UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-23667

HOPFED BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware	61-1322555
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4155 Lafayette Road, Hopkinsville, Kentucky	42240
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (270) 885-1171

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required pursuant to Rule 405 of Regulation S-T (subsection 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file or a non-accelerated filer. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act: (Check one)

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company filer	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	HFBC	The NASDAQ Stock Market LLC

As of May 6, 2019, the Registrant had outstanding 6,648,887 shares of the Registrant’s Common stock.

CONTENTS

HOPFED BANCORP, INC.

		PAGE
PART I. FINANCIAL INFORMATION
The unaudited consolidated condensed financial statements of the Registrant and its wholly owned subsidiaries are as follows:
Item 1.	Financial Statements
	Interim Consolidated Condensed Statements of Financial Condition as of March 31, 2019 (unaudited) and December 31, 2018		2
	Interim Consolidated Condensed Statements of Income for the Three-Month Periods Ended March 31, 2019 and March 31, 2018 (unaudited)		4
	Interim Consolidated Condensed Statements of Comprehensive Income for the Three Month Periods Ended March 31, 2019 and March 31, 2018 (unaudited)		6
	Interim Consolidated Condensed Statement of Stockholders’ Equity for the Three-Month Periods Ended March 31, 2019 and March 31, 2018 (unaudited)		7
	Interim Consolidated Condensed Statements of Cash Flows for the Three-Month Periods Ended March 31, 2019 and March 31, 2018 (unaudited)		8
	Notes to Unaudited Interim Consolidated Condensed Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		45
Item 4.	Controls and Procedures		46
PART II OTHER INFORMATION
Item 1.	Legal Proceedings		47
Item 1A.	Risk Factors		47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3.	Defaults Upon Senior Securities		47
Item 4.	Mine Safety Disclosures		47
Item 5.	Other Information		47
Item 6.	Exhibits		48
SIGNATURES			48

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Financial Condition

(Dollars in Thousands)

	March 31, 2019		December 31, 2018
	(unaudited)
Assets
Cash and due from banks	$	35,052	$	36,339
Interest-bearing deposits in banks		12,364		15,711
Cash and cash equivalents		47,416		52,050
Federal Home Loan Bank stock, at cost		4,428		4,428
Securities available for sale		172,168		170,804
Loans held for sale		742		1,248
Loans receivable, net of allowance for loan losses and deferred loan income at March 31, 2019 of $4,553 and $395 respectively, and $4,536 and $419 at December 31, 2018, respectively.		666,250		658,782
Accrued interest receivable		3,666		3,503
Foreclosed assets, net		3,446		3,598
Bank owned life insurance		10,618		10,672
Premises and equipment, net		21,079		21,759
Deferred tax assets		2,165		1,825
Other assets		2,282		2,730
Total assets	$	934,260	$	931,399
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing accounts	$	125,674	$	129,476
Interest-bearing accounts
Checking accounts		205,420		196,972
Savings and money market accounts		96,504		97,232
Other time deposits		314,229		316,157
Total deposits		741,827		739,837
Advances from Federal Home Loan Bank		26,000		33,000
Repurchase agreements		59,046		53,011
Subordinated debentures		10,310		10,310
Advances from borrowers for taxes and insurance		914		1,279
Accrued expenses and other liabilities		3,276		3,176
Total liabilities		837,633		840,613

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

2

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Financial Condition, Continued

(Dollars in Thousands)

	March 31, 2019			December 31, 2018
	(unaudited)
Stockholders’ equity
Preferred stock, par value $0.01 per share; authorized—500,000 shares; no shares issued and outstanding at March 31, 2019 and December 31, 2018		—			—
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,990,867 issued and 6,648,887 outstanding at March 31, 2019 and December 31, 2018		80			80
Additional paid-in-capital		59,210			59,105
Retained earnings		55,757			55,134
Treasury stock, at cost (1,341,980 shares at March 31, 2019 and December 31, 2018)		(16,706	)		(16,706	)
Unearned Employee Stock Ownership Plan (“ESOP”) shares, at cost (371,693 shares at March 31, 2019 and 382,691 share at December 31, 2018)		(5,124	)		(5,268	)
Accumulated other comprehensive loss, net of taxes		(330	)		(1,559	)
Total stockholders’ equity		92,887			90,786
Total liabilities and stockholders’ equity	$	934,260		$	931,399

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

3

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Income

(Dollars in Thousands)

(Unaudited)

	For the Three-month Periods
	Ended March 31,
	2019		2018
Interest and dividend income:
Loans	$	8,230	$	7,477
Investment in taxable securities available for sale		1,035		1,079
Nontaxable securities available for sale		195		213
Interest-bearing deposits		82		29
Total interest and dividend income		9,542		8,798
Interest expense:
Deposits		2,137		1,244
FHLB borrowings		159		92
Repurchase agreements		302		154
Subordinated debentures		147		122
Total interest expense		2,745		1,612
Net interest income		6,797		7,186
Provision for loan losses		60		68
Net interest income after provision for loan losses		6,737		7,118
Non-interest income:
Service charges		667		706
Merchant card		299		308
Mortgage origination revenue		249		319
Gain on sale of securities		—		27
Income from bank owned life insurance		117		71
Income from financial services		173		138
Other operating income		131		175
Total non-interest income		1,636		1,744

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

4

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Income, Continued

(Dollars in Thousands, Except Share and Per Share Amounts)

(Unaudited)

	For the Three-month Periods
	Ended March 31,
	2019			2018
Non-interest expenses:
Salaries and benefits		4,044			4,117
Occupancy		734			782
Data processing		822			784
State deposit tax		215			169
Professional services		332			466
Advertising		248			308
Foreclosure, net		20			(6	)
Gain on sale of fixed assets		(27	)		—
Merger		596			—
Other		760			920
Total non-interest expense		7,744			7,540
Net income before income tax expense		629			1,322
Income tax expense		6			196
Net income		623			1,126
Earnings per share:
Basic	$	0.10		$	0.18
Diluted	$	0.10		$	0.18
Dividend per share	$	—		$	0.05
Weighted average shares outstanding - basic		6,277,284			6,188,413
Weighted average shares outstanding - diluted		6,277,284			6,188,413

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

5

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Comprehensive Income (Loss)

(Dollars in Thousands)

(Unaudited)

	For the Three Month
	Period Ended March 31,
	2019		2018
Net income	$	623	$	1,126
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on non-other than temporary impaired investment securities available for sale, net of taxes of ($327) and $486 for the three-month periods ended March 31, 2019 and March 31, 2018, respectively.		1,229		(1,830	)
Unrealized gain on OTTI securities, net of taxes of $0 and ($61) for the three-month periods ended March 31, 2019 and March 31, 2018.		—		233
Reclassification adjustment for gains included in net income, net of taxes of $0 and $6 for the three-month periods ended March 31, 2019 and March 31, 2018, respectively.		—		(21	)
Total other comprehensive income (loss)		1,229		(1,618	)
Comprehensive income (loss)	$	1,852	($	492	)

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

6

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statement of Stockholders’ Equity

For the Three-month Period Ended March 31, 2019 and March 31, 2018

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

															Accumulated
					Additional				Common			Unearned			Other			Total
	Common		Common		Paid in		Retained		Treasury			ESOP			Comprehensive			Stockholders’
	Shares		Stock		Capital		Earnings		Shares			Shares			Loss			Equity
Balance December 31, 2018		6,648,887	$	80		59,105		55,134		(16,706	)		(5,268	)		(1,559	)		90,786
Net income		—		—		—		623		—			—			—			2,331
ESOP shares committed to be released		—		—		—		—		—			144			—			144
Change in price of ESOP shares		—		—		68		—		—			—			—			68
Compensation expense, restricted stock awards		—		—		37		—		—			—			—			37
Net change in unrealized loss on securities available for sale, net of income taxes of ($327)		—		—		—		—		—			—			1,229			1,229
Balance March 31, 2019		6,648,887	$	80		59,210		55,757		(16,706	)		(5,124	)		(330	)		92,887

																	Accumulated
	Shares of					Additional					Treasury			Unearned			Other			Total
	Common			Common		Capital		Retained			Stock			ESOP			Comprehensive			Stockholders
	Stock			Stock		Surplus		Earnings			Common			Shares			Income			Equity
Balance at December 31, 2017		6,637,771		$	80		58,825		51,162			(16,655	)		(5,901	)		(99	)		87,412
Restricted stock awards		12,852			—		—		—			—			—			—			—
Consolidated net income		—			—		—		1,126			—			—			—			1,126
Compensation expense, restricted stock awards		—			—		30		—			—			—			—			30
ESOP shares earned		—			—		—		—			—			143			—			143
Change in ESOP Stock Price		—			—		20		—			—			—			—			20
Net change in unrealized gain on securities available for sale, net of income taxes of $431		—			—		—		—			—			—			(1,618	)		(1,618	)
Repurchase common stock		(2,034	)		—		—		—			(29	)		—			—			(29	)
Cash dividend to common stockholders		—			—		—		(331	)		—			—			—			(331	)
Balance March 31, 2018		6,648,589			80		58,875		51,957			(16,684	)		(5,758	)		(1,717	)		86,753

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

7

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

	For the Three-Month Periods
	Ended March 31,
	2019			2018
Cash flows from operating activities:
Net cash provided by operating activities	$	971		$	960
Cash flows from investing activities:
Proceeds from sales, calls and maturities of securities available for sale		4,958			7,013
Purchase of securities available for sale		(4,917	)		(4,210	)
Net increase in loans		(6,979	)		(24,922	)
Proceeds from sale of foreclosed assets		135			78
Proceeds from bank owned insurance death benefit		125			—
Proceeds from sale of premises and equipment		423			—
Purchase of premises and equipment		(10	)		(222	)
Net cash used in investing activities		(6,265	)		(22,263	)
Cash flows from financing activities:
Net increase in demand deposits		3,918			10,689
Net decrease in time and other deposits		(1,928	)		(17,892	)
Decrease in advances from borrowers for taxes and insurance		(365	)		(28	)
Advances from Federal Home Loan Bank		—			12,000
Repayment of advances from Federal Home Loan Bank		(7,000	)		(10,000	)
Net increase in repurchase agreements		6,035			3,439
Cash used to repurchase treasury stock		—			(29	)
Dividends paid on common stock		—			(331	)
Net cash provided by (used in) financing activities		660			(2,152	)
Decrease in cash and cash equivalents		(4,634	)		(23,455	)
Cash and cash equivalents, beginning of period		52,050			45,076
Cash and cash equivalents, end of period	$	47,416		$	21,621
Supplemental disclosures of cash flow information:
Interest paid	$	2,684		$	1,640
Income taxes paid	$	500		$	—

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

8

NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

The accompanying unaudited interim consolidated condensed financial statements include the accounts of HopFed Bancorp, Inc. (the “Corporation” or “HopFed”) and its subsidiaries (collectively, the “Company”). The Corporation is a parent holding company of Heritage Bank USA, Inc. (the “Bank”). The Banks owns JBMM, LLC, a wholly owned, limited liability company, which owns and manages the Bank’s foreclosed assets. The Bank also owns Heritage USA Title, LLC, which sells title insurance to the Bank’s real estate loan customers. The Bank owns Fort Webb LP, LLC, which owns a limited partnership interest in Fort Webb Elderly Housing LLLP, a low income senior citizen housing facility in Bowling Green, Kentucky. All significant intercompany accounts have been eliminated.

The Bank is a Kentucky commercial bank regulated by the Kentucky Department of Financial Institutions (“KDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). HopFed Bancorp is regulated by the Federal Reserve Bank of Saint Louis (“FED”).

The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for fair presentation have been included. The results of operations and other data for the three-month period ended March 31, 2019 are not necessarily indicative of results that may be expected the entire fiscal year ending December 31, 2019.

The accompanying unaudited interim consolidated condensed financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2018. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2018 Consolidated Financial Statements.

9

(2) EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common stock shares outstanding. Diluted EPS is computed by dividing net income by the weighted average number of common stock shares outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period. For the three-month periods ended March 31, 2019 and March 31, 2018, the Company has excluded all unearned shares held by the ESOP.

	For the three-month Periods Ended March 31,
	2019		2018
Basic EPS:
Net income	$	623,000	$	1,126,000
Average common shares outstanding		6,277,284		6,188,413
Earnings per share	$	0.10	$	0.18
Diluted EPS
Net income	$	623,000	$	1,126,000
Average common shares outstanding		6,277,284		6,188,413
Dilutive effect of stock options		—		—
Average diluted shares outstanding		6,277,284		6,188,413
Earnings per share, diluted	$	0.10	$	0.18

10

(3) SECURITIES

The carrying amount of securities and their estimated fair values at March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Restricted:
FHLB stock	$	4,428		—		—			4,428
Available for sale:
U.S. Treasury securities	$	4,929		4		—			4,933
U.S. Agency securities		78,663		442		(722	)		78,383
Tax free municipal bonds		24,718		371		(55	)		25,034
Taxable municipal bonds		955		2		(3	)		954
Mortgage backed securities		63,320		112		(568	)		62,864
	$	172,585		931		(1,348	)		172,168

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Restricted:
FHLB stock	$	4,428		—		—			4,428
Available for sale:
U.S. Agency securities		81,158		345		(1,154	)		80,349
Tax free municipal bonds		25,753		181		(152	)		25,782
Taxable municipal bonds		957		2		(5	)		954
Mortgage-backed securities		64,909		56		(1,246	)		63,719
	$	172,777		584		(2,557	)		170,804

11

The scheduled maturities of debt securities available for sale at March 31, 2019 were as follows:

	Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Due within one year	$	6,889	$	6,897
Due in one to five years		28,310		28,163
Due in five to ten years		13,926		13,910
Due after ten years		14,890		15,260
Amortizing agency bonds		45,250		45,074
Mortgage-backed securities		63,320		62,864
	$	172,585	$	172,168

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of March 31, 2019 were as follows:

	Less than 12 months					12 months or longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(Dollars in Thousands)
Available for sale
U.S. Agency securities	$	1,598		(16	)		50,469		(706	)		52,067		(722	)
Tax free municipal bonds		—		—			4,813		(55	)		4,813		(55	)
Taxable municipal bonds		—		—			507		(3	)		507		(3	)
Mortgage-backed securities		3,771		(1	)		51,151		(567	)		54,922		(568	)
Total available for sale	$	5,369		(17	)		106,940		(1,331	)		112,309		(1,348	)

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2018 were as follows:

	Less than 12 months					12 months or longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(Dollars in Thousands)
Available for sale
U.S. Agency securities	$	—		—			54,441		(1,154	)		54,441		(1,154	)
Tax free municipal bonds		1,465		(8	)		5,619		(144	)		7,084		(152	)
Taxable municipal bonds		—		—			507		(5	)		507		(5	)
Mortgage-backed securities		—		—			54,548		(1,246	)		54,548		(1,246	)
Total available for sale	$	1,465		(8	)		115,115		(2,549	)		116,580		(2,557	)

12

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluations. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At March 31, 2019, the Company has 82 securities with unrealized losses. The losses for all securities are considered to be a direct result of the effect that the prevailing interest rate environment had on the value of debt securities and are not related to the credit worthiness of the issuers. Furthermore, the Company has the intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of March 31, 2019.

At March 31, 2019 and December 31, 2018, securities with a book value of approximately $96.0 million and $96.5 million and a market value of approximately $97.1 million and $96.9 million, respectively, were pledged to various municipalities for deposits in excess of FDIC limits as required by law. At March 31, 2019 and December 31, 2018, securities with a market value of $59.0 million and $53.0 million, respectively, were sold to customers as part of overnight repurchase agreements.

(4) LOANS

The Company uses the following loan segments as described below:

• One-to-four family first mortgages are closed-end loans secured by residential housing. Loans may be either owner or non-owner occupied properties. If the loan is owner-occupied, the loan is analyzed and under-written as a consumer loan. Loan terms may be up to 30 years.

• Home equity lines of credit may be first or second mortgages secured by one-to-four family properties. Home equity loans carry a variable rate and typically are open ended for a period not to exceed ten years with a fifteen year final maturity. Loans secured by home equity lines of credit are under-written under the Company’s consumer loan guidelines.

• Junior liens are closed-end loans secured by one-to-four family residences with a fixed or variable rate. Typically, the collateral for these loans are owner occupied units with a subordinate lien. Loans secured by junior liens are under-written under the Company’s consumer loan guidelines.

• Multi-family loans are closed-end loans secured by residential housing with five or more units in a single building. Multi-family loans may carry a variable rate of interest or the interest rate on the loan is a fixed rate (usually five years). After the initial fixed rate period, the loan reverts to a variable rate or has balloon maturity. Multi-family loans have amortization terms of up to twenty years and are under-written under the Company’s commercial loan underwriting guidelines.

13

• Constructions loans may consist of residential or commercial properties and carry a fixed or variable rate for the term of the construction period. Construction loans have a maturity of between twelve and twenty-four months depending on the type of property. After the construction period, loans are amortized over a twenty-year period. All construction loans are under written under the Company’s commercial loan underwriting guidelines for the type of property being constructed.

• Land loans consist of properties currently under development, land held for future development and land held for recreational purposes. Land loans used for recreational purposes are amortized for twenty years and typically carry a fixed rate of interest for one-to-five years with a balloon maturity or floating rate period to follow and are under-written under the Company’s commercial loan underwriting guidelines.

• Non-residential real estate loans are secured by commercial real estate properties and may be either owner or non-owner occupied. The loans typically have a twenty year maturity and may be fixed for a period of five to ten years. After the initial fixed rate period, the note will either revert to a one year adjustable rate loan or have a balloon maturity. Loans secured by non-residential real estate are under-written under the Company’s commercial loan underwriting standards.

• Loans classified as farmland by the Company include properties that are used exclusively for the production of grain, livestock, poultry or swine. Loans secured by farmland have a maturity of up to twenty years and carry a fixed rate of interest for five to ten years. Loans secured by farmland are under-written under the Company’s commercial loan underwriting guidelines.

• The Company originates secured and unsecured consumer loans. Collateral for consumer loans may include deposits, brokerage accounts, automobiles and other personal items. Consumer loans are typically fixed for a term of one to five years and are under-written using the Company’s consumer loan policy.

• The Company originates unsecured and secured commercial loans. Secured commercial loans may have business inventory, accounts receivable and equipment as collateral. The typical customer may include all forms of manufacturing, retail and wholesale sales, professional services and various forms of agri-business interest. Commercial loans may be fixed or variable rate and typically have terms between one and five years.

14

Set forth below is selected data relating to the composition of the loan portfolio by type of loan at March 31, 2019 and December 31, 2018.

	March 31, 2019			December 31, 2018
	(Dollars in Thousands)
Real estate loans:
One-to-four family first mortgages	$	174,274		$	175,638
Home equity lines of credit		31,407			32,781
Junior liens		995			1,037
Multi-family		26,377			26,067
Construction		36,723			38,700
Land		18,745			12,175
Non-residential real estate		248,285			242,390
Farmland		33,242			34,041
Total mortgage loans		570,048			562,829
Consumer loans		8,060			8,442
Commercial loans		93,090			92,466
Total other loans		101,150			100,908
Total loans		671,198			663,737
Deferred loan fees, net of cost		(395	)		(419	)
Less allowance for loan losses		(4,553	)		(4,536	)
Loans receivable, net	$	666,250		$	658,782

Although the Company has a diversified loan portfolio, 84.9% and 84.8% of the portfolio was concentrated in loans secured by real estate at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and December 31, 2018, the majority of these loans are located within the Company’s general operating area.

15

Risk Grade Classifications

The Company utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, each loan is graded based on pre-determined risk metrics and categorized into one of the risk grades discussed below. The Company uses the following risk grade definitions for commercial loans:

Excellent - Loans in this category are to persons or entities of unquestioned financial strength, a highly liquid financial position, with collateral that is liquid and well margined. These borrowers have performed without question on past obligations, and the Bank expects their performance to continue. Internally generated cash flow covers current maturities of long-term debt by a substantial margin. Loans secured by Bank certificates of deposit and savings accounts, with appropriate holds placed on the accounts, are to be rated in this category.

Very Good - These are loans to persons or entities with strong financial condition and above-average liquidity who have previously satisfactorily handled their obligations with the Bank. Collateral securing the Bank’s debt is margined in accordance with policy guidelines. Internally generated cash flow covers current maturities of long-term debt more than adequately. Unsecured loans to individuals supported by strong financial statements and on which repayment is satisfactory may be included in this classification.

Satisfactory - Assets of this grade conform to substantially all the Bank’s underwriting criteria and evidence an average level of credit risk; however, such assets display more susceptibility to economic, technological or political changes since they lack the above average financial strength of credits rated Very Good. Borrower’s repayment capacity is considered to be adequate. Credit is appropriately structured and serviced; payment history is satisfactory.

Acceptable - Assets of this grade conform to most of the Bank’s underwriting criteria and evidence an acceptable, though higher than average, level of credit risk; however, these loans have certain risk characteristics which could adversely affect the borrower’s ability to repay given material adverse trends. Loans in this category require an above average level of servicing and show more reliance on collateral and guaranties to preclude a loss to the Bank should material adverse trends develop. If the borrower is a company, its earnings, liquidity and capitalization are slightly below average when compared to its peers.

Watch - These loans are characterized by borrowers who have marginal cash flow, marginal profitability, or have experienced an unprofitable year and a declining financial condition. The borrower has in the past satisfactorily handled debts with the Bank, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the Bank continues to be adequately secured, margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit exposure. This classification includes loans to established borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity appears limited.

All commercial loans with a risk classification of watch or better are considered a pass credit.

16

Special Mention - Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the asset or in the institution’s credit position at some future date. Borrowers may be experiencing adverse operating trends or market conditions. Non-financial reasons for rating a credit exposure Special Mention include, but are not limited to: management problems, pending litigations, ineffective loan agreement and/or inadequate loan documentation, structural weaknesses and/or lack of control over collateral.

Substandard - A substandard asset is inadequately protected by the current sound worth or paying capacity of the debtor or the collateral pledged. There exists one or more well defined weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility the Bank will experience some loss if the deficiencies are not corrected.

Doubtful - A loan classified as doubtful has all the weaknesses inherent in a loan classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing the Bank’s loan. These loans are in a work-out status and have a defined work-out strategy.

Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as Bankable assets is not warranted. The Bank takes losses in the period in which they become uncollectible.

The following credit risk standards are assigned to consumer loans:

Satisfactory - All consumer open-end and closed-end retail loans shall have an initial risk grade assigned of 3 - Satisfactory. All consumer loans classified as satisfactory are considered a pass credit.

Substandard - All consumer open-end and closed-end retail loans past due 90 cumulative days from the contractual date will be classified as 7 - Substandard. If a consumer/retail loan customer files bankruptcy, the loan will be classified as 7 - Substandard regardless of payment history.

Loss - All closed-end retail loans that become past due 120 cumulative days and open-end retail loans that become past due 180 cumulative days from the contractual due date will be charged off as loss assets. The charge off will be taken by the end of the month in which the 120-day or 180-day time period elapses. All losses in retail credit will be recognized when the affiliate becomes aware of the loss, but in no case should the charge off exceed the time frames stated within this policy.

17

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the three-month period ended March 31, 2019:

	Balance 12/31/2018		Charge offs 2019			Recoveries 2019		Provision 2019			Ending Balance 03/31/2019
	(Dollars in Thousands)
One-to-four family mortgages	$	992		—			3		(60	)		935
Home equity line of credit		168		—			—		(14	)		154
Junior liens		4		—			—		—			4
Multi-family		172		—			—		(26	)		146
Construction		171		—			—		—			171
Land		797		—			—		218			1,015
Non-residential real estate		1,293		—			2		(49	)		1,246
Farmland		152		—			—		(11	)		141
Consumer loans		112		(73	)		18		100			157
Commercial loans		675		—			7		(98	)		584
Total	$	4,536		(73	)		30		60			4,553

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the year ended December 31, 2018:

	Balance 12/31/2017		Charge offs 2018			Recoveries 2018		Provision 2018			Ending Balance 12/31/2018
	(Dollars in Thousands)
One-to-four family mortgages	$	747		(6	)		13		238			992
Home equity line of credit		189		—			9		(30	)		168
Junior liens		5		—			—		(1	)		4
Multi-family		314		—			—		(142	)		172
Construction		161		—			—		10			171
Land		1,223		(40	)		—		(386	)		797
Non-residential real estate		789		(23	)		14		513			1,293
Farmland		367		(2	)		1		(214	)		152
Consumer loans		184		(329	)		80		177			112
Commercial loans		847		(307	)		12		123			675
Total	$	4,826		(707	)		129		288			4,536

18

The table below presents gross loan balance at March 31, 2019 by loan classification allocated between past due, performing and non-accrual:

	Currently Performing		30 - 89 Days Past Due		Non-accrual Loans		Total
One-to-four family mortgages		173,754		502		18		174,274
Home equity line of credit		31,158		153		96		31,407
Junior liens		991		—		4		995
Multi-family		26,377		—		—		26,377
Construction		36,571		—		152		36,723
Land		18,745		—		—		18,745
Non-residential real estate		247,963		—		322		248,285
Farmland		32,667		575		—		33,242
Consumer loans		8,051		8		1		8,060
Commercial loans		91,918		701		471		93,090
Total		668,195		1,939		1,064		671,198

The table below presents gross loan balance at December 31, 2018 by loan classification allocated between past due, performing and non-accrual:

	Currently Performing		30 – 89 Days Past Due		Non-accrual Loans		Total
One-to-four family mortgages	$	174,962		614		62	$	175,638
Home equity line of credit		32,525		158		98		32,781
Junior liens		1,033		—		4		1,037
Multi-family		26,067		—		—		26,067
Construction		38,548		—		152		38,700
Land		12,175		—		—		12,175
Non-residential real estate		241,809		—		581		242,390
Farmland		34,041		—		—		34,041
Consumer loans		8,408		26		8		8,442
Commercial loans		91,930		11		525		92,466
Total	$	661,498		809		1,430		663,737

19

The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of March 31, 2019 and December 31, 2018 by portfolio segment and based on the impairment method.

	Commercial		Land Development / Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
	(Dollars in Thousands)
March 31, 2019:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	122		15		—		12		91	$	240
Collectively evaluated for impairment		463		1,171		1,533		1,080		66		4,313
Total ending allowance balance	$	585		1,186		1,533		1,092		157		4,553
Loans:
Loans individually evaluated for impairment	$	5,654		152		9,462		273		363	$	15,904
Loans collectively evaluated for impairment		87,436		55,316		298,403		206,403		7,697		655,294
Total ending loans balance	$	93,090		55,468		307,904		206,676		8,060	$	671,198

	Commercial		Land Development / Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
	(Dollars in Thousands)
December 31, 2018:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	141		—		—		13		52	$	206
Collectively evaluated for impairment		534		969		1,616		1,151		60		4,330
Total ending allowance balance	$	675		969		1,616		1,164		112	$	4,536
Loans:
Loans individually evaluated for impairment	$	3,593		—		9,174		274		208	$	13,249
Loans collectively evaluated for impairment		88,873		50,875		293,324		209,182		8,234		650,488
Total ending loans balance	$	92,466		50,875		302,498		209,456		8,442	$	663,737

The determination of the allowance for loan losses is based on management’s analysis, performed on a quarterly basis. Various factors are considered, including the growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical loss experience, delinquency trends and prevailing economic conditions and the market value of the underlying collateral. Although management believes its allowance for loan losses is adequate, there can be no assurance that additional allowances will not be required or that losses on loans will not be incurred.

A loan is considered to be impaired when management determines that it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments or using the fair value of the collateral less cost to sell if the loan is collateral dependent. Currently, it is management’s practice to classify all substandard or doubtful loans as impaired.

20

Loans by classification type and credit risk indicator at March 31, 2019 were as follows:

	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	173,575		—		699		—		174,274
Home equity line of credit		31,311		—		96		—		31,407
Junior liens		991		—		4		—		995
Multi-family		26,377		—		—		—		26,377
Construction		36,571		152		—		—		36,723
Land		18,745		—		—		—		18,745
Non-residential real estate		238,712		19		9,554		—		248,285
Farmland		33,011		231		—		—		33,242
Consumer loans		7,697		—		363		—		8,060
Commercial loans		86,295		879		5,916		—		93,090
Total	$	653,285		1,281		16,632		—		671,198

Loans by classification type and credit risk indicator at December 31, 2018 were as follows:

	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	174,973		—		665		—		175,638
Home equity line of credit		32,684		—		97		—		32,781
Junior liens		1,033		—		4		—		1,037
Multi-family		26,067		—		—		—		26,067
Construction		38,548		152		—		—		38,700
Land		12,175		—		—		—		12,175
Non-residential real estate		232,289		596		9,505		—		242,390
Farmland		33,808		233		—		—		34,041
Consumer loans		8,233		—		209		—		8,442
Commercial loans		85,433		3,190		3,843		—		92,466
Total	$	645,243		4,171		14,323		—		663,737

21

Impaired loans by classification type and the related valuation allowance amounts at March 31, 2019 were as follows:

							For the three-month period
	At March 31, 2019						ended March 31, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in Thousands)
Impaired loans with no specific allowance
One-to-four family mortgages	$	—		—		—		—		—
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		—		—		—		—		—
Non-residential real estate		9,462		9,462		—		9,318		172
Farmland		—		—		—		—		—
Consumer loans		—		—		—		—		—
Commercial loans		5,533		5,533		—		4,492		89
Total		14,995		14,995		—		13,810		261
Impaired loans with a specific allowance
One-to-four family mortgages		273		273		13		273		2
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		152		152		15		76		—
Land		—		—		—		—		—
Non-residential real estate		—		—		—		—		—
Farmland		—		—		—		—		—
Consumer loans		363		363		91		286		—
Commercial loans		121		121		131		131		5
Total		909		909		240		766		7
Total	$	15,904		15,904		240		14,576		268

22

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2018 were as follows:

							For the year ended
	At December 31, 2018						December 31, 2018
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in Thousands)
Impaired loans with no specific allowance
One-to-four family mortgages	$	—		—		—		710		27
Home equity line of credit		—		—		—		261		4
Junior liens		—		—		—		2		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		—		—		—		312		—
Non-residential real estate		9,174		9,174		—		5,973		693
Farmland		—		—		—		111		—
Consumer loans		—		—		—		5		—
Commercial loans		3,452		3,452		—		2,333		234
Total		12,626		12,626		—		9,707		958
Impaired loans with a specific allowance
One-to-four family mortgages	$	274		274		13		55		12
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		—		—		—		—		—
Non-residential real estate		—		—		—		1,115		—
Farmland		—		—		—		—		—
Consumer loans		208		208		52		284		—
Commercial loans		141		141		141		793		23
Total		623		623		206		2,247		35
Total impaired loans	$	13,249		13,249		206		11,954		993

23

At March 31, 2019 non-accrual loans totaled $1.1 million, or 0.16% of total loans compared to $1.4 million, or 0.22% of total loans, at December 31, 2018. At March 31, 2019, the Company is not obligated to lend additional funds to borrowers who have been placed in non-accrual status. There are no loans accruing interest that are past due more than 90 days at March 31, 2019 and December 31, 2018. At March 31, 2019 and December 31, 2018, the Company’s balances in non-accrual loans by loan type is as follows:

	03/31/2019		12/31/2018
	(Dollars in Thousands)
One-to-four family first mortgages	$	18	$	62
Home equity lines of credit		96		98
Junior lien		4		4
Construction		152		152
Land		—		—
Non-residential real estate		322		581
Farmland		—		—
Consumer loans		1		8
Commercial loans		471		525
Total non-accrual loans	$	1,064	$	1,430

The following table provides the number of loans remaining in each category as of March 31, 2019 and December 31, 2018 that the Company had previously modified in a TDR:

	Number of Loans		Pre-Modification Outstanding Record Investment		Post Modification Outstanding Record Investment, net of related allowance
March 31, 2019
Non-residential real estate		3	$	3,409,331		3,409,331
Commercial		3		192,905		192,905
December 31, 2018
Non-residential real estate		3	$	3,422,085		3,422,085
Commercial		2	$	107,535		107,535

For the three-month period ended March 31, 2019, the Company identified one additional commercial loan as a TDR. The loan is secured by a Company’s accounts receivable. The TDR classification is the result of the borrower’s declining financial condition and substandard collateral position, prompting the Company to lengthen the amortization period of the loan to five years, which exceeds our standard amortization period of three years. There were no loans as of March 31, 2019 that have been modified as TDRs and that subsequently defaulted within twelve months on their modified terms. At March 31, 2019, there are no commitments to lend additional funds to any borrower whose loan terms have been modified in a TDR.

24

(5) FORECLOSED ASSETS

The Company’s foreclosed assets have been acquired through customer loan defaults. The property is recorded at the lower of cost or fair value less estimated cost to sell and carrying cost at the date acquired. Any difference between the book value and estimated market value is recognized as a charge off through the allowance for loan loss account. Additional losses on foreclosed assets may be determined on individual properties at specific intervals or at the time of disposal. In general, the Company will obtain a new appraisal on all foreclosed assets with a book balance in excess of $250,000 on an annual basis. Additional losses are recognized as a non-interest expense.

For the three-month period ended March 31, 2019, the Company’s activity in foreclosed property included the following:

			Activity During 2019
	Balance							Reduction			Gain (Loss)		Balance
	1/01/2019		Foreclosure		Sales			in Values			on Sale		3/31/2019
	(Dollars in Thousands)
One-to-four family mortgages	$	256		—		(135	)		(37	)		20	$	104
Non-residential real estate		142		—		—			—			—		142
Land		3,200		—		—			—			—		3,200
Total	$	3,598		—		(135	)		(37	)		20	$	3,446

25

(6) FAIR VALUE OF ASSETS AND LIABILITIES

Accounting Standards Codification Topic (ASC) 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value. The statement establishes a fair value hierarchy which requires an entity to maximize the use of observable input and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

• Level 1 is for assets and liabilities that management has obtained quoted prices (unadjusted for transaction cost) or identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

• Level 2 is for assets and liabilities in which significant unobservable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3 is for assets and liabilities in which significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values for investment securities available-for-sale are based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments provided by a third-party pricing service. The Company reviews all securities in which the book value is greater than the market value for impairment that is other than temporary. For securities deemed to be other than temporarily impaired, the Company reduces the book value of the security to its market value by recognizing an impairment charge on its income statement.

26

Assets and Liabilities Measured on a Recurring Basis

The assets and liabilities measured at fair value on a recurring basis at March 31, 2019 are summarized below:

Description	Total carrying value in the consolidated balance sheet at		Quoted Prices In Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	3/31/2019		(Level 1)		(Level 2)		(Level 3)
	(Dollars in Thousands)
Securities available for sale
U.S. Treasury securities	$	4,933		4,933		—		—
U.S. Agency securities		78,383		—		78,383		—
Tax-free municipals		25,034		—		25,034		—
Taxable municipals		954		—		954		—
Mortgage backed securities		62,864		—		62,864		—
Total	$	172,168		4,933		167,235		—

The assets and liabilities measured at fair value on a recurring basis at December 31, 2018 are summarized below:

Description	Total carrying value in the consolidated balance sheet at		Quoted Prices In Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	12/31/2018		(Level 1)		(Level 2)		(Level 3)
	(Dollars in Thousands)
Securities available for sale
U.S. Agency securities	$	80,349		—		80,349		—
Tax-free municipals		25,782		—		25,782		—
Taxable municipals		954		—		954		—
Mortgage backed securities		63,719		—		93,719		—
Total	$	170,804		—		170,804		—

27

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for March 31, 2019:

Description	Total carrying value in the consolidated balance sheet at March 31, 2019		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets	(Dollars in Thousands)
Foreclosed assets	$	—		—		—	$	—
Impaired loans, net of allowance of $149	$	398		—		—	$	398

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for December 31, 2018:

Description	Total carrying value in the consolidated balance sheet at December 31, 2018		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets	(Dollars in Thousands)
Foreclosed assets	$	—		—		—	$	—
Impaired loans, net of allowance of $154	$	261		—		—	$	261

28

The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a recurring and non-recurring basis at March 31, 2019 and December 31, 2018:

			Level 3 Significant Unobservable Input Assumptions
`	Fair Value		Valuation Technique		Unobservable Input		Quantitative Range of Unobservable Inputs
			(Dollars in Thousands)
March 31, 2019
Assets measured on a non-recurring basis	$	—
Foreclosed assets				Discount to appraised value of collateral. Auction results		Appraisal comparability adjustments		0% to 0	%
Impaired loans		547		Discount to appraised value of collateral		Appraisal comparability adjustments		10% to 50	%
December 31, 2018
Assets measured on a non-recurring basis	$	—
Foreclosed assets				Discount to appraised value of collateral		Appraisal comparability adjustments		—
Impaired loans		415		Discount to appraised value of collateral		Appraisal comparability adjustments		10% to 25	%

29

The estimated fair values of financial instruments were as follows at March 31, 2019:

	Carrying Amount		Estimated Fair Value		In Active Markets for Identical Assets Level 1		Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
	(Dollars in Thousands)
Financial Assets:
Cash and due from banks	$	35,052		35,052		35,052		—		—
Interest-bearing deposits		12,364		12,364		12,364		—		—
Securities available for sale		172,168		172,168		4,929		167,235		—
Federal Home Loan Bank stock		4,428		4,428		—		—		4,428
Loans held for sale		742		742		—		742		—
Loans receivable		666,250		636,933		—		—		636,933
Accrued interest receivable		3,666		3,666		—		3,666		—
Financial liabilities:
Deposits		741,827		741,290		—		741,290		—
Advances from borrowers for taxes and insurance		914		914		—		914		—
Advances from Federal Home Loan Bank		26,000		25,873		—		25,873		—
Repurchase agreements		59,046		59,046		—		59,046		—
Subordinated debentures		10,310		10,310		—		10,310		—

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The estimated fair values of financial instruments were as follows at December 31, 2018:

	Carrying Amount		Estimated Fair Value		Quoted Prices In Active Markets for Identical Assets Level 1		Using Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Financial Assets:
Cash and due from banks	$	36,339		36,339		36,339		—		—
Interest-bearing deposits in banks		15,711		15,711		15,711		—		—
Securities available for sale		4,428		4,428		—		—		4,428
Federal Home Loan Bank stock		170,804		170,804		—		170,804		—
Loans held for sale		1,248		1,248		—		1,248		—
Loans receivable		658,782		627,956		—		—		627,956
Accrued interest receivable		3,503		3,503		—		—		3,503
Financial Liabilities:
Deposits		739,837		739,573		—		739,573		—
Advances from borrowers for taxes and insurance		1,279		1,279		—		1,279		—
Advances from the Federal Home Loan Bank		33,000		32,830		—		32,830		—
Repurchase agreements		53,011		53,011		—		53,011		—
Subordinated debentures		10,310		10,310		—		—		10,310

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(7) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

32

ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 was effective on January 1, 2019. The Company has determined that the leases existing at March 31, 2019 are not material to the Company’s Consolidated Financial Statements.

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On June 16, 2016, the FASB released its finalized ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments to U.S. GAAP require businesses and other organization to measure the expected credit losses on financial assets, such as loans, securities, bond insurance, and many receivables, the FASB said. The accounting changes apply to instruments recorded on balance sheets at their historical cost, although there are some limited changes to the accounting for debt instruments classified as available-for-sale. Write-downs will be based on historical information, current business conditions, and forecasts, and FASB expects the forecasts to improve the loss estimates on financial assets that are losing value. FASB also said the techniques that are employed today to write down loans and other instruments can still be used, although it expects the variables for calculating the losses to change. ASU 2016-13 will become effective on January 1, 2020. Companies are permitted to adopt ASU 2016-13 in fiscal years beginning after December 15, 2018. The Company is currently evaluating the potential impact of ASU 2016-13.

ASU 2017-08, “Receivables – Nonrefundable Fees and Other Cost” (Topic 310) – amends the amortization period for certain purchased callable debt securities held at a premium. Prior to the issuance of this guidance, premiums were amortized as an adjustment of yield over the contractual life of instrument. ASU 2017-08 premiums on purchased callable debt securities that have an explicit, non-contingent call features that are callable at fixed prices to be amortized to the earliest call date. There are no accounting changes for securities held at a discount. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018 and early adoption was permitted. The adoption of ASU 2017-08 did not have a material impact on the Company’s Consolidated Financial Statements.

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ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” Issued in February 2018, ASU 2018-02 seeks to help entities reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (Tax Reform Act), enacted on December 22, 2017.

ASU 2018-02 was issued in response to concerns regarding current guidance in GAAP that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date, even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income, rather than net income, and as a result the stranded tax effects would not reflect the appropriate tax rate. The amendments of ASU 2018-02 allow an entity to make a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects, which is the difference between the historical corporate income tax rate of 35.0% and the newly enacted corporate income tax rate of 21.0%.

ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018; however, public business entities are allowed to early adopt the amendments of ASU 2018-02 in any interim period for which the financial statements have not yet been issued. The amendments of ASU 2018-02 may be applied either at the beginning of the period (annual or interim) of adoption or retrospectively to each of the period(s) in which the effect of the change in the U.S. federal corporate tax rate in the Tax Reform Act is recognized. The Company adopted ASU 2018-02 during the year ended December 31, 2018.

ASU 2018-16, “Derivatives and Hedging (Topic 815)—Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this update permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct U.S. Treasury obligations, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. ASU 2018-16 was effective on January 1, 2019 and did not have a significant impact on the Company’s Consolidated Financial Statements.

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early

35

adoption is permitted. Entities are also allowed to elect early adoption the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

Other accounting standards that have been issued or proposed by the FASB or other standards bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Reclassifications

Certain items in prior financial statements have been reclassified to conform to the current presentation. Reclassifications had no effect on prior year’s net income or shareholders’ equity.

(8) INCOME TAXES

The Company files consolidated federal income tax returns and Tennessee excise tax returns. The Company also files consolidated Kentucky income tax returns. The Bank is exempt from Kentucky corporate income tax. The Company has no unrecognized tax benefits and has accrued any interest or penalties for uncertain tax positions. The effective tax rate differs from the statutory federal rate of 21% and Tennessee excise rate of 6.5% due to investments in qualified municipal securities, bank owned life insurance, income apportioned to Kentucky and certain non-deductible expenses. The Company’s effective federal income tax rate varies significantly from our federal statutory tax rate for a variety of factors, including:

• The Company’s investment in Fort Webb LP, LLC generates tax credits and depreciation expense that the Company can use to offset taxable income. At March 31, 2019, the Company’s balance sheet did not include any equity investment in Fort Webb. The Company has other investments that produce both tax credits and depreciation expense that may be used to offset net income.

• At March 31, 2019, the Company has $10.6 million in Bank owned life insurance policies. The income generated from these policies increase the cash flow of the policies on a tax free basis. Life insurance proceeds are paid upon the death of a covered party. These proceeds, netted against the current cash value of the policy, result in tax free income to the Company. At March 31, 2019, the Company’s investment portfolio includes $25.0 million of tax free municipal securities. Interest income on this portfolio, after netting out a disallowance for interest expense attributable to this portfolio, is tax exempt.

(9) ESOP

Substantially all of the Company’s employees who are at least 21 years old and have one year of employment with the Company participate in the 2015 HopFed Bancorp, Inc. Employee Stock Ownership Plan (“ESOP”). The ESOP purchased 600,000 shares of the Company’s common stock from the Company on March 2, 2015 at $13.14 per share. The ESOP borrowed $7.9 million from an open-end line of credit from the Company for the purchase of the stock, using the 600,000 shares of common stock as collateral. The Company makes discretionary contributions to the ESOP. The ESOP utilizes these contributions along with the dividends on unearned shares held by the ESOP to repay the loan from the Company. When loan payments are made, ESOP shares are released based on reductions in the principal balance of the loan. The shares are allocated to participants based on relative compensation.

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Employees may withdraw proceeds from the ESOP in the year after their employment with the Company is terminated. Former employees have the option of selling Company shares back into the ESOP or withdrawing shares. Employees who are not employed on December 31st of each year are not eligible for participation in the ESOP. The Company anticipates that loan payments will be made at the end of each year. Participants receive shares at the end of employment. The Company has the option to repurchase the shares or provide the shares directly to the employee.

The Company made its fourth ESOP loan payment in December 2018. At March 31, 2019 and December 31, 2018, shares held by the ESOP were as follows:

	March 31, 2019		December 31, 2018
Accrued for allocation to participants
Earned ESOP shares		226,508		215,510
Unearned ESOP shares		371,693		382,691
Total ESOP shares		598,201		598,201
Share price at end of period	$	19.70	$	13.29
Fair value of unearned shares	$	7,322,352	$	5,085,963

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(10) COMMITMENTS AND CONTINGENCIES

At March 31, 2019, the Bank had $32.1 million in outstanding commitments on revolving home equity lines of credit, $20.0 million in outstanding commitments on revolving personal lines of credit and $38.9 million in commitments to originate loans and undisbursed commitments on commercial lines of credit of $46.5 million. At March 31, 2019, the Company had $1.0 million in commercial and standby letters of credit outstanding.

At March 31, 2019, the Company has $48.8 million in times deposits greater than $250,000 that are scheduled to mature in one year or less. Management believes that a significant percentage of such deposits will remain with the Bank.

The Bank’s FHLB borrowings are secured by a blanket security agreement pledging the Bank’s 1-4 family first mortgage loans and non-residential real estate loans. At March 31, 2019 and December 31, 2018, the Bank has pledged all eligible 1-4 family first mortgages. At March 31, 2019 and December 31, 2018, the Bank has outstanding FHLB borrowings of $26.0 million and $33.0 million, respectively. A schedule of FHLB borrowings at March 31, 2019 is provided below:

Outstanding Balance	Rate			Maturity
(Dollars in Thousands, Except Percentages)
5,000		2.56	%		07/11/2019
5,000		1.73	%		01/10/2020
5,000		2.84	%		07/10/2020
5,000		1.92	%		10/06/2020
6,000		3.01	%		07/26/2023
$26,000		2.44	%

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A schedule of FHLB borrowings at December 31, 2018 is provided below:

Outstanding Balance	Rate			Maturity
(Dollars in Thousands, Except Percentages)
7,000		1.55	%		01/10/2019
5,000		2.56	%		07/11/2019
5,000		1.73	%		01/10/2020
5,000		2.84	%		07/10/2020
5,000		1.92	%		10/06/2020
6,000		3.01	%		07/26/2023
$33,000		2.25	%

The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Bank’s name totaling $49.6 million secured by the Bank’s loan portfolio to secure additional municipal deposits. The Company is a party to certain ordinary course litigation, and the Company intends to vigorously defend itself in all such matters. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

On January 7, 2019, the Company announced a definitive agreement to merge into and with First Financial Corporation of Terre Haute, Indiana. The proposed merger requires the Company’s shareholder approval. As a part of the merger agreement, the Company anticipates incurring additional pre-tax expenses to facilitate the merger. The expenses include a non-cash charge of approximately $244,000 for the accelerated vesting of restricted common stock, cash payment of approximately $2.7 million in change of control payments to senior executive officers and cash payments to Sandler O’Neil of approximately $1.0 million for their services as the Company’s investment banker. In addition to the expenses listed above, the Company will incur yet to be determined legal and professional fees as a part of the merger process. The Company anticipates that these expense items will be recognized once shareholder approval is received.

(11) REGULATORY MATTERS

The new minimum capital level requirements applicable to Bank holding companies and Banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%.

The capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January 1, 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Under these new rules, Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions.

Cumulative preferred stock and trust preferred securities issued after May 19, 2010 no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010, including in the case of bank holding companies with less than $15.0 billion in total assets, trust preferred securities issued prior to that date, continue to count as Tier 1 capital subject to certain limitations. The definition of Tier 2 capital is generally unchanged for most banking organizations, subject to certain new eligibility criteria.

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The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company has made the decision to opt-out of this requirement. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to adjusted total assets (as defined), and of total capital (as defined) and Tier 1 to risk weighted assets (as defined). The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2019 and December 31, 2018 to which it is subject. Management believes, as of March 31, 2019 and December 31, 2018, that the Bank meets all capital adequacy requirements to which it is subject. The Company’s consolidated capital ratios and the Bank’s actual capital amounts and ratios as of March 31, 2019 and December 31, 2018 are presented below:

	Actual					Minimum Capital Required					To be Well Capitalized for Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands, Except Percentages)
As of March 31, 2019
Tier 1 leverage capital to adjusted total assets
Company	$	101,051		11.0	%	$	36,665		4.0	%	$	45,832		5.0	%
Bank	$	97,316		10.7	%	$	36,534		4.0	%	$	45,667		5.0	%
Total capital to risk weighted assets
Company	$	105,604		15.3	%	$	55,219		8.0	%	$	69,024		10.0	%
Bank	$	101,868		14.8	%	$	55,107		8.0	%	$	68,884		10.0	%
Tier 1 capital to risk weighted assets
Company	$	101,051		14.6	%	$	41,414		6.0	%	$	55,219		8.0	%
Bank	$	97,316		14.1	%	$	41,331		6.0	%	$	55,107		8.0	%
Common equity tier 1 capital to risk weighted assets
Company	$	101,051		14.6	%	$	31,061		4.5	%		n/a		n/a
Bank	$	97,316		14.1	%	$	30,998		4.5	%	$	44,865		6.5	%
As of December 31, 2018
Tier 1 leverage capital to adjusted total assets
Company	$	100,520		11.0	%	$	36,417		4.0	%	$	45,521		5.0	%
Bank	$	99,478		10.9	%	$	36,361		4.0	%	$	45,451		5.0	%
Total capital to risk weighted assets
Company	$	105,055		16.2	%	$	52.049		8.0	%	$	65,061		10.0	%
Bank	$	104,014		16.0	%	$	51,937		8.0	%	$	64,922		10.0	%
Tier 1 capital to risk weighted assets
Company	$	100,520		15.5	%	$	39,037		6.0	%	$	52,049		8.0	%
Bank	$	99,478		15.3	%	$	38,953		6.0	%	$	51,937		8.0	%
Common equity tier 1 capital to risk weighted assets
Company	$	100,520		15.5	%	$	29,277		4.5	%		n/a		n/a
Bank	$	99,478		15.3	%	$	29,215		4.5	%	$	42,199		6.5	%

40

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with U.S. GAAP and general banking practices. These estimates include accounting for the allowance for loan losses, foreclosed assets, valuation of deferred tax assets and fair value measurements. A description of these estimates, which significantly affect the Company’s determination of our consolidated financial position, results of operations and cash flows, is set forth in Note 1, “Summary of Significant Accounting Policies” of the Notes to the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2018.

The emphasis of this discussion is a comparison of assets, liabilities and stockholders’ equity as of March 31, 2019 to December 31, 2018, while comparing income and expenses for the three-month periods ended March 31, 2019 and March 31, 2018. All information should be read in conjunction with the Company’s unaudited interim consolidated condensed financial statements and related notes appearing elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2018.

Comparison of Financial Condition at March 31, 2019 and December 31, 2018

At March 31, 2019, total assets were $934.3 million, an increase of $2.9 million compared to December 31, 2018. For the three-month period ended March 31, 2019, the Company’s net loan portfolio has increased $7.5 million to $666.3 million.

At March 31, 2019, total deposits increased by $2.0 million to $741.8 million. The increase in deposit accounts occurred despite an $8.9 million decline in brokered deposits. At March 31, 2019, non-interest bearing checking accounts totaled $125.7 million, a decline of $3.8 million compared to December 31, 2018. At March 31, 2019, retail repurchase account balances totaled $59.0 million, an increase of $6.0 million compared to December 31, 2018.

The Company continues to place an emphasis on core funding while attempting to slow the growth of our deposit cost. However, increased competition and the Company’s continued strong loan demand will force management to increase deposit rates to ensure adequate funding levels to meet liquidity needs. Management anticipates that future loan growth will be funded largely by the recruitment of time deposits. The Company’s investment portfolio may provide additional liquidity. However, a significant portion of the investment portfolio is pledged to municipalities to secure deposits, limiting the Company’s ability to significantly increase our loan to deposit ratio above current levels.

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Comparison of Operating Results for the Three-Month Periods Ended March 31, 2019 and March 31, 2018.

The Company’s net income for the three-month period ended March 31, 2019 was $623,000 compared to $1.1 million for the three-month period ended March 31, 2018. The reduction in net income is largely the result of $596,000 in merger related expenses incurred during the three-month period ending March 31, 2019, reducing net income by $471,000.

The Company’s total interest income for the three-month period ended March 31, 2019 was $9.5 million, compared to $8.8 million for the three-month period ended March 31, 2018. The increase in net interest income for the three-month period ended March 31, 2019 compared to March 31, 2018 was largely due to the $14.5 million increase in the average balance of loans outstanding. For the three-month period ended March 31, 2019, total interest expense was $2.7 million compared to $1.6 million for the three-month period ended March 31, 2018.

For the three-month period ended March 31, 2019, total interest bearing liabilities were $685.1 million, representing an increase of $1.5 million for the three-month period ended March 31, 2018. The increase in interest expense is largely the result of increases in short term interest rates spurred by the decision of the Open Market Committee of the Federal Reserve Board of Governors to increase its stated overnight Federal Funds (“Fed Funds”) rate. For the three-month period ended March 31, 2019, the cost of average total deposits was 1.16% compared to 0.67% for the three-month period ended March 31, 2018. For the three-month periods ended March 31, 2019 and March 31, 2018, the Company’s cost of interest bearing liabilities was 1.57% and 0.94%, respectively.

For the three-month period ended March 31, 2019, the Company’s tax equivalent yield on loans was 5.00% compared to 4.62% for the three-month period ended March 31, 2018. For the three-month period ended March 31, 2019, the Company’s tax equivalent yield on tax free municipal securities was 3.82% compared to 3.96% for the three-month period ended March 31, 2018. For the three-month periods ended March 31, 2019 and March 31, 2018, the Company’s net interest margin was 3.24% and 3.45%, respectively.

42

Average Balances, Yields and Interest Expenses. The table on the next page summarizes the overall effect of changes in both interest rates and the average balances of interest earning assets and liabilities for the three-month periods ended March 31, 2019 and March 31, 2018. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate three-month periods. Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $47,000 for the three-month period ended March 31, 2019 and $53,000 for the three-month period ended March 31, 2018, for a tax equivalent rate using a cost of funds rate of 1.57% for the three-month period ended March 31, 2019 and 0.94% for the three-month period ended March 31, 2018. The table adjusts tax-free loan income by $40,000 for the three-month period ended March 31, 2019 and $5,000 for the three-month period ended March 31, 2018, for a tax equivalent rate using the same cost of funds rate.

	Average		Income and		Average			Average		Income and		Average
	Balance		Expense		Rates			Balance		Expense		Rates
	3/31/2019		3/31/2019		3/31/2019			3/31/2018		3/31/2018		3/31/2018
	(Table Amounts in Thousands, Except Percentages)
Loans receivable, net	$	661,735		8,270		5.00	%	$	647,204		7,482		4.62	%
Taxable securities, AFS		150,770		1,035		2.75	%		160,582		1,079		2.69	%
Non-taxable securities, AFS		25,358		242		3.82	%		26,856		266		3.96	%
Other interest bearing deposits		11,474		82		2.86	%		6,030		29		1.92	%
Total interest earning assets		849,337		9,629		4.53	%		840,672		8,856		4.21	%
Other assets		69,384							69,290
Total assets	$	918,721						$	909,962
Retail time deposits		253,921		1,222		1.93	%		240,602		674		1.12	%
Brokered deposits		60,697		373		2.46	%		53,910		188		1.39	%
Interest bearing checking		202,634		486		0.96	%		215,352		341		0.63	%
Saving / MMDA		96,253		56		0.23	%		102,155		41		0.16	%
FHLB borrowings		26,778		159		2.38	%		23,656		92		1.56	%
Repurchase agreements		48,911		302		2.47	%		39,072		154		1.58	%
Subordinated debentures		10,310		147		5.70	%		10,310		122		4.73	%
Total interest bearing liabilities		699,504		2,745		1.57	%		685,057		1,612		0.94	%
Non-interest bearing deposits		123,220							133,412
Other liabilities		4,104							3,887
Stockholders’ equity		91,893							87,336
Total liabilities and stockholders’ equity	$	918,721						$	909,692
Net interest income				6,884							7,244
Net interest spread						2.97	%						3.27	%
Net interest margin						3.24	%						3.45	%

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Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $60,000 in provision for loan loss was required for the three-month period ended March 31, 2019 compared to a $68,000 provision for loan loss expense for the three-month period ended March 31, 2018.

Non-Interest Expenses. For the three-month period ended March 31, 2019, non-interest expenses were $7.7 million compared to $7.5 million for the three-month period ended March 31, 2018. For the three-month period ended March 31, 2019, data processing expenses and occupancy expense increased by $46,000 and $38,000, respectively, compared to the three-month period ended March 31, 2018. The Company incurred net expenses of $20,000 on the sale of foreclosed assets during the three-month period ended March 31, 2019 compared to a net gain on $6,000 for the three-month period ended March 31, 2018. For the three-month period ended March 31, 2019 and excluding merger expenses, no other expense line item experienced an increase compared to the three-month period ended March 31, 2018.

Income Taxes. The effective tax rate for the three-month periods ending March 31, 2019 was 1.0% due to lower levels of net income, municipal bond income and higher levels of tax free income due to the payment of a death benefit on a bank owned life insurance policy. For the three-month period ended March 31, 2018, the Company’s effective tax rate was 14.8%.

Liquidity and Capital Resources. The Company has no business other than that of the Bank. Management believes that dividends that may be paid by the Bank to the Company will provide sufficient funds for its current needs. However, no assurance can be given that the Company will not have a need for additional funds in the future. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company.

The Bank uses brokered deposits to supplement its asset liability need for longer term deposits reasonable prices. In addition to the coupon rate listed below, brokered deposits carry an additional fee of approximately 0.25% that includes the cost of selling and servicing the deposits. The Company includes this cost as interest expense on its income statement. At March 31, 2019, the Bank’s brokered deposits consisted of the following:

Issue Date	Interest rate			Balance		Maturity
4/12/2018		2.00	%		6,036,000		4/12/2019
7/22/2016		1.00	%		2,138,000		5/22/2019
5/10/2018		2.20	%		4,900,973		7/10/2019
7/29/2016		1.05	%		2,964,000		7/29/2019
8/16/2016		1.10	%		1,978,000		8/16/2019
6/19/2018		2.40	%		2,822,000		9/19/2019
2/15/2018		2.20	%		3,417,000		2/15/2020
9/12/2018		2.55	%		2,500,000		3/12/2020
7/18/2018		2.70	%		6,870,000		4/18/2020
4/12/2018		2.50	%		4,190,000		1/12/2021
5/10/2018		2.70	%		5,680,000		3/10/2021
6/19/2018		3.00	%		3,153,000		6/19/2021
7/18/2018		3.00	%		7,620,000		10/18/2021
9/12/2018		3.00	%		2,609,000		3/12/2022
					56,877,973

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words “believe,” “expect,” “seek,” and “intend” and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions, which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The actual results of the Company’s asset liability management analysis are highly dependent on the prepayment speed of mortgage backed securities and collateralized mortgage obligations. The United States Treasury’s policy of purchasing longer dated Treasury bonds has the result of lowering mortgage loan rates, allowing more consumers to refinance their mortgages and pay-off their current mortgage, resulting in higher prepayment speeds on mortgage investment products.

The effects of rising interest rates are discussed throughout Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Actual results for the year ending December 31, 2019 will differ from simulations due to timing, magnitude, and the frequency or interest rate changes, market conditions, management strategies, and the timing of the Company’s cash receipts and disbursements.

The Company’s analysis at March 31, 2019 indicates that an increase in interest rates across the entire yield curve may result in an increase in net interest income. A summary of the Company’s analysis at March 31, 2019 for the twelve month period ending March 31, 2020 is as follows:

	Down 1.00%		No change		Up 1.00%		Up 2.00%		Up 3.00%
			(Dollars in Thousands)
Net interest income	$	29,246	$	31,796	$	33,825	$	35,647	$	37,418

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), an evaluation was carried out with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarter ended March 31, 2019.

Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the three-month period ended March 31, 2019 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud will be detected. The Company is subject to Section 404 of The Sarbanes-Oxley Act of 2002. Section 404 requires management to assess and report on the effectiveness of the Company’s internal controls over financial reporting.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended March 31, 2019 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company is a party to certain ordinary course litigation. The Company will vigorously defend itself in all such matters when the Company determines that it has meritorious defenses. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations. The Company and its subsidiaries have adopted policies and procedures intended to minimize the impact of adverse litigation and regulatory actions, and has endeavored to secure reasonable insurance coverage.

Item 1A. Risk Factors

There have been no material changes to our risk factors as previously disclosed in Part 1, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Unregistered Sales of Equity Securities.

None

(b) Use of Proceeds.

Not applicable

(c) Repurchase of Equity Securities

Not applicable

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. Exhibits

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for John E. Peck, Chief Executive Officer.
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Billy C. Duvall, Chief Financial Officer.
32.1	Certification Pursuant to Section 18 U.S.C. Section 1350 for John E. Peck, Chief Executive Officer.
32.2	Certification Pursuant to Section 18 U.S.C. Section 1350 for Billy C. Duvall, Chief Financial Officer.
101	The following materials from the Company’s quarterly report on Form 10-Q for the three month period ended March 31, 2019 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Statements of Financial Condition as of March 31, 2019 (unaudited) and December 31, 2018, (ii) Consolidated Condensed Statements of Income for the three periods ended March 31, 2019 and March 31, 2018 (unaudited), (iii) Consolidated Condensed Statements of Comprehensive Loss for the three-month periods ended March 31, 2019 and March 31, 2018 (unaudited), (iv) Consolidated Condensed Statements of Stockholders’ Equity for the three-month period ended March 31, 2019 (unaudited); and (v) Consolidated Condensed Statements of Cash Flows for the three-month periods ended March 31, 2019 and March 31, 2018 (unaudited), and (iv) Notes to Consolidated Condensed Financial Statements (unaudited), tagged as blocks of text.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HOPFED BANCORP, INC.
Date: May 9, 2019	/s/ John E. Peck
	John E. Peck
	President and Chief Executive Officer
Date: May 9, 2019	/s/ Billy C. Duvall
	Billy C. Duvall
	Senior Vice President, Chief Financial
	Officer and Treasurer

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