Hopfed Bancorp (HFBC) 10-Q 2017 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

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

For the quarterly period ended June 30, 2017

OR

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

Commission File Number:000-23667

HOPFED BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required and posted pursuant to Rule 405 of RegulationS-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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file or anon-accelerated filer. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” inRule12b-2 of the Exchange Act: (Check one)

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

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

Indicate by check mark whether the registrant is a shell company (as defined by Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of August 4, 2017, the Registrant had outstanding 6,717,663 shares of the Registrant’s Common stock.

CONTENTS

HOPFED BANCORP, INC.

PART I.    FINANCIAL INFORMATION		PAGE
The unaudited consolidated condensed financial statements of the Registrant and its wholly owned subsidiaries are as follows:
Item 1.	Financial Statements
	Interim Consolidated Condensed Statements of Financial Condition as of June 30, 2017 (unaudited) and December 31, 2016	2
	Interim Consolidated Condensed Statements of Income for the Three and Six Month Periods Ended June 30, 2017 and June 30, 2016 (unaudited)	4
	Interim Consolidated Condensed Statements of Comprehensive Income for the Three and Six Month Periods Ended June 30, 2017 and June 30, 2016 (unaudited)	6
	Interim Consolidated Condensed Statement of Stockholders’ Equity for the Six Month Periods Ended June 30, 2017 and June 30, 2016 (unaudited)	7
	Interim Consolidated Condensed Statements of Cash Flows for the Six Month Periods Ended June 30, 2017 and June 30, 2016 (unaudited)	9
	Notes to Unaudited Interim Consolidated Condensed Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53
PART II    OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	56
SIGNATURES		56

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Financial Condition

(Dollars in Thousands)

Assets	June 30, 2017		December 31, 2016
	(unaudited)
Cash and due from banks	$	20,208		21,779
Interest-bearing deposits in banks		4,801		3,970
Cash and cash equivalents		25,009		25,749
Federal Home Loan Bank stock, at cost		4,428		4,428
Securities available for sale		205,363		209,480
Loans held for sale		2,386		1,094
Loans receivable, net of allowance for loan losses of $7,180 at June 30, 2017 and $6,112 at December 31, 2016		631,242		604,286
Accrued interest receivable		3,332		3,799
Foreclosed assets, net		1,408		2,397
Bank owned life insurance		10,192		10,662
Premises and equipment, net		23,097		23,461
Deferred tax assets		3,025		3,052
Other assets		2,645		3,078
Total assets	$	912,127		891,486
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing accounts	$	132,305		131,145
Interest-bearing accounts
Checking accounts		216,256		209,347
Savings and money market accounts		98,270		99,312
Other time deposits		299,113		293,078
Total deposits		745,944		732,882
Advances from Federal Home Loan Bank		21,000		11,000
Repurchase agreements		41,820		47,655
Subordinated debentures		10,310		10,310
Advances from borrowers for taxes and insurance		984		766
Accrued expenses and other liabilities		3,278		2,445
Total liabilities		823,336		805,058

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

2

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Financial Condition, Continued

(Dollars in Thousands)

	June 30, 2017			December 31, 2016
	(unaudited)
Stockholders’ equity
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at June 30, 2017 and December 31, 2016		—			—
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,964,076 issued and 6,716,809 outstanding at June 30, 2017 and 7,963,378 issued and 6,717,242 outstanding at December 31, 2016		80			80
Additionalpaid-in-capital		58,750			58,660
Retained earnings		50,552			49,035
Treasury stock, at cost (1,247,267 shares at June 30, 2017 and 1,246,136 shares at December 31, 2016)		(15,361	)		(15,347	)
Unearned Employee Stock Ownership Plan (“ESOP”) Shares, at cost (476,862 shares at June 30, 2017 and 498,346 shares at December 31, 2016)		(6,269	)		(6,548	)
Accumulated other comprehensive income		1,039			548
Total stockholders’ equity		88,791			86,428
Total liabilities and stockholders’ equity	$	912,127			891,486

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

3

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Income

(Dollars in Thousands)

(Unaudited)

	For the Three Month Periods Ended June 30,				For the Six Month Periods Ended June 30,
	2017		2016		2017		2016
Interest and dividend income:
Loans		6,963		6,141		13,699		12,606
Investment in securities, taxable		1,155		1,198		2,273		2,445
Nontaxable securities available for sale		280		340		563		693
Interest-bearing deposits		21		12		44		28
Total interest and dividend income		8,419		7,691		16,579		15,772
Interest expense:
Deposits		1,197		1,007		2,364		2,102
FHLB borrowings		30		28		62		101
Repurchase agreements		119		139		222		282
Subordinated debentures		108		94		212		188
Total interest expense		1,454		1,268		2,860		2,673
Net interest income		6,965		6,423		13,719		13,099
Provision for loan losses		59		465		350		923
Net interest income after provision for loan losses		6,906		5,958		13,369		12,176
Non-interest income:
Service charges		800		698		1,604		1,375
Merchant card		315		314		617		605
Mortgage origination revenue		278		435		612		803
Gain on sale of investments		14		52		16		343
Income from bank owned life insurance		72		77		307		161
Income from financial services		145		191		285		324
Other operating income		212		203		691		379
Totalnon-interest income		1,836		1,970		4,132		3,990

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

4

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Income, Continued

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

	For the Three Month Periods Ended June 30,				For the Six Month Periods Ended June 30,
	2017		2016		2017		2016
Non-interest expenses:
Salaries and benefits		3,977		3,901		8,213		7,889
Occupancy		729		801		1,504		1,588
Data processing		546		704		1,310		1,431
State deposit tax		200		247		431		495
Professional services		464		305		812		640
Advertising		368		371		749		691
Foreclosure, net		6		201		114		269
Loss on sale of asset		3		—		3		—
Other		940		1,079		1,786		2,289
Totalnon-interest expense		7,233		7,609		14,922		15,292
Income before income tax expense		1,509		319		2,579		874
Income tax expense		368		15		503		61
Net income		1,141		304		2,076		813
Net income per share:
Basic	$	0.18	$	0.05	$	0.33	$	0.13
Diluted	$	0.18	$	0.05	$	0.33	$	0.13
Dividend per share	$	0.05	$	0.04	$	0.09	$	0.08

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

5

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Comprehensive Income

(Dollars in Thousands)

(Unaudited)

	For the Three Month Periods Ended June 30,						For the Six Month Periods Ended June 30,
	2017			2016			2017			2016
Net income	$	1,141			304			2,076			813
Other comprehensive income, net of tax:
Unrealized gain onnon-other than temporary impaired investment securities available for sale, net of taxes of ($126) and ($368) for the three month periods ended June 30, 2017 and June 30, 2016, respectively; and ($247) and ($1,267) for the six month periods ended June 30, 2017 and June 30, 2016, respectively.		240			714			475			2,459
Unrealized gain on OTTI securities, net of taxes of ($43) and none for the three month periods ended June 30, 2017 and June 30, 2016, respectively; and ($14) and ($37) for the six month periods ended June 30, 2017 and June 30, 2016, respectively.		83			—			26			72
Reclassification adjustment for gains included in net income, net of taxes of $5 and $18 for the three month periods ended June 30, 2017 and June 30, 2016, respectively; and $6 and $117 for the six month periods ended June 30, 2017 and June 30, 2016, respectively.		(9	)		(34	)		(10	)		(226	)
Total other comprehensive income		314			680			491			2,305
Comprehensive income	$	1,455			984			2,567			3,118

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

6

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statement of Stockholders’ Equity

For the Six Month Period Ended June 30, 2017

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

	Common Shares			Common Stock		Additional Paid in Capital		Retained Earnings			Common Treasury Shares			Unearned ESOP Shares			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance at December 31, 2016		6,717,242		$	80		58,660		49,035			(15,347	)		(6,548	)		548		86,428
Restricted stock awards		698			—		—		—			—			—			—		—
Net Income		—			—		—		2,076			—			—			—		2,076
Repurchase of treasury stock		(1,131	)		—		—		—			(14	)		—			—		(14	)
ESOP shares committed to be released		—			—		—		—			—			279			—		279
Change in price of ESOP shares		—			—		29		—			—			—			—		29
Compensation expense, restricted stock awards		—			—		61		—			—			—			—		61
Net change in unrealized gain on securities available for sale, net of income taxes of ($255)		—			—		—		—			—			—			491		491
Cash dividend declared to common stockholders		—			—		—		(559	)		—			—			—		(559	)
Balance June 30, 2017		6,716,809		$	80		58,750		50,552			(15,361	)		(6,269	)		1,039		88,791

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

7

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statement of Stockholders’ Equity

For the Six Month Period Ended June 30, 2016

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

	Common Shares			Common Stock		Additional Paid in Capital			Retained Earnings			Common Treasury Shares			Unearned ESOP Shares			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balance at December 31, 2015		6,865,811		$	79		58,604			47,124			(13,471	)		(7,180	)		2,474		87,630
Net Income		—			—		—			813			—			—			—		813
Issuance of restricted stock		11,486			1		—			—			—			—			—		1
Repurchase of treasury stock		(138,218	)		—		—			—			(1,624	)		—			—		(1,624	)
Forfeiture of restricted stock		(663	)		—		—			—			—			—			—		—
Change in price of ESOP shares		—			—		(34	)		—			—			—			—		(34	)
ESOP shares committed to be released		—			—		—			—			—			282			—		282
Compensation expense, restricted stock awards		—			—		78			—			—			—			—		78
Net change in unrealized gain on securities available for sale, net of income taxes of ($1,187)		—			—		—			—			—			—			2,305		2,305
Cash dividend declared to common stockholders		—			—		—			(499	)		—			—			—		(499	)
Balance June 30, 2016		6,738,416		$	80		58,648			47,438			(15,095	)		(6,898	)		4,779		88,952

