Exclusive: A Look Into HopFed Bancorp, Inc. With CEO John Peck

Inexpensive compared to its peers, HopFed Bancorp, Inc HFBC is one of the best banks to invest in, according to community bank stock-picking expert, Tim Melvin.

In addition to being inexpensive, there may be significant growth for the institution as it expands beyond its legacy rural markets into some of the south’s largest cities.

To garner better insight into the company’s future, Melvin spoke with CEO John Peck on everything from the possibility of exponential growth to acquisitions.

Expansion

According to your 10K, HopFed has an interesting service area. You’re very rural and agricultural, correct?

It is. We have 18 offices in two states, both in Kentucky and Tennessee, and much of there, is a rural area that has a presence in the agriculture area. But, we do see our footprint expanding. We’re in a larger market, that is, Clarksville, Tennessee, which is about a 160,000 in population. We also have offices in the Nashville MSA, and we’re currently expanding those numbers as well.

You identified several markets where you would like to expand, including Nashville, which you say you’re pushing ahead with. But you also talk about Bowling Green and Louisville, is that kind of still on the table?

Bowling Green is a natural extension of our existing footprint and geographically, it’s due north of the Nashville market, so it is a natural transition for us. We think there’s some opportunities in several markets, and we’ve identified those. The more immediate expansion is the Nashville area with a heavier presence.

That would make sense because you have some branches that are pretty much just in the suburbs of Nashville at this point, so it will just be a little push down the road.

That’s correct. We’ll be officially announcing the expansion. We’ve hired some lenders in the Nashville market, and we’ll be announcing the location of our most recent loan production office in the next few days.

Shareholders

Last year you doubled your dividend and announced a pretty big buyback, which is still ongoing as of the latest 10Q. Is that something we can expect to see continue going down the road?

I think there’s always a place and time for a stock buyback program, and we have room left in that buyback program to take us into the next year, and we will certainly as a board address that specifically. We always think there’s an opportunity [for] a company our size with the capital, market capital we are in, to have an underlying support for those peaks and valleys of our stock.

Over the past couple of years you have had a little squabble with an activist investor, and he got a seat on the board. There have also been a couple bloggers calling for you to sell the bank. How do you respond to this?

Well, we certainly appreciate input from our investors.

I think you’re referencing Mr. Stilwell. He has a history of taking that kind of focus [sale], but he is just one shareholder and we appreciate his guidance. We now have a board member that he had supported, and his background lends itself to giving us guidance and as any board member does. We continue to try to take advantage of that expertise.

But, as a board of directors, we have given our management team a very clear direction to continue to enhance our shareholder value and look at all attributes that are best for all shareholders.

In addition to the activists you have some incredibly smart bank-stock investors in your shareholder list.

There certainly are. We stay very close to not only our retail investors in the community, but also to our institutional investors, and we like to hear their perspective; it’s not always the same.

Financials

HopFed has an incredibly low amount of non-performing assets. You were well below the national per average. Are you doing something different in underwriting your loans than everybody else?

I think what we do, Tim, is we have a more conservative posture. To some degree, our loan growth is a little more lethargic because of that, but we feel like we continue to invest in the knowledge and experience and expertise that we have on our management team to control our losses and help us prepare ourselves as we see opportunities for loan growth.

But yes, we were able to navigate through the last number of years with minimal losses and we think it’ll continue to pay us a dividend in performance as the industry and the company gets stronger.

Are there any specific policies that you are doing, or just taking a very conservative approach?

Well, a combination of both. But, we do value the expertise that we have in our credit area. We do invest in our analysis. We have a strong credit department. Mike Foley is our chief credit officer and his expertise had been reflected. We think Mike Foley as our chief credit officer has done a good job in keeping us between the ditches there as well.

Commercial real estate is 28 percent of the portfolio which is a little on the high side for a community bank. Is that a conscious strategy?

It is. If you see our background, we have been a thrift for a hundred years. We changed that charter and we have changed the balance sheet to look like a commercial bank much more.

