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, 2014. For the three month period ended September 30, 2014, the Company’s net income was $2.0 million, or $0.27 per share, basic and diluted, compared to net income of $536,000, or $0.07 per share basic and diluted, for the three month period ended September 30, 2013. For the nine month period ended September 30, 2014, the Company’s net income was $3.2 million, or $0.44 per share, basic and diluted, compared to net income of $2.7 million, or $0.36 per share basic and diluted, for the nine month period ended September 30, 2013.

Commenting on the third quarter results, John E. Peck, President and Chief Executive Officer, said, “The Company’s credit quality significantly improved during the quarter, allowing us to recapture $892,000 in provision for loan loss expenses. At September 30, 2014, non-accrual loans were $1.1 million, or 0.21% of total loans. At September 30, 2014, the Company’s balance in other real estate and other assets owned was $2.0 million and our total non-performing asset to total asset ratio was 0.33%. At September 30, 2014, the Company’s allowance for loan loss account totaled $8.1 million, or 728.0% of non-accrual loans and 1.51% of total loans. For the nine month period ended September 30, 2014, the Company’s recoveries exceed charge offs by approximately $224,000.”

Mr. Peck continued, “For the three month periods ended September 30, 2014, income from the origination of mortgage loans sold on the secondary market and wealth management commissions increased by $183,000 and $195,000, respectively, as compared to the three month period ended June 30, 2014. Furthermore, the Company continues to find success in reducing our interest expense. Total interest expense declined by $168,000 during the three month period ended September 30, 2014, as compared to the three month period ended June 30, 2014.”

Financial Highlights

• At September 30, 2014, the Company’s tangible book value was $13.72 per share and tangible common equity ratio was 10.66%. The Bank’s estimated Tier 1 Leverage Ratio and Total Risk Based Capital Ratio at September 30, 2014, were 11.43% and 18.86%, respectively. The Company’s consolidated Tier 1 Leverage Ratio and Total Risk Based Capital Ratio at September 30, 2014, were 11.49% and 18.91%, respectively.
• The Company purchased 186,370 shares of its common stock in the quarter at a weighted average price of $11.74 per share. At September 30, 2014, the Company has purchased 335,694 shares of its common stock under the current repurchase program and is authorized to repurchase an additional 39,306 shares of its common stock under the currently approved repurchase plan. The Company holds a total of 738,610 shares of treasury stock at a weighted average cost of $12.13 per share.
• During the quarter, the Company has opened a loan production office on West End Avenue in Nashville, Tennessee, and has hired two commercial loan officers. We are seeking additional high performing commercial lenders to enhance our presence in the market.

Asset Quality

At September 30, 2014, the Company’s level of non-accrual loans totaled $1.1 million, as compared to $10.1 million at December 31, 2013. For the three month period ended September 30, 2014, the Company had two of its most significant non-accrual relationships become current and placed in accrual status. A summary of non-accrual loans at September 30, 2014, and December 31, 2013, is as follows:

At December 31, 2013, non-accrual loans plus other real estate and other assets owned totaled $11.7 million, or 1.21% of total assets. At September 30, 2014, non-accrual loans plus other real estate and other assets owned totaled $3.1 million, or 0.33% of total assets. A summary of the activity in other real estate owned for the nine month period ended September 30, 2014, is as follows:

Asset Quality (continued)

The Company had no loans classified as performing Troubled Debt Restructurings (“TDRs”) at December 31, 2013. During the three month period ending September 30, 2014, the Company classified the following currently performing loans as TDR:

At September 30, 2014, the Company’s level of loans classified as substandard was $38.4 million as compared to $42.6 million at December 31, 2013. At September 30, 2014, the Company’s classified loan to risk-based capital ratio was 33.7%. The Company’s specific reserve for impaired loans was $2.9 million at September 30, 2014, and $1.9 million at December 31, 2013. A summary of the level of classified loans at September 30, 2014, is as follows:

Net Interest Income

For the three month period ended September 30, 2014, the Company’s net interest income was $6.8 million, compared to $6.4 million for the three month period ended June 30, 2014, and $6.3 million for the three month period ended September 30, 2013. For the three month period ended September 30, 2014, the Company’s net interest margin was 3.22%, as compared to 3.04% for the three month period ended September 30, 2013, and 3.02% for the three month period ended June 30, 2014. The increase in net interest income was due in part to the collection of $280,000 in interest from a loan that was previously classified as non-accrual. In addition to an increase in loan interest income, the Company’s interest expense decline by $168,000 for the three month period ended September 30, 2014, as compared to the three month period ended June 30, 2014. For the three month period ended September 30, 2014, the additional $280,000 of interest collected on non-accrual loans added 0.21% to the Company’s yield on loans and 0.13% to the Company’s net interest margin.

