Hopfed Bancorp (HFBC) 10-Q 2018 Q1 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 March 31, 2018

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 Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒  

As of May 8, 2018, the Registrant had outstanding 6,648,221shares of the Registrant’s Common stock.

CONTENTS

HOPFED BANCORP, INC.

		PAGE
PART I.FINANCIAL INFORMATION
The unaudited consolidated condensed financial statements of the Registrant and its wholly owned subsidiaries are as follows:
Item 1.	Financial Statements
	Interim Consolidated Condensed Statements of Financial Condition as of March 31, 2018 (unaudited) and December 31, 2017		2
	Interim Consolidated Condensed Statements of Income for the Three Month Periods Ended March 31, 2018 and March 31, 2017 (unaudited)		4
	Interim Consolidated Condensed Statements of Comprehensive Income for the Three Month Periods Ended March 31, 2018 and March 31, 2017 (unaudited)		6
	Interim Consolidated Condensed Statement of Stockholders’ Equity for the Three Month Period Ended March 31, 2018 (unaudited)		7
	Interim Consolidated Condensed Statements of Cash Flows for the Three Month Periods Ended March 31, 2018 and March 31, 2017 (unaudited)		8
	Notes to Unaudited Interim Consolidated Condensed Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		45
Item 4.	Controls and Procedures		46
PART IIOTHER INFORMATION
Item 1.	Legal Proceedings		46
Item 1A.	Risk Factors		47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3.	Defaults Upon Senior Securities		47
Item 4.	Mine Safety Disclosures		47
Item 5.	Other Information		47
Item 6.	Exhibits		48
SIGNATURES			49

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Financial Condition

(Dollars in Thousands)

	March 31, 2018		December 31, 2017
	(unaudited)
Assets
Cash and due from banks	$	18,472		37,965
Interest-bearing deposits in banks		3,149		7,111
Cash and cash equivalents		21,621		45,076
Federal Home Loan Bank stock, at cost		4,428		4,428
Securities available for sale		180,212		184,791
Loans held for sale		2,706		1,539
Loans receivable, net of allowance for loan losses of $4,654 at March 31, 2018 and $4,826 at December 31, 2017		660,524		637,102
Accrued interest receivable		3,212		3,589
Foreclosed assets, net		3,329		3,369
Bank owned life insurance		10,439		10,368
Premises and equipment, net		22,619		22,700
Deferred tax assets		2,127		1,764
Other assets		2,748		2,784
Total assets	$	913,965		917,510
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing accounts	$	139,093		136,197
Interest-bearing accounts
Checking accounts		219,483		208,496
Savings and money market accounts		101,153		104,347
Other time deposits		287,077		304,969
Total deposits		746,806		754,009
Advances from Federal Home Loan Bank		25,000		23,000
Repurchase agreements		41,792		38,353
Subordinated debentures		10,310		10,310
Advances from borrowers for taxes and insurance		780		808
Accrued expenses and other liabilities		2,524		3,618
Total liabilities		827,212		830,098

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

2

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Financial Condition, Continued

(Dollars in Thousands)

	March 31, 2018			December 31, 2017
	(unaudited)
Stockholders’ equity
Preferred stock, par value $0.01 per share; authorized - 500,000 shares; no shares issued and outstanding at March 31, 2018 and December 31, 2017		—			—
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,988,983 issued and 6,648,589 outstanding at March 31, 2018 and 7,976,131 issued and 6,637,711 outstanding at December 31, 2017		80			80
Additionalpaid-in-capital		58,875			58,825
Retained earnings		51,957			51,162
Treasury stock, at cost (1,340,394 shares at March 31, 2018 and 1,338,360 shares at December 31, 2017)		(16,684	)		(16,655	)
Unearned Employee Stock Ownership Plan (“ESOP”) shares, at cost (423,675 shares at March 31, 2018 and 434,548 share at December 31, 2017)		(5,758	)		(5,901	)
Accumulated other comprehensive income		(1,717	)		(99	)
Total stockholders’ equity		86,753			87,412
Total liabilities and stockholders’ equity	$	913,965			917,510

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

3

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Income

(Dollars in Thousands)

(Unaudited)

	For the Three Month Periods Ended March 31,
	2018		2017
Interest and dividend income:
Loans		7,477		6,736
Investment in securities, taxable		1,079		1,118
Nontaxable securities available for sale		213		283
Interest-bearing deposits		29		23
Total interest and dividend income		8,798		8,160
Interest expense:
Deposits		1,244		1,167
FHLB borrowings		92		32
Repurchase agreements		154		103
Subordinated debentures		122		104
Total interest expense		1,612		1,406
Net interest income		7,186		6,754
Provision for loan losses		68		291
Net interest income after provision for loan losses		7,118		6,463
Non-interest income:
Service charges		706		804
Merchant card		308		302
Mortgage origination revenue		319		334
Gain on sale of securities		27		2
Income from bank owned life insurance		71		235
Income from financial services		138		140
Other operating income		175		479
Totalnon-interest income		1,744		2,296

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 March 31,
	2018			2017
Non-interest expenses:
Salaries and benefits		4,117			4,236
Occupancy		782			775
Data processing		784			764
State deposit tax		169			231
Professional services		466			348
Advertising		308			381
Foreclosure, net		(6	)		108
Other		920			846
Totalnon-interest expense		7,540			7,689
Income before income tax expense		1,322			1,070
Income tax expense		196			135
Net income		1,126			935
Earnings per share:
Basic	$	0.18		$	0.15
Diluted	$	0.18		$	0.15
Dividend per share	$	0.05		$	0.04
Weighted average shares outstanding - basic		6,188,413			6,218,706
Weighted average shares outstanding - diluted		6,188,413			6,218,706

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

5

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Comprehensive Income (Loss)

(Dollars in Thousands)

(Unaudited)

	For the Three Month Periods Ended March 31,
	2018			2017
Net income	$	1,126			935
Other comprehensive income, net of tax:
Unrealized gain (loss) onnon-other than temporary impaired investment securities available for sale, net of taxes of $486 and ($121) for the three month periods ended March 31, 2018 and March 31, 2017, respectively.		(1,830	)		235
Unrealized gain (loss) on OTTI securities, net of taxes of ($61) and $29 for the three month periods ended March 31, 2018 and March 31, 2017.		233			(57	)
Reclassification adjustment for gains included in net income, net of taxes of $6 and $1 for the three month periods ended March 31, 2018 and March 31, 2017, respectively.		(21	)		(1	)
Total other comprehensive income (loss)		(1,618	)		177
Comprehensive income (loss)	($	492	)		1,112

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

6

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statement of Stockholders’ Equity

For the Three Month Period Ended March 31, 2018

(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 December 31, 2017			6,637,771		$	80		58,825		51,162			(16,655	)		(5,901	)		(99	)		87,412
Restricted stock awards			12,852			—		—		—			—			—			—			—
Net income	��		—			—		—		1,126			—			—			—			1,126
Repurchase of treasury stock			(2,034	)		—		—		—			(29	)		—			—			(29	)
ESOP shares committed to be released			—			—		—		—			—			143			—			143
Change in price of ESOP shares			—			—		20		—			—			—			—			20
Compensation expense, restricted stock awards			—			—		30		—			—			—			—			30
Net change in unrealized gain on securities available for sale, net of income taxes of $431			—			—		—		—			—			—			(1,618	)		(1,618	)
Cash dividend declared to common shareholders			—			—		—		(331	)		—			—			—			(331	)
Balance March 31, 2018			6,648,589		$	80		58,875		51,957			(16,684	)		(5,758	)		(1,717	)		86,753

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

7

HOPFED BANCORP, INC.

