HopFed Bancorp, Inc. Reports Fourth 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 twelve month periods ended December 31, 2014. For the three month period ended December 31, 2014, the Company’s net loss was $1.0 million, or ($0.14) per share, basic and diluted, compared to net income of $1.1 million, or $0.14 per share basic and diluted, for the three month period ended December 31, 2013. For the twelve month period ended December 31, 2014, the Company’s net income was $2.2 million, or $0.30 per share, basic and diluted, compared to net income of $3.8 million, or $0.50 per share basic and diluted, for the twelve month period ended December 31, 2013.

Commenting on the fourth quarter results, John E. Peck, President and Chief Executive Officer, said, “The Company’s decision to prepay $35.9 million in Federal Home Loan Bank (“FHLB”) advances resulted in a $2.5 million prepayment penalty. The penalty reduced the Company’s net income for the three and twelve month period ending December 31, 2014, by $1.7 million, or $0.23 per share basic and diluted. By prepaying the FHLB advances, the Company will reduce its interest expense by $1.5 million in 2015 and $1.4 million in 2016. To fund the prepayment of FHLB borrowings, the Company utilized cash on hand as well as borrowing $15.0 million for one month and $15.0 million for six months. In January 2015, the Company has sold investments that will provide the liquidity necessary to pay off the $15.0 million maturity due in late January 2015.”

Mr. Peck continued, “In the fourth quarter of 2014, the Company completed a sale of a $6.9 million commercial real estate loan. The relationship was classified as substandard and as a Troubled Debt Restructuring, having spent approximately twelve months in bankruptcy. The loan was sold at a loss of $1,781,000. The Company previously had a specific reserve of $1.5 million against this relationship and reduced the allowance for loan loss account by that amount after the sale of the note. After the loan sale, the Company’s allowance for loan loss remains adequately funded.”

“The Company experienced loan growth of $6.7 million during the fourth quarter of 2014. The Company’s loan pipeline is active and we are beginning to see activity grow in our Nashville, Tennessee, loan production office. In 2015, the Company is confident that we will benefit from the reduction in interest expense and continued loan growth,” Mr. Peck concluded.

Financial Highlights

• At December 31, 2014, the Company’s tangible book value was $13.72 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 December 31, 2014, were 10.98% and 18.64%, respectively. The Company’s consolidated Tier 1 Leverage Ratio and Total Risk Based Capital Ratio at December 31, 2014, were 11.10% and 19.05%, respectively.
• The Company purchased 39,773 shares of its common stock in the quarter at a weighted average price of $11.89 per share. For the twelve month period ended December 31, 2014, the Company purchased 298,999 shares of its common stock at a weighted average price of $11.71 per share. At December 31, 2014, the Company holds a total of 778,383 shares of treasury stock at a weighted average cost of $12.12 per share.
• On January 12, 2015, the Company was notified by Wilmington Trust that its investment in First Federal Statutory Trust III, (“FFKY Trust”), has elected to terminate the extension period of interest payments effective January 1, 2015. All accrued interest due and payable to all owners of securities through March 15, 2015, has been paid to the trustee. The Trustee will hold the funds until the next interest payment date of March 15, 2015. At that time, the Company will receive a total of $870,837.98 of interest and compounded interest and will continue to receive regularly scheduled interest of approximately $40,000 each quarter thereafter. On January 21, 2015, the Company has determined that FFKY Trust is no longer impaired and has placed the investment back into accrual status.

Asset Quality

At December 31, 2014, the Company’s level of non-accrual loans totaled $3.2 million, as compared to $10.1 million at December 31, 2013. A summary of non-accrual loans at December 31, 2014, and December 31, 2013, is as follows:

Asset Quality (continued)

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 December 31, 2014, non-accrual loans plus other real estate and other assets owned totaled $5.1 million, or 0.55% of total assets. A summary of the activity in other real estate owned for the twelve month period ended December 31, 2014, is as follows:

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

Asset Quality (continued)

At December 31, 2014, the Company’s level of loans classified as substandard was $37.4 million as compared to $42.6 million at December 31, 2013. At December 31, 2014, the Company’s classified loan to risk-based capital ratio was 33.6%. The Company’s specific reserve for impaired loans was $1.5 million at December 31, 2014, and $1.9 million at December 31, 2013. A summary of the level of classified loans at December 31, 2014, is as follows:

Net Interest Income

For the three month period ended December 31, 2014, the Company’s net interest income was $6.3 million, compared to $6.8 million for the three month period ended September 30, 2014, and $6.4 million for the three month period ended December 31, 2013. For the three month period ended September 30, 2014, the Company’s net interest income received the benefit of a significant reduction in non-accrual loan balances, which added approximately $300,000 in additional interest income on loans. For the three month period ended December 31, 2014, the Company’s net interest margin was 3.06%, as compared to 3.10% for the three month period ended December 31, 2013, and 3.22% for the three month period ended September 30, 2014.