Net Interest Income (continued)

For the nine month period ended September 30, 2014, the Company’s net interest income was $19.5 million, as compared to $18.9 million for the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, the Company’s interest expense on deposits was $4.3 million as compared to $5.6 million for the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, the Company’s net interest margin was 3.12%, as compared to 2.98% for the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, the additional $280,000 of interest collected on non-accrual loans added 0.07% to the Company’s yield on loans and 0.05% to the Company’s net interest margin.

Non-interest Income

Non-interest income for the three month period ended September 30, 2014, was $2.4 million, as compared to $1.8 million for the three month period ended September 30, 2013, and $1.9 million for the three month period ended June 30, 2014. The increase in non-interest income for the three month period ended September 30, 2014, as compared to the three month period ended September 30, 2013, was primarily the result of a $400,000 impairment charge on an investment security incurred in September of 2013. For the three month period ended September 30, 2014, mortgage origination income was $316,000 as compared to $147,000 for the three month period ended September 30, 2013, and $133,000 for the three month period ended June 30, 2014.

For the nine month period ended September 30, 2014, non-interest income was $5.9 million, a decline of $1.1 million as compared to the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, the Company earned $548,000 from gains on the sale of securities as compared to $1.6 million for the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, service charge income declined by $234,000, as compared to the nine month period ended September 30, 2013.

Non-interest Expense

On a linked quarter basis, the Company’s non-interest expenses increased by $116,000. The most significant increases in operating expenses was a $189,000 increase in salaries and benefits expense and a $137,000 increase in other operating expenses. During the same link quarter basis, the Company’s losses on real estate owned and expenses related to other real estate owned declined by $67,000 and $121,000, respectively.

For the three month period ended September 30, 2014, non-interest expenses increased by $579,000, as compared to the three month period ended September 30, 2013. For the three month period ended September 30, 2014, the Company’s salary expense increased by $146,000, state bank taxes increased by $203,000, and other expenses increased by $271,000, respectively, as compared to the three month period ended September 30, 2013. For the three month period ended September 30, 2014, other expenses increased by $271,000 due to operating losses in tax advantaged partnerships. For the three month period ended September 30, 2014, the Company experienced a $96,000 decline in professional services, a $97,000 decline in occupancy expenses and a $107,000 decline in expenses related to other real estate owned, respectively, as compared to the three month period ended September 30, 2013.

For the nine month period ended September 30, 2014, non-interest expenses were $22.3 million, an increase of $1,000,000 as compared to the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, the Company experienced increases of $246,000 in data processing expenses, a $558,000 increase in state bank taxes, a $167,000 increases in losses on the sale of real estate and $298,000 increase in other expenses, respectively, as compared to the nine month period ended September 30, 2013. During the nine month period ended September 30, 2014, the Company experienced a significant decline in professional services expenses, and occupancy expenses as compared to the nine month period ended September 30, 2013.

Balance Sheet

At September 30, 2014, consolidated assets were $929.7 million, a decline of $44 million as compared to December 31, 2013. For the nine month period ended September 30, 2014, the Company experienced a $38.3 million decrease in time deposits, a $6.5 million decrease in FHLB borrowings, a $20.5 million decrease in cash and cash equivalents and a $12.9 million decrease in net loan balances compared to December 31, 2013. The Company continues to re-price its liabilities while working to generate additional loan relationships.

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 Clarksville, 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.

The table below adjusts tax-free investment income for the nine month periods ended September 30, 2014, and September 30, 2013, by $774,000 and $812,000, respectively, for a tax equivalent rate using a cost of funds rate of 1.25% for the nine month period ended September 30, 2014, and 1.40% for the nine month period ended September 30, 2013. The table adjusts tax-free loan income by $9,000 and $6,000, respectively, for nine month periods ended September 30, 2014, and September 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 September 30, 2014, and September 30, 2013, by $251,000 and $264,000, respectively, for a tax equivalent rate using a cost of funds rate of 1.20% for the three month period ended September 30, 2014, and 1.35% for the three month period ended September 30, 2013. The table adjusts tax-free loan income by $3,000 for three month period ended September 30, 2014, and $2,000 for the three month period ended September 30, 2013, respectively, for a tax equivalent rate using the same cost of funds rate: