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, 2016. For the three month period ended June 30, 2016, the Company reported net income of $304,000, or $0.05 per share, basic and diluted, compared to a net loss of $117,000, or ($0.02) per share basic and diluted, for the three month period ended June 30, 2015. For the six month period ended June 30, 2016, the Company’s net income was $813,000, or $0.13 per share, basic and diluted, compared to net income of $1.2 million, or $0.19 per share basic and diluted, for the six month period ended June 30, 2015.

Commenting on the second quarter results, John E. Peck, President and Chief Executive Officer, said, “The Company’s mortgage service division continues to find success in growing their business relationships. For the six month period ended June 30, 2016, mortgage origination revenue was $803,000, as compared to $520,000 in the six month period ended June 30, 2015. We look forward to adding a Nashville, Tennessee, location for Heritage Mortgage Services in the near future.”

Mr. Peck continued, “The Company’s operating results were negatively impacted by an increase in non-accrual loans. At June 30, 2016, Company’s non-accrual loans totaled $11.5 million and our non-accrual interest was approximately $515,000. At March 31, 2016, non-accrual loans totaled $5.0 million and non-accrual interest was approximately $285,000.” Mr. Peck concluded.

Financial Highlights

• At June 30, 2016, the Company’s tangible book value was $14.31 per share and tangible common equity ratio was 10.32%. The Company’s tangible book value and common equity ratio computations do not include 524,929 shares of common stock held by the Company’s ESOP that the Company has currently not committed to release.
• The Company purchased 62,561 shares of its common stock in the three month period ended June 30, 2016, at a weighted average price of $11.56 per share. For the six month period ended June 30, 2016, the Company purchased 138,218 shares of its common stock at a weighted average price of $11.75 per share. At June 30, 2016, the Company owns 1,224,106 shares of treasury stock at a weighted average cost of $12.33 per share.
• At June 30, 2016, net loans totaled $560.8 million, a $4.4 million increase as compared to December 31, 2015, and a $6.0 million increase as compared to March 31, 2016. The Company is encouraged by the size and quality of our loan pipeline.
• The Company’s estimated Tier 1 Leverage Ratio and Total Risk Based Capital Ratio at June 30, 2016, were 10.85% and 17.23%, respectively. The Bank’s Tier 1 Leverage Ratio and Total Risk Based Capital Ratio at June 30, 2015, were 10.64% and 17.01%, respectively.

Asset Quality

At June 30, 2016, the Company’s level of non-accrual loans totaled $11.5 million, as compared to $7.4 million at December 31, 2015. A summary of non-accrual loans at June 30, 2016, and December 31, 2015, is as follows:

The increase in non-accrual loans at June 30, 2016, as compared to December 31, 2015, is largely the result of one land development relationship that has been classified as substandard since July of 2013. The collateral for the loan consist of undeveloped land that is being held for future commercial development and a single family residence.

At June 30, 2016, the Company had one lending relationship, with a balance of $2.7 million, past due more than 90 days and still accruing interest. The lending relationship consists of approximately $1.2 million in loans secured by land held for development, approximately $1.2 million in loans secured by non-residential real estate and approximately $300,000 in loans secured by single family residential properties. The Company’s loan to value ratio on this relationship is very strong and we anticipate the collection of all principal and interest due.

At June 30, 2016, non-performing assets plus loans past due more than 90 days and still accruing interest totaled $15.0 million, or 1.74% of total assets. At December 31, 2015, non-performing assets plus loans past due more than 90 days and still accruing interest was $9.2 million, or 1.01% of total assets. A summary of the activity in other real estate owned for the six month period ended June 30, 2016, is as follows:

Asset Quality (continued)

For the six month period ended June 30, 2016, the Company’s balance of loans classified as Troubled Debt Restructurings (“TDRs”) increased from $5.5 million to $6.5 million. The increase is the result of one lending relationship in which the customer’s payment terms were revised to provide for interest only payments while the customer attempts to sell the collateral. A summary of the activity in loans classified as TDRs for the six month period ended June 30, 2016, is as follows:

At June 30, 2016, the Company’s level of loans classified as substandard was $37.6 million as compared to $28.1 million at December 31, 2015. At June 30, 2016, the Company’s classified loan to risk-based capital ratio was 37.7%. The Company’s specific reserve for impaired loans was $463,000 at June 30, 2016, and $630,000 at December 31, 2015. A summary of the level of classified loans and the Company’s allocation of its allowance for loan loss by loan type at June 30, 2016, is as follows:

Net Interest Income

For the three month period ended June 30, 2016, total interest income was $7.7 million, as compared to $8.1 million for the three month period ended March 31, 2016, and $7.9 million for the three month period ended June 30, 2015. The decline in interest income for the three month period ended June 30, 2016, is largely the result of the increase of unrecognized interest income on non-accrual loans. At June 30, 2016, non-accrual interest on loans was $515,000, as compared to $285,000 at March 31, 2016, and $193,000 at June 30, 2015.

For the three month period ended June 30, 2016, total interest expense was $1.3 million, representing a linked quarter decline of $137,000 and a decline of $344,000 as compared to the three month period ended June 30, 2015. The decline of interest expense is largely attributable to maturities of higher costing time deposits, reducing the Company’s interest expense on deposits by $88,000 on a linked quarter basis and by $238,000 as compared to the three month period ended June 30, 2015. For the three month period ended June 30, 2016, the Company’s interest expense on subordinated debentures declined by $89,000 as compared to the three month period ended June 30, 2015.

For the three month period ended June 30, 2016, the Company’s net interest income was $6.4 million, compared to $6.7 million for the three month period ended March 31, 2016, and $6.3 million for the three month period ended June 30, 2015. For the three month period ended June 30, 2016, the Company’s net interest margin was 3.28%, as compared to 3.39% for the three month period ended March 31, 2016, and 3.17% for the three month period ended June 30, 2015.

For the six month period ended June 30, 2016, the Company’s total interest income was $15.8 million, as compared to $17.1 million for the six month period ended June 30, 2015. The $1.3 million decline in total interest income was largely the result of a decline in investment income. For the six month period ended June 30, 2015, the Company experienced an $830,000 recovery on a previously non-accrual investment. In addition to the investment income recovery, the combined average balance of taxable and tax free investments for the six month period ended June 30, 2016, declined by $29.9 million as compared to the six month period ended June 30, 2015.

For the six month period ended June 30, 2016, the Company’s interest expense was $2.7 million, as compared to $3.2 million for the six month period ended June 30, 2015. The decline of interest expense is the result of both lower interest rates and reduced average balances of time deposits. For the six month period ended June 30, 2016, the average balance of retail time deposits were $258.8 million and their average cost was 0.94%. For the six month period ended June 30, 2015, the average balance of retail time deposits were $290.5 million and their average cost was 1.15%. For the six month period ended June 30, 2016, the Company’s interest expense on subordinated debentures was $188,000, or 3.65%, as compared to $367,000, or 7.12%, for the six month period ended June 30, 2015. The decline in subordinated debentures interest expense is the result of the maturity of the Company’s interest rate swap on its debenture.

For the six month period ended June 30, 2016, the Company’s net interest income was $13.1 million, as compared to $13.9 million for the six month period ended June 30, 2015. For the six month period ended June 30, 2016, the Company’s net interest margin was 3.34%, as compared to 3.48% for the six month period ended June 30, 2015. For the six month period ended June 30, 2015, the recovery of non-accrual investment interest added 0.20% to the Company’s net interest margin.

Non-interest Income

On a linked quarter basis, total non-interest income declined by $50,000 largely due to a $239,000 decline in gains on the sale of securities. During the three month period ended March 31, 2016, the Company utilized proceeds from the sale of securities to fund a reduction in high cost time deposits. The decline in linked quarter gains on the sale of securities was partially offset by a $67,000 increase in mortgage origination revenue and a $58,000 increase in financial services income.

For the three month period ended June 30, 2016, total non-interest income was $102,000 higher as compared to the three month period ended June 30, 2015. For the three month period ended June 30, 2016, service charge income was $698,000, representing a $22,000 decline as compared to the three month period ended June 30, 2015. For the three month period ended June 30, 2016, merchant card income was $314,000, as compared to $286,000 for the three month period ended June 30, 2015. The Company’s mortgage origination revenue for the three month period ended June 30, 2016, was $435,000, as compared to $343,000 for the three month period ended June 30, 2015.

For the six month period ended June 30, 2016, non-interest income was $4.0 million, as compared to $3.8 million for the six month period ended June 30, 2015. The increase in non-interest income for the six month period ended June 30, 2016, as compared to the six month period ended June 30, 2015, is largely the result of a $283,000 increase in mortgage origination revenue. For the six month period ended June 30, 2016, other operating income was $379,000, as compared to $325,000 for the six month period ended June 30, 2015.

Non-interest Expense

On a linked quarter basis, the Company’s non-interest expenses declined by $74,000. On a linked quarter basis, the most significant increases in operating expenses was a $143,000 increase in real estate owned expenses due to legal expenses and a $51,000 increase in advertising expenses. For the three month period ended June 30, 2016, the Company’s salaries and benefits expenses declined by $87,000 and other operating expense declined by $144,000, respectively, as compared to the three month period ended March 31, 2016.

For the three month period ended June 30, 2016, non-interest expenses declined by $625,000 as compared to the three month period ended June 30, 2015. For the three month period ended June 30, 2016, expense items changing by more than $50,000 as compared to the three month period ended June 30, 2015, include:

Non-interest Expense (continued)

For the six month period ended June 30, 2016, non-interest expenses were $15.3 million, a decline of $412,000 as compared to the six month period ended June 30, 2015. For the six month period ended June 30, 2016, expense items changing by more than $75,000 as compared to the six month period ended June 30, 2015, include:

Balance Sheet

At June 30, 2016, consolidated assets were $861.7 million, a decline of $41.5 million as compared to December 31, 2015. For the six month period ended June 30, 2016, the Company experienced a $28.3 million decrease in time deposits, a $4.0 million decrease in FHLB borrowings, a $36.3 million decrease in cash balances and a $4.4 million increase in net loan balances. To fund the growth in loan balances and reduction in FHLB borrowings and time deposits, the Company has reduced its balance in available for sale securities by $4.6 million, to $232.6 million at June 30, 2016, as compared to December 31, 2015.

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 and a loan production office in Nashville, 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.

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