Hopfed Bancorp (HFBC) 10-Q 2014 Q3 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 September 30, 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 Rule12b-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 November 3, 2014, the Registrant had outstanding 7,210,243 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 September 30, 2014 (unaudited) and December 31, 2013		2
	Consolidated Condensed Statements of Income for the Three and Nine-Month Periods Ended September 30, 2014, and September, 2013 (unaudited)		4
	Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three and Nine- Month Periods Ended September 30, 2014, and September 30, 2013 (unaudited)		6
	Consolidated Condensed Statements of Stockholders’ Equity for the Nine-Month Periods Ended September  30, 2014, and September 30, 2013 (unaudited)		7
	Consolidated Condensed Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2014, and September 30, 2013 (unaudited)		9
	Notes to Unaudited Consolidated Condensed Financial Statements		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		55
Item 4.	Controls and Procedures		56
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		57
Item 1A.	Risk Factors		57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 3.	Defaults Upon Senior Securities		57
Item 4.	Mine Safety Disclosure		58
Item 5.	Other Information		58
Item 6.	Exhibits		58
SIGNATURES			59

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition

(Dollars in Thousands)

	September 30, 2014		December 31, 2013
	(unaudited)
Assets
Cash and due from banks	$	18,673		37,229
Interest-earning deposits		16,712		18,619
Cash and cash equivalents		35,385		55,848
Federal Home Loan Bank stock, at cost		4,428		4,428
Securities available for sale		311,685		318,910
Loans held for sale		483		—
Loans receivable, net of allowance for loan losses of $8,133 at September 30, 2014 and $8,682 at December 31, 2013		530,759		543,632
Accrued interest receivable		4,659		5,233
Real estate owned		1,954		1,674
Bank owned life insurance		9,903		9,677
Premises and equipment, net		22,926		23,108
Deferred tax assets		2,189		4,610
Intangible asset		49		130
Other assets		5,266		6,399
Total assets	$	929,686		973,649
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing	$	108,217		105,252
Interest-bearing checking		179,914		183,643
Savings and money market		96,426		92,106
Time deposits		343,669		381,996
Total deposits		728,226		762,997
Federal Home Loan Bank advances		40,269		46,780
Repurchase agreements		46,329		52,759
Subordinated debentures		10,310		10,310
Advances from borrowers for taxes and insurance		849		521
Dividends payable		301		326
Accrued expenses and other liabilities		4,313		4,239
Total liabilities		830,597		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)

	September 30, 2014			December 31, 2013
	(unaudited)
Stockholders’ equity:
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at September 30, 2014, and December 31, 2013.		—			—
Common stock, par value $0.01 per share; authorized 15,000,000 shares; 7,949,665 issued and 7,211,055 outstanding at September 30, 2014, and 7,927,287 issued and 7,447,903 outstanding at December 31, 2013		79			79
Additional paid-in-capital		58,416			58,302
Retained earnings		47,049			44,694
Treasury stock- common (at cost, 738,610 shares at September 30, 2014, and 479,384 shares at December 31, 2013)		(8,956	)		(5,929	)
Accumulated other comprehensive income (loss), net of taxes		2,501			(1,429	)
Total stockholders’ equity		99,089			95,717
Total liabilities and stockholders’ equity	$	929,686			973,649

The consolidated condensed statement of financial condition at December 31, 2013, has been derived from the audited consolidated 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						For the Nine Month Periods
	Ended September 30,						Ended September 30,
	2014			2013			2014			2013
Interest income:
Loans receivable	$	6,913			6,605			19,743			20,163
Securities available for sale - taxable		1,562			1,641			5,035			5,237
Securities available for sale - nontaxable		514			544			1,589			1,676
Interest-earning deposits		5			5			19			18
Total interest income		8,994			8,795			26,386			27,094
Interest expense:
Deposits		1,354			1,622			4,313			5,604
Advances from Federal Home Loan Bank		430			445			1,292			1,335
Repurchase agreements		228			245			722			717
Subordinated debentures		174			184			551			548
Total interest expense		2,186			2,496			6,878			8,204
Net interest income		6,808			6,299			19,508			18,890
Provision for loan losses		(892	)		426			(773	)		1,208
Net interest income after provision for loan losses		7,700			5,873			20,281			17,682
Non-interest income:
Other-than-temporary impairment losses on debt securities		—			(511	)		—			(511	)
Portion of losses recognized in other comprehensive income		—			111			—			111
Net impairment losses recognized in in earnings		—			(400	)		—			(400	)
Service charges		879			949			2,505			2,739
Merchant card income		265			245			800			727
Mortgage origination revenue		316			147			507			559
Gain on sale of securities		294			201			548			1,617
Income from bank owned life insurance		65			88			226			250
Financial services commission		363			314			737			958
Other operating income		211			225			613			630
Total non-interest income		2,393			1,769			5,936			7,080

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						For the Nine Month Periods
	Ended September 30,						Ended September 30,
	2014			2013			2014		2013
Non-interest expenses:
Salaries and benefits	$	3,881			3,735			11,368		11,297
Occupancy		781			878			2,498		2,605
Data processing		730			652			2,194		1,948
State deposit tax		346			143			990		432
Intangible amortization		16			33			81		130
Professional services		397			493			1,025		1,435
Deposit insurance and examination		182			137			562		548
Advertising		368			292			1,023		933
Postage and communications		140			149			423		427
Supplies		156			159			459		388
Loss (gain) on real estate owned		35			(54	)		160		(7	)
Real estate owned expense (refund)		(29	)		78			193		186
Other operating		560			289			1,358		1,060
Total non-interest expense		7,563			6,984			22,334		21,382
Income before income tax		2,530			658			3,883		3,380
Income tax expense		577			122			651		694
Net income	$	1,953			536			3,232		2,686
Net income per share:
Basic	$	0.27			0.07			0.44		0.36
Diluted	$	0.27			0.07			0.44		0.36
Dividend per share	$	0.04			0.04			0.12		0.08
Weighted average shares outstanding - basic		7,265,597			7,483,582			7,348,708		7,483,606
Weighted average shares outstanding - diluted		7,265,597			7,483,582			7,348,708		7,483,606

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						For the Nine Month
	Periods Ended September 30,						Periods Ended September 30,
	2014			2013			2014			2013
Net income	$	1,953			536			3,232			2,686
Other comprehensive income, net of tax:
Unrealized gain (loss) on investment securities available for sale, net of tax effect of $138 and $637 for the three month periods ended September 30, 2014, and September 30, 2013, respectively; and ($2,121) and $4,640 for the nine month periods ended September 30, 2014, and September 30, 2013, respectively;		(269	)		(1,236	)		4,118			(9,007	)
Unrealized gain on derivatives, net of tax effect of ($34) and ($22) for the three month periods ended September 30, 2014, and September 30, 2013, respectively, and of ($90) and ($94) for the nine month periods ending September 30, 2014, and September 30, 2013, respectively;		65			43			174			183
Reclassification adjustment for other than temporary impairment included in net income, net of tax effect of ($136) for the three and nine month periods ended September 30, 2013.		—			264			—			264
Reclassification adjustment for gains included in net income, net of tax effect of $100 and $68 for the three month periods ended September 30, 2014, and September 30, 2013, respectively; and $186 and $550 for the nine month periods ended September 30, 2014, and September 30, 2013, respectively;		(194	)		(132	)		(362	)		(1,067	)
Total other comprehensive income (loss), net of tax	($	398	)		(1,061	)		3,930			(9,627	)
Comprehensive income (loss)	$	1,555			(525	)		7,162			(6,941	)

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

6

HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Nine Month Period Ended September 30, 2014

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

	Shares Common Stock			Common Stock		Additional Paid In Capital		Retained Earnings			Treasury Stock Common			Accumulated Other Comprehensive Income (Loss)			Total Stockholders Equity
Balance at December 31, 2013		7,447,903		$	79		58,302		44,694			(5,929	)		(1,429	)		95,717
Restricted stock awards		22,378			—		—		—			—			—			—
Repurchase of treasury stock		(259,226	)		—		—		—			(3,027	)		—			(3,027	)
Consolidated net income		—			—		—		3,232			—			—			3,232
Compensation expense, restricted stock awards		—			—		114		—			—			—			114
Net change in unrealized gain on securities available for sale, net of income taxes of $1,935		—			—		—		—			—			3,756			3,756
Net change in unrealized loss on derivatives, net of income taxes of $90		—			—		—		—			—			174			174
Cash dividend to common stockholders		—			—		—		(877	)		—			—			(877	)
Balance September 30, 2014		7,211,055		$	79		58,416		47,049			(8,956	)		2,501			99,089

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

7

HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Nine Month Period Ended September 30, 2013

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

	Shares					Common Stock		Common Stock Warrants			Additional Paid In Capital		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		21,559			—		—		—			—		—			—			—			—			—
Consolidated net income		—			—		—		—			—		2,686			—			—			—			2,686
Compensation expense, restricted stock awards		—			—		—		—			75		—			—			—			—			75
Net change in unrealized gain on securities available for sale, net of income tax benefit of $5,054		—			—		—		—			—		—			—			—			(9,810	)		(9,810	)
Net change in unrealized loss on derivatives, net of income taxes of $94		—			—		—		—			—		—			—			—			183			183
Repurchase of treasury stock		(50,104	)		—		—		—			—		—			—			(559	)		—			(559	)
Repurchase of warrant		—			—		—		(556	)		299		—			—			—			—			(257	)
Cash dividend to common stockholders		—			—		—		—			—		(599	)		—			—			—			(599	)
Balance September 30, 2013		7,474,267			18,400	$	79		—			76,662		43,916			(18,400	)		(5,635	)		96			96,718

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

8

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

	For the Nine Month Periods
	Ended September 30,
	2014			2013
Cash flows from operating activities:
Net cash provided by operating activities	$	6,601			6,473
Cash flows from investing activities
Proceeds from sales, calls and maturities of securities available for sale		81,801			99,619
Purchase of securities available for sale		(69,927	)		(80,959	)
Net (increase) decrease in loans		12,205			(9,033	)
Proceeds from sale of foreclosed assets		1,001			913
Purchase of premises and equipment		(856	)		(288	)
Net cash provided by in investing activities		24,224			10,252
Cash flows from financing activities:
Net increase in demand deposits		2,965			4,354
Net decrease in time and other deposits		(37,736	)		(37,282	)
Increase in advances from borrowers for taxes and insurance		328			426
Advances from Federal Home Loan Bank		27,000			23,000
Repayment of advances from Federal Home Loan Bank		(33,511	)		(19,465	)
Net increase (decrease) in repurchase agreements		(6,430	)		4,674
Cash used to repurchase warrant		—			(257	)
Cash used to repurchase treasury stock		(3,027	)		(559	)
Dividends paid on common stock		(877	)		(449	)
Net cash used in financing activities		(51,288	)		(25,558	)
Decrease in cash and cash equivalents		(20,463	)		(8,833	)
Cash and cash equivalents, beginning of period		55,848			37,176
Cash and cash equivalents, end of period	$	35,385			28,343
Supplemental disclosures of Cash Flow Information:
Interest paid	$	6,977			8,463
Income taxes paid		—			495
Supplemental disclosures of non-cash investing and financing activities:
Loans charged off	$	820			2,858
Foreclosures and in substance foreclosures of loans during period	$	1,441			797
Net unrealized gains (losses) on investment securities classified as available for sale	$	5,691			(14,864	)
Increase (decrease) in deferred tax asset related to unrealized gains on investments	($	1,935	)		5,054
Dividends declared and payable	$	301			299
Issue of unearned restricted stock	$	260			232

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

9

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 nine month period ended September 30, 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.

10

(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 and nine month periods ended September 30, 2014, and September 30, 2013. Diluted common shares arise from the potentially dilutive effect of the Company’s stock options and warrant outstanding.

	Three Month Periods Ended
	September 30,
	2014		2013
Basic IPS:
Net income available to common stockholders	$	1,953,000	$	536,000
Average common shares outstanding		7,265,597		7,483,582
Net income per share available to common shareholders, basic	$	0.27	$	0.07
Diluted IPS
Net income available to common stockholders	$	1,953,000	$	536,000
Average common shares outstanding		7,265,597		7,483,582
Dilutive effect of stock options		—		—
Average diluted shares outstanding		7,265,597		7,483,582
Net income per share available to common shareholders, diluted	$	0.27	$	0.07

	Nine Month Periods Ended
	September 30,
	2014		2013
Basic IPS:
Net income available to common stockholders	$	3,232,000	$	2,686,000
Average common shares outstanding		7,348,708		7,483,606
Net income per share available to common shareholders, basic	$	0.44	$	0.36
Diluted IPS
Net income available to common stockholders	$	3,232,000	$	2,686,000
Average common shares outstanding		7,348,708		7,483,606
Dilutive effect of stock options		—		—
Average diluted shares outstanding		7,348,708		7,483,606
Net income per share available to common shareholders, diluted	$	0.44	$	0.36

11

(3) STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $49,000 and $114,000 for the three and nine month periods ended September 30, 2014, and $28,000 and $75,000 for the three and nine month periods ended September 30, 2013, respectively. The Company issued 22,378 shares of restricted stock during the nine-month period ended September 30, 2014. The Company issued 21,559 shares of restricted stock during the nine- month period ended September 30, 2013. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting at September 30, 2014:

Year Ending December 31,	Future Expense
2014	$	49,193
2015		185,810
2016		132,780
2017		45,954
Total	$	413,737

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.

12

(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 September 30, 2014, the Company has 88 securities with unrealized losses. The carrying amount of securities and their estimated fair values at September 30, 2014, were as follows:

	September 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Restricted:
FHLB stock	$	4,428		—		—			4,428
Available for sale securities:
U.S. Treasury securities	$	3,975		—		(5	)		3,970
U.S. Agency debt securities		111,696		1,907		(1,050	)		112,553
Corporate bonds		2,000		19		—			2,019
Taxable municipal bonds		12,743		245		(158	)		12,830
Tax free municipal bonds		58,930		3,722		(191	)		62,461
Trust preferred securities		1,600		—		(111	)		1,489
Mortgage-backed securities:
GNMA		26,110		620		(146	)		26,584
FNMA		55,770		565		(881	)		55,454
FHLMC		3,277		39		(13	)		3,303
SLMA CMOs		10,025		—		(144	)		9,881
AGENCY CMOs		21,283		149		(291	)		21,141
	$	307,409		7,266		(2,990	)		311,685

13

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Restricted:
FHLB stock	$	4,428		—		—			4,428
Available for sale securities:
U.S. Agency debt securities	$	120,608		1,856		(2,441	)		120,023
Corporate bonds		2,000		—		(16	)		1,984
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
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 CMOs		8,459		—		(374	)		8,085
AGENCY CMOs		16,296		134		(420	)		16,010
	$	320,323		5,665		(7,078	)		318,910