For the twelve month period ended December 31, 2014, the Company’s net interest income was $25.8 million, as compared to $25.3 million for the twelve month period ended December 31, 2013. For the twelve month period ended December 31, 2014, the Company’s interest expense on deposits was $5.6 million as compared to $7.1 million for the twelve month period ended December 31, 2013. For the twelve month period ended December 31, 2014, the Company’s net interest margin was 3.08%, as compared to 3.01% for the twelve month period ended December 31, 2013.

Non-interest Income

Non-interest income for the three month period ended December 31, 2014, was $1.9 million, as compared to $2.3 million for the three month period ended December 31, 2013, and $2.4 million for the three month period ended September 30, 2014. The decline in non-interest income for the three month period ended December 31, 2014, as compared to the three month period ended September 30, 2014, was primarily the result of a $264,000 decline in gains on the sale of securities, a $120,000 decline in income from financial services commission and a $104,000 decline in mortgage origination income.

The decline in non-interest income for the three month period ended December 31, 2014, as compared to the three month period ended December 31, 2013, was primarily the result of a $412,000 gain on the sale of insurance assets sold during the fourth quarter of 2014. During the three month period ended December 31, 2014, service charge income and merchant card income declined by a combined $63,000 as compared to the same period in 2013. During the three month period ended December 31, 2014, mortgage origination revenue increased to $212,000 as compared to $75,000 for the three month period ended December 31, 2013.

For the twelve month period ended December 30, 2014, non-interest income was $7.8 million, a decline of $1.5 million as compared to the twelve month period ended December 31, 2013. For the twelve month period ended December 31, 2014, the Company earned $578,000 from gains on the sale of securities as compared to $1.7 million for the twelve month period ended December 31, 2013. As compared to the twelve month period ended December 31, 2013, significant changes in non-interest income production as compared the twelve month period ended December 31, 2014, includes financial services commission ($270,000) and the Company’s 2013 $412,000 gain on sale of insurance assets.

Non-interest Expense

On a linked quarter basis, the Company’s non-interest expenses increased by approximately $4.0 million, largely the result of the $1.8 million loss on the sale of a commercial real estate loan and the $2.5 million FHLB prepayment penalty. On a linked quarter basis, only real estate owned expense, an increase of $102,000 on a linked quarter basis, increased by more than $100,000. For the three month period ended December 31, 2014, non-interest expenses increased by $4.3 million as compared to the three month period ended December 31, 2014, largely the result of the loss on the loan and FHLB prepayment penalty. Other significant expense line items that increased for the three month period ended December 31, 2014, as compared to three month period ended December 31, 2013, included salaries and benefits of $418,000 and state bank taxes of $197,000. During the same periods, the Company saw significant declines in occupancy expense of $151,000, real estate owned expense of $143,000, and losses on other real estate owned of $99,000.

Non-interest Expense (continued)

For the twelve month period ended December 31, 2014, non-interest expenses were $33.9 million, an increase of $5.3 million as compared to the twelve month period ended December 31, 2013. For the twelve month period ended, December 31, 2014, the Company experienced the following significant increases in operating expenses as compared to the twelve month period ended December 31, 2013:

During the twelve month period ended December 31, 2014, the Company saw significant reductions in the following operating expenses as compared to the twelve month period ended December 31, 2013:

Balance Sheet

At December 31, 2014, consolidated assets were $935.8 million, a decline of $37.8 million as compared to December 31, 2013. For the twelve month period ended December 31, 2014, the Company experienced a $50.1 million decrease in time deposits, a $9.8 million increase in non-interest bearing deposits, a $12.8 million decrease in FHLB borrowings, a $15.4 million decrease in cash and cash equivalents and a $4.3 million decrease in net loan balances compared to December 31, 2013. At December 31, 2014, non-interest bearing deposits are 15.7% of total deposits while time deposits account for 45.4% of total deposits.

The Company’s ability to further reduce its interest expense on deposits is limited during the first eleven months of 2015. Beginning in December 2015 and ending in February of 2016, the Company has $91.4 million in time deposits maturing with a weighted average cost of 1.99%. The Company anticipates maintaining the majority of these deposit accounts at the market rates prevalent at the time of their maturity.

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.

HOPFED BANCORP, INC.
Selected Financial Data
(Dollars in thousands, except share and per share data)

The table below adjusts tax-free investment income for the twelve month periods ended December 31, 2014, and December 31, 2013, by $1,016 and $1,073 respectively, for a tax equivalent rate using a cost of funds rate of 1.20% for the twelve month period ended December 31, 2014, and 1.40% for the twelve month period ended December 31, 2013. The table adjusts tax-free loan income by $13 and $9, respectively, for twelve month periods ended December 31, 2014, and December 31, 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 December 31, 2014, and December 31, 2013, by $230 and $264, respectively, for a tax equivalent rate using a cost of funds rate of 1.12% for the three month period ended December 31, 2014, and 1.28% for the three month period ended December 31, 2013. The table adjusts tax-free loan income by $4 for three month period ended December 31, 2014, and $2 for the three month period ended December 31, 2013, respectively, for a tax equivalent rate using the same cost of funds rate: