Hopfed Bancorp (HFBC) 10-Q 2014 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2014

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required and posted 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 and post such files).    Yes  x    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 Rule 12b-2 of the Exchange Act: (Check one)

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company filer	¨

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

As of May 5, 2014, the Registrant had outstanding 7,419,885 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
	Consolidated Condensed Statements of Financial Condition as of March 31, 2014 (unaudited) and December  31, 2013		2
	Consolidated Condensed Statements of Income for the Three-Month Periods Ended March 31, 2014, and March  31, 2013 (unaudited)		4
	Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three-Month Periods Ended March  31, 2014 and March 31, 2013 (unaudited)		6
	Consolidated Condensed Statement of Stockholders’ Equity for the Three-Month Periods Ended March  31, 2014, and March 31, 2013 (unaudited)		7
	Consolidated Condensed Statements of Cash Flows for the Three-Month Periods Ended March  31, 2014, and March 31, 2013 (unaudited)		8
	Notes to Unaudited Consolidated Condensed Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50
Item 4.	Controls and Procedures		51
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		52
Item 1A.	Risk Factors		52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 3.	Defaults Upon Senior Securities		52
Item 4.	Mine Safety Disclosures		52
Item 5.	Other Information		52
Item 6.	Exhibits		53
SIGNATURES			54

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition

(Dollars in Thousands)—Unaudited

	March 31, 2014		December 31, 2013
Assets
Cash and due from banks	$	25,449		37,229
Interest-earning deposits		8,730		18,619
Cash and cash equivalents		34,179		55,848
Federal Home Loan Bank stock, at cost		4,428		4,428
Securities available for sale		341,538		318,910
Loans held for sale		152		—
Loans receivable, net of allowance for loan losses of $8,913 at March 31, 2014, and $8,682 at December 31, 2013		535,951		543,632
Accrued interest receivable		4,447		5,233
Real estate and other assets owned		1,680		1,674
Bank owned life insurance		9,764		9,677
Premises and equipment, net		23,063		23,108
Deferred tax assets		3,327		4,610
Intangible asset		97		130
Other assets		6,398		6,399
Total assets	$	965,024		973,649
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing accounts	$	105,848		105,252
Interest-bearing accounts
Interest bearing checking accounts		190,804		183,643
Savings and money market accounts		93,780		92,106
Other time deposits		371,094		381,996
Total deposits		761,526		762,997
Advances from Federal Home Loan Bank		41,280		46,780
Repurchase agreements		50,129		52,759
Subordinated debentures		10,310		10,310
Advances from borrowers for taxes and insurance		572		521
Dividends payable		309		326
Accrued expenses and other liabilities		3,385		4,239
Total liabilities		867,511		877,932

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

2

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition, Continued

(Dollars in Thousands)—Unaudited

	March 31, 2014			December 31, 2013
Stockholders’ equity
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at March 31, 2014, and December 31, 2013.		—			—
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,927,287 issued and 7,437,517 outstanding at March 31, 2014, and 7,927,287 issued and 7,447,903 outstanding at December 31, 2013		79			79
Additional paid-in-capital		58,333			58,302
Retained earnings		44,753			44,694
Treasury stock- common (at cost, 489,770 shares at March 31, 2014, and 479,384 shares at December 31, 2013)		(6,049	)		(5,929	)
Accumulated other comprehensive income (loss), net of taxes		397			(1,429	)
Total stockholders’ equity		97,513			95,717
Total liabilities and stockholders’ equity	$	965,024			973,649

The consolidated condensed statement of financial condition at December 31, 2013, has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

3

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income

(Dollars in Thousands)

(Unaudited)

	For the Three Month Periods Ended March 31,
	2014		2013
Interest and dividend income:
Loans receivable	$	6,327		6,882
Investment in securities, taxable		1,779		1,832
Investment in securities, non-taxable		544		585
Interest-earning deposits		8		6
Total interest and dividend income		8,658		9,305
Interest expense:
Deposits		1,471		2,046
Advances from Federal Home Loan Bank		434		444
Repurchase agreements		249		242
Subordinated debentures		184		182
Total interest expense		2,338		2,914
Net interest income		6,320		6,391
Provision for loan losses		380		376
Net interest income after provision for loan losses		5,940		6,015
Non-interest income:
Service charges		778		853
Merchant card income		259		223
Mortgage origination revenue		58		200
Gain on sale of securities		13		627
Income from bank owned life insurance		95		75
Financial services commission		206		297
Other operating income		189		208
Total non-interest income		1,598		2,483

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

4

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income, Continued

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

	For the Three Month Periods Ended March 31,
	2014			2013
Non-interest expenses:
Salaries and benefits		3,795			3,848
Occupancy expense		909			845
Data processing expense		728			650
State deposit tax		246			142
Intangible amortization expense		32			49
Professional services expense		287			393
Deposit insurance and examination expense		197			232
Advertising expense		314			333
Postage and communications expense		143			139
Supplies expense		145			136
Loss on sale of real estate owned		23			35
Real estate owned expenses		130			76
Other operating expenses		375			396
Total non-interest expense		7,324			7,274
Income before income tax expense		214			1,224
Income tax expense		(140	)		240
Net income	$	354			984
Net income per share
Basic	$	0.05		$	0.13
Fully diluted	$	0.05		$	0.13
Dividend per share	$	0.04		$	0.02
Weighted average shares outstanding - basic		7,416,716			7,488,445
Weighted average shares outstanding - diluted		7,416,716			7,488,445

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

5

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Comprehensive Income (Loss)

(Dollars in Thousands)

(Unaudited)

	For the Three Month Periods Ended March 31,
	2014			2013
Net income	$	354		$	984
Other comprehensive income, net of tax:
Unrealized gain (loss) on investment securities available for sale, net of tax effect of ($920) and $598 for the three months ended March 31, 2014, and March 31, 2013, respectively;		1,786			(1,161	)
Unrealized gain on derivatives, net of tax effect of ($25) and ($32) for the three month periods ending March 31, 2014, and March 31, 2013, respectively;		49			63
Reclassification adjustment for gains included in net income, net of tax effect of $4 and $213 for the three month periods ended March 31, 2014, and March 31, 2013, respectively;		(9	)		(414	)
Comprehensive income (loss)	$	2,180		($	528	)

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

6

HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Three Month Periods Ended March 31, 2014 and 2013

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

	Shares				Common Stock		Common Stock Warrants			Additional Capital Surplus		Retained Earnings			Treasury Stock Preferred			Treasury Stock Common			Accumulated Other Comprehensive Income			Total Stockholders Equity
	Common Stock		Preferred Stock
Balance at December 31, 2012		7,502,812		18,400	$	79		556			76,288		41,829			(18,400	)		(5,076	)		9,723			104,999
Restricted stock awards		227		—		—		—			—		—			—			—			—			—
Consolidated Net income		—		—		—		—			—		984			—			—			—			984
Compensation expense, restricted stock awards		—		—		—		—			22		—			—			—			—			22
Net change in unrealized gain on securities available for sale, net of income taxes of $811		—		—		—		—			—		—			—			—			(1,575	)		(1,575	)
Net change in unrealized loss on derivatives, net of income tax benefit of $32		—		—		—		—			—		—			—			—			63			63
Repurchase of warrant		—		—		—		(556	)		299		—			—			—			—			(257	)
Cash dividend to common stockholders		—		—		—		—			—		(150	)		—			—			—			(150	)
Balance March 31, 2013		7,503,039		18,400	$	79		—			76,609		42,663			(18,400	)		(5,076	)		8,211			104,086

	Shares Common Stock			Preferred Stock		Common Stock		Additional Paid in Capital Surplus		Retained Earnings			Treasury Stock Common			Accumulated Other Comprehensive Income			Total Stockholders Equity
Balance at December 31, 2013		7,447,903			—	$	79		58,302		44,694			(5,929	)		(1,429	)		95,717
Consolidated net income		—			—		—		—		354			—			—			354
Repurchase of treasury stock		(10,386	)		—		—		—		—			(120	)		—			(120	)
Compensation expense, restricted stock awards		—			—		—		31		—			—			—			31
Net change in unrealized gain on securities available for sale, net of income taxes of ($916)		—			—		—		—		—			—			1,777			1,777
Net change in unrealized loss on derivatives, net of income tax benefit of $25		—			—		—		—		—			—			49			49
Cash dividend to common stockholders		—			—		—		—		(295	)		—			—			(295	)
Balance March 31, 2014		7,437,517			—	$	79		58,333		44,753			(6,049	)		397			97,513

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

7

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

	For the Three Month Periods Ended March 31,
	2014			2013
Cash flows from operating activities:
Net cash provided by operating activities	$	1,864			2,903
Cash flows from investing activities
Proceeds from sales, calls and maturities of securities available for sale		16,463			41,814
Purchase of securities available for sale		(36,904	)		(40,938	)
Net (increase) decrease in loans		7,068			(6,396	)
Proceeds from sale of foreclosed assets		137			110
Purchase of premises and equipment		(332	)		(49	)
Net cash used in investing activities		(13,568	)		(5,459	)
Cash flows from financing activities:
Net increase in demand deposits		596			6,222
Net increase (decrease) in time and other deposits		(2,067	)		11,467
Increase in advances from borrowers for taxes and insurance		51			85
Repayment of advances from Federal Home Loan Bank		(5,500	)		(484	)
Net decrease in repurchase agreements		(2,630	)		(3,023	)
Cash used to repurchase treasury stock		(120	)		—
Cash used to repurchase warrant		—			(257	)
Dividends paid on common stock		(295	)		(150	)
Net cash provided by financing activities		(9,965	)		13,860
Increase (decrease) in cash and cash equivalents		(21,669	)		11,304
Cash and cash equivalents, beginning of period		55,848			37,176
Cash and cash equivalents, end of period	$	34,179			48,480
Supplemental disclosures of cash flow information:
Interest paid	$	2,380			2,782
Income taxes paid		—			445
Supplemental disclosures of non-cash investing and financing activities:
Loans charged off	$	196			523
Foreclosures and in substance foreclosures of loans during period	$	166			77
Net unrealized gains (losses) on investment securities classified as available for sale	$	2,688			(2,386	)
Increase (decrease) in deferred tax asset related to unrealized gains on investments	$	(916	)		811
Dividends declared and payable	$	324			180
Issue of unearned restricted stock		—			2

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

8

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

HopFed Bancorp, Inc. (the “Company”) was formed at the direction of Heritage Bank USA Inc, formerly Hopkinsville Federal Savings Bank (the “Bank”), to become the holding company of the Bank upon the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank. The conversion was consummated on February 6, 1998. The Company’s primary assets are the outstanding capital stock of the converted Bank, and its sole business is that of the converted Bank.

On June 5, 2013, the Bank’s legal name became Heritage Bank USA Inc. and the Bank was granted a commercial bank charter by the Kentucky Department of Financial Institutions (“KDFI”). On June 5, 2013, the Bank became subject to regulation by the KDFI and the Federal Deposit Insurance Corporation (“FDIC”). On the same day, HopFed Bancorp was granted a bank holding company charter by the Federal Reserve Bank of Saint Louis (“FED”) and as such regulated by the FED.

The Bank operates a mortgage division, Heritage Mortgage Services, in Clarksville, Tennessee with agents located in several of its markets. The Bank has a financial services division, Heritage Solutions, with offices in Murray, Kentucky, Kingston Springs, Tennessee, and Pleasant View, Tennessee. Heritage Solutions agents travel throughout western Kentucky and middle Tennessee offering fixed and variable annuities, mutual funds and brokerage services.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America 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 representation have been included. The results of operations and other data for the three month period ended March 31, 2014, are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2014.

The accompanying unaudited 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 for the year ended December 31, 2013. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2013, Consolidated Financial Statements.

9

(2) INCOME PER SHARE

The following schedule reconciles the numerators and denominators of the basic and diluted income per share (“IPS”) computations for the three month periods ended March 31, 2014, and March 31, 2013. Diluted common shares arise from the potentially dilutive effect of the Company’s stock options and warrants outstanding.

	March 31,
	2014		2013
Basic IPS:
Net income available to common stockholders	$	354,000	$	984,000
Average common shares outstanding		7,416,716		7,488,445
Net income per share available to common shareholders, basic	$	0.05	$	0.13
Diluted IPS
Net income available to common stockholders	$	354,000	$	984,000
Average common shares outstanding		7,416,716		7,488,445
Dilutive effect of stock options		—		—
Average diluted shares outstanding		7,416,716		7,488,445
Net income per share available to common shareholders, diluted	$	0.05	$	0.13

(3) STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $31,000 for the three month period ended March 31, 2014, and $22,000 for the three month period ended March 31, 2013, respectively. The Company issued 227 shares of restricted stock during the three month period ended March 31, 2013. The Company did not issue any shares of restricted stock during the three month period ended March 31, 2014. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting at March 31, 2014:

Year Ending December 31,	Future Expense
2014	$	88,685
2015		101,302
2016		48,272
2017		3,125
Total	$	241,384

The compensation committee may make additional awards of restricted stock, thereby increasing the future expense related to this plan. In addition, award vesting may be accelerated due to certain events as outlined in the restricted stock award agreement. Any acceleration of vesting will change the timing of, but not the aggregate amount of, compensation expense incurred.

10

(4) SECURITIES

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, 2014, the Company has 97 securities with unrealized losses. The carrying amount of securities and their estimated fair values at March 31, 2014, were as follows:

	March 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Restricted:
FHLB stock	$	4,428		—		—			4,428
Unrestricted:
U.S. government and agency securities:
Agency debt securities	$	122,736		1,942		(1,839	)		122,839
Taxable municipal bonds		18,987		310		(491	)		18,806
Tax free municipal bonds		64,063		2,796		(511	)		66,348
Trust preferred securities		1,600		—		(111	)		1,489
Commercial bonds		2,000		—		(6	)		1,994
Mortgage-backed securities:
GNMA		28,712		629		(174	)		29,167
FNMA		74,186		553		(1,434	)		73,305
FHLMC		1,215		30		—			1,245
NON-AGENCY CMOs		10,951		4		(341	)		10,614
AGENCY CMOs		15,813		152		(234	)		15,731
	$	340,263		6,416		(5,141	)		341,538

11

The carrying amount of securities and their estimated fair values at December 31, 2013, was as follows:

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Restricted:
FHLB stock	$	4,428		—		—			4,428
Unrestricted:
U.S. government and agency securities:
Agency debt securities	$	120,608		1,856		(2,441	)		120,023
Taxable municipal bonds		18,337		458		(738	)		18,057
Tax free municipal bonds		64,291		2,066		(898	)		65,459
Trust preferred securities		1,600		—		(111	)		1,489
Commercial bonds		2,000		—		(16	)		1,984
Mortgage-backed securities:
GNMA		17,327		590		(142	)		17,775
FNMA		70,104		526		(1,938	)		68,692
FHLMC		1,301		35		—			1,336
SLMA CMO		8,459		—		(374	)		8,085
AGENCY CMOs		16,296		134		(420	)		16,010
	$	320,323		5,665		(7,078	)		318,910

12

The scheduled maturities of debt securities available for sale at March 31, 2014, were as follows:

March 31, 2014	Amortized Cost		Estimated Fair Value
Due within one year	$	501	$	503
Due in one to five years		16,131		16,379
Due in five to ten years		44,634		44,675
Due after ten years		42,244		43,094
		103,510		104,651
Amortizing agency bonds		105,876		106,825
Mortgage-backed securities		130,877		130,062
Total unrestricted securities available for sale	$	340,263	$	341,538

The scheduled maturities of debt securities available for sale at December 31, 2013, were as follows:

December 31, 2013	Amortized Cost		Estimated Fair Value
Due within one year	$	501	$	505
Due in one to five years		12,630		12,954
Due in five to ten years		38,192		37,364
Due after ten years		49,284		49,314
		100,607		100,137
Amortizing agency bonds		106,229		106,875
Mortgage-backed securities		113,487		111,898
Total unrestricted securities available for sale	$	320,323	$	318,910

13

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of March 31, 2014, are 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. government and agency securities:
Agency debt securities	$	37,596		(1,186	)		12,687		(653	)		50,283		(1,839	)
Taxable municipals		6,727		(236	)		4,127		(255	)		10,854		(491	)
Tax free municipals		4,547		(109	)		7,089		(402	)		11,636		(511	)
Trust preferred securities		—		—			1,489		(111	)		1,489		(111	)
Commercial bonds		1,994		(6	)		—		—			1,994		(6	)
Mortgage-backed securities:
GNMA		15,190		(167	)		805		(7	)		15,995		(174	)
FNMA		33,463		(950	)		9,416		(484	)		42,879		(1,434	)
SLMA CMOs		3,410		(198	)		1,798		(143	)		5,208		(341	)
AGENCY CMOs		7,565		(70	)		1,877		(164	)		9,442		(234	)
Total available for sale	$	110,492		(2,922	)		39,288		(2,219	)		149,780		(5,141	)

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2013, 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. government and agency securities:
Agency debt securities	$	44,968		(2,107	)		6,793		(334	)		51,761		(2,441	)
Taxable municipal bonds		7,903		(660	)		797		(78	)		8,700		(738	)
Tax free municipal bonds		9,848		(692	)		3,720		(206	)		13,568		(898	)
Trust preferred securities		—		—			1,489		(111	)		1,489		(111	)
Commercial bonds		1,984		(16	)		—		—			1,984		(16	)
Mortgage-backed securities:
GNMA		5,320		(128	)		1,551		(14	)		6,871		(142	)
FNMA		42,464		(1,626	)		6,746		(312	)		49,210		(1,938	)
NON-AGENCY SLMA CMOs		5,224		(374	)		—		—			5,224		(374	)
AGENCY CMOs		7,031		(223	)		1,844		(197	)		8,875		(420	)
Total available for sale	$	124,742		(5,826	)		22,940		(1,252	)		147,682		(7,078	)

14

At March 31, 2014, securities with a book value of approximately $161.6 million and a market value of approximately $163.7 million were pledged to various municipalities for deposits in excess of FDIC limits as required by law. The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Bank’s name totaling $13.5 million secured by the Bank’s loan portfolio to secure additional municipal deposits.

