HopFed Bancorp, Inc. : Reports Growth in Net Income, Loans and Deposits for Second Quarter

HopFed Bancorp, Inc. (NASDAQ: HFBC) (the “Company”), the holding company for Heritage Bank USA, Inc. (the “Bank”), today reported growth in loans and deposits at June 30, 2017 as well as significant growth in net income in the three and six month periods ended June 30, 2017. For the three month period ended June 30, 2017, net income rose 275.0% to $1.1 million, or $0.18 per share, as compared to the three month period ended June 30, 2016. At June 30, 2017, loans rose 12.6% to $631.2 million and deposits were up 6.6% to $745.9 million as compared to June 30, 2016. For the six month period ended June 30, 2017, net income rose 155.4% to $2.1 million, or $0.33 per share, compared to $813,000, or $0.13 per share, for the six month period ended June 30, 2016.

Commenting on the second quarter results, John E. Peck, President and Chief Executive Officer, said, “HopFed’s earnings rose significantly in the second quarter based on loan growth, improved margins and our program to manage non-interest expenses. We continued to make progress in growing HopFed’s earnings since last year and expect to show solid growth in 2017 compared to last year.

Our Board of Directors recently approved a 25% increase in our quarterly cash dividend to $0.05 per share. We believe the increased dividend highlights our improved profitability and our Board’s positive outlook for the future of HopFed.” The cash dividend is payable on July 27, 2017 to shareholders of record on July 7, 2017.

Financial Highlights

• Net income rose 275.0% to $1,141,000 in the second quarter of 2017 compared to $304,000 in the second quarter of 2016. Net income per diluted share rose 260.0% to $0.18 in the second quarter of 2017 compared to $0.05 in the second quarter of 2016. The growth in net income benefited from higher net interest income, a lower provision for loan losses and lower non-interest expenses.
• Loans receivable rose 12.6% to $631.2 million at June 30, 2017, compared to $560.8 million at June 30, 2016. Loan growth benefited from solid production from the Company’s loan production office in Nashville, Tennessee. At June 30, 2017, total loans originated and outstanding in the Nashville loan production office was $61.5 million, compared to $23.3 million at June 30, 2016.
• Total deposits rose 6.6% to $745.9 million at June 30, 2017, compared to $699.6 million at June 30, 2016. Non-interest bearing deposits rose 8.6% to $132.3 million, NOW accounts rose 13.5% to $216.3 million and other time deposits increased 4.4% to $299.1 million compared to June 30, 2016.
• At June 30, 2017, the Company’s tangible book value rose to $14.23 per share and tangible common equity ratio was 9.73%. The Company’s tangible book value and common equity ratio computations do not include 476,862 unallocated shares of common stock held by the Company’s ESOP.
• Loan quality improved in the second quarter in 2017. Non-accruing loans declined 25.5% to $8.6 million, or 1.34% of total loans, at June 30, 2017, compared to $11.5 million, or 2.03% of total loans, at June 30, 2016. Loans classified as substandard were down 34.1% to $24.8 million at June 30, 2017, compared to $37.6 million at June 30, 2016. For the three and six month periods ended June 30, 2017, recoveries exceeded charge offs by $958,000 and $719,000, respectively. The Company’s provision for loan loss expense declined to $59,000 in the second quarter of 2017 compared to $465,000 in the second quarter of 2016, reflecting the overall improvement in asset quality and higher level of loan loss recoveries.
• The Company’s tax equivalent net interest margin rose 11 basis points to 3.39% for the second quarter of 2017 compared to 3.28% for the second quarter of 2016. The growth in net interest margin benefited from a 4.1% increase in average earning assets and an 18 basis point increase in average rates on interest earning assets compared to the second quarter of 2016. Average rates on interest bearing liabilities increased only 7 basis points since the second quarter of last year.
• The Company continued our efforts to reduce our non-interest expenses. For the three month period ended June 30, 2017, non-interest expense declined 4.9%, to $7.2 million, as compared to $7.6 million in the three month period ended June 30, 2016.

• The Company continued to repurchase its treasury shares as part of the Board approved share repurchase program. For the three and six month periods ended June 30, 2017, the Company purchased 438 shares and 1,131 shares of its common stock, respectively, at a weighted average price of $12.72 per share and $12.64 per share, respectively. At June 30, 2017, the Company held 1,247,267 shares in treasury stock with a weighted average cost of $12.32 per share. The Company may purchase an additional 91,419 additional shares of treasury stock under its current repurchase program.

Net Interest Income

For the six month period ended June 30, 2017, the Company’s net interest income was $13.7 million, compared to $13.1 million for the six month period ended June 30, 2016. For the three month period ended June 30, 2017, the Company’s net interest income was $7.0 million, compared to $6.8 million for the three month period ended March 31, 2017, and $6.4 million for the three month period ended June 30, 2016, respectively. The Company continues to reduce the average balances of our investment portfolio and deploy these funds into higher yielding loans.