14

The scheduled maturities of debt securities available for sale at September 30, 2014, were as follows:

			Estimated
	Amortized		Fair
	Cost		Value
Due within one year	$	195		196
Due in one to five years		25,496		25,740
Due in five to ten years		39,049		39,794
Due after ten years		38,875		40,948
		103,615		106,678
Amortizing agency bonds		87,329		88,644
Mortgage-backed securities		116,465		116,363
Total securities available for sale	$	307,409		311,685

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

			Estimated
	Amortized		Fair
	Cost		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 in more than 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 securities available for sale	$	320,323		318,910

15

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of September 30, 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:
Treasury securities	$	3,970		(5	)		—		—			3,970		(5	)
Agency debt securities		17,512		(50	)		30,890		(1,000	)		48,402		(1,050	)
Taxable municipals		568		(4	)		7,630		(154	)		8,198		(158	)
Tax free municipals		1,969		(22	)		5,088		(169	)		7,057		(191	)
Trust preferred securities		—		—			1,489		(111	)		1,489		(111	)
Mortgage-backed securities:
GNMA		10,567		(104	)		3,007		(42	)		13,574		(146	)
FNMA		7,167		(12	)		31,140		(869	)		38,307		(881	)
FHLMC		2,208		(13	)		—		—			2,208		(13	)
SLMA CMOs		1,924		(12	)		5,511		(132	)		7,435		(144	)
AGENCY CMOs		10,189		(144	)		4,113		(147	)		14,302		(291	)
Total Available for Sale	$	56,074		(366	)		88,868		(2,624	)		144,942		(2,990	)

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 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	)

16

The applicable dates for determining when securities are in an unrealized loss position are September 30, 2014, and December 31, 2013. As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the past twelve-month periods ended September 30, 2014, and December 31, 2013, but is in the “Investments with an Unrealized Loss of less than 12 months” category above.

As shown in the tables above, at September 30, 2014, the Company had approximately $3.0 million in unrealized losses on $144.9 million of securities. The unrealized losses associated with these investment securities are driven by changes in interest rates and the unrealized loss is recorded as a component of equity. These securities will continue to be monitored as a part of our ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond issuers. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. If a shortfall in future cash flows is identified, a credit loss will be deemed to have occurred and will be recognized as a charge to earnings and a new cost basis for the security will be established.

Because the Company currently does not intend to sell those securities that have an unrealized loss at September 30, 2014, and it is not likely the Company will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2014.

Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements and raising funds for liquidity purposes. Additionally, if an available-for-sale security loses its investment grade or tax-exempt status, the underlying credit support is terminated or collection otherwise becomes uncertain based on factors known to management, the Company will consider selling the security, but will review each security on a case-by-case basis as these factors become known.

The carrying values of the Company’s investment securities could decline in the future if the financial condition of issuers deteriorates and management determines it is probable that the Company will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future. There is also a risk that other-than-temporary impairment charges may occur in the future if management’s intention to hold these securities to maturity and or recovery changes.

17

At September 30, 2014, securities with a book value of approximately $188.5 million and a market value of approximately $184.1 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 September 30, 2014, securities with a book and market value of $40.3 million were sold under agreements to repurchase from various customers. Furthermore, the Company has one wholesale repurchase agreement with a third party secured by investments with a book value of $6.5 million and a market value of $6.6 million. The 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%.

18

(5) LOANS

Set forth below is selected data relating to the composition of the loan portfolio by type of loan at September 30, 2014, and December 31, 2013. At September 30, 2014, and December 31, 2013, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

	September 30, 2014			September 30, 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	$	147,650			27.4	%	$	155,252			28.1	%
Second mortgages (closed end)		2,200			0.4	%		3,248			0.6	%
Home equity lines of credit		33,818			6.3	%		34,103			6.2	%
Multi-family		24,567			4.6	%		29,736			5.4	%
Construction		21,678			4.0	%		10,618			1.9	%
Land		25,561			4.7	%		34,681			6.3	%
Farmland		42,706			7.9	%		51,868			9.4	%
Non-residential real estate		154,177			28.6	%		157,692			28.5	%
Total mortgage loans		452,357			83.9	%		477,198			86.4	%
Consumer loans		14,896			2.8	%		11,167			2.0	%
Commercial loans		71,849			13.3	%		64,041			11.6	%
Total other loans		86,745			16.1	%		75,208			13.6	%
Total loans, gross		539,102			100.0	%		552,406			100.0	%
Deferred loan cost, net of fees		(210	)					(92	)
Less allowance for loan losses		(8,133	)					(8,682	)
Total loans	$	530,759					$	543,632

19

The allowance for loan losses totaled $8.1 million at September 30, 2014, and $8.7 million at December 31, 2013, and $9.4 million at September 30, 2013, respectively. The ratio of the allowance for loan losses to total loans was 1.51% at September 30, 2014, 1.57% at December 31, 2013, and 1.74% at September 30, 2013.

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

	September 30, 2014		December 31, 2013		September 30, 2013
	(Dollars in Thousands)
One-to-four family mortgages	$	407		945		865
Home equity line of credit		31		1		275
Junior lien		—		2		2
Construction		—		175		—
Land		301		1,218		2,257
Non-residential real estate		101		6,546		7,187
Farmland		12		703		744
Consumer loans		2		13		316
Commercial loans		263		463		482
Total non-accrual loans	$	1,117		10,066		12,128

20

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the nine month period ended September 30, 2014:

								General			Specific			Ending
	Balance		Charge off			Recovery		Provision			Provision			Balance
	12/31/2013		2014			2014		2014			2014			9/30/2014
	(Dollars in Thousands)
One-to-four family mortgages	$	2,048		(191	)		19		(219	)		(294	)		1,363
Home equity line of credit		218		(73	)		3		44			—			192
Junior liens		39		—			8		(31	)		—			16
Multi-family		466		—			—		(362	)		—			104
Construction		88		(10	)		7		15			60			160
Land		1,305		—			—		(220	)		—			1,085
Non-residential real estate		2,719		(1	)		864		(716	)		660			3,526
Farmland		510		—			—		33			2			545
Consumer loans		541		(308	)		86		33			250			602
Commercial loans		748		(237	)		58		(215	)		186			540
Total	$	8,682		(820	)		1,045		(1,638	)		864			8,133

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:

								General			Specific
	Balance		Charge off			Recovery		Provision			Provision			Balance
	12/31/2012		2013			2013		2013			2013			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

21

The table below presents currently performing, past due and non-accrual balances at September 30, 2014, by loan classification allocated between performing and non-performing:

			30 - 89						Impaired Loans
	Currently		Days		Non-accrual		Special		Currently Performing
September 30, 2014	Performing		Past Due		Loans		Mention		Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	140,971		1,454		407		203		4,615		—		147,650
Home equity line of credit		32,921		91		31		—		775		—		33,818
Junior liens		2,123		—		—		40		37		—		2,200
Multi-family		17,587		1,879		—		2,904		2,197		—		24,567
Construction		21,678		—		—		—		—		—		21,678
Land		14,380		—		301		362		10,518		—		25,561
Farmland		40,180		184		12		516		1,814		—		42,706
Non-residential real estate		132,515		996		101		5,492		15,073		—		154,177
Consumer loans		14,550		4		2		21		319		—		14,896
Commercial loans		68,318		1,002		263		325		1,941		—		71,849
Total	$	485,223		5,610		1,117		9,863		37,289		—	$	539,102

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

			30 - 89						Impaired Loans
	Currently		Days		Non-accrual		Special		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

22

All loans listed as 30-89 days past due and non-accrual are not performing as agreed. Loans listed as special mention, 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 (net recovery) ratios for nine month periods ended September 30, 2014, September 30, 2013, and the year ended December 31, 2013, was (0.05%), 0.61% and 0.66%, respectively. The ratios of allowance for loan losses to non-accrual loans at September 30, 2014, September 30, 2013, and December 31, 2013, were 728.1%, 77.6%, and 86.2% respectively.

