HopFed Bancorp, Inc. Reports Third Quarter Results

HopFed Bancorp, Inc. (NASDAQ: HFBC) (the “Company”), the holding company for Heritage Bank USA, Inc. (the “Bank”), today reported results for the three and nine month periods ended September 30, 2013. For the three month period ended September 30, 2013, the Company’s net income available to common shareholders was $536,000, or $0.07 per share, basic and diluted, compared to net income available to common shareholders of $819,000, or $0.11 per share basic and diluted, for the three month period ended September 30, 2012. For the nine month period ended September 30, 2013, the Company’s net income available to common shareholders was $2.7 million, or $0.36 per share, basic and diluted, compared to a net income attributable to common shareholders of $2.2 million, or $0.29 per share basic and diluted, for the nine month period ended September 30, 2012.

Commenting on the third quarter results, John E. Peck, President and Chief Executive Officer, said, “The Company’s net interest income for the three month period ended September 30, 2013, improved compared to the three month periods ending June 30, 2013, and September 30, 2012. The improved levels of net interest income are the result of our ability to reduce our interest expense by $298,000 on a linked quarter basis. As compared to the three month period ended September 30, 2012, total interest expense declined by approximately $1.6 million in the three month period ended September 30, 2013.”

Mr. Peck continued, “The Company’s non-interest expenses for the three and nine month periods ending September 30, 2013, remain relatively unchanged as compared to the same periods in 2012. On a linked quarter basis, non-interest expenses declined $141,000 despite an increase in non-interest expense associated with the termination of a merger agreement. We continue to focus on operating as efficiently as possible while focusing our energies to grow our loan portfolio in a safe and prudent manner.”

Mr. Peck concluded, “We recently announced a stock purchase program of 375,000 shares as well as an increase in our quarterly dividend payments. These announcements reflect the confidence of the Board of Directors and Management in the future of the Company.”

Financial Highlights

• At September 30, 2013, the Company’s tangible book value was $12.92 per share and tangible common equity ratio was 10.32%. The reduction in book value at September 30, 2013, as compared to December 31, 2012, was the result of a lower level of unrealized gains on securities. The Bank’s Tier 1 Capital and Total Risk Based Capital Ratios at September 30, 2013, were 10.71% and 18.36%, respectively. The Company’s Tier 1 Capital and Total Risk Based Capital Ratios were 11.04% and 19.20%, respectively.
• At September 30, 2013, the Company’s allowance for loan loss totaled $9.4 million, or 1.74% of total loans and 77.7% of non-accrual loans. In the nine month period ended September 30, 2013, the Company’s net charge offs totaled $2.4 million, or an annualized rate of 0.61% of average loans.
• For the three month period ended September 30, 2013, the Company’s net interest margin was 3.04%, as compared to 2.67% for the three month period ended September 30, 2012, and 2.99% for the three month period ended June 30, 2013.

Asset Quality

At September 30, 2013, the Company’s level of non-accrual loans totaled $12.1 million, as compared to $7.7 million at December 31, 2012, and $11.8 million at June 30, 2013. A summary of non-accrual loans at September 30, 2013, and December 31, 2012, is as follows:

A summary of the level of classified loans at September 30, 2013, is as follows:

At September 30, 2013, non-accrual loans plus other real estate owned totaled $13.6 million, or 1.45% of total assets, as compared to $9.2 million, or 0.95% of total assets, at December 31, 2012. A summary of the activity in other real estate owned for the nine month period ended September 30, 2013, is as follows:

At September 30, 2013, the Company’s level of loans classified as substandard was $45.3 million as compared to $66.6 million at December 31, 2012. At September 30, 2013, the Company’s classified loan to risk based capital ratio was 39.2%. The Company’s specific reserve for impaired loans was $3.4 million at September 30, 2013, and $3.8 million at December 31, 2012, respectively.

