HopFed Bancorp, Inc. Reports Second 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 six month periods ended June 30, 2014. For the three month period ended June 30, 2014, the Company’s net income was $925,000, or $0.13 per share, basic and diluted, compared to net income of $1.2 million, or $0.16 per share basic and diluted, for the three month period ended June 30, 2013. For the six month period ended June 30, 2014, the Company’s net income was $1.3 million, or $0.17 per share, basic and diluted, compared to net income of $2.2 million, or $0.29 per share basic and diluted, for the six month period ended June 30, 2013.

Commenting on the second quarter results, John E. Peck, President and Chief Executive Officer, said, “The Company’s net interest income for the three month period ended June 30, 2014, increased by $180,000 and $60,000, respectively, as compared to the three month periods ended June 30, 2013, and March 31, 2014, respectively. At June 30, 2014, net loans totaled $538.1 million, a decline of $5.5 million as compared to December 31, 2013, and an increase of $2.1 million as compared to March 31, 2014.”

Mr. Peck continued, “During the three month period ended June 30, 2014, the Company recaptured $261,000 of provision for loan loss expense into earnings. The provision reduction is possible due to the continued reduction of non-accrual loans and improved charge off trends. At June 30, 2014, non-accrual loans were $8.7 million, or 1.60% of total loans. Also at June 30, 2014, the Company’s allowance for loan loss account total $8.4 million, or 95.6% of non-accrual loans. The Company’s classified loans declined to $37.7 million, approximately 34% of risk based capital. For the six month period ended June 30, 2014, the Company’s net loan charge offs were $448,000, or 0.16% of average loan balances,” Mr. Peck concluded.

Financial Highlights

• At June 30, 2014, the Company’s tangible book value was $13.51 per share and tangible common equity ratio was 10.52%. The Bank’s estimated Tier 1 Leverage Ratio and Total Risk Based Capital Ratio at June 30, 2014, were 10.95% and 18.60%, respectively. The Company’s consolidated Tier 1 Leverage Ratio and Total Risk Based Capital Ratio at June 30, 2014, were 11.29% and 19.07%, respectively.
• The Company purchased 62,470 shares of its common stock in the quarter at a weighted average price of $11.50 per share. The Company has purchased a total of 72,856 shares since December 31, 2013, at a weighted average price of $11.51 per share. At June 30, 2014, the Company has purchased 149,324 shares of its common stock under the current repurchase program and is authorized to repurchase an additional 225,676 shares of its common stock under the currently approved repurchase plan.

Asset Quality

At June 30, 2014, the Company’s level of non-accrual loans totaled $8.7 million, as compared to $10.1 million at December 31, 2013. A summary of non-accrual loans at June 30, 2014, and December 31, 2013, is as follows:

At June 30, 2014, non-accrual loans plus other real estate owned totaled $10.2 million, or 1.08% of total assets. At December 31, 2013, non-accrual loans plus other real estate owned totaled $11.7 million, or 1.21% of total assets. A summary of the activity in other real estate owned for the six month period ended June 30, 2014, is as follows:

The Company had no loans classified as performing Troubled Debt Restructurings (“TDRs”) at June 30, 2014, and December 31, 2013. There were no loans added or removed from TDR status during the three month period ended June 30, 2014.

Asset Quality (continued)

At June 30, 2014, the Company’s level of loans classified as substandard was $37.7 million as compared to $42.6 million at December 31, 2013. At June 30, 2014, the Company’s classified loan to risk-based capital ratio was 33.9%. The Company’s specific reserve for impaired loans was $1.5 million at June 30, 2014, and $1.9 million at December 31, 2013. A summary of the level of classified loans at June 30, 2014, is as follows:

Net Interest Income

For the three month period ended June 30, 2014, the Company’s net interest income was $6.4 million, compared to $6.3 million for the three month period ended March 31, 2014, and $6.2 million for the three month period ended June 30, 2013. For the three month period ended June 30, 2014, the Company’s net interest margin was 3.02%, as compared to 3.00% for the three month period ended March 31, 2014, and 2.90% for the three month period ended June 30, 2013.

The small increase in net interest income was the result of lower interest expense on deposits, offsetting a decline in interest income. For the three month period ended June 30, 2014, total interest income was $8.7 million, a decline of $260,000 compared to the three month period ended June 30, 2013. For the three month period ended June 30, 2014, the Company’s interest expense on deposits was $1.5 million as compared to $1.9 million for the three month period ended June 30, 2013.