Interim Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

	For the Three Month Periods Ended March 31,
	2018			2017
Cash flows from operating activities:
Net cash provided by operating activities	$	960			3,180
Cash flows from investing activities:
Proceeds from sales, calls and maturities of securities available for sale		7,013			15,598
Purchase of securities available for sale		(4,210	)		(13,728	)
Net increase in loans		(24,922	)		(11,528	)
Proceeds from sale of foreclosed assets		78			329
Proceeds from sale of premises and equipment		—			—
Purchase of premises and equipment		(222	)		(70	)
Net cash used in investing activities		(22,263	)		(9,399	)
Cash flows from financing activities:
Net increase in demand deposits		10,689			14,100
Net (decrease) increase in time and other deposits		(17,892	)		18,761
(Decrease) increase in advances from borrowers for taxes and insurance		(28	)		101
Advances from Federal Home Loan Bank		12,000			22,000
Repayment of advances from Federal Home Loan Bank		(10,000	)		(22,000	)
Net increase (decrease) in repurchase agreements		3,439			(2,163	)
Cash used to repurchase treasury stock		(29	)		(9	)
Dividends paid on common stock		(331	)		(249	)
Net cash provided by (used in) financing activities		(2,152	)		30,541
Increase (decrease) in cash and cash equivalents		(23,455	)		24,322
Cash and cash equivalents, beginning of period		45,076			25,749
Cash and cash equivalents, end of period	$	21,621		$	50,071
Supplemental disclosures of cash flow information:
Interest paid		1,640			1,396
Income taxes paid		—			—
Supplemental disclosures ofnon-cash investing and financing activities:
Loans charged off		275			239
Foreclosures of loans during period		25			43
Net unrealized gains (losses) on investment securities classified as available for sale		(2,049	)		268
Increase (decrease) in deferred tax asset related to unrealized gains losses investments		431			(91	)
Dividends declared and payable		353			288
Issuance of restricted common stock		145			—

See accompanying Notes to Unaudited Interim Consolidated Condensed Financial Statements.

8

NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1)    BASIS OF PRESENTATION

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

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

The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to 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 presentation have been included. The results of operations and other data for the three month period ended March 31, 2018 are not necessarily indicative of results that may be expected the entire fiscal year ending December 31, 2018.

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, 2017. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2017 Consolidated Financial Statements.

9

(2)    EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common stock shares outstanding. Diluted EPS is computed by dividing net income by the weighted average number of common stock shares outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period. For the three month periods ended March 31, 2018 and March 31, 2017, the Company has excluded all unearned shares held by the ESOP.

	For the three month Periods Ended March 31,
	2018		2017
Basic EPS:
Net income	$	1,126,000	$	935,000
Average common shares outstanding		6,188,413		6,218,706
Earnings per share	$	0.18	$	0.15
Diluted EPS
Net income	$	1,126,000	$	935,000
Average common shares outstanding		6,188,413		6,218,706
Dilutive effect of stock options		—		—
Average diluted shares outstanding		6,188,413		6,218,706
Earnings per share, diluted	$	0.18	$	0.15

10

(3)    SECURITIES

The carrying amount of securities and their estimated fair values at March 31, 2018 and December 31, 2017 were as follows:

	March 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Restricted:
FHLB stock	$	4,428		—		—			4,428
Available for sale:
U.S. Agency securities	$	81,263		241		(1,358	)		80,146
Taxable municipal bonds		1,277		1		(5	)		1,273
Tax free municipal bonds		26,412		441		(185	)		26,668
Trust preferred securities		1,655		325		—			1,980
Mortgage backed securities		71,772		113		(1,740	)		70,145
	$	182,379		1,121		(3,288	)		180,212

	December 31, 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		84,210		536		(653	)		84,093
Taxable municipal bonds		1,279		5		(1	)		1,283
Tax free municipal bonds		26,412		637		(83	)		26,966
Trust preferred securities		1,650		35		—			1,685
Mortgage-backed securities		71,389		201		(826	)		70,764
	$	184,940		1,414		(1,563	)		184,791

11

The scheduled maturities of debt securities available for sale at March 31, 2018 were as follows:

	Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Due within one year	$	3,103	$	3,123
Due in one to five years		29,802		29,394
Due in five to ten years		16,013		15,885
Due after ten years		7,226		7,643
		56,144		56,045
Amortizing agency bonds		54,463		54,022
Mortgage-backed securities		71,772		70,145
Total securities available for sale	$	182,379	$	180,212

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

	Less than 12 months					12 months or longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(Dollars in Thousands)
Available for sale
U.S. Agency securities	$	50,671		(1,046	)		10,343		(312	)		61,014		(1,358	)
Taxable municipal bonds		515		(5	)		—		—			515		(5	)
Tax free municipal bonds		6,810		(140	)		900		(45	)		7,710		(185	)
Mortgage-backed securities		43,853		(976	)		20,975		(764	)		64,828		(1,740	)
Total available for sale	$	101,849		(2,167	)		32,218		(1,121	)		134,067		(3,288	)

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2017 were as follows:

	Less than 12 months					12 months or longer					Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
	(Dollars in Thousands)
Available for sale
U.S. Agency securities	$	41,501		(431	)		9,846		(222	)		51,347		(653	)
Taxable municipal bonds		521		(1	)		—		—			521		(1	)
Tax free municipal bonds		4,860		(51	)		913		(32	)		5,773		(83	)
Mortgage-backed securities		40,441		(289	)		21,566		(537	)		62,007		(826	)
Total available for sale	$	87,323		(772	)		32,325		(791	)		119,648		(1,563	)

12

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

At March 31, 2018, the Company has 98securities with unrealized losses. The losses for all securities are considered to be a direct result of the effect that the prevailing interest rate environment had on the value of debt securities and are not related to the credit worthiness of the issuers. Furthermore, the Company has the intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of March 31, 2018.

At March 31, 2018 and December 31, 2017, securities with a book value of approximately $113.3 million and $119.8 million and a market value of approximately $113.8 million and $118.0 million, respectively, were pledged to various municipalities for deposits in excess of FDIC limits as required by law. At March 31, 2018 and December 31, 2017, securities with a market value of $41.8 million and $38.4 million, respectively, were sold to customers as part of overnight repurchase agreements.

