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HFBC > SEC Filings for HFBC > Form 10-Q on 13-Aug-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-Aug-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 June 30, 2013, and December 31, 2012, and for the three and six month periods ended June 30, 2013, and June 30, 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 June 30, 2013, and December 31, 2012

At June 30, 2013, total assets declined $18.3 million, to $949.4 million as compared to $967.7 million at December 31, 2012, due to lower deposit and investment levels. Securities available for sale decreased from $356.3 million at December 31, 2012, to $338.9 million at June 30, 2013. At June 30, 2013, and December 31, 2012, securities classified as "available for sale" had an amortized cost of $336.3 million and $340.5 million, respectively. Net loans totaled $528.3 million and $525.0 million at June 30, 2013, and December 31, 2012, 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 June 30, 2013. Total Federal Home Loan Bank "FHLB" borrowings increased from $43.7 million at December 31, 2012, to $45.8 million at June 30, 2013 due to a $3 million overnight borrowing at the end of the second quarter in 2013. Total repurchase balances increased from $43.5 million at December 31, 2012, to $47.1 million at June 30, 2013.

At June 30, 2013, deposits declined to $742.7 million from $759.9 million at December 31, 2012, due to a $29.0 million reduction in time deposits. At June 30, 2013, non-interest checking account balances increased to $94.4 million, or 12.7% of total deposits. The average cost of all deposits during the six month periods ended June 30, 2013, June 30, 2012, and the year ended December 31, 2012, was 1.04%, 1.39% and 1.20%, respectively.


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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 three month period beginning July 1, 2013, and ending September 30, 2013, the Company has approximately $87.1 million in time deposits scheduled to mature at a current weighted average cost of 1.78%.

Comparison of Operating Results for the Six Month Periods Ended June 30, 2013 and 2012.

Net Income. The Company's net income available to common shareholders was $2.2 million for the six month period ended June 30, 2013, as compared to net income available to common shareholders of $1.4 million for the six month period ended June 30, 2012. The improvement in the Company's results for the six month period ended June 30, 2013, was partially the result of the elimination of $516,000 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 six month period ended June 30, 2013, was $12.6 million, compared to $13.5 million for the six month period ended June 30, 2012. The decline in net interest income for the six months ended June 30, 2013, as compared to June 30, 2012, was due to a $66.8 million decline in the average balance of interest earning assets and an overall decline in net yields available on interest earning assets.

For the six months ended June 30, 2013, the average yield on loans was 5.16%, as compared to 5.56% for the six month period ended June 30, 2012. For the six month period ended June 30, 2013, income on taxable securities declined to $3.6 million, from $4.8 million for the six month period ended June 30, 2012, due to lower yields on new investment purchases and a $45.9 million decline in the average balance of available for sale taxable securities. For the six month period ending June 30, 2013, the tax equivalent yield on taxable and tax free securities were 2.53% and 4.56%, respectively, as compared to 2.92% and 4.95% for the six-month period ended June 30, 2012, respectively.

For the six month periods ended June 30, 2013, and June 30, 2012, the Company's cost of interest bearing liabilities was 1.49% and 1.81%, respectively. The lower cost of interest bearing liabilities was the result of the continued re-pricing of higher costing certificates of deposit. At June 30, 2013, and June 30, 2012, the Company's net interest margin was 2.94% and 2.93%, respectively.

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 six-month periods ended June 30, 2013, and June 30, 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 six-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 $545,000 for June 30, 2013, and $533,000 for June 30, 2012, for a tax equivalent rate using a cost of funds rate of 1.50% for June 30, 2013, and 1.80% for June 30, 2012. The table adjusts tax-free loan income by $4,000 for June 30, 2013, and $5,000 for June 30, 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
                                       6/30/2013       6/30/2013         6/30/2013        6/30/2012       6/30/2012         6/30/2012
                                                              (Table Amounts in Thousands, Except Percentages)
Loans                                  $  525,448           13,562             5.16 %    $   547,815           15,219             5.56 %
Investments AFS taxable                   283,867            3,596             2.53 %    $   329,809            4,809             2.92 %
Investment AFS tax free                    73,499            1,677             4.56 %    $    66,852            1,655             4.95 %
Interest earning deposits                   9,672               13             0.27 %    $    14,762               14             0.19 %