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

8

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

	For the Six Month Periods Ended June 30,
	2017			2016
Cash flows from operating activities:
Net cash provided by operating activities	$	4,662			4,300
Cash flows from investing activities
Proceeds from sales, calls and maturities of securities available for sale		27,362			27,615
Purchase of securities available for sale		(23,047	)		(19,952	)
Net increase in loans		(27,474	)		(5,619	)
Proceeds from sale of foreclosed assets		1,136			1,242
Purchase of premises and equipment		(251	)		(376	)
Net cash provided by (used in) investing activities		(22,274	)		2,910
Cash flows from financing activities:
Net increase (decrease) in demand deposits		7,027			(11,525	)
Net increase (decrease) in time and other deposits		6,035			(28,254	)
Increase in advances from borrowers for taxes and insurance		218			553
Advances from Federal Home Loan Bank		32,000			—
Repayment of advances from Federal Home Loan Bank		(22,000	)		(4,000	)
Net increase (decrease) in repurchase agreements		(5,835	)		1,812
Cash used to repurchase treasury stock		(14	)		(1,624	)
Dividends paid on common stock		(559	)		(499	)
Net cash provided by (used in) financing activities		16,872			(43,537	)
Increase (decrease) in cash and cash equivalents		(740	)		(36,327	)
Cash and cash equivalents, beginning of period		25,749			54,698
Cash and cash equivalents, end of period	$	25,009		$	18,371
Supplemental disclosures of cash flow information:
Interest paid		2,840			2,772
Income taxes paid	$	388		$	447
Supplemental disclosures ofnon-cash investing and financing activities:
Loans charged off		401			449
Foreclosures of loans during period		168			286
Net unrealized gains on investment securities classified as available for sale		746			3,493
Decrease in deferred tax asset related to unrealized gains on investments		(255	)		(1,187	)
Dividends declared and payable		356			286
Issuance of restricted common stock		10			135

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

9

NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

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

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

The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form10-Q and Article 10 of RegulationS-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 six month period ended June 30, 2017 are not necessarily indicative of results that may be expected the entire fiscal year ending December 31, 2017.

The accompanying unaudited interim consolidated condensed financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form10-K as of and for the year ended December 31, 2016. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2016 Consolidated Financial Statements.

10

(2) NET INCOME PER SHARE

Basic net income per share (IPS) is computed by dividing net income by the weighted average number of common stock shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common stock shares outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period. For the three and six month periods ended June 30, 2017 and June 30, 2016, the Company has excluded all unearned shares held by the ESOP.

	For the three month Period Ended June 30,
	2017		2016
Basic IPS:
Net income	$	1,141,000	$	304,000
Average common shares outstanding		6,228,894		6,232,457
Net income per share	$	0.18	$	0.05
Diluted IPS
Net income	$	1,141,000	$	304,000
Average common shares outstanding		6,228,894		6,232,457
Dilutive effect of stock options		—		—
Average diluted shares outstanding		6,228,894		6,232,457
Net income per share, diluted	$	0.18	$	0.05
	For the six month period Ended June 30,
	2017		2016
Basic IPS:
Net income	$	2,076,000	$	813,000
Average common shares outstanding		6,223,802		6,265,106
Net income per share	$	0.33	$	0.13
Diluted IPS
Net income	$	2,076,000	$	813,000
Average common shares outstanding		6,223,802		6,265,106
Dilutive effect of stock options		—		—
Average diluted shares outstanding		6,223,802		6,265,106
Net income per share, diluted	$	0.33	$	0.13

11

(3) STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $30,000 and $61,000 for the three and six month period ended June 30, 2017 and $48,000 and $78,000 for the three and six month period ended June 30, 2016. The Company issued 698 shares of restricted shares in the three and six month period ended June 30, 2017. The Company issued 877 and 11,486 shares of restricted stock in the three and six month periods ended June 30, 2016. The table below provides a detail of the Company’s future compensation expense related to future vesting of restricted stock as of June 30, 2017:

Year Ending December 31,	Future Expense
(Dollars in Thousands)
2017		29
2018		57
2019		12
2020		4
2021		1
		103

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

The carrying amount of securities and their estimated fair values at June 30, 2017 were as follows:

	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Restricted:
FHLB stock	$	4,428		—		—			4,428
Available for sale:
U.S. Agency securities	$	94,075		908		(399	)		94,584
Taxable municipal bonds		757		12		—			769
Tax free municipal bonds		31,142		1,165		(25	)		32,282
Trust preferred securities		1,642		223		—			1,865
Mortgage backed securities		76,172		376		(685	)		75,863
	$	203,788		2,684		(1,109	)		205,363

13

The carrying amount of securities and their estimated fair values at December 31, 2016 were as follows:

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Restricted:
FHLB stock	$	4,428		—		—			4,428
Available for sale:
U.S. Treasury securities		2,000		1		—			2,001
U.S. Agency securities		83,667		983		(638	)		84,012
Taxable municipal bonds		2,720		17		(10	)		2,727
Tax free municipal bonds		33,004		1,081		(174	)		33,911
Trust preferred securities		1,634		183		—			1,817
Mortgage-backed securities		85,626		437		(1,051	)		85,012
	$	208,651		2,702		(1,873	)		209,480

The scheduled maturities of debt securities available for sale at June 30, 2017 were as follows:

	Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Due within one year	$	5,439	$	5,469
Due in one to five years		20,620		20,833
Due in five to ten years		28,461		28,896
Due after ten years		9,870		10,504
		64,390		65,702
Amortizing agency bonds		63,226		63,798
Mortgage-backed securities		76,172		75,863
Total securities available for sale	$	203,788	$	205,363

14

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of June 30, 2017 were as follows:

	Less than 12 months					12 months or longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(Dollars in Thousands)
Available for sale
U.S. Agency securities	$	40,006		(368	)		3,350		(31	)		43,356		(399	)
Tax free municipals		2,590		(25	)		—		—			2,590		(25	)
Mortgage-backed securities		40,085		(403	)		12,229		(282	)		52,314		(685	)
Total available for sale	$	82,681		(796	)		15,579		(313	)		98,260		(1,109	)

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2016 were as follows:

	Less than 12 months					12 months or longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
						(Dollars in Thousands)
Available for sale
U.S. Agency securities	$	41,963		(597	)		3,459		(41	)		45,422		(638	)
Taxable municipals		1,347		(10	)		—		—			1,347		(10	)
Tax free municipals		7,369		(174	)		—		—			7,369		(174	)
Mortgage-backed securities		48,462		(796	)		7,439		(255	)		55,901		(1,051	)
Total available for sale	$	99,141		(1,577	)		10,898		(296	)		110,039		(1,873	)

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 June 30, 2017, the Company has 64 securities with unrealized losses. The losses for all securities are considered to be a direct result of the effect that the prevailing interest rate environment had on the value of debt securities and are not related to the credit worthiness of the issuers. Furthermore, the Company has the intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of June 30, 2017.

At June 30, 2017 and December 31, 2016, securities with a book value of approximately $122.4 million and $125.6 million and a market value of approximately $125.2 million and $128.4 million, respectively, were pledged to various municipalities for deposits in excess of FDIC limits as required by law.

15

(5) LOANS

The Company uses the following loan segments as described below:

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

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

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

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

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

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

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

16

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

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

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

Set forth below is selected data relating to the composition of the loan portfolio by type of loan at June 30, 2017 and December 31, 2016.

	June 30, 2017			December 31, 2016
	(Dollars in Thousands)
Real estate loans:
One-to-four family first mortgages	$	162,096			147,962
Home equity lines of credit		35,851			35,684
Junior liens		1,472			1,452
Multi-family		38,623			34,284
Construction		25,033			39,255
Land		20,049			23,840
Farmland		39,575			47,796
Non-residential real estate		217,049			182,940
Total mortgage loans		539,748			513,213
Consumer loans		8,250			8,717
Commercial loans		90,857			88,907
Total other loans		99,107			97,624
Total loans		638,855			610,837
Deferred loan fees, net of cost		(433	)		(439	)
Less allowance for loan losses		(7,180	)		(6,112	)
Total loans, net	$	631,242		$	604,286

Although the Company has a diversified loan portfolio, 84.5% and 84.0% of the portfolio was concentrated in loans secured by real estate at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017 and December 31, 2016, the majority of these loans are located within the Company’s general operating area.