At March 31, 2014, securities with a book and market value of $34.1 million were sold under agreements to repurchase from various customers. Furthermore, the Company has two wholesale repurchase agreements with third parties secured by investments with a combined book value of $19.6 million and a market value of $19.2 million. One repurchase agreement is in the amount of $6.0 million and has a maturity of September 18, 2016 and is currently callable on a quarterly basis and has a fixed rate of interest of 4.36%. The second repurchase agreement, in the amount of $10.0 million, has a maturity of September 5, 2014, is currently callable quarterly and has a fixed rate of interest of 4.28%.

15

(5) LOANS

Set forth below is selected data relating to the composition of the loan portfolio by type of loan at March 31, 2014 and December 31, 2013. At March 31, 2014 and December 31, 2013, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

	March 31, 2014			March 31, 2014			December 31, 2013			December 31, 2013
	Amount			Percent			Amount			Percent
	(Dollars in thousands, except percentages)
Real estate loans:
One-to-four family (closed end) first mortgages	$	153,957			28.2	%	$	155,252			28.1	%
Second mortgages (closed end)		2,829			0.5	%		3,248			0.6	%
Home equity lines of credit		33,947			6.2	%		34,103			6.2	%
Multi-family		28,770			5.3	%		29,736			5.4	%
Construction		11,278			2.1	%		10,618			1.9	%
Land		34,154			6.3	%		34,681			6.3	%
Farmland		47,608			8.7	%		51,868			9.4	%
Non-residential real estate		154,083			28.3	%		157,692			28.5	%
Total mortgage loans		466,626			85.6	%		477,198			86.4	%
Consumer loans		15,260			2.8	%		11,167			2.0	%
Commercial loans		63,098			11.6	%		64,041			11.6	%
Total other loans		78,358			14.4	%		75,208			13.6	%
Total loans, gross		544,984			100.0	%		552,406			100.0	%
Deferred loan cost, net of income		(120	)					(92	)
Less allowance for loan losses		(8,913	)					(8,682	)
Total loans	$	535,951					$	543,632

16

The Bank assigns an industry standard NAICS code to each loan in the Bank’s portfolio. By assigning a standard code to each type of loan, management can more readily determine concentrations in risk by industry, location and loan type. This information is most useful when analyzing the Bank’s non-residential real estate loan portfolio. At March 31, 2014, and December 31, 2013, the Bank’s non-residential real estate loan portfolio was made up of the following loan types:

	Balance		Balance
	March 31, 2014		December 31, 2013
	(Dollars in Thousands)
Land	$	34,154	$	34,681
Manufacturing		3,907		3,962
Professional, Technical		1,784		1,819
Retail Trade		11,902		10,916
Other Services		18,846		21,307
Finance and Insurance		2,439		1,862
Agricultural, Forestry, Fishing & Hunting		47,608		51,868
Real Estate and Rental and Leasing		55,778		55,692
Wholesale Trade		21,486		21,852
Arts, Entertainment and Recreation		3,656		3,015
Accommodations / Food Service		24,004		26,552
Healthcare and Social Assistance		6,668		6,862
Transportation and Warehousing		1,069		1,101
Information		2,309		2,390
Admin Support / Waste Mgmt		235		362
Total	$	235,845	$	244,241

The allowance for loan losses totaled $8.9 million at March 31, 2014, $8.7 million at December 31, 2013, and $10.6 million at March 31, 2013, respectively. The ratio of the allowance for loan losses to total loans was 1.63% at March 31, 2014, 1.57% at December 31, 2013, and 1.95% at March 31, 2013.

The following table indicates the type and level of non-accrual loans at the periods indicated below:

	March 31, 2014		December 31, 2013		March 31, 2013
	(Dollars in Thousands)
One-to-four family mortgages	$	1,056		945		1,883
Home equity line of credit		49		1		66
Junior lien		1		2		3
Multi-family		—		—		—
Construction		—		175		177
Land		1,217		1,218		2,754
Non-residential real estate		6,585		6,546		951
Farmland		669		703		545
Consumer loans		2		13		65
Commercial loans		453		463		592
Total non-accrual loans	$	10,032		10,066		7,036

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, 2014:

	Balance 12/31/2013		Charge off  2014			Recovery 2014		Specific Provision 2014			General Provision 2014			Ending Balance 3/31/2014
	(Dollars in Thousands)
One-to-four family mortgages	$	2,048		(35	)		8		(10	)		125			2,136
Home equity line of credit		218		—			1		—			—			219
Junior liens		39		—			5		4			(22	)		26
Multi-family		466		—			—		—			(134	)		332
Construction		88		(8	)		2		(6	)		4			80
Land		1,305		—			—		41			(133	)		1,213
Non-residential real estate		2,719		—			—		(80	)		250			2,889
Farmland		510		—			—		—			237			747
Consumer loans		541		(103	)		31		(137	)		343			675
Commercial loans		748		(50	)		—		(50	)		(52	)		596
Total	$	8,682		(196	)		47		(238	)		618			8,913

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, 2013:

	Balance 12/31/2012		Charge off 2013			Recovery 2013		Specific Provision 2013			General Provision 2013			Ending Balance 12/31/2013
	(Dollars in Thousands)
One-to-four family mortgages	$	2,490		(852	)		329		(285	)		366			2,048
Home equity line of credit		374		(22	)		9		(88	)		(55	)		218
Junior liens		230		(119	)		71		5			(148	)		39
Multi-family		524		(38	)		164		(20	)		(164	)		466
Construction		256		—			—		(168	)		—			88
Land		2,184		(1,432	)		9		(718	)		1,262			1,305
Non-residential real estate		2,921		(1,041	)		14		757			68			2,719
Farmland		712		—			—		(202	)		—			510
Consumer loans		338		(649	)		246		228			378			541
Commercial loans		619		(291	)		32		437			(49	)		748
Total	$	10,648		(4,444	)		874		(54	)		1,658			8,682

18

The table below presents past due and non-accrual balances at March 31, 2014, by loan classification allocated between performing and non-performing:

March 31, 2014	Currently		30 - 89 Days		Non-accrual		Special		Impaired Loans Currently Performing
	Performing		Past Due		Loans		Mention		Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	150,107		610		1,056		904		1,280		—		153,957
Home equity line of credit		33,256		148		49		—		494		—		33,947
Junior liens		2,764		—		1		42		22		—		2,829
Multi-family		23,871		—		—		4,899		—		—		28,770
Construction		11,278		—		—		—		—		—		11,278
Land		15,982		76		1,217		3,464		13,415		—		34,154
Non-residential real estate		141,228		47		6,585		488		5,735		—		154,083
Farmland		41,605		—		669		345		4,989		—		47,608
Consumer loans		14,576		28		2		—		654		—		15,260
Commercial loans		58,633		189		453		1,399		2,424		—		63,098
Total	$	493,300		1,098		10,032		11,541		29,013		—		544,984

The table below presents past due and non-accrual balances at December 31, 2013, by loan classification allocated between performing and non-performing:

	Currently		30 - 89 Days		Non-accrual		Special		Impaired Loans Currently Performing
December 31, 2013	Performing		Past Due		Loans		Mention		Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	148,759		592		945		814		4,142		—		155,252
Home equity line of credit		33,369		93		1		—		640		—		34,103
Junior liens		3,126		—		2		43		77		—		3,248
Multi-family		29,736		—		—		—		—		—		29,736
Construction		10,443		—		175		—		—		—		10,618
Land		19,899		—		1,218		52		13,512		—		34,681
Non-residential real estate		142,701		343		6,546		515		7,587		—		157,692
Farmland		46,042		—		703		480		4,643		—		51,868
Consumer loans		10,493		234		13		—		427		—		11,167
Commercial loans		61,379		123		463		526		1,550		—		64,041
Total	$	505,947		1,385		10,066		2,430		32,578		—		552,406

19

All loans listed as 30-89 days past due and non-accrual are not performing as agreed. Loans listed as special mentioned, substandard and doubtful are paying as agreed. However, the customer’s financial statements may indicate weaknesses in their current cash flow, the customer’s industry may be in decline due to current economic conditions, collateral values used to secure the loan may be declining, or the Company may be concerned about the customer’s future business prospects.