Total interest earning assets             892,486           18,848             4.22 %        959,238           21,697             4.52 %


Other assets                               79,201                                             89,115


Total assets                           $  971,687                                        $ 1,048,353


Retail time deposits                      378,326            2,877             1.52 %        451,622            4,459             1.97 %
Brokered deposits                          46,390              362             1.56 %         54,265              510             1.88 %
Saving & MMDA                              83,367               70             0.17 %         73,453               66             0.18 %
Now accounts                              165,564              673             0.81 %        147,336              604             0.82 %
FHLB borrowings                            43,586              890             4.08 %         62,537            1,138             3.64 %
Repurchase agreements                      40,595              472             2.33 %         41,915              485             2.31 %
Subordinated debentures                    10,310              364             7.06 %         10,310              368             7.14 %


Total interest bearing liabilities        768,138            5,708             1.49 %        841,438            7,630             1.81 %


Non-interest bearing deposits              93,857                                             82,153
Other liabilities                           4,944                                              5,212

Stockholders' equity                      104,748                                            119,550


Total liabilities and stockholders'
equity                                 $  971,687                                        $ 1,048,353


Net interest income                                         13,140                                             14,067


Net interest spread                                                            2.73 %                                             2.71 %


Net interest margin                                           2.94 %                                             2.93 %


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Interest Income. For the six month periods ended June 30, 2013, and June 30, 2012, the Company's total interest income was $18.3 million and $21.2 million, respectively. As the Company's loan demand remains soft, the Company continues 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 June 30 2013, the Company owns approximately $47.1 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").

The average balance of loans receivable declined from $547.8 million for the six month period ended June 30, 2012, to $525.4 million for the six month period ended June 30, 2013. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 114.0% for the six months ended June 30, 2012, to 116.2% for the three months ended June 30, 2013.

Interest Expense. Interest expense declined approximately $1.9 million for the six months ended June 30, 2013, as compared to June 30, 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 and FHLB borrowings. The average cost of interest-bearing retail time deposits declined from 1.97% for the six month period ended June 30, 2012, to 1.52% for the six months ended June 30, 2013. Over the same period, the average balance of interest bearing retail time deposits declined $73.3 million, from $451.6 million for the three months ended June 30, 2012, to $378.3 million for the three months ended June 30, 2013.

The average cost of brokered deposits declined from 1.88% for the six months ended June 30, 2012, to 1.56% for the six months ended June 30, 2013. Over the same period, the average balance of brokered deposits declined $7.9 million to $46.4 million for the six month period ended June 30, 2013. For the six month period ended June 30, 2013, the Company's total cost of deposits was 1.04% as compared to 1.39% for the six month period ended June 30, 2012.

The average balance of funds borrowed from the FHLB declined $18.9 million, from $62.5 million for the six months ended June 30, 2012, to $43.6 million for the six month period ended June 30, 2013. The average cost of borrowed funds from the FHLB were 3.64% for the six months ended June 30, 2012, and 4.08% for the six months ended June 30, 2013, respectively. The average balance of repurchase agreements declined from $41.9 million for the six months ended June 30, 2012, to $40.6 for the three month period ended June 30, 2013. The average cost of repurchase agreements was 2.31% for the six months ended June 30, 2012, and 2.33% for the six months ended June 30, 2013.


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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 $782,000 in provision for loan loss was required for the six month period ended June 30, 2013, compared to a $1.3 million in provision for loan loss expense for the six month period ended June 30, 2012. The lower level of required provision expense for the six month period ended June 30, 2013, is the result of improving credit quality and risk grade trends on the Company's loan portfolio.

Non-Interest Income. There was a $755,000 increase in non-interest income in the six month period ended June 30, 2013, as compared to the same period in 2012. The increase in non-interest income was largely the result of a $742,000 increase in gains on the sale of investments. For the six month period ended June 30, 2013, the Company earned $412,000 in mortgage origination income as compared to $466,000 during the six month period ended June 30, 2012. The Company's financial services commission increased from $498,000 to $644,000 for the six month period ended June 30, 2013 as compared to the six month period ended June 30, 2012, as bank customers sought higher yields than is available on deposit accounts.