17

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the six month period ended June 30, 2017:

	Balance 12/31/2016		Charge offs 2017			Recoveries 2017		General Provision 2017			Specific Provision 2017			Ending Balance 6/30/2017
	(Dollars in Thousands)
One-to-four family mortgages	$	852		(49	)		6		449			43			1,301
Home equity line of credit		260		—			8		85			(8	)		345
Junior liens		8		—			2		3			(2	)		11
Multi-family		412		—			417		192			(417	)		604
Construction		277		—			—		(51	)		—			226
Land		1,760		—			363		(406	)		(838	)		879
Farmland		778		—			6		(60	)		(7	)		717
Non-residential real estate		964		—			9		363			63			1,399
Consumer loans		208		(128	)		45		12			36			173
Commercial loans		593		(225	)		264		650			243			1,525
Total	$	6,112		(402	)		1,120		1,237			(887	)		7,180

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, 2016:

	Balance 12/31/2015		Charge offs 2016			Recoveries 2016		General Provision 2016			Specific Provision 2016			Ending Balance 12/31/2016
	(Dollars in Thousands)
One-to-four family mortgages	$	1,030		—			167		(118	)		(227	)		852
Home equity line of credit		201		(30	)		14		59			16			260
Junior liens		8		—			14		—			(14	)		8
Multi-family		227		(421	)		—		323			283			412
Construction		377		—			—		(100	)		—			277
Land		1,379		—			—		(586	)		967			1,760
Farmland		358		—			—		420			—			778
Non-residential real estate		1,139		—			10		(41	)		(144	)		964
Consumer loans		358		(422	)		293		(187	)		166			208
Commercial loans		623		(595	)		141		122			302			593
Total	$	5,700		(1,468	)		639		(108	)		1,349			6,112

18

The table below presents past due andnon-accrual balances at June 30, 2017 by loan classification allocated between performing andnon-performing:

	Currently Performing		30 - 89 Days Past Due		Non-accrual Loans		Special Mention		Impaired Loans Currently Performing				Total
									Substandard		Doubtful
	(Dollars in Thousands)
One-to-four family mortgages	$	160,680		404		261		53		698		—	$	162,096
Home equity line of credit		35,289		—		402		—		160		—		35,851
Junior liens		1,434		3		—		27		8		—		1,472
Multi-family		36,765		—		—		—		1,858		—		38,623
Construction		25,033		—		—		—		—		—		25,033
Land		12,398		—		6,730		429		492		—		20,049
Farmland		37,402		—		455		478		1,240		—		39,575
Non-residential real estate		202,950		2,485		207		1,505		9,902		—		217,049
Consumer loans		8,072		18		3		—		157		—		8,250
Commercial loans		87,906		—		521		716		1,714		—		90,857
Total	$	607,929		2,910		8,579		3,208		16,229		—	$	638,855

The table below presents past due andnon-accrual balances at December 31, 2016 by loan classification allocated between performing andnon-performing:

	Currently Performing		30 - 89 Days Past Due		Non-Accrual Loans		Special Mention		Impaired Loans Currently Performing				Total
									Substandard		Doubtful
	(Dollars in Thousands)
One-to-four family mortgages		145,069		896		270		744		983		—		147,962
Home equity line of credit		35,087		22		402		25		148		—		35,684
Junior liens		1,407		4		—		30		11		—		1,452
Multi-family		31,280		—		—		—		3,004		—		34,284
Construction		39,255		—		—		—		—		—		39,255
Land		15,581		—		7,675		35		549		—		23,840
Farmland		44,832		—		—		674		2,290		—		47,796
Non-residential real estate		172,395		—		208		3		10,334		—		182,940
Consumer loans		8,354		28		3		—		332		—		8,717
Commercial loans		84,913		261		516		603		2,614		—		88,907
Total		578,173		1,211		9,074		2,114		20,265		—		610,837

At June 30, 2017 and December 31, 2016, there were no loans more than 90 days past due and accruing interest.

19

The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of June 30, 2017 and December 31, 2016, by portfolio segment and based on the impairment method.

June 30, 2017:	Commercial		Land Development / Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
	(Dollars in Thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	310		561		71		—		37		979
Collectively evaluated for impairment		1,215		544		2,649		1,657		136		6,201
Total ending allowance balance	$	1,525		1,105		2,720		1,657		173		7,180
Loans:
Loans individually evaluated for impairment	$	2,235		7,222		13,662		1,529		160		24,808
Loans collectively evaluated for impairment		88,622		37,860		281,585		197,890		8,090		614,047
Total ending loans balance	$	90,857		45,082		295,247		199,419		8,250		638,855
December 31, 2016:	Commercial		Land Development / Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
	(Dollars in Thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	28		1,036		—		—		84		1,148
Collectively evaluated for impairment		565		1,001		2,154		1,120		124		4,964
Total ending allowance balance	$	593		2,037		2,154		1,120		208		6,112
Loans:
Loans individually evaluated for impairment	$	3,130		8,224		15,836		1,814		335		29,339
Loans collectively evaluated for impairment		85,777		54,871		249,184		183,284		8,382		581,498
Total ending loans balance	$	88,907		63,095		265,020		185,098		8,717		610,837

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

20

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

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

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

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

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

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

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

21

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

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

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

The following credit risk standards are assigned to consumer loans:

Satisfactory -All consumeropen-end andclosed-end retail loans shall have an initial risk grade assigned of 3 - Satisfactory.

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

Loss -Allclosed-end retail loans that become past due 120 cumulative days andopen-end retail loans that become past due 180 cumulative days from the contractual due date will be charged off as loss assets. The charge off will be taken by the end of the month in which the120-day or180-day time period elapses. All losses in retail credit will be recognized when the affiliate becomes aware of the loss, but in no case should the charge off exceed the time frames stated within this policy.

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

22

A summary of the Company’s impaired loans, including their respective regulatory classification and their respective specific reserve at June 30, 2017 and December 31, 2016 were as follows:

June 30, 2017	Pass		Special Mention		Impaired Loans				Total		Specific Allowance for Impairment		Allowance for Loans not Impaired
					Substandard		Doubtful
	(Dollars in Thousands)
One-to-four family mortgages		161,084		53		959		—		162,096		—		1,301
Home equity line of credit		35,289		—		562		—		35,851		—		345
Junior liens		1,437		27		8		—		1,472		—		11
Multi-family		36,765		—		1,858		—		38,623		—		604
Construction		25,033		—		—		—		25,033		—		226
Land		12,398		429		7,222		—		20,049		561		318
Farmland		37,402		478		1,695		—		39,575		69		648
Non-residential real estate		205,435		1,505		10,109		—		217,049		2		1,397
Consumer loans		8,090		—		160		—		8,250		37		136
Commercial loans		87,906		716		2,235		—		90,857		310		1,215
Total		610,839		3,208		24,808		—		638,855		979		6,201
December 31, 2016	Pass		Special Mention		Impaired Loans				Total		Specific Allowance for Impairment		Allowance for Loans not Impaired
					Substandard		Doubtful
	(Dollars in Thousands)
One-to-four family mortgages	$	145,965		744		1,253		—		147,962		—		852
Home equity line of credit		35,109		25		550		—		35,684		—		260
Junior liens		1,411		30		11		—		1,452		—		8
Multi-family		31,280		—		3,004		—		34,284		—		412
Construction		39,255		—		—		—		39,255		—		277
Land		15,581		35		8,224		—		23,840		1,036		724
Farmland		44,832		674		2,290		—		47,796		—		778
Non-residential real estate		172,395		3		10,542		—		182,940		—		964
Consumer loans		8,382		—		335		—		8,717		84		124
Commercial loans		85,174		603		3,130		—		88,907		28		565
Total	$	579,384		2,114		29,339		—		610,837		1,148		4,964

23

Impaired loans by classification type and the related valuation allowance amounts at June 30, 2017 were as follows:

	At June 30, 2017						For the six month period ended June 30, 2017
Impaired loans with no specific allowance	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
					(Dollars in Thousands)
One-to-four family mortgages	$	959		959		—		2,095		62
Home equity line of credit		562		562		—		562		17
Junior liens		8		8		—		10		—
Multi-family		1,858		1,858		—		1,337		—
Construction		—		—		—		—		—
Land		533		533		—		777		22
Farmland		1,569		1,569		—		1,287		12
Non-residential real estate		10,087		10,087		—		9,968		266
Consumer loans		13		13		—		16		—
Commercial loans		1,652		1,652		—		1,494		62
Total		17,241		17,241		—		17,546		441
Impaired loans with a specific allowance
One-to-four family mortgages		—		—		—		—		—
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		6,689		6,689		561		6,680		—
Farmland		126		126		69		326		—
Non-residential real estate		22		22		2		210		1
Consumer loans		147		147		37		271		—
Commercial loans		583		583		310		546		7
Total		7,567		7,567		979		8,033		8
Total	$	24,808		24,808		979		25,579		449

24

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2016 were as follows:

	At December 31, 2016						For the year ended December 31, 2016
Impaired loans with no specific allowance	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
					(Dollars in Thousands)
One-to-four family mortgages	$	1,253		1,253		—		1,470		67
Home equity line of credit		550		550		—		390		24
Junior liens		11		11		—		13		1
Multi-family		3,004		3,004		—		3,005		172
Construction		—		—		—		—		—
Land		1,553		2,513		—		7,868		38
Farmland		2,290		2,290		—		1,563		120
Non-residential real estate		10,542		10,542		—		9,363		485
Consumer loans		—		—		—		21		1
Commercial loans		2,865		2,865		—		3,168		112
Total		22,068		23,028		—		26,861		1,020
Impaired loans with a specific allowance
One-to-four family mortgages		—		—		—		452		—
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		910		—
Construction		—		—		—		—		—
Land		6,671		6,671		1,036		1,811		485
Farmland		—		—		—		533		—
Non-residential real estate		—		—		—		—		—
Consumer loans		335		335		84		273		—
Commercial loans		265		265		28		754		24
Total		7,271		7,271		1,148		4,733		509
Total	$	29,339		30,299		1,148		31,594		1,529

25

On a periodic basis, the Bank may modify the terms of certain loans. At December 31, 2016, the Company had eight loans, representing three lending relationships, classified as performing TDRs. During the six month period ended June 30, 2017, the Company removed one lending relationship from TDR status and one lending relationship had three loans to pay off. Onenon-residential real estate loan relationship, with two loans representing $2.2 million, has paid as agreed based on the original terms of their note for a period of at least six months. For the six month period ended June 30, 2017, no loans were added to TDR classification and all loans currently classified as TDRs are current based on their revised terms.