The Company does not originate loans it considers sub-prime and is not aware of any exposure to the additional credit concerns associated with sub-prime lending in either the Company’s loan or investment portfolios. The Company does have a significant amount of construction and land development loans. Management reports to the Company’s Board of Directors on the status of the Company’s specific construction and development loans as well as the market trends in those markets in which the Company actively participates.

The Company’s annualized net charge off ratios for three month periods ended March 31, 2014, March 31, 2013, and the year ended December 31, 2013, was 0.11%, 0.33% and 0.66%, respectively. The ratios of allowance for loan losses to non-accrual loans at March 31, 2014, March 31, 2013, and December 31, 2013, were 88.85%, 150.35%, and 86.25%, respectively.

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 market value of the underlying collateral, 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. 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.

The Company conducts annual reviews on all loan relationships above one million to ascertain the borrowers continued ability to service their debt as agreed. In addition to the credit relationships mentioned above, management may classify any credit relationship once it becomes aware of adverse credit trends for that customer. Typically, the annual review consists of updated financial statements for borrowers and any guarantors, a review of the borrower’s credit history with the Company and other creditors, and current income tax information.

As a result of this review, management will classify loans based on their credit risk. Additionally, the Company provides a risk grade for all loans past due more than sixty days. The Company uses the following risk definitions for risk grades:

Satisfactory loans of average strength having some deficiency or vulnerability to changing economic or industry conditions. These customers should have reasonable amount of capital and operating ratios. Secured loans may lack in margin or liquidity. Loans to individuals, perhaps supported in dollars of net worth, but with supporting assets may be difficult to liquidate.

Watchloans are acceptable credits: (1) that need continual monitoring, such asout-of territory orasset-based loans (since the Bank does not have anasset-based lending department), or (2) with a marginal risk level to business concerns and individuals that; (a) have exhibited favorable performance in the past, though currently experiencing negative trends;

20

(b) are in an industry that is experiencing volatility or is declining, and their performance is less than industry norms; and (c) are experiencing unfavorable trends in their financial position, such asone-time net losses or declines in asset values. These marginal borrowers may have early warning signs of problems such as occasional overdrafts and minor delinquency. If considered marginal, a loan would be a “watch” until financial data demonstrated improved performance or further deterioration to a “substandard” grade usually within a12-month period. In the table on page 23, Watch loans are included with satisfactory loans and classified as Pass.

Special Mentionare currently protected but are potentially weak. These loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan. These credit weaknesses, if not checked or corrected, will weaken the loan or inadequately protect the Bank’s credit position at some future date.

A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the credit. Examples of substandard loans include those to borrowers with insufficient or negative cash flow, negative net worth coupled with inadequate guarantor support, inadequate working capital, and/or significantlypast-due loans and overdrafts.

A loan classified Doubtful has all the weaknesses inherent in a substandard credit except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. The possibility of loss is extremely high, but because of certain pending factorscharge-off is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. The doubtful classification is applied to that portion of the credit in which the full collection of principal and interest is questionable.

A loan is considered to be impaired when management determines that it is possible 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. At March 31, 2014, December 31, 2013, and March 31, 2013, the Company’s impaired loans totaled $39.0 million, $42.6 million and $43.7 million, respectively. At March 31, 2014, December 31, 2013, and March 31, 2013, the Company’s specific reserve for impaired loans totaled $2.0 million, $1.9 million and $2.7 million, respectively.

21

A summary of the Company’s impaired loans, including their respective regulatory classification and their respective specific reserve at March 31, 2014, were as follows:

March 31, 2014	Pass		Special Mention		Impaired Loans				Total		Specific Allowance for Impairment		Allowance for Performing Loans
					Substandard		Doubtful
	(Dollars in Thousands)
One-to-four family mortgages	$	150,717		904		2,336		—		153,957		580		1,556
Home equity line of credit		33,404		—		543		—		33,947		—		219
Junior liens		2,764		42		23		—		2,829		—		26
Multi-family		23,871		4,899		—		—		28,770		—		332
Construction		11,278		—		—		—		11,278		—		80
Land		16,058		3,464		14,632		—		34,154		730		483
Non-residential real estate		141,275		488		12,320		—		154,083		546		2,343
Farmland		41,605		345		5,658		—		47,608		—		747
Consumer loans		14,604		—		656		—		15,260		160		515
Commercial loans		58,822		1,399		2,877		—		63,098		—		596
Total	$	494,398		11,541		39,045		—		544,984		2,016		6,897

A summary of the Company’s impaired loans and their respective reserve at December 31, 2013, were as follows:

December 31, 2013	Pass		Special Mention		Impaired Loans				Total		Allowance for Impairment		Allowance for Performing Loans
					Substandard		Doubtful
	(Dollars in Thousands)
One-to-four family mortgages	$	149,351		814		5,087		—		155,252		597		1,451
Home equity line of credit		33,462		—		641		—		34,103		—		218
Junior liens		3,126		43		79		—		3,248		—		39
Multi-family		29,736		—		—		—		29,736		—		466
Construction		10,443		—		175		—		10,618		—		88
Land		19,899		52		14,730		—		34,681		771		534
Non-residential real estate		143,044		515		14,133		—		157,692		465		2,254
Farmland		46,042		480		5,346		—		51,868		—		510
Consumer loans		10,727		—		440		—		11,167		96		445
Commercial loans		61,502		526		2,013		—		64,041		—		748
Total	$	507,332		2,430		42,644		—		552,406		1,929		6,753

22

Impaired loans by classification type and the related valuation allowance amounts at March 31, 2014, were as follows:

	At March 31, 2014						For the three month period ended March 31, 2014
Impaired loans with no recorded reserve	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
One-to-four family mortgages	$	481		481		—		1,849		2
Home equity line of credit		543		543		—		592		3
Junior liens		23		23		—		51		1
Multi-family		—		—		—		—		—
Construction		—		—		—		88		—
Land		11,106		11,106		—		10,994		201
Farmland		5,658		5,658				8,217		102
Non-residential real estate		8,987		8,987		—		7,167		157
Consumer loans		14		14		—		35		—
Commercial loans		2,877		2,877		—		2,445		106
Total		29,689		29,689		—		31,438		572
Impaired loans with recorded reserve
One-to-four family mortgages		1,855		1,855		580		1,863		6
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		3,526		5,039		730		3,687		23
Farmland		—		—		—		—		—
Non-residential real estate		3,333		4,118		546		3,346		76
Consumer loans		642		642		160		513		—
Commercial loans		—		—		—		—		—
Total		9,356		11,654		2,016		9,409		105
Total impaired loans	$	39,045		41,343		2,016		40,847		677

23

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2013, were as follows:

	At December 31, 2013						For the year ended December 31, 2013
Impaired loans with no recorded reserve	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
One-to-four family mortgages	$	3,216		3,216		—		2,361		8
Home equity line of credit		641		641		—		564		3
Junior liens		79		79		—		239		1
Multi-family		—		—		—		990		—
Construction		175		175		—		1,072		5
Land		10,882		12,315		—		10,668		186
Farmland		5,346		5,346		—		6,955		149
Non-residential real estate		10,775		10,775		—		6,196		263
Consumer loans		56		56		—		48		—
Commercial loans		2,013		2,013		—		2,391		95
Total		33,183		34,616		—		31,484		710
Impaired loans with recorded reserve
One-to-four family mortgages		1,871		1,871		597		2,501		9
Home equity line of credit		—		—		—		279		—
Junior liens		—		—		—		113		—
Multi-family		—		—		—		—		—
Construction		—		—		—		1,385		—
Land		3,848		3,848		771		2,741		29
Farmland		—		—		—		1,601		—
Non-residential real estate		3,358		4,222		465		2,243		111
Consumer loans		384		384		96		401		—
Commercial loans		—		—		—		346		—
Total	$	9,461		10,325		1,929		11,610		149
Total impaired loans	$	42,644		44,941		1,929		43,094		859

24

On a periodic basis, the Bank may modify the terms of certain loans. In evaluating whether a restructuring constitutes a troubled debt restructuring (TDR), Financial Accounting Standards Board has issued Accounting Standards Update 310 (ASU 310),A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.In evaluating whether a restructuring constitutes a TDR, the Bank must separately conclude that both of the following exist:

• The restructuring constitutes a concession

• The debtor is experiencing financial difficulties

ASU 310 provides the following guidance for the Bank’s evaluation of whether it has granted a concession as follows:

1. If a debtor does not otherwise have access to funds at a market interest rate for debt with similar risk characteristics as the restructured debt, the restructured debt would be considered a below market rate, which may indicate that the Bank may have granted a concession. In that circumstance, the Bank should consider all aspects of the restructuring in determining whether it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a TDR.

2. A temporary or permanent increase in the interest rate on a loan as a result of a restructuring does not eliminate the possibility of the restructuring from being considered a concession if the new interest rate on the loan is below the market interest rate for loans of similar risk characteristics.

3. A restructuring that results in a delay in payment that is insignificant is not a concession. However, the Bank must consider a variety of factors in assessing whether a restructuring resulting in a delay in payment is insignificant.

At March 31, 2014, and December 31, 2013, the Company has no loans classified as Troubled Debt Restructurings (TDR’s) that are reported as performing at March 31, 2014, and December 31, 2013, respectively. For the three month period ended March 31, 2014, no loans were classified as TDR and no loans were added or removed from TDR status during the three month period ended March 31, 2014.

25

(6) REAL ESTATE AND OTHER ASSETS OWNED

The Company’s real estate and other assets owned represent properties and personal collateral 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 real estate owned and other asset losses 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 real estate owned with a book balance in excess of $250,000 on an annual basis. Additional losses are recognized as a non-interest expense.

At March 31, 2014, December 31, 2013, and March 31, 2013, the Company had balances in other real estate and assets owned and non-accrual loans consisting of the following:

		March 31, 2014			December 31, 2013			March 31, 2013
		(Dollars in Thousands)
One-to-four family mortgages		$	446			350			295
Land			1,034			1,124			1,112
Non-residential real estate			200			200			73
Total other assets owned		$	1,680			1,674			1,480
Total non-accrual loans		$	10,032			10,066			7,036
	��
Total non-performing assets		$	11,712			11,740			8,516
Non-performing assets / Total assets			1.21	%		1.21	%		0.86	%

26

The following is a summary of the activity in the Company’s real estate and other assets owned for the three month period ending March 31, 2014:

			Activity During 2014
	Balance 12/31/2013		Foreclosures		Proceeds			Reduction in Values		Gain (Loss) on Sale			Balance 3/31/2014
	(Dollars in Thousands)
One-to-four family mortgages	$	350		166		(66	)		—		(4	)	$	446
Multi-family		—		—		—			—		—			—
Construction		—		—		—			—		—			—
Land		1,124		—		(71	)		—		(19	)		1,034
Non-residential real estate		200		—		—			—		—			200
Consumer assets		—		—		—			—		—			—
Total	$	1,674		166		(137	)		—		(23	)	$	1,680

The following is a summary of the activity in the Company’s real estate and other assets owned for the year ended December 31, 2013:

			Activity During 2013
	Balance 12/31/12		Foreclosures		Proceeds			Reduction in Values			Gain (Loss) on Sale			Balance 12/31/13
	(Dollars in Thousands)
One-to-four family mortgages	$	258		1,052		(938	)		(26	)		4		$	350
Multi-family		—		—		—			—			—			—
Construction		130		—		(110	)		(110	)		90			—
Land		1,112		80		—			(68	)		—			1,124
Non-residential real estate		44		240		(60	)		(11	)		(13	)		200
Consumer assets		4		7		(5	)		(4	)		(2	)		—
Total	$	1,548		1,379		(1,113	)		(219	)		79		$	1,674

27

(7) INVESTMENTS IN AFFILIATED COMPANIES

Investments in affiliated companies accounted for under the equity method consist of 100% of the common stock of HopFed Capital Trust 1 (“Trust”), a wholly-owned statutory business trust. The Trust was formed on September 25, 2003. Summary financial information for the Trust follows (dollars in thousands):

Summary Statements of Financial Condition	At March 31, 2014		At December 31, 2013
Assets - investment in subordinated debentures issued by HopFed Bancorp, Inc.	$	10,310		10,310
Liabilities		—		—
Stockholder’s equity – trust preferred securities		10,000		10,000
Common stock (100% Owned by HopFed Bancorp, Inc.)		310		310
Total stockholders’ equity	$	10,310		10,310

Summary Statements of Income

	Three Month Periods Ended March 31,
	2014		2013
Income – interest income from subordinated debentures issued by HopFed Bancorp, Inc.	$	86		88
Net income	$	86		88

Summary Statement of Stockholders’ Equity

	Trust Preferred Securities		Common Stock		Retained Earnings			Total Stockholders’ Equity
Beginning balances, December 31, 2013	$	10,000		310		—			10,310
Net income		—		—		86			86
Dividends:
Trust preferred securities		—		—		(83	)		(83	)
Common paid to HopFed Bancorp, Inc.		—		—		(3	)		(3	)
Ending balances, March 31, 2014	$	10,000		310		—			10,310

28

(8) FAIR VALUE OF ASSETS AND LIABILITIES

In September 2006, the FASB issued ASC 820-10,Fair Value Measurements. This Statement 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 of securities available for sale are determined by a matrix pricing, which is a mathematical technique that is widely used in the industry to value debt securities without exclusively using quoted prices for the individual securities in the Company’s portfolio but rather by relying on the securities relationship to other benchmark quoted securities. Impaired loans are valued at the net present value of expected payments using the fair value of any assigned collateral. The values for bank owned life insurance are obtained from stated values from the respective insurance companies. The liability associated with the Company’s derivative is obtained from a quoted value supplied by our correspondent banker. The value of real estate owned is obtained from appraisals completed on properties at the time of acquisition and annually thereafter.

29

Assets and Liabilities Measured on a Recurring Basis

The assets and liabilities measured at fair value on a recurring basis at March 31, 2014, are summarized below:

March 31, 2014	Total carrying value in the		Quoted Prices In Active		Significant Other		Significant
Description	consolidated balance sheet at March 31, 2014		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets
Available for sale securities	$	341,538		—		340,049		1,489
Bank owned life insurance	$	9,764		—		9,764		—
Liabilities
Interest rate swap	$	675		—		675		—

The assets and liabilities measured at fair value on a recurring basis at December 31, 2013, are summarized below

December 31, 2013	Total carrying value in the consolidated		Quoted Prices In Active Markets for		Significant Other Observable		Significant Unobservable
Description	balance sheet at December 31, 2013		Identical Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets
Available for sale securities	$	318,910		—		317,421		1,489
Bank owned life insurance	$	9,677		—		9,677		—
Liabilities
Interest rate swap	$	750		—		750		—

30

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for March 31, 2014:

March 31, 2014	Total carrying value in the consolidated		Quoted Prices In Active Markets for		Significant Other Observable		Significant Unobservable
Description	balance sheet at March 31, 2014		Identical Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
	(Dollars in Thousands)
Assets
Other real estate owned	$	1,680		—		—	$	1,680
Impaired loans, net of reserve of $2,016	$	37,029		—		—	$	37,029

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for December 31, 2013:

December 31, 2013	Total carrying value in the		Quoted Prices In Active		Significant Other		Significant
Description	consolidated balance sheet at December 31, 2013		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets
Other real estate owned	$	1,674		—		—	$	1,674
Impaired loans, net of reserve of $1,929	$	40,715		—		—	$	40,715

31

The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the three month periods ended March 31, 2014, and March 31, 2013, (including the change in fair value) for assets and liabilities classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify an asset or liability within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 assets and liabilities typically include, in addition to the unobservable or level 3 components, observable components (that is components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

	2014				2013
Three month period ended March 31,	Other Assets		Other Liabilities		Other Assets		Other Liabilities
	(Dollars in Thousands)
Fair value, January 1,	$	1,489		—		1,489		—
Change in unrealized losses included in other comprehensive income for assets and liabilities still held at March 31,				—		—		—
Purchases, issuances and settlements, net		—		—		—		—
Transfers in and/or out of Level 3		—		—		—		—
Fair value, March 31,	$	1,489		—		1,489		—

32

The estimated fair values of financial instruments were as follows at March 31, 2014:

			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
	Carrying Amount
	(Dollars in Thousands)
Financial Assets:
Cash and due from banks	$	25,449		25,449	$	25,449		—		—
Interest-earning deposits		8,730		8,730		8,730		—		—
Securities available for sale		341,538		341,538		—		340,049		1,489
Federal Home Loan Bank stock		4,428		4,428		—		4,428		—
Loans receivable		535,951		539,482		—		—		539,482
Accrued interest receivable		4,447		4,447		—		4,447		—
Bank owned life insurance		9,764		9,764		—		9,764		—
Financial liabilities:
Deposits		761,526		761,328		—		761,328		—
Advances from borrowers for taxes and insurance		572		572		—		572		—
Advances from Federal Home Loan Bank		41,280		44,865		—		44,865		—
Repurchase agreements		50,129		50,910		—		50,910		—
Subordinated debentures		10,310		10,091		—		—		10,091
Off-balance-sheet liabilities:
Commitments to extend credit		—		—		—		—		—
Commercial letters of credit		—		—		—		—		—
Market value of interest rate swap		675		675	��	—		675		—

33

The estimated fair values of financial instruments were as follows at December 31, 2013:

	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
	(Dollars in Thousands)
Financial Assets:
Cash and due from banks	$	37,229		37,229	$	37,229		—		—
Interest-earning deposits		18,619		18,619		18,619		—		—
Securities available for sale		318,910		318,910		—		317,421		1,489
Federal Home Loan Bank stock		4,428		4,428		—		4,428		—
Loans receivable		543,632		546,319		—		—		546,319
Accrued interest receivable		5,233		5,233		—		5,233		—
Bank owned life insurance		9,677		9,677		—		9,677		—
Financial liabilities:
Deposits		762,997		763,605		—		763,605		—
Advances from borrowers for taxes and insurance		521		521		—		521		—
Advances from Federal Home Loan Bank		46,780		51,010		—		51,010		—
Repurchase agreements		52,759		53,712		—		53,712		—
Subordinated debentures		10,310		10,099		—		—		10,099
Off-balance-sheet liabilities:										—
Commitments to extend credit		—		—		—		—		—
Commercial letters of credit		—		—		—		—		—
Market value of interest rate swap		750		750		—		750		—

(9) STOCK OPTIONS

At March 31, 2014, all stock options outstanding were issued under the HopFed Bancorp, Inc. 1999 Stock Option Plan. At March 31, 2014, the Company can no longer issue options under this plan. The remaining 20,808 options are fully vested with a strike price of $16.67 and have a final maturity of June 1, 2014.

34

(10) DERIVATIVE INSTRUMENTS

Under guidelines of Financial Accounting Standards Board (“FASB”) ASC 815, Derivative Instruments and Hedging Activities, as amended, all derivative instruments are required to be carried at fair value on the consolidated statement of financial position. ASC 815 provides special hedge accounting provisions, which permit the change in fair value of the hedge item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in the fair value of the derivative.

A derivative instrument designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under ASC 815. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash value hedges are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset or liability on the consolidated statement of financial position with corresponding offsets recorded in the consolidated statement of financial position.

The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense recorded on the hedged asset or liability.

Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instrument has been highly effective in offsetting changes in the fair values or cash flows of the hedged items and whether they are expected to be highly effective in the future. If it is determined a derivative instrument has not been, or will not continue to be highly effective as a hedge, hedged accounting is discontinued. ASC 815 basis adjustments recorded on hedged assets and liabilities are amortized over the remaining life of the hedged item beginning no later than when hedge accounting ceases. There were no fair value hedging gains or losses, as a result of hedge ineffectiveness, recognized for the three month period ended March 31, 2014, or the year ended December 31, 2013.

In October of 2008, the Bank entered into an interest rate swap agreement for a term of seven years and an amount of $10.0 million. The Bank will pay a fixed rate of 7.27% for seven years and receive an amount equal to the three-month London Interbank Lending Rate (LIBOR) plus 3.10%. The interest rate swap is classified as a cash flow hedge by the Bank and will be tested quarterly for effectiveness. At March 31, 2014, and December 31, 2013, the cost of the Bank to terminate the cash flow hedge was approximately $675,000 and $750,000, respectively.

35

(11) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In April 2011, the FASB issued ASU 2011-02,A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.The provisions of ASU 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, including factors and examples for creditors to consider in evaluating when a credit restructuring results in a delay in payment that is insignificant, prohibits creditors from using the borrowers interest cost as a factor in determining whether the lender has granted a concession to the borrower, and added factors for creditors to use in determining whether a borrower is experiencing financial difficulties. A provision in ASU 2011-02 ends the FASB’s deferral of additional disclosures about troubled debt restructuring as required by ASU 2010-20. The provisions of ASU 2011-02 were effective for the Company’s reporting period ending September 30, 2011. The adoption of ASU 2011-02 did not have a material impact on the Company’s consolidated financial statements of income, condition and cash flow.

ASU No. 2011-03, “Transfers and Servicing (Topic 860)—Reconsideration of Effective Control for Repurchase Agreements.”ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 became effective for the Company on January 1, 2012, and did not have a significant impact on the Company’s consolidated financial statements of income, condition and cash flow.

In May 2011, the FASB issued ASU No. 2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in United States of America generally accepted accounting principles (U.S. GAAP) and international Financial Reporting Standards (Topic 820) – Fair Value Measurement (ASU 2011-04),to provide consistent definition of the fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 is effective for reporting periods ending after March 30, 2012, and was applied prospectively. The implementation of ASU 2011-04 did not have a material impact on our consolidated financial statements of comprehensive income.

In June 2011, the FASB issued ASU No. 2011-05,Comprehensive Income,new disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity and requires presentation of reclassification adjustments on the face of the income statement. The effective date of this pronouncement is December 15, 2011. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements of income, condition, and cash flow.

36

ASU 2011-11, “Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU No. 2013-01, “Balance Sheet (Topic 210)—Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” clarifies that ordinary trade receivables are not within the scope of ASU 2011-11. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and did not a material impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-12,Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards update No. 2011-05.This update to Comprehensive Income (Topic 220) defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. The deferral supersedes only the paragraphs pertaining to how and where reclassification adjustments are presented. The amendments in this update were effective for public entities for reporting periods beginning after December 15, 2011. The implementation of ASU 2011-12 did not have a material impact on the Company’s consolidated statement of comprehensive income.

ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 give entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 was effective for the Company’s beginning January 1, 2013, and did not have a significant impact on the Company’s financial statements.

37

ASU 2012-06, “Business Combinations (Topic 805) – Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force).”ASU 2012-06 clarifies the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. Under ASU 2012-06, when a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and, subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). ASU 2012-06 became effective for the Company on January 1, 2013, and did not have a significant impact on the Corporation’s financial statements.

ASU 2013-02,“Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Company on January 1, 2013, and did not have a significant impact on the Company’s financial statements.

ASU 2013-08, “Financial Services – Investment Companies (Topic 946) – Amendments to the Scope, Measurement and Disclosure Requirements.” ASU 2013-08 clarifies the characteristics of investment companies and sets forth a new approach for determining whether a company is an investment company. The fundamental characteristics of an investment company include (i) the company obtains funds from investors and provides the investors with investment management services; (ii) the company commits to its investors that its business purpose and only substantive activities are investing the funds for returns solely from capital appreciation, investment income, or both; and (iii) the company or its affiliates do not obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests or that are other than capital appreciation or investment income. ASU 2013-08 also sets forth the scope, measurement and disclosure requirements for investment companies. ASU 2013-08 became effective for the Corporation on January 1, 2014, and did not have a significant impact on the Corporation’s financial statements.

ASU 2013-10, “Derivatives and Hedging (Topic 815) – Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” ASU 2013-10 permits the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate (“LIBOR”). ASU 2013-10 became effective for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013, and did not have a significant impact on the Company’s financial statements.

38

ASU 2013-12, “Definition of a Public Business Entity - An Addition to the Master Glossary.” ASU 2013-12 amends the Master Glossary of the FASB Accounting Standards Codification to include one definition of public business entity for future use in U.S. GAAP and identifies the types of business entities that are excluded from the scope of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies. There is no effective date for ASU 2013-12. ASU 2013-12 did not have a significant impact on the Company’s financial statements.

ASU 2014-01:Accounting for Investments in Qualified Affordable Housing Projects. The amendments in ASU 2014-01 permit entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The Company has not yet determined the impact of this amendment to its future financial statements.

ASU 2014-04;“Receivables, Troubled Debt Restructurings by Creditors(Subtopic 310-40), the reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure.” This amendment is intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The amendments are effective for the Company for annual periods and interim periods within those annual periods beginning after December 15, 2014. The Company has not yet determined the impact of the application of ASU 2014-04 on its future financial statements.

In April 2014, FASB issued ASU 2014-08;“Reporting Discontinued Operations and Disclosures of Components of an Entity.” This amendment changes the criteria for reporting discontinued operations, which includes a component of an entity or a group of components of an entity, a business or non-profit activity. This amendment requires additional disclosures about discontinued operations, including major changes in lines constituting pretax net income (loss) of the discontinued operation for the periods presented in the report. This amendment is effective with all annual periods beginning on or after December 15, 2015. The Company has not yet determined the impact of this amendment on its future financial statements.

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

39

(12) SUBSEQUENT EVENT

On April 22, 2014, Community Bank Shares of Indiana (NASDAQ GM: CBIN), filed an 8-K announcing the purchase of First Financial Services Corporation (NASDAQ GM: FFKY). The announcement indicated that the transaction was expected to close late in the third quarter or the fourth quarter of 2014.

The Company currently owns a trust preferred security issued by FFKY with a $2.0 million par value, a $1.6 million cost basis and a $1.5 million market value. The subordinated debt issued by FFKY has been in deferral status since October 2010. At the close of this transaction, management will carefully review the status of the security.

(13) INCOME TAXES

The Company and its subsidiaries file consolidated federal income tax returns and Tennessee excise tax returns. The Company and its non-bank subsidiaries filed 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 35% and Tennessee excise rate of 6.50% due to investments in qualified municipal securities; bank owned life insurance, income apportioned to Kentucky and certain non-deductible expenses.

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

Critical Accounting Policies

The consolidated condensed financial statements as of March 31, 2014, and December 31, 2013, and for the three month periods ended March 31, 2014, and March 31, 2013, included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Company’s 2013 Annual Report to Stockholders on Form 10-K.

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances, which could affect these material judgments, include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, and assessing other than temporary impairments of securities.

40

Comparison of Financial Condition at March 31, 2014, and December 31, 2013

At March 31, 2014, total assets declined $8.6 million, to $965.0 million as compared to $973.6 million at December 31, 2013, due to lower levels of cash, brokered time deposit and Federal Home Loan Bank (“FHLB”) advances. Securities available for sale increased from $318.9 million at December 31, 2013, to $341.5 million at March 31, 2014. At March 31, 2014, and December 31, 2013, securities classified as “available for sale” had an amortized cost of $340.3 million and $320.3 million, respectively.

The Company’s holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock, at cost was $4.4 million at December 31, 2013, and March 31, 2014. Total Federal Home Loan Bank “FHLB” borrowings declined $5.5 million, from $46.8 million at December 31, 2013, to $41.3 million at March 31, 2014. Total repurchase balances decreased from $52.8 million at December 31, 2013, to $50.1 million at March 31, 2014. Net loans totaled $536.0 million and $543.6 million at March 31, 2014, and December 31, 2013, respectively.

At March 31, 2014, deposits declined to $761.5 million from $763.0 million at December 31, 2013. At March 31, 2014, non-interest checking account balances are $105.8 million, or 13.90% of total deposits as compared to $105.3 million, or 13.79% of total deposits at December 31, 2013. For the period ended March 31, 2014, interest bearing checking accounts and money market accounts increased by $7.2 million and $1.7 million, respectively, as compared to December 31, 2013. At March 31, 2014, time deposits were $371.1 million, representing a $10.9 million decline as compared to December 31, 2013. The average cost of all deposits during the three month periods ended March 31, 2014, December 31, 2013, and March 31, 2013, was 0.78%, 0.82% and 1.06%, respectively. Management continually evaluates the investment alternatives available to customers and adjusts the pricing on its deposit products to more actively manage its funding costs while remaining competitive in its market area.

Comparison of Operating Results for the Three Month Periods Ended March 31, 2014 and 2012.

Net Income. The Company’s net income was $354,000 for the three month period ended March 31, 2014, as compared to net income of $984,000 for the three month period ended March 31, 2013. The decline in the Company’s results for the three month period ended March 31, 2014, was partially the result of an $885,000 reduction in non-interest income.

Net Interest Income. Net interest income for the three month period ended March 31, 2014, was $6.3 million, compared to $6.4 million for the three month period ended March 31, 2013. The decline in net interest income for the three months ended March 31, 2014, as compared to March 31, 2013, was due to a $13.3 million decline in the average balance of interest earning assets and an overall decline in net yields available on interest earning assets.

41

For the three months ended March 31, 2014, the average yield on loans was 4.75%, as compared to 5.27% for the three month period ended March 31, 2013. For the three month periods ended March 31, 2014, and March 31, 2013, income on taxable securities was $1.8 million. For the three month period ending March 31, 2014, the tax equivalent yield on taxable and tax free securities were 2.67% and 4.81%, respectively, as compared to 2.58% and 4.58% for the three-month period ended March 31, 2013, respectively.

For the three month periods ended March 31, 2014, and March 31, 2013, the Company’s cost of interest bearing liabilities was 1.23% and 1.51%, respectively. The lower cost of interest bearing liabilities was the result of a $52.8 million decline in retail time deposits and the re-pricing of a significant percentage of the Company’s time deposits in 2013. At March 31, 2014, and March 31, 2013, the Company’s net interest margin was 3.00% and 2.99%, respectively.

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, 2014, and March 31, 2013. 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.

42

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 $266,000 for March 31, 2014, and $282,000 for March 31, 2013, for a tax equivalent rate using a cost of funds rate of 1.20% for March 31, 2014, and 1.50% for March 31, 2013. The table adjusts tax-free loan income by $1,000 for March 31, 2014, and March 31, 2013, respectively, 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
	3/31/2014		3/31/2014			3/31/2014			3/31/2013		3/31/2013			3/31/2013
	(Table Amounts in Thousands, Except Percentages)
Loans	$	532,720		6,328			4.75	%	$	522,705		6,883			5.27	%
Investments AFS taxable		266,780		1,779			2.67	%		284,378		1,832			2.58	%
Investment AFS tax free		67,294		810			4.81	%		75,689		867			4.58	%
Federal funds		12,569		8			0.25	%		9,882		6			0.24	%
Total interest earning assets		879,363		8,925			4.06	%		892,654		9,588			4.30	%
Other assets		84,187								85,058
Total assets	$	963,550							$	977,712
Interest bearing checking		184,114		321			0.70	%		164,074		330			0.80	%
Saving / MMDA		93,325		42			0.18	%		80,687		33			0.16	%
Retail time deposits		332,033		963			1.16	%		384,815		1,499			1.56	%
Brokered deposits		46,119		145			1.26	%		47,100		184			1.56	%
FHLB borrowings		45,808		434			3.79	%		43,558		444			4.08	%
Repurchase agreements		49,362		249			2.02	%		43,032		242			2.25	%
Subordinated debentures		10,310		184			7.14	%		10,310		182			7.06	%
Total interest bearing liabilities		761,071		2,338			1.23	%		773,576		2,914			1.51	%
Non-interest bearing deposits		100,237								94,100
Other liabilities		4,429								4,989
Stockholders’ equity		97,813								105,047
Total liabilities and stockholders’ equity	$	963,550							$	977,712
Interest rate spread				6,587			2.83	%				6,674			2.79	%
Net interest margin				3.00	%							2.99	%

43

Interest Income. For the three month periods ended March 31, 2014, and March 31, 2013, the Company’s total interest income was $8.7 million and $9.3 million, respectively. As the Company’s loan demand remains soft, we continue to experience a decline in interest income on loans. For the three month period ended March 31, 2014, interest income on loans was $6.3 million, a $555,000 decline as compared to the three month period ended March 31, 2013.

The average balance of loans receivable increased from $522.7 million for the three month period ended March 31, 2013, to $532.7 million for the three month period ended March 31, 2014. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 115.39% for the three months ended March 31, 2013, to 115.54% for the three months ended March 31, 2014.

Interest Expense. Interest expense declined $576,000 for the three months ended March 31, 2014, as compared to the three month period ended March 31, 2013. The decline was attributable to the re-pricing of higher costing deposits, and a reduction in the average balance of time deposits and an increase in lower costing interest bearing checking accounts. The average cost of interest-bearing retail time deposits declined from 1.56% for the three month period ended March 31, 2013, to 1.16% for the three months ended March 31, 2014. Over the same period, the average balance of interest bearing retail time deposits declined $52.8 million, from $384.8 million for the three months ended March 31, 2013, to $332.0 million for the three months ended March 31, 2014.

The average balance cost of brokered deposits declined from 1.56% for the three months ended March 31, 2013, to 1.26% for the three months ended March 31, 2014. Over the same period, the average balance of brokered deposits declined $981,000 to $46.1 million for the three month period ended March 31, 2014 as compared to the three month period ended March 31, 2013. For the three month period ended March 31, 2014, the Company’s total cost of deposits was 0.78% as compared to 1.06% for the three month period ended March 31, 2013.

The average balance of funds borrowed from the FHLB increased $2.2 million, from $43.6 million for the three months ended March 31, 2013, to $45.8 million for the three month period ended March 31, 2014. The average cost of borrowed funds from the FHLB were 4.08% for the three months ended March 31, 2013, and 3.79% for the three months ended March 31, 2014, respectively. The average balance of repurchase agreements increased from $43.0 million for the three months ended March 31, 2013, to $49.4 million for the three month period ended March 31, 2014. The average cost of repurchase agreements was 2.25% for the three months ended March 31, 2013, and 2.02% for the three month period ended March 31, 2014.

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 $380,000 in provision for loan loss was required for the three month period ended March 31, 2014, compared to a $376,000 provision for loan loss expense for the three month period ended March 31, 2013.

44

Non-Interest Income. There was a $885,000 decline in non-interest income in the three month period ended March 31, 2014, as compared to the same period in 2013. The decrease in non-interest income was largely the result of a $614,000 decline in gains realized on the sale of investments. For the three month period ended March 31, 2014, the Company earned $58,000 in mortgage origination income as compared to $200,000 during the three month period ended March 31, 2013. The Company’s income for services charges was $778,000 for the three month period ended March 31, 2014, compared to $853,000 for the same period in 2013. Likewise, the Company’s financial services commission declined from $297,000 for the three month period ended March 31, 2013, to $206,000 for the three month period ended March 31, 2014, due to the Company’s sale of insurance assets in 2013.

Non-Interest Expenses. There was a $50,000 increase in total non-interest expenses in the three-month period ended March 31, 2014, as compared to the same period in 2013. The most significant change in non-interest expenses was a $104,000 increase in state deposit tax expense for the three month period ended March 31, 2014, as compared to the three month period ended March 31, 2013. The increase in state deposit taxes was the result of the Company’s recent charter conversion and differences in which type of investment securities provide state tax deductions. For the three month period ended March 31, 2014, losses incurred on the sale of other assets owned and expenses incurred in the management of problem assets owned were $23,000 and $130,000, respectively, as compared to $35,000 and $76,000, respectively, for the three month period ended March 31, 2013. The increase in real estate owned expenses is the result of legal expenses.

Income Taxes. The effective tax rate for the three-month periods ending March 31, 2014, was negative due to the high level of tax free income and tax credits available to the Company. The effective tax rate for the three month period ended March 31, 2013, was 19.6%.

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.

45

The Bank uses brokered deposits to supplement its asset liability need for longer term deposits at 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 and on its table on page 43 that provides the yields and cost of assets and liabilities.

At March 31, 2014, the Bank’s brokered deposits consisted of the following:

Issue Date	Interest Rate			Balance		Maturity Date
7/1/2011		1.00	%	$	3,000,000		5/1/2014
8/11/2009		3.00	%		5,095,000		8/11/2014
10/18/2013		0.30	%		2,500,000		10/18/2014
7/9/2012		0.54	%		3,159,000		1/9/2015
10/18/2013		0.35	%		2,539,000		1/18/2015
7/27/2012		0.70	%		3,590,000		7/27/2015
7/22/2013		0.65	%		1,940,000		11/22/2015
12/21/2010		1.70	%		805,000		12/21/2015
9/21/2012		0.60	%		2,500,000		1/21/2016
7/9/2012		0.70	%		2,309,000		3/9/2016
3/17/2011		2.25	%		1,500,000		3/17/2016
7/22/2013		0.80	%		2,000,000		7/22/2016
10/13/2011		1.35	%		2,086,000		10/13/2016	(1)
3/9/2012		1.00	%		3,044,000		12/9/2016	(1)
7/9/2012		0.98	%		1,446,000		1/9/2017	(1)
7/27/2012		0.75	%		1,496,000		7/27/2017	(1)
9/22/2011		1.00	%		2,127,000		9/22/2017	(1)
1/3/2013		1.00	%		3,030,000		1/3/2018
Total				$	44,166,000

⁽¹⁾  Denotes brokered deposit with rising rate feature in which the Bank has a call option.

46

The Bank must currently satisfy two capital standards: a ratio of tier 1 leverage capital to adjusted total assets of 4.0% and a combination of core and “supplementary” capital equal to 8.0% of risk-weighted assets. At March 31, 2014, the Bank exceeded all regulatory capital requirements.

The table below presents certain information relating to the Company’s and Bank’s capital compliance at March 31, 2014:

	Company					Bank
	Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Tier 1 leverage ratio	$	107,019		11.08	%	$	102,259		10.65	%
Tier 1 risk-based capital ratio	$	107,019		17.70	%	$	102,259		16.95	%
Total risk based capital ratio	$	114,573		18.95	%	$	109,815		18.21	%

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory capital rules applicable to Pinnacle Bank and Pinnacle Financial. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (Basel III) and changes required by the Dodd-Frank Act.

Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms will become effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. 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 is to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be 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.

47

Under these new rules, Tier 1 capital will generally consist 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, will 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, will 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.

Common equity Tier 1 capital will generally consist of common stock (plus related surplus) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions.

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 anticipates that that it will opt-out of this requirement.

The Federal Reserve has adopted regulations applicable to bank holding companies with assets over $10 billion that require such holding companies and banks to conduct annual stress tests and report the results to the applicable regulators and publicly disclose a summary of certain capital information and results including pro forma changes in regulatory capital ratios. The board of directors and senior management are required to consider the results of the stress test in the normal course of business, including but not limited to capital planning and an assessment of capital adequacy in accordance with management’s policies. The FDIC has adopted all guidelines applicable to state nonmember banks in each case.

At March 31, 2014, the Bank had $26.7 million in outstanding commitments to originate loans and undisbursed commitments on loans outstanding of $97.2 million. Management believes that the Bank’s sources of funds are sufficient to fund all of its outstanding commitments. Certificates of deposits scheduled to mature in one year or less from March 31, 2014, totaled $173.3 million. 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, 2014, the Bank has pledged all eligible 1-4 family first mortgages.

48

At March 31, 2014, the Bank has outstanding borrowings of $41.3 million from the FHLB. A schedule of FHLB borrowings at March 31, 2014, is provided below:

Outstanding Balance		Rate			Maturity		Note
(Dollars in thousands)
$	4,000		5.34	%		03/17/16
	7,000		4.25	%		05/01/17	Quarterly callable
	10,000		4.56	%		06/27/17	Quarterly callable
	10,000		4.26	%		08/17/17	Quarterly callable
	10,280		3.13	%		01/01/19	Monthly Principal Payments
$	41,280		4.15	%		4.6 years	Weighted average life

At March 31, 2014, the Bank had $44.2 million in additional borrowing capacity with the FHLB which includes an overnight line of credit of $30.0 million. The Bank has an $8 million unsecured overnight borrowing capacity from a correspondent bank.

The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

At March 31, 2014, the Company had the following off-balance sheet commitments (in thousands):

Standby letters of credit	$	318
Unused home equity lines of credit	$	29,359
Unused commercial lines of credit	$	44,503
Unused unsecured personal lines of credit	$	23,027
Unfunded commitments on commercial loans	$	26,723

49

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, 2014, 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, 2014, indicates that changes in interest rates are less likely to result in significant changes in the Company’s annual net interest income. A summary of the Company’s analysis at March 31, 2014, for the twelve month period ending March 31, 2015, is as follows:

	Down 1.00%		No change		Up 1.00%		Up 2.00%		Up 3.00%
	(Dollars In Thousands)
Net interest income	$	27,788	$	27,944	$	27,762	$	27,728	$	27,834

50

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, 2014.

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 months ended March 31, 2014, 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, 2014, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

51

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company currently has no material pending legal proceedings

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 10K for the fiscal year ended December 31, 2013.

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

(a) Unregistered Sales of Equity Securities. Not applicable

(b) Use of Proceeds. Not applicable

(c) Repurchase of Equity Securities

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total number of shares Purchased as part of Publically Announced Programs		Maximum Number of Shares that Yet may be Purchased Under the Program at the end of the  period
January 1, 2014, to January 31, 2014		4,476	$	11.40		80,944		294,056
February 1, 2014, to February 28, 2014		3,500	$	11.70		84,444		290,556
March 1, 2014, to March 31, 2014		2,410	$	11.36		86,854		288,146
Total		10,386	$	11.49		86,854		288,146

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

52

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 onForm 10-Q for the three month period ended March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Financial Condition as of March 31, 2014 (unaudited) and December 31, 2013, (ii) Condensed Consolidated Statements of Income for the three-month periods ended March 31, 2014 and 2013 (unaudited), (iii) Consolidated Condensed Statement of Comprehensive Income (Loss) for the three-month periods ended March 31, 2014 and 2013 (unaudited), (iv) Consolidated Condensed Statement of Stockholders’ Equity, for the three month periods ended March 31, 2014 and 2013 (unaudited); and (v) Condensed Consolidated Statements of Cash Flows, for the three month periods ended March 31, 2014 and 2013 (unaudited), and (iv) Notes to Condensed Consolidated Financial Statements (unaudited), tagged as blocks of text.

53

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, 2014	/s/ John E. Peck
	John E. Peck
	President and Chief Executive Officer
Date: May 9, 2014	/s/ Billy C. Duvall
	Billy C. Duvall
	Senior Vice President, Chief Financial Officer and Treasurer

54