[...]

We reduced our concentration on residential loans and migrated to a more balanced commercial loan portfolio, which is reflected in those 28 percent of commercial loans.

Are you targeting any specific industries? Or favoring smaller over medium sized businesses?

We’ve not eliminated any particular industry or product line. We do emphasize our commercial, owner-occupied commercial real estate is a piece of our portfolio that we want to continue to grow as well as see on lending.

Acquisitions

You’re looking at Bowling Green, Louisville, and other markets in Nashville. Are acquisitions still something you’re considering?

We certainly are. Last year we entered into an agreement to acquire a bank in Nashville MSA that we were very excited about, and unfortunately we were not able to consummate that transaction. We had set certain thresholds of expectations for that institution and they were not able to meet all those.

But, there are a lot of institutions that are of the size and similar to that target and we think we will have opportunities in the future. We are not discriminatory in the type of growth that we look at. In the past, we have grown through acquisition, we’ve grown through organic growth in existing markets but we also have grown through branching... So yes, we certainly are continuing to have conversations and we are open to potential acquisition targets.

Do you feel like a lot of the smaller institutions feel some pressure to sell in the current regulatory and slow growth economy?

Those that we’ve had a chance to have conversation with are looking for opportunities to benefit their shareholders and they realize the regulatory pressures continue to mount; the expectations of performance are still there, but the cost of operating that organization continues to grow.

Those boards are seriously sitting down and considering their options. One of which is finding an institution that helps to leverage that cost and that sometimes that ends up being looking for a partner.

Have you guys had much difficulty, or had to expand your legal and compliance department given the current regulatory environment?

We have been somewhat proactive in that process. We raised capital in 2010 with the expectation of continuing to grow. As we did that, we realize that you don’t wait until you have that growth to prepare your institution. So, we had already prepared and put extra infrastructure in place that would accommodate the level of expectations that our regulators have, and we’ve been very pleased.

That’s impressive. You’re one of the few bankers I’ve talked to that was actually proactive in preparing for regulation.

Competition

Right in your region, there are about $15 billion in deposits from national giants such as Bank of America and Wells Fargo. That’s going to increase as you move further into the Nashville market. Do you have any specific plans to take market share from these guys?

We are positioned very well to continue to grow.

As I spoke of earlier, of an expansion in the Nashville market, we can be a small fish in a big pond and grow our balance sheet exponentially for a number of years... not only with the super regionals, but [with] the other competition that is there.

We had positioned our balance sheet with a substantial portion of our assets that are still in our investment portfolio. We’re able to see that growth as we get into that market with more strength and presence and expertise with new lenders. We will be able to deploy that capital from our investment portfolio to higher yielding loans.

We think that it can speak quite well with the super regionals for lots of reasons. One of which is that we have some very talented lenders, but secondly, we have the ability to have parity with the products in which we provide. It’s the technology that has afforded us that opportunity, so we feel like we’re second to none in many of those categories.

Do you have a strong online presence? I know many rely on modern technology for their banking.

I have had a privilege of serving as CEO since the year 2000. To give you some idea of the transformation of our company, when I came to the bank in the year 2000, we had two ATMs and we had bought them used. Today, we have over 65 ATMs.

Today, 87 percent of our transactions are electronic in some fashion. So, our company has made a dramatic transformation and many of our customers are seeing the utilization of their online banking, their mobile banking.

...if you look at our growth pattern over the last number of years, we’ve grown a lot, but our technology customers are out pacing our lobby customers exponentially.

Community

There is a large military base in Clarksville. Do you do anything special to market to the military guys? Also, do you do anything for the retirees surround it?

We do. The thing about military, obviously, is that they’re very noble. So, many times they rely on a more regional or super-regional financial institution, but they have such a substantial impact on the communities around the base. That’s no different for our market, which is in Kentucky and Tennessee.

Of all the bases that you’ll find in state Clarksville’s, Fort Campbell, has the highest return number of retirees. So, that tells you a lot about our communities and certainly the appreciation our military has.

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