(4)    LOANS

The Company uses the following loan segments as described below:

• One-to-four family first mortgages 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 to 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 has balloon maturity. Multi-family loans have amortization terms of up to twenty years and are under-written under the Company’s commercial loan underwriting guidelines.

13

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

• Land loans consist of properties currently under development, land held for future development and land held for recreational purposes. Land loans used for recreational purposes are amortized for twenty years and typically carry a fixed rate of interest 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.

• 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.

14

Set forth below is selected data relating to the composition of the loan portfolio by type of loan at March 31, 2018 and December 31, 2017.

	March 31, 2018			December 31, 2017
	(Dollars in Thousands)
Real estate loans:
One-to-four family first mortgages	$	167,947		$	163,565
Home equity lines of credit		34,261			35,697
Junior liens		1,181			1,184
Multi-family		37,977			37,445
Construction		40,484			30,246
Land		9,096			14,873
Non-residential real estate		234,900			224,952
Farmland		34,830			36,851
Total mortgage loans		560,676			544,813
Consumer loans		8,514			8,620
Commercial loans		96,527			88,938
Total other loans		105,041			97,558
Total loans		665,717			642,371
Deferred loan fees, net of cost		(539	)		(443	)
Less allowance for loan losses		(4,654	)		(4,826	)
Total loans, net	$	660,524		$	637,102

Although the Company has a diversified loan portfolio, 84.2% and 84.8% of the portfolio was concentrated in loans secured by real estate at March 31, 2018 and December 31, 2017, respectively. At March 31, 2018 and December 31, 2017, the majority of these loans are located within the Company’s general operating area.

15

Risk Grade Classifications

The Company utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, each loan is graded based 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.

16

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

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

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

17

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

	Balance 12/31/2017		Charge off 2018			Recovery 2018		Provision 2018			Ending Balance 12/31/2017
One-to-four family mortgages		747		(6	)		3		68			812
Home equity line of credit		189		—			2		(2	)		189
Junior liens		5		—			—		1			6
Multi-family		314		—			—		1			315
Construction		161		—			—		95			256
Land		1,223		—			—		(520	)		703
Non-residential real estate		789		—			4		66			859
Farmland		367		—			1		29			397
Consumer loans		184		(69	)		23		94			232
Commercial loans		847		(200	)		2		236			885
		4,826		(275	)		35		68			4,654

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, 2017:

	Balance 12/31/2016		Charge offs 2017			Recoveries 2017		Provision 2017			Ending Balance 12/31/2017
	(Dollars in Thousands)
One-to-four family  mortgages	$	852		(66	)		13		(52	)		747
Home equity line of credit		260		—			12		(83	)		189
Junior liens		8		—			4		(7	)		5
Multi-family		412		—			417		(515	)		314
Construction		277		—			—		(116	)		161
Land		1,760		(2,608	)		559		1,512			1,223
Farmland		778		—			10		(421	)		367
Non-residential real estate		964		—			16		(191	)		789
Consumer loans		208		(261	)		87		150			184
Commercial loans		593		(224	)		278		200			847
Total	$	6,112		(3,159	)		1,396		477			4,826

18

The table below presents past due andnon-accrual balances, excluding loan fees of $539,000, at March 31, 2018 by loan classification allocated between performing andnon-performing:

	Currently Performing		30 - 89 Days Past Due		Past due more than 90 days and Accruing		Non-accrual Loans		Special Mention		Substandard		Total
	(Dollars in Thousands)
One-to-four family mortgages		166,672		162				521		104		488		167,947
Home equity line of credit		33,706		—		—		530		—		25		34,261
Junior liens		1,177		—		—		4		—		—		1,181
Multi-family		37,977		—		—		—		—		—		37,977
Construction		39,939		—		—		—		—		545		40,484
Land		8,659		—		—		40		397		—		9,096
Non-residential real estate		226,036		206		—		—		1,370		7,288		234,900
Farmland		33,438		—		—		111		1,281		—		34,830
Consumer loans		8,038		39		—		2		0		435		8,514
Commercial loans		91,025		25		—		796		1,339		3,342		96,527
Total		646,667		432		—		2,004		4,491		12,123		665,717

The table below presents past due andnon-accrual balances, excluding loan fees of $443,000, at December 31, 2017 by loan classification allocated between performing andnon-performing:

	Currently Performing		30 - 89 Days Past Due		Past due more than 90 days and Accruing		Non-accrual Loans		Special Mention		Substandard		Total
					(Dollars in Thousands)
One-to-four family mortgages	$	162,724		181		88		266		—		306		163,565
Home equity line of credit		35,285		—		—		402		—		10		35,697
Junior liens		1,180		—		—		4		—		—		1,184
Multi-family		37,445		—		—		—		—		—		37,445
Construction		30,246		—		—		—		—		—		30,246
Land		14,322		—		—		40		—		511		14,873
Non-residential real estate		216,692		209		—		—		979		7,072		224,952
Farmland		35,253		—		—		111		1,147		340		36,851
Consumer loans		8,373		3		—		3		—		241		8,620
Commercial loans		83,892		—		—		459		3,572		1,015		88,938
Total	$	625,412		393		88		1,285		5,698		9,495		642,371

At March 31, 2018, there were no loans more than 90 days past due and accruing interest. At December 31, 2017, there were $88,000 in loans more than 90 days past due accruing interest.

19

The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of March 31, 2018 and December 31, 2017 by portfolio segment and based on the impairment method.

	Commercial		Land Development / Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
	(Dollars in Thousands)
March 31, 2018:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	86		—		1		—		109		196
Collectively evaluated for impairment		799		959		1,570		1,007		123		4,458
Total ending allowance balance	$	885		959		1,571		1,007		232		4,654
Loans:
Loans individually evaluated for impairment	$	3,823		505		5,439		252		434		10,453
Loans collectively evaluated for impairment		92,704		49,075		302,268		203,137		8,080		655,264
Total ending loans balance	$	96,527		49,580		307,707		203,389		8,514		665,717

	Commercial		Land Development / Construction		Commercial Real Estate		Residential Real Estate			Consumer		Total
	(Dollars in Thousands)
December 31, 2017:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	233		—		2		—			54		289
Collectively evaluated for impairment		614		1,384		1,468		941			130		4,537
Total ending allowance balance	$	847		1,384		1,470		941	��		184		4,826
Loans:
Loans individually evaluated for impairment	$	1,416		515		7,532		257			217		9,937
Loans collectively evaluated for impairment		87,522		44,604		291,716		200,189			8,403		632,434
Total ending loans balance	$	88,938		45,119		299,248		200,446			8,620		642,371

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

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

20

Loans by classification type and credit risk indicator at March 31, 2018 and December 31, 2017 were as follows:

March 31, 2018	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	166,937		—		1,010		—		167,947
Home equity line of credit		33,706		—		555		—		34,261
Junior liens		1,181		—		—		—		1,181
Multi-family		37,977		—		—		—		37,977
Construction		40,484		—		—		—		40,484
Land		8,154		397		545		—		9,096
Non-residential real estate		226,242		1,370		7,288		—		234,900
Farmland		33,438		1,281		111		—		34,830
Consumer loans		8,076		—		438		—		8,514
Commercial loans		90,949		1,443		4,135		—		96,527
Total	$	647,144		4,491		14,082		—		665,717

December 31, 2017	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	162,993		—		572		—		163,565
Home equity line of credit		35,285		—		412		—		35,697
Junior liens		1,184		—		—		—		1,184
Multi-family		37,445		—		—		—		37,445
Construction		30,246		—		—		—		30,246
Land		14,318		—		555		—		14,873
Non-residential real estate		216,901		979		7,072		—		224,952
Farmland		35,253		1,147		451		—		36,851
Consumer loans		8,376		—		244		—		8,620
Commercial loans		83,892		3,572		1,474		—		88,938
Total	$	625,893		5,698		10,780		—		642,371

21

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

	At March 31, 2018						For the three month period ended March 31, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in Thousands)
Impaired loans with no specific allowance
One-to-four family mortgages	$	1,010		1,010		—		634		13
Home equity line of credit		555		555		—		278		6
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		545		545		—		530		9
Non-residential real estate		7,287		7,287		—		7,187		77
Farmland		111		111		—		278		—
Consumer loans		4		4		—		2		—
Commercial loans		3,996		4,196		—		2,436		61
Total		13,508		13,708		—		11,345		166
Impaired loans with a specific allowance
One-to-four family  mortgages		—		—		—		—		—
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		—		—		—		—		—
Non-residential real estate		1		1		1		2		—
Farmland		—		—		—		—		—
Consumer loans		434		434		109		326		—
Commercial loans		139		139		86		340		—
Total		574		574		196		668		—
Total	$	14,082		14,282		196		12,013		166

22

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2017 were as follows:

	At December 31, 2017						For the year ended December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
					(Dollars in Thousands)
Impaired loans with no specific allowance
One-to-four family mortgages	$	257		257		—		1,235		35
Home equity line of credit		—		—		—		447		26
Junior liens		—		—		—		6		—
Multi-family		—		—		—		1,135		—
Construction		—		—		—		—		—
Land		515		515		—		837		44
Non-residential real estate		7,086		7,086		—		8,979		395
Farmland		444		444		—		1,094		35
Consumer loans		—		—		—		8		2
Commercial loans		875		875		—		1,571		46
Total		9,177		9,177		—		15,312		583
Impaired loans with a specific allowance
One-to-four family mortgages		—		—		—		—		—
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		—		—		—		4,006		—
Non-residential real estate		2		2		2		88		2
Farmland		—		—		—		195		—
Consumer loans		217		217		54		248		—
Commercial loans		541		541		233		479		13
Total		760		760		289		5,016		15
Total impaired loans	$	9,937		9,937		289		20,328		598

23

At March 31, 2018 and December 31, 2017,non-accrual loans totaled $2.0 million and $1.3 million, respectively. Allnon-accrual loans with the exception of one junior lien loan are classified as substandard. At March 31, 2018, the Company is not obligated to lend additional funds to borrowers who have been placed innon-accrual status. There are no loans accruing interest that are past due more than 90 days at March 31, 2018. At December 31, 2017, there was one loan, totaling $88,000 that was past due more than 90 days and accruing interest. At March 31, 2018 and December 31, 2017, the Company’s balances innon-accrual loans by loan type is as follows:

	March 31, 2018		December 31, 2017
	(Dollars in Thousands)
One-to-four family  mortgages		521		266
Home equity line of credit		530		402
Junior Lien		4		4
Land		40		40
Farmland		111		111
Non-residential real estate		—		—
Consumer loans		2		3
Commercial loans		796		459
Totalnon-accrual loans		2,004		1,285

The following table provides the number of loans remaining in each category as of March 31, 2018 and December 31, 2017 that the Company had previously modified in a TDR:

	Number of Loans		Pre-Modification Outstanding Record Investment		Post Modification Outstanding Record Investment, net of related allowance
March 31, 2018
Non-residential real estate		2	$	3,163,435		3,163,435
Commercial		1		91,683		91,683
December 31, 2017
Non-residential real estate		2		3,163,435		3,163,435

For the three month period ended March 31, 2018, the Company identified one additional commercial loan as a TDR. The loan is secured by equipment and inventory. The TDR classification is the result of the borrower’s declining financial condition, prompting the Company to lengthen the amortization period of the loan to twelve years. The length of the current amortization period is outside of our loan policy and results in a TDR classification. The loan has a one year balloon feature and the borrower’s financial condition will bere-evaluated at that time. There were no loans as of March 31, 2018 that have been modified as TDRs and that subsequently defaulted within twelve months on their modified terms. At March 31, 2018, there are no commitments to lend additional funds to any borrower whose loan terms have been modified in a TDR.

24

(5)    FORECLOSED ASSETS

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

For the three month period ended March 31, 2018, the Company’s activity in foreclosed property included the following:

	Balance		Activity During 2018					Reduction		Gain (Loss)		Balance
	12/31/2017		Foreclosure		Sales			in Values		on Sale		3/31/2018
	(Dollars in Thousands)
One-to-four family  mortgages	$	169		25		(78	)		—		13	$	129
Land		3,200		—		—			—		—		3,200
Total	$	3,369		25		(78	)		—		13	$	3,329

The Company’s activity in foreclosed assets for the twelve month period ended December 31, 2017 is as follows:

	Balance 12/31/2016		Activity During 2017					Reduction in Values			Gain (Loss) on Sale			Balance 12/31/2017
			Foreclosure		Sales
			(Dollars in Thousands)
One-to-four family  mortgages	$	135		1,069		(1,182	)		—			147		$	169
HELOC		28		—		(18	)		(10	)		—			—
Land		—		3,200		—			—			—			3,200
Multi-family		1,775		—		(1,761	)		—			(14	)		—
Non-residential		459		43		(500	)		—			(2	)		—
Total	$	2,397		4,312		(3,461	)		(10	)		131		$	3,369

25

(6)    FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

The 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 in banks

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.

26

Loans receivable

The fair values 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 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.

