10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2009

Commission file number 000-23667

HOPFED BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware	61-1322555
(State of jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4155 Lafayette Road, Hopkinsville, KY	42240
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: None.

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

Common Stock, par value $.01 per share

(Title of Class)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (subsection 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (as defined in Rule 12b-2 of the Act).

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller Reporting Company	x

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

The registrant’s voting stock is traded on the NASDAQ Stock Market. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the price ($9.69 per share) at which the stock was sold on June 30, 2009, was approximately $31,629,972. For purposes of this calculation, the term “affiliate” refers to all executive officers and directors of the registrant and all stockholders beneficially owning more than 10% of the registrant’s Common Stock.

As of the close of business on March 25, 2010, 3,598,857 shares of the registrant’s Common Stock were outstanding.

Documents Incorporated By Reference

Part II:

Annual Report to Stockholders for the year ended December 31, 2009.

Part III:

Portions of the definitive proxy statement for the 2010 Annual Meeting of Stockholders.

PART I

ITEM 1. BUSINESS

In February 1998, HopFed Bancorp, Inc. (the “Company”) issued and sold 4,033,625 shares of common stock, par value $.01 per share (the “Common Stock”), in connection with the conversion of Hopkinsville Federal Savings Bank (the “Bank”) from a federal mutual savings bank to a federal stock savings bank and the issuance of the Bank’s capital stock to the Company. The conversion of the Bank, the acquisition of all of the outstanding capital stock of the Bank by the Company and the issuance and sale of the Common Stock are collectively referred to herein as the “Conversion.”

HopFed Bancorp, Inc.

HopFed Bancorp, Inc. was incorporated under the laws of the State of Delaware in May 1997 at the direction of the Board of Directors of the Bank for the purpose of serving as a savings and loan holding company of the Bank upon the acquisition of all of the capital stock issued by the Bank in the Conversion. The Company’s assets primarily consist of the outstanding capital stock of the Bank. The Company’s principal business is overseeing the business of the Bank. The Company has registered with the Office of Thrift Supervision (“OTS”) as a savings and loan holding company. See “Regulation – Regulation of the Company.”

As a holding company, the Company has greater flexibility than the Bank to diversify its business activities through existing or newly formed subsidiaries or through acquisition or merger with other financial institutions, although the Company currently does not have any plans, agreements, arrangements or understandings with respect to any such acquisitions or mergers. The Company is classified as a unitary savings and loan holding company and is subject to regulation by the OTS. The Company’s executive offices are located at 4155 Lafayette Road, Hopkinsville, Kentucky 42240, and its main telephone number is (270) 885-1171. The Company’s mailing address is P.O. Box 537, Hopkinsville, Kentucky 42241-0537.

Heritage Bank

The Bank is a federally chartered stock savings bank headquartered in Hopkinsville, Kentucky, with branch offices in Kentucky and Tennessee. The Kentucky locations include Hopkinsville, Murray, Cadiz, Elkton, Fulton, Calvert City and Benton, Kentucky. The Tennessee locations include Clarksville, Pleasant View, Ashland City, Kingston Springs and Erin, Tennessee. The Bank was incorporated by the Commonwealth of Kentucky in 1879 under the name Hopkinsville Building and Loan Association. In 1940, the Bank converted to a federal mutual savings association and received federal insurance of its deposit accounts. In 1983, the Bank became a federal mutual savings bank. On May 14, 2002, the Bank changed its name from Hopkinsville Federal Bank to Heritage Bank. The primary market area of the Bank consists of the adjacent counties of Calloway, Christian, Todd, Trigg, Fulton, and Marshall located in southwestern Kentucky and Montgomery, Cheatham, Houston, Obion & Weakley counties located in Tennessee.

The business of the Bank primarily consists of attracting deposits from the general public and investing such deposits in loans secured by single family residential real estate and investment securities, including U.S. Government and agency securities, municipal and corporate bonds, collateralized mortgages obligations (CMO’s), and mortgage-backed securities. The Bank also originates single-family residential/construction loans and multi-family and commercial real estate loans, as well as loans secured by deposits, other consumer loans and commercial loans. The Bank emphasizes the origination of residential real estate loans with adjustable interest rates and other assets which are responsive to changes in interest rates and allow the Bank to more closely match the interest rate maturation of its assets and liabilities.

2

Growth Opportunities

In January 2009, the Company experienced an $8 million reduction in loans outstanding as one of its largest loan relationships ceased operations. Loan growth was slow for most of the first three quarters of 2009. In the fourth quarter of 2009, quality loan demand was exceptionally slow. This limited growth was a combination of weaker loan demand and more conservative lending practices by the Company. In particular, the Company originated a limited number of new construction and land development loans in 2009. For the year ended December 31, 2009, the Company’s construction portfolio declined by approximately $29.1 million, resulting in a 47% reduction in construction loan balances but reducing the Company’s risk profile.

The market for single family homes in Clarksville, Tennessee, the Company’s largest loan market, remained active as total sales in 2009 remained relatively strong. The Clarksville housing market was one of the few in the nation not to experience a decline in home prices in 2009. During 2009, the Clarksville market was the only market in which the Company experienced positive loan growth. The Company’s rural markets have fared much better as compared to urban markets and high growth coastal areas. In 2009, the decline in corn, soybean, and wheat prices were offset by lower input cost and near record yields. The exceptional operating results experienced by the agricultural community in 2009 have provided opportunities for deposit growth. The Company anticipates that agricultural related loan demand will be below average as many farmers have excess funds that may reduce their credit needs in 2010.

The Company anticipates modest loan growth in 2010 as weaknesses in both housing and the automotive sector have resulted in unemployment levels in the Company’s marketplace between 10% and 15%. The Clarksville market continues to perform better than most markets both locally and nationally. However, this market may also slow in 2010 as the 101^st Airborne anticipates the deployment of 17,000 troops to the Middle East for a period of twelve to fifteen months.

Despite the limited short term growth prospects, the Company’s longer term prospects remain strong. The Fort Campbell Army Base continues to experience growth as the Army consolidates smaller bases into this facility. The continued construction of the Hemlock Semiconductor plant (production scheduled to begin in 2012) will provide a stable demand for construction labor as well as opportunity for highly desirable employment when production begins. The Company’s Cheatham County market provides an excellent inroad into the Nashville, Tennessee MSA. The Company anticipates that this market will be among the first to experience an economic recovery due to its well diversified economy and ideal location. Furthermore, the Company’s growth opportunities will continue to be enhanced as many of its competitors struggle to remain in business due to credit and capital concerns. Typically, these opportunities are in the form of seizing on both customer and bank employees dissatisfied with the poor quality of service and the limitations placed on their employees and availability of credit at larger regional and national banks. The Company also anticipates that a limited number of whole bank and branch acquisition opportunities will be available within its market. The Company is interested in FDIC assisted transactions but has a strong preference for local acquisitions.

Beginning in 2008 and continuing through 2009 and 2010, the Company has developed a marketing campaign focused on increasing its market share of checking accounts. The campaign continues to be a resounding success with more than 4,000 new non-interest bearing checking accounts opened in each of the last two years. The Company will continue to focus significant resources to this campaign.

3

The following chart outlines the Bank’s market share in its six largest markets individually at June 30, 2006, June 30, 2007, June 30, 2008 and June 30, 2009 according to information provided by the FDIC market Share Report:

	At June 30
	2006		2007		2008		2009
Calloway	11.8	%	12.6	%	13.2	%	14.0	%
Christian	19.6	%	19.8	%	20.1	%	22.8	%
Fulton	54.2	%	54.8	%	56.7	%	58.9	%
Marshall	11.3	%	12.6	%	13.1	%	14.3	%
Cheatham (a)	16.0	%	14.0	%	14.5	%	14.9	%
Montgomery (b)	—		0.5	%	1.5	%	2.9	%

(a) Represents the market share reported by AmSouth Bank in Cheatham County, Tennessee. These deposits were purchased by Heritage Bank in June 2006.

(b) The Company opened its first retail banking office in December 2006.

Available Information

The Company’s filings with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto, are available on the Company’s website as soon as reasonably practicable after the reports are filed with or furnished to the SEC. Copies can be obtained free of charge in the “Investor Relations” section of the Company’s website at www.bankwithheritage.com.

Stock Repurchases

On September 20, 2000, the Company announced that its Board of Directors had approved the repurchase of up to 200,000 shares of its common stock. The stock repurchase program was completed in February 2001. On March 26, 2001, the Company announced that its Board of Directors had approved the repurchase of an additional 300,000 shares. The Company replaced the March 2001 repurchase plan with a plan to repurchase 125,000 shares of stock beginning on October 1, 2006 and ending September 31, 2008. The purchases were made from time to time on the NASDAQ Stock Market at prices prevailing on that market or in privately negotiated transactions at management’s discretion, depending on market conditions, price of the Company’s common stock, corporate cash requirements and other factors. The Company’s acceptance of the capital investment from the United States Treasury Department requires the Company to cease all stock repurchase activity for a period of no less than three years or until capital investment is redeemed in full. As of March 15, 2010, 515,555 shares of common stock had been repurchased.

Lending Activities

General. The total gross loan portfolio totaled $650.9 million at December 31, 2009, representing 63.2% of total assets at that date. Substantially all loans are originated in the Bank’s market area. At December 31, 2009, $240.8 million, or 37.0% of the loan portfolio, consisted of one-to-four family, residential mortgage loans. Other loans secured by real estate include non-residential real estate loans, which amounted to $254.1 million, or 39.0% of the loan portfolio at December 31, 2009, and multi-family residential loans, which were $46.3 million, or 7.1% of the loan portfolio at December 31, 2009. At December 31, 2009, construction loans were $33.2 million, or 5.1% of the loan portfolio, and total consumer and commercial loans totaled $76.5 million, or 11.8% of the loan portfolio.

4

Analysis of Loan Portfolio. Set forth below is selected data relating to the composition of the loan portfolio by type of loan at the dates indicated. At December 31, 2009, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below.

	2009				2008				2007				2006				2005
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)
Type of Loan:
Real estate loans:
One-to-four family residential	$	240,823	37.0	%	$	223,598	35.3	%	$	222,888	38.4	%	$	225,914	45.2	%	$	211,564	52.7	%
Multi-family residential		46,325	7.1	%		36,857	5.8	%		24,538	4.2	%		12,018	2.4	%		6,613	1.7	%
Construction		33,216	5.1	%		62,300	9.8	%		50,230	8.7	%		39,379	7.9	%		16,592	4.1	%
Non-residential (1)		254,067	39.0	%		223,180	35.2	%		183,168	31.5	%		147,050	29.4	%		102,676	25.6	%
Total real estate loans		574,431	88.2	%		545,935	86.1	%		480,824	82.8	%		424,361	84.9	%		337,445	84.1	%
Other loans:
Secured by deposits		4,075	0.6	%		3,949	0.6	%		4,419	0.7	%		3,855	0.8	%		3,282	0.8	%
Other consumer loans		17,908	2.8	%		19,731	3.1	%		21,331	3.7	%		21,630	4.3	%		23,642	5.9	%
Commercial loans		54,531	8.4	%		64,595	10.2	%		74,276	12.8	%		49,592	10.0	%		36,945	9.2	%
Total other loans		76,514	11.8	%		88,275	13.9	%		100,026	17.2	%		75,077	15.1	%		63,869	15.9	%
		650,945	100.0	%		634,210	100.0	%		580,850	100.0	%		499,438	100.0	%		401,314	100.0	%
Deferred loan cost, net		261				279				244				—				—
Allowance for loan losses		8,851				6,133				4,842				4,470				4,004
Total	$	642,355			$	628,356			$	576,252			$	494,968			$	397,310

(1) Consists of loans secured by first liens on residential lots and loans secured by first mortgages on commercial real property and land.

Loan Maturity Schedule. The following table sets forth certain information at December 31, 2009, regarding the dollar amount of loans maturing in the portfolio based on their contractual maturity dates. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

	Due during the year ending December 31,						Due after 3 through 5 years after December 31,		Due after 5 through 10 years after December 31,		Due after 10 through 15 years after December 31,		Due after 15 years after December 31,
	2010		2011		2012		2010		2010		2010		2010		Total
One-to-four family residential		11,963		5,558		1,831		8,500		31,617		59,893		121,461	$	240,823
Multi-family residential		3,884		544		457		1,350		2,691		5,425		31,974	$	46,325
Construction		13,794		8,712		—		—		778		1,233		8,699	$	33,216
Non-residential		32,246		29,334		22,450		11,857		29,382		26,889		101,909	$	254,067
Secured by deposits		2,745		584		342		308		52		—		44	$	4,075
Other		25,469		11,748		7,310		14,896		8,457		1,383		3,176	$	72,439
Total	$	90,101	$	56,480	$	32,390	$	36,911	$	72,977	$	94,823	$	267,263	$	650,945

5

The following table sets forth at December 31, 2009, the dollar amount of all loans due after December 31, 2010 which had predetermined interest rates and has floating or adjustable interest rates.

	Predetermined Rate		Floating or Adjustable Rate
	(In thousands)
One-to-four family residential	$	32,339	$	196,521
Multi-family residential		1,429		41,012
Construction		3,346		16,076
Non-residential		58,189		163,632
Other		40,493		7,807
Total	$	135,796	$	425,048

Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the lender the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans.

Originations, Purchases and Sales of Loans. The Bank generally has authority to originate and purchase loans secured by real estate located throughout the United States. Consistent with its emphasis on being a community-oriented financial institution, the Bank conducts substantially all of its lending activities in its market area. The following table sets forth certain information with respect to loan origination activity for the periods indicated.

	Year Ended December 31,
	2009		2008			2007
	(In thousands)
Loan originations:
One-to-four family residential	$	52,361	$	81,107		$	74,638
Multi-family residential		10,285		23,007			14,155
Construction		20,352		56,606			67,752
Non-residential		65,125		74,223			88,200
Other		68,980		63,032			70,220
Total loans originated		217,103		297,975		$	314,965
Loan reductions:
Transfer to other real estate owned		1,473		1,246			476
(Increase) decrease in deferred loan origination fees, net of income		18		(35	)		(244	)
Change in allowance for loan losses		2,718		1,291			372
Loans sold		5,771		3,700			5,449
Loan principal payments		193,124		239,669			227,628
Net increase in loan portfolio	$	13,999	$	52,104		$	81,284

Loan originations are derived from a number of sources, including existing customers, referrals by real estate agents, depositors and borrowers and advertising, as well as walk-in customers. Solicitation programs consist of advertisements in local media, in addition to occasional participation in various community organizations and events. Real estate loans are originated by the Bank’s loan personnel. All of the loan personnel are salaried, and are not compensated on a commission basis for loans originated. Loan applications are accepted at any of the Bank’s branches.

6

Loan Underwriting Policies. Lending activities are subject to written, non-discriminatory underwriting standards and to loan origination procedures prescribed by the Board of Directors and its management. Detailed loan applications are obtained to determine the ability of borrowers to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and confirmations. Loan requests exceeding loan officer limits must be approved by the loan committee or Board of Directors.

Generally, upon receipt of a loan application from a prospective borrower, a credit report and verifications are ordered to confirm specific information relating to the loan applicant’s employment, income and credit standing. If a proposed loan is to be secured by a mortgage on real estate, an appraisal of the real estate is undertaken by an appraiser approved by the Board of Directors and licensed or certified (as necessary) by the Commonwealth of Kentucky or the State of Tennessee.

In the case of one-to-four family residential mortgage loans, except when the Bank becomes aware of a particular risk of environmental contamination, the Bank generally does not obtain a formal environmental report on the real estate at the time a loan is made. A formal environmental report may be required in connection with nonresidential real estate loans.

It is the Bank’s policy to record a lien on the real estate securing a loan and to obtain a title opinion from Kentucky counsel who provides that the property is free of prior encumbrances and other possible title defects. Title Insurance is generally required on all commercial real estate loans, all one-to-four family loans with balances exceeding $100,000 and all one-to-four family loans that are to be sold in the secondary market. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood hazard area, pay flood insurance policy premiums. The majority of real estate loan applications are underwritten and closed in accordance with the Bank’s own lending guidelines, which generally do not conform to secondary market guidelines. Although such loans may not be readily saleable in the secondary market, management believes that, if necessary, such loans may be sold to private investors at a discount to par.

The Bank offers a fixed rate loan program with maturities of 15, 20, and 30 years. These loans are underwritten and closed in accordance with secondary market standards. These loans are originated with the intent to sell on the secondary market. The Bank offers both servicing retained and servicing released products in an attempt to meet the needs of our customers. At December 31, 2009, the Bank’s 1-4 family loan servicing portfolio was approximately $27.9 million dollars.

The Bank is permitted to lend up to 100% of the appraised value of the residential real property securing a mortgage loan. The Bank is required by federal regulations to obtain private mortgage insurance on that portion of the principal amount of any loan that is greater than 90% of the appraised value of the property. Under its lending policies, the Bank will originate a one-to-four family residential mortgage loan for owner-occupied property with a loan-to-value ratio of up to 95%. For residential properties that are not owner-occupied, the Bank generally does not lend more than 80% of the appraised value. For all residential mortgage loans, the Bank may increase its lending level on a case-by-case basis, provided that the excess amount is insured with private mortgage insurance. Exceptions to this policy must be approved by the loan committee or the Board of Directors. At December 31, 2009, the Bank held approximately $9.0 million of 1-4 family residential mortgages with a loan to value ratio exceeding 90% without private mortgage insurance. For these loans at December 31, 2009, approximately $337,000 was past due more than 30 days.

Under applicable law, with certain limited exceptions, loans and extensions of credit outstanding by a savings institution to a person at one time shall not exceed 15% of the institution’s unimpaired capital and surplus. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and surplus. Applicable law additionally authorizes savings institutions to make loans to one borrower, for any purpose, in an amount not to exceed the lesser of $30.0 million or 30% of unimpaired capital and surplus to develop residential housing, provided certain requirements are satisfied. Under these limits, the Bank’s loans to one borrower were limited to approximately $13.4 million at December 31, 2009. At that date, the Bank had no lending relationships in excess of the loans-to-one-borrower limit.

7

Interest rates charged by the Bank on loans are affected principally by competitive factors, the demand for such loans and the supply of funds available for lending purposes. These factors are, in turn, affected by general economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and government budgetary matters.

One-to-four Family Residential Lending. The Bank historically has been and continues to be an originator of one-to-four family residential real estate loans in its market area. At December 31, 2009, one-to-four family residential mortgage loans totaled approximately $240.8 million, or 37.0% of the Bank’s loan portfolio. The Bank originated approximately $5.8 million in loans were sold in the secondary market with servicing released. At December 31, 2009, the Bank had approximately $1.4 million in one-to-four family residential real estate loans past due more than ninety days.

The Bank primarily originates residential mortgage loans with adjustable rates. As of December 31, 2009, 84.2% of one-to-four family mortgage loans in the Bank’s loan portfolio carried adjustable rates or mature within one year. The Bank’s one to four family loan portfolio consist of closed end first and second mortgages as well as opened ended home equity lines of credit. At December 31, 2009, approximately $203.2 million of the Bank’s residential mortgage portfolio consisted of closed end first and second mortgage loans. Such loans are primarily for terms of 25 years, although the Bank does occasionally originate adjustable rate mortgages for 15, 20 and 30 year terms, in each case amortized on a monthly basis with principal and interest due each month. The interest rates on these mortgages are adjusted once per year, with a maximum adjustment of 1% per adjustment period and a maximum aggregate adjustment of 5% over the life of the loan. Prior to August 1, 1997, rate adjustments on the Bank’s adjustable rate loans were indexed to a rate which adjusted annually based upon changes in an index based on the National Monthly Median Cost of Funds, plus a margin of 2.75%. Because the National Monthly Median Cost of Funds is a lagging index, which results in rates changing at a slower pace than rates generally in the marketplace, the Bank changed to a one-year Treasury bill constant maturity (“One Year CMT”), which the Bank believes reflects more current market information and thus allows the Bank to react more quickly to changes in the interest rate environment. In mid 2004, the Bank increased its margin on its adjustable rate loans to 3.00%. However, the vast majority of the current adjustable rate portfolio maintains a margin of 2.75% over the One Year CMT.

The Bank also originates, to a limited extent, fixed-rate loans for terms of 10 and 15 years. Such loans are secured by first mortgages on one-to-four family, owner-occupied residential real property located in the Bank’s market area. Because of the Bank’s policy to mitigate its exposure to interest rate risk through the use of adjustable rate rather than fixed rate products, the Bank does not emphasize fixed-rate mortgage loans. Fixed rate mortgage loans originated by the Bank are loans that often do not qualify for the secondary market due to numerous factors not related to credit quality. Typically, these products are not priced to be competitive with secondary market loans but to offer as an alternative if that option is not available. At December 31, 2009, $32.3 million of the Bank’s loan portfolio consisted of fixed-rate one-to-four family first mortgage loans. To further reduce its interest rate risk associated with such loans, the Bank may rely upon FHLB advances with similar maturities to fund such loans. See “— Deposit Activity and Other Sources of Funds — Borrowing.”

At December 31, 2009, the Bank has $37.5 million in home equity lines of credit outstanding and $31.2 million of additional credit available. Typically, these loans are for a term of fifteen years and have loan to value ratio of between 80% to 100%. The home equity portfolio is priced at a spread to prime, adjusted daily, depending on the customer’s loan to value ratio at the time of origination. Many of the home equity lines of credit require monthly interest payments with all unpaid interest and principal due at maturity.

The retention of adjustable rate loans in the Bank’s portfolio helps reduce, but does not eliminate, the Bank’s exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward re-pricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable rate loans may increase due to increases in interest costs to borrowers. Further, although adjustable rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the initial fixed-rate period before the first adjustment and the lifetime interest rate adjustment limitations. This risk is heightened by the Bank’s practice of offering its adjustable rate mortgages with a 1% limitation on annual interest rate adjustments. Accordingly, there can be no assurance that yields on the Bank’s adjustable rate loans will fully adjust to compensate for increases in the Bank’s cost of funds.

8

Finally, adjustable rate loans increase the Bank’s exposure to decreases in prevailing market interest rates, although the 1% limitation on annual decreases in the loans’ interest rate tends to offset this effect. In times of declining interest rates, borrowers often refinance into fixed rate loan products, limiting the Bank’s ability to significantly increase its interest rate margin on adjustable rate loans in a declining interest rate market.

Neither the fixed rate nor the adjustable rate residential mortgage loans held in the Bank’s portfolio are originated in conformity with secondary market guidelines issued by FHLMC or FNMA. As a result, such loans may not be readily saleable in the secondary market to institutional purchasers. However, such loans may still be sold to private investors whose investment strategies do not depend upon loans that satisfy FHLMC or FNMA criteria. Further, given its high liquidity, the Bank does not currently view loan sales as a necessary funding source.

Construction Lending. The Bank engages in construction lending involving loans to individuals for construction of one-to-four family residential housing, multi-family housing and non-residential real estate located within the Bank’s market area, with such loans converting to permanent financing upon completion of construction. The Bank mitigates its risk with construction loans by imposing a maximum loan-to-value ratio of 95% for homes that will be owner-occupied and 80% for homes being built on a speculative basis.

The Bank also makes loans to qualified builders for the construction of one-to-four family residential housing located in established subdivisions in the Bank’s market area. Because such homes are intended for resale, such loans are generally not converted to permanent financing at the Bank. All construction loans are secured by a first lien on the property under construction.

Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction/permanent loans may have adjustable or fixed interest rates and are underwritten in accordance with the same terms and requirements as the Bank’s permanent mortgages. Such loans generally provide for disbursement in stages during a construction period of up to six months, during which period the borrower is required to make payments of interest only. The permanent loans are typically 30-year adjustable rate loans, with the same terms and conditions otherwise offered by the Bank. Monthly payments of principal and interest commence the month following the date the loan is converted to permanent financing. Borrowers must satisfy all credit requirements that would apply to the Bank’s permanent mortgage loan financing prior to receiving construction financing for the subject property.

Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be confronted at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. The ability of a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank’s market area, by requiring the involvement of qualified builders, and by limiting the aggregate amount of outstanding construction loans.

At December 31, 2009, the Bank’s loan portfolio included $33.2 million of loans secured by properties under construction, including construction/permanent loans structured to become permanent loans upon the completion of construction and interim construction loans structured to be repaid in full upon completion of construction and receipt of permanent financing. At December 31, 2009, approximately $14.0 million of construction loans were for one to four family dwellings, $7.3 million were for multi-family dwellings and $11.9 million were for non-residential real estate. At December 31, 2009, there were $572,000 in construction loans past due more than ninety days.

9

Multi-Family Residential and Non-Residential Real Estate Lending. The Bank’s multi-family residential loan portfolio consists of fixed and adjustable rate loans secured by real estate. At December 31, 2009, the Bank had $46.3 million of multi-family residential loans, which amounted to 7.1% of the Bank’s loan portfolio at such date. The Bank’s non-residential real estate portfolio generally consists of adjustable and fixed rate loans secured by first mortgages on commercial real estate, residential lots, and rental property. In most cases, such property is located in the Bank’s market area. At December 31, 2009, the Bank had approximately $254.1 million of such loans, which comprised 39.0% of its loan portfolio. Multi-family residential real estate loans are underwritten with loan-to-value ratios up to 80% of the appraised value of the property. Non-residential real estate loans are underwritten with loan-to-value ratios up to 65% of the appraised value for raw land and 75% for land development loans.

Multi-family residential and non-residential real estate lending entails significant additional risks as compared with one-to-four family residential property lending. Multi-family residential and commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the real estate project, retail establishment or business. These risks can be significantly impacted by supply and demand conditions in the market for the office, retail and residential space, and, as such, may be subject to a greater extent to adverse conditions in the economy generally.

To minimize these risks, the Bank generally limits itself to its market area or to borrowers with which it has prior experience or who are otherwise known to the Bank. It has been the Bank’s policy to obtain annual financial statements of the business of the borrower or the project for which multi-family residential real estate or commercial real estate loans are made. At December 31, 2009, there were $4.9 million in multi-family loans delinquent by 90 days or more. At December 31, 2009, there were $4.0 million in non-residential real estate loans that were past due by 90 days or more. The Company has experienced an increase in the amount of delinquency in the multi-family portfolio. The increase in delinquency is the result of a small number of customer relationships that have been affected by the deployment of military personnel. At December 31, 2009, the Company allowance for loan loss includes $1.3 million in reserve for multi-family loans and $2.3 million in reserve for non-residential real estate loans.

Consumer Lending. The consumer loans currently in the Bank’s loan portfolio consist of loans secured by savings deposits and other consumer loans. Savings deposit loans are usually made for up to 90% of the depositor’s savings account balance. The interest rate is approximately 2.0% above the rate paid on such deposit account serving as collateral, and the account must be pledged as collateral to secure the loan. Interest generally is billed on a quarterly basis. At December 31, 2009, loans on deposit accounts totaled $4.1 million, or 0.6% of the Bank’s loan portfolio. Other consumer loans include automobile loans, the amount and terms of which are determined by the loan committee, and home equity and home improvement loans, which are made for up to 100% of the value of the property. At December 31, 2009, other consumer loan accounts totaled $17.9 million, or 2.8% of total loans.

Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and therefore are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 2009, there was $27,000 in consumer loans delinquent 90 days or more.

Commercial Lending. The Bank originates commercial loans on a secured and, to a lesser extent, unsecured basis. At December 31, 2009, the Bank’s commercial loans amounted to $54.5 million, or 8.4% of the Bank’s loan portfolio. The Bank’s commercial loans generally are secured by business assets. In addition, the Bank generally obtains guarantees from the principals of the borrower with respect to all commercial loans. At December 31, 2009, there was $367,000 in commercial loans delinquent 90 days or more.

10

Non-performing Loans and Other Problem Assets

The Bank’s non-performing loans totaled 1.72% of total loans at December 31, 2009. Loans are placed on a non-accrual status when the loan is past due in excess of 90 days or the collection of principal and interest is doubtful. The Bank places a high priority on contacting customers by telephone as a primary method of determining the status of delinquent loans and the action necessary to resolve any payment problem. The Bank’s management performs quality reviews of problem assets to determine the necessity of establishing additional loss reserves. The Bank’s total non-performing assets to total asset ratio was 1.28% at December 31, 2009.

The following table sets forth information with respect to the Bank’s non-performing loans at the dates indicated. No loans were recorded as restructured loans within the meaning of FASB ASC 310-40, Troubled Debt Restructurings by Creditors, at the dates indicated.

	At December 31,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
Accruing loans which are contractually past due 90 days or more:
Residential real estate	$	—		$	—		$	42		$	93		$	—
Non-residential real estate		—			—			—			—			—
Consumer		—			—			4			8			—
Total		—			—			46			101			—
Non-Accrual Loans:
Construction		572			341			—			—			—
Multi-family		4,851			—			—			—			—
Residential real estate		1,399			1,340			476			599			614
Land		3,503			5,052			—			—			244
Non residential real estate		490			427			46			61			123
Consumer		27			55			—			—			—
Commercial		367			106			25			102			15
Total non-performing loans	$	11,209		$	7,321		$	593		$	863		$	996
Percentage of total loans		1.72	%		1.16	%		0.10	%		0.17	%		0.25	%

At December 31, 2009, the Bank had $11.2 million in loans outstanding which were classified as non-accrual, 90 days past due or restructured but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and may result in disclosure as non-accrual, 90 days past due or restructured. At December 31, 2009, the Bank had $1.9 million in other assets owned. Also, the Bank had impaired loans, as defined by FASB ASC 310, Receivables, totaling approximately $35.5 million at December 31, 2009.

Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset meeting one of the classification definitions set forth below may be classified and still be a performing loan. An asset is classified as substandard if it is determined to be inadequately protected by the current retained earnings and paying capacity of the obligor or of the collateral pledged, if any. An asset is classified as doubtful if full collection is highly questionable or improbable. An asset is classified as loss if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a special mention designation, described as assets which do not currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management’s close attention. Such assets designated as special mention may include non-performing loans consistent with the above definition. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, a savings institution must either establish a specific allowance for loss in the amount of the portion of the asset-classified loss, or charge off such amount. Federal examiners may disagree with a savings institution’s classifications. If a savings institution does not agree with an examiner’s classification of an asset, it may appeal this determination to the OTS Regional Director. The Bank regularly reviews its assets to determine whether any assets require classification or re-classification. At December 31, 2009, the Bank had $35.0 million in assets classified as substandard and $518,000 in assets classified as doubtful.

11

Real estate acquired by the Bank as a result of foreclosure is classified as real estate owned until such time as it is sold. The Bank generally tries to sell the property at a price no less than its net book value; however, it will consider slight discounts to the appraised value to expedite the return of the funds to an earning status. When such property is acquired, it is recorded at its fair value less estimated costs of sale. Any required write-down of the loan to its appraised fair market value upon foreclosure is charged against the allowance for loan losses. Subsequent to foreclosure, in accordance with accounting principles generally accepted in the United States of America, a valuation allowance is established if the carrying value of the property exceeds its fair value net of related selling expenses. At December 31, 2009, the Bank’s other assets owned totaled $1.9 million. This amount represents management’s best estimate on the fair value of these assets.

The following table sets forth information with respect to the Bank’s other real estate and other assets owned at December 31, 2009 and December 31, 2008. (Table Amounts in Thousands)

	12/31/2009			12/31/2008
One-to-four family (closed end) first mortgages		438		85
Multi-family		425		485
Construction		468
Land		225		22
Non-residential real estate		312		249
Consumer assets owned by bank		15		34
Commercial loans		—		—
	$	1,883		875
Non-performing assets to total asset ratio		1.28	%	0.84	%

Allowance for Loan Losses. In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management’s policy to maintain an adequate allowance for loan losses based on, among other things, the Bank’s and the industry’s historical loan loss experience, evaluation of economic conditions, regular reviews of delinquencies and loan portfolio quality and evolving standards imposed by federal bank examiners and other regulatory agencies. The Bank increases its allowance for loan losses by charging provisions for loan losses against the Bank’s income.

Management will continue to actively monitor the Bank’s asset quality and allowance for loan losses. Management will charge off loans and properties acquired in settlement of loans against the allowances for loan losses on such loans and such properties when appropriate and will provide specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for loan losses and believes such allowances are adequate, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations.

The Bank’s methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific assets as well as losses that have not been identified but can be expected to occur. Management conducts regular reviews of the Bank’s assets and evaluates the need to establish allowances on the basis of this review. Allowances are established by the Board of Directors on a quarterly basis based on an assessment of risk in the Bank’s assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, loan concentrations, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic conditions generally.

12

Specific reserves will be provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value of the security. At the date of foreclosure or other repossession, the Bank would transfer the property to real estate acquired in settlement of loans initially at the lower of cost or estimated fair value and subsequently at the lower of book value or fair value less estimated selling costs. Any portion of the outstanding loan balance in excess of fair value less estimated selling costs would be charged off against the allowance for loan losses. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of other real estate would be recorded.

Banking regulatory agencies, including the OTS, have adopted a policy statement regarding maintenance of an adequate allowance for loan and lease losses and an effective loan review system.

The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods indicated.

	Year Ended December 31,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
Balance at beginning of period	$	6,133		$	4,842		$	4,470		$	4,004		$	3,273
Loans charged off:
Commercial loans		(412	)		(364	)		(110	)		(117	)		(20	)
Consumer loans and overdrafts		(661	)		(685	)		(625	)		(628	)		(517	)
Residential real estate		(763	)		(365	)		(186	)		(258	)		(112	)
Total charge-offs		(1,836	)		(1,414	)		(921	)		(1,003	)		(649	)
Recoveries		355			288			317			261			130
Net loans charged off		(1,481	)		(1,126	)		(604	)		(742	)		(519	)
Credit devaluation of purchased loans		—			—			—			185			—
Provision for loan losses		4,199			2,417			976			1,023			1,250
Balance at end of period	$	8,851		$	6,133		$	4,842		$	4,470		$	4,004
Ratio of net charge-offs to average loans outstanding during the period		0.23	%		0.20	%		0.11	%		0.16	%		0.14	%

13

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

	At December 31,
	2009				2008				2007				2006				2005
	Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
One-to-four family		2,226	37.0	%		2,693	35.3	%		1,910	38.4	%		339	45.2	%	$	397	52.7	%
Construction		519	5.1	%		393	9.8	%		292	8.7	%		295	7.9	%		137	4.1	%
Multi-family residential		1,354	7.1	%		445	5.8	%		307	4.2	%		22	2.4	%		133	1.7	%
Non-residential		3,259	39.0	%		443	35.2	%		265	31.5	%		1,044	29.4	%		773	25.6	%
Secured by deposits		—	0.6	%		—	0.6	%		—	0.7	%		—	0.8	%		—	0.8	%
Other loans		1,493	11.2	%		2,159	13.3	%		2,068	16.5	%		2,770	14.3	%		2,564	15.1	%
Total allowance for loan losses	$	8,851	100.0	%	$	6,133	100.0	%	$	4,842	100.0	%	$	4,470	100.0	%	$	4,004	100.0	%

Investment Activities

The Bank makes investments in order to maintain the levels of liquid assets required by regulatory authorities and manage cash flow, diversify its assets, obtain yield and to satisfy certain requirements for favorable tax treatment. The principal objective of the investment policy is to earn as high a rate of return as possible, but to consider also financial or credit risk, liquidity risk and interest rate risk. The investment activities of the Company and the Bank consist primarily of investments in U.S. Government agency securities, municipal and corporate bonds, CMO’s, and mortgage-backed securities. Typical investments include federally sponsored agency mortgage pass-through and federally sponsored agency and mortgage-related securities. Investment and aggregate investment limitations and credit quality parameters of each class of investment are prescribed in the Bank’s investment policy. The Company and the Bank perform analyses on mortgage-related securities prior to purchase and on an ongoing basis to determine the impact on earnings and market value under various interest rate and prepayment conditions. Securities purchases must be approved by the Bank’s Chief Financial Officer or President. The Board of Directors reviews all securities transactions on a monthly basis.

At December 31, 2009, securities, including FHLB stock, with an amortized cost of $288.6 million and an approximate market value of $294.0 million were classified as available for sale. Management presently does not intend to sell such securities and, based on the current liquidity level and the access to borrowings through the FHLB of Cincinnati, management currently does not anticipate that the Company or the Bank will be placed in a position of having to sell securities with material unrealized losses.

Mortgage-Backed and Related Securities. Mortgage-backed securities represent a participation interest in a pool of one-to-four family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators through intermediaries that pool and repackage the participation interest in the form of securities to investors such as the Bank. CMO’s are a variation of mortgage-backed securities in which the mortgage pool is divided into specific classes, with different classes receiving different principal reduction streams based on numerous factors, including prepayments speeds. Such intermediaries may include quasi-governmental agencies such as FHLMC, FNMA and the Government National Mortgage Association (“GNMA”) which guarantees the payment of principal and interest to investors. Of the $80.5 million mortgage-backed security portfolio and $34.9 million CMO portfolio at December 31, 2009, approximately $29.6 million were originated through GNMA, approximately $44.1 million were originated through FNMA, approximately $25.4 million were originated through FHLMC, and approximately $16.3 million are Whole Loan CMO’s.

14

Typically, the collateral in Whole Loan CMO’s include jumbo mortgages that exceeded the limits provided by federal agencies and do not have a federal government or agency guarantee. The issuers of Whole Loan CMO’s receive an AAA rating by credit rating agencies by providing an overabundance of collateral to secure these investments. In capital computations, Whole Loan CMO’s are risk rated 20%, the same of FNMA and FHLMC. At December 31, 2009, the Company two securities, with a combined market value of $1.75 million that have been downgraded below investment grade. During the fourth quarter of 2009, the Company incurred a $200,000 Other Than Temporary Impairment charge to recognize potential losses on these securities due to higher than anticipated defaults within their portfolios. At December 31, 2009, the two securities have a combined market loss of approximately $552,000. Whole Loan CMO’s that fail to maintain an AAA rating from S&P or Moody’s are risked weighted 100%. See Note 2 of Notes to Audited Financial Statements for further details.

Mortgage-backed securities typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have similar maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable-rate mortgage loans. Mortgage-backed securities generally are referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages.

The actual maturity of a mortgage-backed security varies, depending on when the mortgagors prepay or repay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the investment, thereby adversely affecting its yield to maturity and the related market value of the mortgage-backed security.

The yield is based upon the interest income and the amortization of the premium or accretion of the discount related to the mortgage-backed security. Premiums and discounts on mortgage-backed securities are amortized or accreted over the estimated term of the securities using a level yield method. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed security, and these assumptions are reviewed periodically to reflect the actual prepayment.

The actual prepayments of the underlying mortgages depend on many factors, including the type of mortgage, the coupon rate, the age of the mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates. The difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates is an important determinant in the rate of prepayments. During periods of falling mortgage interest rates, prepayments generally increase, and, conversely, during periods of rising mortgage interest rates, prepayments generally decrease. If the coupon rate of the underlying mortgage significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages. Prepayment experience is more difficult to estimate for adjustable-rate mortgage-backed securities.

The following table sets forth the carrying value of the investment securities at the dates indicated.

	At December 31,
	2009		2008		2007
	(In thousands)
FHLB stock, restricted	$	4,281	$	4,050	$	3,836
U. S. government and agency Securities		118,975		117,615		71,991
Mortgage-backed securities		115,382		108,744		51,255
Tax free municipal bonds		51,154		18,092		17,156
Taxable municipal bonds		2,754		—		—
Corporate bonds		—		878		1,908
Trust preferred security		1,426		1,623		—
Securities held to maturity:
U.S. government and agency securities		—		—		13,541
Mortgage-backed securities		—		454		554
Total investment securities	$	293,972	$	251,456	$	160,241

15

The following table sets forth information on the scheduled maturities, amortized cost, market values and average yields for U.S. Government agency securities, corporate bonds and municipal securities in the investment portfolio at December 31, 2009. At such date, $38.8 million of the agency securities were callable and/or due on or before December 31, 2012. At December 31, 2009, $29.4 million were callable before December 31, 2010 and $9.4 million were callable in the year ending December 31, 2012. In addition, approximately $64.4 million in agency bonds are eligible to receive principal payments on a monthly, quarterly, or semi-annual basis. At December 31, 2009, $51.8 million of municipal securities (both taxable and tax free) were callable and/or due between January 2010 and December 2019. The average yield for the tax free municipal security portfolio is quoted as a taxable equivalent yield.

	One Year or Less				One to Five Years				Five to Ten Years				After Ten Years				Total Investment Portfolio
	Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Market Value		Average Yield
	(Dollars in thousands)
U.S. government and agency securities	$	—	—	%	$	5,053	5.07	%	$	44,556	4.80	%	$	69,366	4.69	%	$	118,975	$	118,975	4.75	%
Taxable municipal bonds	$	—	—	%	$	419	4.20	%	$	97	4.70	%		2,238	5.80	%	$	2,754	$	2,754	5.52	%
Tax free municipal bonds	$	—	—	%	$	2,431	5.08	%	$	5,210	5.82	%	$	43,513	6.12	%	$	51,154	$	51,154	6.04	%
Trust preferred		—	—			—	—			—	—		$	1,426	8.00	%	$	1,426	$	1,426	8.00	%

Deposit Activity and Other Sources of Funds

General. Deposits are the primary source of the Bank’s funds for lending, investment activities and general operational purposes. In addition to deposits, the Bank derives funds from loan principal and interest repayments, maturities of investment securities and mortgage-backed securities and interest payments thereon. Although loan repayments are a relatively stable source of funds, deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds, or on a longer term basis for general corporate purposes. The Bank has access to borrow from the FHLB of Cincinnati, and the Bank will continue to have access to FHLB of Cincinnati advances. The Bank may rely upon retail deposits rather than borrowings as its primary source of funding for future asset growth.

Deposits. The Bank attracts deposits principally from within its market area by offering competitive rates on its deposit instruments, including money market accounts, passbook savings accounts, individual retirement accounts, and certificates of deposit which range in maturity from three months to five years. Deposit terms vary according to the minimum balance required and the length of time the funds must remain on deposit and the interest rate. Maturities, terms, service fees and withdrawal penalties for its deposit accounts are established by the Bank on a periodic basis. The Bank reviews its deposit mix and pricing on a weekly basis. In determining the characteristics of its deposit accounts, the Bank considers the rates offered by competing institutions, lending and liquidity requirements, growth goals and federal regulations.

The Bank has, on a limited basis, utilized brokered deposits to augment its funding requirements. At December 31, 2009, the Bank had $83.3 million in brokered deposits as compared to $67.9 million at December 31, 2008. The Bank often chooses these to use longer termed brokered deposits as a substitute for local deposits which can be expensive in the Bank’s local market. All brokered deposits are FDIC insured.

The Bank attempts to compete for deposits with other institutions in its market area by offering competitively priced deposit instruments that are tailored to the needs of its customers. Additionally, the Bank seeks to meet customers’ needs by providing convenient customer service to the community. With the exception of brokered deposits, substantially all of the Bank’s depositors are Kentucky or Tennessee residents who reside in the Bank’s market area.

16

Savings deposits in the Bank at December 31, 2009, were represented by the various types of savings programs described below.

Interest Rate*		Minimum Term	Category	Minimum Amount		Balance		Percentage of Total Deposits
						(In thousands)
—	%	None	Non-interest bearing	$	100	$	68,531	8.6	%
0.05	%*	None	NOW accounts		1,500		105,821	13.3	%
0.20	%	None	Savings & money market		10		60,409	7.6	%
							234,761	29.5	%
			Certificates of Deposit
0.75	%	3 months or less	Fixed-term, fixed rate		1,000		83,308	10.5	%
1.30	%	3 to 12 months	Fixed-term, fixed-rate		1,000		232,564	29.3	%
1.45	%	12 to 24-months	Fixed-term, fixed-rate		1,000		126,855	16.0	%
2.10	%	24 to 36-months	Fixed-term, fixed-rate		1,000		50,788	6.4	%
2.40	%	36 to 48-months	Fixed-term, fixed-rate		1,000		42,948	5.4	%
3.00	%	48 to 60-months	Fixed-term, fixed rate		1,000		22,920	2.9	%
							559,383	70.5	%
						$	794,144	100.0	%

* Represents current interest rate offered by Heritage Bank.

The following table sets forth, for the periods indicated, the average balances and interest rates based on month-end balances for interest-bearing demand deposits and time deposits.

	Year Ended December 31,
	2009						2008						2007
	Interest-bearing demand deposits			Time deposits			Interest-bearing demand deposits			Time deposits			Interest-bearing demand deposits			Time deposits
	(Dollars in thousands)
Average Balance	$	155,956		$	542,411		$	166,745		$	415,072		$	169,915		$	366,704
Average Rate		1.06	%		3.10	%		2.91	%		3.84	%		2.72	%		4.82	%

17

The following table sets forth the change in dollar amount of deposits in the various types of accounts offered by the Bank between the dates indicated.

	Balance at December 31, 2009		% of Deposits		Increase (Decrease) from December 31, 2008		Balance at December 31, 2008		% of Deposits		Increase (Decrease) from December 31, 2007
	(Dollars in thousands)
Non-interest bearing	$	68,531	8.6	%	$	11,397	$	57,134	8.0	%	$	4,908
Demand & Now		105,821	13.3	%		16,272		89,549	12.6	%		(12,157	)
Savings & MMDA		60,409	7.6	%		2,035		58,374	8.2	%		(5,186	)
Time deposits		559,383	70.5	%		51,435		507,948	71.2	%		126,687
Total	$	794,144	100.0	%	$	81,139	$	713,005	100.0	%	$	114,252

	Balance at December 31, 2007		% of Deposits		Increase (Decrease) from December 31, 2006			Balance at December 31, 2006		% of Deposits
	(Dollars in thousands)
Non-interest bearing	$	52,226	8.7	%	$	1,076		$	51,150	9.0	%
Demand & NOW		101,706	17.0	%		5,748			95,958	16.9	%
Savings & MMDA.		63,560	10.6	%		(6,736	)		70,296	12.3	%
Time deposits		381,261	63.7	%		29,232			352,029	61.8	%
Total	$	598,753	100.0	%	$	29,320		$	569,433	100.0	%

The following table sets forth the time deposits in the Bank classified by rates at the dates indicated.

	At December 31,
	2009		2008		2007
	(In thousands)
0.01 - 2.00%	$	121,759	$	16,569	$	130
2.01 - 4.00%		170,233		191,430		30,092
4.01 - 6.00%		266,857		299,446		348,350
6.01 - 8.00%		534		503		2,689
Total	$	559,383	$	507,948	$	381,261

The following table sets forth the amount and maturities of time deposits at December 31, 2009.

	Amount Due
	Less Than One Year		1-2 Years		2-3 Years		After 3 Years		Total
	(In thousands)
0.00 - 2.00%	$	113,196	$	8,269	$	294	$	—	$	121,759
2.01 - 4.00%		103,412		49,061		17,021		739		170,233
4.01 - 6.00%		99,264		68,991		33,473		65,129		266,857
6.01 - 8.00%		—		534		—		—		534
Total	$	315,872	$	126,855	$	50,788	$	65,868	$	559,383

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The following table indicates the amount of the Bank’s certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2009.

Maturity Period	Certificates of Deposit
	(In millions)
Three months or less	$	39.3
Over three through six months		26.6
Over six through 12 months		75.1
Over 12 months		125.8
Total	$	266.8

Certificates of deposit at December 31, 2009 included approximately $266.8 million of deposits with balances of $100,000 or more, compared to $218.9 million and $143.6 million at December 31, 2008 and December 31, 2007, respectively. Such time deposits may be risky because their continued presence in the Bank is dependent partially upon the rates paid by the Bank rather than any customer relationship and, therefore, may be withdrawn upon maturity if another institution offers higher interest rates. The Bank may be required to resort to other funding sources such as borrowings or sales of its securities available for sale if the Bank believes that increasing its rates to maintain such deposits would adversely affect its operating results. At this time, the Bank does not believe that it will need to significantly increase its deposit rates to maintain such certificates of deposit and, therefore, does not anticipate resorting to alternative funding sources. See Note 6 of Notes to Consolidated Financial Statements.

The following table sets forth the deposit activities of the Bank for the periods indicated.

	Year Ended December 31,
	2009		2008		2007
	(In thousands)
Deposits	$	401,246	$	437,661	$	318,910
Withdrawals		332,506		336,464		304,966
Net increase before interest credited		68,740		101,197		13,944
Interest credited		12,399		13,055		15,376
Net increase in deposits	$	81,139	$	114,252	$	29,320

Borrowings. Savings deposits historically have been the primary source of funds for the Bank’s lending, investments and general operating activities. The Bank is authorized, however, to use advances from the FHLB of Cincinnati to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Cincinnati functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions.

As a member of the FHLB System, the Bank is required to own stock in the FHLB of Cincinnati and is authorized to apply for advances. Advances are pursuant to several different programs, each of which has its own interest rate and range of maturities. The Bank has entered into a Cash Management Advance program with FHLB. See Note 7 of Notes to Consolidated Financial Statements. Advances from the FHLB of Cincinnati were $102.5 million at December 31, 2009, and are secured by a blanket security agreement in which the Bank has pledged its 1-4 family first mortgage loans, multi-family residential real estate loans and non-residential real estate loan held in the Bank’s loan portfolio.

On September 25, 2003, the Company issued $10,310,000 in floating rate junior subordinated debentures with a thirty year maturity and callable at the Company’s discretion quarterly after September 25, 2008. The subordinated debentures are priced at a variable rate equal to the three month Libor (London Inter Bank Offering Rate) plus 3.10%. At December 31, 2009, the three-month Libor rate was 0.25%. The securities are immediately callable in the event of a change in tax or accounting law that has a significant negative impact to issuing these securities.

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For regulatory purposes, subordinated debentures may be treated as Tier I capital. Federal regulations limit the use of subordinated debentures to 25% of total Tier I capital. Discussions among regulatory agencies are underway that may limit the current and future use of subordinated debentures as Tier I capital. The Company’s decision to issue subordinated debentures was in part influenced by potential regulatory actions in the future. The Company anticipates above average growth to continue and anticipates a time in the future when capital ratios are lower and additional capital may be need.

In October of 2008, the Bank entered into an interest rate swap agreement. The agreement calls for the Bank to pay a fixed rate of 4.17% until October 8, 2015, on $10 million and receive payment equal to the three month libor. The Bank then completed an intercompany transaction that transferred the swap to the Company, providing an effective hedge for its variable rate subordinated debentures. At December 31, 2009, the cost to the Bank to terminate the swap is approximately $643,000.

Subsidiary Activities

As a federally chartered savings bank, the Bank is permitted to invest an amount equal to 2% of its assets in subsidiaries, with an additional investment of 1% of assets where such investment serves primarily community, inner-city and community development purposes. The Bank’s lone subsidiary is Fall and Fall Insurance Agency (“Fall and Fall”) of Fulton, Kentucky. Fall and Fall was acquired in the Fulton acquisition on September 5, 2002. The Bank’s investment in the agency is approximately $380,000.

Competition

The Bank faces significant competition both in originating mortgage and other loans and in attracting deposits. The Bank competes for loans principally on the basis of interest rates, the types of loans it originates, the deposit products it offers and the quality of services it provides to borrowers. The Bank also competes by offering products which are tailored to the local community. Its competition in originating real estate loans comes primarily from other savings institutions, commercial banks and mortgage bankers making loans secured by real estate located in the Bank’s market area. Commercial banks, credit unions and finance companies provide vigorous competition in consumer lending. Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions.

At June 30, 2009, the Bank had a 14.8% share of the deposit market in its combined markets. The Bank’s most significant competition across its entire market area was Branch Bank & Trust of North Carolina with a 10.4% deposit market share, U.S Bank National Association with an 7.9% deposit market share and Regions Bank of Alabama with an 9.4% deposit market share. In addition, each market contains other community banks that provide competitive products and services within individual markets.

The Bank attracts its deposits through its eighteen offices primarily from the local community. Consequently, competition for deposits is principally from other savings institutions, commercial banks and brokers in the local community as well as from credit unions. The Bank competes for deposits and loans by offering what it believes to be a variety of deposit accounts at competitive rates, convenient business hours, a commitment to outstanding customer service and a well-trained staff. The Bank believes it has developed strong relationships with local realtors and the community in general.

The Bank is a community and retail-oriented financial institution. Management considers the Bank’s branch network and reputation for financial strength and quality customer service as its major competitive advantage in attracting and retaining customers in its market area. A number of the Bank’s competitors have been acquired by statewide/nationwide banking organizations. While the Bank is subject to competition from other financial institutions which may have greater financial and marketing resources, management believes the Bank benefits by its community orientation and its long-standing relationship with many of its customers.

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Employees

As of December 31, 2009, the Company and the Bank had 230 full-time and 10 part-time employees, none of whom were represented by a collective bargaining agreement. Management considers the Bank’s relationships with its employees to be good.

TARP Preferred Stock and Warrant

On December 12, 2008, the Company received an $18.4 million investment from the United States Treasury in the form of preferred stock. The terms of the investment included a 5% dividend for five years, increasing to 9% thereafter. The investment has no stated maturity but may be paid back in whole or part after three years without penalty. The investment may be paid back in less than three years upon the Company’s successful sale of an equal number of common equity. In addition to the dividend, the Treasury received 243,816 stock warrants that are immediately exercisable with a ten year maturity and a strike price of $11.32. Given the current trading price of the Company’s common stock, raising significant amounts of new capital would be highly dilutive to shareholders. The Company will continue to compare the cost and benefits of raising equity capital in 2010. The Company feels that it has an adequate level of capital to meeting its current operating needs. As the time approaches for the preferred stock dividend to increase to 9%, the Company will be more likely to raise additional equity capital. Additional information on the United States Treasury Investment in HopFed Bancorp can be found in Note 17 of the audited financial statements.

SUPERVISION AND REGULATION

General

The Bank is examined and supervised by the Office of Thrift Supervision and is subject to examination by the Federal Deposit Insurance Corporation. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance funds and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the federal agency critiques the institution’s operations and assigns its rating (known as an institution’s CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. The Bank also is a member of and owns stock in the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. The Bank also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System, governing reserves to be maintained against deposits and other matters. The Office of Thrift Supervision will examine the Bank and prepare reports for the consideration of its board of directors on any operating deficiencies. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s loan documents.

Any change in these laws or regulations, whether by the Federal Deposit Insurance Corporation, the Office of Thrift Supervision or Congress, could have a material adverse impact on HopFed Bancorp, Inc., The Bank and their operations.

HopFed Bancorp, Inc., as a savings and loan holding company, is required to file certain reports with, is subject to examination by, and otherwise must comply with rules and regulations of the Office of Thrift Supervision. HopFed Bancorp, Inc. is also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Certain of the regulatory requirements that are applicable to the Bank and HopFed Bancorp, Inc. are described below. This description is not intended to be a complete explanation of such statutes and regulations and their effects on the Bank and HopFed Bancorp, Inc. and is qualified in its entirety by reference to the actual statutes and regulations.

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Federal Banking Regulation

Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the Office of Thrift Supervision. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential real estate without limitation as a percentage of assets, and may invest in non-residential real estate loans up to 400% of capital in the aggregate, commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate, and in certain types of debt securities and certain other assets. The Bank also may establish subsidiaries that may engage in activities not otherwise permissible for the Bank, including real estate investment and securities and insurance brokerage.

Capital Requirements. Office of Thrift Supervision regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4.0% leverage ratio (3.0% for savings associations receiving the highest rating on the CAMELS rating system) and an 8.0% risk-based capital ratio.

The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4.0% and 8.0%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings association that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings association. In assessing an institution’s capital adequacy, the Office of Thrift Supervision takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.

At December 31, 2009, the Bank’s capital exceeded all applicable requirements.

Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2009, the Bank’s largest lending relationship with a single or related group of borrowers totaled $9.4 million, which represented 10.5% of unimpaired capital and surplus. Therefore, the Bank was in compliance with the loans-to-one borrower limitations.

Qualified Thrift Lender Test. As a federal savings association, the Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, the Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.

The Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.

A savings association that fails the qualified thrift lender test must either convert to a bank charter or operate under specified restrictions set forth in the Home Owners’ Loan Act. At December 31, 2009, the Bank maintained approximately 79% of its portfolio assets in qualified thrift investments and, therefore, satisfied the QTL test.

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Capital Distributions. Office of Thrift Supervision regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account. A savings association must file an application for approval of a capital distribution if:

• the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;

• the savings association would not be at least adequately capitalized following the distribution;

• the distribution would violate any applicable statute, regulation, agreement or Office of Thrift Supervision-imposed condition; or

• the savings association is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must still file a notice with the Office of Thrift Supervision at least 30 days before the board of directors declares a dividend or approves a capital distribution.

The Office of Thrift Supervision may disapprove a notice or application if:

• the savings association would be undercapitalized following the distribution;

• the proposed capital distribution raises safety and soundness concerns; or

• the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

The Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making such distribution the institution would be undercapitalized.

In addition, the Company is subject to a restriction and condition that it will not declare any future dividend payable to its common stockholders without prior approval from the Office of Thrift Supervision.

Liquidity. The Bank maintains sufficient liquidity to ensure safe and sound operation in accordance with Office of Thrift Supervision regulations.

Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations of the Office of Thrift Supervision to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the Office of Thrift Supervision is required to assess the savings association’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of Thrift Supervision, as well as other federal regulatory agencies and the Department of Justice. The Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination. The Community Reinvestment Act requires all Federal Deposit Insurance – insured institutions to publicly disclose their ratings.

Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by Office of Thrift Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as the Bank. HopFed Bancorp, Inc. is an affiliate of the Bank. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral of specific types and in specified amounts ranging from 10% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings association. In addition, Office of Thrift

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Supervision regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. The Office of Thrift Supervision requires savings associations to maintain detailed records of all transactions with affiliates.

The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:

(i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

(ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors.

Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the Office of Thrift Supervision may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or to recommend to the Director of the Office of Thrift Supervision that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the Office of Thrift Supervision is required and authorized to take supervisory actions against undercapitalized savings associations. For this purpose, a savings association is placed in one of the following five categories based on the savings association’s capital:

• well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);

• adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);

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• undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital);

• significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and

• critically undercapitalized (less than 2% tangible capital).

Generally, the banking regulator is required to appoint a receiver or conservator for a savings association that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date a savings association receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities in which the savings association will engage while the capital restoration plan is in effect, and assurances that the capital restoration plan will not appreciably increase the current risk profile of the savings association. Any holding company for the savings association required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the savings association’s assets at the time it was notified or deemed to be undercapitalized by the Office of Thrift Supervision, or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the Office of Thrift Supervision notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the Office of Thrift Supervision has the authority to require payment and collect payment under the guarantee. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings association, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The Office of Thrift Supervision may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors. At December 31, 2009, the Bank met the criteria for being considered “well-capitalized.”

Ratio of Earnings to Fixed Charges

The table below is the Company’s computation of earnings to fixed charges for the years ended December 31, 2005 through December 31, 2009. (All dollars in thousands).

	2009	2008	2007	2006	2005
Including interest on deposits
Earnings
Pre-tax income	2,372	6,567	5,844	5,608	5,874
Add: fixed charges from below	26,312	26,420	28,891	23,288	15,474
	28,684	32,987	34,735	28,896	21,348
Fixed Charges:
Total interest expense	26,312	26,420	28,891	23,288	15,474
Preference security dividend	1,394	56	—	—	—
Including preference security dividend	27,706	26,476	28,891	23,288	15,474
Ratio of earnings to fixed charges	1.09	1.25	1.20	1.24	1.38
Including preference security dividend	1.04	1.25	1.20	1.24	1.38
Excluding interest on deposits
Earnings
Pre-tax income	2,372	6,567	5,844	5,608	5,874
Add: fixed charges from below	5,479	5,631	6,612	6,383	3,565
	7,851	12,198	12,456	11,991	9,439
Fixed Charges:
Total interest expense excluding interest paid on deposits	5,479	5,631	6,612	6,383	3,565
Preference security dividend	1,394	56	—	—	—
Including preference security dividend	6,873	5,687	6,612	6,383	3,565
Ratio of earnings to fixed charges	1.43	2.17	1.88	1.88	2.65
Including preference security dividend	1.14	2.14	1.88	1.88	2.65

Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. No institution may pay a dividend if it is in default of the federal deposit insurance assessment.

For 2008, assessments ranged from five to forty-three basis points of assessable deposits. Due to losses incurred by the Deposit Insurance Fund in 2008 from failed institutions, and anticipated future losses, the Federal Deposit Insurance Corporation, pursuant to a Restoration Plan to replenish the fund, adopted an across the board seven basis point increase in the assessment range for the first quarter of 2009. The Federal Deposit Insurance Corporation adopted further refinements to its risk-based assessment that were effective April 1, 2009 and effectively make the range seven to 77 ¹ /2 basis points. The Federal Deposit Insurance Corporation has also provided for the possibility of two additional special assessments for the final two quarters of 2009, if deemed necessary.

Due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000 for all types of accounts until January 1, 2014. In addition, the Federal Deposit Insurance Corporation adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest-bearing transaction accounts would receive unlimited insurance coverage, and certain senior unsecured debt issued by institutions and their holding companies would temporarily be guaranteed by the Federal Deposit Insurance Corporation. The Bank made the business decision not to participate in the unlimited noninterest-bearing transaction account coverage and also opted not to participate in the unsecured debt guarantee program.

The Federal Deposit Insurance Corporation may pay dividends to insured institutions once the Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of estimated insured deposits. In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund.

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The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. The management of The Bank does not know of any practice, condition or violation that might lead to termination of its deposit insurance.

U.S. Treasury’s Troubled Asset Relief Program Capital Purchase Program. The Emergency Economic Stabilization Act of 2008 provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. financial markets. One of the programs resulting from the legislation is the Troubled Asset Relief Program/Capital Purchase Program, or CPP, which provides direct equity investment by the U.S. Treasury Department in perpetual preferred stock of qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. The CPP provides for a minimum investment of 1.0% of total risk-weighted assets and a maximum investment equal to the lesser of three percent of total risk-weighted assets or $25 billion. Participation in the program is not automatic and is subject to approval by the U.S. Treasury Department. We opted to participate in the CPP.

Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Atlanta, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2009, the Bank was in compliance with this requirement.

Other Regulations

Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

• Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

• Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

• Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

• Truth in Savings Act; and

• rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

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The operations of the Bank also are subject to the:

• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

• Electronic Funds Transfer Act and Regulation E promulgated there under, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

• Check Clearing for the 21^st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

• The USA Patriot Act and the related regulations of the Office of Thrift Supervision, which require savings associations operating in the United States, among other things, to develop anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. These compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

• The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

General. HopFed Bancorp, Inc. is a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, HopFed Bancorp, Inc. is registered with the Office of Thrift Supervision and subject to Office of Thrift Supervision regulations, examinations, supervision and reporting requirements. In addition, the Office of Thrift Supervision has enforcement authority over HopFed Bancorp, Inc. and its subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the Federal Reserve Board.

Permissible Activities. Under present law, the business activities of HopFed Bancorp, Inc. are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Office of Thrift Supervision, and certain additional activities authorized by Office of Thrift Supervision regulations.

Federal law prohibits a savings and loan holding company, including HopFed Bancorp, Inc., directly or indirectly, or through one or more subsidiaries, from acquiring more than 5.0% of another savings institution or holding company thereof, without prior written approval of the Office of Thrift Supervision. It also prohibits the acquisition or retention of, with certain exceptions, more than 5.0% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.

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The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

(i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and

(ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including all documents incorporated herein by reference, 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 1A. RISK FACTORS

The Company could experience an increase in loan losses, which would reduce the Company’s earnings.

As the nation continues to suffer from an economic recession, real estate prices remain under pressure in the Company’s market. Furthermore, elevated levels of unemployment have made it difficult for many consumers to meet their monthly obligations. The deployment of military personnel out of Fort Campbell to the Middle East may reduce both demand for and pricing of all types of real estate in the Company’s largest market. As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. As discussed in Footnote 3 of the Notes to Consolidated Financial Statements, the Company has significant exposure to various types of real estate loans, including commercial real estate, land and land development loans, construction loans, multi-family

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real estate and loans for residential homes. Credit losses are inherent in the business of making loans and our industry has seen above average loan loss levels for approximately eighteen months. While the Company believes that its loan underwriting standards have been and remain sound, the Company has experienced an increase in charge offs and non-performing loans. To the extent charge offs exceed our financial models, increased amounts charged to the provision for loan losses would reduce net income.

Rapidly changing interest rate environments could reduce our net interest margin, net interest income, fee income and net income.

Interest and fees on loans and securities, net of interest paid on deposits and borrowings, are a large part of our net income. Interest rates are the key drivers of the Company’s net interest margin and subject to many factors beyond the control of management. As interest rates change, net interest income is affected. Rapid increases in interest rates in the future could result in interest expense increasing faster than interest income because of mismatches in the maturities of the Company’s assets and liabilities. Furthermore, substantially higher rates generally reduce loan demand and may result in slower loan growth. Decreases or increases in interest rates could have a negative effect on the spreads between interest rates earned on assets and the rates of interest paid on liabilities, and therefore decrease net interest income. See “Quantitative and Qualitative Disclosures about Market Risk”

Liquidity needs could adversely affect the Company’s results of operations and financial condition.

The Company relies on dividends from the Bank as a primary source of funds. The Bank’s primary source of funds is customer deposits and cash flows from investment instruments and loan repayments. While scheduled loan repayments are a relatively stable source, they are subject to the ability of the borrowers to repay their loans. The ability of the borrowers to repay their loans can be adversely affected by a number of factors, including changes in the economic conditions, adverse trends or events affecting the business environment, natural disasters and various other factors. Cash flows from the investment portfolio may be affected by changes in interest rates, resulting in excessive levels of cash flow during periods of declining interest rates and lower levels of cash flow during periods of rising interest rates. Deposit levels may be affected by a number of factors, including both the national market and local competitive interest rate environment, local and national economic conditions, natural disasters and other various events. Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include the FHLB advances, brokered deposits and federal funds lines of credit from correspondent banks.

The Company may also pledge investments as collateral to borrow money from third parties. In certain cases, the Company may sell investment instruments for sizable losses to meet liquidity needs, hurting net income. While the Company believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity needs.

The financial industry is very competitive.

We face competition in attracting and retaining deposits, making loans, and providing other financial services throughout our market area. Our competitors include other community banks, regional and super-regional banking institutions, national banking institutions, and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies, brokerage companies, and other non-bank businesses. Many of these competitors have substantially greater resources than HopFed Bancorp, Inc.

Inability to hire or retain certain key professionals, management and staff could adversely affect our revenues and net income.

We rely on key personnel to manage and operate our business, including major revenue generating functions such as our loan and deposit portfolios. The loss of key staff may adversely affect our ability to maintain and manage these portfolios effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting, hiring, and training expenses, resulting in lower net income.

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The Company is subject to extensive regulation that can limit or restrict its activities.

The Company operates in a highly regulated industry and is subject to examination, supervision, and comprehensive regulation by various federal agencies, including the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The Company’s regulatory compliance is costly. Certain types of activities, including the declaration and payment of dividends, mergers and acquisitions, investments, lending (including the amount and types of loans originated), interest rates charged, and interest rates paid are subject to regulatory approval and may be limited by regulation or the supervisory authority of the regulators. The Company currently is subject to a restriction that it will not declare any future common stock dividend without prior Office of Thrift Supervision approval.

The Company is also subject to capitalization guidelines established by its regulators, which require it and the Bank to maintain adequate capital to support its and the Bank’s growth.

The laws and regulations applicable to the banking industry could change at any time, and the Company cannot predict the effects of these changes on its business. To the extent activities of the Company and/or the Bank are restricted or limited by regulation or regulators’ supervisory authority, the Company’s future profitability may be adversely affected.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and NASDAQ Global Market that are now and will be applicable to the Company, have increased the scope, complexity, and cost of corporate governance, reporting and disclosure practices. As a result, the Company has experienced, and may continue to experience, greater compliance cost.

Even though the Company’s common stock is currently traded on The NASDAQ National Market, the trading volume in the Company’s common stock has been low and the sale of substantial amounts of its common stock in the public market could depress the price of the Company’s common stock.

The trading volume of the Company’s common stock on The NASDAQ Global Market has been relatively low when compared with larger companies listed on The NASDAQ Global Market or other stock exchanges. Thinly traded stocks, such as the Company’s, can be more volatile than stocks trading in an active public market. Because of this, the Company stockholders may not be able to sell their shares at the volumes, prices, or times that they desire.

The Company cannot predict the effect, if any, that future sales of its common stock in the market, or availability of shares of its common stock for sale in the market, will have on the market prices of the Company’s common stock. The Company, therefore, can give no assurance that sales of substantial amounts of its common stock in the market, or the potential for large amounts of sale in the market, would not cause the price of its common stock to decline or impair the Company’s ability to raise capital through sales of its common stock.

The market price of the Company’s common stock may fluctuate in the future, and these fluctuations may be unrelated to its performance. General market prices declines or overall market volatility in the future could adversely affect the price of the Company’s common stock, and the current market price may not be indicative of future market prices.

The current banking crisis, including the enactment of Emergency Economic Stabilization Action (EESA) and American Recovery and Reinvestment Act (ARRA), have significantly affected our financial condition, results of operations, liquidity or stock price.

The capital and credit markets have been experiencing volatility and disruption for more than a year. In recent months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers seeming without regard to those issuer’s underlying financial strength.

EESA, which established the TARP, was signed into law in October 2008. As part of TARP, the Treasury established the Capital Purchase Program (CPP) to provide up to $700 billion of funding to eligible financial institutions through the purchase of preferred shares and other financial instruments with the stated purpose of stabilizing and providing liquidity to the U.S. financial markets. On December 12, 2008, the Company accepted an $18.4 million treasury investment of preferred stock with terms that included a 5% dividend that increases to 9% after five years. The Company issued 243,816 common stock warrants that are immediately issued and have a strike price of $11.32 and have a ten year maturity.

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On February 17, 2009, President Obama signed ARRA, an economic recovery package intended to stimulate the economy and provide for a broad range of infrastructure, energy, health and educational needs. There can be no assurance as to the actual impact that EESA or its programs, including the CPP, and the ARRA or its programs, will have on the national economy or financial markets. The failure of these significant legislative measures to help stabilize the financial markets and the continuation or worsening of current financial market conditions may materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common shares.

In February 2009, the FDIC established a revised rate structure for all member banks. The rate structure includes significant increases in quarterly fees charged to banks as well as a one-time fee of approximately $480,000 that was charged September 30, 2009 for deposit balances at June 30, 2009. In addition, the Company was required to prepay approximately $4.3 million in fees to the FDIC, representing estimated quarterly fees for the three month periods beginning October 1, 2009, and ending December 31, 2012. The revised rate structure will result in a significant increase in operating expenses and lower levels of net income. The Company can not determine the extent of future regulator fee increases and emergency assessments required by the FDIC.

The Company conducts virtually all of its business activities in a geographically concentrated area of Middle and West Tennessee and Western Kentucky.

The Company operates eighteen offices located in Middle Tennessee and Western Kentucky. The Company maintains significant business relationships in the markets in which it operates as well as the communities adjoining our offices. Therefore, the Company’s success is directly tied to the economic viability of our markets which may not be representative of the country as a whole. In 2009, the Company’s market had unemployment rates ranging from 10% to 15%. While the Company believes that its credit quality has been strong given the current environment, continued economic stress in the market may result in an increase in non-performing loans and charge offs. Given the limited geographic footprint of our Company, the economic conditions in our marketplace may not be reflective of the entire nation.

Management’s analysis of the necessary funding for the allowance for loan loss account may be incorrect or may suddenly change, resulting in lower earnings.

The funding of the allowance for loan loss account is the most significant estimate made by management in its financial reporting to shareholders and regulators. If negative changes to the performance of the Company’s loan portfolio were to occur, management may find it necessary or be required to funding the allowance for loan loss account through additional charges to the Company’s provision for loan loss expense. These changes may occur suddenly and be dramatic in nature. These changes are likely to affect the Company’s financial performance, capital levels and stock price.

ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments from the Securities and Exchange Commission.

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ITEM 2. PROPERTIES

The following table sets forth information regarding the Bank’s offices at December 31, 2009.

	Year Opened	Owned or Leased	Book Value (1)		Approximate Square Footage of Office
			(In thousands)
Main Office:
4155 Lafayette Road
Hopkinsville, Kentucky	2006	Owned	$	6,062	24,072
Branch Offices:
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky	1995	Owned	$	1,471	17,625
Downtown Branch Office
605 South Virginia Street
Hopkinsville, Kentucky	1997	Owned	$	143	756
Murray South Office
210 N. 12th Street
Murray, Kentucky	2003	Owned	$	1,799	5,600
Murray North Office
1601 North 12th Street
Murray, Kentucky	2007	Owned	$	1,377	3,400
Cadiz Branch Office
352 Main Street
Cadiz, Kentucky	1998	Owned	$	395	2,200
Elkton Branch Office
536 W. Main Street
Elkton, Kentucky	1976	Owned	$	110	3,400
Benton Branch Office
105 W. 5th Street
Benton, Kentucky	2003	Owned	$	550	4,800
Calvert City Office
35 Oak Plaza Drive
Calvert City, Kentucky	2003	Owned	$	1,224	3,400
Carr Plaza Office
607 N. Highland Drive
Fulton, Kentucky	2002	Owned	$	227	800
Lake Street Office
306 Lake Street
Fulton, Kentucky	2002	Owned	$	1,121	15,000
Fall & Fall Insurance Office
101 Main Street
Fulton, Kentucky	2002	Owned	$	24	3,200
Clarksville Main Street
322 Main Street
Clarksville, Tennessee	2007	Owned	$	1,677	10,000
Trenton Road Branch
3845 Trenton Road
Clarksville, Tennessee	2006	Owned	$	2,701	3,362
Madison Street Office
2185 Madison Street
Clarksville, Tennessee	2007	Owned	$	1,936	3,950
Houston County Office
1102 West Main Street
Erin, Tennessee	2006	Owned	$	571	2,390
Ashland City Office
108 Cumberland Street
Ashland City, Tennessee	2006	Owned	$	1,439	7,058
Pleasant View Office
2556 Highway 49 East
Pleasant View, Tennessee	2006	Owned	$	770	2,433
Kingston Springs Office
104 West Kingston Springs Road
Kingston Springs, Tennessee	2006	Owned	$	1,731	9,780
Total			$	25,328

(1) Represents the book value of land, building, furniture, fixtures and equipment owned by the Bank.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company or the Bank is a party to various legal proceedings incident to its business. At December 31, 2009 there were no legal proceedings to which the Company or the Bank was a party, or to which any of their property was subject, which were expected by management to result in a material loss to the Company or the Bank. There are no pending regulatory proceedings to which the Company or the Bank is a party or to which any of their properties is subject which are currently expected to result in a material loss.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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EXECUTIVE OFFICERS OF THE REGISTRANT

John E. Peck. Mr. Peck, 45, has served as President and Chief Executive Officer of the Company and the Bank since July 2000. Prior to that, he was President and Chief Executive Officer of United Commonwealth Bank and President of Firstar Bank-Calloway County.

Boyd M. Clark. Mr. Clark, 64, has served as Senior Vice President — Loan Administration of the Bank since 1995. Prior to his current position, Mr. Clark served as First Vice President of the Bank. He has been an employee of the Bank since 1973. Mr. Clark also serves as Vice President and Secretary of the Company. From May to July 2000, Mr. Clark served as Acting President of both the Company and the Bank.

Michael L. Woolfolk. Mr. Woolfolk, 56, has served as Executive Vice President and Chief Operations Officer of the Bank since August 2000. Prior to that, he was President of Firststar Bank–Marshall County, President and Chief Executive Officer of Bank of Marshall County and President of Mercantile Bank.

Billy C. Duvall. Mr. Duvall, 44, has served as Senior Vice President, Chief Financial Officer and Treasurer of the Company and the Bank since June 1, 2001. Prior to that, he was an Auditor with Rayburn, Betts & Bates, P.C., independent public accountants and a Principal Examiner with the National Credit Union Administration.

Michael F. Stalls. Mr. Stalls, 58, has served as Senior Vice President, Chief Credit Officer of the Bank since May 28, 2004. Prior to that, he was a Senior Lender at Regions Bank in Winchester, Tennessee for 18 years and Vice President of First Tennessee Bank in Knoxville, Tennessee.

All officers serve at the discretion of the boards of directors of the Company or the Bank. There are no known arrangements or understandings between any officer and any other person pursuant to which he or she was or is to be selected as an officer.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERS PURCHASES OF EQUITY SECURITIES.

A dividend of $0.12 per share was declared in each of the four quarters in 2009 and 2008. The high and low price range of the Company’s common stock for 2009 and 2008 is set forth below:

	Year Ended December 31, 2009				Year Ended December 31, 2008
	High		Low		High		Low
First Quarter	$	12.49	$	8.43	$	14.97	$	13.00
Second Quarter	$	9.75	$	8.13	$	14.50	$	13.15
Third Quarter	$	11.51	$	9.25	$	14.00	$	11.01
Fourth Quarter	$	11.00	$	9.33	$	12.99	$	8.78

At December 31, 2009, the Company estimates that is has approximately 2,200 shareholders, with approximately 1,050 reported in the name of the shareholder and the remainder recorded in street name.

On August 25, 2006, the Company announced that its Board of Directors had approved the repurchase of an additional 125,000 of the Company’s common stock, or approximately 3.5% of the total shares outstanding. The purchases are being made from time to time on the NASDAQ Stock Market at prices prevailing on that market or in privately negotiated transactions at management’s discretion, depending on market conditions, price of the Company’s common stock, corporate cash requirements and other factors. The Company has repurchased a total of

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515,555 shares of common stock under all current and prior repurchase programs. The Company’s current repurchase plan has expired. The Company’s participation in the United States Treasury’s Capital Purchase Program precludes it from repurchasing additional treasury shares for a three year period.

ITEM 6. SELECTED FINANCIAL DATA

The information set forth under the caption “Selected Financial Information and Other Data” in the Company’s Annual Report to Stockholders for the year ended December 31, 2009 (Exhibit No. 13.1) is incorporated herein by reference. See Note 17 of Notes of Consolidated Financial Statements which is incorporated herein by reference

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report to Stockholders for the year ended December 31, 2009 (Exhibit No. 13.1) is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity Analysis” in the Company’s Annual Report to Stockholders for the year ended December 31, 2009 (Exhibit No. 13.1) is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company’s Consolidated Financial Statements together with the related notes and the report of Rayburn, Bates & Fitzgerald, P.C., independent registered public accounting firm, all as set forth in the Company’s Annual Report to Stockholders for the year ended December 31, 2009 (Exhibit No. 13.1) are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable

ITEM 9A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to insure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decision making regarding required disclosure. The Company, under the supervision and participation of its management, including the Company’s Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report pursuant to the Exchange Act. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that all material information required to be disclosed is this annual report has been accumulated and communicated to them in a manner appropriate to allow timely decisions regarding required disclosures.

Management Report on Internal Control

The management of HopFed Bancorp, Inc. and its subsidiaries Heritage Bank, (collectively referred to the as Company) is responsible for the preparation, integrity and fair presentation of published financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, as such, include amounts based on informed judgments and estimates made by management.

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Management is responsible for establishing and maintaining adequate internal control over financial reporting for financial presentations in conformity with GAAP. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and included those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company.

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, or that the degree of compliance with the policies and procedures include in such controls may deteriorate.

Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2009 based on the control criteria established in a report entitled Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that HopFed Bancorp’s internal control over financial reporting is effective as of December 31, 2009.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.

Date: March 31, 2010	By:	/s/ John E. Peck
		John E. Peck
		President and Chief Executive Officer
	By:	/s/ Billy C. Duvall
		Billy C. Duvall
		Senior Vice President and Treasurer
		(Principal Financial Officer)

ITEM 9B. OTHER INFORMATION

Not Applicable

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors of the Company is omitted from this Report as the Company will file a definitive proxy statement (the “Proxy Statement”) not later than 120 days after December 31, 2009, and the information included therein under “Proposal I — Election of Directors” is incorporated herein by reference. Information regarding the executive officers of the Company is included under separate caption in Part I of this Form 10-K

Information regarding Section 16(a) beneficial ownership reporting compliance is omitted from this Report as the Company will file the Proxy Statement not later than 120 days after December 31, 2009, and the information included therein under “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

Information regarding audit committee financial expert compliance is omitted from this Report as the Company will file the Proxy Statement not later than 120 days after December 31, 2009, and the information contained therein under “Committees of the Board of Directors” is incorporated herein by reference.

The Company has adopted a code of ethics that applies to all directors and employees, including without exception, the principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is omitted from this Report as the Company will file the Proxy Statement not later than 120 days after December 31, 2009, and the information included therein under “Proposal I — Election of Directors” is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by this Item is omitted from this Report as the Company will file the Proxy Statement not later than 120 days after December 31, 2009, and the information included therein under “Voting Securities and Principal Holders Thereof” and “Proposal I – Election of Directors” is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item is omitted from this Report as the Company will file the Proxy Statement, not later than 120 days after December 31, 2009, and the information included therein under “Proposal I — Election of Directors” is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is omitted from this report as the Company will file the Proxy Statement not later than 120 days after December 31, 2009, and the information included therein under “Independent Registered Public Accounting Firm” is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following consolidated financial statements of the Company included in the Annual Report to Stockholders for the year ended December 31, 2009, are incorporated herein by reference in Item 8 of this Report. The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this Report, except as expressly provided herein.

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1. Report of Independent Registered Public Accounting Firm.

2. Consolidated Balance Sheets - December 31, 2009 and 2008.

3. Consolidated Statements of Income for the Years Ended December 31, 2009, 2008 and 2007.

4. Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007.

5. Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007.

6. Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007.

7. Notes to Consolidated Financial Statements.

(b) The following exhibits either are filed as part of this Report or are incorporated herein by reference:

Exhibit No. 2. Plan of Conversion of Hopkinsville Federal Savings Bank. Incorporated herein by reference to Exhibit No. 2 to Registrant’s Registration Statement on Form S-1 (File No. 333-30215).

Exhibit No. 3.1. Certificate of Incorporation. Incorporated herein by reference to Exhibit No. 3.1 to Registrant’s Registration Statement on Form S-1 (File No. 333-30215).

Exhibit No. 3.2 Certificate of Designations with respect to Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Incorporated herein by reference to Exhibit No. 3.1 to Registrant’s Current Report on Form 8-K dated December 12, 2008 (filed December 17, 2008).

Exhibit No. 3.3 Bylaws, as amended. Incorporated herein by reference to Exhibit No. 3.2 to Registrant’s Current Report on Form 8-K dated December 5, 2007 (filed December 6, 2007).

Exhibit No. 3.4 Warrant to Purchase up to 243,816 shares of Common Stock. Incorporated herein by reference to Exhibit No. 3.2 to Registrant’s Current Report on Form 8-K dated December 12, 2008 (filed December 17, 2008).

Exhibit No. 10.1. HopFed Bancorp, Inc. Management Recognition Plan. Incorporated herein by reference to Exhibit 99.1 to Registration Statement on Form S-8 (File No. 333-79391).

Exhibit No. 10.2. HopFed Bancorp, Inc. 1999 Stock Option Plan. Incorporated herein by reference to Exhibit 99.2 to Registration Statement on Form S-8 (File No. 333-79391).

Exhibit No. 10.3. Employment Agreement by and between Hopkinsville Federal Savings Bank and John E. Peck. Incorporated herein by reference to Exhibit No. 10.2 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.

Exhibit No. 10.4. Employment Agreement by and between Registrant and John E. Peck. Incorporated herein by reference to Exhibit No. 10.2 to Registrant’s Current Report on Form 8-K dated April 17, 2008 (filed April 22, 2008).

38

Exhibit No. 10.5. HopFed Bancorp, Inc. 2000 Stock Option Plan. Incorporated herein by reference to Exhibit 10.10 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.

Exhibit No. 10.6. Employment Agreement by and between Registrant and Billy C. Duvall. Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated February 12, 2008 (filed February 19, 2008).

Exhibit No. 10.7. Employment Agreement by and between Heritage Bank and Billy C. Duvall. Incorporated herein by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated February 12, 2008 (filed February 19, 2008).

Exhibit No. 10.8. Employment Agreement by and between Registrant and Michael L. Woolfolk. Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated April 17, 2008 (filed April 22, 2008).

Exhibit No. 10.9. Employment Agreement by and between Heritage Bank and Michael L. Woolfolk. Incorporated herein by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated April 17, 2008 (filed April 22, 2008).

Exhibit No. 10.10. Fulton Division Acquisition Agreement dated as of March 1, 2002, by and between Old National Bank and Hopkinsville Federal Bank. Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated March 1, 2002.

Exhibit No. 10.11 HopFed Bancorp, Inc. 2004 Long Term Incentive Plan. Incorporated herein by reference to Exhibit 99.3 to Registration Statement on Form S-8 (File No. 333-117956) dated August 5, 2004.

Exhibit No. 10.12 Employment Agreement by and between Registrant and Michael F. Stalls. Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated February 12, 2008 (filed February 19, 2008).

Exhibit No. 10.13 Employment Agreement by and between Heritage Bank and Michael F. Stalls. Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated February 12, 2008 (filed February 19, 2008).

Exhibit No. 10.17 Form of Letter Agreement, executed by each of Messrs. John E. Peck, Michael L. Woolfolk, Michael F. Stalls, Billy C. Duvall, and Keith Bennett with Registrant. Incorporated herein by reference to Exhibit No. 10.3 to Registrant’s Current Report on Form 8-K dated December 12, 2008 (filed December 17, 2008)

Exhibit No. 13.1. Annual Report to Stockholders Except for those portions of the Annual Report to Stockholders for the year ended December 31, 2009, which are expressly incorporated herein by reference, such Annual Report is furnished for the information of the Commission and is not to be deemed “filed” as part of this Report.

Exhibit No. 14.1. Code of Ethics. Incorporated herein by reference to Exhibit 14 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

Exhibit No. 21.1 Subsidiaries of the Registrant.

Exhibit No. 23.1. Consent of Rayburn, Bates & Fitzgerald, P.C.

Exhibit No. 31.1 Certification of Principal Executive Officer pursuant to Exchange Act Rule

13a – 14(a) or 15d – 14(a).

Exhibit No. 31.2 Certification of Principal Financial Officer pursuant to Exchange Act Rule

13a – 14(a) or 15d – 14(a).

39

Exhibit No 32.1. Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

Exhibit No 32.2. Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

Exhibit 99.1. Certification of Principal Executive Officer pursuant to 31 C.F.R. Section 30.15.

Exhibit 99.2. Certification of Principal Financial Officer pursuant to 31 C.F.R. Section 30.15.

(c) All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorized.

	HOPFED BANCORP, INC.
		(Registrant)
Date: March 31, 2010	By:	/s/ John E. Peck
		John E. Peck
		President and
		Chief Executive Officer

40

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.

DATE: SIGNATURE AND TITLE:

/s/ John E. Peck	March 31, 2010
John E. Peck
Director, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Billy C. Duvall	March 31, 2010
Billy C. Duvall
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ Gilbert E. Lee	March 31, 2010
Gilbert E. Lee
Chairman of the Board
/s/ Boyd M. Clark	March 31, 2010
Boyd M. Clark
Director, Vice President and Secretary
/s/ Steve Hunt	March 31, 2010
Steve Hunt
Director
/s/ Harry J. Dempsey	March 31, 2010
Harry J. Dempsey
Director
/s/ Ted Kinsey	March 31, 2010
Ted Kinsey
Director
/s/ Thomas I. Miller	March 31, 2010
Thomas I. Miller
Vice-Chairman of the Board

41

EX-13.1

Exhibit 13.1

SELECTED FINANCIAL INFORMATION AND OTHER DATA

The following summary of selected financial information and other data does not purport to be complete and is qualified in its entirety by reference to the detailed information and Consolidated Financial Statements and accompanying Notes appearing elsewhere in this Report.

Financial Condition and Other Data

	At December 31,
	2009		2008		2007		2006		2005
	(Dollars in thousands)
Total amount of:
Assets	$	1,029,876	$	967,560	$	808,352	$	770,888	$	639,589
Loans receivable, net		642,355		628,356		576,252		494,968		397,310
Federal funds sold		—		16,080		3,755		3,270		2,250
Cash and due from banks		37,938		15,268		17,343		14,423		13,487
Interest-bearing deposits in Federal Home Loan Bank (FHLB)		3,173		5,727		931		4,190		424
Federal Home Loan Bank stock		4,281		4,050		3,836		3,639		3,211
Securities available for sale		289,691		246,952		142,310		183,339		172,890
Securities held to maturity:
U.S. Government agency securities		—		—		13,541		17,318		17,292
Mortgage-backed Securities		—		454		554		700		891
Deposits		794,144		713,005		598,753		569,433		482,728
FHLB advances		102,465		130,012		101,882		113,621		93,172
Subordinated debentures		10,310		10,310		10,310		10,310		10,310
Total stockholders’ equity		79,949		78,284		55,803		52,270		49,842
Number of active:
Real estate loans Outstanding (1)		5,886		6,313		6,211		5,316		5,076
Deposit accounts (1)		51,141		94,171		76,823		67,252		51,635
Offices open		18		18		18		15		9
Operating Data
	At December 31,
	2009		2008		2007		2006		2005
	(Dollars in thousands)
Interest and dividend income	$	53,141	$	49,477	$	49,033	$	40,668	$	29,666
Interest expense		26,312		26,420		28,891		23,288		15,474
Net interest income before provision for loan losses		26,829		23,057		20,142		17,380		14,192
Provision for loan losses		4,199		2,417		976		1,023		1,250
Net interest income		22,630		20,640		19,166		16,357		12,942
Non-interest income		10,225		8,344		7,231		5,765		4,532
Non-interest expense		30,483		22,417		20,553		16,514		11,600
Income before income taxes		2,372		6,567		5,844		5,608		5,874
Provision for income taxes		397		1,952		1,728		1,700		1,744
Net income	$	1,975	$	4,615	$	4,116	$	3,908	$	4,130
Preferred stock dividend and accretion of stock warrants		1,031		56		—		—		—
Net income available to common shareholders	$	944	$	4,559	$	4,116	$	3,908	$	4,130

(1) In 2009, the Bank purged all closed deposit accounts from its system, significantly reducing the amount of deposit accounts. Prior to 2009, the total amount of deposit accounts included closed accounts.

1

Selected Quarterly Information (Unaudited)

	First Quarter		Second Quarter		Third Quarter			Fourth Quarter
	( Dollars in thousands)
Year Ended December 31, 2009:
Interest and dividend income	$	13,194	$	13,307	$	13,505		$	13,135
Net interest income after provision for losses on loans		5,421		5,600		5,491			6,118
Non-interest income		2,359		2,741		2,085			3,040
Non-interest expense		5,962		6,781		11,675			6,065
Net income (loss) available to common shareholders		1,012		854		(2,875	)		1,953
Year Ended December 31, 2008:
Interest and dividend income	$	12,579	$	12,136	$	12,271		$	12,491
Net interest income after provision for losses on loans		5,157		5,400		5,137			4,946
Non-interest income		2,404		2,097		2,050			1,793
Non-interest expense		5,415		5,666		5,613			5,723
Net income available to common shareholders		1,492		1,261		1,149			657

2

Key Operating Ratios

	At or for the Year Ended December 31,
	2009		2008		2007
Performance Ratios
Return on average assets (net income available to common shareholders divided by average total assets)	0.09	%	0.55	%	0.53	%
Return on average equity (net income available to common shareholders divided by average total equity)	1.18	%	8.08	%	7.84	%
Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)	2.74	%	2.81	%	2.65	%
Ratio of average interest-earning assets to average interest-bearing liabilities	107.86	%	107.19	%	106.14	%
Ratio of non-interest expense to average total assets	3.03	%	2.67	%	2.63	%
Ratio of net interest income after provision for loan losses to non-interest expense	76.54	%	93.63	%	95.82	%
Efficiency ratio (non-interest expense divided by sum of interest income plus non-interest income)	80.73	%	70.41	%	73.66	%
Asset Quality Ratios
Non-performing assets to total assets at end of period	1.28	%	0.84	%	0.12	%
Non-performing loans to total loans at end of period	1.72	%	1.16	%	0.10	%
Allowance for loan losses to total loans at end of period	1.36	%	0.97	%	0.83	%
Allowance for loan losses to non-performing loans at end of period	78.96	%	83.01	%	816.53	%
Provision for loan losses to total loans receivable, net	0.64	%	0.39	%	0.17	%
Net charge-offs to average loans outstanding	0.23	%	0.20	%	0.11	%
Capital Ratios
Total equity to total assets at end of period	7.76	%	8.10	%	6.90	%
Average total equity to average assets	7.95	%	6.85	%	6.73	%

Regulatory Capital

	December 31, 2009
	(Dollars in thousands)
	Company		Bank
Tangible capital	$	85,943	$	82,143
Less: Tangible capital requirement		15,383		15,309
Excess		70,560		66,834
Core capital	$	85,943	$	82,143
Less: Core capital requirement		41,022		40,823
Excess		44,921		41,320
Total risk-based capital	$	93,179	$	89,379
Less: Risk-based capital requirement		54,145		53,825
Excess	$	39,034	$	35,554

3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

This discussion relates to the financial condition and results of operations of the Company, which became the holding company for the Bank in February 1998. The principal business of the Bank consists of accepting deposits from the general public and investing these funds primarily in loans and in investment securities and mortgage-backed securities. The Bank’s loan portfolio consists primarily of loans secured by residential real estate located in its market area.

For the year ended December 31, 2009, the Company recorded net income available for common shareholders of $944,000, a return on average assets of 0.09% and a return on average equity of 1.18%. In 2009, the Company’s net income was adversely affected by a $5.0 million ($3.3 million after tax) goodwill impairment charge. The Company’s results of operations for the year ended December 31, 2009 was also negatively affected by the issuance of $18.4 million of preferred stock and the issuance of common stock warrants to the United States Treasury on December 12, 2008 as part of the Treasury Capital Purchase Program. For the year ended December 31, 2009, the Company’s net income available to common shareholders was reduced by $1,031,000 as a result of its issuance of preferred stock to the United States Treasury.

For the year ended December 31, 2008, the Company recorded net income available for common shareholders of $4.6 million, a return on average assets of 0.55% and a return on average equity of 8.08%. For the year ended December 31, 2008, the Company’s total cost related to the issuance of preferred stock was approximately $56,000. For the year ended December 31, 2007, the Company recorded net income of $4.1 million, a return on average assets of 0.53% and a return on average equity of 7.84%.

The Company’s net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loans, investment securities and mortgage-backed securities portfolios and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest rate spread”) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. To a lesser extent, the level of non-interest expenses such as compensation, employee benefits, data processing expenses, local deposit and federal income taxes also affect the Company’s net income.

The operations of the Company and the entire thrift industry are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Company’s market area.

Aggregate Contractual Obligations

	Maturity by Period
December 31, 2009 (In thousands)	Less than 1 year		Greater than 1 year to 3 years	Greater than 3 year to 5 years	Greater than 5 years	Total
Deposits	$	550,633	177,643	65,868	—	794,144
FHLB borrowings		22,000	20,000	11,196	49,269	102,465
Repurchase agreements		20,060	—	10,000	6,000	36,060
Subordinated debentures		—	—	—	10,310	10,310
Lease commitments		84	102	8	—	194
Purchase obligations		864	702	6	—	1,572
Total	$	593,641	198,447	87,078	65,579	944,745

4

Deposits represent non-interest bearing, money market, savings, NOW, certificates of deposit and all other deposits held by the Company. Amounts that have an indeterminate maturity period are included in the less than one-year category.

FHLB borrowings represent the amounts that are due to FHLB of Cincinnati. All amounts have fixed maturity dates. The Company has three callable FHLB advances, totaling $27 million. Putable advances may be called quarterly. With a weighted average cost of 4.37%, management does not anticipate that these advances will be called in 2010. The Company’s putable advances have a final maturity in 2017.

Subordinated debentures represent the amount borrowed in a private pool trust preferred issuance group on September 25, 2003. The debentures are priced at the three-month LIBOR plus 3.10%. At December 31, 2009, the three-month Libor rate was 0.25%. The debentures re-price and pay interest quarterly and have a thirty-year final maturity. The debentures may be called at the issuer’s discretion on a quarterly basis after five years. The interest rate of the debentures reset on the 8^th day of January, April, August and November of each year.

Lease commitments represent the total minimum lease payments under non-cancelable operating leases.

The most significant operating contract is for the Company’s data processing services, which re-prices monthly based on the number of accounts and other operational factors. Estimates have been made to include reasonable growth projections. In December 2008, the Company renewed the operating contract with the current data processing provider for a period not to exceed five years. The Company anticipates only a minor increase in fixed and variable cost rates with this contract.

Off Balance Sheet Arrangements

	Maturity by Period
December 31, 2009 (In thousands)	Less than 1 year		Greater than 1 year to 3 years	Greater than 3 years to 5 years	Greater than 5 years	Total
Commercial lines of credit	$	3,518	7,857	432	8	11,815
Commitments to extend credit		26,759	15,667	5,908	4,605	52,939
Standby letters of credit		1,651	91	155	8	1,905
Home equity lines of credit		663	1,382	357	28,756	31,158
Total	$	32,591	24,997	6,852	33,377	97,817

Standby letters of credit represent commitments by the Company to repay a third party beneficiary when a customer fails to repay a loan or debt instrument. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with stand-by letters of credit because funding for these obligations could be required immediately. Unused lines of credit represent commercial and residential equity lines of credit with maturities ranging from one to fifteen years.

Accounting for Derivative Instruments and Hedging Activities

In October 2008, Heritage Bank entered into a receive fixed pay variable swap transaction in the amount of $10 million with Compass Bank of Birmingham in which Heritage Bank will pay Compass a fixed rate of 4.17% quarterly for seven years while Compass will pay Heritage Bank a rate equal to the three month London Interbank Offering Rate (“LIBOR”), the rate banks in London charge one another for overnight borrowings. Heritage Bank has signed an inter-company transfer with the Company that allows the Company to convert its variable rate subordinated debenture issuance to a fixed rate. The critical terms of the interest rate swap match the term of the corresponding variable rate subordinated debt issuance. The Company considers the interest rate swap a cash flow hedge and conducts a quarterly analysis to ensure that the hedge is effective. At December 31, 2009, the Company’s review indicates that the cash flow hedge is effective. At December 31, 2009, the approximate market loss on the cash flow hedge is $643,289.

5

Quantitative and Qualitative Disclosure about Market Risk

Quantitative Aspects of Market Risk. The principal market risk affecting the Company is risk associated with interest rate volatility (interest rate risk). The Company maintains a trading account for investment securities that may be used to periodically hedge short-term interest rate risk. The Company did not have any activity in its trading account for the years ended December 31, 2009, 2008 and 2007. The Company is not subject to foreign currency exchange rate risk or commodity price risk. Substantially all of the Company’s interest rate risk is derived from the Bank’s lending, deposit taking, and investment activities. This risk could result in reduced net income, loss in fair values of assets and/or increases in fair values of liabilities due to upward changes in interest rates.

Qualitative Aspects of Market Risk. The Company’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between assets and liabilities maturities and interest rates. The principal element in achieving this objective is to increase the interest-rate sensitivity of the Company’s interest-earning assets by retaining for its portfolio loans with interest rates subject to periodic adjustment to market conditions. The Company relies on retail deposits as its primary source of funds. However, management is utilizing brokered deposits, wholesale repurchase agreements and FHLB borrowings as sources of liquidity. As part of its interest rate risk management strategy, the Bank promotes demand accounts, overnight repurchase agreements and certificates of deposit with primarily terms of up to five years.

Asset / Liability Management

Key components of a successful asset/liability strategy are the monitoring and managing of interest rate sensitivity of both the interest-earning asset and interest-bearing liability portfolios. The Company has employed various strategies intended to minimize the adverse affect of interest rate risk on future operations by providing a better match between the interest rate sensitivity between its assets and liabilities. In particular, the Company’s strategies are intended to stabilize net interest income for the long-term by protecting its interest rate spread against increases in interest rates. Such strategies include the origination of adjustable-rate mortgage loans secured by one-to-four family residential real estate, and, to a lesser extent, multi-family real estate loans and the origination of other loans with interest rates that are more sensitive to adjustment based upon market conditions than long-term, fixed-rate residential mortgage loans. For the year ended December 31, 2009, approximately $202.5 million of the $240.8 million of one-to-four family residential loans originated by the Company (comprising 86.7% of such loans) had adjustable rates or will mature within one year.

The U.S. government agency securities generally are purchased for a term of fifteen years or less. Securities may or may not have call options. A security with call options improves the yield on the security but also has little or no positive price convexity. Non-callable securities or securities with one time calls offer a lower yield but more positive price convexity and an improved predictability of cash flow. Generally, securities with the greater call options (continuous and quarterly) are purchased only during times of extremely low interest rates. The reasons for purchasing these securities generally focus on the fact that a non callable or one time call is of little value if rates are exceptionally low.

At December 31, 2009, the Company’s agency security portfolio consisted of $30.4 million in unsecured debt issued by Federal National Mortgage Corporation (FNMA), $5.2 million issued by Federal Home Loan Mortgage Corporation (FHLMC), $6.6 million issued by the Federal Farm Credit Bank (FFCB), $3.1 million issued by Farmer Mac (FMAC) and $9.3 million issued by the Federal Home Loan Bank (FHLB). During 2008, both FNMA and FHLMC required substantial government assistance and were taken into conservatorship by their regulator. All debt securities of both FNMA and FHLMC remain AAA rated and both agencies maintain the implicit backing of the United States of America.

6

At December 31, 2009, no agency securities were due within five years, approximately $14.4 million were due in five to ten years and approximately $40.2 million were due after ten years. At December 31, 2009, $38.8 million of these securities had a call provision, which authorizes the issuing agency to prepay the securities at face value at certain pre-established dates. If, prior to their maturity dates, market interest rates decline below the rates paid on the securities, the issuing agency may elect to exercise its right to prepay the securities. At December 31, 2009, $18.4 million of these securities are callable one time only prior to December 31, 2010, and $9.4 million of these securities may be called one time only prior to December 31, 2012, but not before January 1, 2012. An additional $11.0 million of these securities may be called prior to December 31, 2010, but provide the issuer with multiple call dates and therefore are not as likely to be called. Given the current economic climate as well as the relatively high coupon rates accompanying the one time calls owned by the Company, we anticipate that the majority of eligible one time call provisions for 2010 will be exercised. At December 31, 2009, the estimated average life of this portfolio is 4.1 years and its modified duration is 3.5 years.

In 2008 and 2009, the Company purchased a significant number of agency securities issued by the Small Business Administration. These securities are classified as either SBAPs or SBICs. The SBAP notes have a twenty year maturity, pay interest monthly and principal semi-annually. The SBIC notes have a ten year final maturity and pay principal and interest quarterly. Both securities are classified as a zero risk based agency bond, have a history of slow prepayment speeds and provide yields that are considerable higher than fifteen year GNMA mortgage backed securities. At December 31, 2009, the Company’s agency bond portfolio includes approximately $24.2 million in SBAP securities and $37.2 million in SBIC securities as well as $3.0 million in FHLB amortizing notes. At December 31, 2009, the estimated average life of this portfolio is 5.5 years and its modified duration is 4.5 years.

In 2009, the Company’s municipal portfolio grew significantly. This growth occurred as municipal bond yields increased to levels not seen in the last ten years despite record low Treasury rates. The value of the municipal bond purchases should be enhanced over time as the Company’s earnings increase and with the possibilities of higher income tax rates in the future. The Company anticipates that future issuance of tax exempt securities will be limited as the current trend in the municipal market is towards the issuance of taxable Build America Bonds, a new program initiated as part of the 2009 Economic Stimulus Plan passed by the United States Congress. The municipal bond portfolio largely consists of local school district bonds with the guarantee of the State of Kentucky or out of state bonds insured by private companies. At December 31, 2009, the Company has $51.2 million in tax free municipal bonds and $2.8 million in taxable Build America Bonds. The tax free municipal bonds were purchased to provide long-term income stability and higher tax equivalent yields as compared to other portions of the Company’s investment portfolio.

At December 31, 2009, no bonds were due in less than one year, $2.9 million were due within one to five years, $5.3 million were due in five to ten years, $17.4 million were due in ten to fifteen years and approximately $28.4 million were due after fifteen years. At December 31, 2009, approximately $51.8 million of the Company’s municipal bond portfolio is callable with call dates ranging from February 2010 to December 2019. The call dates are staggered to eliminate the excessive cash flows within any one-year period. At December 31, 2009, approximately $1.4 million of municipal bonds had a call date of less than one year; approximately $5.6 million had a call date from one to five years and approximately $44.8 million in more than five years but less than ten years. At December 31, 2009, the average life of the municipal bond portfolio is approximately 13.3 years and the modified duration of the municipal bond portfolio is approximately 9.6 years. The current credit market crisis has affected the municipal market, making it less likely that issuers with securities that are currently callable will exercise the option to do so.

Mortgage-backed securities entitle the Company to receive a pro-rata portion of the cash flow from an identified pool of mortgages. Although mortgage-backed securities generally offer lesser yields than the loans for which they are exchanged, mortgage-backed securities present lower credit risk by virtue of the guarantees that back them, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Company. Further, mortgage-backed securities provide a monthly stream of both interest and principal, thereby providing the Company with a cash flow to reinvest at current market rates and limit the Company’s interest rate risk. At December 31, 2009, the Company held approximately $73.6 million in fixed rate mortgage backed securities and approximately $6.9 million in adjustable rate mortgage backed securities. The average life of the mortgage backed securities portfolio is approximately 4.6 years and a modified duration of approximately 3.8 years.

7

At December 31, 2009, the Company held approximately $18.6 million in Collateral Mortgage Obligations (CMO) issued by various agencies of the United States government and $16.3 million in Private Label CMOs issued by private companies. A CMO is a mortgage-backed security that has a structured payment stream based on various factors and does not necessarily remit monthly principal and interest on a pro-rata basis. At December 31, 2009, the Company’s CMO portfolio had an average life of approximately 3.3 years and a modified duration of approximately 2.7 years.

The Company’s Whole Loan CMO portfolio includes two securities that have been downgraded below investment grade. As a result of these downgrades, the Company contracted with an independent third party to conduct an impairment analysis of all Private Label securities owned during 2009. This analysis indicated that the following securities were other than temporarily impaired:

CUSIP	Description	Moody’s Credit Rating	Original Par Value		Par Value 12/31/2009		OTTI Charge 12/31/2009
362290AC2	GSR 2007 TR AR1	CCC	$	2,000,000	$	1,264,199	$	180,000
12638PCQ0	CSMC 200-3 4A15	Caa3	$	2,000,000	$	1,222,082	$	20,000

As a result of this analysis, the Company incurred a total impairment charge related to its Private Label CMO portfolio of $200,000 during the fourth quarter of 2009. The Company will continue to monitor the performance of the Private Label CMO portfolio for additional charges as may be necessary.

Interest Rate Sensitivity Analysis

The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates on interest earning assets and interest bearing liabilities do not change at the same speed, to the same extent or on the same basis. As part of its effort to manage interest rate risk, the Bank monitors its net portfolio value (NPV), a methodology adopted by the OTS to assist the Bank in assessing interest rate risk.

Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning assets and other assets and outgoing cash flows on interest-bearing liabilities and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV, which would result from a theoretical 200 basis point (1 basis point equals .01%) change in market rates. Both a 300 basis point increase in market interest rates and a 100 basis point decrease in market interest rates are considered.

The following table presents the Bank’s NPV at December 31, 2009, as calculated by the OTS, based on information provided to the OTS by the Bank.

Change In Rates	Net Portfolio Value							NPV as % of PV of Assets
	$Amount		$ Change			%Change		NPV Ratio		Change
	(Dollars in thousands)
+300 bp	$	56,686	$	(36,369	)	(39	)%	5.75	%	(309	)bp
+200 bp		70,499		(22,557	)	(24	)%	6.98	%	(186	)bp
+100 bp		83,044		(10,011	)	(11	)%	8.05	%	(79	)bp
0 bp		93,055		—		—		8.84	%	—
-100 bp		100,861		7,806		8	%	9.42	%	58	bp
-200 bp		n/a		n/a		n/a		n/a		n/a

8

Interest Rate Risk Measures: 200 Basis Point (bp) Rate Shock

Pre-Shock NPV Ratio: NPV as % of Present Value of Assets	8.84%
Exposure Measure: Post-Shock NPV Ratio	6.98%
Sensitivity Measure: Change in NPV Ratio	186	bp

The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. The computations do not contemplate any actions the Bank could undertake in response to changes in interest rates. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific period if it will mature or re-price within that period.

Interest Income Analysis

As a part of the Company’s asset liability management process, an emphasis is placed on the effect that changes in interest rates have on the net interest income of the Bank and the resulting change in the net present value of capital. As a part of its analysis, the Company uses third party software and analytical tools derived from the Company’s regulatory reporting models to analyze the re-pricing characteristics of both assets and liabilities and the resulting net present value of the Company’s capital given various changes in interest rates. The model also uses mortgage prepayment assumptions obtained from third party vendors to anticipate prepayment speeds on both loans and investments. The Company’s model uses incremental changes in interest rates. For example, a 3.0% change in annual rates includes a 75 basis point change in each of the next four quarters.

For the year ended December 31, 2009, the Company’s previous efforts to increase duration had a positive effect on its results of operations. At December 31, 2009, the extended duration remains in effect. In an effort to prepare for higher interest rates, the Company has begun the process of extending the duration of its long term liabilities. The Company is using both local and brokered deposits and FHLB advances to accomplish this goal. When attempting to extend duration, both brokered deposits and FHLB advances offer several advantages as compared to locally obtained deposits. Specifically, management has determined that it is easier to more accurately target specific maturities using FHLB advances and brokered deposits as compared to local deposits. In addition, the Company has approximately $50 million in short term deposit balances that are currently priced with floors. In most cases, short term federal funds rates can increase 75 basis points without resulting in an increase to the Company’s interest expense.

During 2010, it is the intent of management to continue to extend duration of its liabilities. The amount of duration extension achieved by management will be largely dependent on its ability to obtain additional duration at a reasonable cost. A rapid steepening of the yield curve may limit management’s ability to extend the duration of its liabilities. If management is unable to extend its liabilities, the next option for management would be to gradually reduce those liabilities.

9

The Company’s analysis at December 31, 2009, 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 December 31, 2009 for the twelve month period ending December 31, 2010, is as follows:

	Down 1.00%		No change		Up 1.00%		Up 2.00%		Up 3.00%
Net interest income (In thousands)	$	27,369	$	28,667	$	29,356	$	30,506	$	31,678

Gap Analysis

The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or re-pricing within a specific time period and the amount of interest-bearing liabilities maturing or re-pricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets.

At December 31, 2009, the Company had a negative one year or less interest rate sensitivity gap of 17.65% of total interest-earning assets. Generally, during a period of rising interest rates, a negative gap position would be expected to adversely affect net interest income while a positive gap position would be expected to result in an increase in net interest income. Conversely during a period of falling interest rates, a negative gap would be expected to result in an increase in net interest income and a positive gap would be expected to adversely affect net interest income. This analysis is considered less reliable as compared to the Company’s ALM models as changes in various interest rate spreads are not incorporated in Gap Analysis.

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2009, which are expected to mature, are likely to be called or re-priced in each of the time periods shown.

10

	One Year or Less			Over one Through Five Years			Over Five Through Ten Years			Over Ten Through Fifteen Years			Over Fifteen Years			Total
Interest-earning assets
Loans:
1 - 4 family residential	$	127,800		$	86,144		$	18,129		$	5,526		$	1,015		$	238,614
Multi-family residential		10,427			34,431			123			—			—			44,981
Construction		27,306			3,986			997			—			413			32,702
Non-residential		111,952			100,478			23,764			3,450			12,388			252,032
Secured by deposits		2,749			1,234			92			—			—			4,075
Other loans		36,938			28,092			3,691			191			1,039			69,951
Time deposits and interest bearing deposits in FHLB		3,173			—			—			—			—			3,173
Securities		25,286			50,877			29,018			41,551			27,577			174,309
Mortgage-backed securities		24,045			50,872			21,942			12,080			6,443			115,382
Total		369,676			356,114			97,756			62,798			48,875			935,219
Interest bearing liabililties:
Deposits		482,413			243,200			—			—			—			725,613
Borrowed funds		52,370			41,196			55,269			—			—			148,835
Total		534,783			284,396			55,269			—			—			874,448
Interest sensitivity gap	($	165,107	)	$	71,718		$	42,487		$	62,798		$	48,875		$	60,771
Cumulative interest sensitivity gap	($	165,107	)	($	93,389	)	($	50,902	)	$	11,896		$	60,771		$	60,771
Ratio of interest-earning assets to interest bearing liabilities		69.13	%		125.22	%		230.08	%		—			—			106.95	%
Ratio of cumulative gap to total interest-earning assets		(17.65	%)		(9.99	%)		(5.44	%)		1.27	%		6.50	%		6.50	%

The preceding table was prepared based upon the assumption that loans will not be repaid before their respective contractual maturities, except for adjustable rate loans, which are classified, based upon their next re-pricing date. Further, it is assumed that fixed maturity deposits are not withdrawn prior to maturity and other deposits are withdrawn or re-priced within one year. Mortgage-backed securities are classified based on their lifetime prepayment speeds. In 2010, the Company is aware that the decision by Freddie Mac and Fannie Mae to redeem all mortgages past due more than 120 days will result in faster prepayment speeds for its mortgage backed security portfolio. However, management does not have enough information specific to its portfolio to model the changes on prepayment speeds that may result. As a result, the preceding table does not reflect possible changes in cash flows that may result from this change in Fannie Mae and Freddie Mac portfolio servicing practices. The actual interest rate sensitivity of the Company’s assets and liabilities could vary significantly from the information set forth in the table due to market and other factors. The retention of adjustable-rate mortgage loans in the Company’s portfolio helps reduce the Company’s exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to borrowers as a result of re-pricing adjustable-rate mortgage loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrowers.

11

Average Balance, Interest and Average Yields and Rates

The following table sets forth certain information relating to the Company’s average interest-earning assets and average interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods and at the date indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of daily balances has caused any material difference in the information presented.

The table also presents information for the periods and at the date indicated with respect to the difference between the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities, or “interest rate spread,” which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution’s net interest income is its “net yield on interest-earning assets,” which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.

	December 2009 Averages
	Balance			Weighted Average Yield/Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net	$	644,676		6.23	%**
Non taxable securities available for sale		48,307		6.11	%*
Taxable securities available for sale		238,537		4.95	%
Federal Home Loan Bank stock		4,281		4.50	%
Securities held to maturity		—		—
Time deposits and other interest- bearing cash deposits		—		—
Total interest-earning assets		935,801		5.89	%
Non-interest-earning assets		93,299
Total assets	$	1,029,100
Interest-bearing liabilities:
Deposits	$	726,847		2.62	%
FHLB borrowings		104,834		3.57	%
Repurchase agreements		31,340		2.54	%
Subordinated debentures		10,310		5.65	%
Total interest-bearing liabilities		873,331		2.77	%
Non-interest-bearing liabilities		75,849
Total liabilities		949,180
Common stock		41
Common stock warrants		556
Additional paid-in capital		44,450
Retained earnings		38,220
Treasury stock		(6,495	)
Accumulated other comprehensive income		3,148
Total liabilities and equity	$	1,029,100
Interest rate spread				3.12	%
Ratio of interest-earning assets to interest-bearing liabilities				107.2	%

* Tax equivalent yield at the Company’s 34% tax bracket and a 2.75% cost of funds rate.

** Yield on loans excludes $229,000 adjustment made December 31, 2009 to eliminate all interest on non-accrual loans.

12

	Years Ended December 31,
	2009						2008						2007
							(Dollars in Thousands)
	Average Balance			Interest	Average Yield/Cost		Average Balance			Interest	Average Yield/Cost		Average Balance			Interest	Average Yield/Cost
Interest-earning assets:
Loans receivable, net	$	633,143		38,921	6.15	%	$	601,847		41,692	6.93	%	$	532,761		41,031	7.70	%
Taxable securities AFS		252,707		12,635	5.00	%		141,668		7,115	5.02	%		138,392		6,512	4.71	%
Non-taxable securities AFS		36,559		2,268	6.20	%		17,038		916	5.38	%		15,159		727	4.80	%
Securities held to maturity		280		12	4.29	%		3,534		155	4.39	%		17,549		771	4.39	%
Time deposits and other interest-bearing cash deposits		3,270		8	0.24	%		8,171		147	1.80	%		10,152		519	5.12	%
Total interest-earning assets	$	925,959		53,844	5.81	%	$	772,258		50,025	6.48	%	$	714,013		49,560	6.94	%
Non-interest-earning assets		80,423						66,573						66,379
Total assets		1,006,382						838,831						780,392
Interest-bearing liabilities:
Deposits	$	698,367		20,833	2.98	%	$	581,817		20,789	3.57	%	$	536,619		22,279	4.15	%
Borrowings		160,081		5,479	3.42	%		138,671		5,631	4.06	%		136,103		6,612	4.86	%
Total interest-bearing liabilities		858,448		26,312	3.07	%		720,488		26,420	3.67	%		672,722		28,891	4.29	%
Non-interest-bearing liabilities		67,944						60,897						55,139
Total liabilities		926,392						781,385						727,861
Common stock Common stock warrants		41 556						41 29						41 —
Additional paid-in capital		44,324						26,998						25,996
Retained earnings		38,599						37,605						33,917
Treasury stock		(6,495	)					(6,350	)					(5,788	)
Accumulated other comprehensive (loss)		2,965						(877	)					(1,635	)
Total liabilities and equity		1,006,382						838,831						780,392
Net interest income				27,532						23,605						20,669
Interest rate spread					2.74	%*					2.81	%*					2.65	%*
Net interest margin					2.97	%*					3.06	%*					2.89	%*
Ratio of average interest-earning assets to average interest- bearing liabilities					107.86	%					107.19	%					106.14	%
Using a 34% tax rate.

