HopFed Bancorp, Inc. Reports Third Quarter Results

HOPKINSVILLE, Ky., Oct. 31, 2012 /PRNewswire/ -- HopFed Bancorp, Inc. (NASDAQ: HFBC) (the "Company"), the holding company for Heritage Bank (the "Bank"), today reported results for the three and nine month periods ended September 30, 2012.  For the three month period ended September 30, 2012, the Company's net income available to common shareholders was $819,000, or $0.11 per share, basic and diluted, compared to net income available to common shareholders of $1.4 million, or $0.18 per share basic and diluted, for the three month period ended September 30, 2011. For the nine month period ended September 30, 2012, the Company's net income available to common shareholders was $2.2 million, or $0.29 per share, basic and diluted, compared to a net loss attributable to common shareholders of $180,000, or ($0.02) per share basic and diluted, for the nine month period ended September 30, 2011.

Commenting on the third quarter results, John E. Peck, President and Chief Executive Officer, said, "The Company has reduced the amount of Federal Home Loan Bank borrowings by approximately $20.0 million during the quarter. The reduction in FHLB borrowings, which include prepayment fees of approximately $480,000, reduces our balances outstanding related to wholesale funding. The prepayment penalties were offset by gains on the sales of securities, many of which were experiencing increasing high levels of cash flow and lower net yields due to national mortgage refinancing activity. We remain focused on reducing our cost of funds with approximately $96.8 million in time deposits maturing in the fourth quarter of 2012 with a weighted average cost of approximately 2.00%."

Mr. Peck concluded, "The Company experienced an $11.8 million reduction in classified loans during the quarter due. In addition, we have contracts to sell $2.7 million in non-performing loans scheduled to close during the fourth quarter of 2012 at or near their current book value. The Company continues to market other non-performing assets in an attempt to further reduce our level of classified assets.  The Company continues to find success working with borrowers in an effort to address credit quality issues."

Financial Highlights

• The Company and Bank's capital ratios continue to strengthen. At September 30, 2012, the Company's tangible book value was $13.88 and our tangible common equity ratio is 10.65%. The Bank's tier 1 leverage and total risk based capital ratios at September 30, 2012, are 10.91% and 19.7240700%, respectively. The Company's tier 1 leverage and total risk based capital ratios are 12.33% and 22.34%, respectively.
• At September 30, 2012, the Company's and Bank's net classified asset to risk based capital ratios were 68.78% and 60.37%, respectively. At June 30, 2012, these ratios were 86.50% for the Bank and 76.1% for the Company.  
• At September 30, 2012, the Company's allowance for loan loss totaled $10.5 million, or 1.90% of total loans and 87.23% of non-accrual loans. In the nine month period ended September 30, 2012, the Company's net charge offs totaled $2.5 million, or an annualized rate of 0.61% of average loans.
• For the three month period ended September 30, 2012, the Company's net interest margin was 2.67%, as compared to 3.00% for the three month period ended September 30, 2011, and 2.87% for the three month period ended June 30, 2012. For the three month period ended September 30, 2012, the Company's net interest margin was reduced 0.21% by our decision to liquidate FHLB borrowings and incur $480,000 in prepayment penalties.  

Asset Quality

At September 30, 2012, the Company's level of non-accrual loans totaled $12.6 million, as compared to $6.1 million at December 31, 2011. At September 30, 2012, non-accrual loans total 2.20% of total loans.  The Company has contracted to sell certain non-accrual assets classified as substandard at their current book balance. The sale includes $2.0 million in commercial real estate and $760,000 of land development. We anticipate the sale closing in mid-November 2012. We continue to market one additional commercial real estate property, with a book value of $900,000, through a nationally recognized broker dealer.  All three loans are purchased participation loans outside of our current market area.

A summary of non-accrual loans at September 30, 2012, and December 31, 2011, is as follows:

A summary of the level of classified loans at September 30, 2012, is as follows:

At September 30, 2012, non-accrual loans plus other real estate owned totaled $13.3 million, or 1.33% of total assets, as compared to $8.4 million, or 0.81% of total assets, at December 31, 2011. The Company's level of other real estate owned has declined from $2.3 million at December 31, 2011, to $681,000 at September 30, 2012.