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 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 March 31, 2018 are summarized below:

Description	Total carrying value in the consolidated balance sheet at 3/31/2018		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Securities available for sale
U.S. Agency securities	$	80,146		—		80,146		—
Taxable municipals		26,668		—		26,668		—
Tax-free municipals		1,273		—		1,273		—
Trust preferred securities		1,980		—		—		1,980
Mortgage backed securities		70,145		—		70,145		—
Total	$	180,212		—		178,232		1,980

The assets and liabilities measured at fair value on a recurring basis at December 31, 2017 are summarized below:

Description	Total carrying value in the consolidated balance sheet at 12/31/2017		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Securities available for sale
U.S. Agency securities		84,093		—		84,093		—
Taxable municipals		1,283		—		1,283		—
Tax-free municipals		26,966		—		26,966		—
Trust preferred securities		1,685		—		—		1,685
Mortgage backed securities		70,764		—		70,764		—
Total	$	184,791		—		183,106		1,685

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

Description	Total carrying value in the consolidated balance sheet at March 31, 2018		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Assets
Foreclosed assets	$	3,329		—		—	$	3,329
Impaired loans, net of allowance of $196	$	378		—		—	$	378
The assets and liabilities measured at fair value on anon-recurring basis are summarized below for December 31, 2017:
Description	Total carrying value in the consolidated balance sheet at December 31, 2017		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
			(Dollars in Thousands)
Assets
Foreclosed assets	$	3,369		—		—	$	3,369
Impaired loans, net of allowance of $289	$	473		—		—	$	473

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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 March 31, 2018 and December 31, 2017:

Level 3 Significant Unobservable Input Assumptions
	Fair Value		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs
			(Dollars in Thousands)
March 31, 2018
Assets measured on anon-recurring basis
Foreclosed assets	$	3,329	Discount to appraised value of collateral. Auction results	Appraisal comparability adjustments		5% to 10%
Impaired loans		574	Discount to appraised value of collateral	Appraisal comparability adjustments		10% to 25%
Asset measured on a recurring basis
Trust preferred securities		1,980	Discounted cash flow Spread to Libor swap curve	Compare to quotes for sale when available		One month libor 5% to 8%
December 31, 2017
Assets measured on anon-recurring basis
Foreclosed assets	$	3,369	Discount to appraised value of collateral	Appraisal comparability adjustments		30% to 55%
Impaired loans		760	Discount to appraised value of collateral	Appraisal comparability adjustments		10% to 15%
Asset measured on a recurring basis
Trust preferred securities		1,685	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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The estimated fair values of financial instruments were as follows at March 31, 2018:

	Carrying Amount		Estimated Fair Value		In Active Markets for Identical Assets Level 1		Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
	(Dollars in Thousands)
Financial Assets:
Cash and due from banks	$	18,472		180,472		180,472		—		—
Interest-bearing deposits		3,149		3,149		3,149		—		—
Securities available for sale		180,212		180,212		—		178,232		1,980
Federal Home Loan Bank stock		4,428		4,428		—		—		4,428
Loans held for sale		2,706		2,706		—		2,706		—
Loans receivable		665,178		633,671		—		—		633,671
Accrued interest receivable		3,212		3,212		—		—		3,212
Financial liabilities:
Deposits		746,806		745,508		—		745,508		—
Advances from borrowers for taxes and insurance		780		780		—		781		—
Advances from Federal Home Loan Bank		25,000		24,795		—		24,795		—
Repurchase agreements		41,792		41,792		—		41,792		—
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, 2017:

	Carrying		Estimated Fair		Quoted Prices In Active Markets for Identical Assets		Using Significant Other Observable Inputs		Significant Unobservable Inputs
	Amount		Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Financial Assets:
Cash and due from banks	$	37,965		37,965		37,965		—		—
Interest-bearing deposits		7,111		7,111		7,111		—		—
Securities available for sale		184,791		184,791		—		183,106		1,685
Federal Home Loan Bank stock		4,428		4,428		—		—		4,428
Loans held for sale		1,539		1,539		—		1,539		—
Loans receivable		637,102		615,265		—		—		—
Accrued interest receivable		3,589		3,589		—		—		3,589
Financial liabilities:
Deposits		754,009		754,510		—		754,510		—
Advances from borrowers for taxes and insurance		808		808		—		808		—
Advances from Federal Home Loan Bank		23,000		22,849		—		22,849		—
Repurchase agreements		38,353		38,353		—		38,353		—
Subordinated debentures		10,310		10,099		—		—		10,099

(7)    EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued Accounting Standards Update (“ASU”)2014-09, “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 deferred the effective date reporting periods beginning after December 15, 2017. The implementation of ASC Topic 605 did not have a material impact 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 was effective on January 1, 2018 and did not have a material effect 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. We are currently evaluating the potential impact of ASU2016-02 on the Company’s Consolidated Financial Statements.

ASU2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additionalpaid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additionalpaid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additionalpaid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. ASU2016-09 was effective on January 1, 2017. The implementation of ASU2016-09 did not have a material effect 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 FASB said. The accounting changes apply to instruments recorded on balance sheets at their historical cost, although there are some limited changes to the accounting for debt instruments classified asavailable-for-sale. The accounting board added that the write-downs will be based on historical information, current business conditions, and forecasts, and it expects the forecasts to improve the loss estimates on financial assets that are losing value. The board also said the techniques that are employed today to write down loans and other instruments can still be used, although it expects the variables for calculating the losses to change. ASU2016-13 will become effective for fiscal years beginning after December 15, 2020, 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. The Company is currently evaluating the potential impact of ASU2016-13.

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 is permitted with retrospective application. The application of ASU2016-15 did not have a material impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” (“ASU2017-01”) to improve such definition and, as a result, assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or as business combinations. The definition of a business impacts many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU2017-01 was effective for the Company on January 1, 2018 and is to be applied under a prospective approach. The Company expects the adoption of this new guidance to impact the determination of whether future acquisitions are considered business combinations.

ASU2017-08,“Receivables – Nonrefundable Fees and Other Cost” (Topic 310)– amends the amortization period for certain purchased callable debt securities held at a premium. Prior to the issuance of this guidance, premiums were amortized as an adjustment of yield over the contractual life of instrument. ASU2017-08 premiums on purchased callable debt securities that have an explicit,non-contingent call features that are callable at fixed prices to be amortized to the earliest call date. There are no accounting changes for securities held at a discount. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU2017-08 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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ASU2017-09“Compensation – Stock Compensation (Topic 718) – clarifies when changes to the terms or conditions of a share-based payment must be accounted for as modifications. Under AUS2017-09, an entity should account for changes to the terms or conditions of a share-based payment unless all of the following are met:

• The fair value of the modified award is the same as the fair value of the original award immediately before modification,

• The vesting conditions of the modified award is the same as the vesting conditions value of the original award immediately before modification, and

• The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before modification.

ASU2017-09 was effective for the Company on January 1, 2018 and did not have a material impact on our consolidated financial statements.

ASU2017-12“Derivatives and Hedging (Topic 815)amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information convey to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU2017-12 will be effective for the Company on January 1, 2019 and is not expected to have a significant impact 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.

ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” Issued in February 2018, ASU 2018-02 seeks to help entities reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (Tax Reform Act), enacted on December 22, 2017. ASU 2018-02 was issued in response to concerns regarding current guidance in GAAP that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date, even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income, rather than net income, and as a result the stranded tax effects would not reflect the appropriate tax rate. The amendments of ASU 2018-02 allow an entity to make a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects, which is the difference between the historical corporate income tax rate of 34.0% and the newly enacted corporate income tax rate of 21.0%. ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 31, 2018; however, public business entities are allowed to early adopt the amendments of ASU 2018-02 in any interim period for which the financial statements have not yet been issued. The amendments of ASU 2018-02 may be applied either at the beginning of the period (annual or interim) of adoption or retrospectively to each of the period(s) in which the effect of the change in the U.S. federal corporate tax rate in the Tax Reform Act is recognized. The Company is currently reviewing the impact of the adoption of ASU 2018-02 on its Consolidated Financial Statements.