The determination of the allowance for loan losses is based on management’s analysis, completed 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 dollars 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 ninety 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;

23

(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 25, Watch loans are included with satisfactory loans and classified as Pass.

Other Loans Especially Mentionedare 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 probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments using the fair value of the collateral if the loan is collateral dependent. Currently, it is management’s practice to test all loans for impairment that are classified as substandard or doubtful loans that have an outstanding balance of more than $250,000. At September 30, 2014, December 31, 2013, and September 30, 2013, the Company’s impaired loans totaled $38.4 million, $42.6 million and $45.3 million, respectively. At September 30, 2014, December 31, 2013, and September 30, 2013, the Company’s specific reserve for impaired loans totaled $2.9 million, $1.9 million and $3.4 million, respectively.

24

A summary of the Company’s loans, including their respective regulatory classification and their respective specific reserve at September 30, 2014, were as follows:

September 30, 2014	Pass		Special		Impaired Loans				Total		Specific Allowance for		Allowance for Performing
			Mention		Substandard		Doubtful				Impairment		Loans
	(Dollars in Thousands)
One-to-four family mortgages	$	142,425		203		5,022		—		147,650		131	$	1,232
Home equity line of credit		33,012		—		806		—		33,818		—		192
Junior liens		2,123		40		37		—		2,200		—		16
Multi-family		19,466		2,904		2,197		—		24,567		—		104
Construction		21,678		—		—		—		21,678		—		160
Land		14,380		362		10,819		—		25,561		703		382
Non-residential real estate		133,511		5,492		15,174		—		154,177		1,988		1,538
Farmland		40,364		516		1,826		—		42,706		2		543
Consumer loans		14,554		21		321		—		14,896		74		528
Commercial loans		69,320		325		2,204		—		71,849		8		532
Total	$	490,833		9,863		38,406		—	$	539,102		2,906	$	5,227

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

	Pass		Special		Impaired Loans				Total		Specific Allowance for		Allowance for Performing Loans
			Mention		Substandard		Doubtful				Impairment
	(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

25

Impaired loans by classification type and the related valuation allowance amounts at September 30, 2014, were as follows:

	At September 30, 2014						For the nine month period ended September 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Impaired loans with no recorded reserve:
One-to-four family mortgages	$	3,746		3,746		—		2,795		141
Home equity line of credit		806		806		—		668		28
Junior liens		37		37		—		40		2
Multi-family		2,197		2,197		—		782		93
Construction		—		—		—		39		—
Land		7,504		7,504		—		9,391		292
Farmland		1,794		1,794		—		4,545		114
Non-residential real estate		6,778		6,778		—		7,544		318
Consumer loans		26		26		—		31		1
Commercial loans		1,804		1,804		—		2,133		101
Total	$	24,692		24,692		—		27,968		1,090
Impaired loans with recorded reserve:
One-to-four family mortgages	$	1,276		1,276		131		1,673		56
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		3,315		3,315		703		3,482		134
Farmland		32		32		2		825		2
Non-residential real estate		8,396		8,396		1,988		4,425		74
Consumer loans		295		295		74		391		—
Commercial loans		400		400		8		133		17
Total	$	13,714		13,714		2,906		10,929		283
Total impaired loans	$	38,406		38,406		2,906		38,897		1,373

26

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
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
			(Dollars in thousands)
Impaired loans with no recorded reserve:
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
Non-residential real estate		10,775		10,775		—		6,196		263
Farmland		5,346		5,346		—		6,955		149
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
Non-residential real estate		3,358		4,222		465		2,243		111
Farmland		—		—		—		1,601		—
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

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans of September 30, 2014 and December 31, 2013, by portfolio segment and based on impairment method as of September 30, 2014 and December 31, 2013 (in thousands):

	Commercial		Land Development/ Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
September 30, 2014:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	8	$	703	$	1,991	$	131	$	73	$	2,906
Collectively evaluated for impairment		532		542		2,184		1,440		529		5,227
Total ending allowance balance	$	540	$	1,245	$	4,175	$	1,571	$	602	$	8,133
Loans:
Loans individually evaluated for impairment	$	2,204	$	10,819	$	19,197	$	5,865	$	321	$	38,406
Loans collectively evaluated for impairment		69,645		36,420		202,253		177,803		14,575		500,696
Total ending loans balance	$	71,849	$	47,239	$	221,450	$	183,668	$	14,896	$	539,102
	Commercial		Land Development/ Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
December 31, 2013:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	771	$	465	$	597	$	96	$	1,929
Collectively evaluated for impairment		748		622		3,230		1,708		445		6,753
Total ending allowance balance	$	748	$	1,393	$	3,695	$	2,305	$	541	$	8,682
Loans:
Loans individually evaluated for impairment	$	2,013	$	14,905	$	19,479	$	5,807	$	440	$	42,644
Loans collectively evaluated for impairment		62,028		30,394		219,817		186,796		10,727		509,762
Total ending loans balance	$	64,041	$	45,299	$	239,296	$	192,603	$	11,167	$	552,406

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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:

• 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.

• 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.

• 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.

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At December 31, 2013, the Company has no loans classified as TDR’s that are reported as performing on December 31, 2013, respectively. For the nine month period ended September 30, 2014, the Company’s TDR activity is listed below.

	Balance at 12/31/13		New TDR		Loss or Foreclosure		Removed Due to Performance		Removed from (Taken to) Non-accrual		Balance at 9/30/14
Non-residential real estate	$	—		10,271		—		—		—		10,271
Total performing TDR	$	—		10,271		—		—		—		10,271

(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 September 30, 2014, December 31, 2013, and September 30, 2013, the Company had balances in other real estate and other assets owned and non-accrual loans consisting of the following:

	September 30, 2014			December 31, 2013			September 30, 2013
	(Dollars in Thousands)
One-to-four family mortgages	$	120			350			252
Land		1,834			1,124			1,112
Non-residential real estate		—			200			73
Consumer assets		—			—			2
Total other real estate owned	$	1,954			1,674			1,439
Total non-accrual loans		1,117			10,066			12,128
Total non-performing assets	$	3,071			11,740			13,567
Non-performing assets / Total assets		0.33	%		1.21	%		1.45	%

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The following is a summary of the activity in the Company’s real estate and other assets owned for the nine month period ending September 30, 2014:

	Activity During 2014
	Balance 12/31/2013		Foreclosures		Proceeds			Reduction in Values			Gain (Loss) on Sale			Balance 9/30/2014
	(Dollars in Thousands)
One-to-four family mortgages	$	350		365		(601	)		(5	)		11		$	120
Land		1,124		901		(72	)		(100	)		(19	)		1,834
Non-residential real estate		200		175		(328	)		—			(47	)		—
Total	$	1,674		1,441		(1,001	)		(105	)		(55	)	$	1,954

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 12/31/2012		Foreclosures		Proceeds			Reduction in Values			Gain (Loss) on Sale			Balance 12/31/2013
	(Dollars in Thousands)
One-to-four family mortgages	$	258		1,052		(938	)		(26	)		4			350
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

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(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 September 30, 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 Statement of Income

	Three Month Periods Ended September 30,				Nine Month Period Ended September 30,
	2014		2013		2014		2013
Income – interest income from subordinated debentures issued by HopFed Bancorp, Inc.	$	88		88	$	261		264
Net income	$	88		88	$	261		264

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		—		—		261			261
Dividends:
Trust preferred securities		—		—		(253	)		(253	)
Common paid to HopFed Bancorp, Inc.		—		—		(8	)		(8	)
Ending balances, September 30, 2014	$	10,000		310		—			10,310

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(8) FAIR VALUE OF ASSETS AND LIABILITIES

ASC 820-10, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value. The statement establishes a fair value hierarchy which requires an entity to maximize the use of observable input and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

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

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

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

The fair values 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 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.