A summary of the activity in other real estate owned for the nine month period ended September 30, 2012, is as follows:

At September 30, 2012, the Company's level of loans classified as substandard and doubtful were $78.4 million and $116,000, respectively, as compared to $47.5 million and $1.7 million, respectively, at December 31, 2011. The Company's specific reserve for impaired loans was $3.6 million at September 30, 2012, and $4.1 million at December 31, 2011, respectively.

At September 30, 2012, the Company's level of performing Troubled Debt Restructurings ("TDRs") was $9.3 million, as compared to $6.2 million at December 31, 2011. A summary of the activity in loans classified as performing TDRs for the nine month period ended September 30, 2012, is as follows:

A summary of TDRs and non-performing TDRs at September 30, 2012, and December 31, 2011, is stated below:

Net Interest Income

For the three month period ended September 30, 2012, the Company's net interest income was $5.9 million, compared to $6.9 million for the three month period ended September 30, 2011, and $6.7 million for the three month period ended June 30, 2012. For the three and nine month periods ended September 30, 2012, net interest income was reduced by $480,000 as a result of FHLB prepayment penalties.

For the nine month period ended September 30, 2012, the Company's net interest income was $19.4 million, as compared to $20.7 million for the nine month period ended September 30, 2011. For the nine month period ended September 30, 2012, the Company's net interest margin was 2.84%, as compared to 3.01% for the nine month period ended September 30, 2011. For the nine month period ended September 30, 2012, FHLB prepayment penalties reduced the Company's net interest margin 0.07%.

The decline in the Company's net interest income and net interest margin for the three and nine month periods ended September 30, 2012, is largely the result of declining average loan balances and an increasingly high level of cash flow from our investment portfolio, resulting in an increase in premium amortizations and the reinvestment of funds at less attractive yields. Given the poor climate for reinvesting excess funds, management anticipates that our current pricing strategy may result in further reductions in time deposits. Management will fund the reduction in assets by selling investment securities. 

Non-interest Income

Non-interest income for the three month period ended September 30, 2012, was $2.9 million, as compared to $3.3 million for the three month periods ended September 30, 2011, and $2.6 million for the three month period ended June 30, 2012, respectively. Non-interest income for the nine month periods ended September 30, 2012, and September 30, 2011, was $7.5 million and $7.8 million, respectively.

The decrease in non-interest income for the three month period ended September 30, 2012, as compared to the three month period ended September 30, 2011, was primarily the result of a lower level of gains on the sale of securities. The Company recognized net gains on the sale of securities of $944,000 and $1,247,000 for the three month periods ended September 30, 2012, and September 30, 2011, respectively.   

For the nine month period ended September 30, 2012, the Company's non-interest income declined $311,000 as compared to the nine month period ended September 30, 2011. For the nine month period ended September 30, 2012, gains on the sale of securities were $1.6 million, as compared to $2.3 million for the nine month period ended September 30, 2011. For the nine month periods ended September 30, 2012, and September 30, 2011, revenue related to the origination of fixed rate mortgage loans was $755,000 and $425,000, respectively.

Non-interest Expense

Non-interest expenses were $7.1 million for the three month periods ended September 30, 2012, and September 30, 2011, respectively as compared to $7.4 million for the three month period ended June 30, 2012. For the nine months ended September 30, 2012, and September 30, 2011, non-interest expenses were $21.6 million and $22.0 million, respectively.  On a linked quarter basis, non-interest expenses declined $378,000 due to slightly lower levels of compensation and professional services expenses.  The increase in other operating expenses is the result of expenses related to the Company's annual meeting and reporting requirements as well as increases in training expenses.  No other operating expense item increased by more than $100,000 from June 30, 2012, to September 30, 2012.

The decrease in non-interest expense during the nine month period ended September 30, 2012, as compared to September 30, 2011, is largely the result of a reduced level of losses on the sale of other real estate owned. Losses on the sale of other real estate owned were $1.6 million during the nine month period ended September 30, 2011, and $287,000 for the same period in 2012. For the nine month period ended September 30, 2012, non-interest expenses experiencing notable changes as compared to the nine month period ended September 31, 2011, were:

The Company's salaries and benefits expense, other operating expenses and professional services expenses have increased due to increased regulatory and compliance requirements. The reduction in losses on sale of other real estate owned is the result of lower balances in that asset class. The reduction in the Company's deposit insurance and examination expense is largely the result of a reduced level of brokered and time deposits.

