200
Elkton Branch Office
West Main Street
Elkton, Kentucky ............ 1976 Owned $ 57 3,400
-----------
$ 2,472
- ----------------------
(1) Represents the book value of land, building, furniture, fixtures and
equipment owned by the Bank.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company or the Bank is a party to various legal
proceedings incident to its business. At December 31, 1999, there were no legal
proceedings to which the Company or the Bank was a party, or to which any of
their property was subject, which were expected by management to result in a
material loss to the Company or the Bank. There are no pending regulatory
proceedings to which the Company or the Bank is a party or to which any of their
properties is subject which are currently expected to result in a material loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
BRUCE THOMAS. Mr. Thomas, 62, has served as President and Chief Executive
Officer of the Bank since 1992. He has been an employee of the Bank since 1962.
Mr. Thomas also serves as President and Chief Executive Officer of the Company.
Effective May 5, 2000, Mr. Thomas will retire as an officer and director of each
of the Company and the Bank.
PEGGY R. NOEL. Ms. Noel, 61, has served as Executive Vice President, Chief
Financial Officer and Chief Operations Officer of the Bank since 1990. She has
been an employee of the Bank since 1966. Ms. Noel also serves as Vice President,
Chief Financial Officer and Treasurer of the Company.
25
BOYD M. CLARK. Mr. Clark, 54, has served as Senior Vice President -- Loan
Administration of the Bank since 1995. Prior to his current position, Mr. Clark
served as First Vice President of the Bank. He has been an employee of the Bank
since 1973. Mr. Clark also serves as Vice President and Secretary of the
Company. Effective May 5, 2000, Mr. Clark will become Acting President of each
of the Company and the Bank.
26
All officers serve at the discretion of the boards of directors of the
Company or the Bank. There are no known arrangements or understandings between
any officer and any other person pursuant to which he or she was or is to be
selected as an officer.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information set forth under the caption "Market and Dividend
Information" in the Company's Annual Report to Stockholders for the year ended
December 31, 1999 (Exhibit No. 13) is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Information
and Other Data" in the Company's Annual Report to Stockholders for the year
ended December 31, 1999 (Exhibit No. 13) is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report to Stockholders for the year ended December 31, 1999 (Exhibit No.
13) is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate
Sensitivity Analysis" in the Company's Annual Report to Stockholders for the
year ended December 31, 1999 (Exhibit No. 13) is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Bank's Financial Statements together with the related notes and the
report of York, Neel & Co. - Hopkinsville, LLP, independent public accountants,
all as set forth in the Company's Annual Report to Stockholders for the year
ended December 31, 1999 (Exhibit No. 13) are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is omitted from this Report
as the Company has filed a definitive proxy statement (the "Proxy Statement"),
and the information included therein under "Proposal I -- Election of Directors"
is incorporated herein by reference. Information regarding the executive
officers of the Company is included under separate caption in Part I of this
Form 10-K
27
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is omitted from this Report as
the Company has filed the Proxy Statement, and the information included therein
under "Proposal I -- Election of Directors" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is omitted from this Report as the
Company has filed the Proxy Statement, and the information included therein
under "Voting Securities and Principal Holders Thereof" and "Proposal I -
Election of Directors" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is omitted from this Report as the
Company has filed the Proxy Statement, and the information included therein
under "Proposal I -- Election of Directors" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company
included in the Annual Report to Stockholders for the year ended December 31,
1999, are incorporated herein by reference in Item 8 of this Report. The
remaining information appearing in the Annual Report to Stockholders is not
deemed to be filed as part of this Report, except as expressly provided herein.
1. Independent Auditor's Report.
2. Statements of Financial Condition - December 31, 1999 and 1998.
3. Statements of Income for the Years Ended December 31, 1999, 1998 and
1997.
4. Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.
5. Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997.
6. Notes to Financial Statements.
(a)(2) All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(a)(3) The following exhibits either are filed as part of this Report or
are incorporated herein by reference:
Exhibit No. 2. Plan of Conversion of Hopkinsville Federal Savings
Bank. Incorporated herein by reference to Exhibit No. 2 to
Registrant's Registration Statement on Form S-1 (File No. 333-30215).
Exhibit No. 3.1. Certificate of Incorporation. Incorporated herein by
reference to Exhibit No. 3.1 to Registrant's Registration Statement on
Form S-1 (File No. 333-30215).
Exhibit No. 3.2. Bylaws. Incorporated herein by reference to Exhibit
No. 3.2 to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
28
Exhibit No. 10.1. Employment Agreements by and between Hopkinsville
Federal Savings Bank and Bruce Thomas, Peggy R. Noel and Boyd M.
Clark. Incorporated herein by reference to Exhibit No. 10.1 to
Registrant's Registration Statement on Form S-1 (File No. 333-30215).
Exhibit No. 10.2. Employment Agreements by and between HopFed Bancorp,
Inc. and Bruce Thomas, Peggy R. Noel and Boyd M. Clark. Incorporated
herein by reference to Exhibit No. 10.2 to Registrant's Registration
Statement on Form S-1 (File No. 333-30215).
Exhibit No. 10.3. Employment Agreement Amendments by and between
Hopkinsville Federal Savings Bank and Bruce Thomas, Peggy R. Noel and
Boyd M. Clark. Incorporated herein by reference to Exhibit No. 10.3 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
Exhibit No. 10.4. Employment Agreement Amendments by and between
HopFed Bancorp, Inc. and Bruce Thomas, Peggy R. Noel and Boyd M.
Clark. Incorporated herein by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
Exhibit No. 10.5. HopFed Bancorp, Inc. Management Recognition Plan.
Incorporated herein by reference to Exhibit 99.1 to Registration
Statement on Form S-8 (File No. 333-79391).
Exhibit No. 10.6. HopFed Bancorp, Inc. 1999 Stock Option Plan.
Incorporated herein by reference to Exhibit 99.2 to Registration
Statement on Form S-8 (File No. 333-79391).
Exhibit No. 13. Annual Report to Stockholders
Except for those portions of the Annual Report to Stockholders for the
year ended December 31, 1999, which are expressly incorporated herein
by reference, such Annual Report is furnished for the information of
the Commission and is not to be deemed "filed" as part of this Report.
Exhibit No. 21. Subsidiaries of the Registrant.
Exhibit No. 27. Financial Data Schedule (SEC use only)
(b) Current Report on Form 8-K dated November 17, 1999, reporting under
Item 5 the approval of a special cash dividend of $4.00 per share.
Current Report on Form 8-K dated December 15, 1999, reporting under
Item 5 the approval of the termination of the Employee Stock Ownership
Plan, effective December 31, 1999.
(c) Exhibits to this Form 10-K are attached or incorporated by reference
as stated above.
(d) None.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
HOPFED BANCORP, INC.
(Registrant)
Date: April 14, 2000 By: /s/ Bruce Thomas
---------------------
Bruce Thomas
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
DATE: SIGNATURE AND TITLE:
/s/ Bruce Thomas April 14, 2000
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Bruce Thomas
Director, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Peggy R. Noel April 14, 2000
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Peggy R. Noel
Director, Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ WD Kelley April 14, 2000
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WD Kelley
Chairman of the Board
/s/ Boyd M. Clark April 14, 2000
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Boyd M. Clark
Director, Vice President and Secretary
/s/ Clifton H. Cochran April 14, 2000
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Clifton H. Cochran
Director
/s/ Walton G. Ezell April 14, 2000
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Walton G. Ezell
Director
30
/s/ Gilbert E. Lee April 14, 2000
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Gilbert E. Lee
Director
/s/ Harry J. Dempsey April 14, 2000
- --------------------------------------------
Harry J. Dempsey
Director
31