(8)    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 Company’s effective tax rate changed from 34% to 21% effective January 1, 2018 as a result of the Tax Cut and Jobs Act of 2017. The effective tax rate differs from the statutory federal rate of 21% and Tennessee excise rate of 6.5% due to investments in qualified municipal securities, bank owned life insurance, income apportioned to Kentucky and 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 March 31, 2018, the Company’s balance sheet did not include any equity investment in Fort Webb. The Company has other investments that produce both tax credits and depreciation expense that may be used to offset net income.

• At March 31, 2018, the Company has $10.4 million in Bank owned life insurance policies. The income generated from these policies increase the cash flow of the policies on a tax free basis. Life insurance proceeds are paid upon the death of a covered party. These proceeds, netted against the current cash value of the policy, result in tax free income to the Company. At March 31, 2018, the Company’s investment portfolio includes $26.7 million of tax free municipal securities. Interest income on this portfolio, after netting out a disallowance for interest expense attributable to this portfolio, is tax exempt.

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(9)    ESOP

Substantially all of the Company’s employees who are at least 21 years old and have one year of employment with the Company participate in the 2015 HopFed Bancorp, Inc. Employee Stock Ownership Plan (“ESOP”). The ESOP purchased 600,000 shares of the Company’s common stock from the Company on March 2, 2015 at $13.14 per share. The ESOP borrowed $7.9 million from 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.

The Company made its third ESOP loan payment in December 2017. At March 31, 2018 and December 31, 2017, shares held by the ESOP were as follows:

	March 31, 2018		December 31, 2017
Accrued for allocation to participants		10,873		—
Earned ESOP shares		165,686		165,686
Unearned ESOP shares		423,675		434,548
Total ESOP shares		600,234		600,234
Fair value of unearned shares	$	6,164,471	$	6,127,127

(10)    COMMITMENTS AND CONTINGENCIES

At March 31, 2018, the Bank had $33.1 million in outstanding commitments on revolving home equity lines of credit, $20.5 million in outstanding commitments on revolving personal lines of credit and $48.4 million in commitments to originate loans and undisbursed commitments on commercial lines of credit of $62.9 million. At March 31, 2018, the Company had $293,000 in standby letters of credit outstanding.

At March 31, 2018, the Company has $40.9 million in times deposits greater than $100,000 but less than $250,000 that are schedule to mature in one year and $61.9 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 March 31, 2018 and December 31, 2017, the Bank has pledged all eligible1-4 family first mortgages. At March 31, 2018 and December 31, 2017, the

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Bank has outstanding borrowings of $25.0 million and $23.0 million, respectively, from the FHLB. A schedule of FHLB borrowings at March 31, 2018 is provided below:

Outstanding Balance		Rate			Maturity
	2,000,000		1.82	%		Overnight
	6,000,000		1.18	%		7/6/2018
	7,000,000		1.55	%		1/10/2019
	5,000,000		1.73	%		1/10/2020
	5,000,000		1.92	%		10/6/2020
	$25,000,000		1.59	%

A schedule of FHLB borrowings at December 31, 2017 is provided below:

Outstanding Balance		Rate			Maturity
	6,000,000		1.18	%		7/6/2018
	7,000,000		1.55	%		1/10/2019
	5,000,000		1.73	%		1/10/2020
	5,000,000		1.92	%		10/6/2020
	$23,000,000		1.57	%

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 March 31, 2018, securities with a book value of $39.3 million and a fair market value of $38.1 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.

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(11)    REGULATORY MATTERS

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

The capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. For 2018, the capital conservation buffer is 1.875%. 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.

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 March 31, 2018 and December 31, 2017 to which it is subject. Management believes, as of March 31, 2018 and December 31, 2017, that the Bank meets all capital adequacy requirements to which it is subject, including the phase–in requirements of Basel III.

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The Company’s consolidated capital ratios and the Bank’s actual capital amounts and ratios as of March 31, 2018 and December 31, 2017 are presented below:

	Actual					Minimum Capital Required					To be Well Capitalized for Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands, Except Percentages)
As of March 31, 2018
Tier 1 leverage capital to adjusted total assets
Company	$	96,343		10.6	%	$	36,294		4.0	%	$	45,368		5.0	%
Bank	$	93,775		10.3	%	$	36,297		4.0	%	$	45,371		5.0	%
Total capital to risk weighted assets
Company	$	100,997		15.5	%	$	52,058		8.0	%	$	65,072		10.0	%
Bank	$	98,429		15.2	%	$	51,946		8.0	%	$	64,933		10.0	%
Tier 1 capital to risk weighted assets
Company	$	96,343		14.8	%	$	39,043		6.0	%	$	52,058		8.0	%
Bank	$	93,775		14.4	%	$	38,960		6.0	%	$	51,946		8.0	%
Common equity tier 1 capital to risk weighted assets
Company	$	96,343		14.8	%	$	29,283		4.5	%		n/a		n/a
Bank	$	93,775		14.4	%	$	29,220		4.5	%	$	42,207		6.5	%
As of December 31, 2017
Tier 1 leverage capital to adjusted total assets
Company	$	95,709		10.6	%	$	36,137		4.0	%	$	45,171		5.0	%
Bank	$	95,123		10.5	%	$	36,090		4.0	%	$	45,112		5.0	%
Total capital to risk weighted assets
Company	$	100,535		16.0	%	$	50,352		8.0	%	$	62,940		10.0	%
Bank	$	99,949		15.9	%	$	50,314		8.0	%	$	62,892		10.0	%
Tier 1 capital to risk weighted assets
Company	$	95,709		15.2	%	$	37,764		6.0	%	$	50,352		8.0	%
Bank	$	95,123		15.1	%	$	37,735		6.0	%	$	50,314		8.0	%
Common equity tier 1 capital to risk weighted assets
Company	$	95,709		15.2	%	$	28,323		4.5	%		n/a		n/a
Bank	$	95,123		15.1	%	$	28,301		4.5	%	$	40,880		6.5	%

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(12)    SUBSEQUENT EVENTS

On April 10, 2018, HopFed Bancorp, Inc. (the “Company”) entered into a Standstill Agreement (the “Agreement”) with Stilwell Activist Fund, L.P., Stilwell Activist Investments, L.P., Stilwell Associates, L.P., Stilwell Value LLC and Joseph Stilwell (collectively, the “Stilwell Group”) and Mark D. Alcott. The Stilwell Group owns approximately 9.5% of the shares of the Company’s outstanding common stock.

The Agreement provides that, effective upon a meeting of the Board of Directors to be held no later than April 30, 2018, the Board will be expanded by one Board seat, and Mr. Alcott will be appointed to serve as a director of the Company in the class of directors with terms expiring at the Company’s 2019 Annual Meeting of Stockholders or until his successor is elected and qualified. Mr. Alcott will be nominated at the 2019 Annual Meeting of Stockholders to serve until the 2022 Annual Meeting of Stockholders, or until his successor is elected and qualified. Mr. Alcott also will be nominated and elected to concurrent terms on the Board of Directors of the Bank and Company. The Company appointed Mr. Alcott to its Board of Directors on April 18, 2018.

During the term of the Agreement, which is scheduled to continue through the date of that is 15 business days prior to the deadline for submission of stockholder nominations and proposals for the Company’s 2022 Annual Meeting of Stockholders (which may be extended by written agreement of the parties), the Stilwell Group and Mr. Alcott will not, among other things, solicit proxies in opposition to any recommendation or proposal of the Company’s Board of Directors, initiate or solicit stockholder proposals or seek to place any additional representatives on the Company’s Board of Directors other than Mr. Alcott (or any replacement director selected by the Stilwell Group in the event Mr. Alcott’s position as a director of the Company or the Bank is terminated during the term of the Stilwell Agreement due to his resignation, death, permanent disability or otherwise), oppose any proposal or director nomination submitted by the Board of Directors to the Company’s stockholders, vote for any nominee to, or proposal by, the Company’s Board of Directors other than those nominated, proposed or supported by the Board of Directors, seek removal of any Company or Bank director, seek to exercise any control or influence over the management of the Company or the Boards of Directors of the Company or the Bank, propose or seek to effect a merger or sale of the Company or initiate litigation against the Company (except in connection with enforcement of the Agreement). The Stilwell Group also agreed not to acquire any additional shares of the outstanding Company common stock or, without the Company’s prior written consent, sell or otherwise dispose of any interest in the Stilwell Group’s shares of Company Common Stock to any person the Stilwell Group believes, after reasonable inquiry, would be a beneficial owner after any such sale or transfer of more than 5% of the outstanding shares of the Company Common Stock.

The parties have also entered into aNon-Disclosure Agreement, in the form attached as an exhibit to the Agreement, providing that the Stilwell Group will maintain the confidentiality ofnon-public information regarding the Company or the Bank in full compliance with federal and state securities laws, which became effective upon execution of the Agreement, and will remain in effect until the date that is 15 business days prior to the deadline for submission of stockholder nominations and proposal for the Company’s 2022 Annual Meeting of Stockholders pursuant to the Company’s Certificate of Incorporation; provided, however, that the parties may agree in writing to extend the term of theNon-Disclosure Agreement.

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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, 2017.

The emphasis of this discussion is a comparison of assets, liabilities and stockholders’ equity as of March 31, 2018 to December 31, 2017, while comparing income and expenses for the three month periods ended March 31, 2018 and March 31, 2017. 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, 2017.

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

At March 31, 2018, total assets were $914.0 million, a decline of $3.5 million compared to December 31, 2017. For the three month period ended March 31, 2018, the Company’s net loan portfolio has increased $23.4 million to $660.5 million. To fund the Company’s loan growth, the Company reduced cash balances by $23.5 million in the three month period ended March 31, 2018 to $21.6 million.

At March 31, 2018, total deposits declined by $7.2 million to $746.8 million. The decline in deposit accounts is the result of lower levels of brokered deposits. At March 31, 2018, brokered deposits totaled $50.5 million, representing a decline of $10.1 million compared to December 31, 2017. At March 31, 2018, interest-bearing checking accounts totaled $219.5 million, an increase of $9.0 million compared to December 31, 2017. At March 31, 2018,non-interest bearing checking accounts totaled $139.1 million, an increase of $2.9 million compared to December 31, 2017.

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

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Comparison of Operating Results for the Three Month Periods Ended March 31, 2018 and March 31, 2017.

The Company’s net income was $1.1 million for the three month period ended March 31, 2018, compared to net income of $935,000 for the three month period ended March 31, 2017. The improved level of net income for the three month period ended March 31, 2018 compared to the three month period ended March 31, 2017 was largely the result of growth in the average balance of loans, a $149,000 reduction innon-interest expenses and a $223,000 decline in the Company’s provision for loan loss expense and a reduction in the federal tax rate.

The Company’s total interest income for the three month period ended March 31, 2018 was $8.8 million, compared to $8.2 million for the three month period ended March 31, 2017. The increase in net interest income for the three month period ended March 31, 2018 compared to March 31, 2017 was largely due to the $31.8 million increase in the average balance of loans outstanding.

For the three month period ended March 31, 2018, total interest expense was $1.6 million compared to $1.4 million for the three month period ended March 31, 2017. For the three month period ended March 31, 2018, total interest bearing liabilities were $685.1 million, representing a decline of $5.6 million for the three month period ended March 31, 2017. The increase in interest expense is largely the result of increases in short term interest rates spurred by the decision of the Open Market Committee of the Federal Reserve Board of Governors to increase its stated overnight Federal Funds (“Fed Funds”) rate. For the three month period ended March 31, 2018, the cost of average total deposits was 0.67% compared to 0.62% for the three month period ended March 31, 2017. Based on current fed funds future projections, Management anticipates that the Company’s total cost of deposits will increase by an average of three or four basis points per quarter for the remainder of 2018.

For the three month periods ended March 31, 2018 and March 31, 2017, the Company’s cost of interest bearing liabilities was 0.94% and 0.81%, respectively. In addition to increases in our cost of deposits, the interest expense on the Company’s floating rate subordinated debt has increased from $122,000 for the three month period ended March 31, 2018 from $102,000 for the three month period ended March 31, 2017 due to increases in the three month Libor rate.

For the three month period ended March 31, 2018, the Company’s tax equivalent yield on loans was 4.62% compared to 4.38% for the three month period ended March 31, 2017.For the three month period ended March 31, 2018, the Company’s tax equivalent yield on tax free municipal securities was 3.96% compared to 5.00% for the three month period ended March 31, 2017. The reduction in Company’s stated tax rate from 34% to 21% reduced our tax equivalent yield on tax free securities by 0.80% and our net interest margin by 2 basis points. For the three month periods ended March 31, 2018 and March 31, 2017, the Company’s net interest margin was 3.45% and 3.31%, respectively. The increase in net interest margin occurred as result of loan growth and increases in loan yields due to increases in the Prime Rate.

Average Balances, Yields and Interest Expenses. The table on the next page summarizes the overall effect of changes in both interest rates and the average balances of interest earning assets and liabilities for the three month periods ended March 31, 2018 and March 31, 2017. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate three month periods. Average balances for loans include loans classified asnon-accrual, net of the allowance for loan losses. On January 1, 2018, the Company’s stated tax rate decreased from 34.0% to 21.0%, reducing the tax equivalent yield on tax free loans and tax free municipal investments.

The table adjuststax-free investment income by $53,000 for the three month period ended March 31, 2018 and $141,000 for the three month period ended March 31, 2017, for a tax equivalent rate using a cost of funds rate of 0.94%for the three month period ended March 31, 2018 and 0.81% for the three month period ended March 31, 2017. The table adjuststax-free loan income by $5,000 for the three month period ended March 31, 2018 and $9,000 for the three month period ended March 31, 2017, for a tax equivalent rate using the same cost of funds rate.

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	Average Balance 3/31/2018		Income and Expense 3/31/2018		Average Rates 3/31/2018			Average Balance 3/31/2017		Income and Expense 3/31/2017		Average Rates 3/31/2017
			(Table Amounts in Thousands, Except Percentages)
Loans receivable, net	$	647,204		7,482		4.62	%		615,382		6,745		4.38	%
Taxable securities, AFS		160,582		1,079		2.69	%		176,824		1,118		2.53	%
Non-taxable securities, AFS		26,856		266		3.96	%		33,868		424		5.00	%
Other interest bearing deposits		6,030		29		1.92	%		9,260		23		0.99	%
Total interest earning assets		840,672		8,856		4.21	%		835,334		8,310		3.98	%
Other assets		69,290							73,527
Total assets	$	909,962						$	908,861
Retail time deposits		240,602		674		1.12	%		259,086		664		1.03	%
Brokered deposits		53,910		188		1.39	%		46,040		135		1.17	%
Interest bearing checking		215,352		341		0.63	%		219,696		326		0.59	%
Saving / MMDA		102,155		41		0.16	%		100,282		42		0.17	%
FHLB borrowings		23,656		92		1.56	%		13,433		32		0.95	%
Repurchase agreements		39,072		154		1.58	%		41,840		103		0.98	%
Subordinated debentures		10,310		122		4.73	%		10,310		104		4.03	%
Total interest bearing liabilities		685,057		1,612		0.94	%		690,687		1,406		0.81	%
Non-interest bearing deposits		133,412							126,809
Other liabilities		3,887							3,993
Stockholders’ equity		87,336							87,372
Total liabilities and stockholders’ equity	$	909,692							908,861
Net interest income				7,244							6,904
Net interest spread						3.27	%						3.17	%
Net interest margin						3.45	%						3.31	%

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Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $68,000 in provision for loan loss was required for the three month period ended March 31, 2018 compared to a $291,000 provision for loan loss expense for the three month period ended March 31, 2017.

Non-Interest Expenses.For the three month period ended March 31, 2018,non-interest expenses were $7.5 million compared to $7.7 million for the three month period ended March 31, 2017. For the three month period ended March 31, 2018, reduced foreclosure activity resulted in a net gain of $6,000 compared to net expenses of $108,000 for the three month period ended March 31, 2017. For the three month period ended March 31, 2018, total salaries and benefits expense declined $119,000 to $4.1 million compared to the three month period ended March 31, 2017. The Company’snon-interest expenses are typically higher in the first quarter of each year and typically are lowest in the fourth quarter of each year largely due to seasonal payroll fluctuations.

Income Taxes. The effective tax rate for the three month periods ending March 31, 2018 was 14.8% due to the reduction in the Company’s effective tax rate as a result of the Tax Cuts and Jobs Act of 2017. For the three month period ended March 31, 2017, the Company’s effective tax rate was 12.6% due to the receipt of proceeds from a bank owned life insurance policy.

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

The Bank uses brokered deposits to supplement its asset liability need for longer term deposits reasonable prices. In addition to the coupon rate listed below, brokered deposits carry an additional fee of approximately 0.25% that includes the cost of selling and servicing the deposits. The Company includes this cost as interest expense on its income statement. At March 31, 2018, the Bank’s brokered deposits consisted of the following:

Date of Issue	Coupon			Balance		Maturity
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
2/15/2018		1.50	%		3,130,000		7/16/2018
8/15/2017		1.45	%		5,854,000		8/15/2018
1/12/2017		1.25	%		5,074,000		9/12/2018
7/10/2017		1.40	%		1,079,000		10/10/2018
7/19/2017		1.50	%		2,060,000		11/19/2018
2/15/2017		1.30	%		4,278,000		12/15/2018
10/11/2017		1.55	%		5,000,000		1/11/2019
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
2/15/2018		2.20	%		3,417,000		2/15/2020
Totals		1.33	%	$	50,548,000

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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.

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 March 31, 2018 indicates that changes in interest rates are less likely to result in significant changes in the Company’s annual net interest income. A summary of the Company’s analysis at March 31, 2018 for the twelve month period ending March 31, 2019 is as follows:

	Down 1.00%		No change		Up 1.00%		Up 2.00%		Up 3.00%
			(Dollars in Thousands)
Net interest income	$	29,474	$	30,844	$	31,676	$	32,265	$	32,994

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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 in Rule13a-15(e) and15d-15(e) under the Exchange Act) as of the end of the quarter ended March 31, 2018.

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 nine months ended March 31, 2018 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.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended March 31, 2018 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.

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Item 1A. Risk Factors

There have been no material changes to our risk factors as previously disclosed in Part 1, Item 1A of our annual report on Form10-K for the fiscal year ended December 31, 2017.

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
January 1, 2018 to January 31, 2018		1,040	$	12.45		1,939,400		298,960
February 1, 2018 to February 28, 2018		786	$	14.10		1,940,186		298,174
March 1, 2018 to March 31, 2018		208	$	14.10		1,940,394		297,966
Total		2,034	$	14.14		1,940,394		297,966

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. Exhibits

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for John E. Peck, Chief Executive Officer.
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Billy C. Duvall, Chief Financial Officer.
32.1	Certification Pursuant to Section 18 U.S.C. Section 1350 for John E. Peck, Chief Executive Officer.
32.2	Certification Pursuant to Section 18 U.S.C. Section 1350 for Billy C. Duvall, Chief Financial Officer.
101	The following materials from the Company’s quarterly report on Form 10-Q for the three month period ended March 31, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Statements of Financial Condition as of March 31, 2018 (unaudited) and December 31, 2017, (ii) Consolidated Condensed Statements of Income for the three period periods ended March 31, 2018 and March 31, 2017 (unaudited), (iii) Consolidated Condensed Statements of Comprehensive Income (Loss) for the three month periods ended March 31, 2018 and March 31, 2017 (unaudited), (iv) Consolidated Condensed Statements of Stockholders’ Equity for the three month period ended March 31, 2018 (unaudited); and (v) Consolidated Condensed Statements of Cash Flows for the three month periods ended March 31, 2018 and March 31, 2017 (unaudited), and (iv) Notes to Consolidated Condensed Financial Statements (unaudited), tagged as blocks of text.

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SIGNATURES

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

	HOPFED BANCORP, INC.
Date: May 9, 2018	/s/ John E. Peck
	John E. Peck
	President and Chief Executive Officer
Date: May 9, 2018	/s/ Billy C. Duvall
	Billy C. Duvall
	Senior Vice President, Chief Financial
	Officer and Treasurer

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