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Assets and Liabilities Measured on a Recurring Basis

The assets and liabilities measured at fair value on a recurring basis at September 30, 2014, are summarized below:

Description	Total carrying value in the consolidated balance sheet at September 30, 2014		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(Dollars in Thousands)
Assets
Available for sale securities	$	311,685		—		310,196		1,489
Liabilities
Interest rate swap	$	485		—		485		—

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

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

34

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for September 30, 2014:

Description	Total carrying value in the consolidated balance sheet at September 30, 2014		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(Dollars in Thousands)
Assets
Other real estate owned	$	1,954		—		—	$	1,954
Impaired loans, net of reserve of $2,906	$	35,500		—		—	$	35,500

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

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

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The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the nine month periods ended September 30, 2014, and September 30, 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.

Nine month period ended September 30,	2014				2013
	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 September 30,		—		—		—		—
Purchases, issuances and settlements, net		—		—		—		—
Transfers in and/or out of Level 3		—		—		—		—
Fair value, September 30,	$	1,489		—		1,489		—

36

The estimated fair values of financial instruments were as follows at September 30, 2014:

	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	$	18,673		18,673	$	18,673		—		—
Interest-earning deposits		16,712		16,712		16,712		—		—
Securities available for sale		311,685		311,685		—		310,196		1,489
Federal Home Loan Bank Stock		4,428		4,428		—		4,428		—
Loans held for sale		483		483		—		—		483
Loans receivable		530,759		529,363		—		—		529,363
Accrued interest receivable		4,659		4,659		—		4,659		—
Financial liabilities:
Deposits		728,226		712,658		—		712,658		—
Advances from borrowers for taxes and insurance		849		849		—		849		—
Advances from Federal Home Loan Bank		40,269		42,582		—		42,582		—
Repurchase agreements		46,329		46,684		—		46,684		—
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		485		485		—		485		—

37

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		—
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		—

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(9) STOCK OPTIONS

At September 30, 2014, all stock options outstanding were issued under the HopFed Bancorp, Inc. 1999 Stock Option Plan and have expired.

(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 nine month period ended September 30, 2014, or the year ended December 31, 2013.

39

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 September 30, 2014, and December 31, 2013, the cost of the Bank to terminate the cash flow hedge was approximately $485,000 and $750,000, respectively.

(11) REGULATORY CHANGES

On June 5, 2013, the Company announced that its wholly owned subsidiary, Heritage Bank, has completed its conversion from a federally chartered savings and loan to a state chartered commercial bank regulated by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation. In connection with the Bank’s charter conversion, the Company has received approval from the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to convert our holding company from a savings and loan holding company to a bank holding company also with an effective date of June 5, 2013.

On July 2, 2013, the Board of Governors of the Federal Reserve Bank approved the final rule for BASEL III capital requirements for all commercial banks charted in the United States of America. The rule was subsequently approved by the FDIC on July 9, 2013. The rule will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. In addition, for the largest, most internationally active banking organizations, the final rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. The transition period for implementation of Basel III is January 1, 2015, through December 31, 2018. The Company is currently evaluating the impact of Basel III on our financial statements.

40

(12) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

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.

In January 2014, the FASB issued ASU No. 2014-04,Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. These amendments are 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. The 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: (1) the creditor obtaining legal title to the residential real estate property upon completion of residential foreclosure, or (2) 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 about such activities are required by these amendments. The amendments in this ASU become effective for public companies for annual periods and interim periods within those annual periods beginning after December 15, 2014, and early adoption is permitted. The Company is assessing the impact that these amendments will have on its financial position and results of operations, but does not currently anticipate that it will have a material impact.

On June 12, 2014, the FASB issued ASU 2014-11, which makes limited amendments to the guidance in ASC 860 on accounting for certain repurchase agreements (“repos”). ASU 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings.

ASU 2014-11 also amends ASC 860 to clarify that repos and securities lending transactions that do not meet all of the de-recognition criteria in ASC 860-10-40-5 should be accounted for as secured borrowings. In addition, the ASU provides examples of repurchase and securities lending arrangements that illustrate whether a transferor has maintained effective control over the transferred financial assets. For public business entities, the accounting changes are effective for the first interim or annual period beginning after December 15, 2014. The Company is assessing the impact that these amendments will have on its financial position and results of operations.

41

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.

(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.

(14) Subsequent Event

The Company issued a press release on October 31, 2014 announcing that its Board of Directors approved the commencement of a new stock repurchase program of up to 300,000 shares of the Company’s common stock. Furthermore, the Company may purchase up to 1 million shares of common stock that may be used a later date for general corporate purposes and employee benefit plans.

In September 2013, the Company’s Board authorized a 375,000 share repurchase program. At October 29, 2014, the Company had 38,494 shares remaining under this plan. The Company intends to complete the current repurchase program before repurchasing shares under the new program.

The Company will conduct repurchases through various means, including, without limitation, open market transactions or in privately negotiated transactions that may be made from time to time depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company. The share repurchase program does not obligate the Company to acquire a specific number of shares in any period and may be modified, suspended, extended or discontinued at any time, without prior notice.

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

Critical Accounting Policies

The consolidated condensed financial statements as of September 30, 2014, and December 31, 2013, and for the three and nine month periods ended September 30, 2014, and September 30, 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.

42

Comparison of Financial Condition at September 30, 2014, and December 31, 2013

At September 30, 2014, total assets declined $43.9 million, to $929.7 million as compared to $973.6 million at December 31, 2013, due to lower levels of cash, time deposit and Federal Home Loan Bank (“FHLB”) advances. Securities available for sale decreased from $318.9 million at December 31, 2013, to $311.7 million at September 30, 2014. At September 30, 2014, and December 31, 2013, securities classified as “available for sale” had an amortized cost of $307.4 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 September 30, 2014. Total Federal Home Loan Bank “FHLB” borrowings declined $6.5 million, from $46.8 million at December 31, 2013, to $40.3 million at September 30, 2014. Total repurchase balances decreased from $52.8 million at December 31, 2013, to $46.3 million at September 30, 2014, largely due to the maturity of a $10.0 million wholesale repurchase agreement. Net loans totaled $530.8 million and $543.6 million at September 30, 2014, and December 31, 2013, respectively.