The following table provides the number of loans remaining in each category as of June 30, 2017 and December 31, 2016 that the Company had previously modified in a TDR:

	Number of Loans		Pre-Modification Outstanding Record Investment		Post Modification Outstanding Record Investment, net of related allowance
June 30, 2017
Non-residential real estate		3	$	3,388,370		3,388,370
December 31, 2016
Multi-family		3	$	815,273		815,273
Non-residential real estate		5		5,646,223		5,646,223

There were no loans as of June 30, 2017 that have been modified as TDRs and that subsequently defaulted within twelve months on their modified terms. At June 30, 2017, there are no commitments to lend additional funds to any borrower whose loan terms have been modified in a TDR.

26

(6) FORECLOSED ASSETS

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

At June 30, 2017 and December 31, 2016, the Company had balances in foreclosed assets consisting of the following:

	June 30, 2017		December 31, 2016
	(Dollars in Thousands)
One-to-four family mortgages	$	190		135
Home equity line of credit		18		28
Multi-family real estate		1,200		1,775
Non-residential real estate		—		459
Total other assets owned	$	1,408		2,397

For the six month period ended June 30, 2017, the Company’s activity in foreclosed property included the following:

			Activity During 2017
	Balance 12/31/2016		Foreclosure		Sales			Reduction in Values			Gain (Loss) on Sale			Balance 6/30/2017
			(Dollars in Thousands)
One-to-four family mortgages	$	135		125		(84	)		—			14		$	190
HELOC		28		—		—			(10	)		—			18
Multi-family		1,775		—		(552	)		—			(23	)		1,200
Non-residential real estate		459		43		(500	)		—			(2	)		—
Total	$	2,397		168		(1,136	)		(10	)		(11	)	$	1,408

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The Company’s activity in foreclosed assets for the six month period ended June 30, 2016 is as follows:

			Activity During 2016
	Balance 12/31/2015		Foreclosure		Sales			Reduction in Values		Gain (Loss) on Sale			Balance 6/30/2016
			(Dollars in Thousands)
One-to-four family mortgages	$	55		—		(40	)		—		(15	)		—
Multi-family		—		141		—			—		—			141
Land		943		130		(913	)		—		12			172
Non-residential real estate		738		—		(270	)		—		(9	)		459
Consumer		—		15		(19	)		—		4			—
Total	$	1,736		286		(1,242	)		—		(8	)	$	772

(7) FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

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The following are the significant methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments:

Cash and due from banks

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate those assets’ fair values, because they mature within 90 days or less and do not present credit risk concerns.

Interest-bearing deposits

The carrying amounts reported in the consolidated balance sheets for interest earning deposits approximate those assets’ fair values, because they are considered overnight deposits and may be withdrawn at any time without penalty and do not present credit risk concerns.

Available-for-sale securities

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

FHLB stock

The fair value of FHLB stock is recognized at cost.

Loans held for sale

Mortgage loans originated and intended to be sold are carried at the lower of cost or estimated fair value as determined on a loan by loan basis. Gains or losses are recognized at the time of ownership transfer. Net unrealized losses, if any, are recognized through a valuation allowance and charged to income.

Loans receivable

The fair values for of fixed-rate loans and variable rate loans thatre-price on an infrequent basis is estimated using discounted cash flow analysis which considers futurere-pricing dates and estimated repayment dates, and further using interest rates currently being offered for loans of similar type, terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The estimated fair value of variable-rate loans thatre-price frequently and with have no significant change in credit risk is approximately the carrying value of the loan.

Accrued interest receivable

Fair value is estimated to approximate the carrying amount because such amounts are expected to be received within 90 days or less and any credit concerns have been previously considered in the carrying value.

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Deposits

The fair values disclosed for deposits with no stated maturity such as demand deposits, interest-bearing checking accounts and savings accounts are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit and other fixed maturity time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on such type accounts or similar accounts to a schedule of aggregated contractual maturities or similar maturities on such time deposits.

Advances from borrowers for taxes and insurance

The carrying amount of advances from borrowers for taxes and insurance approximates its fair value.

Advances from the Federal Home Loan Bank (FHLB)

The fair value of these advances is estimated by discounting the future cash flows of these advances using the current rates at which similar advances or similar financial instruments could be obtained.

Repurchase agreements

Overnight repurchase agreements have a fair value at book, given that they mature overnight. The fair values for of longer date repurchase agreements is estimated using discounted cash flow analysis which considers the current market pricing for repurchase agreements of similar final maturities and collateral requirements.

Subordinated debentures

The book value of subordinated debentures is cost. The subordinated debenturesre-price quarterly at a rate equal to three month libor plus 3.10%.

Fair Value Measurements on a Recurring Basis

Where quoted prices are available for identical securities in an active market, securities available for sale are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.

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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 June 30, 2017 are summarized below:

Description	Total carrying value in the consolidated balance sheet at 6/30/2017		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets	(Dollars in Thousands)
Securities available for sale
U.S. Agency securities		94,584		—		94,584		—
Taxable municipals		769		—		769		—
Tax-free municipals		32,282		—		32,282		—
Trust preferred securities		1,865		—		—		1,865
Mortgage backed securities		75,863		—		75,863		—
Total		205,363		—		203,498		1,865

The assets and liabilities measured at fair value on a recurring basis at December 31, 2016 are summarized below:

Description	Total carrying value in the consolidated balance sheet at 12/31/2016		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets	(Dollars in Thousands)
Securities available for sale
U.S. Treasury securities		2,001		2,001		—		—
U.S. Agency securities		84,012		—		84,012		—
Taxable municipals		2,727		—		2,727		—
Tax-free municipals		33,911		—		33,911		—
Trust preferred securities		1,817		—		—		1,817
Mortgage backed securities		85,012		—		85,012		—
Total		209,480		2,001		205,662		1,817

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The assets and liabilities measured at fair value on anon-recurring basis are summarized below for June 30, 2017:

Description	Total carrying value in the consolidated balance sheet at June 30, 2017		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets	(Dollars in Thousands)
Foreclosed assets	$	1,408		—		—	$	1,408
Impaired loans, net of allowance	$	6,588		—		—	$	6,588

The assets and liabilities measured at fair value on anon-recurring basis are summarized below for December 31, 2016:

Description	Total carrying value in the consolidated balance sheet at December 31, 2016		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets	(Dollars in Thousands)
Foreclosed assets	$	2,397		—		—	$	2,397
Impaired loans, net of allowance	$	6,123		—		—	$	6,123

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The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a recurring andnon-recurring basis at June 30, 2017 and December 31, 2016:

Level 3 Significant Unobservable Input Assumptions
`	Fair Value	Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs
June 30, 2017		(Dollars in Thousand)
Assets measured on anon-recurring basis
Foreclosed assets	$1,408	Discount to appraised value of collateral	Appraisal comparability adjustments	30% to 55%
Impaired loans	6,588	Discount to appraised value of collateral	Appraisal comparability adjustments	10% to 25%
Asset measured on a recurring basis
Trust preferred securities	1,865	Discounted cash flow Spread to Libor swap curve	Compare to quotes for sale when available	One month libor 4% to 6%
December 31, 2016
Assets measured on anon-recurring basis
Foreclosed assets	$2,397	Discount to appraised value of collateral	Appraisal comparability adjustments	30% to 55%
Impaired loans	6,123	Discount to appraised value of collateral	Appraisal comparability adjustments	10% to 15%
Asset measured on a recurring basis
Trust preferred securities	1,817	Discounted cash flow Spread to Libor swap curve	Compare to quotes for sale when available	One month libor 4% to 6%

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Foreclosed assets and impaired loans are valued at fair value, less cost to sell. Fair value of a foreclosed asset is determined by an appraised value of the underlying collateral to which a discount is applied. Management establishes the discount or adjustments based on recent sales and any unique features the collateral may possess. Management also considers the anticipated selling cost associated with the collateral when establishing the discounted percentage. Management may adjust the discounts based on the most recent sales of comparable collateral.

The Company bases the value of its trust preferred security on a quarterly review of SEC filings by the issuer to ascertain overall financial strength. Based on the analysis, the Company then reviews the Libor swap curve to analyze the overall yield of our investment as compared to long-term swap rates. On rare occasions, the Company may receive an offer from a broker to purchase similar type instruments and the Company will analyze these offerings as compared to our investment.

The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the six month periods ended June 30, 2017 and June 30, 2016, (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.

	2017		2016
Six month period ended June 30,	Other Assets		Other Assets
	(Dollars in Thousands)
Fair value, January 1	$	1,817		1,865
Change in unrealized gain included in other comprehensive income for assets and liabilities still held at June 30,		40		97
Accretion of previously discounted amounts		8		16
Purchases, issuances and settlements, net		—		—
Transfers in and/or out of Level 3		—		—
Fair value, June 30	$	1,865		1,978

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The estimated fair values of financial instruments were as follows at June 30, 2017:

	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	$	20,208		20,208		20,208		—		—
Interest-bearing deposits		4,801		4,801		4,801		—		—
Securities available for sale		205,363		205,363		—		203,498		1,865
Federal Home Loan Bank stock		4,428		4,428		—		—		4,428
Loans held for sale		2,386		2,386		—		2,386		—
Loans receivable		631,242		611,910		—		—		611,910
Accrued interest receivable		3,332		3,332		—		—		3,332
Financial liabilities:
Deposits		745,944		746,635		—		746,635		—
Advances from borrowers for taxes and insurance		984		984		—		984		—
Advances from Federal Home Loan Bank		21,000		21,007		—		21,007		—
Repurchase agreements		41,820		41,820		—		41,820		—
Subordinated debentures		10,310		10,099		—		—		10,099

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The estimated fair values of financial instruments were as follows at December 31, 2016:

	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	$	21,779		21,779		21,779		—		—
Interest-bearing deposits		3,970		3,970		3,970		—		—
Securities available for sale		209,480		209,480		2,001		205,662		1,817
Federal Home Loan Bank stock		4,428		4,428		—		—		4,428
Loans held for sale		1,094		1,094		—		1,094		—
Loans receivable		604,286		593,257		—		—		593,257
Accrued interest receivable		3,799		3,799		—		—		3,799
Financial liabilities:
Deposits		732,882		732,942		—		732,942		—
Advances from borrowers for taxes and insurance		766		766		—		766		—
Advances from Federal Home Loan Bank		11,000		10,979		—		10,979		—
Repurchase agreements		47,655		47,655		—		47,655		—
Subordinated debentures		10,310		10,099		—		—		10,099

(8) EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued new guidance related to “Revenue from Contracts with Customers.” This guidance supersedes the revenue recognition requirements in ASC Topic 605,Revenue Recognition, and most industry-specific guidance throughout the ASC. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016; however, the FASB has agreed to aone-year deferral of the effective date to December 15, 2017. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

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ASU2016-01, “Financial Instruments – Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”ASU2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related toavailable-for-sale. ASU2016-01 will be effective on January 1, 2018. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

ASU2016-02, “Leases (Topic 842).” ASU2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and aright-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU2016-02 will be effective for us on January 1, 2019, and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Management is currently evaluating the potential impact of ASU2016-02 on the Company’s consolidated financial statements.

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On June 16, 2016, the FASB released its finalized ASU2016-13,“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments to U.S. GAAP require businesses and other organization to measure the expected credit losses on financial assets, such as loans, securities, bond insurance, and many receivables. The accounting changes apply to instruments recorded on balance sheets at their historical cost, although there are some limited changes to the accounting for debt instruments classified asavailable-for-sale. Write-downs will be based on historical information, current business conditions, and forecasts, and it expects the forecasts are expected to improve the loss estimates on financial assets that are losing value. The techniques that are employed today to write down loans and other instruments can still be used, although the variables for calculating the losses are expected to change. ASU2016-13 will become effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2021. Companies are permitted to adopt ASU2016-13 in fiscal years beginning after December 15, 2018. Management is currently evaluating the potential impact of this ASU on the Company’s consolidated financial statements.

ASU2016-15“Statement of Cash Flows (Topic 230)” (“ASU2016-15”) is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU2016-15 is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption was permitted with retrospective application. Management is evaluating the impact that the adoption of ASU2016-15 will have on the Company’s consolidated financial statements.

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

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(9) INCOME TAXES

The Company files consolidated federal income tax returns and Tennessee excise tax returns. The Company files consolidated Kentucky income tax returns. The Bank is exempt from Kentucky corporate income tax. The Company has no unrecognized tax benefits and has accrued any interest or penalties for uncertain tax positions.     The effective tax rate differs from the statutory federal rate of 35% and Tennessee excise rate of 6.5% due to investments in qualified municipal securities, Bank owned life insurance, income apportioned to Kentucky and certainnon-deductible expenses. The Company’s effective federal income tax rate varies significantly from our federal statutory tax rate for a variety of factors, including:

The Company’s investment in Fort Webb LP, LLC generates tax credits and depreciation expense that the Company can use to offset taxable income. At June 30, 2017 and December 31, 2016, the Company’s balance sheet did not include any equity investment in Fort Webb. The Company has other investments that produce both tax credits and depreciation expense that may be used to offset net income.

At June 30, 2017, the Company has $10.2 million in Bank owned life insurance policies. The income generated from these policies increase the cash flow of the policies on a tax free basis. Life insurance proceeds are paid upon the death of a covered party. These proceeds, netted against the current cash value of the policy, result in tax free income to the Company. For the six month period ended June 30, 2017, the Company received additional income of approximately $160,000 from the net proceeds of a life insurance policy, further reducing our effective tax rate.

At June 30, 2017, the Company’s investment portfolio includes $32.3 million of tax free municipal bonds. Interest income on this portfolio, after netting out a disallowance for interest expense attributable to this portfolio, is tax exempt.

(10) ESOP

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

Employees who are not employed on December 31st of each year are not eligible for participation in the ESOP. The Company anticipates that loan payments will be made at the end of each year. Participants receive shares at the end of employment. The Company has the option to repurchase the shares or provide the shares directly to the employee.

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The Company made its second ESOP loan payment in December 2016. At June 30, 2017 and December 31, 2016, shares held by the ESOP were as follows:

	June 30, 2017		December 31, 2016
Accrued for allocation to participants		21,484		—
Earned ESOP shares		101,654		101,654
Unearned ESOP shares		476,862		498,346
Total ESOP shares		600,000		600,000
Fair value of unearned shares	$	6,833,432	$	6,707,737

(11) COMMITMENTS AND CONTINGENCIES

At June 30, 2017, the Bank had $32.8 million in outstanding commitments on revolving home equity lines of credit, $18.3 million in outstanding commitments on revolving personal lines of credit and $47.1 million in commitments to originate loans and undisbursed commitments on commercial lines of credit of $52.3 million. At June 30, 2017, the Company had $268,000 in standby letters of credit outstanding.

At June 30, 2017, the Company has $38.1 million in times deposits greater than $100,000 but less than $250,000 that are schedule to mature in one year and $54.7 million in time deposits with balances greater than $250,000 that are scheduled to mature in one year or less. Management believes that a significant percentage of such deposits will remain with the Bank.

The Bank’s FHLB borrowings are secured by a blanket security agreement pledging the Bank’s1-4 family first mortgage loans andnon-residential real estate loans. At June 30, 2017 and December 31, 2016, the Bank has pledged all eligible1-4 family first mortgages. At June 30, 2017, the Bank has outstanding borrowings of $21.0 million from the FHLB. A schedule of FHLB borrowings at June 30, 2017 is provided below:

Outstanding Balance		Rate			Maturity
(Dollars in thousands)
$	10,000		1.27	%		Overnight
	5,000		0.88	%		10/06/2017
	6,000		1.18	%		07/06/2018
$	21,000		1.15	%

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A schedule of FHLB borrowings at December 31, 2016 is provided below:

Outstanding Balance		Rate			Maturity
(Dollars in thousands)
$	5,000		0.88	%		10/06/2017
	6,000		1.18	%		07/06/2018
$	11,000		1.04	%

The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Bank’s name totaling $47.6 million secured by the Bank’s loan portfolio to secure additional municipal deposits. At June 30, 2017, securities with a fair market value of $41.8 million were sold under agreements to repurchase from various customers.

The Company is a party to certain ordinary course litigation, and the Company intends to vigorously defend itself in all such matters. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

(12) REGULATORY MATTERS

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

The capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. For 2017, the capital conservation buffer is 1.25%. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Under these new rules, Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, andnon-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. Cumulative preferred stock and trust preferred securities issued after May 19, 2010 no longer qualify as Tier 1 capital, but such securities issued prior to May 19, 2010, including in the case of Bank holding companies with less than $15.0 billion in total assets, trust preferred securities issued prior to that date, continue to count as Tier 1 capital subject to certain limitations. The definition of Tier 2 capital is generally unchanged for most Banking organizations, subject to certain new eligibility criteria.

41

The final rules allow Banks and their holding companies with less than $250 billion in assets aone-time opportunity toopt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company has made the decision toopt-out of this requirement.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to adjusted total assets (as defined), and of total capital (as defined) and Tier 1 to risk weighted assets (as defined). The minimum required capital amounts presented include the minimum required capital levels as of June 30, 2017 and December 31, 2016 based on thephase-in provisions of Basel III Capital Rules. Management believes, as of June 30, 2017 and December 31, 2016, that the Bank meets all capital adequacy requirements to which it is subject. The Company’s consolidated capital ratios and the Bank’s actual capital amounts and ratios as of June 30, 2017 and December 31, 2016 are presented below (Dollars in Thousands):

As of June 30, 2017	Actual					Minimum Capital Required – Basel III Phase-In Schedule					To be Well Capitalized for Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier 1 leverage capital to adjusted total assets
Company	$	94,993		10.4	%	$	36,273		4.0	%	$	45,341		5.0	%
Bank	$	91,851		10.4	%	$	35,472		4.0	%	$	44,240		5.0	%
Total capital to risk weighted assets
Company	$	102,173		16.1	%	$	58,361		9.25	%	$	63,093		10.0	%
Bank	$	99,032		15.7	%	$	58,232		9.25	%	$	62,954		10.0	%
Tier 1 capital to risk weighted assets
Company	$	94,993		15.0	%	$	45,743		7.25	%	$	50,475		8.0	%
Bank	$	91,851		14.6	%	$	45,642		7.25	%	$	50,363		8.0	%
Common equity tier 1 capital to risk weighted assets
Company	$	94,993		15.0	%	$	36,279		5.75	%		n/a		n/a
Bank	$	91,851		14.6	%	$	36,199		5.75	%	$	40,920		6.5	%
As of December 31, 2016
Tier 1 leverage capital to adjusted total assets
Company	$	92,803		10.8	%	$	34,392		4.0	%	$	42,990		5.0	%
Bank	$	91,617		10.7	%	$	34,315		4.0	%	$	42,894		5.0	%
Total capital to risk weighted assets
Company	$	98,915		16.2	%	$	52,682		8.625	%	$	61,080		10.0	%
Bank	$	97,729		16.0	%	$	52,561		8.625	%	$	60,941		10.0	%
Tier 1 capital to risk weighted assets
Company	$	92,803		15.2	%	$	40,466		6.625	%	$	48,864		8.0	%
Bank	$	91,617		15.0	%	$	40,373		6.625	%	$	48,753		8.0	%
Common equity tier 1 capital to risk weighted assets
Company	$	92,803		15.2	%	$	31,304		5.125	%		n/a		n/a
Bank	$	91,617		15.0	%	$	31,232		5.125	%	$	39,611		6.5	%

42

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

Critical Accounting Policies

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with U.S. GAAP and general banking practices. These estimates include accounting for the allowance for loan losses, foreclosed assets, valuation of deferred tax assets and fair value measurements. A description of these estimates, which significantly affect the Company’s determination of our consolidated financial position, results of operations and cash flows, is set forth in Note 1, “Summary of Significant Accounting Policies” of the Notes to the Company’s consolidated financial statements in the Company’s Annual Report on Form10-K as of and for the year ended December 31, 2016.

The emphasis of this discussion is a comparison of assets, liabilities and stockholders’ equity as of June 30, 2017 to December 31, 2016, while comparing income and expenses for the three and six month periods ended June 30, 2017 and June 30, 2016.

All information should be read in conjunction with the Company’s unaudited interim consolidated condensed financial statements and related notes appearing elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in the Company’s Annual Report on Form10-K as of and for the year ended December 31, 2016.

Comparison of Financial Condition at June 30, 2016, and December 31, 2016

At June 30, 2017, total assets increased $20.6 million, to $912.1 million as compared to $891.5 million at December 31, 2016, largely due to higher levels of time deposits, cash on hand and loan growth. Securities available for sale declined from $209.5 million at December 31, 2016 to $205.4 million at June 30, 2017. At June 30, 2017 and December 31, 2016, securities classified as “available for sale” had an amortized cost of $203.8 million and $208.7 million, respectively. Net loans totaled $631.2 million and $604.3 million at June 30, 2017 and December 31, 2016, respectively.

The Company’s holdings of Federal Home Loan Bank of Cincinnati (“FHLB”) stock, at cost were $4.4 million at December 31, 2016 and June 30, 2017. Total FHLB borrowings were $21.0 million at June 30, 2017 and $11.0 million at December 31, 2016, respectively. Total repurchase balances declined from $47.7 million at December 31, 2016 to $41.8 million at June 30, 2017.

At June 30, 2017, deposits increased $13.0 million from $732.9 million at December 31, 2016 to $745.9 million at June 30, 2017. At June 30, 2017,non-interest checking account balances are $132.3 million, or 17.7% of total deposits as compared to $131.1 million, or 17.9% of total deposits at December 31, 2016. For the period ended June 30, 2017, interest bearing checking accounts increased by $6.9 million as compared to December 31, 2016. At June 30, 2017, time deposits were $299.1 million, representing an increase of $6.0 million as compared to December 31, 2016. 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 Six Month Periods Ended June 30, 2017 and June 30, 2016.

Net Income. The Company’s net income was $2.1 million for the six month period ended June 30, 2017, as compared to net income of $813,000 for the six month period ended June 30, 2016. The improved level of income is largely the result of growth in the average balance of loans and a reduction in the Company’s provision for loan loss expense. For the six month period ended June 30, 2017, the reduction in provision expense was accomplished as a result of $718,000 in net recoveries as well as continued improvements in credit quality.

Net Interest Income. Net interest income for the six month period ended June 30, 2017 was $13.7 million, compared to $13.1 million for the six month period ended June 30, 2016. The increase in net interest income for the six month period ended June 30, 2017 as compared to June 30, 2016 was largely due to the $61.9 million increase in the average balance of loans outstanding. The growth in loan balances offset a decline in the average yield of the loan portfolio as well as the average balance of available for sale investment securities.

For the six month period ended June 30, 2017, the average tax equivalent yield on loans was 4.44%, as compared to 4.53% for the six month period ended June 30, 2016. For the six month period ended June 30, 2017, income on taxable securities and tax free securities was $2.3 million and $563,000, respectively. Income on taxable and tax free securities was $2.4 million and $693,000 for the six month period ended June 30, 2016, respectively. For the six month period ending June 30, 2017, the tax equivalent yield on taxable and tax free securities were 2.57% and 5.04%, respectively, as compared to 2.46% and 5.03% for the six month period ended June 30, 2016, respectively. For the six month periods ended June 30, 2017 and June 30, 2016, the Company’s cost of interest bearing liabilities was 0.83% and 0.80%, respectively. For the six month periods ended June 30, 2017 and June 30, 2016, the Company’s net interest margin was 3.35% and 3.34%, 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 six month periods ended June 30, 2017 and June 30, 2016. 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 six month periods.

44

Average balances for loans include loans classified asnon-accrual, net of the allowance for loan losses. The table adjuststax-free investment income by $279,000 for the six month period ended June 30, 2017 and $344,000 for the six month period ended June 30, 2016, for a tax equivalent rate using a cost of funds rate of 0.83%for the six month period ended June 30, 2017 and 0.80% for the six month period ended June 30, 2016. The table adjuststax-free loan income by $21,000 for the six month period ended June 30, 2017 and $13,000 for the six month period ended June 30, 2016, for a tax equivalent rate using the same cost of funds rate (Dollars in thousands):

	Average Balance 06/30/2017		Income & Expense 06/30/2017			Average Rates 06/30/2017			Average Balance 06/30/2016		Income & Expense 06/30/2016			Average Rates 06/30/2016
Loans	$	618,430	$	13,720			4.44	%	$	556,562	$	12,619			4.53	%
Taxable AFS securities		177,044		2,273			2.57	%		199,129		2,445			2.46	%
Non-taxable AFS securities		33,391		842			5.04	%		41,202		1,037			5.03	%
Other interest bearing deposits		7,565		44			1.16	%		9,508		28			0.59	%
Total interest earning assets		836,430		16,879			4.04	%		806,401		16,129			4.00	%
Other assets		73,072								77,219
Total assets	$	909,502							$	883,620
Retail time deposits	$	258,518		1,342			1.04	%	$	258,776		1,218			0.94	%
Brokered deposits		47,461		280			1.18	%		34,478		187			1.08	%
Interest bearing checking accounts		221,580		660			0.60	%		209,810		610			0.58	%
MMDA and savings accounts		99,294		82			0.17	%		98,223		87			0.18	%
FHLB borrowings		12,298		62			1.01	%		12,297		101			1.64	%
Repurchase agreements		40,482		222			1.10	%		43,127		282			1.31	%
Subordinated debentures		10,310		212			4.11	%		10,310		188			3.65	%
Total interest bearing liabilities		689,943		2,860			0.83	%		667,021		2,673			0.80	%
Non-interest bearing deposits		127,447								124,379
Othernon-interest bearing liabilities		3,987								3,270
Stockholders’ equity		88,125								88,950
Total liabilities and stockholders’ equity	$	909,502							$	883,620
Net interest income			$	14,019							$	13,456
Interest rate spread							3.21	%							3.20	%
Net interest margin				3.35	%							3.34	%

45

Interest Income. For the six month period ended June 30, 2017, the Company’s total interest income was $16.6 million, representing an increase of $807,000 as compared to the six month period ended June 30, 2016. For the six month periods ended June 30, 2017 and June 30, 2016, interest income on loans was $13.7 million and $12.6 million, respectively. The average balance of loans receivable increased from $556.6 million for the six month period ended June 30, 2016 to $618.4 million for the six month period ended June 30, 2017. For the six month period ended June 30, 2017, the increase in interest income on loans as compared to the six month period ended June 30, 2016 was partially offset by a $302,000 decline in investment income during the period resulting from a decline in the average balance of both taxable and tax free investment securities. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 120.9% for the six month period ended June 30, 2016 to 121.2% for the six month period ended June 30, 2017.

Interest Expense. Interest expense increased $187,000 for the six month period ended June 30, 2017 as compared to the six month period ended June 30, 2016. For the six month period ending June 30, 2017, the Company’s interest expense on FHLB advances was $62,000, as compared to $101,000 for the six month period ended June 30, 2016. The average cost of FHLB borrowings were 1.01% for the six month period ended June 30, 2017 and 1.64% for the six month period ended June 30, 2016.