Non-Interest Expenses. There was a $140,000 decrease in total non-interest expenses in the six-month period ended June 30, 2013, as compared to the same period in 2012. The most significant change in non-interest expenses was a $494,000 increase in salary and benefit expenses for the six month period ended June 30, 2013, as compared to the six month period ended June 30, 2012. For the six month period ended June 30, 2013, the Company's deposit insurance expense was $411,000 as compared to $853,000 for the six month period ended June 30, 2012. The decline was due to the removal of the Company's and Bank's Memorandum of Understanding and Agreement and declining deposit balances. For the six month period ended June 30, 2013, professional services increased to $942,000 as compared to $886,000 for the six month period ended June 30, 2012, due to the cost associated with the Company's contested proxy vote.

Income Taxes. The effective tax rate for the six-month periods ending June 30, 2013, and June 30, 2012, was 21.0% and 17.1%, respectively.


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Comparison of Operating Results for the Three Month Periods Ended June 30, 2013 and 2012.

Net Income. The Company's net income available to common shareholders was $1.2 million for the three month period ended June 30, 2013, as compared to net income available to common shareholders of $903,000 for the three month period ended June 30, 2012. The improvement in the Company's results for the three month period ended June 30, 2013, was partially the result of the elimination of $259,000 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 June 30, 2013, was $6.2 million, compared to $6.7 million for the three month period ended June 30, 2012. The decline in net interest income for the three months ended June 30, 2013, as compared to June 30, 2012, was due to a $72.6 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 June 30, 2013, the average yield on loans was 5.06%, as compared to 5.45% for the three month period ended June 30, 2012. For the three month period ended June 30, 2013, income on taxable securities declined to $1.8 million, from $2.4 million for the three month period ended June 30, 2012, due to lower yields on new investment purchases and a $55.9 million decline in the average balance of available for sale taxable securities. For the three month period ending June 30, 2013, the tax equivalent yield on taxable and tax free securities were 2.49% and 4.54%, respectively, as compared to 2.87% and 4.74% for the three-month period ended June 30, 2012, respectively.

For the three month periods ended June 30, 2013, and June 30, 2012, the Company's cost of interest bearing liabilities was 1.47% and 1.79%, respectively. The lower cost of interest bearing liabilities was the result of lower short term interest rates. At June 30, 2013, and June 30, 2012, the Company's net interest margin was 2.90% and 2.87%, respectively.

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 June 30, 2013, and June 30, 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.


Table of Contents

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 $263,000 for June 30, 2013, and $260,000 for June 30, 2012, for a tax equivalent rate using a cost of funds rate of 1.50% for June 30, 2013, and 1.80% for June 30, 2012. The table adjusts tax-free loan income by $1,000 for June 30, 2013, and $3,000 for June 30, 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
                                       6/30/2013       6/30/2013         6/30/2013        6/30/2012       6/30/2012         6/30/2012
                                                              (Table Amounts in Thousands, Except Percentages)
Loans                                  $  528,160            6,677             5.06 %    $   544,056            7,416             5.45 %
Investments AFS taxable                   283,262            1,764             2.49 %        339,125            2,434             2.87 %
Investment AFS tax free                    71,333              810             4.54 %         68,035              807             4.74 %
Interest earnings deposits                  9,465                7             0.30 %         13,632                6             0.18 %


Total interest earning assets             892,220            9,258             4.15 %        964,848           10,663             4.42 %


Other assets                               73,757                                             79,426


Total assets                           $  965,977                                        $ 1,044,274


Retail time deposits                      371,908            1,378             1.48 %        445,784            2,186             1.96 %
Brokered deposits                          45,688              178             1.56 %         51,185              226             1.77 %
Savings & MMDA                             86,018               37             0.17 %         74,472               33             0.18 %
Now accounts                              167,038              343             0.82 %        150,813              310             0.82 %
FHLB borrowings                            43,612              446             4.09 %         62,105              565             3.64 %
Repurchase agreements                      38,185              230             2.41 %         39,788              237             2.38 %
Subordinated debentures                    10,310              182             7.06 %         10,310              181             7.02 %


Total interest bearing liabilities        762,759            2,794             1.47 %        834,457            3,738             1.79 %


Non-interest bearing deposits              93,616                                             83,803
Other liabilities                           4,891                                              4,158

Stockholders' equity                      104,711                                            121,856


Total liabilities and stockholders'
equity                                 $  965,977                                        $ 1,044,274


Net interest income                                          6,464                                              6,925


Interest rate spread                                                           2.68 %                                             2.63 %


Net interest margin                                           2.90 %                                             2.87 %

Interest Income. For the three month periods ended June 30, 2013, and June 30, 2012, the Company's total interest income was $9.0 million and $10.4 million, respectively. As the Company's loan demand remains soft, we continue to have a high dependency on investment income. The average balance of loans receivable declined from $544.1 million for the three month period ended June 30, 2012, to $528.2 million for the three month period ended June 30, 2013. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 115.63% for the three months ended June 30, 2012, to 116.97% for the three months ended June 30, 2013.


Table of Contents

Interest Expense. Interest expense declined $944,000 for the three months ended June 30, 2013, as compared to June 30, 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 1.96% for the three month period ended June 30, 2012, to 1.48% for the three months ended June 30, 2013. Over the same period, the average balance of interest bearing retail time deposits declined $73.9 million, from $445.8 million for the three months ended June 30, 2012, to $371.9 million for the three months ended June 30, 2013.

The average cost of brokered deposits declined from 1.77% for the three months ended June 30, 2012, to 1.56% for the three months ended June 30, 2013. Over the same period, the average balance of brokered deposits declined from $51.2 million for the three month period ended June 30, 2012, to $45.7 million for the three month period ended June 30, 2013. For the three month period ended June 30, 2013, the Company's total cost of deposits was 1.01% as compared to 1.37% for the three month period ended June 30, 2012.

The average balance of funds borrowed from the FHLB declined $18.5 million, from $62.1 million for the three months ended June 30, 2012, to $43.6 million for the three month period ended June 30, 2013. The average cost of borrowed funds from the FHLB were 3.64% for the three months ended June 30, 2012, and 4.09% for the three months ended June 30, 2013, respectively. The average balance of repurchase agreements declined from $39.8 million for the three months ended June 30, 2012, to $38.2 for the three month period ended June 30, 2013. The average cost of repurchase agreements was 2.38% for the three months ended June 30, 2012, and 2.41% for the three months ended June 30, 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 $406,000 in provision for loan loss was required for the three month period ended June 30, 2013, compared to a $400,000 in provision for loan loss expense for the three month period ended June 30, 2012.


Table of Contents

Non-Interest Income. There was a $189,000 increase in non-interest income in the three month period ended June 30, 2013, as compared to the same period in 2012. The increase in non-interest income was largely the result of a $159,000 increase in gains on the sale of investments. For the three month period ended June 30, 2013, the Company earned $212,000 in mortgage origination income as compared to $263,000 during the three month period ended June 30, 2012. The Company's financial services commission increased from $271,000 for the three month period ended June 30, 2012, to $347,000 for the three month period ended June 30, 2013.

Non-Interest Expenses. There was a $315,000 decrease in total non-interest expenses in the three-month period ended June 30, 2013, as compared to the same period in 2012. The most significant change in non-interest expenses was a $153,000 increase in salary and benefit expenses for the three month period ended June 30, 2013, as compared to the three month period ended June 30, 2012. For the three month period ended June 30, 2013, the Company's deposit insurance expense was $179,000 as compared to $434,000 for the three month period ended June 30, 2012. The decline was due to the removal of the Company's and Bank's Memorandum of Understanding and Agreement.

Income Taxes. The effective tax rate for the three-month periods ending June 30, 2013, and June 30, 2012, was 22.2% and 20.5%, respectively.

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 . . .

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