* The tax equivalent adjustments were $703, $392 and $527 for 2009, 2008 and 2007, respectively

Rate Volume Analysis

The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume from year to year multiplied by the average rate for the prior year) and (ii) changes in rate (changes in the average rate from year to year multiplied by the prior year’s volume).

13

	Year Ended December 31,
	2009 vs. 2008							2008 vs. 2007
	Increase (Decrease) due to					Total Increase (Decrease)		Increase (Decrease) due to					Total Increase (Decrease)
	Rate			Volume				Rate			Volume
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	(4,695	)	1,924		(2,771	)	$	(4,125	)	4,786		661
Securities available for sale, taxable		(32	)	5,552		5,520			286		317		603
Securities available for sale, non-taxable		141		1,211		1,352			88		101		189
Securities held to maturity		(3	)	(140	)	(143	)		(1	)	(615	)	(616	)
Other interest-earning assets		(51	)	(88	)	(139	)		(337	)	(35	)	(372	)
Total interest-earning assets		(4,640	)	8,459		3,819			(4,089	)	4,554		465
Interest-bearing liabilities:
Deposits		(4,379	)	4,423		44			(3,105	)	1,615		(1,490	)
Borrowings		(905	)	753		(152	)		(1,058	)	77		(981	)
Total interest-bearing liabilities		(5,284	)	5,176		(108	)		(4,163	)	1,692		(2,471	)
Increase (decrease) in net interest income	$	644		3,283		3,927		$	74		2,862		2,936

Critical Accounting Policies and Estimates

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on appropriate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involved the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan losses. The Company’s allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative; in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors included the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrower’s sensitivity to economic conditions throughout the southeast and particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of the loan portfolio, its methodology accordingly may change. In addition, it may report materially different amounts for the provision for loan losses in the statement of operations if management’s assessment of the above factors changes in future periods. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes presented elsewhere herein. Although management believes the levels of the allowance for loan losses as of both December 31, 2009 and 2008 were adequate to absorb inherent losses in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time. The Company also considers its policy on non-accrual loans as a critical accounting policy. Loans are placed on non-accrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 91 days or more. At December 31, 2009, the Company did not recognize accrued interest on non-accrual loans on its balance sheet or income statement.

14

Comparison of Financial Condition at December 31, 2009 and December 31, 2008

The Company’s total assets increased by $62.4 million, from $967.56 million at December 31, 2008, to $1.030 billion at December 31, 2009. The Company did not sell any federal funds at December 31, 2009, as compared to $16.1 million at December 31, 2008. The Company no longer has any agency securities classified as held to maturity. The available for sale portfolio increased $42.7 million, from $247.0 million at December 31, 2008, to $289.7 million at December 31, 2009. At December 31, 2009, the Company’s investment in Federal Home Loan Bank stock was carried at an amortized cost of $4.3 million. See Note 2 of Notes to Consolidated Financial Statements.

The Company’s net loan portfolio increased by $14.0 million during the year ended December 31, 2009. Net loans totaled $628.4 and $642.4 at December 31, 2008 and December 31, 2009, respectively. The increase in the loan activity during the year ended December 31, 2009 was achieved in spite of weak national economic conditions which include the loss of an $8 million relationship at the beginning of 2009 and more conservative loan underwriting standards. Loan growth was achieved largely through new business obtained from customers of large regional banks who became disenchanted with both access to funds and service levels. In 2009, economic activity remained subdued in the majority of the Company’s markets. For the year ended December 31, 2009, the Company’s tax equivalent average yield on loans was 6.15%, compared with 6.93% for the year ended December 31, 2008.

The allowance for loan losses totaled $8.9 million at December 31, 2009, an increase of approximately $2.8 million from the allowance for loan losses of $6.1 million at December 31, 2008. The ratio of the allowance for loan losses to total loans was 1.36% and 0.97% at December 31, 2009 and 2008, respectively. Also, at December 31, 2009, the Company’s non-accrual loans were approximately $11.2 million or 1.72% of total loans, compared to $7.3 million, or 1.16% of total loans, at December 31, 2008. The Company’s ratio of allowance for loan losses to non-performing loans at December 31, 2009 and 2008 was 78.96% and 83.01%, respectively.

Comparison of Operating Results for the Years Ended December 31, 2009 and 2008

Net Income. The Company’s net income available for common shareholders for the year ended December 31, 2009 was $944,000 compared to $4.6 million at December 31, 2008. In 2009, net income available for common shareholders was adversely affected by a $5.0 million goodwill impairment charge, $4.2 million in provision for loan loss expense, $1.5 million increase in assessments from the FDIC and $1.0 million in dividends and accretion of preferred stock discount related to the Company’s issuance of preferred stock in December 2008.

Net Interest Income. Net interest income for the year ended December 31, 2009, was $26.8 million, compared to $23.1 million for the year ended December 31, 2008. The increase in net interest income for the year ended December 31, 2009, was the result of a sharp decline in market interest rates, allowing the Company to reduce its cost of funds. At the same time, higher average balances of both taxable and tax free investments provided higher levels of interest income. For the year ended December 31, 2009, the Company’s tax equivalent average yield on total interest-earning assets was 5.81% compared to 6.48% for the year ended December 31, 2008, and its average cost of interest-bearing liabilities was 3.07%, compared to 3.67% for the year ended December 31, 2008. As a result, the Company’s tax equivalent interest rate spread for the year ended December 31, 2009 was 2.74%, compared to 2.81% for the year ended December 31, 2008 and its tax equivalent net interest margin was 2.97% for the year ended December 31, 2009, compared to 3.06% for the year ended December 31, 2008. At December 31, 2009, the Company reduced interest income on loans by $229,000 to eliminate all interest income on non-accrual loans. For the year ended December 31, 2009, the change in income recognition reduced the Company’s net interest margin by 0.03%.

Interest Income. Interest income increased $3.6 million from $49.5 million to $53.1 million, or 7.3% during the year ended December 31, 2009 compared to 2008. The modest increase was attributable to an increase in the volume of loans and investments outstanding, offsetting a decline in market interest rates. The Company does not classify any securities as held to maturity at December 31, 2009, as compared to an average balance of $3.5 million for the year ended December 31, 2008. The average balance on taxable securities available for sale increased $111.0 million, from $141.7 million for the year ended December 31, 2008, to $252.7 million for the year ended December 31, 2009. The average balance of non-taxable securities available for sale increased approximately $19.6 million, from $17.0 million for the year ended December 31, 2008, to $36.6 million for the year ended December 31, 2009.

15

Average time deposits and other interest-bearing cash deposits declined from $8.2 million for the year ended December 31, 2008, to $3.3 million for the year ended December 31, 2009. Overall, average total interest-earning assets increased $153.7 million from December 31, 2008, to December 31, 2009.

Interest Expense. Interest expense declined to $26.3 million for the year ended December 31, 2009, compared to $26.4 million for 2008. The decline in interest expense was attributable to a decline in the average cost of both interest bearing deposits and Federal Home Loan Bank (“FHLB”) borrowings. The average cost of average interest-bearing deposits declined from 3.57% for the year ended December 31, 2008, to 2.98% for the year ended December 31, 2009. Over the same period, the average balance of interest bearing deposits increased from $581.8 million for the year ended December 31, 2008, to $698.4 million for the year ended December 31, 2009. The average balance of FHLB borrowings increased from $95.0 million for the year ended December 31, 2008 to $119.1 million for the year ended December 31, 2009. The average cost of FHLB borrowings declined from 4.15% for the year ended December 31, 2008, to 3.42% for the year ended December 31, 2009.

Provision for Loan Losses. The Company determined that an additional $4.2 million and $2.4 million in provision for loan losses was required for the years ended December 31, 2009, and December 31, 2008, respectively. The increase in the Company’s provision for loan loss expense is the result of both local and national economic conditions, including an increase in the unemployment rate in the communities served by the Company as well as higher levels of non-performing loans.

Non-Interest Income. Non-interest income increased by $1.9 million for the year ended December 31, 2009, to $10.2 million, compared to $8.3 million for the year ended December 31, 2008. The increase in non-interest income is the result of a $2.0 million increase on gains taken on the sale of investments. For the year ended December 31, 2009, income from deposit accounts and financial services income were marginally lower while the Company experienced a 15% decline in the level of brokerage income. Non-interest income for the year ended December 31, 2009, included a $200,000 other than temporary impairment charge on two Private Label CMOs previously discussed.

Non-Interest Expense. Total non-interest expense for the year ended December 31, 2009, was $30.5 million, compared to $22.4 million in 2008. The increase was the result of the Company’s $5.0 million goodwill impairment charge and the sharp increase in cost associated with the Company’s FDIC expenses. The Company’s cost related to FDIC coverage increased from $463,000 in 2008 to $2.0 million in 2009. The increase in FDIC expenses relates to the cost incurred by the FDIC to pay for more than 130 bank failures in 2009, The Company anticipates that FDIC expense will remain elevated for the next five years. For the year ended December 31, 2009, the Company’s compensation expense increased by approximately $800,000 as compared to the year ended December 31, 2008, due to higher payroll and insurance expenses.

Income Taxes. The effective tax rates for the years ended December 31, 2009, and December 31, 2008, was 16.7% and 29.7%, respectively. The Company’s effective tax rate declined sharply due to higher levels of tax free investments, a higher level of income related to bank owned life insurance and lower levels of taxable income in 2009.

Comparison of Operating Results for the Years Ended December 31, 2008 and 2007

Net Income. The Company’s net income for the years ended December 31, 2008, was $4.6 million compared to $4.1 million at December 31, 2007.

Net Interest Income. Net interest income for the year ended December 31, 2008, was $23.1 million, compared to $20.1 million for the year ended December 31, 2007. The increase in net interest income for the year ended December 31, 2008 was the result of a sharp decline in market interest rates, allowing the Company to reduce its cost of funds. At the same time, liquidity and credit issues provided wider than normal spreads for those companies with excess liquidity. For the year ended December 31, 2008, the Company’s tax equivalent average yield on total interest-earning assets was 6.46% compared to 6.94% for the year ended December 31, 2007, and its average cost of interest-bearing liabilities was 3.67%, compared to 4.29% for the year ended December 31, 2007. As a result, the Company’s tax equivalent interest rate spread for the year ended December 31, 2008, was 2.81%, compared to 2.65% for the year ended December 31, 2007, and its tax equivalent net interest margin was 3.06% for the year ended December 31, 2008, compared to 2.89% for the year ended December 31, 2007.

16

Interest Income. Interest income increased $444,000 from $49.0 million to approximately $49.5 million, or 1% during the year ended December 31, 2008 compared to 2007. The modest increase was attributable to an increase in the volume of loans outstanding, offsetting a decline in market interest rates. The average balance on securities held to maturity decreased approximately $14.0 million, from $17.5 million at December 31, 2007, to $3.5 million at December 31, 2008. The average balance on taxable securities available for sale increased $3.3 million, from $138.4 million at December 31, 2007, to $141.7 million at December 31, 2008.

The average balance of non-taxable securities available for sale increased approximately $1.8 million, from $15.2 million at December 31, 2007, to $17.0 million at December 31, 2008. Average time deposits and other interest-bearing cash deposits declined $2.0 million, from $10.2 million at December 31, 2007, to $8.2 million at December 31, 2008. Overall, average total interest-earning assets increased $58.2 million from December 31, 2007 to December 31, 2008.

Interest Expense. Interest expense declined to $26.4 million for the year ended December 31, 2008, compared to $28.9 million for 2007. The decline in interest expense was attributable to a decline in the average cost of both interest bearing deposits and Federal Home Loan Bank (“FHLB”) borrowings. The average cost of average interest-bearing deposits declined from 4.15% for the year ended December 31, 2007, to 3.57% for the year ended December 31, 2008. Over the same period, the average balance of interest bearing deposits increased from $536.7 million for the year ended December 31, 2007 to $581.8 million at December 31, 2008. The average balance of FHLB borrowings declined from $95.7 million for the year ended December 31, 2007, to $95.0 million for the year ended December 31, 2008. The average cost of FHLB borrowings declined from 4.63% for the year ended December 31, 2007, to 4.15% for the year ended December 31, 2008.

Provision for Loan Losses. The Company determined that an additional $2.4 million and $976,000 in provision for loan losses was required for the years ended December 31, 2008, and December 31, 2007, respectively. The increase in the Company’s provision for loan loss expense is the result of both local and national economic conditions, including an increase in the unemployment rate in our communities as well as the expectation of a prolonged recession.

Non-Interest Income. Non-interest income increased by $1.1 million for the year ended December 31, 2008, to $8.3 million, compared to $7.2 million for the year ended December 31, 2007. The increase in non-interest income is the result of higher income realized on deposit accounts and approximately $700,000 gain on the sale of securities. Income from financial services was down slightly during the year as a decline in brokerage income was partially offset by the addition of a title insurance program to the Company’s insurance division.

Non-Interest Expense. Total non-interest expense for the year ended December 31, 2008, was $22.4 million, compared to $20.6 million in 2007. The increase was the result of the Company’s expansion of retail offices opened during 2007 now operating for a full year. The cost of the Company’s retirement plan increased by more than $150,000 due to an increase in the number of participants enrolled in the plan. The Company’s advertising expense increased by more than $150,000 due to a successful checking account campaign. The Company’s cost related to FDIC deposit insurance increased by more than $220,000 due to the regulatory agency’s increase in fees to offset its increasing cost to fund its operating losses. The increase in other operating expenses also includes the additional cost for postage, communications and other expenses related to operating more retail offices.

Income Taxes. The effective tax rates for the years ended December 31, 2008, and December 31, 2007, was 29.7% and 29.6%, respectively. The Company’s effective tax rate is below its corporate tax rate of 34% due to higher levels of tax free loans, municipal bonds and income from bank owned life insurance.

Liquidity and Capital Resources

The Company’s primary business is that of the Bank. Management believes dividends that may be paid from the Bank to the Company will provide sufficient funds for the Company’s current and anticipated 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.

Capital Resources. At December 31, 2009, the Bank exceeded all regulatory minimum capital requirements. For a detailed discussion of the Office of Thrift Supervision regulatory capital requirements, and for a tabular presentation of the Bank’s compliance with such requirements, see Note 16 of Notes to Consolidated Financial Statements.

17

Liquidity. Liquidity management is both a daily and long-term function of business management. If the Bank requires funds beyond its ability to generate them internally, the Bank believes that it could borrow funds from the FHLB. At December 31, 2009, the Bank had outstanding advances of $102.5 million from the FHLB and $30.0 million of letters of credit issued by the FHLB to secure municipal deposits. The Bank can immediately borrow an additional $99.2 million from the FHLB by purchasing additional capital. See Note 7 of Notes to Consolidated Financial Statements.

Subordinated Debentures Issuance. On September 25, 2003, the Company issued $10,310,000 of subordinated debentures in a private placement offering. The securities have a thirty-year maturity and are callable at the issuer’s discretion on a quarterly basis beginning five years after issuance. The securities are priced at a variable rate equal to the three-month LIBOR (London Interbank Offering Rate) plus 3.10%. Interest is paid and the rate of interest may change on a quarterly basis. The Company’s subsidiary, a federal chartered thrift supervised by the Office of Thrift Supervision (OTS) may recognize the proceeds of trust preferred securities as capital. OTS regulations provide that 25% of Tier I capital may consist of trust preferred proceeds. See Note 10 of Notes to Consolidated Financial Statements.

The Bank’s primary sources of funds consist of deposits, repayment of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, and funds provided from operations. While scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions and competition. The Bank uses its liquidity resources principally to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, to maintain liquidity, and to meet operating expenses.

Management believes that loan repayments and other sources of funds will be adequate to meet the Bank’s liquidity needs for the immediate future. A portion of the Bank’s liquidity consists of cash and cash equivalents. At December 31, 2009, cash and cash equivalents totaled $41.1 million. The level of these assets depends upon the Bank’s operating, investing and financing activities during any given period.

Cash flows from operating activities for the years ended December 31, 2009, 2008 and 2007 were $2.7 million, $7.7 million, and $7.3 million, respectively.

Cash flows from investing activities were a net use of funds of $57.0 million, $142.8 million and $38.3 million in 2009, 2008 and 2007, respectively. A principal use of cash in this area has been purchases of securities available for sale of $186.7 million partially offset by proceeds from sales, calls and maturities of securities of $148.9 million during 2009. Maturities, calls and cash flow from securities classified as held to maturity totaled $448,000. At the same time, the investment of cash in loans was $19.9 million in 2009, $55.6 million in 2008 and $82.7 in 2007. Purchases of securities available for sale exceeded maturities and sales by $37.8 million in 2009 and $100.9 million in 2008. Cash flows from securities available for sale that were sold, matured or called exceeded purchases by $43.5 million in 2007. There were no purchases of securities classified as held to maturity in 2009, 2008 and 2007.

At December 31, 2009, the Bank had $52.9 million in outstanding commitments to originate loans and unused lines of credit of $43.0 million. The Bank anticipates that it will have sufficient funds available to meet its current loan origination and lines of credit commitments. The Bank has certificates of deposit maturing in one year or less of $315.9 million at December 31, 2009. Based on historical experience, management believes that a significant portion of such deposits will remain with the Bank.

18

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Bank’s operations.

Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, changes in interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Forward-Looking Statements

Management’s discussion and analysis includes certain forward-looking statements addressing, among other things, the Bank’s prospects for earnings, asset growth and net interest margin. Forward-looking statements are accompanied by, and identified with, such terms as “anticipates,” “believes,” “expects,” “intends,” and similar phrases. Management’s expectations for the Bank’s future involve a number of assumptions and estimates. Factors that could cause actual results to differ from the expectations expressed herein include: substantial changes in interest rates, and changes in the general economy; changes in the Bank’s strategies for credit-risk management, interest-rate risk management and investment activities. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized.

Stock Performance Comparison

The following graph, which was prepared by SNL Financial LC (“SNL”), shows the cumulative total return of the Common Stock of the Company since December 31, 2004, compared with the (1) NASDAQ Composite Index, comprised of all U.S. Companies quoted on NASDAQ, (2) the SNL Midwest Thrift Index, comprised of publically traded thrifts and thrift holding companies operating in the Midwestern United States. Cumulative total return on the Common Stock or the index equals the total increase in the value since December 31, 2004, assuming reinvestment of all dividends paid into the Common Stock or the index, respectively. The graph was prepared assuming that $100 was invested on December 31, 2004, in the Common Stock, the securities included in the indices. The stock price performance included in this graph is not necessarily indicative of future stock price performance.

19

HopFed Bancorp, Inc.

	Period Ending
Index	12/31/04	12/31/05	12/31/06	12/31/07	12/31/08	12/31/09
HopFed Bancorp, Inc.	100.00	95.46	99.87	94.34	66.50	65.33
NASDAQ Composite	100.00	101.37	111.03	121.92	72.49	104.31
SNL Midwest Thrift	100.00	97.72	110.91	93.68	83.25	70.12

20

Consolidated Financial Statements

HopFed Bancorp, Inc. and Subsidiaries

December 31, 2009, 2008 and 2007

21

Table of Contents

	Page Number
Report of Independent Registered Public Accounting Firm	23
Consolidated Balance Sheets as of December 31, 2009 and 2008	24-25
Consolidated Statements of Income for the Years ended December 31, 2009, 2008 and 2007	26-27
Consolidated Statements of Comprehensive Income for the Years ended December 31, 2009, 2008 and 2007	28
Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2009, 2008 and 2007	29
Consolidated Statements of Cash Flows for the Years ended December 31, 2009, 2008 and 2007	30-31
Notes to Consolidated Financial Statements	32-84

22

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of HopFed Bancorp, Inc.

Hopkinsville, Kentucky

We have audited the accompanying consolidated balance sheets of HopFed Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. As of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007, the Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HopFed Bancorp, Inc. and subsidiaries as of December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/ Rayburn, Bates & Fitzgerald, P.C.

Brentwood, Tennessee

March 31, 2010

23

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2009 and 2008

(Dollars in Thousands)

	2009		2008
Assets
Cash and due from banks	$	37,938	15,268
Interest-earning deposits in Federal Home Loan Bank		3,173	5,727
Federal funds sold		—	16,080
Cash and cash equivalents		41,111	37,075
Federal Home Loan Bank stock, at cost (note 2)		4,281	4,050
Securities available for sale (note 2)		289,691	246,952
Securities held to maturity, market value of $455 at December 31, 2008 (note 2)		—	454
Loans receivable, net of allowance for loan losses of $8,851 at December 31, 2009 and $6,133 at December 31, 2008 (note 3)		642,355	628,356
Accrued interest receivable		5,777	5,852
Real estate and other assets owned (note 14)		1,883	875
Bank owned life insurance		8,475	7,994
Premises and equipment, net (note 4)		25,328	26,443
Deferred tax assets (note 13)		2,458	737
Intangible asset (note 5)		1,168	1,818
Goodwill (note 5)		—	4,989
Other assets		7,349	1,965
Total assets	$	1,029,876	967,560
Liabilities and Stockholders’ Equity
Liabilities:
Deposits (note 6)
Non-interest-bearing accounts	$	68,531	57,134
Interest-bearing accounts:
NOW accounts		105,821	89,549
Savings and money market accounts		60,409	58,374
Other time deposits		559,383	507,948
Total deposits		794,144	713,005
Advances from Federal Home Loan Bank (note 7)		102,465	130,012
Repurchase agreements (note 8)		36,060	28,680
Subordinated debentures (note 10)		10,310	10,310
Advances from borrowers for taxes and insurance		236	210
Dividends payable		454	444
Accrued expenses and other liabilities		6,258	6,615
Total liabilities		949,927	889,276

See accompanying notes to consolidated financial statements.

24

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets, Continued

December 31, 2009 and 2008

(Dollars in Thousands)

	2009			2008
Stockholders’ equity (notes 16 and 17):
Preferred stock, par value $0.01 per share; authorized—500,000 shares; 18,400 shares issued and outstanding with a liquidation preference of $18,400,000 at December 31, 2009 and December 31, 2008	$	—		—
Common stock, par value $.01 per share; authorized 7,500,000 shares; 4,110,175 issued and 3,594,620 outstanding at December 31, 2009 and 4,100,604 issued and 3,585,049 outstanding at December 31, 2008		41		41
Common stock warrants		556		556
Additional paid-in-capital		44,455		44,193
Retained earnings-substantially restricted		38,244		38,954
Treasury stock (at cost, 515,555 shares at December 31, 2009 and December 31, 2008)		(6,495	)	(6,495	)
Accumulated other comprehensive income, net of taxes		3,148		1,035
Total stockholder’s equity		79,949		78,284
Total liabilities and stockholders’ equity	$	1,029,876		967,560
Commitments and contingencies (notes 9, 11, and 15)

See accompanying notes to consolidated financial statements.

25

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

For the Years ended December 31, 2009, 2008, and 2007

(Dollars in Thousands)

	2009			2008	2007
Interest and dividend income
Loans receivable	$	38,921		41,421	40,720
Securities available for sale		12,635		7,115	6,512
Securities held to maturity		12		155	771
Nontaxable securities available for sale		1,565		639	511
Interest-earning deposits		8		147	519
Total interest and dividend income		53,141		49,477	49,033
Interest expense:
Deposits (note 6)		20,833		20,789	22,279
Advances from Federal Home loan Bank		4,070		3,940	4,428
Repurchase agreements		767		1,079	1,411
Subordinated debentures		642		612	773
Total interest expense		26,312		26,420	28,891
Net interest income		26,829		23,057	20,142
Provision for loan losses (note 3)		4,199		2,417	976
Net interest income after provision for loan losses		22,630		20,640	19,166
Non-interest income:
Service charges		4,222		4,535	4,105
Merchant card income		612		576	494
Gain on sale of loans		271		135	98
Realized gain from sale of securities		2,715		718	6
Other-than-temporary impairment on investments		(200	)	—	—
Income from bank owned life insurance		481		270	302
Financial services commission		983		1,055	1,140
Other operating income		1,141		1,055	1,086
Total non-interest income		10,225		8,344	7,231

See accompanying notes to consolidated financial statements.

26

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income, Continued

For the Years ended December 31, 2009, 2008 and 2007

(Dollars in Thousands, Except Per Share Amounts)

	2009		2008	2007
Non-interest expenses:
Salaries and benefits (note 12)	$	12,240	11,456	10,619
Occupancy expense (note 4)		3,074	2,882	2,672
Data processing expense		2,595	2,260	1,850
State deposit tax		619	512	504
Intangible amortization (note 5)		650	847	961
Goodwill impairment (note 5)		4,989	—	—
Professional services		1,002	1,167	1,412
Advertising expense		1,304	1,271	1,005
Postage and communications expense		616	622	550
Supplies expense		363	341	374
Deposit insurance and examination fees		2,026	463	420
Losses and expenses related to real estate owned		241	104	103
Other operating expenses		764	492	83
Total non-interest expense		30,483	22,417	20,553
Income before income tax expense		2,372	6,567	5,844
Income tax expense (note 13)		397	1,952	1,728
Net income		1,975	4,615	4,116
Less: Dividend on preferred shares		920	50	—
Accretion of preferred stock discount		111	6	—
Net income available for common shareholders	$	944	4,559	4,116
Earnings per share available to common stockholders (note 18):
Basic	$	0.26	1.28	1.15
Fully diluted	$	0.26	1.27	1.14
Weighted average shares outstanding—basic		3,569,969	3,572,127	3,588,163
Weighted average shares outstanding—diluted		3,569,969	3,597,483	3,607,870

See accompanying notes to consolidated financial statements.

27

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Years ended December 31, 2009, 2008 and 2007

(Dollars in Thousands)

	2009			2008		2007
Net income	$	1,975		4,615		4,116
Other comprehensive income (loss), net of tax
Unrealized holding gain arising during the period net of tax effect		3,553		2,585		1,762
Unrealized gain (loss) on derivatives, net of tax effect		351		(824	)	(65	)
Reclassification adjustment for gains included in net income net of taxes		(1,791	)	(458	)	(4	)
Comprehensive income	$	4,088		5,918		5,809

See accompanying notes to consolidated financial statements.

28

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Years ended December 31, 2009, 2008 and 2007

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

	Common Shares		Preferred Shares	Common Stock		Common Stock Warrants	Additional Paid-in Capital	Retained Earnings		Treasury Stock		Accumulated other Comprehensive Income (Loss)		Total Equity
Balance January 1, 2007	3,627,906		—	$	41	—	25,918	33,678		(5,406	)	(1,961	)	52,270
Net income	—		—		—	—	—	4,116		—		—		4,116
Restricted stock awards	9,082		—		—	—	—	—		—		—		—
Forfeit of restricted stock award	(305	)	—		—	—	—	—		—		—		—
Net change in unrealized gains on securities available for sale, net of taxes of $906	—		—		—	—	—	—		—		1,758		1,758
Purchase of treasury stock	(44,650	)	—		—	—	—	—		(706	)	—		(706	)
Loss recognized on derivative contract termination, net of taxes of $33	—		—		—	—	—	—		—		(65	)	(65	)
Dividends ($0.48 per share)	—		—		—	—	—	(1,729	)	—		—		(1,729	)
Compensation expense, options	—		—		—	—	22	—		—		—		22
Compensation expense, restricted stock awards	—		—		—	—	137	—		—		—		137
Balance December 31, 2007	3,592,033		—		41	—	26,077	36,065		(6,112	)	(268	)	55,803
Net income	—		—		—	—	—	4,615		—				4,615
Restricted stock awards	11,962		—		—	—	—	—		—		—		—
Net change in unrealized gains on securities available for sale, net of taxes of $1,096	—		—		—	—	—	—		—		2,127		2,127
Net change in unrealized gain (losses) on derivatives, net of taxes of $423	—		—		—		—	—		—		(824	)	(824	)
Dividends ($0.48 per share)	—		—		—	—	—	(1,720	)	—		—		(1,720	)
Exercise of options	10,000		—		—	—	100	—		(100	)	—		—
Compensation expense, options	—		—		—	—	9	—		—		—		9
Compensation expense, restricted stock awards	—		—		—	—	157	—		—		—		157
Purchase of treasury stock	(28,496	)	—		—	—	—	—		(283	)	—		(283	)
Restricted stock awards forfeited.	(450	)	—		—	—	—	—		—		—		—
Issue 18,400 of shares Preferred Stock	—		18,400		—	556	17,844	—		—		—		18,400
Accretion of Preferred Stock Discount	—		—		—	—	6	(6	)	—		—		—
Balance December 31, 2008	3,585,049		18,400		41	556	44,193	38,954		(6,495	)	1,035		78,284
Net income	—		—		—	—	—	1,975		—		—		1,975
Restricted stock awards	9,571		—		—	—	—	—		—		—		—
Net change in unrealized gains on securities available for sale, net of taxes of $908	—		—		—	—	—	—		—		1,762		1,762
Net change in unrealized gain on derivatives, net of taxes of $181	—		—		—		—	—		—		351		351
Dividends ($0.48 per share)	—		—		—	—	—	(1,723	)	—		—		(1,723	)
Compensation expense, restricted stock awards	—		—		—	—	151	—		—		—		151
Preferred stock dividend	—		—		—	—	—	(851	)	—		—		(851	)
Accretion of Preferred Stock Discount	—		—		—	—	111	(111	)	—		—		—
Balance December 31, 2009	3,594,620		18,400	$	41	556	44,455	38,244		(6,495	)	3,148		79,949

See accompanying notes to consolidated financial statements.

29

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Years ended December 31, 2009, 2008 and 2007

(Dollars in Thousands)

	2009			2008		2007
Cash flows from operating activities:
Net income	$	1,975		4,615		4,116
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,199		2,417		976
Depreciation		1,548		1,464		1,284
Goodwill impairment		4,989		—		—
Amortization of intangible assets		650		847		961
Amortization of investment premiums and discounts, net		299		154		98
Other than temporary impairment charge on AFS securities		200		—		—
Benefit for deferred income taxes		(2,809	)	(609	)	(8	)
Stock dividends on Federal Home Loan Bank stock		—		(157	)	—
Compensation expense, restricted stock grants and options		151		166		159
Increase in cash surrender value of bank owned life insurance		(481	)	(270	)	(302	)
(Gain) loss on sale or call of securities held to maturity		6		(27	)	—
Gain on sale of securities available for sale		(2,715	)	(691	)	(6	)
Gain on sales of loans		(271	)	(135	)	(98	)
Gain on settlement of derivative		—		(74	)	(98	)
Loss on sale of premises and equipment		22		—		—
Proceeds from sales of loans		5,771		3,700		5,547
Loss on sale of other assets		—		15		—
Gain on sale of foreclosed assets		(241	)	—		—
Originations of loans sold		(5,500	)	(3,565	)	(5,449	)
(Increase) decrease in:
Accrued interest receivable		75		(617	)	(426	)
Other assets		(5,385	)	(1,178	)	154
Increase (decrease) in:
Accrued expenses and other liabilities		(541	)	1,638		359
Income taxes payable		716		—		—
Net cash provided by operating activities		2,658		7,693		7,267
Cash flows from investing activities
Proceeds from sales, calls and maturities of securities held to maturity		448		13,675		3,945
Proceeds from sales, calls and maturities of securities available for sale		148,883		84,930		88,218
Purchase of securities available for sale		(186,736	)	(185,821	)	(44,639	)
Net increase in loans		(19,857	)	(55,596	)	(82,740	)
Purchase of Federal Home Loan Bank stock		(231	)	(57	)	(197	)
Proceeds from sale of foreclosed asset		902		727		471
Purchase of premises and equipment		(455	)	(659	)	(3,317	)
Net cash used in investing activities		(57,046	)	(142,801	)	(38,259	)

See accompanying notes to consolidated financial statements.

30

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows, Continued

For the Years ended December 31, 2009, 2008 and 2007

(Dollars in Thousands)

	2009			2008		2007
Cash flows from financing activities:
Net increase in deposits	$	81,139		114,252		29,320
(Decrease) increase in advance payments by borrowers for taxes and insurance		26		(106	)	29
Advances from Federal Home Loan Bank		66,895		162,500		82,000
Repayment of advances from Federal Home Loan Bank		(94,442	)	(134,370	)	(93,739	)
Other advances		35,395		57,115		—
Repayment of other advances		(35,395	)	(57,115	)	—
Increase (decrease) in repurchase agreements		7,380		(8,519	)	15,963
Sale of preferred stock		—		18,400		—
Purchase of treasury stock		—		(283	)	(706	)
Dividends paid on preferred stock		(851	)	—		—
Dividends paid on common stock		(1,723	)	(1,720	)	(1,729	)
Net cash provided by financing activities		58,424		150,154		31,138
Increase in cash and cash equivalents		4,036		15,046		146
Cash and cash equivalents, beginning of period		37,075		22,029		21,883
Cash and cash equivalents, end of period	$	41,111		37,075		22,029
Supplemental disclosures of cash flow information:
Interest paid		14,424		13,296		13,225
Income taxes paid		2,420		2,420		1,542
Supplemental disclosures of non-cash investing and financing activities:
Loans charged off		1,836		1,414		921
Foreclosures and in substance foreclosures of loans during year		1,473		1,246		476
Net unrealized gains on investment securities classified as available for sale		2,670		3,223		2,664
Increase in deferred tax asset related to unrealized losses on investments		(1,089	)	(1,096	)	(906	)
Dividends declared and payable		454		444		431
Issue of unearned restricted stock		93		157		137
Capitalized interest		—		—		27

See accompanying notes to consolidated financial statements.

31

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies:

        Nature of Operations and Customer Concentration

HopFed Bancorp, Inc. (the Corporation) is a thrift holding company incorporated in the state of Delaware. The Company’s principal business activities are conducted through it’s wholly-owned subsidiary, Heritage Bank (the Bank), which is a federally chartered savings bank engaged in the business of accepting deposits and providing mortgage, consumer, construction and commercial loans to the general public through its retail banking offices. The Bank’s business activities are primarily limited to western Kentucky and middle and western Tennessee. The Bank is subject to competition from other financial institutions. Deposits at the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation (FDIC). The Bank is subject to comprehensive regulation, examination and supervision by the Office of Thrift Supervision (OTS) and the FDIC.

A substantial portion of the Bank’s loans are secured by real estate in the western Kentucky and middle and west Tennessee markets. In addition, foreclosed real estate is located in this same market. Accordingly, the ultimate ability to collect on a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate is susceptible to changes in local market conditions.

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowances for losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation, the Bank and its wholly-owned subsidiary Fall & Fall Insurance (collectively the Company) for all periods. Significant inter-company balances and transactions have been eliminated in consolidation.

Accounting

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices in the banking industry.

32

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

        Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and revenues and expenses for the year. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties.

Cash and Cash Equivalents

Cash and cash equivalents are defined as cash on hand, amounts due on demand from banks, interest-earning deposits in the Federal Home Loan Bank and federal funds sold with maturities of three months or less.

Securities

The Company reports debt, readily-marketable equity, mortgage-backed and mortgage related securities in one of the following categories: (i) “held to maturity” (management has a positive intent and ability to hold to maturity) which are to be reported at cost, adjusted for premiums and discounts that are recognized in interest income; (ii) “trading” (held for current resale) which are to be reported at fair value, with unrealized gains and losses included in earnings; and (iii) “available for sale” (all other debt, equity, mortgage-backed and mortgage related securities) which are to be reported at fair value, with unrealized gains and losses reported net of tax as a separate component of stockholders’ equity. At the time of new security purchases, a determination is made as to the appropriate classification. Realized and unrealized gains and losses on trading securities are included in net income. Unrealized gains and losses on securities available for sale are recognized as direct increases or decreases in stockholders’ equity, net of any tax effect. Cost of securities sold is recognized using the specific identification method.

Interest income on securities is recognized as earned. The Company purchases many agency bonds at either a premium or discount to its par value. Premiums and discounts on agency bonds are amortized using the net interest method. For callable bonds purchased at a premium, the premium is amortized to the first call date. If the bond is not called on that date, the premium is fully amortized and the Company recognizes an increase in the net yield of the investment. The decision to amortize premiums to their first call is a more conservative method of recognizing income. For agency bonds purchased at a discount, the discount is accreted to the final maturity date. For callable bonds purchased at discount and called before maturity, the Company recognizes a gain on the sale of securities. The Company amortizes premiums and accretes discounts on mortgage back securities and collateralized mortgage obligations based on the securities three month average prepayment speed.

33

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

        Other Than Temporary Impairment

A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in a reduction in the carrying amount to fair value. To determine whether impairment is other-than-temporary, management considers whether the entity expects to recover the entire amortized cost basis of the security by reviewing the present value of the future cash flows associated with the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as a credit loss. If a credit loss is identified, management then considers whether it is more-likely-than-not that the company will be required to sell the security prior to recovery. If management concludes that it is not more-likely-than-not that it will be required to sell the security, then the security is not other-than-temporarily impaired and the shortfall is recorded as a component of equity. If the security is determined to be other-than-temporarily impaired, the credit loss is recognized as a charge to earnings and a new cost basis for the security is established.

Other Securities

Other securities, such as Federal Home Loan Bank stock are recognized at cost, as the value is not considered impaired.

Loans Receivable

Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and deferred loan cost. The Statement of Financial Accounting Standards ASC 310-20, Nonrefundable Fees and Other Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, requires the recognition of loan origination fee income over the life of the loan and the recognition of certain direct loan origination costs over the life of the loan.

Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management’s periodic evaluation. The Company charges off loans after, in management’s opinion, the collection of all or a large portion of the principal or interest is not collectable. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received while the loan is classified as non-accrual, when the loan is ninety days past due. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of interest and principal.

The Bank provides an allowance for loan losses and includes in operating expenses a provision for loan losses determined by management. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. Management’s estimate of the adequacy of the allowance for loan loss can be classified as either a reserve for currently classified loans or estimates of future losses in the current loan portfolio.

34

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

Loans Receivable (Continued)

Loans are considered to be impaired when, in management’s judgment, principal or interest is not collectible according to the contractual terms of the loan agreement. When conducting loan evaluations, management considers various factors such as historical loan performance, the financial condition of the borrower and adequacy of collateral to determine if a loan is impaired. Impaired loans may be classified as either substandard or doubtful and reserved for based on individual loans risk for loss. Loans not considered impaired may be classified as either special mention or watch and may be reserved for. Typically, unimpaired classified loans exhibit some form of weakness in either industry trends, collateral, or cash flow that result in a default risk greater than that of the Company’s typical loan. All classified amounts include all unpaid interest and fees as well as the principal balance outstanding.

The measurement of impaired loans generally is based on the present value of future cash flows discounted at the historical effective interest rate, except that collateral-dependent loans generally are measured for impairment based on the fair value of the collateral. When the measured amount of an impaired loan is less than the recorded investment in the loan, the impairment is recorded as a charge to income and a valuation allowance, which is included as a component of the allowance for loan losses.

For loans not individually classified, Management considers the Bank’s recent charge off history, the Bank’s current past due and non-accrual trends, banking industry trends and both local and national economic conditions when making an estimate as to the amount to reserve for losses. In today’s economic climate, the Bank must be mindful of its local economy and the current loan portfolio mix. Overall loan growth was sluggish in 2009 as unemployment in most of the Bank’s market area ranged from 11% to 15%. As real estate sales began to slow in early 2008, management reduced the Bank’s exposure to construction lending. At December 31, 2009, the construction portfolio is slightly more than half of the balance at December 31, 2008. The Bank’s loan portfolio includes a significant amount of commercial and multi-family real estate loans. If the local economy does not improve, these loans may experience higher levels of losses in the future. Management believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and has taken into account the views of its regulators and the current economic environment.

Fixed Rate Mortgage Originations

The Company operates a mortgage company that originates mortgage loans in the name of assorted investors, including Federal Home Loan Mortgage Corporation (Freddie Mac). Originations for Freddie Mac are sold through the Bank while originations to other investors are sold directly to those investors. On a limited basis, loans sold to Freddie Mac may result in the Bank retaining loan servicing rights. In recent years, customers have chosen lower origination rates over having their loan locally serviced; thereby limiting the amount of new loans sold with servicing retained. At December 31, 2009, the Bank maintained a servicing portfolio of one to four family real estate loans of approximately $27.9 million. For the years ended December 31, 2009 and December 31, 2008, the Bank has reviewed the value of the servicing asset as well as the operational cost associated with servicing the portfolio. After this review, the Bank has determined that the values of its servicing rights are not material to the Company’s consolidated financial statements.

35

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

        Real Estate Owned and Other Assets Owned

Assets acquired through, or in lieu of, loan foreclosure are carried at the lower of cost or fair value less selling expenses. Costs of improving the assets are capitalized, whereas costs relating to holding the property are expensed. Management conducts periodic valuations and any adjustments to value are recognized in the current period’s operations.

Brokered Deposits

The Company may choose to attract deposits from several sources, including using outside brokers to assist in obtaining time deposits using national distribution channels. Brokered deposits offer the Company an alternative to Federal Home Loan Bank advances and local retail time deposits.

Repurchase Agreements

The Company sells investments from its portfolio to business and municipal customers with a written agreement to repurchase those investments on the next business day. The repurchase product gives business customers the opportunity to earn income on liquid cash reserves. These funds are overnight borrowings of the Company secured by Company assets and are not FDIC insured. The Company has also entered into two long-term repurchase agreements with third parties as discussed in Note 8 of the consolidated financial statements.

Revenue Recognition

Mortgage loans held for sale are generally delivered to secondary market investors under firm sales commitments entered into prior to the closing of the individual loan. Loan sales and related gains or losses are recognized at settlement. Loan fees earned for the servicing of secondary market loans are recognized as earned.

Interest income on loans receivable is reported on the interest method. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due more than 90 days. Interest earned as reported as income is reversed on any loans classified as impaired or past due more than 90 days. Interest may continue to accrue on loans over 90 days past due if they are well secured and in the process of collection.

Income Taxes

Income taxes are accounted for through the use of the asset and liability method. Under the asset and liability method, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates would be recognized in income in the period that includes the enactment date. The Company files its federal income tax return on a consolidated basis with its subsidiaries. The Company files its Tennessee state income tax return on a consolidated basis. All taxes are accrued on a separate entity basis.

Operating Segments

The Company’s continuing operations include one primary segment, retail banking. The retail banking segment involves the origination of commercial, residential and consumer loans as well as the collections of deposits in eighteen branch offices.

36

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

Premises and Equipment

Land, land improvements, buildings, and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Buildings and land improvements are depreciated generally by the straight-line method, and furniture and equipment are depreciated under various methods over the estimated useful lives of the assets. The Company capitalizes interest expense on construction in process at a rate equal to the Company’s cost of funds. The estimated useful lives used to compute depreciation are as follows:

Land improvements	5-15 years
Buildings	40 years
Furniture and equipment	5-15 years

Goodwill

It is the Company’s policy to review goodwill annually to determine if impairment exist. On October 7, 2009, the Company determined that all goodwill outstanding at September 30, 2009 was impaired and therefore should be charged off. At December 31, 2009, the Company has charged off all goodwill.

Intangible Assets

The intangible assets for insurance contracts and core deposits related to the Fulton acquisition of September 2002 was amortized using the straight-line method over the estimated period of benefit of seven years and was fully amortized in July of 2009. The core deposit intangible asset related to the middle Tennessee acquisition of June 2006 is amortized using the sum of the year’s digits method over an estimated period of nine years. The Company periodically evaluates the recoverability of the intangible assets and takes into account events or circumstances that warrant a revised estimate of the useful lives or indicates that impairment exists.

Bank Owned Life Insurance

Bank Owned Life Insurance policies (BOLI) are recorded at the cash surrender value or the amount to be realized upon current redemption. The realization of the redemption value is evaluated for each insuring entity that holds insurance contracts annually by management

Advertising

The Company expenses the production cost of advertising as incurred.

Financial Instruments

The Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and commercial letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.

37

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

        Derivative Instruments:

Under guidelines ASC 815, Accounting for Derivative Instruments and Hedging Activities, as amended, all derivative instruments are required to be carried at fair value on the consolidated balance sheet. ASC 815 provides special hedge accounting provisions, which permit the change in fair value of the hedge item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in the fair value of the derivative.

A derivative instrument designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under ASC 815. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash value hedges are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset or liability on the consolidated balance sheet with corresponding offsets recorded in the consolidated balance sheet. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense recorded on the hedged asset or liability.

Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instrument has been highly effective in offsetting changes in the fair values or cash flows of the hedged items and whether they are expected to be highly effective in the future. If it is determined a derivative instrument has not been, or will not continue to be highly effective as a hedge, hedged accounting is discontinued. ASC 815 basis adjustments recorded on hedged assets and liabilities are amortized over the remaining life of the hedged item beginning no later than when hedge accounting ceases. There were no fair value hedging gains or losses, as a result of hedge ineffectiveness, recognized for the years ended December 31, 2009, 2008 and 2007.

38

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

Fair Values of Financial Instruments

In October of 2008, the Bank entered into an interest rate swap agreement for a term of seven years and an amount of $10 million. The Bank will pay a fixed rate of 7.27% for seven years and receive an amount equal to the three-month London Interbank Lending Rate (Libor) plus 3.10%. The interest rate swap is classified as a cash flow hedge by the Bank and will be tested quarterly for effectiveness. At December 31, 2009, the cost of the Bank to terminate the cash flow hedge is approximately $643,000. The Bank, in the normal course of business, originates fixed rate mortgages that are sold to the Federal Home Loan Mortgage Corporation (Freddie Mac). Upon tentative underwriting approval by Freddie Mac, the Bank issues a best effort commitment to originate a fixed rate first mortgage under specific terms and conditions that the Bank intends to sell to Freddie Mac. The Bank no longer assumes a firm commitment to originate fixed rate loans, thus eliminating the risk of having to deliver loans they did not close or pay commitment fees to make Freddie Mac whole.

ASC 825, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. Accordingly, such estimates involve uncertainties and matters of judgment and therefore cannot be determined with precision. ASC 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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

Cash and cash equivalents

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.

Available-for-sale and held-to-maturity securities

Fair values for investment securities available-for-sale and held-to-maturity 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.

39

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

Fair Values of Financial Instruments (Continued)

Loans receivable

The fair values for loans receivable are estimated using discounted cash flow analysis which considers future re-pricing dates and estimated repayment dates, and further using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics.

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.

Other Assets – FDIC assessment

In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011. Included in other assets at December 31, 2009 is $4.6 million in prepaid risk-based assessments, which includes $300,000 related to the fourth quarter of 2009 that would have otherwise been payable in the first quarter of 2010. This amount is included in deposit insurance expense for 2009. The remaining $4.3 million in pre-paid deposit insurance is included in other assets in the accompanying consolidated balance sheet as of December 31, 2009.

Repurchase agreements

Overnight repurchase agreements have a fair value at book, given that they mature overnight. Longer maturity repurchase agreements are assigned a fair value of book given the limited nature of a secondary market.

Bank owned life insurance

The fair value of bank owned life insurance is the cash surrender value of the policy less redemption charges. By surrendering the policy, the Company is also subject to federal income taxes on all earnings previously recognized.

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 to a schedule of aggregated contractual maturities on such time deposits.

40

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

Fair Values of Financial Instruments (Continued)

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 could be obtained.

FHLB stock

The fair value of FHLB stock is recognized at cost.

Subordinated debentures

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

Dividend restrictions

The Company is not permitted to pay a dividend to common shareholders if they fail to make a quarterly interest payment to the holders of the Company’s subordinated debentures or fail to make a quarterly dividend payment on preferred shares owned by the United States Treasury Department. Furthermore, the Bank may be restricted in the payment of dividends to the Company by the Bank’s primary regulator, the Office of Thrift Supervision (OTS). Any restrictions imposed by the OTS would effectively limit the Company’s ability to pay a dividend to its common stockholders.

Off-Balance-Sheet Instruments

Off-balance-sheet lending commitments approximate their fair values due to the short period of time before the commitment expires.

Earnings Per Share

Earnings per share (EPS) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (CSE). CSE consists of dilutive stock options granted through the Company’s stock option plan. Restricted stock awards represent future compensation expense and are dilutive. Common stock equivalents which are considered anti-dilutive are not included for the purposes of this calculation. Common stock warrants issued in December 2008 and all stock options outstanding are currently anti-dilutive and are not included for the purposes of this calculation. Both EPS and diluted EPS are reduced by the amount of dividend payments on preferred stock and the accretion of the discount on the preferred stock. For the year ended December 31, 2009, the effect of the Company’s dividend payment on preferred stock and accretion of the preferred stock discount reduced the Company’s earnings by $1.0 million, or $0.29 per share (basic and fully diluted). For the year ended December 31, 2008, the effect of the Company’s dividend payment on preferred stock and accretion of the preferred stock discount reduced the Company’s earnings by $56,000, or $0.02 per share (basic and fully diluted).

41

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

Stock Compensation

For the year ended December 31, 2008, the implementation of ASC 718, Compensation – Stock Compensation, reduced net income by $9,100 and had no effect on either basic or fully diluted earnings per share. The implementation of this standard had no effect on the Company’s net income or earnings per share for the year ended December 31, 2009.

The Company utilized the Black-Sholes valuation model to determine the fair value of stock options on the date of grant. The model derives the fair value of stock options based on certain assumptions related to the expected stock prices volatility, expected option life, risk-free rate of return and the dividend yield of the stock. The expected life of options granted is estimated based on historical employee exercise behavior. The risk free rate of return coincides with the expected life of the options and is based on the ten year Treasury note rate at the time the options are issued. The historical volatility levels of the Company’s common stock are used to estimate the expected stock price volatility. The set dividend yield is used to estimate the expected dividend yield of the stock.

At December 31, 2009, the Company’s ability to issue additional options under the 1999 Stock Option Plan has expired. Additional stock option information at December 31, 2009, includes:

	Outstanding Options	Weighted Average Exercise Price		Weighted Average Remaining Term	Aggregate Intrinsic Value
Exercisable and outstanding, December 31, 2009	110,000	$	12.61	1.8 years	$	—

42

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

Effect of New Accounting Pronouncements

In June 2009, the FASB issued FASB ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162, (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification as the source of authoritative generally accepted accounting principles for nongovernmental entities. SFAS 168 is effective for interim and annual periods ending after September 15, 2009 and is not expected to have any impact on the Company’s consolidated financial position.

On April 9, 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, (“FSP SFAS 115-2 and SFAS 124-2”), which was subsequently incorporated into ASC topic 320-10-65-1, “Investments – Debt and Equity Securities”. ASC 320 categorizes losses on debt securities available-for-sale or held-to-maturity determined by management to be other-than-temporarily impaired into losses due to credit issues and losses related to all other factors. Other-than-temporary impairment (OTTI) exists when it is more likely than not that the security will mature or be sold before its amortized cost basis can be recovered. An OTTI related to credit losses should be recognized through earnings. An OTTI related to other factors should be recognized in other comprehensive income. The ASC does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. Annual disclosures required in ASC 320-10-65-1 are also required for interim periods (including the aging of securities with unrealized losses).

In April 2009, the FASB issued FSP SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly, which was subsequently incorporated into FASB ASC topic 820-10-65-4, “Fair Value Measurements and Disclosures.” This ASC recognizes that quoted prices may not be determinative of fair value when the volume and level of trading activity has significantly decreased. The evaluation of certain factors may necessitate that fair value be determined using a different valuation technique. Fair value should be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, not a forced liquidation or distressed sale. If a transaction is considered to not be orderly, little, if any, weight should be placed on the transaction price. If there is not sufficient information to conclude as to whether or not the transaction is orderly, the transaction price should be considered when estimating fair value. An entity’s intention to hold an asset or liability is not relevant in determining fair value. Quoted prices provided by pricing services may still be used when estimating fair value in accordance with ASC topic 820-10-65-4; however, the entity should evaluate whether the quoted prices are based on current information and orderly transactions. Inputs and valuation techniques are required to be disclosed in addition to any changes in valuation techniques.

43

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

Effect of New Accounting Pronouncements (Continued)

FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which was subsequently incorporated into ASC 825-10-65-1, Financial Instruments. ASC 825-10-65-1 requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and also requires those disclosures in summarized financial information at interim reporting periods A publicly traded company includes any company whose securities trade in a public market on either a stock exchange or in the over-the-counter market, or any company that is a conduit bond obligor. Additionally, when a company makes a filing with a regulatory agency in preparation for sale of its securities in a public market it is considered a publicly traded company for this purpose.

The three staff positions are effective for periods ending after June 15, 2009, with early adoption of all three permitted for periods ending after March 15, 2009. The Company adopted the staff positions for its second quarter 10-Q. With the exception of ASC topic 320-10-65-1, the staff positions had no material impact on the consolidated financial statements of the Company.

Also on April 1, 2009, the FASB issued FSP SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which was subsequently incorporated into ASC 805, Business Combinations, ASC 805 requires that assets acquired and liabilities assumed in a business combination that arise from a contingency be recognized at fair value. If fair value cannot be determined during the measurement period as determined in ASC 805, the asset or liability can still be recognized if it can be determined that it is probable that the asset existed or the liability had been incurred as of the measurement date and if the amount of the asset or liability can be reasonably estimated. If it is not determined to be probable that the asset/liability existed/was incurred or no reasonable amount can be determined, no asset or liability is recognized.

The entity should determine a rational basis for subsequently measuring the acquired assets and assumed liabilities. Contingent consideration agreements should be recognized initially at fair value and subsequently reevaluated in accordance with guidance found in ASC 805. The ASC is effective for business combinations with an acquisition date on or after the beginning of the Company’s first annual reporting period beginning on or after December 15, 2008. The Company will assess the impact of the ASC if and when a future acquisition occurs.

In December 2009, the FASB issued FASB ASC 810, Consolidations. This accounting guidance was originally issued in June 2009 and is now included in ASC 810. The guidance amends the consolidation guidance applicable for variable interest entities. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2009, and early adoption is prohibited. We do not anticipate the adoption of this standard will have a significant impact on the Company’s consolidated financial statements.

44

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(1) Summary of Significant Accounting Policies: (Continued)

Effect of New Accounting Pronouncements (Continued)

In May 2009, the FASB issued SFAS 165, Subsequent Events, which was subsequently incorporated into FASB ASC topic 855, Subsequent Events. ASC topic 855 provides guidance on when a subsequent event should be recognized in the financial statements. Subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is the date the financial statements were issued or the date the financial statements were available to be issued. For non-recognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, should be disclosed. ASC topic 855 is effective for interim or annual periods ending after June 15, 2009. The implementation of this standard did not have a material impact on the consolidated financial statements of the Company.

ASC Topic 815, Derivatives and Hedging, amends prior guidance to amend and expand the disclosure requirements for derivatives and hedging activities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under ASC Topic 815, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, the new authoritative accounting guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. ASC 815 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

In June 2009, the Company adopted the provisions of ASC Topic 855, Subsequent Events. ASC Topic 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated all events or transactions that occurred after December 31, 2009, through March 30, 2010, the date management issued these financial statements. During this period there were no material recognizable subsequent events that required recognition in our disclosures to the December 31, 2009 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.

45

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(2) Securities:

Securities, which consist of debt and equity investments, have been classified in the consolidated balance sheets according to management’s intent. The carrying amount of securities available for sale and their estimated fair values follow:

	December 31, 2009
			Gross	Gross		Estimated
	Amortized		Unrealized	Unrealized		Fair
	Cost		Gains	Losses		Value
Restricted:
FHLB stock	$	4,281	—	—		4,281
Unrestricted:
U.S. government and agency debt securities	$	115,852	3,618	(495	)	118,975
Tax free municipal bonds		49,896	1,354	(96	)	51,154
Taxable municipal bonds		2,815	5	(66	)	2,754
Trust preferred securities		2,000	—	(574	)	1,426
Mortgage-backed securities:
GNMA		27,919	679	(89	)	28,509
FNMA		39,313	977	(51	)	40,239
FHLMC		11,432	354	—		11,786
NON-AGENCY CMOs		17,056	161	(917	)	16,300
AGENCY CMOs		17,997	557	(6	)	18,548
	$	284,280	7,705	(2,294	)	289,691

46

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(2) Securities: (Continued)

	December 31, 2008
			Gross	Gross		Estimated
	Amortized		Unrealized	Unrealized		Fair
	Cost		Gains	Losses		Value
Restricted:
FHLB stock	$	4,050	—	—		4,050
Unrestricted:
U.S. government agency debt securities	$	114,365	3,363	(113	)	117,615
Corporate bonds		1,015	—	(137	)	878
Municipal bonds		18,367	141	(416	)	18,092
Trust preferred securities		2,000	—	(377	)	1,623
Mortgage-backed securities:
GNMA		26,028	731	—		26,759
FNMA		33,505	733	(27	)	34,211
FHLMC		14,181	279	(1	)	14,459
NON-AGENCY CMOs		13,692	23	(1,802	)	11,913
AGENCY CMOs		21,058	345	(1	)	21,402
	$	244,211	5,615	(2,874	)	246,952

The scheduled maturities of debt securities available for sale at December 31, 2009 and 2008 were as follows:

			Estimated
	Amortized		Fair
	Cost		Value
2009
Due within one year		—		—
Due in one to five years		2,827		2,850
Due in five to ten years		19,595		19,695
Due after ten years		86,639		87,350
	$	109,061	$	109,895
Amortizing agency bonds		61,502		64,414
Mortgage-backed securities		113,717		115,382
Total unrestricted securities available for sale	$	284,280	$	289,691

47

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(2) Securities: (Continued)

	Amortized Cost		Estimated Fair Value
2008
Due within one year	$	1,471	$	1,336
Due in one to five years		8,835		9,040
Due in five to ten years		19,710		20,655
Due after ten years		42,977		42,998
		72,993		74,029
Amortizing agency bonds		62,754		64,179
Mortgage-backed securities		108,464		108,744
Total unrestricted securitiesavailable for sale	$	244,211	$	246,952

FHLB stock is an equity interest in the Federal Home Loan Bank. FHLB stock does not have a readily determinable fair value because ownership is restricted and a market is lacking. FHLB stock is classified as a restricted investment security, carried at cost and evaluated for impairment. The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2009 are as follows:

	Less than 12 months				12 months or longer			Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value	Unrealized Losses		Estimated Fair Value	Unrealized Losses
Available for sale
U.S. government and agency debt securities	$	21,557	(493	)	625	(2	)	22,182	(495	)
Taxable municipal bonds		1,654	(66	)	—	—		1,654	(66	)
Tax free municipal bonds		5,675	(58	)	3,091	(38	)	8,766	(96	)
Trust preferred securities		—	—		1,426	(574	)	1,426	(574	)
Mortgage-backed securities:
GNMA		9,382	(89	)	—	—		9,382	(89	)
FNMA		8,650	(45	)	776	(6	)	9,426	(51	)
FHLMC		—	—		—	—		—	—
NON-AGENCY CMOs		8,852	(304	)	3,219	(613	)	12,071	(917	)
AGENCY CMOs		2,004	(6	)	—	—		2,004	(6	)
Total Available for Sale	$	57,774	(1,061	)	9,137	(1,233	)	66,911	(2,294	)

48

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(2) Securities: (Continued)

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 December 31, 2009, the Company has 57 securities with unrealized losses. With the exception of two bonds discussed below, Management believes these unrealized losses relate to changes in interest rates and not credit quality. Management also believes the Company has the ability to hold these securities until maturity or for the foreseeable future and therefore no declines are deemed to be other than temporary.

The Company’s most recent review for other than temporary impairment indicated that two private label cmo’s were other than temporarily impaired due to adverse credit quality. As a result, the Company reduced the book balance of two private label CMO’s as follows:

CUSIP	Description	Current Par Value		Current Moody’s Credit Rating	Impairment Charge Taken
362290AC2	GSR 2007 TR AR1		$1,264,199	CCC	$	180,000
12638PCQ0	CSMC 2007-3 4A15		$1,222,083	Caa3	$	20,000

As part of its normal course of business, the Bank holds significant balances of municipal and other deposits that require the Bank to pledge investment instruments as collateral. At December 31, 2009, the Bank pledged investments with a book value of $84.3 million and a market value of approximately $86.5 million to various municipal entities as required by law. The Bank has pledged various investments with a book value of $25.5 million and a market value of $26.7 million to the Federal Home Loan Bank of Cincinnati to provide for a higher level of available borrowings. In addition, the Bank has provided $30.5 million of letters of credit issued by the Federal Home Loan Bank of Cincinnati to collateralize municipal deposits. The collateral for these letters of credit are the Bank’s one to four family loan portfolio, commercial real estate portfolio and its multi-family loan portfolio.

During 2009, the Company sold investment securities classified as available-for-sale for proceeds of $80.5 million resulting in gross gains of $2.7 million and gross losses of $17,000. During 2008, the Company sold investment securities classified as available for sale for proceeds of $25.4 million resulting in gross gains of $708,000 and gross losses of $17,000. During 2008, the Company had one held to maturity security with a par value of $1.5 million and purchased at a discount called at par, resulting in a $27,000 gain. During 2007, the Company sold investments securities classified as available-for-sale for proceeds of $1.5 million resulting in gross gains of $6,000.

49

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(2) Securities: (Continued)

At December 31, 2009, the Company had no investments classified as held to maturity. The carrying amount of securities held to maturity at December 31, 2008, and their estimated fair values follow:

	December 31, 2008
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Held to maturity securities
Mortgage-backed securities:
GNMA	$	396	—	—	396
FNMA		58	1	—	59
		454	1	—	455
	$	454	1	—	455

The scheduled maturities of debt securities held to maturity at December 31, 2008 were as follows:

	Amortized Cost		Estimated Fair Value
2008
Due within one year	$	—	—
Due in one to five years		—	—
Due in five to ten years		—	—
Due after ten years		—	—
		—	—
Mortgage-backed securities		454	455
Total unrestricted securities held to maturity	$	454	455

50

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands, Except Percentages)

(3) Loans Receivable, Net:

The components of loans receivable in the consolidated balance sheets as of December 31, 2009 and December 31, 2008, were as follows:

	12/31/2009 Amount			12/31/2009 Percent		12/31/2008 Amount			12/31/2008 Percent
Real estate loans:
One-to-four family (closed end) first mortgages	$	195,665		30.0	%	$	178,862		28.2	%
Second mortgages (closed end)		7,616		1.2	%		8,404		1.3	%
Home equity lines of credit		37,542		5.8	%		36,332		5.8	%
Multi-family		46,325		7.1	%		36,857		5.8	%
Construction		33,216		5.1	%		62,300		9.8	%
Commercial real estate		254,067		39.0	%		223,180		35.2	%
Total mortgage loans		574,431		88.2	%		545,935		86.1	%
Loans secured by deposits		4,075		0.6	%		3,949		0.6	%
Other consumer loans		17,908		2.8	%		19,731		3.1	%
Commercial loans		54,531		8.4	%		64,595		10.2	%
Total other loans		76,514		11.8	%		88,275		13.9	%
Total loans, gross		650,945		100.0	%		634,210		100.0	%
Deferred loan cost, net of income		261					279
Less allowance for loan losses		(8,851	)				(6,133	)
Total loans	$	642,355				$	628,356

The Company originates most fixed rate loans for immediate sale to the Federal Home Loan Mortgage Corporation (FHLMC) or other investors. Generally, the sale of such loans is arranged shortly after the loan application is tentatively approved through commitments.

Loans serviced for the benefit of others totaled approximately $42.1 million, $35.2 million and $44.4 million at December 31, 2009, 2008 and 2007, respectively. At December 31, 2009, approximately $27.9 million of the $42.1 million in loans serviced by the Company are serviced for the benefit of Freddie Mac. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow amounts, disbursing payments to investors and foreclosure processing. Qualified one-to-four family first mortgage loans, non-residential real estate loans, multi-family loans and commercial real estate loans are pledged to the Federal Home Loan Bank of Cincinnati as discussed in note 7.

51

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued)

Impaired loans and related valuation allowance amounts at December 31, 2009 and 2008 were as follows:

	2009		2008
Recorded investment	$	35,534	11,293
Valuation allowance	$	2,512	731

The average recorded investment in impaired loans for the years ended December 31, 2009, 2008 and 2007 was $27.7 million, $9.0 million and $1.9 million, respectively. As of December 31, 2009, all interest income recognized on impaired loans was reversed, resulting in a $229,000 reduction in net interest income, a $151,000 reduction in net income and a $0.04 reduction in earnings per share (basic and fully diluted). Interest income recognized on impaired loans was $143,000 in 2008. Interest income recognized on impaired loans was not significant for the year ended December 31, 2007.

An analysis of the change in the allowance for loan losses for the years ended December 31, 2009, 2008 and 2007 follows:

	2009			2008		2007
Balance at beginning of year	$	6,133		4,842		4,470
Loans charged off		(1,836	)	(1,414	)	(921	)
Recoveries		355		288		317
Provision for loan losses		4,199		2,417		976
Balance at end of year	$	8,851		6,133		4,842

52

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(3) Loans Receivable, Net (Continued)

Non-accrual loans totaled $11.2 million and $7.3 million at December 31, 2009, and December 31, 2008, respectively. Interest income foregone on such loans totaled $186,000 at December 31, 2008, and $679,000 at December 31, 2009. The Company is not committed to lend additional funds to borrowers whose loans have been placed on a non-accrual basis. There were no loans past due more than three months and still accruing interest as of December 31, 2009, and December 31, 2008. At December 31, 2007, the Company had $46,000 in loans past due more than three months and still accruing interest. For the years ended December 31, 2009, and December 31, 2008, the components of the Company’s balances of non-performing loans are as follows:

	12/31/2009			12/31/2008
Real estate loans:
One-to-four family (closed end) first mortgages	$	1,399		1,254
Home equity lines of credit		—		86
Multi-family		4,851		—
Construction		572		341
Land		3,503		5,052
Non-residential real estate		490		427
Consumer loans		27		55
Commercial loans		367		106
Total non-performing loans	$	11,209		7,321
Non-performing loans to total loans ratio		1.72	%	1.16	%

The Company originates loans to officers and directors and their affiliates at terms substantially identical to those available to other borrowers. Loans to officers and directors at December 31, 2009 and December 31, 2008, were approximately $9,892,000 and $10,989,000, respectively. At December 31, 2009, funds committed that were undisbursed to officers and directors approximated $2.5 million.

The following summarizes activity of loans to officers and directors and their affiliates for the years ended December 31, 2009, and December 31, 2008:

	2009			2008
Balance at beginning of period	$	10,989			11,382
New loans		10,879			6,358
Principal repayments		(11,976	)		(6,751	)
Balance at end of period	$	9,892		$	10,989

53

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(4) Premises and Equipment:

Components of premises and equipment included in the consolidated balance sheets as of December 31, 2009, and December 31, 2008, consisted of the following:

	2009		2008
Land	$	5,560	5,560
Land improvements		482	468
Buildings		20,043	19,859
Furniture and equipment		6,336	6,101
		32,421	31,988
Less accumulated depreciation		7,093	5,545
	$	25,328	26,443

Depreciation expense was approximately $1,548,000, $1,464,000 and $1,284,000 for the years ended December 31, 2009, 2008 and 2007, respectively. For the year ended December 31, 2007, the Company capitalized interest expenses related to construction in process of approximately $27,000. The Company did not capitalize any interest expenses in 2008 or 2009.

(5) Goodwill and Intangible Assets:

Goodwill is tested for impairment on an annual basis and as events or circumstances change that would more likely than not reduce fair value below its carrying amount. In 2009, the Company determined that its goodwill was other than temporarily impaired. As a result, the Company incurred a goodwill impairment charge of $4,989,000 that was effective September 30, 2009.

54

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(5) Goodwill and Intangible Assets (continued)

The amount of other intangible assets and the changes in the carrying amounts of other intangible assets for the years ended December 31, 2009, 2008 and 2007:

	Core Deposits Intangible			Insurance Contracts Intangible		Total
Balance, December 31, 2006	$	3,576		50			3,626
Amortization		(911	)	(50	)		(961	)
Balance, December 31, 2007		2,665		—			2,665
Amortization		(847	)	—			(847	)
Balance December 31, 2008		1,818		—			1,818
Amortization		(650	)	—			(650	)
Balance December 31, 2009	$	1,168		—		$	1,168

The estimated amortization expense for intangible assets for the subsequent years is as follows:

	Core Deposit Intangible
2010		357
2011		292
2012		227
2013		162
2014		97
2015		33
Total	$	1,168

55

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(6) Deposits:

At December 31, 2009, the scheduled maturities of other time deposits were as follows:

2010	$	315,872
2011		126,855
2012		50,788
2013		42,948
2014		22,920
	$	559,383

The amount of other time deposits with a minimum denomination of $100,000 was approximately $266.8 million and $218.9 million at December 31, 2009 and 2008, respectively. At December 31, 2009, directors, members of senior management and their affiliates had deposits in the Bank of approximately $2.4 million.

Interest expense on deposits for the years ended December 31, 2009, December 31, 2008 and December 31, 2007 is summarized as follows:

	2009		2008	2007
Demand and NOW accounts	$	1,450	2,276	3,216
Money market accounts		59	271	514
Savings		120	405	887
Other time deposits		19,204	17,837	17,662
	$	20,833	20,789	22,279

The Bank maintains clearing arrangements for its demand, NOW and money market accounts with BBVA Compass Bank. The Bank is required to maintain certain cash reserves in its account to cover average daily clearings. At December 31, 2009, average daily clearings were approximately $5.5 million.

At December 31, 2009, the Company had approximately $602,000 of deposit accounts in overdraft status and thus has been reclassified to loans on the accompanying consolidated balance sheet. At December 31, 2008, the Company had approximately $520,000 of deposit accounts in overdraft status and thus has been reclassified to loans on the accompanying consolidated balance sheet. At December 31, 2009 and December 31, 2008, the Company had deposits classified as brokered deposits totaling $83.3 million and $67.9 million, respectively.

56

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands, Except Percentages)

(7) Advances from Federal Home Loan Bank:

Federal Home Loan Bank (FHLB) advances are summarized as follows:

	December 31,
	2009				2008
Types of Advances	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Fixed-rate	$	94,465	3.77	%	$	108,012	3.73	%
Variable-rate		8,000	1.05	%		22,000	0.90	%
Total	$	102,465	3.56	%	$	130,012	3.25	%

Scheduled maturities of FHLB advances as of December 31, 2009 are as follows:

Years Ending December 31,	Fixed Rate		Fixed Rate Avg Cost		Variable Rate		Variable Rate Avg Cost
2010	$	14,000	3.50	%	$	8,000	1.05	%
2011		15,000	4.36	%		—	—
2012		5,000	1.83	%		—	—
2013		4,552	3.30	%		—	—
2014		6,644	3.16	%		—	—
Thereafter		49,269	3.99	%		—	—
Total	$	94,465	3.77	%	$	8,000	1.05	%

The Bank has an approved line of credit of $30.0 million at December 31, 2009 which is secured by a blanket agreement to maintain residential first mortgage loans and non-residential real estate loans with a principal value of 125% of the outstanding advances and has a variable interest rate. At December 31, 2009, the Bank has access to the full balance on both lines of credit. All borrowings with the FHLB are secured under a blanket agreement using the Bank’s portfolio of 1-4 family home loans and non-residential real estate loans as collateral. In addition, the Bank has pledged investments with a book value of $25.5 million and a market value of $26.7 million. At December 31, 2009, the Bank could borrow a total of $99.2 million from the FHLB of Cincinnati. The Bank has an $8 million unsecured line of credit with BVA Compass Bank of Birmingham, Alabama. The Company’s overnight lines of credit with both the Federal Home Loan Bank of Cincinnati and Compass Bank had a zero balance at December 31, 2009.

At December 31, 2009, the Bank pledged investment securities with a book balance of $84.3 million and a market value of $86.5 million to various municipalities. In addition to the pledged securities, the Bank has issued $30.5 million in letters of credit issued by the Federal Home Loan Bank of Cincinnati as collateral for select municipality deposits.

57

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands, Except Percentages)

(8) Repurchase Agreements

In 2006, the Bank enhanced its cash management product line to include an automated sweep of excess funds from checking accounts to repurchase accounts, allowing interest to be paid on excess funds remaining in checking accounts of business and municipal customers. Repurchase balances are overnight borrowings from customers and are not FDIC insured. In addition, the Company has entered into two long term repurchase agreements with third parties.

At December 31, 2009, the Company provided investment securities with a market value of $40.5 million and a book value of $39.8 million as collateral for repurchase agreements. The maximum repurchase balances outstanding during the twelve month periods ending December 31, 2009 and December 31, 2008 was $40.6 million and $39.2 million, respectively.

At December 31, 2009 and December 31, 2008, the respective cost and maturities of the Company’s repurchase agreements are as follows:

2009
Third Party	Balance		Average Cost		Maturity	Comments
Deutsch Bank		10,000	4.28	%	9/5/2014	Quarterly callable
Merrill Lynch		6,000	4.36	%	9/18/2016	Quarterly callable
Various customers		20,060	.65	%		Overnight
Total	$	36,060	2.27	%

2008
Third Party	Balance		Average Cost		Maturity	Comments
Deutsch Bank		10,000	4.28	%	9/5/2014	Quarterly callable
Merrill Lynch		6,000	4.36	%	9/18/2016	Quarterly callable
Various customers		12,680	1.00	%		Overnight
Total	$	28,680	2.85	%

58

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(9) Financial Instruments:

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

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

	December 31,
	2009		2008
Commitments to extend credit	$	52,939	$	53,836
Standby letters of credit		1,905		3,577
Unused commercial lines of credit		11,815		13,095
Unused home equity lines of credit		31,158		32,626

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter-party. Collateral held varies but may include property, plant, and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most guarantees extend from one to two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The fair value of standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counter parties drawing on such financial instruments and the present creditworthiness of such counter parties. Such commitments have been made on terms which are competitive in the markets in which the Company operates, thus, the fair value of standby letters of credit equals the carrying value for the purposes of this disclosure. The maximum potential amount of future payments that the Company could be required to make under the guarantees totaled $1,905,000 at December 31, 2009.

59

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(9) Financial Instruments: (Continued)

In September 2006, the Financial Accounting Standards Board (FASB) issued ASC Topic 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value. ASC 820 was effective for fiscal years beginning after November 15, 2007. ASC 820 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. ASC 820 had no impact on the consolidated financial statements of HopFed Bancorp because the Company did not elect the fair value option for any financial instrument not presently being accounted for at fair value.

HopFed Bancorp has developed a process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models or processes that use primarily market based or based on third party market data, including interest rate yield curves, option volatilities and other third party information. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financials instruments could result in a different estimate of fair value at the reporting date.

ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

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

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

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

The fair value of securities available for sale are determined by a matrix pricing, which is a mathematical technique what is widely used in the industry to value debt securities without relying exclusively on quoted prices for the individual securities in the Company’s portfolio but relying on the securities relationship to other benchmark quoted securities. Impaired loans are valued at the net present value of expected payments and considering the fair value of any assigned collateral.

60

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(9) Financial Instruments: (Continued)

The Company has certain liabilities carried at fair value including interest rate swap agreements. The fair value of these liabilities is based on information obtained from a third party bank and is reflected within level 2 of the valuation hierarchy.

Assets and Liabilities Measured on a Recurring Basis

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

2009 Description	Total carrying value in the consolidated balance sheet at 12/31/2009		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available for sale securities	$	289,691	$	—	$	288,265	$	1,426
Bank owned life insurance		8,475		—		8,475		—
Liabilities
Interest rate swap	$	643		—	$	643	$	—

2008 Description	Total carrying value in the consolidated balance sheet at 12/31/2008		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available for sale securities	$	246,952	$	—	$	245,329	$	1,623
Bank owned life insurance		7,994		—		7,994		—
Liabilities
Interest rate swap	$	1,175	$	—	$	1,175	$	—

61

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(9) Financial Instruments: (Continued)

The assets and liabilities measured at fair value on a non-recurring basis are summarized below:

2009 Description	Total carrying value in the consolidated balance sheet at 12/31/2009		Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets
Other real estate owned	$	1,868	—	—	$	1,868
Other assets owned	$	15	—	—	$	15
Impaired loans, net of reserve of $2,512	$	33,022	—	—	$	33,022

2008 Description	Total carrying value in the consolidated balance sheet at 12/31/2008		Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets
Other real estate owned	$	841	—	—	$	841
Other assets owned	$	34	—	—	$	34
Impaired loans, net of reserve of $731	$	10,562	—	—	$	10,562

62

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(9) Financial Instruments: (Continued)

Change in level 3 fair value measurements

The table below includes a roll-forward of the balance sheet items for the years ended December 31, 2009 and 2008, (including the change in fair value) for financial instruments classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

	2009					2008
Twelve months ended December 31, (In thousands)	Other Assets			Other Liabilities		Other Assets			Other Liabilities
Fair value, January 1,	$	1,623		$	—	$	—		$	—
Total realized gains (losses) included in income		—			—		—			—
Change in unrealized gains (losses) included in other comprehensive income for assets and liabilities still held at year end.		(197	)		—		(377	)		—
Purchases, issuances and settlements, net		—			—		2,000			—
Transfers in and/or out of Level 3		—			—		—			—
Fair value, December 31,	$	1,426		$	—	$	1,623		$	—

63

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(9) Financial Instruments: (Continued)

The estimated fair values of financial instruments were as follows at December 31, 2009:

	Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and due from banks	$	37,938	37,938
Interest-earning deposits in Federal Home Loan Bank		3,173	3,173
Securities available for sale		289,691	289,691
Federal Home Loan Bank stock		4,281	4,281
Loans receivable		642,355	655,105
Accrued interest receivable		5,777	5,777
Bank owned life insurance		8,475	8,475
Financial liabilities:
Deposits		794,144	806,816
Advances from borrowers for taxes and insurance		236	236
Advances from Federal Home Loan Bank		102,465	105,763
Repurchase agreements		36,060	38,902
Subordinated debentures		10,310	10,091
Market value of interest rate swap		643	643
Off-balance-sheet liabilities:
Commitments to extend credit		—	—
Commercial letters of credit		—	—

64

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(9) Financial Instruments: (Continued)

The estimated fair values of financial instruments were as follows at December 31, 2008:

	Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and due from banks	$	15,268	15,268
Interest-earning deposits in Federal Home Loan Bank		5,727	5,727
Federal funds sold		16,080	16,080
Securities available for sale		246,952	246,952
Federal Home Loan Bank stock		4,050	4,050
Securities held to maturity		454	455
Loans receivable		628,356	635,324
Accrued interest receivable		5,852	5,852
Bank owned life insurance		7,994	7,994
Financial liabilities:
Deposits		713,005	723,354
Advances from borrowers for taxes and insurance		210	210
Advances from Federal Home Loan Bank		130,012	131,803
Repurchase agreements		28,680	31,713
Subordinated debentures		10,310	13,602
Market value of interest rate swap		1,175	1,175
Off-balance-sheet liabilities:
Commitments to extend credit		—	—
Commercial letters of credit		—	—

65

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(10) Subordinated Debentures:

On September 25, 2003, the Company formed HopFed Capital Trust I (the Trust). The Trust is a statutory trust formed under the laws of the state of Delaware. In September 2003, the Trust issued variable rate capital securities with an aggregate liquidation amount of $10,000,000 ($1,000 per preferred security) to a third-party investor. The Company then issued floating rate junior subordinated debentures aggregating $10,310,000 to the Trust. The junior subordinated debentures are the sole assets of the Trust. The junior subordinated debentures and the capital securities pay interest and dividends, respectively, on a quarterly basis. The variable interest rate is the three-month LIBOR plus 3.10% adjusted quarterly (3.61% for the quarter ending December 31, 2009). These junior subordinated debentures mature in 2033, at which time the capital securities must be redeemed. The junior subordinated debentures and capital securities can be redeemed contemporaneously, in whole or in part, beginning October 8, 2008 at a redemption price of $1,000 per capital security.

The Company has provided a full-irrevocable and unconditional guarantee on a subordinated basis of the obligations of the Trust under the capital securities in the event of the occurrence of an event of default, as defined in such guarantee. Debt issuance cost and underwriting fees of $190,000 were capitalized related to the offering and are fully amortized at December 31, 2009.

(11) Concentrations of Credit Risk:

Most of the Bank’s business activity is with customers located within the western part of the Commonwealth of Kentucky and middle and western Tennessee. One-to-four family residential and non residential real estate collateralize the majority of the loans. The Bank requires collateral for the majority of loans.

The distribution of commitments to extend credit approximates the distribution of loans outstanding. The contractual amounts of credit-related financial instruments such as commitments to extend credit and commercial letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless. In October of 2008, the FDIC increased its deposit coverage on all accounts to $250,000. In addition, financial institutions could choose to pay a higher premium to have all non-interest demand deposit balances insured. Compass Bank of Birmingham, Alabama, the Heritage Bank correspondent banker, elected to accept this additional coverage. Therefore, uninsured deposits are limited to those balances transferred to an overnight federal funds account. During 2009, Heritage Bank chose not to transfer balances to an overnight federal funds account.

At December 31, 2009, all cash and cash equivalents are deposited with either Compass Bank or the Federal Home Loan Bank of Cincinnati (FHLB). Compass Bank is a participant in the FDIC’s TALC program that provides 100% insurance for all funds in non-interest bearing accounts. All funds deposited into Compass Bank are placed in non-interest bearing accounts and are fully insured by the FDIC. All deposits at the FHLB are liabilities of the individual bank and are not federally insured. The FHLB is a government sponsored enterprise (GSE) and has the highest rating available by all rating agencies. At December 31, 2009, total FHLB deposits were approximately $3.2 million, none of which is insured by the FDIC.

66

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(12) Employee Benefit Plans:

Stock Option Plan

The following is a summary of stock options outstanding at December 31, 2009:

Exercise Price		Weighted Average Remaining Life (Years)	Outstanding Options	Options Exercisable
$	12.33	1.6	60,000	60,000
	17.34	4.4	20,000	20,000
	10.00	0.4	30,000	30,000
$	12.61	1.8	110,000	110,000

On February 24, 1999, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 1999 Stock Option Plan (Option Plan), which was subsequently approved at the 1999 Annual Meeting of Stockholders. Under the Option Plan, the Option Committee has discretionary authority to grant stock options and stock appreciation rights to such employees, directors and advisory directors, as the committee shall designate. The Option Plan reserved 403,360 shares of common stock for issuance upon the exercise of options or stock appreciation rights. At December 31, 2009, the Company can no longer issue options under this plan. The remaining 80,000 options are fully vested and outstanding until their maturity date. At December 31, 2009, the strike price of all outstanding options is above the Company’s current stock price.

On May 31, 2000, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 2000 Stock Option Plan (the “2000 Option Plan”). Under the 2000 Option Plan, the option committee has discretionary authority to grant stock options to such employees as the committee shall designate. The 2000 Option Plan reserves 40,000 shares of common stock for issuance upon the exercise of options. The Company will receive the exercise price for shares of common stock issued to 2000 Option Plan participants upon the exercise of their option. The Board of Directors has granted options to purchase 40,000 shares of common stock under the 2000 Option Plan at an exercise price of $10.00 per share, which was the fair market value on the date of the grant. In 2008, 10,000 shares were exercised. The 2000 Stock Option Plan has 30,000 fully vested options outstanding.

67

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(12) Employee Benefit Plans: (Continued)

Stock Option Plan (Continued)

The following summary represents the activity under the stock option plans:

	Number of Shares	Weighted Average Exercise Price
Options outstanding, December 2007	273,752	$	15.22
Granted	—		—
Exercised	10,000		10.00
Forfeited	—		—
Options outstanding, December 2008	263,752		15.41
Granted	—		—
Exercised	—		—
Forfeited	153,752	$	17.42
Options outstanding, December 2009	110,000	$	12.61

Stock options vest and become exercisable annually over a four-year period from the date of the grant. All options are fully vested.

The value of vested options outstanding at December 31, 2009 is $362,000 for options issued under the 1999 Plan and $108,600 for options vested under the 2000 Plan. No options vested in 2009. Shares issued for option exercises are expected to come from authorized but unissued shares. At December 31, 2009, the Company has no unvested stock options.

68

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(12) Employee Benefit Plans: (Continued)

2004 HopFed Bancorp Long Term Incentive Plan

On February 18, 2004, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan (the Plan), which was subsequently approved at the 2004 Annual Meeting of Stockholders. Under the Plan, the Compensation Committee has discretionary authority to grant up to 200,000 shares in the form of restricted stock grants, options, and stock appreciation rights to such employees, directors and advisory directors as the committee shall designate. The grants vest in equal installments over a four-year period. Grants may vest immediately upon specific events, including a change of control of the Company, death or disability of award recipient, and termination of employment of the recipient by the Company without cause.

Awards are recognized as an expense to the Company in accordance with the vesting schedule. Awards in which the vesting is accelerated must be recognized as an expense immediately. Awards are valued at the closing stock price on the day the award is granted. In 2009, the Compensation Committee granted a total of 9,571 shares with a market value of $92,600. In 2008, the Compensation Committee granted a total of 11,962 shares with a market value of $160,000. In 2007, The Compensation Committee granted a total of 9,082 shares with a market value of $140,000. The Company recognized $152,000, $157,000, and $137,000 in compensation expense in 2009, 2008 and 2007, respectively.

Approximate Future Year Ending	Compensation Expense
December 31, 2010	$	121
December 31, 2011	$	81
December 31, 2012	$	43
December 31, 2013	$	11

The Compensation Committee may make additional awards of restricted stock, thereby increasing the future expense related to this plan. The early vesting of restricted stock awards due to factors outlined in the award agreement may accelerate future compensation expenses related to the plan. However, the total amount of future compensation expense would not change as a result of an accelerated vesting of shares. At December 31, 2009, the Company has 139,130 restricted shares available from the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan that may be awarded.

69

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(12) Employee Benefit Plans: (Continued)

401(K) Plan

During 2002, the Company initiated a 401(k) retirement program. The 401(k) plan is available to all employees who meet minimum eligibility requirements. Participants may generally contribute up to 15% of earnings, and in addition, management will match employee contributions up to 4%. In addition, the Company has chosen to provide all eligible employees an additional 4% of compensation without regards to the amount of the employee contribution. Expense related to Company contributions amounted to $617,000, $587,000, and $427,000 in 2009, 2008 and 2007, respectively.

Deferred Compensation Plan

During the third quarter of 2002, the Company purchased assets and assumed the liabilities relating to a nonqualified deferred compensation plan for certain employees of the Fulton division. The Company owns single premium life insurance policies on the life of each participant and is the beneficiary of the policy value. When a participant retires, the benefits accrued for each participant will be distributed to the participant in equal installments for 15 years. The expense recognized by the Company for 2009, 2008, and 2007 amounted to $19,000 annually. The Deferred Compensation Plan also provides the participant with life insurance coverage, which is a percentage of the net death proceeds for the policy, if any, applicable to the participant. The original face value of all deferred compensation contracts was approximately $668,000. At December 31, 2009, the accrued value of all deferred compensation contacts is approximately $417,000. The Company is currently making cash remittances of approximately $29,000 per year on deferred compensation contracts.

(13) Income Taxes:

The provision for income tax expense (benefit) for the years ended December 31, 2009, 2008 and 2007 consisted of the following:

	2009			2008		2007
Current
Federal	$	2,976		2,403		1,571
State		230		158		165
		3,206		2,561		1,736
Deferred
Federal		(2,809	)	(609	)	(8	)
State		—		—		—
		(2,809	)	(609	)	(8	)
	$	397		1,952		1,728

70

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands, Except Percentages)

(13) Income Taxes (Continued):

Total income tax expense for the years ended December 31, 2009, 2008 and 2007 differed from the amounts computed by applying the federal income tax rate of 34 percent to income before income taxes as follows:

	2009			2008		2007
Expected federal income tax expense at statutory tax rate	$	806		2,233		1,987
Effect of non-taxable interest income		(444	)	(326	)	(309	)
Effect of non-taxable bank owned life insurance income		(120	)	(92	)	(103	)
State taxes on income, net of federal benefit		152		104		109
Non deductible expenses		3		33		44
Total federal income tax expense	$	397		1,952		1,728
Effective rate		16.7	%	29.7	%	29.6	%

The components of deferred taxes as of December 31, 2009 and 2008 are summarized as follows:

	2009			2008
Deferred tax assets:
Allowance for loan loss	$	2,995		$	2,072
Accrued expenses		354			329
Intangible amortization		1,786			105
		5,135			2,506
Deferred tax liabilities:
FHLB stock dividends		(787	)		(787	)
Unrealized gain on securities available for sale		(1,622	)		(533	)
Depreciation and amortization		(410	)		(418	)
Unearned loan interest and fees, net		142			(31	)
		(2,677	)		(1,769	)
Net deferred tax asset	$	2,458		$	737

71

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(13) Income Taxes: (Continued)

The Small Business Protection Act of 1996, among other things, repealed the tax bad debt reserve method for thrifts effective for taxable years beginning after December 31, 1995. Thrifts such as the Bank may now only use the same tax bad debt reserve method that is allowed for commercial banks. A thrift with assets greater than $500 million can no longer use the reserve method and may only deduct loan losses as they actually arise (i.e., the specific charge-off method).

The portion of a thrift’s tax bad debt reserve that is not recaptured (generally pre-1988 bad debt reserves) under the 1996 law is only subject to recapture at a later date under certain circumstances. These include stock repurchase redemptions by the thrift or if the thrift converts to a type of institution (such as a credit union) that is not considered a bank for tax purposes. However, no further recapture would be required if the thrift converted to a commercial bank charter or was acquired by a bank. The Bank does not anticipate engaging in any transactions at this time that would require the recapture of its remaining tax bad debt reserves. Therefore, retained earnings at December 31, 2009 and 2008 includes approximately $4,027,000 which represents such bad debt deductions for which no deferred income taxes have been provided.

(14) Real Estate and Other Assets Owned:

The Company’s other real estate and other assets owned balances at December 31, 2009, and December 31, 2008 represent properties and personal collateral acquired by the Bank through loan defaults of customers. The property is recorded at the lower of cost or fair value less estimated cost of to sell at the date acquired with any loss recognized as a charge off through the allowance for loan loss account. Additional OREO and other asset losses may be determined on individual properties at specific intervals or at the time of disposal. Additional losses are recognized as a non-interest expense. For the years ended December 31, 2009 and December 31, 2008, the composition of the Company’s balance in both other assets owned and other real estate owned are as follows:

Other Real Estate Owned	2009	2008
	(Dollars in Thousands)
One-to-four family first mortgages	438	85
Multi-family	425	485
Construction	468	—
Land	225	22
Non-residential real estate	312	249
Consumer assets owned by bank	15	34
Total Other Real Estate and Assets Owned	1,883	875

72

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(15) Commitments and Contingencies:

In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements.

The Bank had open loan commitments at December 31, 2009 and 2008 of approximately $52,939,000 and $53,836,000, respectively. At December 31, 2009 and 2008, the Bank had no fixed rate loan commitments. Unused lines of credit were approximately $43.0 million and $45.7 million at December 31, 2009 and 2008, respectively.

The Company and the Bank have agreed to enter into employment agreements with certain officers, which provide certain benefits in the event of their termination following a change in control of the Company or the Bank. The employment agreements provide for an initial term of three years. On each anniversary of the commencement date of the employment agreements, the term of each agreement may be extended for an additional year at the discretion of the Board. In the event of a change in control of the Company or the Bank, as defined in the agreement, the officers shall be paid an amount equal to two times the officer’s base salary as defined in the employment agreement.

The Company and the Bank have entered into commitments to rent facilities and lease operating equipment that are non-cancelable. At December 31, 2009, future minimal lease and rental commitments were as follows:

Years Ending December 31,
2010	$	84,000
2011		63,000
2012		39,000
2013		8,000
2014		—
	$	194,000

The Company incurred rental expenses of approximately $73,000, $71,000 and $131,000 for the years ended December 31, 2009, 2008, and 2007, respectively.

In the normal course of business, the Bank and Company have entered into operating contracts necessary to conduct the Company’s daily business. The most significant operating contract is for the Bank’s data processing services. The monthly cost associated with this contract is variable based on the number of accounts and usage but averages approximately $185,000 per month. The Bank has three outstanding ATM branding agreements with local convenience stores. These agreements allow the Bank to maintain a cash machine and signage in various locations for an annual cost of approximately $120,000.

73

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(15) Commitments and Contingencies: (Continued)

The Company is partially self-insured for medical benefits provided to employees. Heritage Bank is named as the plan administrator for this plan and has retained Blue Cross Blue Shield of Kentucky to process claims and handle other duties of the plan. Blue Cross Blue Shield does not assume any liabilities as a third party administrator. Heritage Bank purchased two stop-loss insurance policies to limit total medical claims from Blue Cross Blue Shield of Kentucky. The first specific stop-loss policy limits the Company’s cost in any one year to $50,000 per covered individual. The Company has purchased a second stop-loss policy that limits the aggregate claims for the Company in a given year at $1,163,508 based upon the Company’s current enrollment. The Company has established a liability for outstanding claims as well as incurred but unreported claims. While management uses what it believes are pertinent factors in estimating the plan liability, the actual liability is subject to change based upon unexpected claims experience and fluctuations in enrollment during the plan year. At December 31, 2009, the Company recognized a liability for self-insured medical expenses of $423,000.

(16) Regulatory Matters:

The Company is a unitary thrift holding company and, as such, is subject to regulation, examination and supervision by the Office of Thrift Supervision (OTS).

The Bank is also subject to various regulatory requirements administered by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

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). Management believes, as of December 31, 2009 and 2008, that the Bank meets all capital adequacy requirements to which it is subject.

The most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total, tangible and core capital ratios as set forth in the table below.

74

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands, Except Percentages)

(16) Regulatory Matters (Continued)

The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2009 and December 31, 2008, are presented below:

	Company Actual				Bank Actual				Required for Capital Adequacy Purposes				Required to be Categorized as Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2009
Tangible capital to adjusted total assets	$	85,943	8.4	%	$	82,143	8.1	%	$	15,309	1.50	%		N/A	N/A
Core capital to adjusted total assets	$	85,943	8.4	%	$	82,143	8.1	%	$	40,823	4.00	%	$	51,029	5.00	%
Total capital to risk weighted assets	$	93,179	13.8	%	$	89,379	13.3	%	$	53,825	8.00	%	$	67,281	10.00	%
Tier 1 capital to risk weighted assets	$	85,943	12.7	%	$	82,143	12.2	%		N/A	N/A		$	40,369	6.00	%
As of December 31, 2008
Tangible capital to adjusted total assets	$	80,751	8.4	%	$	73,867	7.8	%	$	14,269	1.50	%		N/A	N/A
Core capital to adjusted total assets	$	80,751	8.4	%	$	73,867	7.8	%	$	38,050	4.00	%	$	47,562	5.00	%
Total capital to risk weighted assets	$	86,884	13.7	%	$	79,999	12.6	%	$	50,632	8.00	%	$	63,289	10.00	%
Tier 1 capital to risk weighted assets	$	80,751	12.7	%	$	73,867	11.7	%		N/A	N/A		$	37,974	6.00	%

75

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(17) Stockholders’ Equity:

The Company’s sources of income and funds for dividends to its stockholders are earnings on its investments and dividends from the Bank. The Bank’s primary regulator, the OTS, has regulations that impose certain restrictions on payment of dividends to the Company. Current regulations of the OTS allow the Bank (based upon its current capital level and supervisory status assigned by the OTS) to pay a dividend of up to 100% of net income to date during the calendar year plus the retained income for the preceding two years. Currently the Company must seek approval from OTS prior to declaring future common stock dividends.

The Bank must provide the OTS with 30 days prior notice to the payment of the dividend. Any capital distribution in excess of this amount would require supervisory approval. Capital distributions are further restricted should the Bank’s capital level fall below the fully phased-in capital requirements of the OTS. In no case will the Bank be allowed to make capital distributions reducing equity below the required balance of the liquidation account. For the year ended December 31, 2009, the Bank did not pay a dividend to the Corporation. For the years ended December 31, 2008 and December 31, 2007, the Bank paid dividends of $2 million and $3 million to the Corporation, respectively.

OTS regulations also place restrictions after the conversion on the Company with respect to repurchases of its common stock. With prior notice to the OTS, the Company is allowed to repurchase its outstanding shares. In August 2006, the Company announced that it replaced a previously announced stock buyback plan with a new plan to purchase up to 125,000 shares of common stock over the next two years. Under the plan that expired September 30, 2008, the Company purchased 106,647 shares of common stock at an average price of $15.36 per share. As of December 31, 2009, a total of 515,555 shares had been repurchased from all active and inactive stock repurchase plans at an average price of $12.60 per share. As discussed below, the Company’s participation in the United States Treasury Capital Purchase Program prevents it from purchasing additional treasury stock for a period of three years ending December 12, 2011 without first redeeming all of the Treasury’s investment.

On December 12, 2008, HopFed Bancorp issued 18,400 shares of preferred stock to the United States Treasury (Treasury) for $18,400,000 pursuant to the Capital Purchase Program. The Company issued 243,816 common stock warrants to the Treasury as a condition to its participation in the Capital Purchase Program. The warrants have an exercise price of $11.32 each and are immediately exercisable. The warrants expire ten years from the date of issuance. The preferred stock has no stated maturity and is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per year for the first five years and 9% thereafter. The Company must have the written approval of the Treasury to redeem the shares prior to December 12, 2011 except with the proceeds from a qualified equity offering.

Upon receipt of the proceeds from the Treasury, the Company immediately invested $14.0 million in capital into Heritage Bank.

76

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(17) Stockholders’ Equity : (Continued)

Based on the binomial method, the common stock warrants have been assigned a value of $2.28 per warrant, or $555,900. As a result, the value of the warrants has been recorded as a discount on the preferred stock and will be accreted as a reduction in net income available for common shareholders over the next five years at $111,800 per year. For the purposes of these calculations, the fair value of the common stock warrants was estimated using the following assumptions:

•     Risk free rate		2.60	%
•     Expected life of warrants		10 years
•     Expected dividend yield		3.50	%
•     Expected volatility		26.5	%
•     Weighted average fair value	$	2.28

The Company’s computation of expected volatility is based on the weekly historical volatility. The risk free rate was the approximate rate of the ten year treasury at the end of November 2008.

By participating in the Capital Purchase Program, the Company agreed to not increase its dividend paid to common shareholders for a period of three years without prior approval of the United States Treasury. If the Company fails to make all dividend payments due to preferred shareholders, the Company is prohibited from paying any dividend to common shareholders. In addition, the United States Treasury placed certain restrictions on the amount and type of compensation that can be paid to certain senior level executives of the Company. Furthermore, the United States Treasury may, at its sole discretion, change the terms and conditions of the Capital Purchase Programs.

(18) Earnings Per Share:

Earnings per share of common stock are based on the weighted average number of basic shares and dilutive shares outstanding during the year. Common stock warrants outstanding are not included in the dilutive earnings per share computations because they would be anti-dilutive.

The following is a reconciliation of weighted average common shares for the basic and dilutive earnings per share computations:

	Years Ended December 31,
	2009	2008	2007
Basic earnings per share:
Weighted average common shares	3,569,969	3,572,127	3,588,163
Diluted earnings per share:
Weighted average common shares	3,569,969	3,572,127	3,588,163
Diluted effect of stock options	—	25,356	19,707
Weighted average common and incremental shares	3,569,969	3,597,483	3,607,870

77

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(19) Condensed Parent Company Only Financial Statements:

The following condensed balance sheets as of December 31, 2009 and 2008 and condensed statements of income and cash flows for the years ended December 31, 2009, 2008 and 2007 of the parent company only should be read in conjunction with the consolidated financial statements and the notes thereto.

Condensed Balance Sheets:

	2009			2008
Assets:
Cash and due from banks	$	3,130		50
Federal funds sold		—		6,685
Investment in subsidiary		65,990		61,591
Prepaid expenses and other assets		1,431		1,197
Total assets	$	70,551		69,523
Liabilities and Stockholders’ Equity
Liabilities
Unrealized loss on derivative	$	643		1,175
Dividends payable—common		454		444
Interest payable		88		204
Subordinated debentures		10,310		10,310
Total liabilities		11,495		12,133
Stockholders Equity:
Preferred stock		—		—
Common stock		41		41
Common stock warrants		556		556
Additional paid-in capital		40,183		39,926
Retained earnings		21,623		22,327
Treasury stock		(6,495	)	(6,495	)
Accumulated other comprehensive income		3,148		1,035
Total equity		59,056		57,390
Total liabilities and stockholders’ equity	$	70,551		69,523

78

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(19) Condensed Parent Company Only Financial Statements: (Continued)

Condensed Statements of Income:

	2009			2008			2007
Interest and dividend income
Dividend income	$	—			2,000			3,000
Time deposits		2			29			86
Total interest and dividend income		2			2,029			3,086
Interest expense		625			612			775
Non-interest expenses		438			480			443
Total expenses		1,063			1,092			1,218
Income (loss) before income taxes and equity in undistributed earnings of subsidiary		(1,061	)		937			1,868
Income tax benefits		(399	)		(363	)		(416	)
Income (loss) before equity in undistributed earnings of subsidiary		(662	)		1,300			2,284
Equity in undistributed earnings of subsidiary		2,637			3,315			1,832
Net income		1,975			4,615			4,116
Preferred stock dividend and warrant accretion		(1,031	)		(56	)		—
Income available to common shareholders	$	944		$	4,559		$	4,116

79

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(19) Condensed Parent Company Only Financial Statements: (Continued)

Condensed Statement of Cash Flows:

	2009			2008		2007
Cash flows from operating activities
Net income	$	1,975		4,615		4,116
Adjustments to reconcile net income to net cash (used in) provided by operating activities
Equity in undistributed earnings of subsidiary		(2,636	)	(3,315	)	(1,832	)
Amortization of restricted stock		151		155		137
Stock option expense		—		9		22
Increase (decrease) in:
Current income taxes payable		(361	)	977		(369	)
Accrued expenses		(160	)	(40	)	(94	)
Net cash (used in) provided by operating activities:		(1,031	)	2,401		1,980
Cash flows for investing activities:
Investment in subsidiary		—		(14,000	)	—
Net (increase) decrease in federal funds sold		6,685		(4,785	)	440
Net cash (used in) provided by investing activities		6,685		(18,785	)	440
Cash flows from financing activities:
Purchase of treasury stock		—		(283	)	(706	)
Proceeds from sale of preferred stock		—		18,400		—
Dividends paid on preferred stock		(851	)	—		—
Dividends paid on common stock		(1,723	)	(1,720	)	(1,729	)
Net cash (used in) provided by financing activities		(2,574	)	16,397		(2,435	)
Net increase (decrease) in cash		3,080		13		(15	)
Cash and due from banks at beginning of year		50		37		52
Cash and due from banks at end of year	$	3,130		50		37

80

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands)

(20) Investments in Affiliated Companies: (Unaudited)

Investments in affiliated companies accounted for under the equity method consist of 100%

of the common stock of HopFed Capital Trust I (the Trust), a wholly owned statutory business

trust. The Trust was formed on September 25, 2003. Summary financial information for the

Trust follows:

Summary Balance Sheets

	At Dec. 31, 2009		At Dec. 31, 2008
Asset – investment in subordinated debentures issued by HopFed Bancorp, Inc.	$	10,310	10,310
Liabilities	$	—	—
Stockholders’ equity:
Trust preferred securities		10,000	10,000
Common stock (100% owned by HopFed Bancorp, Inc.)		310	310
Total stockholder’s equity		10,310	10,310
Total liabilities and stockholder’s equity	$	10,310	10,310

Summary Statements of Income

	Years Ended Dec. 31,
	2009		2008
Income – interest income from subordinated debentures issued by HopFed Bancorp, Inc.	$	403	707
Net income	$	403	707

Summary Statements of Stockholder’s Equity

	Trust Preferred Securities		Common Stock	Retained Earnings		Total Stockholder’s Equity
Beginning balances, December 31, 2008	$	10,000	310	—		10,310
Retained earnings:
Net income		—	—	403		403
Dividends:
Trust preferred securities		—	—	(391	)	(391	)
Common dividends paid to HopFed Bancorp, Inc.		—	—	(12	)	(12	)
Total retained earnings		—	—	—		—
Ending balances, December 31, 2009	$	10,000	310	—		10,310

81

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands, Except Per Share Amounts)

(21) Quarterly Results of Operations: (Unaudited)

Summarized unaudited quarterly operating results for the year ended December 31, 2009:

	First Quarter		Second Quarter	Third Quarter		Fourth Quarter
December 31, 2009:
Interest and dividend income	$	13,194	13,307	13,505		13,135
Interest expense		6,799	6,745	6,635		6,133
Net interest income		6,395	6,562	6,870		7,002
Provision for loan losses		974	962	1,379		884
Net interest income after provision for loan losses		5,421	5,600	5,491		6,118
Noninterest income		2,359	2,741	2,085		3,040
Noninterest expense		5,962	6,781	11,675		6,065
Income before income taxes		1,818	1,560	(4,099	)	3,093
Income taxes		552	449	(1,484	)	880
Net income	$	1,266	1,111	(2,615	)	2,213
Net income available to common shareholders	$	1,012	854	(2,875	)	1,953
Basic earnings per share	$	0.28	0.24	(0.80	)	0.55
Diluted earnings per share	$	0.28	0.24	(0.80	)	0.55
Weighted average shares outstanding:
Basic		3,566,638	3,568,814	3,571,716		3,574,375
Diluted		3,566,638	3,568,814	3,571,716		3,574,375

82

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands, Except Per Share Amounts)

(21) Quarterly Results of Operations: (Unaudited)

Summarized unaudited quarterly operating results for the year ended December 31, 2008:

	First Quarter		Second Quarter	Third Quarter	Fourth Quarter
December 31, 2008:
Interest and dividend income	$	12,579	12,136	12,271	12,491
Interest expense		7,021	6,260	6,329	6,810
Net interest income		5,558	5,876	5,942	5,681
Provision for loan losses		401	476	805	735
Net interest income after provision for loan losses		5,157	5,400	5,137	4,946
Noninterest income		2,404	2,097	2,050	1,793
Noninterest expense		5,415	5,666	5,613	5,723
Income before income taxes		2,146	1,831	1,574	1,016
Income taxes		654	570	425	303
Net income	$	1,492	1,261	1,149	713
Net income available to common shareholders	$	1,492	1,261	1,149	657
Basic earnings per share	$	0.42	0.35	0.32	0.19
Diluted earnings per share	$	0.42	0.35	0.32	0.18
Weighted average shares outstanding:
Basic		3,568,556	3,558,893	3,578,924	3,571,713
Diluted		3,583,017	3,573,652	3,583,018	3,576,604

83

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2009, 2008 and 2007

(Table Amounts in Thousands, Except Per Share Amounts)

(22) Comprehensive Income:

FASB ASC 220, Comprehensive Income, established standards for reporting comprehensive income. Comprehensive income includes net income and other comprehensive net income which is defined as non-owner related transactions in equity. The following table sets forth the amounts of other comprehensive income included in stockholders’ equity along with the related tax effect for the years ended December 31, 2009, 2008 and 2007.

	Pre-Tax Amount			Tax Benefit (Expense)		Net of Tax Amount
December 31, 2009:
Unrealized holding gains (losses) on:
Available for sale securities	$	5,383		(1,830	)	3,553
Derivatives		532		(181	)	351
Reclassification adjustments for gains on: Available for sale securities		(2,713	)	922		(1,791	)
	$	3,202		(1,089	)	2,113

	Pre-Tax Amount			Tax Benefit (Expense)		Net of Tax Amount
December 31, 2008:
Unrealized holding gains (losses) on:
Available for sale securities	$	3,917		(1,332	)	2,585
Derivatives		(1,247	)	423		(824	)
Reclassification adjustments for gains on: Available for sale securities		(694	)	236		(458	)
	$	1,976		(673	)	1,303

	Pre-Tax Amount			Tax Benefit (Expense)		Net of Tax Amount
December 31, 2007:
Unrealized holding gains (losses) on:
Available for sale securities	$	2,670		(908	)	1,762
Reclassification adjustments for gains included in net income		(6	)	2		(4	)
Realized gain on settlement of derivative		(98	)	33		(65	)
	$	2,566		(873	)	1,693

84

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

	Percentage Owned	Jurisdiction of Incorporation
Heritage Bank	100%	United States
HopFed Capital Trust I	100%	Delaware

SUBSIDIARIES OF HERITAGE BANK

	Percentage Owned	Jurisdiction of Incorporation
Fall & Fall Insurance, Inc.	100%	Kentucky

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in registration statements No. 333-117956 and 333-79391 on Forms

S-8 and No. 333-156652 on Form S-3 of HopFed Bancorp, Inc. and subsidiaries of our report dated March 31, 2010, relating to the consolidated balance sheets of HopFed Bancorp, Inc., and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009, which report appears in the December 31, 2009 Annual Report on Form 10-K of HopFed Bancorp, Inc and subsidiaries.

/s/ Rayburn, Bates & Fitzgerald, P.C.

Brentwood, Tennessee

Date: March 31, 2010

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, John E. Peck, certify that:

(1) I have reviewed this annual report on Form 10-K of HopFed Bancorp, Inc.;

(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrants internal control over financial reporting; and

(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2010	/s/ John E. Peck
	John E. Peck, Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Billy C. Duvall, certify that:

(1) I have reviewed this annual report on Form 10-K of HopFed Bancorp, Inc.;

(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrants internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2010	/s/ Billy C. Duvall
	Billy C. Duvall, Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of HopFed Bancorp, Inc. (the “Company”) on

Form 10-K for the period ending December 31, 2009 as filed with the Securities and

Exchange Commission on the date hereof (the “Report”), I, John E. Peck, Chief Executive

Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and the result of operations of the Company.

Date: March 31, 2010

/s/ John E. Peck

John E. Peck, Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to HopFed Bancorp, Inc. and will be retained by HopFed Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The information furnished herein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of HopFed Bancorp, Inc. (the “Company”) on

Form 10-K for the period ending December 31, 2009 as filed with the Securities and

Exchange Commission on the date hereof (the “Report”), I, Billy C. Duvall,

Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and the result of operations of the Company.

Date: March 31, 2010

/s/ Billy C. Duvall

Billy C. Duvall, Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to HopFed Bancorp, Inc. and will be retained by HopFed Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The information furnished herein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.

EX-99.1

EXHIBIT 99.1

CERTIFICATION PURSUANT TO

31 C.F.R. SECTION 30.15

I, John E. Peck, certify, based on my knowledge, that:

(i) The Compensation Committee of HopFed Bancorp, Inc. has discussed, reviewed, and evaluated with senior risk officers at least every six months during the period beginning on the later of September 14, 2009, or ninety days after the closing date of the agreement between the TARP recipient and the Treasury and ending with the last day of the TARP recipient’s fiscal year containing that date (the applicable period), the senior executive officer (SEO) compensation plans and the employee compensation plans and the risks these plans pose to HopFed Bancorp, Inc.;

(ii) The Compensation Committee of HopFed Bancorp, Inc. has identified and limited during the applicable period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of HopFed Bancorp, Inc., and during that same applicable period has identified any features of the employee compensation plans that pose risks to HopFed Bancorp, Inc. and has limited those features to ensure that HopFed Bancorp, Inc. is not unnecessarily exposed to risks;

(iii) The Compensation Committee has reviewed, at least every six months during the applicable period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of HopFed Bancorp, Inc. to enhance the compensation of an employee, and has limited those features;

(iv) The Compensation Committee of HopFed Bancorp, Inc. will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v) The Compensation Committee of HopFed Bancorp, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that included a TARP period the features in

a. SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of HopFed Bancorp, Inc.;

b. Employee compensation plans that unnecessarily expose HopFed Bancorp, Inc. to risks; and

c. Employee compensation plans that could encourage the manipulation of reported earnings of HopFed Bancorp, Inc. to enhance the compensation of an employee;

(vi) HopFed Bancorp, Inc. has required that bonus payments, as defined in the regulations and guidance established under Section 111 of EESA (bonus payments), of SEOs and twenty next most highly compensation employees be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) HopFed Bancorp, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under Section 111 of EESA, to a SEO or any of the next five most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(viii) HopFed Bancorp, Inc. has limited bonus payments to its applicable employees in accordance with Section 111 of EESA and the regulations and guidance established thereunder during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(ix) The Board of Directors of HopFed Bancorp, Inc. has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under Section 111 of EESA, by the later of September 14, 2009, or ninety days after the closing date of the agreement between the TARP recipient and Treasury; this policy has been provided to Treasury and its primary regulatory agency; HopFed Bancorp, Inc. and its employees have complied with this policy during the applicable period; and any expenses that, pursuant to this policy, required approval of the Board of Directors, a committee of the Board of Directors, an SEO, or an executive officer with a similar level of responsibility, were properly approved;

(x) HopFed Bancorp, Inc. will permit a non-binding shareholder resolution in compliance with any applicable federal securities rules and regulations on the disclosures provided under the federal securities laws related to SEO compensation paid or accrued during the period beginning on the later of the closing date or the agreement between the TARP recipient and Treasury or June 15, 2009, and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xi) HopFed Bancorp, Inc. will disclose the amount, nature, and justification for the offering during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending the last day of the TARP recipient’s fiscal year containing that date of any perquisites, as defined in the regulations and guidance established under Section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii) HopFed Bancorp, Inc. will disclose whether HopFed Bancorp, Inc., the Board of Directors of HopFed Bancorp, Inc., or the Compensation Committee of HopFed Bancorp, Inc. has engaged during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date, a compensation consultant; and the services of the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) HopFed Bancorp, Inc. has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under Section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xiv) HopFed Bancorp, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between HopFed Bancorp, Inc. and Treasury, including any amendments;

(xv) HopFed Bancorp, Inc. has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and the most highly compensated employees identified; and

(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Date: March 31, 2010

/s/ John E. Peck

John E. Peck

President and Chief Executive Officer

EX-99.2

EXHIBIT 99.2

CERTIFICATION PURSUANT TO

31 C.F.R. SECTION 30.15

I, Billy C. Duvall, certify, based on my knowledge, that:

(xvii) The Compensation Committee of HopFed Bancorp, Inc. has discussed, reviewed, and evaluated with senior risk officers at least every six months during the period beginning on the later of September 14, 2009, or ninety days after the closing date of the agreement between the TARP recipient and the Treasury and ending with the last day of the TARP recipient’s fiscal year containing that date (the applicable period), the senior executive officer (SEO) compensation plans and the employee compensation plans and the risks these plans pose to HopFed Bancorp, Inc.;

(xviii) The Compensation Committee of HopFed Bancorp, Inc. has identified and limited during the applicable period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of HopFed Bancorp, Inc., and during that same applicable period has identified any features of the employee compensation plans that pose risks to HopFed Bancorp, Inc. and has limited those features to ensure that HopFed Bancorp, Inc. is not unnecessarily exposed to risks;

(xix) The Compensation Committee has reviewed, at least every six months during the applicable period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of HopFed Bancorp, Inc. to enhance the compensation of an employee, and has limited those features;

(xx) The Compensation Committee of HopFed Bancorp, Inc. will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(xxi) The Compensation Committee of HopFed Bancorp, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that included a TARP period the features in

a. SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of HopFed Bancorp, Inc.;

b. Employee compensation plans that unnecessarily expose HopFed Bancorp, Inc. to risks; and

c. Employee compensation plans that could encourage the manipulation of reported earnings of HopFed Bancorp, Inc. to enhance the compensation of an employee;

(xxii) HopFed Bancorp, Inc. has required that bonus payments, as defined in the regulations and guidance established under Section 111 of EESA (bonus payments), of SEOs and twenty next most highly compensation employees be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(xxiii) HopFed Bancorp, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under Section 111 of EESA, to a SEO or any of the next five most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xxiv) HopFed Bancorp, Inc. has limited bonus payments to its applicable employees in accordance with Section 111 of EESA and the regulations and guidance established thereunder during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xxv) The Board of Directors of HopFed Bancorp, Inc. has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under Section 111 of EESA, by the later of September 14, 2009, or ninety days after the closing date of the agreement between the TARP recipient and Treasury; this policy has been provided to Treasury and its primary regulatory agency; HopFed Bancorp, Inc. and its employees have complied with this policy during the applicable period; and any expenses that, pursuant to this policy, required approval of the Board of Directors, a committee of the Board of Directors, an SEO, or an executive officer with a similar level of responsibility, were properly approved;

(xxvi) HopFed Bancorp, Inc. will permit a non-binding shareholder resolution in compliance with any applicable federal securities rules and regulations on the disclosures provided under the federal securities laws related to SEO compensation paid or accrued during the period beginning on the later of the closing date or the agreement between the TARP recipient and Treasury or June 15, 2009, and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xxvii) HopFed Bancorp, Inc. will disclose the amount, nature, and justification for the offering during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending the last day of the TARP recipient’s fiscal year containing that date of any perquisites, as defined in the regulations and guidance established under Section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xxviii) HopFed Bancorp, Inc. will disclose whether HopFed Bancorp, Inc., the Board of Directors of HopFed Bancorp, Inc., or the Compensation Committee of HopFed Bancorp, Inc. has engaged during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date, a compensation consultant; and the services of the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xxix) HopFed Bancorp, Inc. has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under Section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xxx) HopFed Bancorp, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between HopFed Bancorp, Inc. and Treasury, including any amendments;

(xxxi) HopFed Bancorp, Inc. has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and the most highly compensated employees identified; and

(xxxii) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Date: March 31, 2010

/s/ Billy C. Duvall

Billy C. Duvall

Senior Vice President, Chief Financial
Officer and Treasurer