For the six month period ended June 30, 2017, the average balance of interest bearing retail time deposits declined $258,000 to $258.5 million, as compared to $258.8 million for the six month period ended June 30, 2016. The average cost of retail time deposits for the six month periods ended June 30, 2017 and June 30, 2016 was 1.04% and 0.94%, respectively.

The average cost of brokered deposits increased from 1.08% for the six month period ended June 30, 2016 as compared to 1.18% for the six month period ended June 30, 2017. Over the same period, the average balance of brokered deposits increased $13.0 million. For the six month period ended June 30, 2017, the Company’s total cost of deposits was 0.63% as compared to 0.58% for the six month period ended June 30, 2016. The increase in deposit cost is the result of three increases in overnight federal funds rates, increasing the cost of all deposits.

The average balance of repurchase agreements declined from $43.1 million for the six months ended June 30, 2016, to $40.5 million for the six month period ended June 30, 2017. The average cost of repurchase agreements was 1.31% for the six months ended June 30, 2016 and 1.10% for the six month period ended June 30, 2017. For the six month period ended June 30, 2017, the Company’s subordinated debt interest expense was $212,000 as compared to $188,000 for the six month period ended June 30, 2016. The increase in the subordinated debt interest expense is the result of an increase in the three month libor rate.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $350,000 in provision for loan loss was required for the six month period ended June 30, 2017 compared to a $923,000 provision for loan loss expense for the six month period ended June 30, 2016. The lower level of required provision expense for the six month period ended June 30, 2017 as compared to June 30, 2016 is the result of improving credit quality and $718,000 in net loan loss recoveries in during the six month period ended June 30, 2017.

46

Non-Interest Income. There was a $142,000 increase innon-interest income in the six month period ended June 30, 2017 as compared to the six month period ended June 30, 2016. For the six month period ended June 30, 2017, other operating income was $691,000 as compared to $379,000 for the six month period ended June 30, 2016. The improved level of other operating income is largely the result of $225,000 in one time licensing fees earned by the Bank from a vendor. For the six month period ended June 30, 2017, the Company earned $612,000 in mortgage origination income as compared to $803,000 during the six month period ended June 30, 2016. The decline in mortgage origination income was largely the result of an increase in mortgage loan rates which reduced the demand for fixed rate mortgage loan products.

The Company’s income for services charges was $1.6 million for the six month period ended June 30, 2017, as compared to $1.4 million for the same period in 2016. The increase in service charge income is the result of the Company’s revised consumer transaction account product offerings, providing additional income on these accounts. The Company’s financial services commission was $285,000 for the six month period ended June 30, 2017 as compared to $324,000 for the six month period ended June 30, 2016. For the six month period ended June 30, 2017, gains on the sale of securities were $16,000, as compared to $343,000 for the six month period ended June 30, 2016. The decline in gains on the sale of securities is largely the result of higher short term interest rates.

The Company’s income from bank owned life insurance was $307,000 for the six month period ended June 30, 2017 compared to $161,000 for the six month period ended June 30, 2016. The increase in bank owned life insurance income is largely the result of the receipt of a death benefit payment of approximately $160,000 in March 2017.

Non-Interest Expenses. There was a $370,000 decline in totalnon-interest expenses for the six month period ended June 30, 2017 as compared to the six month period ended June 30, 2016. The most significant change innon-interest expenses was a $324,000 increase in salaries and benefits expense. The increase in salaries and benefits expense is largely the result of an $180,000 increase in the cost of health insurance benefits and a $104,000 increase in overall compensation.

During the six month period ended June 30, 2017, the Company’s professional expenses were $812,000 as compared to $640,000 for the six month period ended June 30, 2016. The increase in professional services expense is largely the result of increased legal expenses related to a shareholder demand letter and shareholder lawsuit filed by an activist shareholder. For the six month period ended June 30, 2017, other operating expenses were $1.8 million as compared to $2.3 million for the six month period ended June 30, 2016. The reduction in other expenses is attributable to several factors, including a $250,000one-time refund of other operating expenses. For the six month period ended June 30, 2017, foreclosure expenses were $114,000 as compared to $269,000 for the six month period ended June 30, 2016. The decrease in foreclosure expenses is the result of lower balances in foreclosed assets and a reduction in foreclosure activity as compared to the six month period ended June 30, 2016.

Income Taxes. The effective tax rate for the six month periods ending June 30, 2017 was 19.5% as compared to 7.0% for the six month period ended June 30, 2016. The increase in the Company’s tax rate is due to an increase in taxable net interest income. The Company’s tax rate remains well below the statutory tax rate of 34% due to the relatively high level of tax free income from a $32.3 million in tax free municipal bonds and an increase in income from Bank owned life insurance resulting from the receipt of approximately $160,000 in proceeds from the death benefit of a life insurance policy.

47

Comparison of Operating Results for the Three Month Periods Ended June 30, 2017 and June 30, 2016.

Net Income. The Company’s net income was $1,141,000 for the three month period ended June 30, 2017, as compared to net income of $304,000 for the three month period ended June 30, 2016. The improved level of net income for the three month period ended June 30, 2017 as compared to the three month period ended June 30, 2016 was largely the result of growth in the average balance of loans, a $376,000 reduction innon-interest expenses and $406,000 decline in provision for loan loss expense.

Net Interest Income. Net interest income for the three month period ended June 30, 2017 was $7.0 million, compared to $6.4 million for the three month period ended June 30, 2016. The increase in net interest income for the three month period ended June 30, 2017 as compared to June 30, 2016 was largely due to the $67.5 million increase in the average balance of loans outstanding. For the three month period ended June 30, 2017, the growth in the average balance of loans outstanding as compared to three month period ended June 30, 2016 helped to offset a decline in the average yield and the average balance of taxable and tax free securities.

For the three month period ended June 30, 2017, the average yield on loans was 4.48%, as compared to 4.43% for the three month period ended June 30, 2016. For the three month period ended June 30, 2017, income on taxable securities and tax free securities was $1.2 million and $280,000, respectively. Income on taxable securities and tax free securities was $1.2 million and $340,000 for the three month period ended June 30, 2016, respectively. For the three month period ending June 30, 2017, the tax equivalent yield on taxable and tax free securities were 2.61% and 5.09%, respectively, as compared to 2.39% and 5.05% for the three month period ended June 30, 2016, respectively.

For the three month periods ended June 30, 2017 and June 30, 2016, the Company’s cost of interest bearing liabilities was 0.84% and 0.77%, respectively. For the three month periods ended June 30, 2017 and June 30, 2016, the Company’s net interest margin was 3.39% and 3.28%, 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 June 30, 2017 and June 30, 2016. 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 asnon-accrual, net of the allowance for loan losses. The table adjuststax-free investment income by $139,000 for the three month period ended June 30, 2017 and $169,000 for the three month period ended June 30, 2016, for a tax equivalent rate using a cost of funds rate of 0.84%for the three month period ended June 30, 2017 and 0.77% for the three month period ended June 30, 2016. The table adjuststax-free loan income by $12,000 for the three month period ended June 30, 2017 and $6,000 for the three month period ended June 30, 2016, for a tax equivalent rate using the same cost of funds rate (Dollars in thousands):

	Average Balance 06/30/2017		Income & Expense 06/30/2017			Average Rates 06/30/2017			Average Balance 06/30/2016		Income & Expense 06/30/2016			Average Rates 06/30/2016
Loans	$	622,606	$	6,975			4.48	%	$	555,147	$	6,147			4.43	%
Taxable AFS securities		177,260		1,155			2.61	%		200,496		1,198			2.39	%
Non-taxable AFS securities		32,919		419			5.09	%		40,306		509			5.05	%
Other interest bearing deposits		5,888		21			1.43	%		9,525		12			0.50	%
Total interest earning assets		838,673		8,570			4.09	%		805,474		7,866			3.91	%
Other assets		70,359								67,697
Total assets	$	909,032							$	873,171
Retail time deposits	$	257,956		678			1.05	%	$	253,244		578			0.91	%
Brokered deposits		48,866		145			1.19	%		32,971		88			1.07	%
Interest bearing checking accounts		223,444		334			0.60	%		206,284		299			0.58	%
MMDA and savings accounts		98,317		40			0.16	%		99,054		42			0.17	%
FHLB borrowings		11,176		30			1.07	%		11,000		28			1.02	%
Repurchase agreements		39,138		119			1.22	%		42,510		139			1.31	%
Subordinated debentures		10,310		108			4.19	%		10,310		94			3.65	%
Total interest bearing liabilities		689,207		1,454			0.84	%		655,373		1,268			0.77	%
Non-interest bearing deposits		128,078								125,833
Othernon-interest bearing liabilities		3,915								3,302
Stockholders’ equity		87,832								88,663
Total liabilities and stockholders’ equity	$	909,032							$	873,171
Net interest income			$	7,116							$	6,598
Interest rate spread							3.25	%							3.14	%
Net interest margin				3.39	%							3.28	%

49

Interest Income. For the three month period ended June 30, 2017, the Company’s total interest income was $8.4 million, representing an increase of $728,000 as compared to the three month period ended June 30, 2016. For the three month periods ended June 30, 2017 and June 30, 2016, interest income on loans was $6.9 million and $6.1 million, respectively. The average balance of loans receivable increased from $555.1 million for the three month period ended June 30, 2016 to $622.6 million for the three month period ended June 30, 2017. The ratio of average interest-earning assets to average interest-bearing liabilities declined from 122.9% for the three month period ended June 30, 2016 to 121.7% for the three month period ended June 30, 2017.

Interest Expense. Interest expense increased $186,000 for the three month period ended June 30, 2017 as compared to the three month period ended June 30, 2016. For the three month period ending June 30, 2017, the Company’s interest expense on FHLB advances was $30,000, as compared to $28,000 for the three month period ended June 30, 2016. The average cost of FHLB borrowings were 1.07% for the three month period ended June 30, 2017 and 1.02% for the three month period ended June 30, 2016.

For the three month period ended June 30, 2017, the average balance of interest bearing retail time deposits increased $4.8 million to $258.0 million, as compared to $253.2 million for the three month period ended June 30, 2016. The average cost of retail time deposits for the three month periods ended June 30, 2017 and June 30, 2016 was 1.05% and 0.91%, respectively.

The average cost of brokered deposits increased from 1.07% for the three month period ended June 30, 2016 to 1.19% for the three month period ended June 30, 2017. Over the same period, the average balance of brokered deposits increased $15.9 million. For the three month period ended June 30, 2017, the Company’s total cost of deposits was 0.63% as compared to 0.55% for the three month period ended June 30, 2016.

The average balance of repurchase agreements declined from $42.5 million for the three months ended June 30, 2016 to $39.1 million for the three month period ended June 30, 2017. The average cost of repurchase agreements was 1.31% for the three months ended June 30, 2016 and 1.22% for the three month period ended June 30, 2017. For the three month period ended June 30, 2017, the Company’s subordinated debt interest expense was $108,000 as compared to $94,000 for the three month period ended June 30, 2016. The increase in the subordinated debt interest expense is the result of an increase in the three month libor rate.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $59,000 in provision for loan loss was required for the three month period ended June 30, 2017 compared to a $465,000 provision for loan loss expense for the three month period ended June 30, 2016. For the three month period ended June 30, 2017, the lower level of provision expense was the result of improving credit quality and $956,000 in loan loss recoveries during the period.

50

Non-Interest Income. There was a $134,000 decline innon-interest income in the three month period ended June 30, 2017 as compared to the three month period ended June 30, 2016. For the three month period ended June 30, 2017, other operating income was $212,000 as compared to $203,000 for the three month period ended June 30, 2016. For the three month period ended June 30, 2017, the Company earned $278,000 in mortgage origination income as compared to $435,000 during the three month period ended June 30, 2016. The decline in mortgage origination income was largely the result of an increase in mortgage loan rates which reduced the demand for fixed rate mortgage loan products.

The Company’s income for services charges was $800,000 for the three month period ended June 30, 2017, as compared to $698,000 for the same period in 2016. The increase in service charge income is the result of the Company’s revised consumer transaction account product offerings. The Company’s financial services commission was $145,000 for the three month period ended June 30, 2017 as compared to $191,000 for the three month period ended June 30, 2016. For the three month period ended June 30, 2017, gains on the sale of securities were $14,000, as compared to $52,000 for the three month period ended June 30, 2016.

Non-Interest Expenses. There was a $376,000 decline in totalnon-interest expenses for the three month period ended June 30, 2017 as compared to the three month period ended June 30, 2016. For the three month period ended June 30, 2017, salaries and benefits increased by $76,000 as compared to the three month period ended June 30, 2016. The increase in salaries and benefits expense is largely the result of an $112,000 increase in health insurance benefits due to an increase in medical insurance. For the three month period ended June 30, 2017, the Company’s professional services expense was $464,000, an increase of $159,000 as compared to the three month period ended June 30, 2016, largely the result of shareholder lawsuits and demand letters filed in the three month period ended Jun 30, 2017. For the three month period ended June 30, 2017, other operating expenses were $940,000 as compared to $1.1 million for the three month period ended June 30, 2016.

Income Taxes. The effective tax rate for the three month periods ending June 30, 2017 was 24.4% due to an increase in the Company’s taxable net interest income. For the three month period ended June 30, 2016, the Company’s effective tax rate was 4.7% due to very low levels of net income and a relatively higher level of tax free income.

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

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

51

At June 30, 2017, the Bank’s brokered deposits consisted of the following:

Issue Date	Interest Rate		Balance		Maturity Date
10/16/2015		0.85%		4,042,000		7/16/2017
7/27/2015		1.00%		1,500,000		7/27/2017
8/16/2016		0.75%		2,153,000		10/16/2017
7/22/2016		0.75%		2,070,000		11/22/2017
10/24/2016		0.80%		964,000		12/24/2017
1/3/2013		1.00%		3,030,000		1/3/2018
1/9/2015		1.20%		2,004,000		1/9/2018
7/29/2016		0.85%		1,887,000		3/29/2018
1/12/2017		1.10%		5,433,000		4/12/2018
2/15/2017		1.10%		4,986,000		5/15/2018
10/24/2016		1.00%		2,149,000		6/24/2018
1/12/2017		1.25%		5,074,000		9/12/2018
2/15/2017		1.30%		4,278,000		12/15/2018
8/16/2016		1.00%		1,008,000		2/16/2019
7/22/2016		1.00%		2,138,000		5/22/2019
7/29/2016		1.05%		2,964,000		7/29/2019
8/16/2016		1.10%		1,978,000		8/16/2019
Total			$	47,658,000

Forward-Looking Statements

This Quarterly Report on Form10-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.

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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 andpay-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, 2017 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 June 30, 2017 indicates that changes in interest rates are less likely to result in significant changes in the Company’s annual net interest income. A summary of the Company’s analysis at June 30, 2017 for the twelve month period ending June 30, 2018 is as follows:

	Down 1.00%		No change		Up 1.00%		Up 2.00%		Up 3.00%
	(Dollars in Thousands)
Net interest income	$	29,058	$	30,406	$	31,352	$	32,096	$	32,640

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

In accordance with Rule13a-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 inRule 13a-15(e) and15d-15(e) under the Exchange Act) as of the end of the quarter ended June 30, 2017.

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 six months ended June 30, 2017 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 Form10-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.

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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 June 30, 2017 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.     

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

On May 4, 2017, the Company and its directors, John Peck, Michael Woolfolk, Harry Dempsey, Ted Kinsey, Steve Hunt, Clay Smith, Thomas Miller and Richard Perkins, and a former director, Gilbert Lee, were named as defendants in a lawsuit filed in the Court of Chancery in the State of Delaware by Company stockholders, Stilwell Associates, L.P., Stilwell Activist Fund, L.P. and Stilwell Activist Investments, L.P. (collectively, the “Plaintiffs”), concerning the adoption of Article III, Section 13 of the Company’s Amended and Restated Bylaws. The Bylaw concerns qualifications for individuals to serve on the Company’s Board of Directors and qualifications for individuals that wish to nominate a candidate for the Board of Directors. The Plaintiffs seek a declaration that the Bylaw is invalid or, in the alternative, a declaration that the Bylaw does not prevent Plaintiffs from nominating candidates for director. The Plaintiffs also seek an injunction enjoining the application of the Bylaw prohibiting Plaintiffs from nominating director candidates and an order declaring that the Defendants, other than Mr. Miller, breached their fiduciary duties in adopting the Bylaw. The Plaintiffs do not seek damages. A motion to dismiss the lawsuit is pending. At this time the Company cannot predict with any certainty the outcome of the lawsuit.

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 onForm 10-K for the fiscal year ended December 31, 2016.

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

(a) Unregistered Sales of Equity Securities.

None

(b) Use of Proceeds. Not applicable

(c) Repurchase of Equity Securities

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
April 1, 2017 to April 30, 2017		—		—		1,846,829		91,857
May 1, 2017 to May 31, 2017		260	$	12.70		1,847,089		91,597
June 1, 2017 to June 30, 2017		178	$	12.75		1,847,267		91,419
Total		438	$	12.72		1,847,267		91,419

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. Exhibits

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for John E. Peck, Chief Executive Officer.
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Billy C. Duvall, Chief Financial Officer.
32.1	Certification Pursuant to Section 18 U.S.C. Section 1350 for John E. Peck, Chief Executive Officer.
32.2	Certification Pursuant to Section 18 U.S.C. Section 1350 for Billy C. Duvall, Chief Financial Officer.
101	The following materials from the Company’s quarterly report onForm 10-Q for the three and six month periods ended June 30, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Statements of Financial Condition as of June 30, 2017 (unaudited) and December 31, 2016, (ii) Consolidated Condensed Statements of Income for the three and six month periods ended June 30, 2017 and June 30, 2016 (unaudited), (iii) Consolidated Condensed Statements of Comprehensive Income (Loss) for the six month periods ended June 30, 2017 and June 30, 2016 (unaudited), (iv) Consolidated Condensed Statements of Stockholders’ Equity, for the six month periods ended June 30, 2016 and June 30, 2017 (unaudited); and (v) Consolidated Condensed Statements of Cash Flows, for the six month periods ended June 30, 2017 and June 30, 2016 (unaudited), and (iv) Notes to Consolidated Condensed Financial Statements (unaudited), tagged as blocks of text.

SIGNATURES

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

	HOPFED BANCORP, INC.
Date: August 9, 2017	/s/ John E. Peck
	John E. Peck
	President and Chief Executive Officer
Date: August 9, 2017	/s/ Billy C. Duvall
	Billy C. Duvall
	Senior Vice President, Chief Financial
	Officer and Treasurer

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