For the six month period ended June 30, 2014, the Company’s net interest income was $12.7 million, as compared to $12.6 million for the six month period ended June 30, 2013. For the six month period ended June 30, 2014, the Company’s interest expense on deposits was $3.0 million as compared to $4.0 million for the six month period ended June 30, 2013. For the six month period ended June 30, 2014, the Company’s net interest margin was 3.01%, as compared to 2.94% for the six month period ended June 30, 2013.

Non-interest Income

Non-interest income for the three month period ended June 30, 2014, was $1.9 million, as compared to $2.8 million for the three month period ended June 30, 2013. The decline in non-interest income for the three month period ended June 30, 2014, as compared to the three month period ended June 30, 2013, was primarily the result of a $548,000 decline in gains on the sale of the securities and a $79,000 decline of mortgage origination income. For the three month period ended June 30, 2014, financial services income declined by $179,000 as compared to the three month period ended June 30, 2013, due to the sale of the Company’s insurance assets in December 2013.

On a linked quarter basis, non-interest income increased by $347,000 in the three month period ended June 30, 2014. The increase was largely the result of lower interest rates, providing for a $75,000 increase in mortgage origination revenue and a $228,000 increase in realized gains on the sale of securities. Also on a linked quarter basis, service charge revenue increased by $70,000.

For the six month period ended June 30, 2014, non-interest income was $3.5 million, a decline of $1.8 million as compared to the six month period ended June 30, 2013. At June 30, 2014, the Company’s recognized gains on the sale of securities of $254,000 as compared to $1.4 million for the six month period ended June 30, 2013. During the same period, mortgage origination income declined by $221,000. The decline in both mortgage origination income and gains on sales of securities for the three and six month period ended June 30, 2014, as compared to the same periods in 2013, was largely the result of a 1.25% increase in the ten year treasury bond during the three month period ended June 30, 2013.

For the six month period ended June 30, 2014, service charge income declined by $164,000 as compared to the six month period ended June 30, 2013. For the six month period ended June 30, 2014, financial services income was $374,000, as compared to $644,000 for the six month period ended June 30, 2013. The decline in financial services income for the three and six month periods ended June 30, 2014, as compared to the same periods in 2013 is largely the result of the Company’s sale of its insurance assets in December 2013. For the three month period ended June 30, 2013, the Company’s financial services income was $347,000, which included the Company’s insurance assets in the amount of $233,000.

Non-interest Expense

On a linked quarter basis, the Company’s non-interest expenses increased by $123,000. The most significant increases in operating expenses were a $152,000 increase in bank franchise taxes, a $54,000 increase in professional services expense and $79,000 in losses on the sale of real estate. The most significant reductions in operating expense line items were to salaries and benefits of $103,000 and $101,000 in occupancy expenses.

For the three month period ended June 30, 2014, non-interest expenses increased by $323,000 as compared to the three month period ended June 30, 2013. At June 30, 2014, the Company’s bank franchise taxes increased by $251,000 and our data processing expenses increased by $90,000, each as compared to the three month period ended June 30, 2013. For the three month period ended June 30, 2014, the Company’s combined losses and expenses related to other real estate owned was $194,000 as compared to $44,000 for the three month period ended June 30, 2013.

Balance Sheet

At June 30, 2014, consolidated assets were $949.9 million, a decline of $23.7 million as compared to December 31, 2013. For the six month period ended June 30, 2014, the Company experienced a $30.9 million decrease in time deposits, a $6.0 million decrease in FHLB borrowings, a $26.0 million decrease in cash balances and a $5.1 million decrease in net loan balances. The Company invested excess liquidity in securities as the balance of available for sale securities increased $12.7 million to $331.6 million.

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. 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.

HOPFED BANCORP, INC.
Selected Financial Data

The table below adjusts tax-free investment income for the six month periods ended June 30, 2014, and June 30, 2013, by $524,000 and $545,000, respectively, for a tax equivalent rate using a cost of funds rate of 1.25% for the six month period ended June 30, 2014, and 1.50% for the six month period ended June 30, 2013. The table adjusts tax-free loan income by $6,000 and $4,000, respectively, for six month periods ended June 30, 2014, and June 30, 2013, respectively, for a tax equivalent rate using the same cost of funds rate:

HOPFED BANCORP, INC.
Selected Financial Data

The table below adjusts tax-free investment income for the three month periods ended June 30, 2014, and June 30, 2013, by $259,000 and $263,000, respectively, for a tax equivalent rate using a cost of funds rate of 1.20% for the three month period ended June 30, 2014, and 1.50% for the three month period ended June 30, 2013. The table adjusts tax-free loan income by $3,000 for three month period ended June 30, 2014, and $1,000 for the three month period ended June 30, 2013, respectively, for a tax equivalent rate using the same cost of funds rate: