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HFBC > SEC Filings for HFBC > Form 10-Q on 13-May-2013All Recent SEC Filings

Show all filings for HOPFED BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HOPFED BANCORP INC


13-May-2013

Quarterly Report


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

Critical Accounting Policies

The consolidated condensed financial statements as of March 31, 2013, and December 31, 2012, and for the three month periods ended March 31, 2013, and March 31, 2012, included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Company's 2012 Annual Report to Stockholders on Form 10-K.

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

Comparison of Financial Condition at March 31, 2013, and December 31, 2012

At March 31, 2013, total assets increased $13.4 million, to $981.1 million as compared to $967.7 million at December 31, 2012, due to higher deposit and loan levels. Securities available for sale decreased from $356.3 million at December 31, 2012, to $353.0 million at March 31, 2013. At March 31, 2013, and December 31, 2012, securities classified as "available for sale" had an amortized cost of $339.5 million and $340.5 million, respectively.

The Company's holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock, at cost was $4.4 million at December 31, 2012, and March 31, 2013. Total Federal Home Loan Bank "FHLB" borrowings declined $484,000, from $43.7 million at December 31, 2012, to $43.3 million at March 31, 2013. Total repurchase balances decreased from $43.5 million at December 31, 2012, to $40.5 million at March 31, 2013.

Net loans totaled $530.9 million and $525.0 million at March 31, 2013, and December 31, 2012, respectively. In the three month period ended March 31, 2013, loans outstanding increased during the final two weeks of the period, providing for a higher balance of loans outstanding while average loan balances declined over the same period.


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At March 31, 2013, deposits increased to $777.6 million from $759.9 million at December 31, 2012 despite a $11.6 million reduction in time deposits. At March 31, 2013, non-interest checking account balances increased by $6.2 million, to $100.3 million, or 12.9% of total deposits as compared to December 31, 2012. For the three month period ended March 31, 2013, interest bearing checking accounts and money market accounts increased by $22.2 million and $886,000, respectively, as compared to December 31, 2012. The average cost of all deposits during the three month periods ended March 31, 2013, December 31, 2012, and March 31, 2012, was 1.06%, 1.20% and 1.42%, respectively. Management continually evaluates the investment alternatives available to customers and adjusts the pricing on its deposit products to more actively manage its funding costs while remaining competitive in its market area. Given our continued high level of liquidity, the Company has chosen to reduce its balances of higher costing time deposits. In the six month period beginning April 1, 2013, and ending September 30, 2013, the Company has $138.6 million in time deposits scheduled to mature at a current weighted average cost of 1.71%.

Comparison of Operating Results for the Three Month Periods Ended March 31, 2013 and 2012.

Net Income. The Company's net income available to common shareholders was $984,000 for the three month period ended March 31, 2013, as compared to net income available to common shareholders of $470,000 for the three month period ended March 31, 2012. The improvement in the Company's results for the three month period ended March 31, 2013, was partially the result of the elimination of $257,000 in preferred stock dividend and warrant accretion and an increase in gains recognized on the sale of securities.

Net Interest Income. Net interest income for the three month period ended March 31, 2013, was $6.4 million, compared to $6.9 million for the three month period ended March 31, 2012. The decline in net interest income for the three months ended March 31, 2013, as compared to March 31, 2012, was due to a $66.3 million decline in the average balance of interest earning assets and an overall decline in net yields available on interest earning assets.

For the three months ended March 31, 2013, the average yield on loans was 5.27%, as compared to 5.66% for the three month period ended March 31, 2012. For the three month period ended March 31, 2013, income on taxable securities declined to $1.8 million, from $2.4 million for the three month period ended March 31, 2012, due to lower yields on new investment purchases and a $45.4 million decline in the average balance of available for sale taxable securities. For the three month period ending March 31, 2013, the tax equivalent yield on taxable and tax free securities were 2.58% and 4.58%, respectively, as compared to 2.88% and 5.15% for the three-month period ended March 31, 2012, respectively.

For the three month periods ended March 31, 2013, and March 31, 2012, the Company's cost of interest bearing liabilities was 1.51% and 1.83%, respectively. The lower cost of interest bearing liabilities was the result of lower short term interest rates. At March 31, 2013, and March 31, 2012, the Company's net interest margin was 2.99% and 2.98%, respectively.


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Average Balances, Yields and Interest Expenses. The table on the next page summarizes the overall effect of changes in both interest rates and the average balances of interest earning assets and liabilities for the three-month periods ended March 31, 2013, and March 31, 2012. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate three-month periods.


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Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $282,000 for March 31, 2013, and $271,000 for March 31, 2012, for a tax equivalent rate using a cost of funds rate of 1.50% for March 31, 2013, and 1.80% for March 31, 2012. The table adjusts tax-free loan income by $1,000 for March 31, 2013, and $6,000 for March 31, 2012, for a tax equivalent rate using the same cost of funds rate:

                                     Average        Income and         Average          Average        Income and         Average
                                     Balance         Expense            Rates           Balance         Expense            Rates
                                    3/31/2013       3/31/2013         3/31/2013        3/31/2012       3/31/2012         3/31/2012
                                                           (Table Amounts in Thousands, Except Percentages)
Loans                               $  522,705            6,883             5.27 %    $   551,579            7,807             5.66 %
Investments AFS taxable                284,378            1,832             2.58 %        329,819            2,375             2.88 %
Investment AFS tax free                 75,689              867             4.58 %         65,669              846             5.15 %
Federal funds                            9,882                6             0.24 %         11,911                8             0.27 %


Total interest earning assets          892,654            9,588             4.30 %        958,978           11,036             4.60 %


Other assets                            85,058                                             94,246


Total assets                        $  977,712                                        $ 1,053,224


Interest bearing checking           $  164,074              330             0.80 %    $   143,858              294             0.82 %
Saving / MMDA                           80,687               33             0.16 %         72,434               33             0.18 %
Retail time deposits                   384,815            1,499             1.56 %        457,461            2,289             2.00 %
Brokered deposits                       47,100              184             1.56 %         57,345              268             1.87 %
FHLB borrowings                         43,558              444             4.08 %         62,969              573             3.64 %
Repurchase agreements                   43,032              242             2.25 %         44,043              248             2.25 %
Subordinated debentures                 10,310              182             7.06 %         10,310              187             7.26 %


Total interest bearing
liabilities                            773,576            2,914             1.51 %        848,420            3,892             1.83 %


Non-interest bearing deposits           94,100                                             80,503
Other liabilities                        4,989                                              5,164

Stockholders' equity                   105,047                                            119,137


Total liabilities and
stockholders' equity                $  977,712                                        $ 1,053,224


Net change in interest earning
assets and interest bearing
liabilities                                        $      6,674             2.79 %                    $      7,144             2.77 %


Net yield on interest earning
assets                                                     2.99 %                                             2.98 %

Interest Income. For the three month periods ended March 31, 2013, and March 31, 2012, the Company's total interest income was $9.3 million and $10.8 million, respectively. As the Company's loan demand remains soft, we continue to have a high dependency on investment income. As investment options have become less attractive, the Company has chosen to increase its holdings in floating rate securities. By investing in floating rate securities, the Company is limiting the price volatility on a portion of the portfolio while accepting yields that are significantly below the average yield in the remaining portfolio. At March 31, 2013, the Company owns approximately $59.5 million in floating rate securities that re-price monthly or quarterly based on movements in the one and three month London Interbank Offering Rate ("LIBOR").


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The average balance of loans receivable declined from $551.6 million for the three month period ended March 31, 2012, to $522.7 million for the three month period ended March 31, 2013. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 113.03% for the three months ended March 31, 2012, to 115.39% for the three months ended March 31, 2013.

Interest Expense. Interest expense declined approximately $978,000 for the three months ended March 31, 2013, as compared to March 31, 2012. The decline was attributable to lower market interest rates, the re-pricing of higher costing deposits, and a reduction in the average balance of time deposits FHLB borrowings. The average cost of interest-bearing retail time deposits declined from 2.00% for the three month period ended March 31, 2012, to 1.56% for the three months ended March 31, 2013. Over the same period, the average balance of interest bearing retail time deposits declined $72.7 million, from $457.5 million for the three months ended March 31, 2012, to $384.5 million for the three months ended March 31, 2013.

The average balance cost of brokered deposits declined from 1.87% for the three months ended March 31, 2012, to 1.56% for the three months ended March 31, 2013. Over the same period, the average balance of brokered deposits declined $10.2 million for the three month period ended March 31, 2012 to $47.1 million for the three month period ended March 31, 2013. For the three month period ended March 31, 2013, the Company's total cost of deposits was 1.06% as compared to 1.42% for the three month period ended March 31, 2012.

The average balance of funds borrowed from the FHLB declined $19.4 million, from $63.0 million for the three months ended March 31, 2012, to $43.6 million for the three month period ended March 31, 2013. The average cost of borrowed funds from the FHLB were 3.64% for the three months ended March 31, 2012, and 4.08% for the three months ended March 31, 2013, respectively. The average balance of repurchase agreements declined from $44.0 million for the three months ended March 31, 2012, to $43.0 for the three month period ended March 31, 2013. The average cost of repurchase agreements was 2.25% for the three months ended March 31, 2012, and March 31, 2013, respectively.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $376,000 in provision for loan loss was required for the three month period ended March 31, 2013, compared to a $869,000 in provision for loan loss expense for the three month period ended March 31, 2012. The lower level of required provision expense for the three month period ended March 31, 2013, is the result of improving credit quality and risk grade trends on the Company's loan portfolio.


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Non-Interest Income. There was a $566,000 increase in non-interest income in the three month period ended March 31, 2013, as compared to the same period in 2012. The increase in non-interest income was largely the result of a $583,000 increase in gains realized on the sale of investments. For the three month period ended March 31, 2013, the Company earned $200,000 in mortgage origination income as compared to $203,000 during the three month period ended March 31, 2012. The Company's financial services commission increased from $227,000 to $297,000 for the three month period ended March 31, 2012, as compared to the three month period ended March 31, 2013, as bank customers sought higher yields than is available on deposit accounts.

Non-Interest Expenses. There was a $175,000 increase in total non-interest expenses in the three-month period ended March 31, 2013, as compared to the same period in 2012. The most significant change in non-interest expenses was a $341,000 increase in salary and benefit expenses for the three month period ended March 31, 2013, as compared to the three month period ended March 31, 2012. For the three month period ended March 31, 2013, the Company's deposit insurance expense was $232,000 as compared to $419,000 for the three month period ended March 31, 2012. The decline was due to the removal of the Company's and Bank's Memorandum of Understanding and Agreement. For the three month period ended March 31, 2013, losses incurred on the sale of other assets owned were $35,000 as compared to $147,000 for the three month period ended March 31, 2012. The reduction in losses on other assets owned is largely the result of lower asset balances and an improving level of overall asset quality.

Income Taxes. The effective tax rate for the three-month periods ending March 31, 2013, and March 31, 2012, was 19.6% and 10.9%, respectively. The Company's lower tax rate is the result of lower levels of taxable net income.

Liquidity and Capital Resources. The Company has no business other than that of the Bank. Management believes that dividends that may be paid by the Bank to the Company will provide sufficient funds for its current needs. However, no assurance can be given that the Company will not have a need for additional funds in the future. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company. In the past, the Company has been required to seek approval from the Office of Thrift Supervision prior to the declaration of a dividend to common shareholders. Currently, we are not required to seek approval for each cash common dividend payment to the Federal Reserve Bank.

The Bank uses brokered deposits to supplement its asset liability need for longer term deposits at reasonable prices. In addition to the coupon rate listed below, brokered deposits carry an additional fee of approximately 0.25% that includes the cost of selling and servicing the deposits. The Company includes this cost as interest expense on its income statement and on its table on page 44 that provides the yields and cost of assets and liabilities.


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At March 31, 2013, the Bank's brokered deposits consisted of the following:

          Issue Date       Interest Rate         Balance         Maturity Date

            1/22/2010                2.20 %    $  3,092,000           7/22/2013
             3/2/2010                2.00 %       3,204,000            9/2/2013
            9/22/2010                1.15 %       2,144,000           3/22/2014
             7/1/2011                1.00 %       3,000,000            5/1/2014
            8/11/2009                3.00 %       5,095,000           8/11/2014
             7/9/2012                0.54 %       3,159,000            1/9/2015
            7/27/2012                0.70 %       3,590,000           7/27/2015
           12/21/2010                1.70 %         805,000          12/21/2015
            9/21/2012                0.60 %       2,500,000           1/21/2016
             7/9/2012                0.70 %       2,309,000            3/9/2016
            3/17/2011                2.25 %       1,500,000           3/17/2016
           10/13/2011                1.35 %       2,086,000          10/13/2016  (1)
             3/9/2012                1.00 %       3,044,000           12/9/2016  (1)
             7/9/2012                0.98 %       1,446,000            1/9/2017  (1)
            7/27/2012                0.50 %       1,496,000           7/27/2017  (1)
            9/22/2011                1.00 %       2,127,000           9/22/2017  (1)
             1/3/2013                1.00 %       3,030,000            1/3/2018


                Total                          $ 43,627,000

(1) Denotes brokered deposit with rising rate feature in which the Bank has a call option.


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The Bank must satisfy three capital standards: a ratio of core capital to adjusted total assets of 4.0%, a tangible capital standard expressed as 1.5% of total adjusted assets, and a combination of core and "supplementary" capital equal to 8.0% of risk-weighted assets. At March 31, 2013, the Bank exceeded all regulatory capital requirements.

The table below presents certain information relating to the Company's and Bank's capital compliance at March 31, 2013:

                                       Company                       Bank
                                 Amount       Percent        Amount       Percent
                                              (Dollars in Thousands)

           Tangible Capital     $ 105,632        10.77 %    $ 103,606        10.59 %

           Core Capital         $ 105,632        18.03 %    $ 103,606        17.78 %

           Risk Based Capital   $ 112,958        19.28 %    $ 110,932        19.03 %

At March 31, 2013, the Bank had no outstanding commitments to originate loans and undisbursed commitments on loans outstanding of $102.5 million. Management believes that the Bank's sources of funds are sufficient to fund all of its outstanding commitments. Certificates of deposits scheduled to mature in one year or less from March 31, 2013, totaled $214.4 million. Management believes that a significant percentage of such deposits will remain with the Bank.

The Bank's FHLB borrowings are secured by a blanket security agreement pledging the Bank's 1-4 family first mortgage loans and non-residential real estate loans. At March 31, 2013, the Bank has pledged all eligible 1-4 family first mortgages.


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At March 31, 2013, the Bank has outstanding borrowings of $43.3 million from the FHLB with maturities two months to seven years. A schedule of FHLB borrowings at March 31, 2013, is provided below:

         Outstanding
           Balance          Rate           Maturity       Note
                            (Dollars in thousands)
        $       4,000         5.34 %         03/17/16
                7,000         4.25 %         05/01/17     Quarterly callable
               10,000         4.56 %         06/28/17     Quarterly callable
               10,000         4.26 %         08/17/17     Quarterly callable
               12,257         3.13 %         01/01/19     Monthly Principal Payments


        $      43,257         4.11 %        4.6 years     Weighted average life

At March 31, 2013, the Bank had $43.6 million in additional borrowing capacity with the FHLB which includes an overnight line of credit of $30.0 million. The Bank has an $8 million unsecured overnight borrowing capacity from a correspondent bank.

The Bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

At March 31, 2013, the Company had the following off-balance sheet commitments (in thousands):

               Standby letters of credit                   $    340
               Unused home equity lines of credit          $ 27,926
               Unused commercial lines of credit           $ 50,736
               Unused unsecured personal lines of credit   $ 23,506


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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words "believe," "expect," "seek," and "intend" and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions, which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

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