At September 30, 2014, deposits declined to $728.2 million from $763.0 million at December 31, 2013. At September 30, 2014, non-interest checking account balances are $108.2 million, or 14.86% of total deposits as compared to $105.3 million, or 13.80% of total deposits at December 31, 2013. At September 30, 2014, time deposits were $343.7 million, representing a $38.3 million decline as compared to December 31, 2013. The average cost of all deposits during the nine month periods ended September 30, 2014, and September 30, 2013, was 0.78% and 0.99%, 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.

43

Comparison of Operating Results for the Nine Month Periods Ended September 30, 2014 and 2013.

Net Income. The Company’s net income was $3.2 million for the nine month period ended September 30, 2014, as compared to net income of $2.7 million for the nine month period ended September 30, 2013. The increase in the Company’s results for the nine month period ended September 30, 2014, was largely the result of a $2.0 million reduction in provision for loan loss expense.

Net Interest Income. Net interest income for the nine month period ended September 30, 2014, was $19.5 million, compared to $18.9 million for the nine month period ended September 30, 2013. The small increase in net interest income for the nine months ended September 30, 2014, as compared to September 30, 2013, was due to a $1.3 million decline in the total interest expenses. The decline in interest expense offset a $708,000 decline in total interest income.

For the nine months ended September 30, 2014, the average yield on loans was 4.92%, as compared to 5.10% for the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, the Company’s loan yields and net interest margin increased by 0.07% and 0.05%, respectively, due to the collection of $280,000 in non-accrual interest during September 2014. For the nine month periods ending September 30, 2014, and September 30, 2013, income on taxable securities was $5.0 million and $5.2 million, respectively. For the nine month period ending September 30, 2014, the tax equivalent yield on taxable and tax free securities were 2.59% and 4.98%, respectively, as compared to 2.53% and 4.66% for the nine-month period ended September 30, 2013, respectively.

For the nine month periods ended September 30, 2014, and September 30, 2013, the Company’s cost of interest bearing liabilities was 1.25% and 1.44%, respectively. The lower cost of interest bearing liabilities was the result of a $63.6 million decline in average retail time deposits and the re-pricing of a significant percentage of the Company’s time deposits in 2013. For the nine month periods ended September 30, 2014, and September 30, 2013, the Company’s net interest margin was 3.12% and 2.98%, 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 nine-month periods ended September 30, 2014, and September 30, 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 nine-month periods.

44

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 $774,000 for September 30, 2014, and $812,000 for September 30, 2013, for a tax equivalent rate using a cost of funds rate of 1.25% for September 30, 2014, and 1.40% for September 30, 2013. The table adjusts tax-free loan income by $9,000 for the nine month period ended September 30, 2014, and $6,000 for the nine month period ended September 30, 2013, respectively, for a tax equivalent rate using the same cost of funds rate:

	Average Balance 9/30/2014		Income and Expense 9/30/2014			Average Rates 9/30/2014			Average Balance 9/30/2013		Income and Expense 9/30/2013			Average Rates 9/30/2013
	(Table Amounts in Thousands, Except Percentages)
Loans	$	535,659		19,752			4.92	%	$	527,054		20,169			5.10	%
Investments AFS taxable		259,615		5,035			2.59	%		275,934		5,237			2.53	%
Investment AFS tax free		63,321		2,363			4.98	%		71,269		2,488			4.66	%
Interest bearing deposits		9,819		19			0.26	%		8,851		18			0.27	%
Total interest earning assets		868,414		27,169			4.17	%		883,108		27,912			4.21	%
Other assets		73,550								79,779
Total assets	$	941,964							$	962,887
Retail time deposits		307,307		2,786			1.21	%		370,917		4,018			1.44	%
Brokered deposits		39,741		401			1.35	%		44,002		525			1.59	%
Savings and MMDA		96,278		145			0.20	%		84,823		109			0.17	%
Interest bearing checking		191,925		981			0.68	%		163,493		952			0.78	%
FHLB borrowings		44,985		1,292			3.83	%		43,602		1,335			4.08	%
Repurchase agreements		41,386		722			2.33	%		41,556		717			2.30	%
Subordinated debentures		10,310		551			7.13	%		10,310		548			7.09	%
Total interest bearing liabilities		731,932		6,878			1.25	%		758,703		8,204			1.44	%
Non-interest bearing deposits		105,325								94,695
Other liabilities		5,026								4,361
Stockholders’ equity		99,681								105,128
Total liabilities and stockholders’ equity	$	941,964							$	962,887
Net interest spread				20,291			2.92	%				19,708			2.77	%
Net interest margin				3.12	%							2.98	%

45

Interest Income. For the nine month periods ended September 30, 2014, and September 30, 2013, the Company’s total interest income was $26.4 million and $27.1 million, respectively. The Company’s loan demand remains weak and we continue to experience a decline in interest income on loans. For the nine month period ended September 30, 2014, interest income on loans was $19.7 million, a $420,000 decline as compared to the nine month period ended September 30, 2013. The average balance of loans receivable increased from $527.1 million for the nine month period ended September 30, 2013, to $535.7 million for the nine month period ended September 30, 2014. The average yields on loans for the nine month period ended September 30, 2014, was 4.92%, a 0.18% basis point decline in the average yield on loans as compared to the nine month period ended September 30, 2013.

Interest Expense. Interest expense declined $1.3 million for the nine months ended September 30, 2014, as compared to the nine month period ended September 30, 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 1.44% for the nine month period ended September 30, 2013, to 1.21% for the nine months ended September 30, 2014. The average balance of interest bearing retail time deposits declined $63.6 million, from $370.9 million for the nine months ended September 30, 2013, to $307.3 million for the nine months ended September 30, 2014.

The average cost of brokered deposits declined from 1.59% for the nine months ended September 30, 2013, to 1.35% for the nine months ended September 30, 2014. Over the same period, the average balance of brokered deposits declined $4.3 million to $39.7 million for the nine month period ended September 30, 2014, as compared to the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, the Company’s total cost of deposits was 0.78% as compared to 0.99% for the nine month period ended September 30, 2013.

The average balance of funds borrowed from the FHLB increased $1.4 million, from $43.6 million for the nine months ended September 30, 2013, to $45.0 million for the nine month period ended September 30, 2014. The average cost of borrowed funds from the FHLB were 4.08% for the nine months ended September 30, 2013, and 3.83% for the nine months ended September 30, 2014, respectively. For the nine month periods ending September 30, 2014, and September 30, 2013, the average balance of repurchase agreements was $41.4 million and $41.6 million, respectively. The average cost of repurchase agreements was 2.30% for the nine months ended September 30, 2013, and 2.33% for the nine month period ended September 30, 2014.

46

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 it could reduce its allowance funding by $773,000 for the nine month period ended September 30, 2014, compared to a provision for loan loss expense of $1.2 million for the nine month period ended September 30, 2013.

Non-Interest Income. There was a $1.1 million decline in non-interest income in the nine month period ended September 30, 2014, as compared to the same period in 2013. The decline in non-interest income was largely the result of a $1.1 million decline in gains realized on the sale of investments. For the nine month period ended September 30, 2014, the Company earned $507,000 in mortgage origination income as compared to $559,000 during the nine month period ended September 30, 2013. The Company’s income for services charges was $2.5 million for the nine month period ended September 30, 2014, compared to $2.7 million for the same period in 2013. Likewise, the Company’s financial services commission declined from $958,000 for the nine month period ended September 30, 2013, to $737,000 for the nine month period ended September 30, 2014, due to the Company’s sale of insurance assets on December 31, 2013. For the nine month period ended September 20, 2013, the Company’s insurance assets provided $344,000 of revenue.

Non-Interest Expenses. There was a $1.0 million increase in total non-interest expenses in the nine-month period ended September 30, 2014, as compared to the same period in 2013. The most significant change in non-interest expenses was a $558,000 increase in state deposit tax expense for the nine month period ended September 30, 2014, as compared to the nine month period ended September 30, 2013. The increase in state deposit taxes was the result of the Company’s recent charter conversion and changes in which type of investment securities may be used to reduce the Company’s tax burden. For the nine month period ended September 30, 2014, losses incurred on the sale of other assets owned and expenses incurred in the management of problem assets owned were $160,000 and $193,000, respectively, as compared to ($7,000) and $186,000, respectively, for the nine month period ended September 30, 2013. The increase in real estate owned expenses is the result of legal expenses involving customer bankruptcy filings.

Income Taxes. The effective tax rate for the nine-month period ending September 30, 2014, was 16.8% due to the high level of tax free income and tax credits available to the Company. The effective tax rate for the nine month period ended September 30, 2013, was 20.5%.

47

Comparison of Operating Results for the Three Month Periods Ended September 30, 2014 and 2013.

Net Income. The Company’s net income was $2.0 million for the three month period ended September 30, 2014, as compared to net income of $536,000 for the three month period ended September 30, 2013. The increase in the Company’s results for the three month period ended September 30, 2014, was partially the result of a $624,000 increase in non-interest income and a $1.3 million decline in our provision for loan loss expense.

Net Interest Income. Net interest income for the three month period ended September 30, 2014, was $6.8 million, compared to $6.3 million for the three month period ended September 30, 2013. The increase in net interest income for the three months ended September 30, 2014, as compared to September 30, 2013, was due to a $310,000 decline in the Company’s total interest expense and the $280,000 collection of non-accrual interest.

For the three months ended September 30, 2014, the average yield on loans was 5.16%, as compared to 4.99% for the three month period ended September 30, 2013. For the three month period ended September 30, 2014, the average yield on loans and net interest margin were affected by 0.21% and 0.13%, respectively by the collection of $280,000 of previously non-accrued interest income on loans. For the three month periods ended September 30, 2014, and September 30, 2013, income on taxable investments was $1.6 million. For the three month period ending September 30, 2014, the tax equivalent yield on taxable and tax free securities were 2.35% and 4.69%, respectively, as compared to 2.52% and 4.83% for the three-month period ended September 30, 2013, respectively.

For the three month periods ended September 30, 2014, and September 30, 2013, the Company’s cost of interest bearing liabilities was 1.17% and 1.35%, respectively. The lower cost of interest bearing liabilities was the result of a $32.3 million decline in average retail time deposits and the re-pricing of a significant percentage of the Company’s time deposits in 2013. For the three month period ended September 30, 2014, and September 30, 2013, the Company’s net interest margin was 3.22% and 3.04%, 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 September 30, 2014, and September 30, 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.

48

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 $251,000 for September 30, 2014, and $264,000 for September 30, 2013, for a tax equivalent rate using a cost of funds rate of 1.20% for September 30, 2014, and 1.35% for September 30, 2013. The table adjusts tax-free loan income by $3,000 for the three month period ended September 30, 2014, and $2,000 for the three month period ended and September 30, 2013, respectively, for a tax equivalent rate using the same cost of funds rate:

	Average Balance 9/30/2014		Income and Expense 9/30/2014			Average Rates 9/30/2014			Average Balance 9/30/2013		Income and Expense 9/30/2013			Average Rates 9/30/2013
	(Table Amounts in Thousands, Except Percentages)
Loans	$	535,774		6,916			5.16	%	$	530,086		6,607			4.99	%
Investments AFS taxable		265,853		1,562			2.35	%		260,326		1,641			2.52	%
Investment AFS tax free		65,298		765			4.69	%		66,882		808			4.83	%
Interest bearing deposits		10,917		5			0.18	%		7,237		5			0.28	%
Total interest earning assets		877,842		9,248			4.21	%		864,531		9,061			4.19	%
Other assets		75,617								75,930
Total assets	$	953,459							$	940,461
Retail time deposits		320,008		896			1.12	%		352,291		1,141			1.30	%
Brokered deposits		42,605		110			1.03	%		43,353		163			1.50	%
Savings & MMDA		94,522		49			0.21	%		87,687		39			0.18	%
Interest bearing checking		190,329		299			0.63	%		159,419		279			0.70	%
FHLB borrowings		42,970		430			4.00	%		43,634		445			4.08	%
Repurchase agreements		46,765		228			1.95	%		43,448		245			2.26	%
Subordinated debentures		10,310		174			6.75	%		10,310		184			7.14	%
Total interest bearing liabilities		747,509		2,186			1.17	%		740,142		2,496			1.35	%
Non-interest bearing deposits		103,112								96,343
Other liabilities		4,660								5,013
Stockholders’ equity		98,178								98,963
Total liabilities and stockholders’ equity	$	953,459							$	940,461
Net interest income				7,062								6,565
Net interest spread							3.04	%							2.84	%
Net interest margin				3.22	%							3.04	%

49

Interest Income. For the three month periods ended September 30, 2014, and September 30, 2013, the Company’s total interest income was $9.0 million and $8.8 million, respectively. For the three month period ended September 30, 2014, interest income on loans was $6.9 million, a $308,000 increase as compared to the three month period ended September 30, 2013. The average balance of loans receivable increased from $530.1 million for the three month period ended September 30, 2013, to $535.8 million for the three month period ended September 30, 2014. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 116.81% for the three months ended September 30, 2013, to 117.44% for the three months ended September 30, 2014.

Interest Expense. Interest expense declined $310,000 for the three months ended September 30, 2014, as compared to the three month period ended September 30, 2013. The decline was attributable to the re-pricing of higher costing deposits, 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 1.30% for the three month period ended September 30, 2013, to 1.12% for the three months ended September 30, 2014. Over the same period, the average balance of interest bearing retail time deposits declined $32.3 million, from $352.3 million for the three months ended September 30, 2013, to $320.0 million for the three months ended September 30, 2014.

The average cost of brokered deposits declined from 1.50% for the three months ended September 30, 2013, to 1.03% for the three months ended September 30, 2014. Over the same period, the average balance of brokered deposits declined $748,000, to $42.6 million, for the three month period ended September 30, 2014 as compared to the three month period ended September 30, 2013. For the three month period ended September 30, 2014, the Company’s total average cost of deposits was 0.72% as compared to 0.88% for the three month period ended September 30, 2013.

The average balance of funds borrowed from the FHLB declined by $664,000, from $43.6 million for the three months ended September 30, 2013, to $43.0 million for the three month period ended September 30, 2014. The average cost of borrowed funds from the FHLB was 4.08% for the three months ended September 30, 2013, and 4.00% for the three months ended September 30, 2014, respectively. The average balance of repurchase agreements increased from $43.4 million for the three months ended September 30, 2013, to $46.8 million for the three month period ended September 30, 2014. The average cost of repurchase agreements was 2.26% for the three months ended September 30, 2013, and 1.95% for the three month period ended September 30, 2014.

50

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 it could reduce the funding in the allowance for loan loss account by $892,000 during three month period ended September 30, 2014, as compared to a $426,000 provision for loan loss expense for the three month period ended September 30, 2013. The reduction in the allowance for loan loss account was the result of improved credit quality, enhanced economic trends, and lower levels of non-performing assets and charge offs.