The Company’s improved level of net interest income compared to last year was largely the result of an increase in the average balance in loans. For the six month period ended June 30, 2017, the average balance of loans was $618.4 million with a weighted average yield of 4.44% compared to $556.6 million with a weighted average yield of 4.53% for the same period in 2016. For the three month period ended June 30, 2017, the average balance of loans was $622.6 million with a weighted average yield of 4.48% compared to $555.1 million with a weighted average yield of 4.43% in the second quarter of 2016.

For the six month period ended June 30, 2017, the average balance of taxable securities available for sale was $177.0 million with an average yield of 2.57% compared to $199.1 million with an average yield of 2.46% for the first six months of 2016. For the six month period ended June 30, 2017, the average balance of tax free securities available for sale was $33.4 million with a weighted average tax equivalent yield of 5.04% compared to $41.2 million with a weighted average tax equivalent yield of 5.03% for the first six months of 2016.

For the three month period ended June 30, 2017, the average balance of taxable securities available for sale was $177.3 million with a weighted average yield of 2.61% compared to $200.5 million with an average yield of 2.39% for the three month period ended June 30, 2016. The average balance of tax free securities available for sale was $32.9 million with a weighted average tax equivalent yield of 5.09% for the three month period ended June 30, 2017 compared to $40.3 million with a weighted average tax equivalent yield of 5.05% for the three month period ended June 30, 2016.

Interest expense for the six month period ended June 30, 2017, was $2.9 million compared to $2.7 million for the six month period ended June 30, 2016. The average cost of interest bearing liabilities was 0.83% and 0.80% for the six month periods ended June 30, 2017 and June 30, 2016, respectively. The average balance of interest bearing liabilities for the six month periods ended June 30, 2017 and June 30, 2016 were $689.9 million and $667.0 million, respectively. For the six month periods ended June 30, 2017 and June 30, 2016, the Company’s tax equivalent net interest margin was 3.35% and 3.34%, respectively.

Interest expense was $1.5 million for the three month period ended June 30, 2017, compared to $1.4 million in the three month period ended March 31, 2017, and $1.3 million for the three month period ended June 30, 2016. For the three month periods ending June 30, 2017, March 31, 2017 and June 30, 2016, the average cost of interest bearing liabilities was 0.84%, 0.81% and 0.77%, respectively. The average balance of interest bearing liabilities for the three month periods ended June 30, 2017, March 31, 2017 and June 30, 2016 were $689.2 million, $690.7 million and $655.4 million, respectively. For the three month periods ended June 30, 2017, March 31, 2017 and June 30, 2016, the Company’s tax equivalent net interest margin was 3.39%, 3.31% and 3.28%, respectively.

Non-interest Income

Non-interest income for the six month period ended June 30, 2017, was $4.1 million, compared to $4.0 million for the six month period ended June 30, 2016. For the six month period ended June 30, 2017, service charge income was $1.6 million, compared to $1.4 million for the six month period ended June 30, 2016. The improvement in service charge income is the result of a change made to the Company’s consumer transaction deposit product offerings. For the six month period ended June 30, 2017, income from bank owned life insurance was $307,000, compared to $161,000 for the six month period ended June 30, 2016, due to the payment of a death benefit in March 2017. For the six month period ended June 30, 2017, other income was $691,000, an increase of $312,000 compared to the six month period ended June 30, 2016. The increase in other income was the result of a one-time bonus paid for a marketing agreement with a vendor. In the six month period ended June 30, 2017, the Company experienced declines in mortgage origination income and gains on the sale of securities of $191,000 and $327,000 compared to the six month period ended June 30, 2016, due largely to an increase in market interest rates.

Non-interest income for the three month period ended June 30, 2017, was $1.8 million compared to $2.3 million for the three month period ended March 31, 2017, and $2.0 million for the three month period ended June 30, 2016. For the three month period ended June 30, 2017, service charge income was $800,000 compared to $804,000 for the three month period ended March 31, 2017, and $698,000 for the three month period ended June 30, 2016.

For the three month period ended June 30, 2017, the Company’s income on the origination of mortgage loans was $278,000 compared to $334,000 for the three month period ended March 31, 2017, and $435,000 for the three month period ended June 30, 2016. The Company recognized net gains on the sale of securities of $14,000, $2,000 and $52,000 for the three month periods ended June 30, 2017, March 31, 2017 and June 30, 2016, respectively. The decline in security gains is the result of higher interest rates and modest growth in the Company’s deposit balances.

Non-interest Expense

For the six month period ended June 30, 2017, non-interest expenses were $14.9 million, representing a decline of $370,000 compared to the six month period ended June 30, 2016. For the six month period ended June 30, 2017, the Company’s salary and benefit expense was $8.2 million, an increase of $324,000 compared to the six month period ended June 30, 2016. The increase in salary and benefit expense is the result of higher costs associated with employee medical insurance and an increase in salaries due to bonuses paid to commercial loan officers who exceeded production goals. For the six month period ended June 30, 2017, professional services expense was $812,000, an increase of $172,000 compared to the six month period ended June 30, 2016. The increase in professional services expense was due largely to higher legal fees associated with a shareholder demand letter and shareholder lawsuit. For the six month period ended June 30, 2017, foreclosure expenses were $114,000, representing a decline of $155,000 compared to the six month period ended June 30, 2017. For the six month period ended June 30, 2017, other operating expenses were $1.8 million compared to $2.3 million for the six month period ended June 30, 2016.

For the three month period ended June 30, 2017, total non-interest expenses were $7.2 million, compared to $7.6 for the three month period ended June 30, 2016. For the three month period ended June 30, 2017, the Company’s salaries and benefits expense was $4.0 million, compared to $3.9 million for the three month period ended June 30, 2016. The Company’s reduced balances in foreclosed assets have resulted in lower levels of expenses and losses of $6,000 in the three month period ended June 30, 2017, compared to $201,000 for the three month period ended June 30, 2016.

On a linked quarter basis, non-interest expenses declined by $456,000. On a linked quarter basis, the Company’s salary and benefit expense declined by $259,000 largely as the result of reduced vacation accruals and lower levels of payroll taxes. On a linked quarter basis, foreclosed assets expense declined by $102,000 and data processing expenses declined by $218,000 due to a one-time reimbursement of previously paid expenses.

Balance Sheet

At June 30, 2017, consolidated assets rose 5.8% to $912.1 million, an increase of $50.4 million compared to June 30, 2016. For the six month period ended June 30, 2017, the Company experienced a $6.0 million increase in time deposits, a $740,000 decline in cash balances, and a $27.0 million increase in net loan balances. For the six month period ended June 30, 2017, the Company’s non-interest bearing and interest bearing checking accounts increased by $1.2 million and $6.9 million, respectively.

The Bank’s Tier 1 Leverage Ratio, Common Equity Tier 1 Capital Ratio and Total Risk Based Capital Ratio at June 30, 2017, were 10.36%, 14.59% and 15.73, respectively. The Company’s Tier 1 Leverage Ratio, Common Equity Tier 1 Capital Ratio and Total Risk Based Capital Ratio at June 30, 2017, were 10.41%, 14.97% and 16.11%, respectively. All of the capital ratios were significantly above the highest regulatory rating of “well capitalized.”

Asset Quality

For the three and six month periods ended June 30, 2017, loan recoveries exceeded charge offs by $958,000 and $719,000, respectively. For the six month period ended June 30, 2017, the Company’s annualized net recoveries ratio was 0.23% of average loans. A summary of non-accrual loans at June 30, 2017 and December 31, 2016, is as follows:

At June 30, 2017, the Company’s level of loans classified as substandard was $24.8 million compared to $29.3 million at December 31, 2016. At June 30, 2017, the Company’s classified loans to risk based capital ratio was 24.9%. The Company’s specific reserve for impaired loans was $979,000 at June 30, 2017 and $1,148,000 at December 31, 2016. A summary of the level of classified loans at June 30, 2017, is as follows:

Foreclosed Assets

A summary of the activity in foreclosed assets for the six month period ended June 30, 2017, is as follows:

The Company

HopFed Bancorp, Inc. is the holding company for Heritage Bank USA, Inc. (“Heritage Bank”), a Kentucky state chartered commercial bank. Heritage Bank has eighteen offices in western Kentucky and middle Tennessee and loan production offices in Nashville, Tennessee and Brentwood, Tennessee. The Company offers a broad line of financial services and products with the personalized focus of a community banking organization. More information about HopFed Bancorp and Heritage Bank is located 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 risks, 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, 2017 and June 30, 2016, by $279,000 and $344,000, respectively; for a tax equivalent rate using a cost of funds rate of 0.83% for the three month period ended June 30, 2017, and 0.80% for the six month period ended June 30, 2016. The table adjusts tax-free loan income by $21,000 for the six month period ended June 30, 2017, and $13,000 for the three month period ended June 30, 2016, 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, 2017 and June 30, 2016, by $139,000 and $169,000, respectively; for a tax equivalent rate using a cost of funds rate of 0.84% for the three month period ended June 30, 2017, and 0.77% for the three month period ended June 30, 2016. The table adjusts tax-free loan income by $12,000 for the three month period ended June 30, 2017, and $6,000 for the three month period ended June 30, 2016, for a tax equivalent rate using the same cost of funds rate:

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