HopFed Bancorp, Inc. Reports Second Quarter Results

HOPKINSVILLE, Ky.--(BUSINESS WIRE)--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, 2015. For the three month period ended June 30, 2015, the Company reported a net loss of $117,000, or $0.02 per share, basic and diluted, compared to net income of $925,000, or $0.13 per share basic and diluted, for the three month period ended June 30, 2014. For the six month period ended June 30, 2015, the Company’s net income was $1.2 million, or $0.19 per share, basic and diluted, compared to net income of $1.3 million, or $0.17 per share basic and diluted, for the six month period ended June 30, 2014.

Commenting on the second quarter results, John E. Peck, President and Chief Executive Officer, said, “The Company’s operating results were negatively impacted by the results of an absolute auction of two properties owned by the bank as other real estate owned, resulting in a loss of $741,000. At June 30, 2015, the balance of the Company’s other real estate owned is $1.8 million,” Mr. Peck concluded.

Financial Highlights

• At June 30, 2015, the Company’s tangible book value was $13.78 per share and tangible common equity ratio was 10.06%. The Company’s tangible book value and common equity ratio computations do not include 570,830 shares of common stock held by the Company’s ESOP that the Company has currently not committed to release.
• The Company purchased 69,467 shares of its common stock in the three month period ended June 30, 2015, at a weighted average price of $12.83 per share. At June 30, 2015, the Company owns 973,191 shares of treasury stock at a weighted average cost of $12.49 per share.
• At June 30, 2015, net loans totaled $554.8 million, a $15.5 million increase, as compared to December 31, 2014, and a $6.1 million increase as compared to March 31, 2015. The Company’s current annualized growth rate of loans is 5.7%.
• The Company’s estimated Tier 1 Leverage Ratio and Total Risk Based Capital Ratio at June 30, 2015, were 10.65% and 17.26%, respectively. The Bank’s Tier 1 Leverage Ratio and Total Risk Based Capital Ratio at June 30, 2015, were 10.56% and 17.18%, respectively.

Asset Quality

At June 30, 2015, the Company’s level of non-accrual loans totaled $7.1 million, as compared to $3.2 million at December 31, 2014. A summary of non-accrual loans at June 30, 2015, and December 31, 2014, is as follows:

For the three month period ended June 30, 2015, the Company placed two significant loan relationships into non-accrual status. Both relationships were previously classified as substandard due to known credit weaknesses. The first relationship includes both a single family property and 100% of the Company’s multi-family non-accrual loans. The relationship was placed into non-accrual status after the borrowers filed for bankruptcy. The Company’s current appraisals indicate that the value of the collateral adequately secures the relationship. However, we are in the process of obtaining new appraisals.

The second relationship encompasses 100% of our non-accrual land development portfolio. At March 31, 2015, the Company had a $630,000 specific reserve for this relationship. During the three month period ended June 30, 2015, the Company placed this relationship in non-accrual status and charged off $716,000.

At June 30, 2015, non-accrual loans plus other real estate owned totaled $8.9 million, or 1.01% of total assets. At December 31, 2014, non-accrual loans plus other real estate owned totaled $5.1 million, or 0.55% of total assets.

A summary of the activity in other real estate owned for the six month period ended June 30, 2015, is as follows:

A summary of the activity in loans classified as TDRs for the three and six month periods ended June 30, 2015, is as follows:

At June 30, 2015, the Company’s level of loans classified as substandard was $28.7 million as compared to $37.4 million at December 31, 2014. At June 30, 2015, the Company’s classified loan to risk-based capital ratio was 28.4%. The Company’s specific reserve for impaired loans was $746,000 at June 30, 2015, and $1.5 million at December 31, 2014. A summary of the level of classified loans at June 30, 2015, is as follows:

Net Interest Income

For the three month period ended June 30, 2015, the Company’s net interest income was $6.3 million, compared to $7.6 million for the three month period ended March 31, 2015, and $6.4 million for the three month period ended June 30, 2014. For the three month period ended June 30, 2015, the Company’s net interest margin was 3.17%, as compared to 3.78% for the three month period ended March 31, 2015, and 3.02% for the three month period ended June 30, 2014.

The decline in linked quarter net interest income and net interest margin is largely the result of an $830,000 recovery of an investment security that was removed from non-accrual status during the three month period ended March 31, 2015. Additional, the Company’s non-accrual loan portfolio increased from $2.1 million at March 31, 2015, to $7.1 million at June 30, 2015. The increase in non-accrual loans resulted in an $85,000 reduction in interest income on loans.

For the six month period ended June 30, 2015, the Company’s net interest income was $13.9 million, as compared to $12.7 million for the six month period ended June 30, 2014. For the six month period ended June 30, 2015, the Company’s interest expense was $3.2 million as compared to $4.7 million for the six month period ended June 30, 2014. The Company’s reduced interest expense was largely the result of lower Federal Home Loan Bank borrowing balances and a reduced dependency on non-core funding. For the six month period ended June 30, 2015, the Company’s net interest margin was 3.48%, as compared to 3.01% for the six month period ended June 30, 2014.

Non-interest Income

Non-interest income for the three month periods ended June 30, 2015, March 31, 2015, and June 30, 2014, was $1.9 million, respectively. On a linked quarter basis, total non-interest income declined by $45,000 largely due to a $283,000 decline in gains on the sale of securities. During the three month period ended March 31, 2015, the Company utilized proceeds from the sale of securities to fund a reduction in the size of FHLB borrowing balances. The decline in linked quarter gains on the sale of securities was partially offset by a $166,000 increase in the level of mortgage origination revenue.

During the three and six month periods ended June 30, 2015, mortgage origination revenue was $343,000 and $520,000, respectively, as compared to $133,000 and $191,000 for the three and six month period ended June 30, 2014. The growth in revenue is the result of a renewed success in building relationships with real estate agents and an increase in the amount of resources committed to the business.

For the three month period ended June 30, 2015, total non-interest income was $77,000 lower as compared to the three month period ended June 30, 2014. For the three month period ended June 30, 2015, service charge income was $720,000, representing a $128,000 decline as compared to the three month period ended June 30, 2014. For the six month period ended June 30, 2015, service charge income was $1.4 million, a $192,000 declined as compared to the six month period ended June 30, 2014. The decline in service charge income is the result of changes in regulations as well as customer utilization of overdraft services.

For the six month period ended June 30, 2015, non-interest income was $3.8 million, as compared to $3.5 million for the six month period ended June 30, 2014. The increase in non-interest income for the six month period ended June 30, 2015, as compared to the same period in 2014 is largely the result of previously mentioned increases in mortgage origination revenue and gains on the sale of securities.

Non-interest Expense

On a linked quarter basis, the Company’s non-interest expenses increased by $764,000. The most significant increases in operating expenses was an $748,000 increase in losses on the sale of real estate owned and a $139,000 increase in professional services expense. For the three month period ended June 30, 2015, the Company’s salaries and benefits expenses declined by $180,000 as compared to the three month period ended March 31, 2015. The decline in linked quarter salary and benefits expense is largely due to seasonal factors.

For the three month period ended June 30, 2015, non-interest expenses increased by $787,000 as compared to the three month period ended June 30, 2014. For the three month period ended June 30, 2015, expense items increasing by more than 5% as compared to the three month period ended June 30, 2014, include:

For the six month period ended June 30, 2015, non-interest expenses were $15.7 million, an increase of $933,000 as compared to the six month period ended June 30, 2014. Generally, the same factors influenced increases in non-interest expenses for both the three and six month periods ended June 30, 2015, as compared to the three and six month periods ended June 30, 2014. For the six month period ended June 30, 2015, expense items increasing by more than 5% as compared to the six month period ended June 30, 2014, include:

For the three and six month periods ended June 30, 2015, the Company’s loss on the sale of other real estate owned accounted for $639,000 and $609,000 of the increase in total non-interest expenses, respectively. The increase in salaries and benefits expenses is the result of an increased level of staffing for the Company’s mortgage loan origination division and our loan production office in Nashville as well as increases in the cost of employer provided health insurance. The increase in professional services expense was largely the result of an increase in legal expenses.

Balance Sheet

At June 30, 2015, consolidated assets were $877.6 million, a decline of $58.2 million as compared to December 31, 2014. For the six month period ended June 30, 2015, the Company experienced a $11.5 million decrease in time deposits, a $25.0 million decrease in FHLB borrowings, a $20.7 million decrease in cash balances and a $15.5 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 $55.9 million, to $247.7 million at June 30, 2015, as compared to December 31, 2014.

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.