Non-Interest Income. There was a $624,000 increase in non-interest income in the three month period ended September 30, 2014, as compared to the same period in 2013. The increase in non-interest income was largely the result of a $400,000 impairment of investment securities incurred in the three month period ended September 30, 2013. For the three month period ended September 30, 2014, the Company earned $316,000 in mortgage origination income as compared to $147,000 during the three month period ended September 30, 2013, due to lower levels of interest rates and an increase in single family home sales in our market. The Company’s income for services charges was $879,000 for the three month period ended September 30, 2014, compared to $949,000 for the same period in 2013. The Company’s financial services commission increased to $363,000 for the three month period ended September 30, 2014, as compared to $314,000 for the three month period ended September 30, 2013. This increase was achieved despite the sale of the Company’s insurance assets in December 2013. For the three and nine month periods ended September 30, 2013, the Company’s insurance assets contributed $111,000 and $344,000, respectively, to our non-interest income.

Non-Interest Expenses. There was a $579,000 increase in total non-interest expenses in the three-month period ended September 30, 2014, as compared to the same period in 2013. The most significant change in non-interest expenses was a $203,000 increase in bank franchise tax expense for the three month period ended September 30, 2014, as compared to the three month period ended September 30, 2013. The increase in bank franchise taxes was the result of the Company’s recent charter conversion and changes in which type of investment securities may be used to reduce the Company’s tax burden. For the three month period ended September 30, 2014, salaries and benefits expense increased by $146,000, to $3.9 million, as compared to the same period in 2013 due to higher commissions for commission based employees. Other operating expenses increased by $271,000 for the three month period ended September 30, 2014, as compared to the three month period ended September 30, 2013.

Income Taxes. The effective tax rate for the three-month periods ending September 30, 2014, was 22.8%, resulting from a high level of taxable income. The effective tax rate for the three month period ended September 30, 2013, was 18.5%.

51

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. Currently, we are not required to seek approval for each cash common dividend payment to the Federal Reserve Bank or the Kentucky Department of Financial Institutions.

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 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 tables that provides the yields and cost of assets and liabilities for the three and nine month periods ended September 30, 2014.

At September 30, 2014, the Bank’s brokered deposits consisted of the following:

Issue Date	Interest Rate			Balance		Maturity Date
10/18/2013		0.30	%	$	2,500,000		10/18/2014
7/9/2012		0.60	%		3,159,000		1/9/2015
10/18/2013		0.35	%		2,539,000		1/18/2015
8/06/2014		0.25	%		2,861,000		3/06/2015
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		0.75	%		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
8/6/2014		0.75	%		2,842,000		10/6/2016
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		1.05	%		1,446,000		1/9/2017	(1)
7/27/2012		0.75	%		1,496,000		7/27/2017	(1)
1/3/2013		1.00	%		3,030,000		1/3/2018
Total				$	39,647,000

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

52

Presently, the Bank must satisfy three capital standards: a tier 1 capital to adjusted total assets ratio of 4.0%, a tier one capital to risk weighted asset ratio of 4.0%, and total capital to risk weighted assets ratio of 8.0%. At September 30, 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 September 30, 2014:

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Applicable Regulatory Provisions
September 30, 2014	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier 1 leverage ratio:
Consolidated		$106,539		11.18	%		$37,101		4.0	%		$46,377		5.0	%
Heritage Bank		105,659		11.25	%		36,984		4.0	%		46,230		5.0	%
Tier 1 Risk Based Capital Ratio:
Consolidated		106,539		17.73	%		24,121		4.0	%		36,182		6.0	%
Heritage Bank		105,659		17.61	%		24,004		4.0	%		36,006		6.0	%
Total Risk Based Capital Ratio:
Consolidated		114,047		18.98	%		48,242		8.0	%		60,303		10.0	%
Heritage Bank		113,167		18.86	%		48,008		8.0	%		60,010		10.0	%

Under Kentucky and federal banking regulations, the dividends the Bank can pay during any calendar year are generally limited to its profits for that year, plus its retained net profits for the two preceding years, less any required transfers to surplus or to fund the retirement of preferred stock or debt, absent approval of the respective state or federal banking regulators. FDIC regulations also require all insured depository institutions to remain in a safe and sound condition, as defined in regulations, as a condition of having federal deposit insurance.

At September 30, 2014, the Bank had no outstanding commitments to originate loans and undisbursed commitments on loans outstanding of $29.9 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 September 30, 2014, totaled $146.5 million. Management believes that a significant percentage of such deposits will remain with the Bank.

53

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 September 30, 2014, the Bank has pledged all eligible 1-4 family first mortgages.

At September 30, 2014, the Bank has outstanding borrowings of $40.3 million from the FHLB with maturities ranging from approximately 18 months to 4.5 years. A schedule of FHLB borrowings at September 30, 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
	9,269		3.13	%	01/01/19	Monthly Principal Payments
$	40,269		4.18	%	2.97 years	Weighted average maturity

At September 30, 2014, the Bank had $61.2 million in additional borrowing capacity with the FHLB which includes an overnight line of credit of $30.0 million. The Bank has an $8.0 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 September 30, 2014, the Company had the following off-balance sheet commitments (in thousands):

Standby letters of credit	$	1,141
Unused home equity lines of credit	$	29,436
Unused commercial lines of credit	$	48,369
Unused unsecured personal lines of credit	$	33,550

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Forward-Looking Statements

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

The effects of rising interest rates are discussed throughout Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Actual results for the year ending December 31, 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 September 30, 2014, indicates that changes in interest rates are less likely to result in changes in the Company’s annual net interest income. A summary of the Company’s analysis at September 30, 2014, for the twelve month period ending September 30, 2015, is as follows:

	Down 1.00%		No change		Up 1.00%		Up 2.00%		Up 3.00%
	(Dollars In Thousands)
Net interest income	$	24,294	$	25,619	$	26,410	$	27,262	$	28,111

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), an evaluation was carried out with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarter ended September 30, 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 September 30, 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 September 30, 2014, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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
July 1, 2014, to July 31, 2014		76,149	$	11.84		225,473		149,527
August 1, 2014, to August 31, 2014		48,016	$	11.82		273,489		101,511
September 1, 2014, to September 30, 2014		62,205	$	11.57		335,694		39,306
Total		186,370	$	11.74		335,694		39,306

The Company issued a press release on October 31, 2014 announcing that its Board of Directors approved the commencement of a new stock repurchase program of up to 300,000 shares of the Company’s common stock. Furthermore, the Company may purchase up to 1 million shares of common stock that may be used a later date for general corporate purposes and employee benefit plans.

In September 2013, the Company’s Board authorized a 375,000 share repurchase program. At October 29, 2014, the Company had 38,494 shares remaining under this plan. The Company intends to complete the current repurchase program before repurchasing shares under the new program.

The Company will conduct repurchases through various means, including, without limitation, open market transactions or in privately negotiated transactions that may be made from time to time depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company. The share repurchase program does not obligate the Company to acquire a specific number of shares in any period and may be modified, suspended, extended or discontinued at any time, without prior notice.

Item 3. Defaults Upon Senior Securities

None

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Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document
101.DEF	XBRL Definition Linkbase Document

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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: November 10, 2014		/s/ John E. Peck
		John E. Peck
		President and Chief Executive Officer
Date: November 10, 2014		/s/ Billy C. Duvall
		Billy C. Duvall
		Senior Vice President, Chief Financial Officer and Treasurer

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