Balance Sheet 

Total assets were $996.7 million at September 30, 2012, a decrease of $44.1 million as compared to December 31, 2011.  The decline in the size of the balance sheet is largely the result of a $45.5 million reduction in time deposit balances and a $19.1 million decline in FHLB borrowings. The reduction in time deposits included an $8.2 million decline in brokered deposits.  The Company funded the decline in the balance sheet largely by reducing the size of its investment portfolio by $34.9 million.  

For the nine month period ended September 30, 2012, gross loans declined by approximately $17.6 million, to $550.0 million as compared to $567.6 million at December 31, 2011.  For the three month period ended September 30, 2012, gross loans decreased $884,000. The Company is experiencing modest loan demand in its highly competitive market.  

The Company recently completed its first examination under the Office of the Comptroller of the Currency ("OCC").  As a result of the examination, the OCC has terminated the Bank's Memorandum of Understanding agreement. The termination of the memorandum may result in lower operating cost and increased business opportunities in the future. The Company remains fully compliant with a Memorandum of Understanding with the Federal Reserve Bank that limits our ability to borrow money and make capital distributions. The termination of the Company's Memorandum will provide management the opportunity to re-evaluate its capital requirements, including the possibility of making a request to the United States Treasury Department to repurchase all outstanding preferred shares sold under the Treasury's Capital Purchase Plan in 2008. In repurchasing all outstanding preferred shares, the Company would save $920,000 in preferred dividends,  or $0.12 per share, basic and diluted.

The Company

HopFed Bancorp, Inc. is the holding company for Heritage Bank headquartered in Hopkinsville, Kentucky.  The Bank has eighteen offices in western Kentucky and middle Tennessee in addition to its subsidiary, Fall & Fall Insurance of Fulton, Kentucky. The Bank has two additional operating divisions including Heritage Solutions of Murray, Kentucky, Hopkinsville, Kentucky, Kingston Springs, Tennessee 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 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 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.

HOPFED BANCORP, INC.
Balance Sheet
(Dollars in thousands)

This information is preliminary and based on company data available at the time of the presentation.

HOPFED BANCORP, INC.
Balance Sheet
(Dollars in thousands)

This information is preliminary and based on company data available at the time of the presentation.

HOPFED BANCORP, INC.
Selected Financial Data
(Dollars in thousands)

This information is preliminary and based on company data available at the time of the presentation.

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

This information is preliminary and based on company data available at the time of the presentation.

HOPFED BANCORP, INC.
Selected Financial Data
(Dollars in thousands

This information is preliminary and based on company data available at the time of the presentation

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

This information is preliminary and based on company data available at the time of the presentation.

HOPFED BANCORP, INC.
Selected Financial Data

The table below adjusts tax-free investment income for the nine month periods ended September 30, 2012, and September 30, 2011, by $798,000 and $810,000, respectively; for a tax equivalent rate using a cost of funds rate of 2.00% for the nine month period ended September 30, 2012, and 2.20% for the nine month period ended September 30, 2011.  The table adjusts tax-free loan income by $7,000 for the nine month period ended September 30, 2012, and $27,000 for the nine month period ended September 30, 2011, for a tax equivalent rate using the same cost of funds rate:

This information is preliminary and based on company data available at the time of the presentation.

HOPFED BANCORP, INC.
Selected Financial Data

The table below adjusts tax-free investment income for the three month periods ended September 30, 2012, and September 30, 2011, by $273,000 and $250,000, respectively; for a tax equivalent rate using a cost of funds rate of 2.00% for the three month period ended September 30, 2012, and 2.00% for the three month period ended September 30, 2011.  The table adjusts tax-free loan income by $2,000 for the three month period ended September 30, 2012 and $7,000 for the three month period ended September 30, 2011, for a tax equivalent rate using the same cost of funds rate:

SOURCE HopFed Bancorp, Inc.

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