At September 30, 2013, the Company has no loans classified as Troubled Debt Restructurings (“TDRs”) as compared to $11.0 million at December 31, 2012. A summary of the activity in loans classified as TDRs for the nine month period ended September 30, 2013, is as follows:

A summary of TDRs and non-performing TDRs at September 30, 2013, and December 31, 2012, is stated below:

Net Interest Income

For the three month period ended September 30, 2013, the Company’s net interest income was $6.3 million, compared to $5.9 million for the three month period ended September 30, 2012, and $6.2 million for the three month period ended June 30, 2013. For the three month period ended September 30, 2013, the Company’s net interest margin was 3.04%, as compared to 2.67% for the three month period ended September 30, 2012, and 2.90% for the three month period ended June 30, 2013.

For the nine month period ended September 30, 2013, the Company’s net interest income was $18.9 million, as compared to $19.4 million for the nine month period ended September 30, 2012. For the nine month period ended September 30, 2013, the Company’s net interest margin was 2.98%, as compared to 2.84% for the nine month period ended September 30, 2012.

The increase in the Company’s net interest income and net interest margin are largely the result of significant balances of time deposits that matured in the second and third quarters of 2013. The Company anticipates that the full benefit of the deposit maturities will be realized in the fourth quarter of 2013. The Company does not anticipate that it can make material reductions in its deposit structure for the next few quarters as the weighted average cost of upcoming maturities are generally below 1.00%.

Non-interest Income

Non-interest income for the three month period ended September 30, 2013, was $1.8 million, as compared to $2.9 million for the three month period ended September 30, 2012, and $2.8 million for the three month period ended June 30, 2013. Non-interest income for the nine month periods ended September 30, 2013, and September 30, 2012, was $7.1 million and $7.5 million, respectively.

The decline in non-interest income for the three month period ended September 30, 2013, as compared to the three month periods ended September 30, 2012, and June 30, 2013, was primarily the result of a $400,000 other than temporary impairment on the trust preferred security in the Company’s investment portfolio and a reduced amount of gains on the sale of securities. In June 2008, the Company purchased a $2.0 million private placement trust preferred security issued by First Financial Services Corporation (“FFKY”) of Elizabethtown, Kentucky. The security has a thirty year maturity and is scheduled to pay an 8% annualized dividend quarterly. In October 2010, the Company was informed that, pursuant to the trust preferred agreement, FFKY would defer future dividends due to asset quality and capital issues at FFKY.

The Company has continually reviewed all quarterly regulatory filings to determine the future viability of FFKY. Despite asset quality improvements at FFKY, we have determined that it is unlikely that FFKY will be able to resume dividend payments prior to the five year deferral period (set to expire in October 2015) provided for in the trust preferred agreement. Therefore, we have determined that the Company’s investment in FFKY is permanently impaired and should be written down accordingly. At September 30, 2013, the Company reduced the value of its FFKY investment by $400,000, or 20%, through an expense other than temporary impairment charge.

The Company recognized net gains on the sale of securities of $201,000, $944,000, and $789,000 for the three month periods ended September 30, 2013, September 30, 2012, and June 30, 2013, respectively. The Company recognized net gains on the sales of securities of $1.6 million, for the nine month periods ended September 30, 2013, and September 30, 2012, respectively.

For the three and nine month periods ended September 30, 2013, the Company’s revenue related to the origination of fixed rate mortgage loans was $147,000 and $559,000, respectively, as compared to $218,000 and $684,000 for the same periods in 2012. The recent increase in the long term interest rates has negatively affected the demand for secondary market mortgage loans, reducing our income in the three month period ended September 30, 2013. The Company earned $314,000 and $958,000 in commission from our financial services production during the three and nine month periods ended September 30, 2013, as compared to $280,000 and $778,000, respectively, for the same periods in 2012. The Company’s wealth management employees report increased interest in non-FDIC insured products as interest rates remain low and the United States equity markets continue to improve.

Non-interest Expense

Non-interest expenses were $7.0 million, $7.0 million and $7.1 million for the three month periods ended September 30, 2013, September 30, 2012, and June 30, 2013, respectively. For the nine months ended September 30, 2013, and September 30, 2012, non-interest expenses were $21.4 million and $21.5 million, respectively.

On a linked quarter basis, professional services expenses declined by $56,000 despite the Company incurring charges in excess of $150,000 related to the previously announced termination of a merger agreement with Sumner Bank and Trust. On a linked quarter basis, the Company has experienced a modest decline in most operating expense line items.

Balance Sheet

At September 30, 2013, consolidated assets were $935.5 million, a decrease of $32.1 million as compared to December 31, 2012. The decline in assets is largely the result of a $54.1 million reduction in time deposits as the Company has chosen to allow selected high cost deposit funding to leave the Company. The Company has funded the outflow of deposits by the sale of securities.

For the nine month period ended September 30, 2013, gross loans increased by approximately $5.8 million, to $541.4 million as compared to $535.6 million at December 31, 2012. In the Company’s market area, desirable lending opportunities remain limited at this time, making meaningful loan growth challenging.

The Company

Prior to June 5, 2013, HopFed Bancorp, Inc. was a federally chartered savings and loan holding company with Heritage Bank as its wholly owned thrift subsidiary. On June 5, 2013, Heritage Bank’s legal name was changed to Heritage Bank USA, Inc. and its charter was converted to a Kentucky state chartered commercial bank with the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation as its regulators. Also on June 5, 2013, HopFed Bancorp, Inc. became a non-member federally chartered commercial bank holding company regulated by the Federal Reserve Board. HopFed Bancorp, Inc. is the holding company for Heritage Bank USA, Inc. headquartered in Hopkinsville, Kentucky. The Bank has eighteen offices in western Kentucky and middle Tennessee in addition to its subsidiary, Fall & Fall Insurance of Fulton, Kentucky. The Company has two additional operating divisions including Heritage Wealth Management of Murray, Kentucky, Hopkinsville, Kentucky, and Pleasant View, Tennessee, which offers a broad line of financial services. Heritage Mortgage Services of Clarksville, Tennessee, offers long term fixed rate 1- 4 family mortgages loans that are originated for the secondary market in all communities in the Company’s general market area. The Bank offers a broad line of banking and financial products and services with the personalized focus of a community banking organization. More information about HopFed Bancorp and Heritage Bank USA, Inc. may be found on its website www.bankwithheritage.com.

Forward-Looking Information

Information contained in this press release, other than historical information, may be considered forward-looking in nature and is subject to various risk, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on the Company’s operating results, performance or financial condition are competition and the demand for the Company’s products and services, and other factors as set forth in filings with the Securities and Exchange Commission. The Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations. Certain tabular presentations may not reconcile because of rounding.

This information is preliminary and based on company data available at the time of the presentation.

This information is preliminary and based on company data available at the time of the presentation.

This information is preliminary and based on company data available at the time of the presentation.

This information is preliminary and based on company data available at the time of the presentation.

This information is preliminary and based on company data available at the time of the presentation

This information is preliminary and based on company data available at the time of the presentation.

HOPFED BANCORP, INC.
Selected Financial Data

The table below adjusts tax-free investment income for the nine month periods ended September 30, 2013, and September 30, 2012, by $811,000 and $798,000, respectively; for a tax equivalent rate using a cost of funds rate of 1.40% for the nine month period ended September 30, 2013, and 1.80% for the nine month period ended September 30, 2012. The table adjusts tax-free loan income by $6,000 for nine month period ended September 30, 2013, and $7,000 for the nine month period ended September 30, 2012, for a tax equivalent rate using the same cost of funds rate:

This information is preliminary and based on company data available at the time of the presentation.

HOPFED BANCORP, INC.
Selected Financial Data

The table below adjusts tax-free investment income for the three month periods ended September 30, 2013, and September 30, 2012, by $264,000 and $273,000, respectively; for a tax equivalent rate using a cost of funds rate of 1.35% for the three month period ended September 30, 2013, and 2.00% for the three month period ended September 30, 2012. The table adjusts tax-free loan income by $2,000 for three month periods ended September 30, 2013, and September 30, 2012, respectively, for a tax equivalent rate using the same cost of funds rate: