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, 2011

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 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	¨	Small 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 ($7.91 per share) at which the stock was sold on June 30, 2011, was approximately $55,721,821. 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, 2012, 7,493,975 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, 2011.

Part III:

Portions of the definitive proxy statement for the 2012 Annual Meeting of Stockholders.

PART I

ITEM 1. BUSINESS

In February 1998, HopFed Bancorp, Inc. (the “Corporation”) 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 Corporation. The conversion of the Bank, the acquisition of all of the outstanding capital stock of the Bank by the Corporation and the issuance and sale of the Common Stock are collectively referred to herein as the “Conversion.” In June of 2010, the Corporation issued and sold 3,333,334 shares of common stock, par value $0.01 per share in connection with a common stock offering. In July 2010, the Corporation issued and sold an additional 250,000 shares of common stock. Both sales were completed at an offering price of $9.00 per share. After underwriting fees and selling expenses, the Corporation received additional capital proceeds of approximately $30.4 million. The consolidated results of the Bank and the Corporation are referred to as the Company.

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 Corporation’s assets primarily consist of the outstanding capital stock of the Bank. The Corporation’s principal business is overseeing the business of the Bank. The Corporation has registered with the Federal Reserve Bank (“FRB”) as a savings and loan holding company. See “Regulation – Regulation of the Company.”

As a holding company, the Corporation 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. In previous years, both the Company and its wholly owned subsidiary, Heritage Bank, were supervised by the Office of Thrift Supervision. As part of the Dodd-Frank Act of 2010, the Office of Thrift Supervision was merged into the Office of the Comptroller of the Currency (OCC) on July 21, 2011, which assumed responsibility for the supervision of Heritage Bank. After the merger of the Office of Thrift Supervision into the Office of the Comptroller of the Currency, the Federal Reserve Bank (FRB) assumed responsibility for the supervision and regulation of the Company. 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. The Tennessee locations include Clarksville, Pleasant View, Ashland City, Kingston Springs and Erin. 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

For the years ended December 31, 2011, and December 31, 2010, the Company’s loan portfolio shrank by approximately $43.8 million and $42.1 million, respectively. There were many factors that resulted in the Company’s negative loan growth in 2011 and 2010. In 2010, the deployment of more than 15,000 troops from nearby Fort Campbell, Kentucky, to Afghanistan resulted in a reduced level of economic activity, lower sales for merchants, weaker demand for most goods and services and reduced tax collections. Furthermore, the deployment of troops occurred during a time of a national recession, further exasperating the weakness in the local economy. The most recent deployment of troops is ending and the majority of troops stationed at Fort Campbell have returned. Despite an increase in economic activity since the return of the division, loan demand remains muted.

Another important factor inhibiting lending growth is the presence of a Memorandum of Understanding and Agreement (MOU) originally between the Board of Directors of the Company and the OTS. The MOU requires the Bank to limit the growth of specific types of lending, including commercial real estate lending. In 2010 and 2011, the MOU’s limitation on commercial real estate made it more difficult for the Bank to experience positive loan growth. The MOU’s limitation on commercial real estate lending is focused on the OTS definition of commercial real estate loan concentrations. OTS viewed all commercial real estate under the same risk profile while the OCC and FDIC may view owner occupied commercial real estate differently as compared to non-owner occupied commercial real estate.

As discussed previously, supervision of the Company and Heritage Bank is now the responsibility of the FRB and OCC, respectively. We anticipate that the change in the interpretation of regulations may change possible making it easier for the Company to grow its loan portfolio in the future. The Company anticipates undergoing its first OCC examination in June of 2012, after which time we will have a clearer picture of how these regulations will be interpreted in the future.

The Company’s rural markets have fared relatively well compared to urban markets and high growth coastal areas. In 2011, the yields on corn, soybean, and wheat were below average as spring-time flooding was followed by a summer drought. Higher commodity prices helped offset below average yields. The agricultural community has good reason to be optimistic in 2012 as commodity prices are at near record levels. The Company anticipates an increase in crop production and an increase in demand for agricultural related credit.

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.

The Company continues to focus its marketing campaign on increasing its market share of checking accounts. The campaign continues to be a resounding success, opening more than 3,500 new non-interest bearing checking accounts opened in each of the last three years. The Company will continue to focus significant resources to this campaign.

3

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 at any time with regulatory approval. 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. The amount and price of the warrants have been adjusted to 253,665.84 shares and a strike price of $10.88 as a result of a 2% stock dividend declared for shareholders of record at September 30, 2010 and October 3, 2011.

In June and July of 2010, the Company sold a total of 3,583,334 shares of Common Stock at $9.00 per share in a public offering. The net proceeds of the public offering, $30.4 million, were used for general corporate purposes and included a $10 million distribution to the Bank, our wholly owned subsidiary. The sale of common stock in June 2010 included 112,639 shares of treasury stock.

At this time, the Company has not redeemed the $18.4 million in preferred stock issued to the United States Treasury under the Troubled Asset Relief Program. The Company continues to evaluate local and national economic trends and the Company’s trends of criticized and non-performing assets. It remains the Company’s intent to repurchase the preferred stock prior to the increase of the dividend to 9% in December of 2013. At this time, the Company does not anticipate raising additional capital to repurchase the preferred stock but may raise additional capital should the opportunity for an acquisition present itself. Additional information on the United States Treasury’s Investment in HopFed Bancorp can be found in Note 17 of the audited consolidated financial statements.

The following chart outlines the Bank’s market share in its six largest markets individually at June 30, 2008, 2009, 2010, and 2011, according to information provided by the FDIC market Share Report:

	At June 30
	2008			2009			2010			2011
Calloway		13.2	%		14.0	%		17.4	%		16.2	%
Christian		20.1	%		22.8	%		28.4	%		26.2	%
Fulton		56.7	%		58.9	%		58.2	%		56.4	%
Marshall		13.1	%		14.3	%		14.6	%		15.0	%
Cheatham		14.5	%		14.9	%		14.8	%		16.9	%
Montgomery		1.5	%		2.9	%		3.2	%		3.0	%

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

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 25, 2012, 402,916 shares of common stock had been repurchased. The Company did not purchase any capital stock in 2010 and 2011. The Company sold 112,639 treasury shares as part of its capital sale in June 2010.

4

Lending Activities

General. The total gross loan portfolio totaled $567.4 million at December 31, 2011, representing 54.5% of total assets at that date. Substantially all loans are originated in the Bank’s market area. At December 31, 2011, $216.1 million, or 38.1% 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 $235.8 million, or 41.6% of the loan portfolio at December 31, 2011, and multi-family residential loans, which were $33.7 million, or 5.9% of the loan portfolio at December 31, 2011. At December 31, 2011, construction loans were $11.9 million, or 2.1% of the loan portfolio, and total consumer and commercial loans totaled $69.8 million, or 12.3% of the loan portfolio.

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, 2011, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below.

	2011						2010						2009						2008						2007
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Type of Loan:
Real estate loans:
One-to-four family residential	$	216,095			38.1	%	$	229,058			37.6	%	$	240,823			37.0	%	$	223,598			35.3	%	$	222,888			38.4	%
Multi-family residential		33,739			5.9	%		29,416			4.8	%		46,325			7.1	%		36,857			5.8	%		24,538			4.2	%
Construction		11,931			2.1	%		23,361			3.8	%		33,216			5.1	%		62,300			9.8	%		50,230			8.7	%
Non-residential (1)		235,823			41.6	%		255,348			41.9	%		254,067			39.0	%		223,180			35.2	%		183,168			31.5	%
Total real estate loans		497,588			87.7	%		537,183			88.1	%		574,431			88.2	%		545,935			86.1	%		480,824			82.8	%
Other loans:
Secured by deposits		4,016			0.7	%		4,081			0.7	%		4,075			0.6	%		3,949			0.6	%		4,419			0.7	%
Other consumer loans		11,094			2.0	%		13,979			2.3	%		17,908			2.8	%		19,731			3.1	%		21,331			3.7	%
Commercial loans		54,673			9.6	%		54,439			8.9	%		54,531			8.4	%		64,595			10.2	%		74,276			12.8	%
Total other loans		69,783			12.3	%		72,499			11.9	%		76,514			11.8	%		88,275			13.9	%		100,026			17.2	%
		567,371			100.0	%		609,682			100.0	%		650,945			100.0	%		634,210			100.0	%		580,850			100.0	%
Deferred loan cost, net		251						363						261						279						244
Allowance for loan losses		(11,262	)					(9,830	)					(8,851	)					(6,133	)					(4,842	)
Total	$	556,360					$	600,215					$	642,355					$	628,356					$	576,252

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

5

Loan Maturity Schedule. The following table sets forth certain information at December 31, 2011, 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 the year ending December 31,						Due 3 through 5 years after December 31,		Due 5 through 10 years after December 31,		Due 10 through 15 years after December 31,		Due 15 years after December 31,
	2012		2013		2014		2012		2012		2012		2012		Total
	(Dollars In Thousands)
One-to-four family residential	$	4,407		4,033		3,877		6,902		43,807		46,161		106,908		216,095
Multi-family residential		2,892		832		260		3,283		4,269		863		21,340		33,739
Construction		8,219		3,257		—		—		—		—		455		11,931
Non-residential		46,579		12,861		12,368		8,271		24,740		43,947		87,057		235,823
Secured by deposits		1,852		1,234		308		622		—		—		—		4,016
Other		25,097		7,156		10,368		12,083		7,005		2,279		1,779		65,767
Total	$	89,046		29,373		27,181		31,161		79,821		93,250		217,539		567,371

The following table sets forth at December 31, 2011, the dollar amount of all loans due after December 31, 2012, which had predetermined interest rates and had floating or adjustable interest rates.

	Predetermined Rate		Floating or Adjustable Rate
	(Dollars In Thousands)
One-to-four family residential	$	29,300	$	182,388
Multi-family residential		3,317		27,530
Construction		—		3,712
Non-residential		37,185		152,059
Other		29,735		13,099
Total	$	99,537	$	378,788

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.

6

In the last ten years, the Company has attempted to diversify its loan portfolio mix to mitigate the risk of lending in a geographically limited area. The Company uses several metrics to measure our relative success in this area. The table below identifies loan balances by type as a percentage of consolidated risk based capital:

	Total		Current Balance as Percentage Of Consolidated Risk Based Capital
	(Dollars in Thousands)
One-to-four family residential	$	216,095		168.71	%
Multi-family residential		33,739		26.34	%
Construction		11,931		9.31	%
Non-residential		183,485		143.25	%
Land		52,338		40.86	%
Consumer		15,110		11.80	%
Commercial		54,673		42.68	%
Total gross loans		567,371		442.95	%

As discussed on page 3 of this report, the Corporation and the Bank are subject to an MOU issued by the OTS and currently enforced by the OCC and FRB. A significant concern to the OTS was the level of the Bank’s non-residential real estate lending as compared to its risk based capital. The OTS considered all lending outside of loans secured by commercial equipment, consumer goods, and 1-4 family homes as non-residential real estate. At December 31, 2011, non-residential real estate loans total 183.5 million, or approximately 143.25% of total consolidated risk based capital. The Company uses standardized industry codes known as NASICS codes to track the individual components of its loan portfolio, including our non-residential real estate loan portfolio. At December 31, 2011, the Company commercial real estate loan portfolio consisted of the following:

	Current Balance		Unadvanced Amount		Total Commitment
	(Dollars in Thousands)
Land		52,338		986		53,324
Construction		6,151		613		6,764
Manufacturing		4,172		459		4,631
Professional, Technical		2,300		106		2,406
Retail Trade		12,019		446		12,465
Other Services		17,767		120		17,887
Finance & Insurance		141		—		141
Agricultural, Forestry, Fishing & Hunting		33,473		3,042		36,515
Real Estate and Rental and Leasing		50,770		1,059		51,829
Wholesale Trade		6,235		5,051		11,286
Arts, Entertainment & Recreation		5,309		129		5,438
Accomodations / Food Service		25,255		46		25,301
Healthcare and Social Assistance		10,140		22		10,162
Educational Services		30		—		30
Transportation & Warehousing		1,638		1		1,639
Information		2,646		28		2,674
Non-industry		3,219		—		3,219
Admin Support / Waste Mgmt		2,220		20		2,240
Total		235,823		12,128		247,951

7

In addition to the measurements prescribed by the OTS in its MOU, management measures commercial real estate (CRE) concentrations as discussed in Concentrations of Commercial Real Estate Lending, Sound Risk Management Practices issued on December 12, 2006, jointly by the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC). In this guidance, the agencies make a significant distinction between owner-occupied CRE and non-owner occupied CRE. The agencies have a heighted level of concerned with those loans with risk profiles sensitive to the condition of the CRE market. CRE loans secured by non-farm, non-residential CRE where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the owner of the property are generally excluded from the guidance. Using the instructions provided in the FDIC call report, the Company estimates that 60% of our CRE portfolio (excluding land) consists of owner occupied properties. Management anticipates that this guidance will be applied to its operations during the first OCC examination scheduled to begin in June of 2012.

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,
	2011			2010			2009
	(Dollars In Thousands)
Loan originations:
One-to-four family residential	$	39,651		$	83,568			52,361
Multi-family residential		7,494			13,480			10,285
Construction		15,975			18,537			20,352
Non-residential		52,093			74,798			65,125
Other		60,001			54,240			68,980
Total loans originated		175,214			244,623			217,103
Loan reductions:
Transfer to other real estate owned		3,748			11,505			1,473
(Increase) decrease in deferred loan origination fees, net of income		112			(102	)		18
Change in allowance for loan losses		1,432			979			2,718
Loans sold		35,647			42,866			5,500
Loan principal payments		178,130			231,515			193,395
Net increase (decrease) in loan portfolio		($43,855	)		($42,140	)		$13,999

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.

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.

8

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 $70,000 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, 2011, the Bank’s 1-4 family loan servicing portfolio was approximately $22.3 million.

The Bank is permitted to lend up to 100% of the appraised value of the residential real property securing a mortgage loan. 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, 2011, the Bank held approximately $10.6 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, 2011, approximately $111,000 was past due more than 30 days or in non-accrual status.

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 $16.6 million at December 31, 2011. At that date, the Bank had no lending relationships in excess of the loans-to-one-borrower limit.

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.

9

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, 2011, one-to-four family residential mortgage loans totaled approximately $216.1 million, or 38.1% of the Bank’s loan portfolio. The Bank originated approximately $36.4 million in loans that were sold in the secondary market with servicing released. At December 31, 2011, the Bank had approximately $2.3 million in one-to-four family residential real estate loans past due more than ninety days or in non-accrual status. At December 31, 2011, the Company’s allowance for loan loss included $3.3 million in reserve for one to four family residential lending.

The Bank primarily originates residential mortgage loans with adjustable rates. As of December 31, 2011, 86.4% 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 consists of closed end first and second mortgages as well as opened ended home equity lines of credit. At December 31, 2011, approximately $177.4 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, 2011, $29.3 million of the Bank’s loan portfolio consisted of fixed-rate one-to-four family first mortgage loans that will mature after December 31, 2012. 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, 2011, the Bank had $38.7 million in home equity lines of credit outstanding and $30.5 million of additional credit available. Typically, these loans are for a term of fifteen years and have loan to value ratio of 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 prior 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.

10

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. In times of increasing interest rates, the 1% annual cap on increases in the interest rates tends to reduce refinancing activity and reduce the Bank’s net interest margin.

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 80% for homes that will be owner-occupied or 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 eighteen 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, 2008, the Bank’s loan portfolio included $62.3 million. By that time, the Bank had begun to reduce its construction loan exposure due to concerns about a slowing economy. The significant reduction in construction loans has had a negative impact on the Bank’s loan portfolio balances and net interest margin. However, the negative impact has been offset by the relatively minor credit problems that have occurred in this portfolio.

11

At December 31, 2011, the Bank’s loan portfolio included $11.9 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, 2011, approximately $7.9 million of construction loans were for one to four family dwellings, $1.4 million were for multi-family dwellings and $2.6 million were for non-residential real estate. At December 31, 2011, there were no construction loans past due more than ninety days or in non-accrual status. At December 31, 2011, the Company’s allowance for loan loss included $139,000 in reserve for construction loans.

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, 2011, the Bank had $33.7 million of multi-family residential loans, which amounted to 5.9% 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, 2011, the Bank had approximately $235.8 million of such loans, which comprised 41.5% of its loan portfolio. The Company estimates that approximately 60% of its non-residential real estate loans (excluding land loans) are owner occupied. 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 non-residential real estate loans are made. At December 31, 2011, no multi-family loans were past due more than 90 days or classified as non-accrual. At December 31, 2011, there were $3.6 million in non-residential real estate and loan loans that were past due by 90 days or more or classified as non-accrual.

In 2010 and 2011, weather related events both locally and nationally factored into the performance of the non-residential real estate portfolio. Locally, significant flooding in both years resulted in farmers having to delay or replant spring crops and limited overall yields on wheat crops. Yields were especially weak in 2011, with unusually high commodity prices partially offsetting lower yields. In 2011, local manufactures were affected by a tornado in the Christian County industrial park and the tsunami in Japan, which resulted in lower demand for auto parts from Asian automakers.

In 2010, the Company experienced a significant increase in the amount of delinquency and charge offs in the multi-family portfolio. In 2010, the Company charged off approximately $1.5 million (net of recoveries) in multi-family properties while transferring another $7.9 million to other real estate owned. The increase in delinquency, other real estate owned and loan losses for multi-family loans is the result of a small number of customer relationships that have been affected by the deployment of military personnel. In 2011, credit quality improved as we were successful in liquidating a large portion of the Company’s other real estate owned. In 2011, the Company’s most significant credit quality issues were concentrated in our commercial real estate portfolio. In 2011, the Company’s commercial real estate portfolio experienced approximately $2.5 million in net charge offs. At December 31, 2011, the Company has provided reserves in the allowance for loan loss account related to its commercial real estate loan portfolio (including land) and multi-family portfolio of $5.0 million and $1.2 million, respectively.

12

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, 2011, loans on deposit accounts totaled $4.0 million, or 0.7% 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, 2011, other consumer loan accounts totaled $11.1 million, or 2.0% 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, 2011, there was $9,000 in consumer loans delinquent 90 days or more or classified as non-accrual. At December 31, 2011, the Company’s allowance for loan loss included $262,000 in reserve for consumer loans.

Commercial Lending. The Bank originates commercial loans on a secured and, to a lesser extent, unsecured basis. At December 31, 2011, the Bank’s commercial loans amounted to $54.7 million, or 9.7% 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, 2011, there was $254,000 in commercial loans delinquent 90 days or more or classified as non-accrual. At December 31, 2011, the Company’s allowance for loan loss included $1.3 million in reserve for commercial loans.

13

Non-accrual Loans and Other Problem Assets

The Bank’s non-accrual loans totaled 1.08% of total loans at December 31, 2011. 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 0.81% at December 31, 2011.

The following table sets forth information with respect to the Bank’s non-accrual loans at the dates indicated.

	At December 31,
	2011			2010			2009			2008			2007
	(Dollars In Thousands)
Accruing loans which are contractually past due 90 days or more:
Residential real estate	$	—		$	—		$	—		$	—		$	42
Non-residential real estate		—			—			—			—			—
Consumer		—			—			—			—			4
Total		—			—			—			—			46
Non-Accrual Loans:
Construction		—			1,541			572			341			—
Multi-family		—			301			4,851			—			—
Residential real estate		2,309			1,662			1,399			1,340			476
Land		1,330			363			3,503			5,052			—
Non residential real estate		2,231			1,043			490			427			46
Consumer		9			23			27			55			—
Commercial		254			97			367			106			25
Total non-accrual loans	$	6,133		$	5,030		$	11,209		$	7,321		$	593
Percentage of total loans		1.08	%		0.82	%		1.72	%		1.16	%		0.10	%

Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. In determining the classification of an asset, the Company utilizes a Classified Asset Committee consisting of members of senior management, accounting, credit analysis, loan administration, loan review, internal audit and collections. The committee is charged with determining the value of assets that are potentially impaired as well as the accurate reporting of Troubled Debt Restructuring (TDR) assets as defined later in this report. The committee’s function is an important step in management’s determination as to the necessary level of funding required in the Company’s allowance for loan loss account.

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. A substandard classification may also result from the change in business purpose of a loan and / or its collateral. For example, a home builder who intends to sell a home upon completion changes his mind due to market conditions and places the home in a rental portfolio that he maintains.

The Company may allow the builder to do this if he has experience in this line of business but requires the customer to refinance the home on a twenty year loans with monthly principal and interest payments. The change of business purpose (built for sale then converted to rental) requires that the Company classify the loan as substandard and review the collateral for impairment. After a period of time of satisfactory loan performance and having satisfactory financial trends, the Company may gradually upgrade the loan from substandard to satisfactory. The typical time for a loan to receive an upgrade from a substandard to satisfactory is twelve to eighteen months of continuous satisfactory performance.

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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 conduct an impairment test to determine if the establishment of a specific reserve against the allowance for loan loss account is necessary. Typically, the basis for a loan impairment test is the current market value of the collateral, discounted to allow for selling and carrying cost. Typically, new appraisals on 1-4 family properties are discounted 10% to 15% from the appraised value while land and commercial real estate are discounted at 15% to 25% of new appraised values depending on the perceived marketability of the property.

The Company requires a new appraisal for all impairment testing of collateral when the loan balance exceeds $100,000. For loans less than $100,000, the Company may choose to use an old appraisal and provide additional discounts to the appraised value in determining the amount of specific reserve required. In the last twelve months, the Company has found that appraisers face in increase in request for services and the time between a request for an appraisal and its completion is longer than normal, up to sixty days for complex multi-family or commercial properties. During the interim, the Company may chose to use an old appraisal with larger discounts to ascertain the likelihood of a loan impairment until a current appraisal is received.

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. If the Company determines that a loan relationship is collateral dependent, it will charge off the portion of that loan that is deemed to be impaired. The Company defines collateral dependent as any loan in that the customer will be unable to reduce the principal balance of the loan without the complete or partial sale of the collateral. As a result of applying these principals to the classified loan portfolio, the Company charged off more than $2.0 million in impaired loans in the fourth quarter of 2011.

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, 2011, the Bank had $47.5 million in assets classified as substandard and $1.7 million in assets classified as doubtful. Loans classified as substandard or doubtful by the Bank meet our classification of impaired loans, as defined by FASB ASC 942-310-45-1.

As depicted in the table below, the level of impaired assets experienced a moderate decline in 2011 as compared to 2010. The decline was primary the result of modest improvement in the local and national economy and the return of deployed army personnel assigned to Fort Campbell from the Middle East. The decline in classified assets does not necessarily translate into a lower level of charge offs.

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The tables below provide a summary of loans classified by the Bank as special mention, substandard and doubtful by category for the years ended December 31, 2011, and December 31, 2010. The table also identifies the amount of the Bank’s allowance for loan loss account specifically allocated to individual loans for the specific periods below:

	Special Mention		Impaired Loans				Specific Allowance for Impairment
			Substandard		Doubful
	(Dollars In Thousands)
December 31, 2011
One-to-four family mortgages	$	9,434		8,153		230		728
Home equity line of credit		1,694		233		239		131
Junior lien		622		809		—		180
Multi-family		7,073		5,951		—		26
Construction		213		1,775		—		14
Land		24,714		9,055		999		924
Non-residential real estate		25,077		16,101		117		1,374
Consumer loans		268		423		20		80
Commercial loans		4,009		5,034		121		623
Total	$	73,104		47,534		1,726	$	4,080

	Special Mention		Impaired Loans				Specific Allowance for Impairment
			Substandard		Doubful
	(Dollars In Thousands)
December 31, 2010
One-to-four family mortgages	$	8,121		8,388		298		350
Home equity line of credit		499		333		230		77
Junior lien		495		187		—		105
Multi-family		—		3,017		301		178
Construction		3,292		3,702		203		108
Land		16,930		13,275		—		588
Non-residential real estate		11,089		22,780		421		2,540
Consumer loans		205		367		—		85
Commercial loans		2,314		5,092		17		255
Total	$	42,945		57,141		1,470	$	4,286

Troubled Debt Restructuring

Due to challenges in the local and national economy that persisted into 2010, the Company has had more of its customers incur financial problems. These customers may request temporary or permanent modification of loans in an effort to avoid foreclosure. The Company analyzes each request separately and grants loan modifications based on the customer’s ability to eventually repay the loan and return to the original loan terms, the customer’s current loan status and the current and projected future value of the Bank’s collateral. Loans that are modified as a result of a customer’s financial distress are classified as Troubled Debt Restructuring (TDR). The classification of a loan as TDR is important in that it indicates that a particular customer may not be past due but represents a credit weakness due to the Bank’s willingness to modify loan terms based on the financial weakness of the borrower.

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The classification of a loan as a TDR may represent the Company’s “last best chance” to work with a distressed customer before foreclosure proceedings begin. At December 31, 2011, the Company had $7.8 million in loans classified as TDR, with $6.2 million of reported TDR’s performing as agreed by the loans modified terms. At December 31, 2011, non-performing TDRs included $1.4 million in 1-4 family mortgage loans, $100,000 in loans on junior liens on residential mortgages and $105,000 in commercial loans. At December 31, 2011, the Company had $1.0 million in specific reserves of the allowance for loan loss account allocated to loans classified as performing TDRs and $175,000 in specific reserves for non-performing TDRs. A summary of loans classified as TDR and the respective TDR activity for the year ended December 31, 2011, can be found in the table below (Dollars in Thousands):

	Balance at December 31, 2010		New TDR		Loss or Foreclosure		Removed due to performance		Balance at December 31, 2011
One-to-four family mortgages	$	4,046		1,163		401		2,287		2,521
Junior Lien		—		857		—		—		857
Multi-family		246		—		5		241		—
Construction		1,541		100		1,641		—		—
Land		512		963		534		—		941
Non-residential real estate		3,915		1,540		1,228		860		3,367
Consumer loans		69		27		9		54		33
Commercial loans		700		102		235		442		125
Total performing TDR	$	11,029		4,752		4,053		3,884		7,844

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 its current market price. The current market price is determined by obtaining an appraisal prior to the acquisition of the property. When such property is acquired, it is recorded at its fair value less estimated costs of sale. In the last eighteen months, the Company has determined that properties acquired through foreclosure have experienced a significant loss in market value as compared to the market value at the time of the origination of the loan. At the time of foreclosure, the collateral is reduced in value to its fair market value less holding and selling expenses and the remaining balance 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. The value of other real estate owned is periodically evaluated, no less than annually, to ascertain its current market value. Additional reductions in market value or recognized as an expense through a charge to losses on real estate owned. At December 31, 2011, the Bank’s real estate and other assets owned totaled $2.3 million.

The following table sets forth information with respect to the Bank’s real estate and other assets owned at December 31, 2011, and December 31, 2010 (Dollars in Thousands):

	2011		2010
One-to-four family first mortgages	$	480		534
Multi-family		905		7,266
Construction		465		624
Land		248		482
Non-residential real estate		160		900
Consumer assets owned by bank		9		6
Total real estate and other assets owned	$	2,267		9,812

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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.

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.

Financial institutions must provide adequate disclosure of the methodology used regarding maintenance of an adequate allowance for loan and lease losses and an effective loan review system. The Bank utilizes a combination of its four quarter loan loss history and the sum of all impairment testing completed on individually classified loans.

The charge off history is weighted using the sum of the year’s digits. This method provides the a 40% weight to the most recent quarters losses, then 30% for the prior quarters losses, 20% for the 2^nd prior quarters losses and 10% for the fourth quarter losses. Using this method, the Bank trends for increasing or decreasing levels of charge offs may materially impact the funding level of the allowance for loan loss account. Additional, the Bank reserves the loss amount of any loans deemed to be impaired. The Bank also applies certain qualitative factors in reviewing its allowance funding, including local and national delinquency and loss trends, noted concentrations or risk and recent additions to regulator guidance.

Financial institutions regulated by the OCC and FDIC may require institutions to immediately charge off any portion of a collateral dependent loan that is deemed to be impaired. After July 21, 2011, the Company anticipates that this requirement will be applied to it as well, eliminating all specific reserves for impaired loans.

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

	Year Ended December 31,
	2011			2010			2009			2008			2007
	(Dollars in thousands)
Balance at beginning of period	$	9,830		$	8,851		$	6,133		$	4,842		$	4,470
Loans charged off:
Commercial loans		(3,596	)		(4,354	)		(530	)		(364	)		(110	)
Consumer loans and overdrafts		(371	)		(472	)		(662	)		(685	)		(625	)
Residential real estate		(908	)		(464	)		(644	)		(365	)		(186	)
Total charge-offs		(4,875	)		(5,290	)		(1,836	)		(1,414	)		(921	)
Recoveries		386			299			355			288			317
Net loans charged off		(4,489	)		(4,991	)		(1,481	)		(1,126	)		(604	)
Provision for loan losses		5,921			5,970			4,199			2,417			976
Balance at end of period	$	11,262		$	9,830		$	8,851		$	6,133		$	4,842
Ratio of net charge-offs to average loans outstanding during the period		0.76	%		0.79	%		0.23	%		0.20	%		0.11	%

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,
	2011					2010					2009					2008
	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	$	3,325		38.1	%	$	1,455		37.6	%	$	2,209		37.0	%	$	2,683		35.3	%
Construction		139		2.1	%		657		3.8	%		514		5.1	%		393		9.8	%
Multi-family residential		1,201		5.9	%		2,022		4.8	%		1,344		7.1	%		455		5.8	%
Non-residential		5,003		41.6	%		4,890		41.9	%		3,231		39.0	%		443		35.2	%
Secured by deposits		—		0.7	%		—		0.7	%		—		0.6	%		—		0.6	%
Other loans		1,594		11.6	%		806		11.2	%		1,553		11.2	%		2,159		13.3	%
Total allowance for loan losses	$	11,262		100.0	%	$	9,830		100.0	%	$	8,851		100.0	%	$	6,133		100.0	%

	At December 31, 2007
	Amount		Percent of Loans in Each Category to Total Loans
	(Dollars In Thousands)
One-to-four family	$	1,910		38.4	%
Construction		292		8.7	%
Multi-family residential		307		4.2	%
Non-residential		265		31.5	%
Secured by deposits		—		0.7	%
Other consumer loans		2,068		16.5	%
Total allowance for loan losses	$	4,842		100.0	%

19

Investment Activities

The Company 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 Corporation and the Bank consist primarily of investments in U.S. Government agency securities, municipal and corporate bonds, CMO’s (see definition below), 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 Corporation 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, 2011, securities, including FHLB stock, with an amortized cost of $359.6 million and an approximate market value of $362.1 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 Corporation 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 $108.7 million mortgage-backed security portfolio and $20.5 million CMO portfolio at December 31, 2011, approximately $39.4 million were originated through GNMA, approximately $67.9 million were originated through FNMA, approximately $20.1 million were originated through FHLMC, and approximately $1.8 million are Whole Loan CMO’s.

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, 2011, the Company owns two securities, with a combined market value of $1.2 million that have been downgraded below investment grade. During 2011, the Company incurred a $155,000 in Other Than Temporary Impairment charge to recognize potential losses on these securities due to higher than anticipated defaults within their portfolios. 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 Consolidated Financial Statements for further details.

20

Mortgage-backed securities are typically 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.

Amortizing U.S. Agency securities owned by the Company are similar in structure to mortgage backed securities. The Company owns two types of amortizing agency securities, both of which are issued with the full faith and credit guarantee of the Small Business Administration (SBA). The Small Business Investment Corporation (SBIC) bonds include pools of SBA loans for business equipment with a ten year maturity. The Small Business Administration Participation Notes (SBAP) has a twenty year maturity and are secured by pools of commercial real estate loans guaranteed by the SBA. Both investments provide superior yields to mortgage backed securities with a credit rating equal to GNMA and superior to FHLMC and FNMA. The actual cash flows and prepayment speeds for SBIC and SBAP bonds are typically slower than similar maturities for mortgage backed securities due to the cost of refinancing SBA loans.

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.

21

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

	At December 31,
	2011		2010		2009
	(In thousands)
FHLB stock, restricted	$	4,428		4,378		4,281
Securities available for sale:
U.S. Agency securities, non-amortizing		29,397		33,988		54,561
U.S. Agency securities, amortizing		145,190		130,416		64,414
Mortage-backed securities		129,242		110,872		115,382
Tax free municipal bonds		65,055		64,393		51,154
Taxable municipal bonds		13,905		16,792		2,754
Trust preferred security		993		1,277		1,426
Total investment securities	$	388,210		362,116		293,972

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, 2011. At such date, $24.2 million of the agency securities were callable and/or due on or before December 31, 2012 and $4.1 million were due and/or callable before December 31, 2013. The Bank had securities that may be called only one time totaling $12.7 million that are callable in the year ending December 31, 2012, and $4.1 million that are callable only once on February 26, 2013. In addition, approximately $130.4 million in small business administration amortizing bonds require periodic principal payments. At December 31, 2011, all municipal securities (both taxable and tax free) were callable and/or due between January 2012 and December 2020. 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)
Non-amortizing U.S. agency securities	$	—		—	%	$	—		—	%	$	7,223		3.87	%	$	22,174		3.96	%	$	29,397	$	29,397		3.96	%
Taxable municipal bonds	$	—		—	%	$	342		3.08	%	$	4,043		4.13	%	$	9,520		4.19	%	$	13,905	$	13,905		4.14	%
Tax free municipal bonds	$	464		4.84	%	$	6,587		4.36	%	$	14,887		4.65	%	$	43,117		5.46	%	$	65,055	$	65,055		5.35	%
Trust preferred		—		—			—		—			—		—		$	993		8.00	%	$	993	$	993		8.00	%

22

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, 2011, the Bank had $56.3 million in brokered deposits as compared to $75.7 million at December 31, 2010. In addition to brokered deposits, the Bank has deposits through the CDARS program of $2.1 million at December 31, 2011, as compared to $15.7 million at December 31, 2010, that are classified as brokered deposits by our regulators. 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. The MOU currently between the Bank and the OCC limits the amount of outstanding brokered deposits to $104.0 million, the balance of brokered deposits at April 30, 2010. 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.

23

Deposits in the Bank at December 31, 2011, were represented by the various types of deposit programs described below.

Interest Rate*	Minimum Term	Category	Minimum Amount		Balance		Percentage of Total Deposits
			(In thousands)
—  %	None	Non-interest bearing	$	100	$	79,550		9.9	%
0.05%*	None	NOW accounts		1,500		130,114		16.3	%
0.10%	None	Savings & money market		10		70,443		8.8	%
						280,107		35.0	%
		Certificates of Deposit
0.15%	3 months or less	Fixed-term, fixed rate		1,000		60,370		7.6	%
0.60%	3 to 12 months	Fixed-term, fixed-rate		1,000		174,145		21.8	%
1.00%	12 to 24-months	Fixed-term, fixed-rate		1,000		126,870		15.8	%
1.25%	24 to 36-months	Fixed-term, fixed-rate		1,000		50,626		6.3	%
1.25%	36 to 48-months	Fixed-term, fixed-rate		1,000		31,407		3.9	%
1.40%	48 to 60-months	Fixed-term, fixed rate		1,000		76,570		9.6	%
						519,988		65.0	%
					$	800,095		100.0	%

* Represents current interest rate offered by the 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,
	2011						2010						2009
	Interest-bearing demand deposits			Time deposits			Interest-bearing demand deposits			Time deposits			Interest-bearing demand deposits			Time deposits
	(Dollars in thousands)
Average Balance	$	205,175		$	548,048		$	191,661		$	570,757		$	155,956		$	542,411
Average Rate		0.81	%		2.29	%		0.94	%		2.73	%		1.06	%		3.10	%

24

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, 2011		% of Deposits			Increase (Decrease) from December  31, 2010			Balance at December 31, 2010		% of Deposits			Increase (Decrease) from December  31, 2009
	(Dollars in thousands)
Non-interest bearing	$	79,550		9.9	%	$	10,411		$	69,139		8.4	%	$	608
Demand & Now		130,114		16.3	%		(8,822	)		138,936		16.8	%		33,115
Savings & MMDA		70,443		8.8	%		6,595			63,848		7.7	%		3,439
Time deposits		519,988		65.0	%		(35,018	)		555,006		67.1	%		(4,377	)
Total	$	800,095		100.0	%	$	(26,834	)	$	826,929		100.0	%	$	32,785

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

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

	At December 31,
	2011		2010		2009
	(In thousands)
0.01 - 2.00%	$	273,950	$	206,126	$	121,759
2.01 - 4.00%		228,255		280,943		170,233
4.01 - 6.00%		17,783		67,370		266,857
6.01 - 8.00%		—		567		534
Total	$	519,988	$	555,006	$	559,383

The following table sets forth the amount and maturities of time deposits at December 31, 2011.

	Amount Due
	Less Than One Year		1-2 Years		2-3 Years		After 3 Years		Total
	(In thousands)
0.00 - 2.00%	$	159,089	$	54,953	$	42,555	$	17,353	$	273,950
2.01 - 4.00%		58,626		71,157		7,848		90,624		228,255
4.01 - 6.00%		16,800		760		223		—		17,783
6.01 - 8.00%		—		—		—		—		—
Total	$	234,515	$	126,870	$	50,626	$	107,977	$	519,988

25

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, 2011.

Maturity Period	Certificates of Deposit
	(In millions)
Three months or less	$	29.7
Over three through six months		30.1
Over six through 12 months		60.6
Over 12 months		152.1
Total	$	272.5

Certificates of deposit at December 31, 2011, included approximately $272.5 million of deposits with balances of $100,000 or more, compared to $289.1 million and $266.8 million at December 31, 2010, and December 31, 2009, 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,
	2011			2010		2009
	(In thousands)
Deposits	$	320,208		$	321,997	$	401,246
Withdrawals		355,868			299,929		332,506
Net increase (decrease) before interest credited		(35,660	)		22,068		68,740
Interest credited		8,826			10,717		12,399
Net increase (decrease) in deposits	$	(26,834	)	$	32,785	$	81,139

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 $63.3 million at December 31, 2011, 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, 2011, the three-month Libor rate was 0.54%. 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.

26

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 7.27% until October 8, 2015, on $10 million and receive payment equal to the three month libor plus 3.10%. 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, 2011, the cost to the Bank to terminate the swap is approximately $1,297,000.

Repurchase Agreements

The Company offers cash management customers an automated sweep account of excess funds from checking accounts into repurchase accounts. Prior to 2011, this product was the preferred method to provide commercial deposit customers the opportunity to earn interest income on demand deposit accounts. Repurchase balances are overnight borrowings from customers and are not FDIC insured but are fully collateralized by specific securities in the Company’s investment portfolio. In addition to customer repurchase agreements, the Company has two long term repurchase agreements with large money center banks that are secured by individual investment securities. At December 31, 2011, the Company’s retail repurchase agreements total $27.1 million and total long term repurchase agreements of $16.0 million.

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 has two subsidiary organizations. The Bank’s insurance subsidiary, Fall and Fall Insurance Agency (“Fall and Fall”) of Fulton, Kentucky was acquired in the Fulton acquisition on September 5, 2002. The Bank’s investment in the agency is approximately $830,000.

The Company owns 99% of Fort Webb, LLC, a low income senior citizen housing facility in Bowling Green, Kentucky. The facility offers apartments for rent for those senior citizens who qualify and is managed by the Bowling Green, Kentucky Housing Authority. The Company realizes the tax benefits from the projects net operating loss over a fifteen year period. The Company’s investment in the project is $420,000.

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, 2011, the Bank had a 15.1% share of the deposit market in its combined markets. The Bank’s most significant competition across its entire market area was Planters Bank of Kentucky with a 9.1% deposit market share and Branch Bank & Trust of North Carolina with an 8.3% deposit market share. In addition, each market contains other community banks that provide competitive products and services within individual markets.

27

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.

Employees

As of December 31, 2011, the Company and the Bank had 260 full-time and 11 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.

Seasonality of Revenues and Expenses

The Company’s business is not materially affected by seasonality fluctuations in our business cycle. The Company financial health is substantially affected by the overall business cycle and market interest rates.

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act is intended to affect a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act created a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. The Dodd-Frank Act eliminated our current primary federal regulator and subjects savings and loan holding companies to greater regulation. The Dodd-Frank Act additionally creates a new independent federal regulator to administer federal consumer protection laws. The Dodd-Frank Act is expected to have a significant impact on our business operations as its provisions take effect. Among the provisions that are likely to affect us are the following:

Elimination of OTS. The Dodd-Frank Act resulted in the elimination of the OTS, which was our primary federal regulator and the primary federal regulator of the Bank until July 21, 2011. The current primary federal regulator of HopFed Bancorp, Inc. is the Board of Governors of the Federal Reserve System (the “FRB”), and the primary federal regulator for the Bank is the Office of the Comptroller of the Currency (“OCC”). The FRB and OCC have rulemaking, examination, supervision and oversight authority over our operations and the FDIC will retain secondary authority over the Bank. OTS guidance, orders, interpretations, policies and similar items under which we and other savings and loan holding companies and federal savings associations operate will continue to remain in effect until they are superseded by new guidance and policies from the OCC or Federal Reserve.

Holding Company Capital Requirements. Effective as of the transfer date, the Federal Reserve is authorized to establish capital requirements for savings and loan holding companies. These capital requirements must be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Savings and loan holding companies are now required to serve as a source of financial strength for their depository institution subsidiaries. Leverage capital requirements and risk-based capital requirements applicable to depository institutions and banking holding companies will be extended to thrift holding companies. However, the FRB has not yet issued regulations regarding the levels of these capital requirements or when they will apply to the Company.

28

Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010, by a bank or savings and loan holding company with less than $15 billion in assets. The Company has trust preferred securities, but is exempt from these standards.

Federal Preemption. A major benefit of the federal thrift charter has been the strong preemptive effect of the Home Owners’ Loan Act (“HOLA”), under which we are chartered. Historically, the courts have interpreted the HOLA to “occupy the field” with respect to the operations of federal thrifts, leaving no room for conflicting state regulation. The Dodd-Frank Act, however, amends the HOLA to specifically provide that it does not occupy the field in any area of state law. Henceforth, any preemption determination must be made in accordance with the standards applicable to national banks, which have themselves been scaled back to require case-by-case determinations of whether state consumer protection laws discriminate against national banks or interfere with the exercise of their powers before these laws may be pre-empted.

Deposit Insurance. The Dodd-Frank Act permanently increases the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and extends unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2013. The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act eliminates the federal statutory prohibition against the payment of interest on business checking accounts.

Qualified Thrift Lender Test. Under the Dodd-Frank Act, a savings association that fails the qualified thrift lender test is prohibited from paying dividends, except for dividends that: (i) would be permissible for a national bank; (ii) are necessary to meet obligations of a company that controls the savings association; and (iii) are specifically approved by the OCC and the FRB. In addition, a savings association that fails the qualified thrift lender test is deemed to have violated Section 5 of the Home Owners’ Loan Act and is subject to enforcement actions thereunder.

Corporate Governance. The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions. The new legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gave the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Pursuant to the Dodd-Frank Act, the SEC adopted “say-on-pay” rules. Under these rules, smaller reporting companies such as the Company are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after January 21, 2013. In adopting the two-year deferral period, the SEC stated that it may adjust the rule before it applies to smaller issuers.

Also pursuant to the Dodd-Frank Act the SEC proposed a so-called “proxy access rule.” However, in July 2011, the U.S. Court of Appeals for the District of Columbia rejected the SEC’s proposed rule, and the SEC subsequently announced that it would not dispute the Court’s decision.

Transactions with Affiliates and Insiders. The Dodd-Frank Act expanded the definition of affiliate for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates. The Dodd-Frank Act applies to Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transaction that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. The current exemption from Section 23A for transactions with financial subsidiaries is eliminated. The Dodd-Frank Act prohibits an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.

Consumer Financial Protection Bureau. The Dodd-Frank Act created a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which has been granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but are examined and supervised by federal banking regulators for consumer compliance purposes.

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The CFPB has the authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay.

In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. Federal preemption of state consumer protection law requirements, traditionally an attribute of the federal savings association charter, has also been modified by the Dodd-Frank Act and now requires a case-by-case determination of preemption by the OCC and eliminates preemption for subsidiaries of a bank. Depending on the implementation of this revised federal preemption standard, the operations of the Bank are subject to additional compliance burdens in the states in which it operates.

Ratio of Earnings to Fixed Charges.

The table below is a Company’s computation of earnings to fixed charges for the years ended December 31, 2011, through December 31, 2007 (All dollars in thousands).

	2011		2010		2009		2008		2007
Including interest on deposits
Earnings
Pre-tax income	$	3,404		9,129		2,372		6,567		5,844
Add: fixed charges from below		18,415		22,246		26,312		26,420		28,891
	$	21,819		31,375		28,684		32,987		34,735
Fixed Charges:
Total interest expense	$	18,415		22,246		26,312		26,420		28,891
Preference security dividend		1,394		1,394		1,394		56		—
Including preference security dividend	$	19,809		23,640		27,706		26,476		28,891
Ratio of earnings to fixed charges	$	1.18		1.41		1.09		1.25		1.20
Including preference security dividend	$	1.10		1.33		1.04		1.25		1.20
Excluding interest on deposits
Earnings
Pre-tax income	$	3,404		9,129		2,372		6,567		5,844
Add: fixed charges from below		4,208		4,862		5,479		5,631		6,612
	$	7,612		13,991		7,851		12,198		12,456
Fixed Charges:
Total interest expense excluding interest paid on deposits	$	4,208		4,862		5,479		5,631		6,612
Preferred security dividend		1,394		1,394		1,394		56		—
Including preference security dividend	$	5,602		6,256		6,873		5,687		6,612
Ratio of earnings to fixed charges	$	1.81		2.88		1.43		2.17		1.88
Including preference security dividend	$	1.36		2.24		1.14		2.14		1.88

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Limitations on Capital Distributions. The FRB regulations impose limitations upon capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. Under the FRB capital distribution regulations, a savings institution that (i) qualifies for expedited treatment of applications by maintaining one of the two highest supervisory examination ratings, (ii) will be at least adequately capitalized after the proposed capital distribution and (iii) and is not otherwise restricted by applicable law in making capital distributions may, without prior approval by the FRB, make capital distributions during a calendar year equal to its net income for such year plus its retained net income for the preceding two years. Capital distributions in excess of such amount would require prior Fed approval. However, given the current economic climate, FRB has publically stated that it is carefully reviewing every dividend request and has informed the Company that it must seek approval prior to any future declaration of dividends to common shareholders.

As a participant in the United States Treasury’s Capital Purchase Program, the Company was required to obtain prior written approval before it increased the amount of dividends paid to common shareholders prior to December 12, 2011. In the event that the Company fails to make a scheduled dividend payment to preferred shareholders or interest payments on trust preferred securities, the Company is prohibited from paying any dividends to common shareholders.

As a condition in the Company’s MOU signed April 30, 2010, the Company must make a request to the FRB prior to the payment of any dividends from either the Bank to the Company or from the Company to its common shareholders. The Company may continue to pay dividends on preferred stock and interest on subordinated debentures as long as the Bank’s Tier 1 Capital Ratio exceeds 9% and its Total Risk Based Capital Exceeds 12%. At December 31, 2011, the Bank’s Tier 1 and Total Risk Based Capital Ratios were 10.18% and 17.63%, respectively.

Future earnings of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of dividends or other distributions to the Company without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed from the reserves for such distributions.

Transactions with Affiliates and Insiders. Generally, transactions between a savings bank or its subsidiaries and its affiliates are required to be on terms as favorable to the savings bank as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the savings bank’s capital. Affiliates of the Bank include the Company and any company that is under common control with the Bank. In addition, a savings bank may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The OCC has the discretion to treat subsidiaries of savings banks as affiliates on a case-by-case basis.

Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OCC. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must generally be made on terms that are substantially the same as for loans to unaffiliated individuals.

Reserve Requirements. Pursuant to regulations of the FRB, all FDIC-insured depository institutions must maintain average daily reserves at specified levels against their transaction accounts. The Bank met these reserve requirements at December 31, 2011.

Federal Home Loan Bank System. The Federal Home Loan Bank System consists of 12 district Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board (“FHFB”). The Federal Home Loan Banks provide a central credit facility primarily for member institutions. As a member of the FHLB, the Bank is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 5% of its advances (borrowings) from the FHLB, whichever is greater. The Bank was in compliance with this requirement, with a $4.4 million investment in FHLB stock at December 31, 2011.

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Emergency Economic Stabilization Act of 2008, Federal Deposit Insurance Corporation, Financial Stability Plan, American Recovery and Reinvestment Act of 2009, Homeowner Affordability and Stability Plan, and Other Regulatory Developments

Emergency Economic Stabilization Act of 2008

On October 3, 2008, the EESA was enacted, enabling the federal government to insure troubled assets of financial institutions and collect fees from institutions participating in this program under the terms and conditions set forth by the Secretary of the Treasury. EESA includes, among other provisions: (a) the $700 billion Troubled Asset Relief Program (“TARP”), under which the Secretary of the Treasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages originated or issued on or before March 14, 2008; and (b) an increase in the amount of deposit insurance provided by the FDIC.

Troubled Assets Relief Program (TARP)

Under TARP, the United States Department of the Treasury authorized a voluntary capital purchase program (“CPP”) to purchase up to $250 billion of senior preferred shares of qualifying financial institutions that elected to participate. Participating companies must adopt certain standards for executive compensation, including prohibiting “golden parachute” payments as defined in EESA to senior Executive Officers; (b) requiring recovery of any compensation paid to senior Executive Officers based on criteria that is later proven to be materially inaccurate; and (c) prohibiting incentive compensation that encourages unnecessary and excessive risks that threaten the value of the financial institution. The terms of the CPP also limit certain uses of capital by the issuer, including repurchases of company stock and increases in dividends paid to common shareholders.

On December 12, 2008, the Company agreed to participate in the CPP and issued and sold 18,400 shares of preferred stock for $18.4 million. The preferred stock pays a cash dividend of 5% per year for the first five years and then increases to 9% per year thereafter. In addition, the Company issued the United States Treasury warrants to purchase up to 243,816 shares of its common stock at a strike price of $11.32 per share. The warrants are immediately exercisable and have a ten year final maturity. The warrants outstanding were adjusted to 248,692 shares and the strike price was adjusted to $11.098 per share as a result of a 2% stock dividend paid to shareholders of record at September 30, 2010. In October of 2011, the warrants outstanding were again adjusted to 253,666 shares and the strike price was adjusted to $10.88 per share as a result of a 2% stock dividend paid to shareholders of record at October 3, 2011.

Financial Stability Plan

The Financial Stability Plan (“FSP”) is a comprehensive set of measures intended to improve the health of the financial system. The key elements of the FSP include making additional capital injections into financial institutions, creating a private – public investment fund to buy troubled assets, establishing guidelines for loan modification programs and expanding the Federal Reserve lending program.

American Recovery and Reinvestment Act of 2009

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted. ARRA is intended to provide a stimulus to the United States economy in the wake of the economic downturn brought about by the subprime mortgage crisis and resulting liquidity and credit crunch. The bill includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, healthcare, and infrastructure, including the energy structure. The new law also includes numerous non-economic recovery related items, including a limitation on executive compensation in federally aided banks.

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Under ARRA, an institution will be subject to the following restrictions and standards through out the period of which any obligation arising from the financial assistance provide under TARP remains outstanding:

• Limits on incentive compensation for risk taking by senior executive officers.

• “Claw Back” provisions for compensation paid based or inaccurate financial information.

• Prohibition on “Golden Parachute Payments”.

• Limitations on luxury expenditures.

• TARP recipients are required to permit a separate shareholder vote to approve the compensation of executives, as disclosed pursuant to the SEC’s compensation disclosure rules.

• Publically registered TARP recipients must establish a board compensation committee comprised entirely of independent directors, for the purpose of reviewing employee compensation plans.

Sarbanes–Oxley Act of 2002

The Sarbanes-Oxley Act provided for sweeping changes with respect to corporate governance, accounting policies and disclosure requirements for public companies, and also for their directors and officers. The Sarbanes-Oxley Act required the SEC to adopt new rules to implement the Act’s requirements. These requirements include new financial reporting requirements and rules concerning the chief executive and chief financial officers to certify certain financial and other information included in the company’s quarterly and annual reports. The rules also require these officers to certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the company’s disclosure controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. The certifications by the Company’s Chief Executive Officer and Chief Financial Officer of the financial statements and other information included in this Annual Report on Form 10-K have been filed as exhibits to this Form 10-K. See Item 9A (“Controls and Procedures”) hereof for the Company’s evaluation of disclosure controls and procedures.

Pursuant to Section 404 of the Sarbanes-Oxley Act, the Company is required under rules adopted by the SEC to include in its annual reports a report by management on the Company’s internal control over financial reporting and an accompanying auditor’s report. In September 2005, the SEC extended the Section 404 compliance date for the Company and other non-accelerated filers. Under the extension, the Company is required to comply with these requirements.

USA Patriot Act

The USA Patriot Act authorizes new regulatory powers to combat international terrorism. The provisions that affect financial institutions most directly provide the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes. Among other things, the USA Patriot Act prohibits financial institutions from doing business with foreign “shell” banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions have to follow minimum verification of identity standards for all new accounts and are permitted to share information with law enforcement authorities under circumstances that were not previously permitted.

Community Reinvestment Act

The Community Reinvestment Act requires federal bank regulatory agencies to encourage financial institutions to meet the credit needs of low and moderate-income borrowers in their local communities. An institution’s size and business strategy determines the type of examination that it will receive. Large, retail-oriented institutions are examined using a performance-based lending, investment and service test. Small institutions are examined using a streamlined approach. All institutions may opt to be evaluated under a strategic plan formulated with community input and pre-approved by the bank regulatory agency.

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The Community Reinvestment Act regulations provide for certain disclosure obligations. Each institution must post a notice advising the public of its right to comment to the institution and its regulator on the institution’s Community Reinvestment Act performance and to review the institution’s Community Reinvestment Act public file. Each lending institution must maintain for public inspection a file that includes a listing of branch locations and services, a summary of lending activity, a map of its communities and any written comments from the public on its performance in meeting community credit needs. The Community Reinvestment Act requires public disclosure of a financial institution’s written Community Reinvestment Act evaluations. This promotes enforcement of Community Reinvestment Act requirements by providing the public with the status of a particular institution’s community reinvestment record.

The Gramm-Leach-Bliley Act made various changes to the Community Reinvestment Act. Among other changes, Community Reinvestment Act agreements with private parties must be disclosed and annual Community Reinvestment Act reports must be made available to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the Gramm-Leach-Bliley Act may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory Community Reinvestment Act rating in its latest Community Reinvestment Act examination.

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 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.

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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 could 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 the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The Company’s regulatory compliance is costly and certain types of activities, including the payment of dividends, mergers and acquisitions, investments, loans and interest rates charged and interest rates paid on deposits and locations of offices are subject to regulatory approval and may be limited by regulation. 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 and profitability. The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and NASDAQ National 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.

Legislation was enacted on July 21, 2010 that will implement sweeping changes to the current bank regulatory structure. The Dodd-Frank eliminated the OTS. The Comptroller of the Currency (the primary federal regulator for national banks) will become the primary federal regulator of the Bank. The FRB now has exclusive authority to regulate all bank and thrift holding companies. As a result, the Company is now subject to supervision by the FRB as opposed to the OTS. These changes occurred July 21, 2011.

Among the many requirements in the Dodd-Frank Act for new banking regulations is a requirement for new capital regulations to be adopted within 18 months. These regulations must be at least as stringent as, and may call for higher levels of capital than, current regulations. Generally, trust preferred securities will no longer be eligible as Tier 1 capital, but the Company’s currently outstanding trust preferred securities will be grandfathered. Savings and loan holding companies like the Company have not previously been subject to capital requirements, but under the Dodd-Frank Act, five years from the date of enactment, savings and loan holding companies will become subject to the same capital requirements as bank holding companies. Savings and loan holding companies are immediately subject to the source of strength doctrine, under which a holding company must serve as a source of financial strength for its depository institution subsidiaries.

The Dodd-Frank Act also establishes a new minimum reserve ratio for the deposit insurance fund of 1.35%, and requires the FDIC to take steps to reach this ratio by September 30, 2020. It is expected that this will result in relatively higher assessments for larger institutions (with assets greater than $10 billion).

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 National Market has been relatively low when compared with larger companies listed on The NASDAQ National 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.

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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 that 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. The amount of common warrants outstanding has been adjusted to 253,666 and the strike price adjusted to $10.88 as a result of a 2% common stock dividend paid on October 18, 2010, to shareholders of record on September 30, 2010, and October 20, 2011, to shareholders of record on October 3, 2011.

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.

The Corporation and the Bank each are required to comply with the terms of a Memorandum of Understanding (MOU) issued by the OTS and currently enforced by the OCC and FRB and lack of compliance could result in monetary penalties and/or regulatory actions.

On April 30, 2010, the Company and the Bank each entered into a Memorandum of Understanding (“MOU”) with the Office of Thrift Supervision (OTS). This informal agreement places additional reporting and operational requirements on the Company and Bank. The Bank is required to reduce the level of commercial real estate loans to Total Risk Based Capital. This requirement may result in lower levels of commercial real estate loans, reducing the Bank’s ability to continue to pursue its current strategy to grow its loan portfolio and net interest income. The OCC and the FRB have now assumed responsibility for monitoring the Bank’s and Company’s compliance with the MOU.

The MOU will remain in effect until stayed, modified, terminated or superseded by the FRB and OCC were to determine that the Company or the Bank were not in compliance with their respective MOUs, it would have available numerous remedies. Management continues to take actions necessary to comply with the MOUs requirements. The OCC may determine, however, in its sole discretion that the issues raised have not been addressed satisfactorily, or any current or past action, violation or deficiencies could be subject to future regulatory enforcement actions. Such enforcement actions could result in penalties or additional limitations on the Company’s business.

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There can be no assurance of whether or when the Company may pay dividends in the future. Cash available to pay dividend to our shareholders is derived primarily, if not entirely, from dividends paid to us from the Bank. The ability of the Bank to pay dividends to us, as well as our ability to pay dividends to our shareholders, is limited by regulatory and legal restrictions and the need to maintain sufficient capital at the Bank.

The MOU with the FRB restricts us from declaring or paying any dividends or other capital distributions to common shareholders without prior FRB approval. This dividend restriction does not apply to cash dividends on currently outstanding shares on Series A Preferred Stock issued to and held by the United States Department of the Treasury and obligations in connection with currently outstanding trust preferred securities, provided that such dividend payment or distribution of capital does not cause the Bank’s capital levels to fall below a Tier 1 core capital ratio of 8.00% and a total risk based capital of 12.00%. We may also decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business. We are restricted from paying dividends if we have deferred payments of the interest on, or an event of default has occurred with respect to, our trust preferred securities or Series A Preferred Stock.

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 2011, the Company’s market had unemployment rates ranging from 8% to 12%. 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.

A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our businesses, result in the unauthorized disclosure of confidential information, damage our reputation and cause financial losses.

Our businesses are dependent on their ability to process and monitor, on a daily basis, a large number of transactions, many of which are highly complex, across numerous and diverse markets. These transactions, as well as the information technology services we provide to clients, often must adhere to client-specific guidelines, as well as legal and regulatory standards. Due to the breadth of our client base and our geographical reach, developing and maintaining our operational systems and infrastructure is challenging, particularly as a result of rapidly evolving legal and regulatory requirements and technological shifts. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a spike in transaction volume, cyber-attack or other unforeseen catastrophic events, which may adversely affect our ability to process these transactions or provide services.

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In addition, our operations rely on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Although we take protective measures to maintain the confidentiality, integrity and availability of our and our clients’ information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software and networks may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks and other events that could have an adverse security impact. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support providers and application developers, or may originate internally from within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.

We also face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure. In addition, as interconnectivity with our clients grows, we increasingly face the risk of operational failure with respect to our clients’ systems.

Although we have not experienced a cyber-incident, if one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, as well as our clients’ or other third parties’, operations, which could result in damage to our reputation, substantial costs, regulatory penalties and/or client dissatisfaction or loss. Potential costs of a cyber-incident may include, but would not be limited to, remediation costs, increased protection costs, lost revenue from the unauthorized use of proprietary information or the loss of current and/or future customers, and litigation.

We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope with similar technological systems. However, we cannot assure that this policy would be sufficient to cover all financial losses, damages, penalties, including lost revenues, should we experience any one or more of our or a third party’s systems failing or experiencing attack.

Our loan portfolio includes loans with a higher risk of loss which could lead to higher loan losses and non-accrual assets.

We originate commercial real estate loans, construction and development loans, consumer loans, and residential mortgage loans primarily within our market area. Commercial real estate, commercial, and construction and development loans tend to involve larger loan balances to a single borrower or groups of related borrowers and are most susceptible to a risk of loss during a downturn in the business cycle. These loans also have historically had greater credit risk than other loans for the following reasons:

• Commercial Real Estate Loans. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they may not be fully amortizing over a loan period, but may have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of December 31, 2011, commercial real estate loans and multi-family loans comprised approximately 38.2% of our total loan portfolio, or 169.3% of the Company’s total risk based capital.

• Commercial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business. As of December 31, 2011, commercial loans comprised approximately 9.7% of our total loan portfolio, or 42.6% of the Company’s consolidated total risk based capital.

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• Construction and Development Loans. The risk of loss is largely dependent on our initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If our estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing our loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of December 31, 2011, construction, land and land development loans comprised approximately 11.3% of our total loan portfolio and approximately 50.0% of the Company’s consolidated total risk based capital.

The increased risks associated with these types of loans result in a correspondingly higher probability of default on such loans (as compared to single-family real estate loans). Loan defaults would likely increase our loan losses and non-accrual assets and could adversely affect our allowance for loan losses.

Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs associated with the ownership of real property, which could result in reduced net income.

Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate.

The amount that we, as mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to general and local economic conditions, changing values of property, interest rates, unpaid real estate taxes, environmental issues, operating expenses involved with managing other real estate owned, and the supply and demand for units held for sale as well as other unforeseen cost and delays.

Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment or we may be required to dispose of the real property at a loss.

The downgrade of the U.S. credit rating and Europe’s debt crisis could have a material adverse effect on our business, financial condition and liquidity.

Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+ on August 5, 2011. A further downgrade or a downgrade by other rating agencies could have a material adverse impact on financial markets and economic conditions in the United States and worldwide. Any such adverse impact could have a material adverse effect on our liquidity, financial condition and results of operations.

In addition, the possibility that certain European Union (“EU”) member states will default on their debt obligations has negatively impacted economic conditions and global markets. The continued uncertainty over the outcome of international and the EU’s financial support programs and the possibility that other EU member states may experience similar financial troubles could further disrupt global markets. The negative impact on economic conditions and global markets could also have a material adverse effect on our liquidity, financial condition and results of operations.

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, 2011:

	Year Opened		Owned or Leased		Book Value (1)		Approximate Square Footage of Office
					(In thousands)
Main Office:
4155 Lafayette Road
Hopkinsville, Kentucky		2006		Owned	$	4,914		24,072
Branch Offices:
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky		1995		Owned	$	2,067		17,625
Downtown Branch Office
605 South Virginia Street
Hopkinsville, Kentucky		1997		Owned	$	135		756
Murray South Office
210 N. 12th Street
Murray, Kentucky		2003		Owned	$	1,673		5,600
Murray North Office
1601 North 12th Street
Murray, Kentucky		2007		Owned	$	1,243		3,400
Cadiz Branch Office
352 Main Street
Cadiz, Kentucky		1998		Owned	$	406		2,200
Elkton Branch Office
536 W. Main Street
Elkton, Kentucky		1976		Owned	$	111		3,400
Benton Branch Office
105 W. 5th Street
Benton, Kentucky		2003		Owned	$	533		4,800
Calvert City Office
35 Oak Plaza Drive
Calvert City, Kentucky		2003		Owned	$	1,158		3,400
Carr Plaza Office
607 N. Highland Drive
Fulton, Kentucky		2002		Owned	$	188		800
Lake Street Office
306 Lake Street
Fulton, Kentucky		2002		Owned	$	1,042		15,000
Fall & Fall Insurance Office
101 Main Street
Fulton, Kentucky		2002		Owned	$	20		3,200
Clarksville Main Street
322 Main Street
Clarksville, Tennessee		2007		Owned	$	1,567		10,000
Trenton Road Branch
3845 Trenton Road
Clarksville, Tennessee		2006		Owned	$	2,462		3,362
Madison Street Office
2185 Madison Street
Clarksville, Tennessee		2007		Owned	$	1,691		3,950
Houston County Office
1102 West Main Street
Erin, Tennessee		2006		Owned	$	528		2,390
Ashland City Office
108 Cumberland Street
Ashland City, Tennessee		2006		Owned	$	1,341		7,058
Pleasant View Office
2556 Highway 49 East
Pleasant View, Tennessee		2006		Owned	$	716		2,433
Kingston Springs Office
104 West Kingston Springs Road
Kingston Springs, Tennessee		2006		Owned	$	1,636		9,780
Total					$	23,431

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

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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 March 25, 2012, 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. MINE SAFETY DISCLOSURE

Not Applicable

PART II

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

A cash dividend of $0.12 per share was declared in the first and second quarter of 2010. A cash dividend of $0.08 per share was declared in the third and fourth quarter of 2010 and the first and second quarter of 2011. A cash dividend of $0.02 per share was declared in the third and fourth quarter of 2011. The Company paid a 2% common stock dividend during the third quarter of 2010 and 2011, respectively. The Company paid a 5% preferred stock dividend in 2010 and 2011, respectively. As a participant in the U.S. Treasury’s Capital Purchase Program, the Company may not increase its cash dividend without the express written approval of the Treasury Department. As agreed upon in the previously mentioned Memorandum of Understanding and Agreement between the OCC, the Federal Reserve Bank and the Company, we must obtain prior written permission from the Federal Reserve Bank prior to the payment of any cash dividend on common shares. The high and low price range of the Company’s common stock for 2011 and 2010 is set forth below and has been adjusted to reflect the 2% stock dividend paid to shareholders of record at September 30, 2010 and October 3, 2011:

	Year Ended December 31, 2011				Year Ended December 31, 2010
	High		Low		High		Low
First Quarter	$	9.58	$	8.82	$	12.00	$	8.94
Second Quarter	$	9.11	$	7.42	$	14.45	$	8.65
Third Quarter	$	8.98	$	5.08	$	9.44	$	8.74
Fourth Quarter	$	6.89	$	5.32	$	9.12	$	8.66

At March 25, 2012, the Company estimates that is has approximately 2,900 shareholders, with approximately 1,600 reported in the name of the shareholder and the remainder recorded in street name.

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. The Company issued 112,639 shares of treasury stock as part of its common equity offering in June 2010. The Company currently has 402,916 shares of treasury stock.

See Note 16 of Notes to the Consolidated Financial Statements regarding the restrictions on the payment of cash dividends by the Company and the Bank.

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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, 2011, (Exhibit No. 13.1) is incorporated herein by reference. See Note 21 of Notes of Consolidated Financial Statements which is incorporated herein by reference.

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, 2011, (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, 2011, (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, 2011, (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.

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Management Report on Internal Control

The management of HopFed Bancorp, Inc. and its subsidiaries (collectively referred to as the 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.

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, 2011 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, 2011.

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 29, 2012	By:	(signed) JOHN E. PECK
		John E. Peck
		President and Chief Executive Officer

By:	(signed) BILLY C. DUVALL
	Billy C. Duvall
	Senior Vice President and Treasurer
	(Principal Financial Officer)

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ITEM 9B. OTHER INFORMATION

Not Applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 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, 2011, 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, 2011, 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, 2011, 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, 2011, 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, 2011, 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 AND DIRECTOR INDEPENDENCE

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, 2011, and the information included therein under “Proposal I — Election of Directors” is incorporated herein by reference.

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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, 2011, 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, 2011, 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.

1. Report of Independent Registered Public Accounting Firm.

2. Consolidated Balance Sheets - December 31, 2011 and 2010.

3. Consolidated Statements of Income for the Years Ended December 31, 2011, 2010 and 2009.

4. Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2010 and 2009.

5. Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2011, 2010 and 2009.

6. Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009.

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. 2.1. 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 on 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 on December 6, 2007).

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Exhibit No. 4.1. Form of Common Stock Certificate incorporated herein by reference to Exhibit No. 4.1 to Registrant’s Registration Statement on Form S-1 (File No. 333-30215).

Exhibit No. 4.2 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).

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. 10.13 Employment Agreement by and between Heritage Bank and P. Michael Foley. Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated December 6, 2011 (filed December 7, 2011).

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, P. Michael Foley 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).

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Exhibit No. 13.1. Annual Report to Stockholders Except for those portions of the Annual Report to Stockholders for the year ended December 31, 2011, 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 Independent Registered Public Accounting Firm.

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).

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 101. The following materials from the Company’s annual report on Form 10-K for the three months ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statement of Financial Condition as of December 31, 2011 and December 31, 2010, (ii) Condensed Consolidated Statements of Income (Loss) for the years ended December 31, 2011, 2010 and 2009, respectively (iii)Condensed Consolidated Statements of Cash Flows, for the years ended December 31, 2011, 2010 and 2009, respectively, and (iv) Notes to Condensed Consolidated Financial Statements (unaudited), tagged as blocks of text.

(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.

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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 29, 2012	By:	(signed)    JOHN E. PECK
		John E. Peck
		President and
		Chief Executive Officer

49

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:
(signed)    JOHN E. PECK         John E. Peck Director, President and Chief Executive Officer (Principal Executive Officer)	March 29, 2012
(signed)    BILLY C. DUVALL         Billy C. Duvall Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	March 29, 2012
(signed)    GILBERT E. LEE         Gilbert E. Lee Chairman of the Board	March 29, 2012
(signed)    THOMAS I. MILLER         Thomas I. Miller Vice-Chairman of the Board	March 29, 2012
(signed)    MICHAEL WOOLFOLK         Michael Woolfolk Secretary	March 29, 2012
(signed)    STEVE HUNT         Steve Hunt Director	March 29, 2012
(signed)    HARRY J. DEMPSEY         Harry J. Dempsey Director	March 29, 2012
(signed)    TED KINSEY         Ted Kinsey Director	March 29, 2012
(signed)    CLAY SMITH         Clay Smith Director	March 29, 2012

50

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,
	2011		2010		2009		2008		2007
	(Dollars in thousands)
Total amount of:
Assets	$	1,040,820	$	1,082,591	$	1,029,876	$	967,560	$	808,352
Loans receivable, net		556,360		600,215		642,355		628,356		576,252
Federal funds sold		—		—		—		16,080		3,755
Cash and due from banks		44,389		54,042		37,938		15,268		17,343
Interest-bearing deposits in Federal Home Loan Bank (FHLB)		4,371		6,942		3,173		5,727		931
Federal Home Loan Bank stock		4,428		4,378		4,281		4,050		3,836
Securities available for sale		383,782		357,738		289,691		246,952		142,310
Securities held to maturity:
U.S. Government agency securities		—		—		—		—		13,541
Mortgage-backed Securities		—		—		—		454		554
Deposits		800,095		826,929		794,144		713,005		598,753
Repurchase agreements		43,080		45,110		36,060		28,680		37,199
FHLB advances Subordinated debentures		63,319 10,310		81,905 10,310		102,465 10,310		130,012 10,310		101,882 10,310
Total stockholders’ equity		118,483		111,444		79,949		78,284		55,803
Number of active:
Real estate loans Outstanding (1)		4,383		4,715		5,886		6,313		6,211
Deposit accounts (1)		42,140		40,359		40,783		94,171		76,823
Offices open		18		18		18		18		18

Operating Data

	Year Ended December 31,
	2011		2010		2009		2008		2007
	(Dollars in thousands)
Interest and dividend income	$	46,240	$	52,417	$	53,141	$	49,477	$	49,033
Interest expense		18,415		22,246		26,312		26,420		28,891
Net interest income before provision for loan losses		27,825		30,171		26,829		23,057		20,142
Provision for loan losses		5,921		5,970		4,199		2,417		976
Net interest income		21,904		24,201		22,630		20,640		19,166
Non-interest income		10,193		11,106		10,225		8,344		7,231
Non-interest expense		28,693		26,178		30,483		22,417		20,553
Income before income taxes		3,404		9,129		2,372		6,567		5,844
Provision for income taxes		484		2,613		397		1,952		1,728
Net income	$	2,920	$	6,516	$	1,975	$	4,615	$	4,116
Preferred stock dividend and accretion of stock warrants		1,031		1,031		1,031		56		—
Net income available to common shareholders	$	1,889	$	5,485	$	944	$	4,559	$	4,116

(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.

9

Selected Quarterly Information (Unaudited)

	First Quarter			Second Quarter		Third Quarter		Fourth Quarter
	( Dollars in thousands)
Year Ended December 31, 2011:
Interest and dividend income	$	11,787		$	11,766	$	11,450	$	11,237
Net interest income after provision for losses on loans		2,280			6,551		6,383		6,690
Non-interest income		2,365			2,118		3,281		2,429
Non-interest expense		7,449			7,436		7,127		6,681
Net income (loss) available (attributable) to common shareholders		(2,098	)		550		1,368		2,069
Year Ended December 31, 2010:
Interest and dividend income	$	13,106		$	13,656	$	13,196	$	12,459
Net interest income after provision for losses on loans		6,663			7,086		6,327		4,125
Non-interest income		2,309			2,456		3,085		3,256
Non-interest expense		6,386			6,587		6,856		6,349
Net income available to common shareholders		1,606			1,814		1,508		557

10

Key Operating Ratios

	At or for the Year Ended December 31,
	2011			2010			2009
Performance Ratios
Return on average assets (net income available to common shareholders divided by average total assets)		0.18	%		0.51	%		0.09	%
Return on average equity (net income available to common shareholders divided by average total equity)		1.64	%		5.38	%		1.18	%
Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)		2.83	%		3.01	%		2.74	%
Net interest margin		3.02	%		3.19	%		2.97	%
Ratio of average interest-earning assets to average interest-bearing liabilities		109.55	%		108.19	%		107.86	%
Ratio of non-interest expense to average total assets		2.69	%		2.42	%		3.03	%
Ratio of net interest income after provision for loan losses to non-interest expense		80.17	%		96.96	%		76.54	%
Efficiency ratio (non-interest expense divided by sum of interest income plus non-interest income)		73.35	%		61.65	%		80.73	%
Asset Quality Ratios
Non-performing assets to total assets at end of period		0.81	%		1.37	%		1.28	%
Non-accrual loans to total loans at end of period		1.08	%		0.82	%		1.72	%
Allowance for loan losses to total loans at end of period		1.98	%		1.61	%		1.36	%
Allowance for loan losses to non-performing loans at end of period		183.62	%		195.35	%		78.96	%
Provision for loan losses to total loans receivable, net		1.06	%		0.98	%		0.64	%
Net charge-offs to average loans outstanding		0.76	%		0.79	%		0.23	%
Capital Ratios
Total equity to total assets at end of period		11.38	%		10.29	%		7.76	%
Average total equity to average assets		10.78	%		9.41	%		7.95	%

Regulatory Capital

	December 31, 2011
	(Dollars in thousands)
	Company		Bank
Tangible capital	$	120,908	$	103,173
Less: Tangible capital requirement		15,494		15,205
Excess		105,414		87,968
Core capital	$	120,908	$	103,173
Less: Core capital requirement		41,317		40,545
Excess		79,591		62,628
Total risk-based capital	$	128,089	$	110,355
Less: Risk-based capital requirement		50,576		50,064
Excess	$	77,513	$	60,291

11

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 consist of the consolidation of Heritage Bank (“the Bank”) and HopFed Bancorp, Inc. (“the Corporation”) . The Corporation 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, 2011, the Company recorded net income available for common shareholders of $1,889,000, a return on average assets of 0.18% and a return on average equity of 1.64%. The Company’s results of operations for the year ended December 31, 2011, was negatively affected by the continued presence 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 years ended December 31, 2011, December 31, 2010, and 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, 2011, net income was also negatively influenced by $5.9 million in provision for loan loss expense and $2.0 million in losses and expenses related to other real estate owned.

In 2011, the Company continued to endure the effects of a two year trend of negative loan growth, which is the result of a continued weak economy and regulatory pressure to reduce the Company’s exposure to commercial real estate loans. In 2011, the average balance of loans declined by $54.5 million, limiting the Company’s ability to leverage its strong capital position. Due to the poor re-investment alternatives for excess liquidity funds, the Company has chosen to reduce the size of its balance sheet by allowing the liquidation of maturing FHLB advances, brokered deposits and select time deposits. This strategy is likely to continue as the Company maintains an excessive level of liquidity in its investment portfolio and loan demand remains muted.

For the year ended December 31, 2010, the Company recorded net income available for common shareholders of $5,485,000, a return on average assets of 0.51% and a return on average equity of 5.38%. In June and July of 2010, the Company issued 3,583,334 shares of common stock, receiving net proceeds of $30.4 million. The additional capital improved the Company’s capital position but resulted in a lower return on average equity.

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 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.

12

Aggregate Contractual Obligations

	Maturity by Period
December 31, 2011 (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	$	514,622		177,496		102,911		5,066		800,095
FHLB borrowings		5,000		12,678		4,000		41,641		63,319
Repurchase agreements		27,080		10,000		6,000		—		43,080
Subordinated debentures		—		—		—		10,310		10,310
Lease commitments		37		56		25		—		118
Purchase obligations		1,878		3,125		151		—		5,154
Total	$	548,617		203,355		113,087		57,017		922,076

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. All of the Company’s callable advances may be called quarterly. With a weighted average cost of 4.37%, management does not anticipate that the FHLB will exercise its call option in 2012. The Company’s callable 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, 2011, the three-month Libor rate was 0.56%. 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 2010, 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, 2011 (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	$	223		10,237		21,869		—		32,329
Commitments to extend credit		271		19,760		2,546		845		23,422
Standby letters of credit		706		594		155		4		1,459
Home equity lines of credit		340		546		585		29,065		30,536
Total	$	1,540		31,137		25,155		29,914		87,746

13

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, the 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 7.27% quarterly for seven years while Compass will pay Heritage Bank a rate equal to the three month London Interbank Offering Rate (“LIBOR”) plus 3.10%, the rate banks in London charge one another for overnight borrowings. The 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, 2011, the Company’s review indicates that the cash flow hedge is effective. At December 31, 2011, the approximate market loss on the cash flow hedge is $1,297,000.

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, 2011, December 31, 2010 and December 31, 2009, respectively. 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 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. At December 31, 2011, approximately $186.8 million of the $216.1 million of one-to-four family residential loans originated by the Company (comprising 83.6% of such loans) had adjustable rates or will mature within one year.

14

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.

In 2011, Standard and Poor Inc. issued a rating downgrade on all debt issued or guaranteed by the U.S. government. This downgrade has had little impact on the liquidity and yields associated with any form of U.S. guaranteed debt. The Company remains heavily invested in U.S. agency debt and the Company has not experienced any negative effects due to the rating change. The Company has no exposure of the rating downgrades.

At December 31, 2011, the Company’s agency security portfolio consisted of $14.7 million in unsecured debt issued by Federal National Mortgage Corporation (FNMA), $3.0 million issued by Federal Home Loan Mortgage Corporation (FHLMC) and $11.7 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 AA+ rated and both agencies maintain the implicit backing of the United States of America.

At December 31, 2011, no agency securities were due within five years, approximately $7.2 million were due in five to ten years and approximately $22.2 million were due after ten years. At December 31, 2011, $28.3 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, 2011, $12.2 million of these securities may be called one time only prior to December 31, 2012, but not before January 1, 2012 and $4.1 million is callable only in February of 2013. An additional $12.0 million of these securities may be called prior to December 31, 2012, 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 all agency bonds that are eligible to be called in 2012 will have their call exercised. These calls will provide cash flow to the Company but will result in a significantly reduced yield on any securities purchased to replace these securities. At December 31, 2011, the estimated average life of the U.S. government agency portfolio is 9.8 years and its effective duration is 1.0 year.

The Company owns significant positions in agency securities issued by the Small Business Administration. These securities are classified as SBAPs, SBICs and SBA Pools. 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. SBA pools are floating rate securities tied to prime that have twenty five and thirty year maturities and pay interest monthly. The interest rate on SBA pools reset either on a quarterly or monthly basis, providing the Company with lower price volatility as compared to fixed rate securities. In 2011, the Company shifted a significant portion of its new investment purchases into SBA Pools due to the lower yields available on fixed rate investment products. The purchase of variable rate securities with low price volatility provides the Company with a source of lower risk liquidity should loan demand improve or interest rates increase. The risk in purchasing SBA Pools is that they are typically purchased at significant premiums and provide lower yields as compared to many long term fixed rate investment products. To help alleviate this risk, the Company typically purchases newly issued securities and amortizes the premiums at faster long term historic speeds.

All SBA securities, SBAP, SBIC’s and SBA Pools are backed by the full faith and credit of the United States Government and classified by the Company’s regulators as zero risk based assets. SBIC notes are ten year notes that typically behave similar to a ten year mortgage backed security, with slow prepayments in their first two or three years and then experiencing an acceleration of payments. SBAP notes typically experience slower prepayment speeds as compared to 20 year GNMA mortgage backed securities as SBAP notes typically have prepayment penalties that make it cost prohibitive for many borrowers to prepay early. Current SBA pools are experiencing abnormally slow prepayment speeds as the loans tied to the prime rate provide relatively inexpensive financing for businesses requiring an SBA guarantee to meet their credit needs.

15

At December 31, 2011, the Company’s agency bond portfolio includes approximately $55.6 million in SBAP securities, $38.8 million in SBIC securities and $50.8 million in SBA Pools. At December 31, 2011, the estimated average life of the Company’s SBAP and SBIC portfolio is 5.4 years and its effective duration is 4.9 years. At December 31, 2011, the estimated average life of the Company’s SBA Pool portfolio is 6.3 years and its effective duration is 0.4 years.

The Company maintains a significant municipal bond portfolio. The majority of the municipal portfolio was purchased during 2008 and 2009 as municipal bond yields increased to levels not seen in the last ten years despite record low Treasury rates. The municipal bond portfolio largely consists of local school district and county courthouse bonds with guarantees from both the local counties and the State of Kentucky and general obligations bonds issued by municipalities in Tennessee and Kentucky. The Company’s municipal portfolio consists of the following:

•   Kentucky School Bonds	$	24.4 million
•   Kentucky Courthouse Bonds		10.1 million
•   Kentucky Judicial Bonds		5.7 million
•   Kentucky General Obligation Bonds		19.9 million
•   Tennessee General Obligation Bonds		8.2 million
•   General Obligation Bonds – Out of market		1.8 million
•   Kentucky and Tennessee Revenue Bonds		8.9 million
Total	$	79.0 million

At December 31, 2011, the Company has $65.1 million in tax free municipal bonds and $13.9 million in taxable Kentucky municipal bonds. 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, 2011, approximately $68.0 million in municipal bonds were issued by Kentucky municipalities, $800,000 was issued by Texas municipalities, $9.1 million were issued by Tennessee municipalities and $1.1 million were issued by Indiana municipalities.

The Company’s investment policy limits municipal concentrations to 125% of the Bank’s Tier 1 Capital, currently $103.2 million. The investment policy places a concentration limit on the amounts of municipal bonds per issuer in Tennessee and Kentucky to 15% of the Bank’s Tier 1 Capital and out of market issuers to 10% of Tier 1 Capital. At December 31, 2011, the largest municipal bond concentration for one issuer was $4.8 million. The investment policy limits concentrations in the amounts a single state guarantee program can provide to a bond at 75% of Tier 1 Capital. The Company is currently well within policy guidelines on all concentration limits.

At December 31, 2011, $464,000 in municipal bonds were due in less than one year, $6.9 million were due within one to five years, $18.9 million were due in five to ten years, $28.4 million were due in ten to fifteen years and approximately $24.3 million were due after fifteen years. At December 31, 2011, approximately $69.2 million of the Company’s municipal bond portfolio is callable with call dates ranging from January 2012 to September 2020. The call dates are staggered to eliminate the excessive cash flows within any one-year period. At December 31, 2011, approximately $3.2 million of municipal bonds had a call date of less than one year; approximately $13.5 million had a call date from one to five years and approximately $52.5 million in more than five years but less than ten years. At December 31, 2011, the average life of the municipal bond portfolio is approximately 8.2 years and the modified duration of the taxable municipal bond portfolio is approximately 7.1 years.

16

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, 2011, the Company held approximately $95.6 million in fixed rate mortgage backed securities and approximately $13.1 million in adjustable rate mortgage backed securities. The average life of the mortgage backed securities portfolio is approximately 4.4 years and a modified duration of approximately 3.6 years.

At December 31, 2011, the Company held approximately $18.7 million in Collateral Mortgage Obligations (CMO) issued by various agencies of the United States government and $1.8 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, 2011, the Company’s CMO portfolio had an average life of approximately 4.8 years and a modified duration of approximately 3.9 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 2011. This analysis indicated that the following securities were other than temporarily impaired:

CUSIP	Description		Current Par Value		Current Moody’s Credit Rating	2011 Impairment Charge		Total Aggregate Impairment Charge
362290AC2		GSR 2007 TR-AR12	$	984,098	CC	$	65,500	$	245,500
12638PCQ0		CSMC 2007-3 4A15	$	719,907	Caa3	$	89,500	$	109,500

As a result of this analysis, the Company incurred a total impairment charge related to its Private Label CMO portfolio of $155,000 in 2011. The Company recognized impairment charges on the above mentioned securities of $180,000 and $20,000, respectively in 2009. The Company will continue to monitor the performance of the Private Label CMO portfolio for additional charges as may be necessary.

In June of 2008, the Company purchased $2 million par value of a private placement subordinated debenture issued by First Financial Services Corporation. The debenture is a thirty year security with a coupon rate of 8.00%. First Financial Services Corporation is a NASDAQ listed commercial bank holding company trading under the symbol FFKY and located in Elizabethtown, Kentucky. In October of 2010, FFKY informed the owners of its subordinated trust, including the Company, that it was deferred dividend payments for up to five years as prescribed by the trust. FFKY has suffered significant asset quality issues that has resulted in negative earnings since 2009 and has negatively impacted FFKY’s capital position.

Currently, FFKY is under a Consent Order issued jointly by the Kentucky State Department of Bank and the FDIC. The consent order requires FFKY to increase its Tier 1 Capital Ratio to 8% and its Total Risk Based Capital Ratio to 12.00%. At September 30, 2011, FFKY had not met the capital goals established by their regulators but remains “Adequately Capitalized” in accordance to FDIC guidelines.

The Company continues to monitor all quarterly reports issued by both FFKY and its bank subsidiary to determine if the investment in the subordinated trust is other than temporarily impaired. At December 31, 2011, the Company has determined, based on the suspension of the dividend, that the investment is temporally impaired and has reduced the estimated market value of the security by $1.0 due to the lack of current cash flow from the debenture. The Company has further determined, based on the financial trends and capital position of FFKY and its bank subsidiary, that the Company’s investment in the subordinated debenture is not permanently impaired at this time. The Company will continue to monitor all available public information as well as maintain a dialogue with the management team of FFKY to ascertain the future business prospects of FFKY and the Company’s investment.

17

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. With the merger of the OTS into the Office of the Comptroller of the Currency (OCC) in July 2011, the production of the model will cease to exist after December 31, 2011.

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 Company’s NPV at December 31, 2011, as calculated by the OTS, based on information provided to the OCC 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	$	90,777	$	(15,770	)		(15	)%		9.12	%		(108) bp
+200 bp		100,869		(5,677	)		(5	)%		9.93	%		(26) bp
+100 bp		109,026		2,480			2	%		10.53	%		34 bp
0 bp		106,546		—			—			10.19	%		—
-100 bp		113,735		7,189			7	%		10.73	%		54 bp

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

Pre-Shock NPV Ratio: NPV as % of Present Value of Assets	10.19	%
Exposure Measure: Post-Shock NPV Ratio	9.93	%
Sensitivity Measure: Change in NPV Ratio	26 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 Company 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 Company 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.

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For the year ended December 31, 2011, the Company’s previous efforts to increase duration had a positive effect on its results of operations. At December 31, 2011, 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 $65 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 2012, it is the intent of management to attempt to grow the loan portfolio with high quality commercial and owner occupied commercial real estate loans. In the absence of meaningful loan growth, the Company will look to shrink the balance sheet by reducing its amount of higher cost time deposits, brokered deposits and FHLB advances. The reduction of these liabilities will be funded by the selective sale of investment securities. The potential reduction in assets represents the reality the investment alternatives do not allow the Company to maintain acceptable interest rate margins.

The amount of change in interest rate sensitivity eventually achieved by management will be largely dependent on its ability to make changes at a reasonable cost. The reduction of interest rate in the one to two year time frame can dramatically reduce the Company’s net income due to the severe upward slope of the interest rate yield curve. To the extent possible, management will reduce its balances in FHLB deposits to ensure greater flexibility in the event of a sudden change of interest rates.

The Company’s analysis at December 31, 2011, 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, 2011, for the twelve month period ending December 31, 2012, is as follows:

	Down 1.00%		No change		Up 1.00%		Up 2.00%		Up 3.00%
	(Dollars in Thousands)
Net interest income	$	27,387	$	28,303	$	28,840	$	29,545	$	30,255

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, 2011, the Company had a negative one year or less interest rate sensitivity gap of 6.20% 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. Furthermore, the presence of non-interest bearing liabilities does not factor in the Company’s Gap Analysis but provides an additional source of funds that can offset the negative impact of changing interest rates.

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The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2011, which are expected to mature, are likely to be called or re-priced in each of the time periods shown.

	One Year or Less			Through Five Years			Through Ten Years			Through Fifteen Years			Fifteen Years			Total
Interest-earning assets
Loans:
1 - 4 family residential	$	122,996			71,345			17,978			2,713			1,063			216,095
Multi-family		9,336			24,403			—			—			—			33,739
Construction		11,476			455			—			—			—			11,931
Non-residential		122,728			84,337			15,062			4,184			9,512			235,823
Secured by deposits		1,852			2,164			—			—			—			4,016
Other loans		34,575			25,343			—			—			5,849			65,767
Interest bearing deposits		4,371			—			—			—			—			4,371
Non-amortizing securities		18,122			23,617			64,318			1,750			1,543			109,350
Amortizing securities		57,275			25,974			46,090			14,266			1,585			145,190
Mortgage backed securities		35,506			42,039			22,617			20,032			9,048			129,242
Total		418,237			299,677			166,065			42,945			28,600			955,524
Interest bearing liabilities:
Deposits		435,094			280,385			5,066			—			—			720,545
Borrowed funds		42,390			32,678			41,641			—			—			116,709
Total		477,484			313,063			46,707			—			—			837,254
Interest sensitivity gap		($59,247	)		(13,386	)		119,358			42,945			28,600			118,270
Cumulative interest senitivity gap		($59,247	)		(72,633	)		46,725			89,670			118,270			118,270
Ratio of interest-earning assets to interest bearing liabilities		87.59	%		95.72	%		355.55	%		—			—			114.13	%
Ratio of cumulative gap to total interest-earning assets		(6.20	%)		(7.60	%)		4.89	%		9.38	%		12.38	%		12.38	%

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 three month prepayment speeds. In 2011, record low mortgage rates have spurred a wave of refinancing that has increased the cash flow on mortgage backed securities. Any future legislation to help homeowners refinance their mortgages is likely to result in faster mortgage prepayments and reinvestment yields. 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 investment and loan portfolios 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.

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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 2011 Averages
	Balance			Weighted Average Yield/Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net	$	569,216			5.61	%
Non taxable securities available for sale		64,113			4.92	%*
Taxable securities available for sale Federal Home Loan Bank stock		312,212 4,428			3.01 4.00	%  %
Total interest-earning assets		949,969			4.70	%
Non-interest-earning assets		90,015
Total assets	$	1,039,984
Interest-bearing liabilities:
Deposits	$	727,155			1.64	%
FHLB borrowings		65,349			3.59	%
Repurchase agreements		43,080			2.26	%
Subordinated debentures		10,310			7.24	%
Total interest-bearing liabilities		845,894			1.86	%
Non-interest-bearing liabilities		77,365
Total liabilities		923,259
Common stock Common stock warrants		77 556
Additional paid-in capital		75,967
Retained earnings		39,591
Treasury stock		(5,076	)
Accumulated other comprehensive income		5,610
Total liabilities and equity	$	1,039,984
Interest rate spread					2.84	%
Net interest margin					3.05	%
Ratio of interest-earning assets to interest-bearing liabilities					112.30	%

* Tax equivalent yield at the Company’s 34% tax bracket and a 2.00% cost of funds rate.

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	Years Ended December 31,
	2011								2010								2009
	(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 (a)	$	575,133			33,527		5.83	%	$	629,633			38,089		6.05	%	$	633,143			38,921		6.15	%
Taxable securities AFS Non-taxable securities AFS		308,022 66,104			10,465 3,328		3.40 5.03	%  %		289,556 63,179			11,923 3,587		4.12 5.68	%  %		252,707 36,559			12,635 2,268		5.00 6.20	%  %
Securities held to maturity		—			—		—			—			—		—			280			12		4.29	%
Time deposits and other interest-bearing cash deposits		9,075			19		0.21	%		—			—		—			3,270			8		0.24	%
Total interest-earning assets	$	958,334			47,339		4.94	%	$	982,368			53,599		5.46	%	$	925,959			53,844		5.81	%
Non-interest-earning assets		108,997								101,119								80,423
Total assets		1,067,331								1,083,487								1,006,382
Interest-bearing liabilities:
Deposits	$	753,223			14,207		1.89	%	$	762,418			17,384		2.28	%	$	698,367			20,833		2.98	%
Borrowings		121,556			4,208		3.46	%		145,582			4,862		3.34	%		160,081			5,479		3.42	%
Total interest-bearing liabilities		874,779			18,415		2.11	%		908,000			22,246		2.45	%		858,448			26,312		3.07	%
Non-interest-bearing liabilities		77,523								73,552								67,944
Total liabilities		952,302								981,552								926,392
Common stock Common stock warrants		79 556								59 556								41 556
Additional paid-in capital		75,444								61,949								44,324
Retained earnings		40,298								39,119								38,599
Treasury stock		(5,076	)							(5,786	)							(6,495	)
Accumulated other comprehensive (loss)		3,728								6,038								2,965
Total liabilities and equity		1,067,331								1,083,487								1,006,382
Net interest income					28,924								31,353								27,532
Interest rate spread							2.83	%*							3.01	%*							2.74	%*
Net interest margin							3.02	%*							3.19	%*							2.97	%*
Ratio of average interest-earning assets to average interest- bearing liabilities							109.55	%							108.19	%							107.86	%

Using a 34% tax rate.

* The tax equivalent adjustments were $1,099, $1,182 and $703 for 2011, 2010 and 2009, respectively

(a) Average loans include non-performing loans.

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). All yields are quoted on a tax equivalent basis using a cost of funds rate of 2.50% for 2010 and a 2.25% rate for 2011.

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	Year Ended December 31,
	2011 vs. 2010									2010 vs. 2009
	Increase (Decrease) due to									Increase (Decrease) due to
	Rate			Volume			Total Increase (Decrease)			Rate			Volume			Total Increase (Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	(1,385	)		(3,177	)		(4,562	)	$	(620	)		(212	)		(832	)
Securities available for sale, taxable		(2,086	)		628			(1,458	)		(2,229	)		1,517			(712	)
Securities available for sale, non-taxable		(406	)		147			(259	)		(192	)		1,511			1,319
Securities held to maturity		—			—			—			—			(12	)		(12	)
Other interest-earning assets		19			—			19			—			(8	)		(8	)
Total interest-earning assets		(3,858	)		(2,402	)		(6,260	)		(3,041	)		2,796			(245	)
Interest-bearing liabilities:
Deposits		(2,763	)		(414	)		(3,177	)		(4,584	)		1,135			(3,449	)
Borrowings		174			(828	)		(654	)		84			(701	)		(617	)
Total interest-bearing liabilities		(2,589	)		(1,242	)		(3,831	)		(4,500	)		434			(4,066	)
Increase (decrease) in net interest income	$	(1,269	)		(1,160	)		(2,429	)	$	1,459			2,362			3,821

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, 2011 and 2010 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.

23

Comparison of Financial Condition at December 31, 2011 and December 31, 2010

For the twelve month period ended December 31, 2011, the Company’s total assets decreased by $41.8 million, from $1.08 billion to $1.04 billion. The decline in assets was the result of management’s decision to reduce FHLB borrowings and brokered deposit balances given the current lack of economically viable uses for these funds. The available for sale portfolio increased $26.1 million, from $357.7 million at December 31, 2010, to $383.8 million at December 31, 2011. At December 31, 2011, the Company’s investment in Federal Home Loan Bank stock was carried at an amortized cost of $4.4 million. See Note 2 of Notes to Consolidated Financial Statements.

The Company’s net loan portfolio declined by $43.8 million during the year ended December 31, 2011. Net loans totaled $600.2 and $556.4 at December 31, 2010, and December 31, 2011, respectively. The decline in the loan activity during the year ended December 31, 2011, was primarily the result of weak loan demand and limitations placed on the Company by its former regulator, Office of Thrift Supervision (OTS), on certain types of lending deemed most profitable to the Company as well as the implementation of more conservative loan underwriting standards. In 2011, economic activity remained subdued in the majority of the Company’s markets. For the year ended December 31, 2011, the Company’s tax equivalent average yield on loans was 5.83%, compared with 6.05% for the year ended December 31, 2010.

The allowance for loan losses totaled $11.3 million at December 31, 2011, an increase of approximately $1.5 million from the allowance for loan losses of $9.8 million at December 31, 2010. The ratio of the allowance for loan losses to total loans was 1.98% and 1.61% at December 31, 2011, and December 31, 2010, respectively. Also, at December 31, 2011, the Company’s non-accrual loans were approximately $6.1 million or 1.08% of total loans, compared to $5.0 million, or 0.82% of total loans, at December 31, 2010. The Company’s ratio of allowance for loan losses to non-accrual loans at December 31, 2011 and 2010 was 183.62% and 195.35%, respectively.

Comparison of Operating Results for the Years Ended December 31, 2011 and 2010

Net Income. The Company’s net income available for common shareholders for the year ended December 31, 2011, was $1.9 million compared to $5.5 million for the year ended December 31, 2010. In 2011, net income available for common shareholders was adversely affected by a $2.0 million loss and related expenses on other real estate owned as well as a larger than anticipated level of provision for loan loss expense. In addition, the average balance and yields on interest bearing assets fell sharply.

Net Interest Income. Net interest income for the year ended December 31, 2011, was $27.8 million, compared to $30.2 million for the year ended December 31, 2010. The decrease in net interest income for the year ended December 31, 2011, was the result of Company’s declining average balance of loans outstanding and the re-pricing of all assets to lower levels as interest rates remain at historically low levels. The Company’s level of average interest bearing assets declined $24.0 million during 2011 and the average balance of loans receivable declined by $54.5 million. An increase in the average balance of investments insufficient to make up the difference in interest income as investment yields continue to decline.

For the year ended December 31, 2011, the Company’s tax equivalent average yield on total interest-earning assets was 4.94% compared to 5.46% for the year ended December 31, 2010, and its average cost of interest-bearing liabilities was 2.11%, compared to 2.45% for the year ended December 31, 2010. As a result, the Company’s tax equivalent interest rate spread for the year ended December 31, 2011, was 2.83%, compared to 3.01% for the year ended December 31, 2010, and its tax equivalent net interest margin was 3.02% for the year ended December 31, 2011, compared to 3.19% for the year ended December 31, 2010.

Interest Income. Interest income declined $6.2 million from $52.4 million to $46.2 million, or 11.8% during the year ended December 31, 2011, compared to 2010. The decline in interest income was attributable to a decline in yields on assets as well as a sharp decline in the average balance of loans outstanding. The average balance on taxable securities available for sale increased $18.4 million, from $289.6 million for the year ended December 31, 2010, to $308.0 million for the year ended December 31, 2011. The average balance of non-taxable securities available for sale increased approximately $2.9 million, from $63.2 million for the year ended December 31, 2010, to $66.1 million for the year ended December 31, 2010.

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Interest Expense. Interest expense declined to $18.4 million for the year ended December 31, 2011, compared to $22.2 million for 2010. The decline in interest expense was attributable to a decline in the average cost interest bearing deposits. The average cost of average interest-bearing deposits declined to 1.89% for the year ended December 31, 2011, from 2.28% for the year ended December 31, 2010. Over the same period, the average balance of interest bearing deposits declined from $762.4 million for the year ended December 31, 2010, to $753.2 million for the year ended December 31, 2011. The average balance of FHLB borrowings declined from $92.8 million for the year ended December 31, 2010, to $71.4 million for the year ended December 31, 2011. The average cost of FHLB borrowings increased from 3.55% for the year ended December 31, 2010, to 3.58% for the year ended December 31, 2011, due to the maturity of lower costing advances. The Company’s recent practice is to allow FHLB advances to mature and not renew. The Company anticipates this practice to continue into 2012 with $5 million in advances set to mature as well as for monthly principal payments made on three outstanding advances.

Provision for Loan Losses. The Company determined that an additional $5.9 million and $6.0 million in provision for loan losses was required for the years ended December 31, 2011, and December 31, 2010, 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, higher levels of non-performing assets and lower appraised values for problem loans secured by real estate.

Non-Interest Income. Non-interest income declined by $900,000 for the year ended December 31, 2011, to $10.2 million, compared to $11.1 million for the year ended December 31, 2010. The decline in non-interest income is largely the result of a $600,000 decrease on gains taken on the sale of investments. For the year ended December 31, 2011, financial services income declined by approximately $80,000 and service charge income on deposit accounts declined by approximately $110,000. Non-interest income for the year ended December 31, 2011, included a $155,000 other than temporary impairment charge on two Private Label CMOs.

Non-Interest Expense. Total non-interest expense for the year ended December 31, 2011, was $28.7 million, compared to $26.2 million in 2010. The increase in non-interest expenses was largely the result of the Company’s $1.7 million in losses on the sale of other real estate owned as compared to a $321,000 gain on the sale of other real estate loans in 2010. The Company incurred an additional $145,000 in losses on the disposal of equipment. For the year ended December 31, 2011, the Company’s salaries and benefits expense increased by approximately $500,000 as compared to the year ended December 31, 2010, due to higher staffing levels. Excluding the losses and expenses incurred on other real estate owned and equipment disposal, total non-interest expenses increased by $346,000 in 2011 as compared to 2010, an increase of 2.17%.

Income Taxes. The effective tax rates for the years ended December 31, 2011, and December 31, 2010, was 14.2% and 28.6%, respectively. The Company’s effective tax rate declined sharply due to lower levels of pre-tax income. In 2011, non-taxable income declined by approximately 8% as compared to 2010 while net income before taxes declined by approximately 62% during the same period.

Comparison of Operating Results for the Years Ended December 31, 2010 and 2009

Net Income. The Company’s net income available for common shareholders for the year ended December 31, 2010, was $5.5 million compared to $944,000 for the year ended December 31, 2009. In 2009, net income available for common shareholders was adversely affected by a $5.0 million goodwill impairment charge. The Company’s provision expenses in both 2010 and 2009 are well in excess of our normally operating expectations and reflect the continued challenges in our local and national economies. Improved profitability in 2010 resulted from improved net interest margins and the lack of a goodwill impairment charge.

Net Interest Income. Net interest income for the year ended December 31, 2010, was $30.2 million, compared to $26.8 million for the year ended December 31, 2009. The increase in net interest income for the year ended December 31, 2010, was the result of Company’s ability to re-price time deposits at lower rates due to the continued struggles in the economy. The Company’s level of average interest bearing assets increased $56.4 million during 2010. However, the increase in average interest bearing assets was insufficient to offset the decline in yields, resulting in a slightly reduced level of interest income. For the year ended December 31, 2010, the Company’s tax equivalent average yield on total interest-earning assets was 5.46% compared to 5.81% for the year ended December 31, 2009, and its average cost of interest-bearing liabilities was 2.45%, compared to 3.07% for the year ended December 31, 2009.

25

As a result, the Company’s tax equivalent interest rate spread for the year ended December 31, 2010 was 3.01%, compared to 2.74% for the year ended December 31, 2009 and its tax equivalent net interest margin was 3.19% for the year ended December 31, 2010, compared to 2.97% for the year ended December 31, 2009.

Interest Income. Interest income declined $700,000 from $53.1 million to $52.4 million, or 1.3% during the year ended December 31, 2010 compared to 2009. The modest decline was attributable to a decline in yields on assets that was not fully offset by an increase in the volume of investments outstanding. The average balance on taxable securities available for sale increased $36.9 million, from $252.7 million for the year ended December 31, 2010, to $289.6 million for the year ended December 31, 2009. The average balance of non-taxable securities available for sale increased approximately $26.6 million, from $36.6 million for the year ended December 31, 2009, to $63.2 million for the year ended December 31, 2010. The Company did not carry time deposits or held to maturity securities in its portfolio at December 31, 2010.

Interest Expense. Interest expense declined to $22.2 million for the year ended December 31, 2010, compared to $26.3 million for 2009. The decline in interest expense was attributable to a decline in the average cost interest bearing deposits. The average cost of average interest-bearing deposits declined to 2.28% for the year ended December 31, 2010, from 2.98% for the year ended December 31, 2009. Over the same period, the average balance of interest bearing deposits increased from $698.4 million for the year ended December 31, 2009, to $762.4 million for the year ended December 31, 2010. The average balance of FHLB borrowings declined from $119.1 million for the year ended December 31, 2009 to $92.8 million for the year ended December 31, 2010. The average cost of FHLB borrowings increased from 3.42% for the year ended December 31, 2009, to 3.55% for the year ended December 31, 2010, due to the maturity of lower costing advances.

Provision for Loan Losses. The Company determined that an additional $6.0 million and $4.2 million in provision for loan losses was required for the years ended December 31, 2010, and December 31, 2009, 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, higher levels of non-performing assets and lower appraised values for problem loans secured by real estate.

Non-Interest Income. Non-interest income increased by $900,000 for the year ended December 31, 2010, to $11.1 million, compared to $10.2 million for the year ended December 31, 2009. The increase in non-interest income is largely the result of an $800,000 increase on gains taken on the sale of investments. For the year ended December 31, 2010, income from deposit accounts and financial services income were relatively unchanged as lower brokerage income was offset by higher mortgage origination 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.

Non-Interest Expense. Total non-interest expense for the year ended December 31, 2010, was $26.2 million, compared to $30.5 million in 2009. The decline was the result of the Company’s $5.0 million goodwill impairment charge in 2009 and a net gain on the sale of real estate owned of approximately $300,000. For the year ended December 31, 2010, the Company’s salaries and benefits expense increased by approximately $500,000 as compared to the year ended December 31, 2009, due to higher staffing levels and an increase in the cost of health insurance. Professional services expenses, data processing expenses and other expenses are the only additional non-interest expense items that increased by more than $200,000 in 2010 as compared to 2009.

Income Taxes. The effective tax rates for the years ended December 31, 2010, and December 31, 2009, was 28.6% and 16.7%, respectively. The Company’s effective tax rate increased sharply due to higher levels of pre-tax income as the majority of the overall increase in the Company’s net income for 2010 was the result of lower expenses and higher levels of net interest income.

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, 2011, the Bank exceeded all regulatory minimum capital requirements. For a detailed discussion of the OCC 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.

26

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, 2011, the Bank had outstanding advances of $63.3 million from the FHLB and $32.75 million of letters of credit issued by the FHLB to secure municipal deposits. The Bank can immediately borrow an additional $40.1 million from the FHLB and has the ability to pledge another $130.0 million in agency bonds to the FHLB for additional borrowing capacity. 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 Comptroller of the Currency “OCC” may recognize the proceeds of trust preferred securities as capital. OCC 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, 2011, cash and cash equivalents totaled $48.8 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, 2011, 2010 and 2009 were $11.2 million, $12.4 million, and $2.7 million, respectively.

Cash flows from investing activities were $26.9 million, ($41.0) million and ($57.0) million in 2011, 2010 and 2009, respectively. A principal use of cash in this area has been purchases of securities available for sale of $195.7 million partially offset by proceeds from sales, calls and maturities of securities of $179.8 million during 2011. At the same time, the investment of cash in loans was $19.9 million in 2009 while the loan portfolio provided cash of $24.7 million in 2010 and $34.2 million in 2011. Purchases of securities available for sale exceeded maturities and sales by $15.9 million in 2011, $68.9 million in 2010 and $37.8 million in 2009. There were no purchases of securities classified as held to maturity in 2010, 2009 and 2008.

At December 31, 2011, the Bank had $23.4 million in outstanding commitments to originate loans and unused lines of credit of $62.9 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 $234.5 million at December 31, 2011. Based on historical experience, management believes that a significant portion of such deposits will remain with the Bank.

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 Company’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.

27

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 Company’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 Company’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, 2006, 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, 2006, 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, 2006, 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.

28

HopFed Bancorp, Inc.

	Period Ending
Index	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
HopFed Bancorp, Inc.		100.00		94.46		66.59		65.41		67.25		50.21
NASDAQ COMPOSITE		100.00		110.66		66.42		96.54		114.06		113.16
SNL Midwest Thrift		100.00		84.47		75.06		63.22		51.25		45.21

29

Consolidated Financial Statements

HopFed Bancorp, Inc.

and Subsidiaries

December 31, 2011, 2010 and 2009

30

Table of Contents

	Page Number
Report of Independent Registered Public Accounting Firm		34
Consolidated Balance Sheets as of December 31, 2011 and 2010		35-36
Consolidated Statements of Income for the Years ended December 31, 2011, 2010 and 2009		37-38
Consolidated Statements of Comprehensive Income for the Years ended December 31, 2011, 2010 and 2009		39
Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2011, 2010 and 2009		40-41
Consolidated Statements of Cash Flows for the Years ended December 31, 2011, 2010 and 2009		42-43
Notes to Consolidated Financial Statements		44-106

32

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, 2011 and 2010, 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, 2011. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

(signed) Rayburn, Bates & Fitzgerald, P.C.

Brentwood, Tennessee

March 29, 2012

34

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2011 and 2010

(Dollars in Thousands)

	2011		2010
Assets
Cash and due from banks	$	44,389		54,042
Interest-earning deposits in Federal Home Loan Bank		4,371		6,942
Cash and cash equivalents		48,760		60,984
Federal Home Loan Bank stock, at cost (note 2)		4,428		4,378
Securities available for sale (notes 2, 7 and 8)		383,782		357,738
Loans receivable, net of allowance for loan losses of $11,262 at December 31, 2011, and $9,830 at December 31, 2010 (notes 3 and 7)		556,360		600,215
Accrued interest receivable		6,183		6,670
Real estate and other assets owned (note 14)		2,267		9,812
Bank owned life insurance		9,135		8,819
Premises and equipment, net (note 4)		23,431		24,289
Deferred tax assets (note 13)		1,132		3,788
Intangible asset (note 5)		519		810
Other assets		4,823		5,088
Total assets	$	1,040,820		1,082,591
Liabilities and Stockholders’ Equity
Liabilities:
Deposits (note 6):
Non-interest-bearing accounts	$	79,550		69,139
Interest-bearing accounts
NOW accounts		130,114		138,936
Savings and money market accounts		70,443		63,848
Other time deposits		519,988		555,006
Total deposits		800,095		826,929
Advances from Federal Home Loan Bank (note 7)		63,319		81,905
Repurchase agreements (note 8)		43,080		45,110
Subordinated debentures (note 10)		10,310		10,310
Advances from borrowers for taxes and insurance		153		239
Dividends payable		176		613
Accrued expenses and other liabilities		5,204		6,041
Total liabilities		922,337		971,147

See accompanying notes to consolidated financial statements.

35

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets, Continued

December 31, 2011 and 2010

(Dollars in Thousands)

	2011			2010
Stockholders’ equity (note 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, 2011 and December 31, 2010	$	—			—
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,895,336 issued and 7,492,420 outstanding at December 31, 2011, and 7,737,879 issued and 7,334,963 outstanding at December 31, 2010		79			77
Common stock warrants		556			556
Additional paid-in-capital		75,967			74,920
Retained earnings-substantially restricted		39,591			39,994
Treasury stock (at cost, 402,916 shares at December 31, 2011 and December 31, 2010)		(5,076	)		(5,076	)
Accumulated other comprehensive income, net of taxes		7,366			973
Total stockholders’ equity		118,483			111,444
Total liabilities and stockholders’ equity	$	1,040,820			1,082,591

Commitments and contingencies (notes 11 and 15)

See accompanying notes to consolidated financial statements.

36

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

For the Years ended December 31, 2011, 2010 and 2009

(Dollars in Thousands)

	2011			2010		2009
Interest and dividend income:
Loans receivable	$	33,493			38,037		38,921
Securities available for sale		10,465			11,911		12,635
Securities held to maturity		—			—		12
Non-taxable securities available for sale		2,263			2,457		1,565
Interest-earning deposits		19			12		8
Total interest and dividend income		46,240			52,417		53,141
Interest expense:
Deposits (note 6)		14,207			17,384		20,833
Advances from Federal Home loan Bank		2,557			3,292		4,070
Repurchase agreements		909			831		767
Subordinated debentures		742			739		642
Total interest expense		18,415			22,246		26,312
Net interest income		27,825			30,171		26,829
Provision for loan losses (note 3)		5,921			5,970		4,199
Net interest income after provision for loan losses		21,904			24,201		22,630
Non-interest income:
Service charges		3,813			3,922		4,222
Merchant card income		768			698		612
Mortgage origination income		720			590		271
Realized gain from sale of securities available for sale, net (note 2)		2,897			3,504		2,715
Other than temporary impairment on investments (note 2)		(155	)		—		(200	)
Income from bank owned life insurance		316			344		481
Financial services commission		894			971		983
Other operating income		940			1,077		1,141
Total non-interest income		10,193			11,106		10,225

See accompanying notes to consolidated financial statements.

37

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income, Continued

For the Years ended December 31, 2011, 2010 and 2009

(Dollars in Thousands, Except Per Share Amounts)

	2011		2010			2009
Non-interest expenses:
Salaries and benefits (note 12)		13,266		12,762			12,240
Occupancy expense (note 4)		3,269		3,158			3,074
Data processing expense		2,645		2,807			2,595
State deposit tax		627		640			619
Intangible amortization (note 5)		291		358			650
Goodwill impairment (note 5)		—		—			4,989
Professional services		1,372		1,225			1,002
Advertising expense		1,235		1,115			1,304
Postage and communications expense		549		557			616
Supplies expense		399		404			363
Deposit insurance and examination fees		2,021		2,107			2,026
Loss on sale of assets		145		—			—
Loss (gain) on sale of real estate owned		1,703		(321	)		—
Expenses related to real estate owned		276		264			241
Other operating expenses		895		1,102			764
Total non-interest expense		28,693		26,178			30,483
Income before income tax expense		3,404		9,129			2,372
Income tax expense (note 13)		484		2,613			397
Net income		2,920		6,516			1,975
Less: Dividend on preferred shares		920		920			920
Accretion dividend on preferred shares		111		111			111
Net income available for common shareholders	$	1,889		5,485			944
Earnings per share available to common stockholders (note 18):
Basic	$	0.25		0.96			0.25
Fully diluted	$	0.25		0.96			0.25
Weighted average shares outstanding - basic		7,460,294		5,732,495	(1)		3,714,195	(1)
Weighted average shares outstanding - diluted		7,460,294		5,732,495	(1)		3,714,195	(1)

(1) Weighted average shares outstanding (basic and diluted) for 2009 adjusted to reflected 2% stock dividend paid to shareholders of record on September 30, 2010 and October 3, 2011. Weighted average shares outstanding (basic and diluted) for 2010 adjusted to reflected 2% stock dividend paid to shareholders of record on October 3, 2011.

See accompanying notes to consolidated financial statements.

38

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Years ended December 31, 2011, 2010 and 2009

(Dollars in Thousands)

	2011			2010			2009
Net income	$	2,920			6,516			1,975
Other comprehensive income, net of tax:
Unrealized holding gain arising during the year, net of tax effect		8,443			431			3,553
Unrealized gain (loss) on derivatives, net of tax effect		(138	)		(293	)		351
Reclassification adjustment for gains included in net income, net of tax effect		(1,912	)		(2,313	)		(1,791	)
Comprehensive income	$	9,313			4,341			4,088

See accompanying notes to consolidated financial statements.

39

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Years ended December 31, 2011, 2010 and 2009

(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, 2009		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
Preferred stock dividend of 5%		—		—		—		—		—		(851	)		—			—			(851	)
Common stock dividends ($0.48 per share)		—		—		—		—		—		(1,723	)		—			—			(1,723	)
Compensation expense, restricted stock awards		—		—		—		—		151		—			—			—			151
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
Net income		—		—		—		—		—		6,516			—			—			6,516
Restricted stock awards		9,751		—		—		—		—		—			—			—			—
Net change in unrealized losses on securities available for sale, net of taxes of $969		—		—		—		—		—		—			—			(1,882	)		(1,882	)
Net change in unrealized losses on derivatives, net of taxes of $151		—		—		—		—   —		—		—			—			(293	)		(293	)
Preferred stock dividend of 5%		—		—		—		—		—		(920	)		—			—			(920	)
Common stock issuance at $8.55 share, net and includes 112,639 of treasury stock with an average cost of $12.60 share		3,583,334		—		35		—		28,917		—			1,419			—			30,371
Exercise of options, net		3,800		—		—		—		—		—			—			—			—
Stock dividend to common stockholders’		143,458		—		1		—		1,303		(1,304	)		—			—			—
Cash dividend to common stockholders’ ($0.40 per share)		—		—		—		—		—		(2,431	)		—			—			(2,431	)
Compensation expense, restricted stock awards		—		—		—		—		134		—			—			—			134
Accretion of preferred stock discount		—		—		—		—		111		(111	)		—			—			—
Balance December 31, 2010		7,334,963		18,400	$	77		556		74,920		39,994			(5,076	)		973			111,444

See accompanying notes to consolidated financial statements.

40

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Years ended December 31, 2011, 2010 and 2009 (Continued)

(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
Brought Forward, December 31, 2010		7,334,963		18,400	$	77		556		74,920			39,994			(5,076	)		973			111,444
Net Income Restricted stock awards		--- 10,972		—   —		—   1		—   —		—   (1	)		2,920 —			—   —			—   —			2,920 —
Net change in unrealized gain on securities available for sale, net of taxes of ($3,364)		—		—		—		—		—			—			—			6,531			6,531
Net change in unrealized losses on derivatives, net of taxes of $71		—		—		—		—   —		—			—			—			(138	)		(138	)
Preferred stock dividend of 5%		—		—		—		—		—			(920	)		—			—			(920	)
Stock dividend to common stockholders’		146,485		—		1		—		819			(820	)		—			—			—
Cash dividend to common stockholders’ ($0.20 per share)		—		—		—		—		—			(1,472	)		—			—			(1,472	)
Compensation expense, restricted stock awards		—		—		—		—		118			—			—			—			118
Accretion of preferred stock discount		—		—		—		—		111			(111	)		—			—			—
Balance December 31, 2011		7,492,420		18,400	$	79		556		75,967			39,591			(5,076	)		7,366			118,483

See accompanying notes to consolidated financial statements.

41

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Years ended December 31, 2011, 2010 and 2009

(Dollars in Thousands)

	2011			2010			2009
Cash flows from operating activities:
Net income	$	2,920			6,516			1,975
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		5,921			5,970			4,199
Depreciation		1,569			1,586			1,548
Goodwill impairment		—			—			4,989
Amortization of intangible assets		291			358			650
Amortization of investment premiums and discounts, net		2,538			1,496			299
Other than temporary impairment charge on available for sale securities		155			—			200
Benefit for deferred income taxes		(637	)		(210	)		(2,809	)
Compensation expense, restricted stock grants and options		118			134			151
Income from bank owned life insurance		(316	)		(344	)		(481	)
Loss on sale or call of securities held to maturity		—			—			6
Gain on sale of securities available for sale		(2,897	)		(3,504	)		(2,715	)
Gain on sales of loans		(720	)		(590	)		(271	)
Loss on sale of premises and equipment		145			6			22
Proceeds from sales of loans		36,367			43,456			5,771
(Gain) loss on sale of foreclosed assets		1,703			(321	)		241
Originations of loans sold		(35,647	)		(42,866	)		(5,500	)
(Increase) decrease in:
Accrued interest receivable		487			(893	)		75
Other assets		265			2,261			(5,867	)
Increase (decrease) in:
Accrued expenses and other liabilities		(1,046	)		(661	)		(541	)
Income taxes payable		—			—			716
Net cash provided by operating activities		11,216			12,394			2,658
Cash flows from investing activities:
Proceeds from sales, calls and maturities of securities held to maturity		—			—			448
Proceeds from sales, calls and maturities of securities available for sale		179,795			221,875			148,883
Purchase of securities available for sale		(195,740	)		(290,765	)		(186,736	)
Net (increase) decrease in loans		34,186			24,665			(19,857	)
Purchase of Federal Home Loan Bank stock		(50	)		(97	)		(231	)
Proceeds from sale of foreclosed assets		9,590			3,897			902
Purchase of premises and equipment		(856	)		(553	)		(455	)
Net cash provided (used in) investing activities		26,925			(40,978	)		(57,046	)

See accompanying notes to consolidated financial statements.

42

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows, Continued

For the Years ended December 31, 2011, 2010 and 2009

(Dollars in Thousands)

	2011			2010			2009
Cash flows from financing activities:
Net increase (decrease) in deposits		($26,834	)		32,785			81,139
Increase (decrease) in advance payments by borrowers for taxes and insurance		(86	)		3			26
Advances from Federal Home Loan Bank		30,000			39,000			66,895
Repayment of advances from Federal Home Loan Bank		(48,586	)		(59,560	)		(94,442	)
Other advances		—			—			35,395
Repayment of other advances		—			—			(35,395	)
Increase (decrease) in repurchase agreements		(2,030	)		9,050			7,380
Sale of common stock		—			28,952			—
Sale of treasury stock		—			1,419			—
Dividends paid on preferred stock		(920	)		(920	)		(851	)
Dividends paid on common stock		(1,909	)		(2,272	)		(1,723	)
Net cash provided (used) in financing activities		(50,365	)		48,457			58,424
Increase (decrease) in cash and cash equivalents		(12,224	)		19,873			4,036
Cash and cash equivalents, beginning of period		60,984			41,111			37,075
Cash and cash equivalents, end of period	$	48,760		$	60,984			41,111
Supplemental disclosures of cash flow information:
Interest paid	$	9,589			11,826			14,424
Income taxes paid	$	2,105			4,110			2,420
Supplemental disclosures of non-cash investing and financing activities:								.
Loans charged off	$	4,875			5,290			1,836
Foreclosures and in substance foreclosures of loans during year	$	3,748			11,505			1,473
Net unrealized gains (losses) on investment securities classified as available for sale	$	9,895			(2,851	)		2,670
Increase (decrease) in deferred tax asset related to unrealized gain (losses) on investments		($3,364	)		969			(908	)
Dividends declared and payable	$	176			613			454
Issue of unearned restricted stock	$	87			92			93

See accompanying notes to consolidated financial statements.

43

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

(1) Summary of Significant Accounting Policies:

Nature of Operations and Customer Concentration

HopFed Bancorp, Inc. (the Corporation) is a bank 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).

As part of the enactment of the Dodd-Frank Financial Reform Act of 2010, the Corporation and Bank’s former regulator, the Office of Thrift Supervision, was eliminated on July 21, 2011. The Bank is currently subject to comprehensive regulation, examination and supervision by the Office of Comptroller of the Currency (OCC) and the FDIC. Supervision of the Corporation is conducted by the Federal Reserve.

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.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation, the Bank and its wholly-owned subsidiaries Fall & Fall Insurance and Fort Webb, LLC. (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.

44

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

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

Accounting: (Continued)

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE) under accounting principles generally accepted in the United States. Voting interest entities are entities are entities in which the total equity investment is a risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decision about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, VIE’s are entities in which it has all, or at least a majority of, the voting interest. A controlling financial interest in a VIE is present when an enterprise has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The subsidiary Fort Webb LLC is a VIE for which the Company is not the primary beneficiary. Accordingly, its accounts are not included in the Company’s consolidated financial statements.

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) “trading” (held for current resale) which are to be reported at fair value, with unrealized gains and losses included in earnings; and (ii) “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. The Company does not classify any portion of its securities portfolio as held to maturity.

45

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

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

Securities: (Continued)

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. The Company has determined that callable bonds purchased at a premium have a high likelihood of being called, and 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.

Other Than Temporary Impairment

A decline in the fair value of any available-for-sale 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.

Restricted Stock

Other securities, such as Federal Home Loan Bank (FHLB) stock are recorded at cost, as it is not actively traded and are reviewed for impairment at least annually.

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.

46

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

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

Loans Receivable (Continued)

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 Company 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 Company’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.

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 and loans classified as temporary debt restructured 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 may be based on the present value of future cash flows discounted at the historical effective interest rate. However, the majority of the Company’s problem loans become collateral dependent at the time they are judged to be impaired. Therefore, the measurement of impaired requires the Company to obtain a new appraisal to obtain the fair value of the collateral. The appraised value is then discounted to an estimated of the Company’s net realizable value, reducing the appraised value by the amount of holding and selling costs. 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 Company’s recent charge off history, the Company’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 Company must be mindful of its local economy and the current loan portfolio mix.

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.

47

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

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

Fixed Rate Mortgage Originations

The Company operates a mortgage division 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, 2011, the Bank maintained a servicing portfolio of one to four family real estate loans of approximately $22.3 million. For the years ended December 31, 2011, and December 31, 2010, 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.

Mortgage loans held for sale are generally delivered to secondary market investors under best efforts 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.

Real Estate and Other Assets Owned

Assets acquired through, or in lieu of, loan foreclosure or repossession 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 (no less than annually) 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.

Revenue Recognition

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, placed in non-accrual status, or payments are past due more than 90 days. Interest earned as reported as income is reversed on any loans classified as non-accrual 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.

48

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

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

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.

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 was charged off.

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. On an annual basis, the Company 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.

49

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

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

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.

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 sheets. 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, 2011, 2010 and 2009.

50

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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, 2011, the cost of the Bank to terminate the cash flow hedge is approximately $1,297,000.

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 securities

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

51

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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.

Letters of Credit

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.

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.

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.

52

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

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

Fair Values of Financial Instruments (Continued)

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.

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.

Restricted Stock

The fair value of restricted stock is recorded at cost as this is the contractual redemption amount subject to certain restrictions.

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%.

Off-Balance-Sheet Instruments

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

Dividend Restrictions

The Company is not permitted to pay a dividend to common shareholders if it fails to make a quarterly interest payment to the holders of the Company’s subordinated debentures or fails 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 Comptroller of the Currency (OCC). Any restrictions imposed by the OCC would effectively limit the Company’s ability to pay a dividend to its common stockholders as discussed in note 17.

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 available to common shareholders by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income available to common shareholders 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.

53

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

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

Earnings Per Share (Continued):

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. 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 for the years ended December 31, 2011, December 31, 2010, and December 31, 2009, or $0.14 per share (basic and fully diluted) for the year ended December 31, 2011, $0.18 per share (basic and fully diluted) for the year ended December 31, 2010, and $0.28 per share (basic and fully diluted) for the year ended December 31, 2009.

Stock Compensation

The implementation of ASC 718, Compensation – Stock Compensation, had no effect on the Company’s net income or earnings per share for the year ended December 31, 2011, 2010 and 2009, respectively.

The Company utilized the Black-Scholes 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, 2011, the number of options outstanding and the weighted average exercise price of options have been adjusted for the 2% stock dividend paid to stockholders of record on September 30, 2010, and October 3, 2011.

Reclassifications

Certain items in prior financial statements have been reclassified to conform to the current presentation.

54

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

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

Effect of New Accounting Pronouncements

In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 provides enhanced disclosures related to the credit quality of financing receivables and the allowance for credit losses, and provides that new and existing disclosures should be disaggregated based on how an entity develops its allowance for credit losses and how it manages credit exposures.

Under the provisions of ASU 2010-20, additional disclosures required for financing receivables include information regarding the aging of past due receivables, credit quality indicators, and modifications of financing receivables. The provisions of ASU 2010-20 were effective for periods ending after December 15, 2010, with the exception of the amendments to the roll-forward of the allowance for credit losses which are effective for periods beginning after December 15, 2010. Comparative disclosures are required only for periods ending subsequent to initial adoption. HopFed Bancorp adopted the provisions of ASU 2010-20 and has provided the required disclosures in the consolidated financial statements provided herein.

In 2010, the FASB issued ASU 2010-11, Scope Exception Related to Embedded Credit Derivatives. ASU 2010-11 amends ASC 815 to provide clarifying language regarding when embedded credit derivative features are not considered embedded derivatives subject to potential bifurcation and separate accounting. The provisions of ASU 2010-11 are effective for periods beginning after June 15, 2010, and require re-evaluation of certain preexisting contracts to determine whether the accounting for such contracts is consistent with the amended guidance in ASU 2010-11. If the fair value option is elected for an instrument upon adoption of the amendments to ASC 815, re-evaluation of such preexisting contracts is not required. The adoption of this standard did not impact the operating results of the Company.

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

ASU 2011-01 - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (“ASU 2011-01”). ASU 2011-01 temporarily delayed the effective date of the disclosures surrounding troubled debt restructurings in Update 2010-20 for public companies. The Financial Accounting Standards Board (“FASB”) deliberated on what constitutes a troubled debt restructuring and coordinated that guidance with the effective date of the new disclosures, which are effective for interim and annual periods ending after June 15, 2011.

55

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

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

Effect of New Accounting Pronouncements (Continued)

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

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in United States of America generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (Topic 820) – Fair Value Measurement (ASU 2011-04), to provide consistent definition of the fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 is effective for reporting periods ending after March 30, 2012, and will be applied prospectively. The Company is currently evaluating the impact of ASU 2011-04.

In September 2011, the FASB issued ASU No. 2011-8, Intangibles – Goodwill and other, regarding testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting until is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill reporting unit is more than its carrying amount, the two-step goodwill impairment test is not required. The new guidance is effective on January 1, 2012. The Company does not anticipate that the implementation of ASU 2011-8 will have a material impact on our consolidated financial statements of income, condition and cash flow.

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.

56

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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 and their estimated fair values follow:

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Restricted:
FHLB stock	$	4,428		—		—			4,428
Available for Sale:
U.S. government and agency securities	$	171,141		3,511		(65	)		174,587
Tax free municipal bonds		60,432		4,623		—			65,055
Taxable municipal bonds		12,846		1,059		—			13,905
Trust preferred securities		2,000		—		(1,007	)		993
Mortgage-backed securities:
GNMA		30,427		1,413		(19	)		31,821
FNMA		59,195		2,101		(1	)		61,295
FHLMC		15,108		491		—			15,599
NON-AGENCY CMOs		2,012		7		(223	)		1,796
AGENCY CMOs		18,163		568		—			18,731
	$	371,324		13,773		(1,315	)		383,782

57

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(2) Securities: (Continued)

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Restricted:
FHLB stock	$	4,378		—		—			4,378
Available for Sale:
U.S. government and agency securities	$	163,365		2,921		(1,882	)		164,404
Tax free municipal bonds		64,967		481		(1,055	)		64,393
Taxable municipal bonds		17,037		105		(350	)		16,792
Trust preferred securities		2,000		—		(723	)		1,277
Mortgage-backed securities:
GNMA		30,325		873		(184	)		31,014
FNMA		27,324		1,247		(23	)		28,548
FHLMC		19,059		413		(29	)		19,443
NON-AGENCY CMOs		3,711		38		(205	)		3,544
AGENCY CMOs		27,388		1,039		(104	)		28,323
	$	355,176		7,117		(4,555	)		357,738

The scheduled maturities of debt securities available for sale at December 31, 2011, and December 31, 2010, were as follows:

2011	Amortized Cost		Estimated Fair Value
Due within one year	$	461		464
Due in one to five years		6,844		6,929
Due in five to ten years		24,471		26,153
Due after ten years		72,460		75,804
		104,236		109,350
Amortizing agency bonds		142,183		145,190
Mortgage-backed securities		124,905		129,242
Total securities available for sale	$	371,324		383,782

58

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(2) Securities: (Continued)

2010	Amortized Cost		Estimated Fair Value
Due within one year	$	778		773
Due in one to five years		6,699		6,772
Due in five to ten years		21,825		22,069
Due after ten years		88,180		86,836
		117,482		116,450
Amortizing agency bonds		129,887		130,416
Mortgage-backed securities		107,807		110,872
Total securities available for sale	$	355,176		357,738

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, 2011, 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 securities:
Agency debt securities	$	20,422		(54	)		2,007		(11	)		22,429		(65	)
Taxable municipals		—		—			—		—			—		—
Tax free municipals		—		—			—		—			—		—
Trust preferred securities		—		—			993		(1,007	)		993		(1,007	)
Mortgage-backed securities:
GNMA		1,925		(19	)		—		—			1,925		(19	)
FNMA		—		—			81		(1	)		81		(1	)
FHLMC		—		—			—		—			—		—
NON-AGENCY CMOs		—		—			1,494		(223	)		1,494		(223	)
AGENCY CMOs		—		—			—		—			—		—
Total Available for Sale	$	22,347		(73	)		4,575		(1,242	)		26,922		(1,315	)

59

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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, 2011, the Company has nine 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 has reduced the book balance of two private label CMO’s as follows:

CUSIP	Description	Current Par Value		Current Moody’s Credit Rating	2011 Impairment Charge		2009 Impairment Charge		Total Impairment Charge
362290AC2	GSR 2007 TR-AR12	$	984,098	CC	$	65,500	$	180,000	$	245,500
12638PCQ0	CSMC 2007-3 4A15	$	719,907	Caa3	$	89,500	$	20,000	$	109,500

In June of 2008, the Company purchased $2 million par value of a private placement subordinated debenture issued by First Financial Services Corporation. The debenture is a thirty year security with a coupon rate of 8.00%. First Financial Services Corporation is a NASDAQ listed commercial bank holding company trading under the symbol FFKY and located in Elizabethtown, Kentucky. In October of 2010, FFKY informed the owners of its subordinated trust, including the Company, that it was deferring the dividend payments for up to five years as prescribed by the trust. FFKY has suffered significant asset quality issues that have resulted in negative earnings since 2009 and have negatively impacted FFKY’s capital position.

Currently, FFKY is under a Consent Order issued jointly by the Kentucky State Department of Financial Institutions and the FDIC. The consent order requires FFKY to increase its Tier 1 Capital Ratio to 8% and its Total Risk Based Capital Ratio to 12.00%. At September 30, 2010, FFKY had not met the capital goals established by their regulators but remains “Adequately Capitalized” in accordance with FDIC guidelines.

60

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(2) Securities: (Continued)

The Company continues to monitor all quarterly reports issued by both FFKY and its bank subsidiary to determine if the investment in the subordinated trust is other than temporarily impaired. At December 31, 2011, the Company has determined, based on the suspension of the dividend, that the investment is not other than temporarily impaired and has taken a $1.0 million reduction in other comprehensive income related to the lack of current cash flow from the debenture. The Company has further determined, based on the financial trends and capital position of FFKY and its bank subsidiary, that the Company’s investment in the subordinated debenture is not permanently impaired at this time.

On February 9, 2012, FFKY announced the sale of four branch offices located in Indiana to a local financial institution. At December 31, 2011, the branches held approximately $117.2 million in deposits and $35.4 million in loans. FFKY anticipates realizing a net gain of approximately $3.4 million on this transaction based on the financial information at December 31, 2011. This transaction is projected to increase the Tier 1 Capital of FFKY to 6.75% from 5.87%. The transaction is expected to close in the third quarter of 2012. The Company will continue to monitor all available public information as well as maintain a dialogue with the management team of FFKY to ascertain the future business prospects of FFKY and the Company’s investment.

During 2011, the Company sold investment securities classified as available for sale for proceeds of $115.2 million resulting in gross gains of $3.2 million and gross losses of $335,000. During 2010, the Company sold investment securities classified as available for sale for proceeds of $103.8 million resulting in gross gains of $3.5 million and gross losses of $30,000. 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.

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, 2011, the Bank pledged investments with a book value of $124.2 million and a market value of approximately $133.0 million to various municipal entities as required by law. The Bank has pledged various investments with a book value of $5.8 million and a market value of $6.0 million to the Federal Home Loan Bank of Cincinnati to provide for a higher level of available borrowings. In addition, the Bank has provided $32.8 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.

61

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands, Except Percentages)

(3) Loans Receivable, Net:

The components of loans receivable in the consolidated balance sheets as of December 31, 2011, and December 31, 2010, were as follows:

	12/31/2011		12/31/2011			12/31/2010		12/31/2010
	Amount		Percent			Amount		Percent
Real estate loans:
One-to-four family (closed end) first mortgages	$	171,192		30.2	%	$	182,671		30.0	%
Home equity lines of credit		38,694		6.8	%		40,191		6.6	%
Junior lien		6,209		1.1	%		6,196		1.0	%
Multi-family		33,739		5.9	%		29,416		4.8	%
Construction		11,931		2.1	%		23,361		3.8	%
Land		52,338		9.2	%		60,063		9.9	%
Non-residential real estate		183,485		32.3	%		195,285		32.0	%
Total mortgage loans		497,588		87.6	%		537,183		88.1	%
Consumer loans		15,110		2.7	%		18,060		3.0	%
Commercial loans		54,673		9.7	%		54,439		8.9	%
Total other loans		69,783		12.4	%		72,499		11.9	%
Total loans, gross		567,371		100.0	%		609,682		100.0	%
Deferred loan cost, net of income		251					363
Less allowance for loan losses		11,262					9,830
Total loans	$	556,360				$	600,215

The Company’s loan portfolio balance has declined in each of the last two years. The decline is the result of a combination of factors, including a weak economy, both locally and nationally. In 2010 and 2011, unemployment in the Company’s market area ranged from 9% to 13%. The Company’s MOU with its former regulator, the OTS, restricted the Company’s ability to grow its owner occupied commercial real estate loan portfolio.

The Company’s loan portfolio includes a significant amount of loans secured by raw land and commercial real estate. These loans have come under increased regulatory scrutiny due to the potential for higher levels of losses. At December 31, 2011, the performance of the Company’s land and commercial real estate loans has been satisfactory.

In 2010, the credit quality of the Company’s multi-family loan portfolio began to experience an increase in delinquency and losses as compared to other segments of the loan portfolio due to the deployment of the more than 10,000 army personnel from the 101^st Airborne at Fort Campbell, Kentucky, to the Middle East, reducing the number of potential renters in the Company’s largest market. In the first half of 2011, the deployed troops returned to Fort Campbell, thus creating a strong demand for multi-family real estate properties. This demand allowed the Company to sell a large portion of its other real estate owned.

62

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

Loans serviced for the benefit of others totaled approximately $59.2 million, $56.3 million and $42.1 million at December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, approximately $22.3 million of the $59.2 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. The servicing rights associated with these loans are not material to the Company’s consolidated financial statements. 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.

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.

The Company conducts annual reviews on all loan relationships above $1.0 million to ascertain the borrowers continued ability to service their debt as agreed. In addition to the credit relationships mentioned above, management may classify any credit relationship once it becomes aware of adverse credit trends for that customer. Typically, the annual review consists of updated financial statements for borrowers and any guarantors, a review of the borrower’s credit history with the Company and other creditors, and current income tax information. As a result of this review, management will classify loans based on their credit risk. Additionally, the Company provides a risk grade for all loans past due more than sixty days. The Company uses the following risk definitions for risk grades:

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

Watch loans are acceptable credits: (1) that need continual monitoring, such as out-of territory or asset-based loans (since the Company does not have an asset-based lending department), or (2) with a marginal risk level to business concerns and individuals that; (a) have exhibited favorable performance in the past, though currently experiencing negative trends; (b) are in an industry that is experiencing volatility or is declining, and their performance is less than industry norms; and (c) are experiencing unfavorable trends in their financial position, such as one-time net losses or declines in asset values. These marginal borrowers may have early warning signs of problems such as occasional overdrafts and minor delinquency.

63

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

If considered marginal, a loan would be a “watch” until financial data demonstrated improved performance or further deterioration to a “substandard” grade usually within a 12-month period. In the table on page 65, Watch loans are included with satisfactory loans and classified as Pass.

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

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

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

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

64

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

Loans by classification type and the related valuation allowance amounts at December 31, 2011, were as follows:

	Pass		Special Mention		Impaired Loans				Total		Specific Allowance for  Impairment		Allowance for Performing  loans
					Substandard		Doubtful
					(Dollars in Thousands)
December 31, 2011
One-to-four family mortgages	$	153,375		9,434		8,153		230		171,192		728		1,912
Home equity lines of credit		36,528		1,694		233		239		38,694		131		277
Junior lien		4,778		622		809		—		6,209		180		97
Multi-family		20,715		7,073		5,951		—		33,739		26		1,175
Construction		9,943		213		1,775		—		11,931		14		125
Land		17,570		24,714		9,055		999		52,338		924		408
Non-residential real estate		142,190		25,077		16,101		117		183,485		1,374		2,297
Consumer loans		14,399		268		423		20		15,110		80		182
Commercial loans		45,509		4,009		5,034		121		54,673		623		709
Total	$	445,007		73,104		47,534		1,726		567,371		4,080		7,182

Loans by classification type and the related valuation allowance amounts at December 31, 2010, were as follows:

	Pass		Special Mention		Impaired Loans				Total		Specific Allowance for  Impairment		Allowance for Performing  loans
					Substandard		Doubtful
					(Dollars in Thousands)
December 31, 2010
One-to-four family mortgages	$	165,864		8,121		8,388		298		182,671		350		747
Home equity lines of credit		39,129		499		333		230		40,191		77		135
Junior lien		5,514		495		187		—		6,196		105		41
Multi-family		26,098		—		3,017		301		29,416		178		1,844
Construction		16,164		3,292		3,702		203		23,361		108		549
Land		29,858		16,930		13,275		—		60,063		588		277
Non-residential real estate		160,995		11,089		22,780		421		195,285		2,540		1,485
Consumer loans		17,488		205		367		—		18,060		85		23
Commercial loans		47,016		2,314		5,092		17		54,439		255		443
Total	$	508,126		42,945		57,141		1,470		609,682		4,286		5,544

65

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2011, were as follows:

	At December 31, 2011						For the year ended December 31, 2011
Impaired loans with no recorded allowance	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
One-to-four family mortgages	$	5,144		5,300		—		5,814		220
Home equity line of credit		181		181		—		312		5
Junior lien		469		469		—		287		14
Multi-family		5,059		5,059		—		2,797		242
Construction		1,589		1,589		—		1,437		63
Land		7,513		7,513		—		10,777		446
Non-residential real estate		9,458		11,530		—		10,410		312
Consumer loans		75		75		—		92		4
Commercial loans		480		584		—		2,244		33
Total	$	29,968		32,300		—		34,170		1,339
	At December 31, 2011						For the year ended December 31, 2011
Impaired loans with recorded allowance:	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
One-to-four family mortgages	$	3,239		3,239		728		3,563		183
Home equity line of credit		291		291		131		399		13
Junior lien		340		340		180		703		16
Multi-family		892		892		26		1,962		15
Construction		186		186		14		1,222		11
Land		2,541		2,541		924		3,261		157
Non-residential real estate		6,760		6,760		1,374		10,833		360
Consumer loans		368		368		80		344		3
Commercial loans		4,675		4,675		623		2,671		27
Total	$	19,292		19,292		4,080		24,958		785
Total impaired loans	$	49,260		51,592		4,080		59,128		2,124

66

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2010, were as follows:

	At December 31, 2010						For the year ended December 31, 2010
Impaired loans with no recorded allowance:	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
One-to-four family mortgages	$	7,097		7,097		—		3,863		352
Home equity line of credit		419		419		—		207		15
Junior lien		—		—		—		156		10
Multi-family		1,456		1,456		—		389		31
Construction		1,238		1,238		—		1,480		38
Land		11,175		11,175		—		10,282		328
Non-residential real estate		13,194		13,194		—		10,242		808
Consumer loans		51		51		—		459		1
Commercial loans		4,576		4,576		—		1,721		73
Total	$	39,206		39,206		—		28,799		1,656

	At December 31, 2010						For the year ended December 31, 2010
Impaired loans with recorded allowance:	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
One-to-four family mortgages	$	1,589		1,589		350		1,059		88
Home equity line of credit		144		144		77		156		6
Junior lien		187		187		105		75		5
Multi-family		1,862		1,862		178		6,828		18
Construction		2,667		2,667		108		1,202		176
Land		2,100		2,100		588		573		92
Non-residential real estate		10,007		10,007		2,540		3,537		720
Consumer loans		316		316		85		613		1
Commercial loans		533		533		255		353		34
Total	$	19,405		19,405		4,286		14,396		1,140
Total impaired loans	$	58,611		58,611		4,286		43,195		2,796

67

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

The average recorded investment in impaired loans for the years ended December 31, 2011, 2010 and 2009 was $59.1 million, $43.2 million and $27.7 million, respectively. Interest income recognized on impaired loans for the years ended December 31, 2011 and December 31, 2010 was $2.1 million and $2.8 million, respectively. The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the year ended December 31, 2011:

Year ended December 31, 2011	Balance 12/31/2010		Charge off 2011			Recovery 2011		General Provision 2011			Specific Provision 2011			Ending Balance 12/31/2011
One-to-four family mortgages	$	1,097		(758	)		139		1,687			475			2,640
Home equity line of credit		212		(123	)		—		245			74			408
Junior liens		146		(27	)		1		79			78			277
Multi-family		2,022		(89	)		—		26			(758	)		1,201
Construction		657		(353	)		—		(91	)		(74	)		139
Land		865		(308	)		30		353			392			1,332
Non-residential real estate		4,025		(2,645	)		84		1,114			1,093			3,671
Consumer loans		108		(371	)		112		425			(12	)		262
Commercial loans		698		(201	)		20		305			510			1,332
	$	9,830		(4,875	)		386		4,143			1,778			11,262

The following table provides a detail of the Company’s activity in the allowance for loan loss account allocated by loan type for the year ended December 30, 2010:

Year ended December 31, 2010	Balance 12/31/2009		Charge off 2010			Recovery 2010		General Provision 2010			Specific Provision 2010			Ending Balance 12/31/2010
One-to-four family mortgages	$	1,827		(403	)		10		(418	)		81			1,097
Home equity line of credit		245		(61	)		1		9			18			212
Junior liens		137		—			5		(20	)		24			146
Multi-family		1,344		(1,605	)		85		299			1,899			2,022
Construction		514		(751	)		—		392			502			657
Land		935		(265	)		3		61			131			865
Non-residential real estate		2,295		(1,252	)		—		1,695			1,287			4,025
Consumer loans		317		(472	)		184		66			13			108
Commercial loans		1,237		(481	)		11		(39	)		(30	)		698
	$	8,851		(5,290	)		299		2,045			3,925			9,830

68

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

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 allowance for loan losses account by management 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.

Non-accrual loans totaled $6.1 million and $5.0 million at December 31, 2011, and December 31, 2010, respectively. All non-accrual loans noted below are classified as either substandard or doubtful. Interest income foregone on such loans totaled $246,000 at December 31, 2011, $243,000 at December 31, 2010 and $679,000 at December 31, 2009, respectively. 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, 2011, December 31, 2010 and December 31, 2009. For the years ended December 31, 2011, and December 31, 2010, the components of the Company’s balances of non-accrual loans are as follow:

	December 31,
	2011			2010
One-to-four family (closed end) first mortgages	$	2,074			1,559
Home equity lines of credit		134			103
Junior liens Multi-family		101 —			—   301
Construction		—			1,541
Land		1,330			363
Non-residential real estate		2,231			1,043
Consumer loans		9			23
Commercial loans		254			97
Total non-performing loans	$	6,133			5,030
Non-accrual loans to total loans ratio		1.08	%		0.82	%

69

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

The table below presents past due balances at December 31, 2011, by loan classification allocated between performing and non-performing:

	Currently Performing		30 - 89 Days Past  Due		Non-accrual Loans		Special Mention		Impaired Loans Currently Performing				Total
									Substandard		Doubtful
	(Dollars in Thousands)
One-to-four family mortgages	$	153,375		628		2,074		9,163		5,722		230		171,192
Home equity line of credit		36,528		5		134		1,664		134		229		38,694
Junior liens		4,778		312		101		521		497		—		6,209
Multi-family		20,715		—		—		7,073		5,951		—		33,739
Construction		9,943		107		—		213		1,668		—		11,931
Land		17,570		237		1,330		24,714		7,488		999		52,338
Non-residential real estate		142,190		487		2,231		24,782		13,678		117		183,485
Consumer loans		14,399		28		9		268		386		20		15,110
Commercial loans		45,509		506		254		4,003		4,385		16		54,673
Total	$	445,007		2,310		6,133		72,401		39,909		1,611		567,371

The table below presents past due balances at December 31, 2010, by loan classification allocated between performing and non-performing:

	Currently Performing		30 - 89 Days Past  Due		Non-accrual Loans		Special Mention		Impaired Loans Currently Performing				Total
									Substandard		Doubful
	(Dollars in Thousands)
One-to-four family mortgages	$	162,840		3,024		1,559		8,121		7,032		95		182,671
Home equity line of credit		39,087		42		103		499		260		200		40,191
Junior liens		5,514		—		—		495		187		—		6,196
Multi-family		25,852		246		301		—		2,716		301		29,416
Construction		15,351		813		1,541		3,292		2,364		—		23,361
Land		29,270		588		363		16,930		12,912		—		60,063
Non-residential real estate		156,997		3,998		1,043		11,089		21,737		421		195,285
Consumer loans		17,351		137		23		205		344		—		18,060
Commercial loans		46,676		340		97		2,314		4,995		17		54,439
Total	$	498,938		9,188		5,030		42,945		52,547		1,034		609,682

70

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

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

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

• The restructuring constitutes a concession

• The debtor is experiencing financial difficulties

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

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

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

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

71

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

Troubled Debt Restructurings (Continued)

A summary of the Company’s loans classified as Troubled Debt Restructuring (TDR’s) that are reported as performing and non-performing at December 31, 2011 and December 31, 2010 is below:

TDR by loan type:	2011			2010
One-to-four family mortgages	$	2,521			4,013
Home equity line of credit		—			33
Junior lien		857			—
Multi-family		—			246
Construction		—			1,541
Land		941			512
Non-residential real estate		3,367			3,915
Consumer loans		33			69
Commercial loans		125			700
Total TDR	$	7,844			11,029
Less:
TDR in non-accrual status:
One-to-four family mortgages		(1,410	)		(1,181	)
Home equity line of credit		—			—
Junior lien		(100	)		—
Multi-family		—			—
Construction		—			(1,338	)
Land		—			(512	)
Non-residential real estate		(1	)		—
Consumer loans		(1	)		—
Commercial loans		(105	)		—
Total performing TDR	$	6,227			7,998

72

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(3) Loans Receivable, Net (Continued):

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, 2011 and December 31, 2010, were approximately $10,917,000 and $11,641,000, respectively. At December 31, 2011, funds committed that were undisbursed to officers and directors approximated $677,000.

The following summarizes activity of loans to officers and directors and their affiliates for the years ended December 31, 2011, and December 31, 2010:

	2011			2010
Balance at beginning of period	$	11,641			9,892
New loans		2,940			4,284
Principal repayments		(3,664	)		(2,535	)
Balance at end of period	$	10,917		$	11,641

(4) Premises and Equipment:

Components of premises and equipment included in the consolidated balance sheets as of December 31, 2011 and December 31, 2010, consisted of the following:

	2011		2010
Land	$	5,560		5,560
Land improvements		558		504
Buildings		20,206		20,170
Furniture and equipment		6,765		6,257
		33,089		32,491
Less accumulated depreciation		9,658		8,202
Premises and equipment, net	$	23,431		24,289

Depreciation expense was approximately $1,569,000, $1,586,000 and $1,548,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

73

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(5) 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.

The amount of other intangible assets and the changes in the carrying amounts of other intangible assets for the years ended December 31, 2011, December 31, 2010 and December 31, 2009:

	Core Deposits Intangible
Balance, December 31, 2008	$	1,818
Amortization		(650	)
Balance December 31, 2009		1,168
Amortization		(358	)
Balance December 31, 2010		810
Amortization		(291	)
Balance, December 31, 2011	$	519

The estimated amortization expense for intangible assets for the subsequent years at December 31, 2011, is as follows:

Year Ending	Core Deposit Intangible
2012	$	227
2013		162
2014		97
2015		33
Total	$	519

74

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(6) Deposits:

At December 31, 2011, the scheduled maturities of other time deposits were as follows:

Year Ending:
2012	$	234,515
2013		126,870
2014		50,626
2015		31,407
2016 and thereafter		76,570
	$	519,988

The amount of other time deposits with a minimum denomination of $100,000 was approximately $272.5 million and $289.1 million at December 31, 2011, and December 31, 2010, respectively. At December 31, 2011, directors, members of senior management and their affiliates had deposits in the Bank of approximately $1.9 million.

Interest expense on deposits for the years ended December 31, 2011, December 31, 2010 and December 31, 2009 is summarized as follows:

	2011		2010		2009
Demand and NOW accounts	$	1,435		1,553		1,450
Money market accounts		108		113		59
Savings		114		130		120
Other time deposits		12,550		15,588		19,204
	$	14,207		17,384		20,833

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, 2011, average daily clearings were approximately $5.7 million.

At December 31, 2011, the Company had approximately $358,000 of deposit accounts in overdraft status and thus has been reclassified to loans on the accompanying consolidated balance sheet. At December 31, 2010, the Company had approximately $307,000 of deposit accounts in overdraft status and thus has been reclassified to loans on the accompanying consolidated balance sheet. At December 31, 2011, and December 31, 2010, the Company had deposits classified as brokered deposits totaling $56.3 million and $75.7 million, respectively. At December 31, 2011 and December 31, 2010, the Company had CDARS deposits totaling $2.1 million and $15.7 million, respectively.

75

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands, Except Percentages)

(7) Advances from Federal Home Loan Bank:

Federal Home Loan Bank advances are summarized as follows:

	December 31,
	2011					2010
Types of Advances	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Fixed-rate	$	63,319		3.64	%	$	81,905		3.75	%

Scheduled maturities of FHLB advances as of December 31, 2011 are as follows:

Years Ending December 31,	Fixed Rate		Average Cost
2012	$	5,000		1.82	%
2013		6,950		2.59	%
2014		5,728		3.16	%
2015		—		—
2016		4,000		5.34	%
Thereafter		41,641		3.93	%
Total	$	63,319		3.64	%

The Bank has an approved line of credit of $30.0 million at the FHLB of Cincinnati, 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, 2011, the Bank has immediate access to $40.1 million of credit at the FHLB. 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 $5.8 million and a market value of $6.0 million. 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, 2011.

At December 31, 2011, the Bank pledged investment securities with a book balance of $124.2 million and a market value of $133.0 million to various municipalities. In addition to the pledged securities, the Bank has issued $32.75 million in letters of credit issued by the Federal Home Loan Bank of Cincinnati as collateral for select municipality deposits.

76

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands, Except Percentages)

(8) Repurchase Agreements:

In 2006, the Company 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, 2011, the Company provided investment securities with a market value and book value of $45.9 million as collateral for repurchase agreements. The maximum repurchase balances outstanding during the twelve month periods ending December 31, 2011, and December 31, 2010, was $46.7 million and $56.9 million, respectively.

At December 31, 2011, and December 31, 2010, the respective cost and maturities of the Company’s repurchase agreements are as follows:

2011 Third Party	Balance		Average Cost			Maturity		Comments
Deutsch Bank	$	10,000		4.28	%		9/05/2014		Quarterly callable
Merrill Lynch		6,000		4.36	%		9/18/2016		Quarterly callable
Various customers		27,080		0.88	%				Overnight
Total	$	43,080		2.15	%

2010 Third Party	Balance		Average Cost			Maturity		Comments
Deutsch Bank	$	10,000		4.28	%		9/05/2014		Quarterly callable
Merrill Lynch		6,000		4.36	%		9/18/2016		Quarterly callable
Various customers		29,110		0.44	%				Overnight
Total	$	45,110		1.81	%

77

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(9) Fair Value Measurement:

ASC Topic 820, Fair Value Measurements and Disclosures 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. Although ASC 820 provides for fair value accounting, the Company did not elect the fair value option for any financial instrument not presently required to be 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.

78

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(9) Fair Value Measurement: (Continued)

The fair value of bank owned life insurance is determined by reducing the annual stated dividend payments of each insurance company by the annual cost of life insurance provided. 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.

The Company determines the fair value of impaired loans and other real estate owned by obtaining an appraisal on an annual basis on all properties. Management reduces the appraised values by the estimated cost to carry and sell the properties.

Assets and Liabilities Measured on a Recurring Basis

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

December 31, 2011 Description	Total carrying value in the consolidated balance sheet at December 31, 2011		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	$	383,782		—		382,789		993
Bank owned life insurance		9,135		—		9,135		—
Liabilities
Interest rate swap		1,297		—		1,297		—

December 31, 2010 Description	Total carrying value in the consolidated balance sheet at December 31, 2010		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	$	357,738		—		356,461		1,277
Bank owned life insurance		8,819		—		8,819		—
Liabilities
Interest rate swap		1,088		—		1,088		—

79

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(9) Fair Value Measurement: (Continued)

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

December 31, 2011 Description	Total carrying value in the consolidated balance sheet at December 31, 2011		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	$	2,258		—		—		2,258
Other assets owned		9		—		—		9
Impaired loans, net of reserve of $4,080		45,180		—		—		45,180

December 31, 2010 Description	Total carrying value in the consolidated balance sheet at 12/31/2010		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	$	9,806		—		—		9,806
Other assets owned		6		—		—		6
Impaired loans, net of reserve of $4,286		54,325		—		—		54,325

80

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(9) Fair Value Measurement: (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, 2011 and 2010, (including the change in fair value) for assets and liabilities classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify 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.

	Year ended December 31,
	2011					2010
	Other Assets			Other Liabilities		Other Assets			Other Liabilities
Fair value, December 31,	$	1,277			—	$	1,426			—
Change in unrealized gains (losses) included in other comprehensive income for assets and liabilities still held at December 31,		(284	)		—		(149	)		—
Purchases, issuances and settlements, net		—			—		—			—
Transfers in and/or out of Level 3		—			—		—			—
Fair value, December 31,	$	993			—	$	1,277			—

81

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(9) Fair Value Measurement: (Continued)

The estimated fair values of financial instruments were as follows at December 31, 2011:

	Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and due from banks	$	44,389		44,389
Interest-earning deposits in the Federal Home Loan Bank		4,371		4,371
Federal Home Loan Bank stock		4,428		4,428
Securities available for sale		383,782		383,782
Loans receivable		556,360		585,734
Accrued interest receivable		6,183		6,183
Bank owned life insurance		9,135		9,135
Financial liabilities:
Deposits		800,095		811,415
Advances from Federal Home Loan Bank		63,319		69,206
Repurchase agreements		43,080		44,969
Subordinated debentures		10,310		10,099
Advances from borrowers for taxes and insurance		153		153
Market value of interest rate swap		1,297		1,297
Accrued interest payable		3,907		3,907
Off-balance-sheet liabilities:
Commitments to extend credit		—		—
Commercial letters of credit		—		—

82

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(9) Fair Value Measurement: (Continued)

The estimated fair values of financial instruments were as follows at December 31, 2010:

	Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and due from banks	$	54,042		54,042
Interest-earning deposits in the Federal Home Loan Bank		6,942		6,942
Federal Home Loan Bank stock		4,378		4,378
Securities available for sale		357,738		357,738
Loans receivable		600,215		612,694
Accrued interest receivable		6,670		6,670
Bank owned life insurance		8,819		8,819
Financial liabilities:
Deposits		826,929		835,465
Advances from Federal Home Loan Bank		81,905		85,209
Repurchase agreements		45,110		46,273
Subordinated debentures		10,310		10,092
Advances from borrowers for taxes and insurance		239		239
Market value of interest rate swap		1,088		1,088
Accrued interest payable		5,566		5,566
Off-balance-sheet liabilities:
Commitments to extend credit		—		—
Commercial letters of credit		—		—

83

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(9) Fair Value Measurement: (Continued)

Non-Financial Assets and Non-Financial Liabilities:

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during the reported periods include certain foreclosed assets which, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were re-measured at fair value through a write-down included in other non-interest expense. The fair value of a foreclosed asset is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs.

The following table presents foreclosed assets that were re-measured and reported at fair value:

	2011			2010			2009
Beginning balance	$	9,812			1,883			875
Foreclosed assets measured at initial recognition:
Carrying value of foreclosed assets prior to acquisition		4,591			15,848			2,614
Charge-offs recognized in the allowance for loan loss		(843	)		(4,343	)		(704	)
Proceeds from sale of foreclosed assets		(9,590	)		(3,897	)		(902	)
Gains (losses) on REO included in non-interest expense		(1,703	)		321			—
Fair value	$	2,267			9,812			1,883

84

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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 (3.58% at December 31, 2011). These junior subordinated debentures mature in 2033, at which time the capital securities must be redeemed. The junior subordinated debentures and capital securities became redeemable 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.

(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 2011 and 2010, Heritage Bank chose not to transfer balances to an overnight federal funds account.

At December 31, 2011, all cash and cash equivalents are deposited with either Compass Bank, the Federal Reserve 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 second highest rating available by all rating agencies. At December 31, 2011, total FHLB deposits were approximately $4.4 million, none of which is insured by the FDIC.

85

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(12) Employee Benefit Plans:

Stock Option Plan

The following is a summary of stock options outstanding at December 31, 2011:

Exercise Price		Weighted Average Remaining Life (Years)		Outstanding Options		Options Exercisable
$	11.85		0.7		10,404		10,404
	16.77		2.4		20,808		20,808
$	15.06		1.8		31,212		31,212

The total amount of options outstanding and the exercise price of options were adjusted to reflect a 2% stock dividend paid to stockholders’ of record on September 30, 2010, and October 3, 2011.

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, 2011, the Company can no longer issue options under this option plan. The remaining 31,212 options are fully vested and outstanding until their maturity date.

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. At December 31, 2011, all options having been granted under the 2000 Option Plan have been exercised.

86

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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 2008		263,752		$	15.41
Granted		—			—
Exercised		—			—
Forfeited		(153,752	)		17.42
Options outstanding, December 2009		110,000			12.61
Granted		—
Exercised		(30,000	)		10.00
Forfeited		—			—
Adjusted for 2% stock dividend		1,600			—
Options outstanding, December 2010		81,600			13.32
Granted		—			—
Exercised		—			—
Forfeited		(51,000	)		12.10
Adjusted for 2% stock dividend		612			—
Options outstanding, December 2011		31,212		$	15.06

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

The fair value at the grant date of the vested options outstanding at December 31, 2011, is $138,000 for options issued under the 1999 plan.

At December 31, 2011, the strike price for all outstanding options exceeds the current trading price of the Company’s common stock.

87

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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. For the year ended December 31, 2011, the Compensation Committee granted 10,972 shares of restricted stock with a market value of $87,000. For the year ended December 31, 2010, the Compensation Committee granted 9,751 shares of restricted stock with a market value of $92,000. For the year ended December 31, 2009, the Compensation Committee granted a total of 9,571 shares with a market value of $92,600. The Company recognized $118,000, $134,000, and $151,000 in compensation expense in 2011, 2010 and 2009, respectively.

The remaining compensation expense to be recognized at December 31, 2011 is as follows:

Year Ending December 31,	Compensation Expense Approximate Future
(Dollars in thousands)
2012	$	88
2013		55
2014		27
2015		9

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, 2011, the Company has 117,957 restricted shares available from the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan that may be awarded.

88

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(12) Employee Benefit Plans: (Continued)

Stock Options

At December 31, 2011, the Company’s ability to issue additional options under the 1999 Stock Option Plan has expired. Additional stock option information at December 31, 2011, includes:

	Outstanding Options		Weighted Average Exercise Price		Weighted Average Remaining Term		Aggregate Intrinsic Value
Exercisable and outstanding, December 31, 2011		31,212	$	15.06		1.8 years	$	—

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 $532,000, $611,000, and $617,000 in 2011, 2010 and 2009, respectively. The reduction in expense related to the 401K program in 2011 was the offset of approximately $100,000 in Company contributions forfeited by employees who are no longer employed at the bank and have not met the full vesting requirements of the plan.

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 2010 and 2009 amounted to $19,000 annually. The plan is now fully funded and no additional expenses will be recognized. 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, 2011, the accrued value of all deferred compensation contacts is approximately $379,000. The Company is currently making cash remittances of approximately $29,000 per year on deferred compensation contracts.

89

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands, Except Percentages)

(13) Income Taxes:

The provision for income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 consisted of the following:

	2011			2010			2009
Current
Federal	$	1,011			2,613			2,976
State		110			210			230
		1,121			2,823			3,206
Deferred
Federal		(637	)		(210	)		(2,809	)
State		—			—			—
		(637	)		(210	)		(2,809	)
	$	484			2,613			397

Total income tax expense for the years ended December 31, 2011, 2010, and 2009 differed from the amounts computed by applying the federal income tax rate of 34 percent to income before income taxes as follows:

	2011			2010			2009
Expected federal income tax expense at statutory tax rate	$	1,157			3,104			806
Effect of nontaxable interest income		(547	)		(695	)		(444	)
Effect of nontaxable bank owned life insurance income		(107	)		(117	)		(120	)
Effect of QSCAB credit		(220	)		—			—
State taxes on income, net of federal benefit		73			139			152
Other		—			84			—
Non deductible expenses		128			98			3
Total income tax expense	$	484			2,613			397
Effective rate		14.2	%		28.6	%		16.7	%

90

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands, Except Percentages)

(13) Income Taxes: (Continued)

The components of deferred taxes as of December 31, 2011, and December 31, 2010, are summarized as follows:

	2011			2010
Deferred tax assets:
Allowance for loan loss	$	3,829			3,342
Accrued expenses		679			327
Intangible amortization		1,534			1,661
		6,042			5,330
Deferred tax liabilities:
FHLB stock dividends		(787	)		(787	)
Unrealized gain on securities available for sale		(3,794	)		(501	)
Depreciation and amortization		(244	)		(213	)
Unearned loan cost and fees, net		(85	)		(41	)
		(4,910	)		(1,542	)
Net deferred tax asset	$	1,132			3,788

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, 2011 and 2010 includes approximately $4,027,000 which represents such bad debt deductions for which no deferred income taxes have been provided.

No valuation allowance for deferred tax assets was recorded at December 31, 2011 and 2010 as management believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years. There were not unrecognized tax benefits during any of the reported periods.

The Corporation files income tax returns in the U.S. federal jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2008.

91

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands, Except Percentages)

(14) Real Estate and Other Assets Owned:

The Company’s real estate and other assets owned balances at December 31, 2011, and December 31, 2010, represent properties and personal collateral acquired by the Bank through customer loan defaults. 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 real estate 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, 2011, and December 31, 2010, the composition of the Company’s balance in both real estate and other assets owned are as follows:

	December 31,
	2011		2010
One-to-four family mortgages	$	480		534
Multi-family		905		7,266
Construction		465		624
Land		248		482
Non-residential real estate		160		900
Consumer assets owned by bank		9		6
Total other assets owned	$	2,267		9,812

92

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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, 2011 and 2010 of approximately $23.4 million and $34.8 million, respectively. At December 31, 2011 and 2010, the Bank had no fixed rate loan commitments. Unused lines of credit were approximately $62.9 million and $40.8 million at December 31, 2011 and 2010, 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, 2011, future minimal lease and rental commitments were as follows:

Years Ending December 31,
2012	$	37,000
2013		28,000
2014		28,000
2015		25,000
Total	$	118,000

The Company incurred rental expenses of approximately $55,000, $62,000 and $73,000 for the years ended December 31, 2011, 2010, and 2009, 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 $210,000 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 $116,000.

93

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(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 $1,430,204 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, 2011 and December 31, 2010, the Company recognized a liability for self-insured medical expenses of $506,000 and $406,000, respectively.

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,
	2011		2010
Commitments to extend credit	$	23,422		34,808
Standby letters of credit		1,459		1,500
Unused commercial lines of credit		32,329		11,256
Unused home equity lines of credit		30,536		29,562

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.

94

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(15) Commitments and Contingencies: (Continued)

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 Company is subject to various claims and legal actions that have arisen in the course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on the Company’s financial statements.

(16) Regulatory Matters:

The Company is a unitary thrift holding company and, as such, is subject to regulation, examination and supervision by the Federal Reserve Bank. The Company’s wholly owned bank subsidiary is a federally chartered savings and loan supervised by the Office of the Comptroller of the Currency (OCC) and the FDIC. 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, 2011, and 2010, that the Bank meets all capital adequacy requirements to which it is subject.

On April 30, 2010, the Company and the Bank, and the Office of Thrift Supervision (OTS), since merged into the OCC, signed a Memorandum of Understanding and Agreement. Included in the agreement was a requirement that the Bank maintain a Core Capital to adjusted total assets ratio of no less than 8.00% and a Total Risk Based Capital to Risk Weighted Assets ratio of no less than 12.00%. If the Bank did not meet these guidelines, the Bank would have to make a capital distribution request to the OTS (now OCC) prior to the payment of preferred stock dividends or interest payments to HopFed Capital Trust 1.

The most recent notification from the OCC 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 following table.

95

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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, 2011, and December 31, 2010, 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, 2011
Tangible capital to adjusted total assets	$	120,908		11.7	%	$	103,173		10.2	%	$	15,205		1.50	%		N/A		N/A
Core capital to adjusted total assets	$	120,908		11.7	%	$	103,173		10.2	%	$	40,545		4.00	%	$	50,682		5.00	%
Total capital to risk weighted assets	$	128,089		20.3	%	$	110,355		17.6	%	$	50,064		8.00	%	$	62,580		10.00	%
Tier 1 capital to risk weighted assets	$	120,908		19.1	%	$	103,172		16.5	%		N/A		N/A		$	37,548		6.00	%
As of December 31, 2010
Tangible capital to adjusted total assets	$	119,971		11.1	%	$	99,111		9.4	%	$	15,872		1.50	%		N/A		N/A
Core capital to adjusted total assets	$	119,971		11.1	%	$	99,111		9.4	%	$	42,326		4.00	%	$	52,907		5.00	%
Total capital to risk weighted assets	$	125,515		19.2	%	$	104,655		16.2	%	$	51,602		8.00	%	$	64,503		10.00	%
Tier 1 capital to risk weighted assets	$	119,971		18.4	%	$	99,111		15.4	%		N/A		N/A		$	38,702		6.00	%

96

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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 OCC, has regulations that impose certain restrictions on payment of dividends to the Corporation. Current regulations of the OCC allow the Bank (based upon its current capital level and supervisory status assigned by the OCC) 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. Due to the presence of a Memorandum of Understanding and Agreement between the Company and the OCC and the Federal Reserve Bank, we must seek approval from Federal Reserve Bank prior to declaring future cash common stock dividends and seek approval from the OCC prior to the payment of a cash dividend from the Bank to the Corporation.

Federal Reserve regulations also place restrictions after the conversion on the Company with respect to repurchases of its common stock. With prior notice to the Federal Reserve, the Company is allowed to repurchase its outstanding shares. In August 2006, under the supervision of the OTS, 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 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. The Company reissued 112,639 shares of Treasury Stock as part of the stock offering discussed below. At December 31, 2011, the Company holds 402,916 shares of treasury stock at an average price of $12.60 per share.

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 had an exercise price of $11.32 each and were 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. As a result of a 2% stock dividend paid to shareholders of record at September 30, 2010, total warrants issued was adjusted to 248,692 and the warrant strike price was adjusted to $11.098. As a result of a 2% stock dividend paid to shareholders of record at October 3, 2011, total warrants issued was adjusted to 253,666 and the warrant strike price was adjusted to $10.88.

In June and July of 2010, the Company sold a total of 3,583,334 shares of common stock in a public offering with net proceeds of $30.4 million. In June 1010, the Company invested $10.0 million into the Bank.

97

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(17) Stockholders’ Equity: (Continued)

On September 16, 2010, and September 21, 2011, respectively, the Company declared a 2% stock dividend payable to shareholders of record on September 30, 2010 and October 3, 2011. The stock dividend was paid on October 18, 2010, and October 18, 2011, resulting in the issuance of 143,458 shares of common stock in October of 2010 and 146,485 share of common stock in October 2011. As discussed earlier, both the price and amount of all outstanding options and common stock warrants were adjusted accordingly.

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.

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 the Bank.

98

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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 and stock options outstanding are not included in the dilutive earnings per share computations because they would be anti-dilutive. Earnings per share numbers in 2010 and 2009 were adjusted to reflect a 2% stock dividend paid in 2010 and 2011.

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

	Years Ended December 31,
	2011		2010		2009
Basic earnings per share:
Weighted average common shares		7,460,294		5,620,093		3,569,969
Adjustment for stock dividend		—		112,402		144,226
Weighted average common shares		7,460,294		5,732,495		3,714,195
Weighted average common and incremental shares		7,460,294		5,732,495		3,714,195

99

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(19) Condensed Parent Company Only Financial Statements:

The following condensed balance sheets as of December 31, 2011 and 2010 and condensed statements of income and cash flows for the years ended December 31, 2011, 2010 and 2009 of the parent company only should be read in conjunction with the consolidated financial statements and the notes thereto. The parent company realized an increase in its investment in subsidiary as a result of the release of the subsidiary bank’s liquidation account.

Condensed Balance Sheets:

	2011			2010
Assets:
Cash and due from banks	$	17,602			20,724
Investment in subsidiary		111,912			101,612
Prepaid expenses and other assets		841			1,208
Total assets	$	130,355			123,544
Liabilities and equity
Liabilities
Unrealized loss on derivative	$	1,297			1,088
Dividends payable - Common		176			613
Interest payable		89			89
Subordinated debentures		10,310			10,310
Total liabilities		11,872			12,100
Equity:
Preferred stock		—			—
Common stock		79			77
Common stock warrants		556			556
Additional paid-in capital		75,967			74,920
Retained earnings		39,591			39,994
Treasury stock		(5,076	)		(5,076	)
Accumulated other comprehensive loss		7,366			973
Total equity		118,483			111,444
Total liabilities and equity	$	130,355			123,544

100

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

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

Condensed Statements of Income:

	Years Ended
	2011			2010			2009
Interest and dividend income:
Dividend income	$	—			750			—
Time deposits		—			—			2
Total interest and dividend income		—			750			2
Interest expense		742			739			625
Non-interest expenses		423			448			438
Total expenses		1,165			1,187			1,063
Loss before income tax benefit and equity in undistributed earnings of subsidiary		(1,165	)		(437	)		(1,061	)
Income tax benefits		(316	)		(342	)		(399	)
Loss before equity in undistributed earnings of subsidiary		(849	)		(95	)		(662	)
Equity in undistributed earnings of subsidiary		3,769			6,611			2,637
Net income		2,920			6,516			1,975
Preferred stock dividend and warrant accretion		(1,031	)		(1,031	)		(1,031	)
Income available to common shareholders	$	1,889			5,485			944

101

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

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

Condensed Statement of Cash Flows:

	Years Ended
	2011			2010			2009
Cash flows from operating activities
Net income	$	2,920			6,516			1,975
Adjustments to reconcile net income to net cash (used in) provided by operating activities
Equity in undistributed earnings of subsidiary		(3,769	)		(6,611	)		(2,637	)
Amortization of restricted stock		118			134			151
Increase (decrease) in:
Current income taxes payable		—			358			(361	)
Accrued expenses		438			18			(159	)
Net cash (used) provided by operating activities:		(293	)		415			(1,031	)
Cash flows for investing activities:
Investment in subsidiary		—			(10,000	)		—
Net (increase) decrease in federal funds sold		—			—			6,685
Net cash (used in) provided by investing activities		—			(10,000	)		6,685
Cash flows from financing activities:
Proceeds from sale of treasury stock		—			1,419			—
Proceeds from sale of common stock		—			28,952			—
Dividends paid on preferred stock		(920	)		(920	)		(851	)
Dividends paid on common stock		(1,909	)		(2,272	)		(1,723	)
Net cash (used in) provided by financing activities		(2,829	)		27,179			(2,574	)
Net increase (decrease) in cash		(3,122	)		17,594			3,080
Cash and due from banks at beginning of year		20,724			3,130			50
Cash and due from banks at end of year	$	17,602			20,724			3,130

102

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(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 HopFed Capital Trust 1 is as follows:

Summary Balance Sheets

	At Dec. 31, 2011		At Dec. 31, 2010
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,
	2011		2010
Income – interest income from subordinated debentures issued by HopFed Bancorp, Inc.	$	367		362
Net income	$	367		362

Summary Statements of Stockholder’s Equity

	Trust Preferred Securities		Common Stock		Retained Earnings			Total Stockholder’s Equity
Beginning balances, January 1, 2011	$	10,000		310		—			10,310
Retained earnings:
Net income		—		—		367			367
Dividends:
Trust preferred securities		—		—		(356	)		(356	)
Common dividends paid to HopFed Bancorp, Inc.		—		—		(11	)		(11	)
Total retained earnings		—		—		—			—
Ending balances, December 31, 2011	$	10,000		310		—			10,310

103

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(21) Quarterly Results of Operations: (Unaudited)

Summarized unaudited quarterly operating results for the year ended December 31, 2011:

	First Quarter			Second Quarter		Third Quarter		Fourth Quarter
December 31, 2011:
Interest and dividend income	$	11,787			11,766		11,450		11,237
Interest expense		4,989			4,763		4,592		4,071
Net interest income		6,798			7,003		6,858		7,166
Provision for loan losses		4,518			452		475		476
Net interest income after provision for loan losses		2,280			6,551		6,383		6,690
Noninterest income		2,365			2,118		3,281		2,429
Noninterest expense		7,449			7,436		7,127		6,681
Income (loss) before income taxes		(2,804	)		1,233		2,537		2,438
Income tax expense (benefit)		(960	)		426		909		109
Net income (loss)		($1,844	)		807		1,628		2,329
Net income (loss) available (attributable) to common shareholders		($2,098	)		550		1,368		2,069
Basic earnings (loss) per share		($0.28	)		0.07		0.18		0.28
Diluted earnings (loss) per share		($0.28	)		0.07		0.18		0.28
Weighted average shares outstanding:
Basic		7,465,077			7,467,438		7,481,448		7,484,420
Diluted		7,465,077			7,467,438		7,481,448		7,484,420

104

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(21) Quarterly Results of Operations: (Unaudited)

Summarized unaudited quarterly operating results for the year ended December 31, 2010:

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Interest and dividend income	$	13,106		13,656		13,196		12,459
Interest expense		5,832		5,712		5,537		5,165
Net interest income		7,274		7,944		7,659		7,294
Provision for loan losses		611		858		1,332		3,169
Net interest income after provision for loan losses		6,663		7,086		6,327		4,125
Noninterest income		2,309		2,456		3,085		3,256
Noninterest expense		6,386		6,587		6,856		6,349
Income before income taxes		2,586		2,955		2,556		1,032
Income tax expense		726		884		788		215
Net income	$	1,860		2,071		1,768		817
Net income available to common shareholders	$	1,606		1,814		1,508		557
Basic earnings per share	$	0.43		0.44		0.20		0.07
Diluted earnings per share	$	0.43		0.44		0.20		0.07
Weighted average shares outstanding:
Basic		3,722,626		4,096,619		7,416,541		7,481,662
Diluted		3,722,626		4,098,513		7,416,541		7,481,662

105

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2011, 2010 and 2009

(Table Amounts in Thousands)

(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, 2011, 2010 and 2009.

	Pre-Tax Amount			Tax Benefit (Expense)			Net of Tax Amount
December 31, 2011:
Unrealized holding gains on:
Available for sale securities	$	12,792			(4,349	)		8,443
Derivatives		(209	)		71			(138	)
Reclassification adjustments for gains on available for sale securities		(2,897	)		985			(1,912	)
	$	9,686			(3,293	)		6,393

	Pre-Tax Amount			Tax Benefit (Expense)			Net of Tax Amount
December 31, 2010:
Unrealized holding gains on:
Available for sale securities	$	653			(222	)		431
Derivatives		(444	)		151			(293	)
Reclassification adjustments for gains on available for sale securities	($	3,504	)		1,191			(2,313	)
	($	3,295	)		1,120			(2,175	)

	Pre-Tax Amount			Tax Benefit (Expense)			Net of Tax Amount
December 31, 2009:
Unrealized holding gains 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

106

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
Fort Webb LLC		99	%	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 Form

S-8 and No. 333-156652 on Form S-3 of HopFed Bancorp, Inc. and subsidiaries of our report dated March 29, 2012, relating to the consolidated balance sheets of HopFed Bancorp, Inc., and subsidiaries as of December 31, 2011 and 2010, 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, 2011, which report appears in the December 31, 2011 Annual Report on Form 10-K of HopFed Bancorp, Inc and subsidiaries.

(signed) Rayburn, Bates & Fitzgerald, P.C.

Brentwood, Tennessee

Date: March 29, 2012

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 officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c) 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

d) 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 (the registrant’s fourth fiscal quarter in the case of an Annual Report) 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 reasonably 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 29, 2012	(signed) 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 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 officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c) 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

d) 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 (the registrant’s fourth fiscal quarter in the case of an Annual Report) 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 reasonably 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 29, 2012	(signed) 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, 2011 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 results of operations of the Company.

Date: March 29, 2012

(signed) 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, 2011 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 results of operations of the Company.

Date: March 29, 2012

(signed) 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.

XML

Regulatory Matters:

12 Months Ended

Dec. 31, 2011

Regulatory Matters [Abstract]

Regulatory Matters:

(16) Regulatory Matters:

The Company is a unitary thrift holding company and, as such, is subject to regulation, examination and supervision by the Federal Reserve Bank. The Company's wholly owned bank subsidiary is a federally chartered savings and loan supervised by the Office of the Comptroller of the Currency (OCC) and the FDIC. 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, 2011, and 2010, that the Bank meets all capital adequacy requirements to which it is subject.

On April 30, 2010, the Company and the Bank, and the Office of Thrift Supervision (OTS), since merged into the OCC, signed a Memorandum of Understanding and Agreement. Included in the agreement was a requirement that the Bank maintain a Core Capital to adjusted total assets ratio of no less than 8.00% and a Total Risk Based Capital to Risk Weighted Assets ratio of no less than 12.00%. If the Bank did not meet these guidelines, the Bank would have to make a capital distribution request to the OTS (now OCC) prior to the payment of preferred stock dividends or interest payments to HopFed Capital Trust 1.

The most recent notification from the OCC 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 following table.

The Company's and the Bank's actual capital amounts and ratios as of December 31, 2011, and December 31, 2010, 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, 2011
Tangible capital to adjusted total assets	$	120,908		11.7	%	$	103,173		10.2	%	$	15,205		1.50	%		N/A		N/A
Core capital to adjusted total assets	$	120,908		11.7	%	$	103,173		10.2	%	$	40,545		4.00	%	$	50,682		5.00	%
Total capital to risk weighted assets	$	128,089		20.3	%	$	110,355		17.6	%	$	50,064		8.00	%	$	62,580		10.00	%
Tier 1 capital to risk weighted assets	$	120,908		19.1	%	$	103,172		16.5	%		N/A		N/A		$	37,548		6.00	%
As of December 31, 2010
Tangible capital to adjusted total assets	$	119,971		11.1	%	$	99,111		9.4	%	$	15,872		1.50	%		N/A		N/A
Core capital to adjusted total assets	$	119,971		11.1	%	$	99,111		9.4	%	$	42,326		4.00	%	$	52,907		5.00	%
Total capital to risk weighted assets	$	125,515		19.2	%	$	104,655		16.2	%	$	51,602		8.00	%	$	64,503		10.00	%
Tier 1 capital to risk weighted assets	$	119,971		18.4	%	$	99,111		15.4	%		N/A		N/A		$	38,702		6.00	%

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Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Cash flows from operating activities:
Net income	$ 2,920	$ 6,516	$ 1,975
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	5,921	5,970	4,199
Depreciation	1,569	1,586	1,548
Goodwill impairment			4,989
Amortization of intangible assets	291	358	650
Amortization of investment premiums and discounts, net	2,538	1,496	299
Other than temporary impairment charge on available for sale securities	155		200
Benefit for deferred income taxes	(637)	(210)	(2,809)
Compensation expense, restricted stock grants and options	118	134	151
Income from bank owned life insurance	(316)	(344)	(481)
Loss on sale or call of securities held to maturity			6
Gain on sale of securities available for sale	(2,897)	(3,504)	(2,715)
Gain on sales of loans	(720)	(590)	(271)
Loss on sale of premises and equipment	145	6	22
Proceeds from sales of loans	36,367	43,456	5,771
(Gain) loss on sale of foreclosed assets	1,703	(321)	241
Originations of loans sold	(35,647)	(42,866)	(5,500)
(Increase) decrease in:
Accrued interest receivable	487	(893)	75
Other assets	265	2,261	(5,867)
Increase (decrease) in:
Accrued expenses and other liabilities	(1,046)	(661)	(541)
Income taxes payable			716
Net cash provided by operating activities	11,216	12,394	2,658
Cash flows from investing activities
Proceeds from sales, calls and maturities of securities held to maturity			448
Proceeds from sales, calls and maturities of securities available for sale	179,795	221,875	148,883
Purchase of securities available for sale	(195,740)	(290,765)	(186,736)
Net (increase) decrease in loans	34,186	24,665	(19,857)
Purchase of Federal Home Loan Bank stock	(50)	(97)	(231)
Proceeds from sale of foreclosed assets	9,590	3,897	902
Purchase of premises and equipment	(856)	(553)	(455)
Net cash provided (used in) investing activities	26,925	(40,978)	(57,046)
Cash flows from financing activities:
Net increase (decrease) in deposits	(26,834)	32,785	81,139
Increase (decrease) in advance payments by borrowers for taxes and insurance	(86)	3	26
Advances from Federal Home Loan Bank	30,000	39,000	66,895
Repayment of advances from Federal Home Loan Bank	(48,586)	(59,560)	(94,442)
Other advances			35,395
Repayment of other advances			(35,395)
Increase (decrease) in repurchase agreements	(2,030)	9,050	7,380
Sale of common stock		28,952
Sale of treasury stock		1,419
Dividends paid on preferred stock	(920)	(920)	(851)
Dividends paid on common stock	(1,909)	(2,272)	(1,723)
Net cash provided (used) in financing activities	(50,365)	48,457	58,424
Increase (decrease) in cash and cash equivalents	(12,224)	19,873	4,036
Cash and cash equivalents, beginning of period	60,984	41,111	37,075
Cash and cash equivalents, end of period	48,760	60,984	41,111
Supplemental disclosures of cash flow information:
Interest paid	9,589	11,826	14,424
Income taxes paid	2,105	4,110	2,420
Supplemental disclosures of non-cash investing and financing activities:
Loans charged off	4,875	5,290	1,836
Foreclosures and in substance foreclosures of loans during year	3,748	11,505	1,473
Net unrealized gains (losses) on investment securities classified as available for sale	9,895	(2,851)	2,670
Increase (decrease) in deferred tax asset related to unrealized gain (losses) on investments	(3,364)	969	(908)
Dividends declared and payable	176	613	454
Issue of unearned restricted stock	$ 87	$ 92	$ 93

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Investments In Affiliated Companies:

12 Months Ended

Dec. 31, 2011

Investments In Affiliated Companies [Abstract]

Investments In Affiliated Companies:

(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 HopFed Capital Trust 1 is as follows:

Summary Balance Sheets

	At Dec. 31, 2011		At Dec. 31, 2010
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,
	2011		2010
Income – interest income from subordinated debentures issued by HopFed Bancorp, Inc.	$	367		362
Net income	$	367		362

Summary Statements of Stockholder's Equity

	Trust Preferred Securities		Common Stock		Retained Earnings			Total Stockholder's Equity
Beginning balances, January 1, 2011	$	10,000		310		—			10,310
Retained earnings:
Net income		—		—		367			367
Dividends:
Trust preferred securities		—		—		(356	)		(356	)
Common dividends paid to HopFed Bancorp, Inc.		—		—		(11	)		(11	)
Total retained earnings		—		—		—			—
Ending balances, December 31, 2011	$	10,000		310		—			10,310

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Condensed Parent Company Only Financial Statements:

12 Months Ended

Dec. 31, 2011

Condensed Parent Company Only Financial Statements [Abstract]

Condensed Parent Company Only Financial Statements:

(19) Condensed Parent Company Only Financial Statements:

The following condensed balance sheets as of December 31, 2011 and 2010 and condensed statements of income and cash flows for the years ended December 31, 2011, 2010 and 2009 of the parent company only should be read in conjunction with the consolidated financial statements and the notes thereto. The parent company realized an increase in its investment in subsidiary as a result of the release of the subsidiary bank's liquidation account.

Condensed Balance Sheets:

	2011			2010
Assets:
Cash and due from banks	$	17,602			20,724
Investment in subsidiary		111,912			101,612
Prepaid expenses and other assets		841			1,208
Total assets	$	130,355			123,544
Liabilities and equity
Liabilities
Unrealized loss on derivative	$	1,297			1,088
Dividends payable - Common		176			613
Interest payable		89			89
Subordinated debentures		10,310			10,310
Total liabilities		11,872			12,100
Equity:
Preferred stock		—			—
Common stock		79			77
Common stock warrants		556			556
Additional paid-in capital		75,967			74,920
Retained earnings		39,591			39,994
Treasury stock		(5,076	)		(5,076	)
Accumulated other comprehensive loss		7,366			973
Total equity		118,483			111,444
Total liabilities and equity	$	130,355			123,544

Condensed Statements of Income:

	Years Ended
	2011			2010			2009
Interest and dividend income:
Dividend income	$	—			750			—
Time deposits		—			—			2
Total interest and dividend income		—			750			2
Interest expense		742			739			625
Non-interest expenses		423			448			438
Total expenses		1,165			1,187			1,063
Loss before income tax benefit and equity in undistributed earnings of subsidiary		(1,165	)		(437	)		(1,061	)
Income tax benefits		(316	)		(342	)		(399	)
Loss before equity in undistributed earnings of subsidiary		(849	)		(95	)		(662	)
Equity in undistributed earnings of subsidiary		3,769			6,611			2,637
Net income		2,920			6,516			1,975
Preferred stock dividend and warrant accretion		(1,031	)		(1,031	)		(1,031	)
Income available to common shareholders	$	1,889			5,485			944

Condensed Statement of Cash Flows:

	Years Ended
	2011			2010			2009
Cash flows from operating activities
Net income	$	2,920			6,516			1,975
Adjustments to reconcile net income to net cash (used in) provided by operating activities
Equity in undistributed earnings of subsidiary		(3,769	)		(6,611	)		(2,637	)
Amortization of restricted stock		118			134			151
Increase (decrease) in:
Current income taxes payable		—			358			(361	)
Accrued expenses		438			18			(159	)
Net cash (used) provided by operating activities:		(293	)		415			(1,031	)
Cash flows for investing activities:
Investment in subsidiary		—			(10,000	)		—
Net (increase) decrease in federal funds sold		—			—			6,685
Net cash (used in) provided by investing activities		—			(10,000	)		6,685
Cash flows from financing activities:
Proceeds from sale of treasury stock		—			1,419			—
Proceeds from sale of common stock		—			28,952			—
Dividends paid on preferred stock		(920	)		(920	)		(851	)
Dividends paid on common stock		(1,909	)		(2,272	)		(1,723	)
Net cash (used in) provided by financing activities		(2,829	)		27,179			(2,574	)
Net increase (decrease) in cash		(3,122	)		17,594			3,080
Cash and due from banks at beginning of year		20,724			3,130			50
Cash and due from banks at end of year	$	17,602			20,724			3,130

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Quarterly Results Of Operations:

12 Months Ended

Dec. 31, 2011

Quarterly Results Of Operations [Abstract]

Quarterly Results Of Operations:

(21) Quarterly Results of Operations: (Unaudited)

Summarized unaudited quarterly operating results for the year ended December 31, 2011:

	First Quarter			Second Quarter		Third Quarter		Fourth Quarter
December 31, 2011:
Interest and dividend income	$	11,787			11,766		11,450		11,237
Interest expense		4,989			4,763		4,592		4,071
Net interest income		6,798			7,003		6,858		7,166
Provision for loan losses		4,518			452		475		476
Net interest income after provision for loan losses		2,280			6,551		6,383		6,690
Noninterest income		2,365			2,118		3,281		2,429
Noninterest expense		7,449			7,436		7,127		6,681
Income (loss) before income taxes		(2,804	)		1,233		2,537		2,438
Income tax expense (benefit)		(960	)		426		909		109
Net income (loss)		($1,844	)		807		1,628		2,329
Net income (loss) available (attributable) to common shareholders		($2,098	)		550		1,368		2,069
Basic earnings (loss) per share		($0.28	)		0.07		0.18		0.28
Diluted earnings (loss) per share		($0.28	)		0.07		0.18		0.28
Weighted average shares outstanding:
Basic		7,465,077			7,467,438		7,481,448		7,484,420
Diluted		7,465,077			7,467,438		7,481,448		7,484,420

(21) Quarterly Results of Operations: (Unaudited)

Summarized unaudited quarterly operating results for the year ended December 31, 2010:

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Interest and dividend income	$	13,106		13,656		13,196		12,459
Interest expense		5,832		5,712		5,537		5,165
Net interest income		7,274		7,944		7,659		7,294
Provision for loan losses		611		858		1,332		3,169
Net interest income after provision for loan losses		6,663		7,086		6,327		4,125
Noninterest income		2,309		2,456		3,085		3,256
Noninterest expense		6,386		6,587		6,856		6,349
Income before income taxes		2,586		2,955		2,556		1,032
Income tax expense		726		884		788		215
Net income	$	1,860		2,071		1,768		817
Net income available to common shareholders	$	1,606		1,814		1,508		557
Basic earnings per share	$	0.43		0.44		0.20		0.07
Diluted earnings per share	$	0.43		0.44		0.20		0.07
Weighted average shares outstanding:
Basic		3,722,626		4,096,619		7,416,541		7,481,662
Diluted		3,722,626		4,098,513		7,416,541		7,481,662

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Comprehensive Income:

12 Months Ended

Dec. 31, 2011

Comprehensive Income [Abstract]

Comprehensive Income:

(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, 2011, 2010 and 2009.

	Pre-Tax Amount			Tax Benefit (Expense)			Net of Tax Amount
December 31, 2011:
Unrealized holding gains on:
Available for sale securities	$	12,792			(4,349	)		8,443
Derivatives		(209	)		71			(138	)
Reclassification adjustments for gains on available for sale securities		(2,897	)		985			(1,912	)
	$	9,686			(3,293	)		6,393

	Pre-Tax Amount			Tax Benefit (Expense)			Net of Tax Amount
December 31, 2010:
Unrealized holding gains on:
Available for sale securities	$	653			(222	)		431
Derivatives		(444	)		151			(293	)
Reclassification adjustments for gains on available for sale securities	($	3,504	)		1,191			(2,313	)
	($	3,295	)		1,120			(2,175	)

	Pre-Tax Amount			Tax Benefit (Expense)			Net of Tax Amount
December 31, 2009:
Unrealized holding gains 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

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Consolidated Statements Of Changes In Stockholders' Equity (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Consolidated Statements Of Changes In Stockholders' Equity [Abstract]
Change in unrealized gain (losses) on securities available for sale, taxes	$ (3,364)	$ 969	$ (908)
Change in unrealized gain (losses) on derivatives, taxes	$ 71	$ 151	$ (181)
Preferred stock dividend, rate	5.00%	5.00%	5.00%
Common stock dividends per share	$ 0.2	$ 0.4	$ 0.48
Common stock issuance price per share		$ 8.55
Common stock issuance, treasury stock shares used for issuance		112,639
Common stock issuance, treasury stock average cost per share		$ 12.6

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Assets
Cash and due from banks	$ 44,389	$ 54,042
Interest-earning deposits in Federal Home Loan Bank	4,371	6,942
Cash and cash equivalents	48,760	60,984
Federal Home Loan Bank stock, at cost (note 2)	4,428	4,378
Securities available for sale (notes 2, 7 and 8)	383,782	357,738
Loans receivable, net of allowance for loan losses of $11,262 at December 31, 2011, and $9,830 at December 31, 2010 (notes 3 and 7)	556,360	600,215
Accrued interest receivable	6,183	6,670
Real estate and other assets owned (note 14)	2,267	9,812
Bank owned life insurance	9,135	8,819
Premises and equipment, net (note 4)	23,431	24,289
Deferred tax assets (note 13)	1,132	3,788
Intangible asset (note 5)	519	810
Other assets	4,823	5,088
Total assets	1,040,820	1,082,591
Liabilities and Stockholders' Equity
Non-interest-bearing accounts	79,550	69,139
Interest-bearing accounts
NOW accounts	130,114	138,936
Savings and money market accounts	70,443	63,848
Other time deposits	519,988	555,006
Total deposits	800,095	826,929
Advances from Federal Home Loan Bank (note 7)	63,319	81,905
Repurchase agreements (note 8)	43,080	45,110
Subordinated debentures (note 10)	10,310	10,310
Advances from borrowers for taxes and insurance	153	239
Dividends payable	176	613
Accrued expenses and other liabilities	5,204	6,041
Total liabilities	922,337	971,147
Stockholders' equity (note 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, 2011 and December 31, 2010
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,895,336 issued and 7,492,420 outstanding at December 31, 2011, and 7,737,879 issued and 7,334,963 outstanding at December 31, 2010	79	77
Common stock warrants	556	556
Additional paid-in-capital	75,967	74,920
Retained earnings-substantially restricted	39,591	39,994
Treasury stock (at cost, 402,916 shares at December 31, 2011 and December 31, 2010)	(5,076)	(5,076)
Accumulated other comprehensive income, net of taxes	7,366	973
Total stockholders' equity	118,483	111,444
Total liabilities and stockholders' equity	$ 1,040,820	$ 1,082,591

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Consolidated Statements Of Comprehensive Income (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Consolidated Statements Of Comprehensive Income [Abstract]
Net income	$ 2,920	$ 6,516	$ 1,975
Other comprehensive income, net of tax:
Unrealized holding gain arising during the year, net of tax effect	8,443	431	3,553
Unrealized gain (loss) on derivatives, net of tax effect	(138)	(293)	351
Reclassification adjustment for gains included in net income, net of tax effect	(1,912)	(2,313)	(1,791)
Comprehensive income	$ 9,313	$ 4,341	$ 4,088

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Income Taxes:

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes:

(13) Income Taxes:

The provision for income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 consisted of the following:

	2011			2010			2009
Current
Federal	$	1,011			2,613			2,976
State		110			210			230
		1,121			2,823			3,206
Deferred
Federal		(637	)		(210	)		(2,809	)
State		—			—			—
		(637	)		(210	)		(2,809	)
	$	484			2,613			397

Total income tax expense for the years ended December 31, 2011, 2010, and 2009 differed from the amounts computed by applying the federal income tax rate of 34 percent to income before income taxes as follows:

	2011			2010			2009
Expected federal income tax expense at statutory tax rate	$	1,157			3,104			806
Effect of nontaxable interest income		(547	)		(695	)		(444	)
Effect of nontaxable bank owned life insurance income		(107	)		(117	)		(120	)
Effect of QSCAB credit		(220	)		—			—
State taxes on income, net of federal benefit		73			139			152
Other		—			84			—
Non deductible expenses		128			98			3
Total income tax expense	$	484			2,613			397
Effective rate		14.2	%		28.6	%		16.7	%

The components of deferred taxes as of December 31, 2011, and December 31, 2010, are summarized as follows:

	2011			2010
Deferred tax assets:
Allowance for loan loss	$	3,829			3,342
Accrued expenses		679			327
Intangible amortization		1,534			1,661
		6,042			5,330
Deferred tax liabilities:
FHLB stock dividends		(787	)		(787	)
Unrealized gain on securities available for sale		(3,794	)		(501	)
Depreciation and amortization		(244	)		(213	)
Unearned loan cost and fees, net		(85	)		(41	)
		(4,910	)		(1,542	)
Net deferred tax asset	$	1,132			3,788

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, 2011 and 2010 includes approximately $4,027,000 which represents such bad debt deductions for which no deferred income taxes have been provided.

No valuation allowance for deferred tax assets was recorded at December 31, 2011 and 2010 as management believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years. There were not unrecognized tax benefits during any of the reported periods.

The Corporation files income tax returns in the U.S. federal jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2008.

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Commitments And Contingencies:

12 Months Ended

Dec. 31, 2011

Commitments And Contingencies [Abstract]

Commitments And Contingencies:

(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, 2011 and 2010 of approximately $23.4 million and $34.8 million, respectively. At December 31, 2011 and 2010, the Bank had no fixed rate loan commitments. Unused lines of credit were approximately $62.9 million and $40.8 million at December 31, 2011 and 2010, 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, 2011, future minimal lease and rental commitments were as follows:

Years Ending December 31,
2012	$	37,000
2013		28,000
2014		28,000
2015		25,000
Total	$	118,000

The Company incurred rental expenses of approximately $55,000, $62,000 and $73,000 for the years ended December 31, 2011, 2010, and 2009, 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 $210,000 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 $116,000.

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 $1,430,204 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, 2011 and December 31, 2010, the Company recognized a liability for self-insured medical expenses of $506,000 and $406,000, respectively.

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,
	2011		2010
Commitments to extend credit	$	23,422		34,808
Standby letters of credit		1,459		1,500
Unused commercial lines of credit		32,329		11,256
Unused home equity lines of credit		30,536		29,562

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 Company is subject to various claims and legal actions that have arisen in the course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on the Company's financial statements.

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Consolidated Statements Of Changes In Stockholders' Equity (USD $) In Thousands, except Share data	Common Stock [Member] USD ($)	Preferred Stock [Member]	Common Stock Warrants [Member] USD ($)	Additional Paid-In Capital [Member] USD ($)	Retained Earnings [Member] USD ($)	Treasury Stock [Member] USD ($)	Accumulated Other Comprehensive Income (Loss) [Member] USD ($)	Total USD ($)
Balance at Dec. 31, 2008	$ 41		$ 556	$ 44,193	$ 38,954	$ (6,495)	$ 1,035	$ 78,284
Balance, shares at Dec. 31, 2008	3,585,049	18,400
Net income					1,975			1,975
Restricted stock awards, shares	9,571
Net change in unrealized gains (losses) on securities available for sale, net of taxes							1,762	1,762
Net change in unrealized gain (losses) on derivatives, net of taxes							351	351
Preferred stock dividend					(851)			(851)
Common stock dividends					(1,723)			(1,723)
Compensation expense, restricted stock awards				151				151
Accretion of preferred stock discount				111	(111)
Balance at Dec. 31, 2009	41		556	44,455	38,244	(6,495)	3,148	79,949
Balance, shares at Dec. 31, 2009	3,594,620	18,400
Net income					6,516			6,516
Restricted stock awards, shares	9,751
Net change in unrealized gains (losses) on securities available for sale, net of taxes							(1,882)	(1,882)
Net change in unrealized gain (losses) on derivatives, net of taxes							(293)	(293)
Preferred stock dividend					(920)			(920)
Common stock issuance, net including treasury stock	35			28,917		1,419		30,371
Common stock issuance, net including treasury stock, shares	3,583,334
Exercise of options, net, shares	3,800
Stock dividend to common stockholders'	1			1,303	(1,304)
Stock dividend to common stockholders', shares	143,458
Cash dividend to common stockholders'					(2,431)			(2,431)
Compensation expense, restricted stock awards				134				134
Accretion of preferred stock discount				111	(111)
Balance at Dec. 31, 2010	77		556	74,920	39,994	(5,076)	973	111,444
Balance, shares at Dec. 31, 2010	7,334,963	18,400
Net income					2,920			2,920
Restricted stock awards	1			(1)
Restricted stock awards, shares	10,972
Net change in unrealized gains (losses) on securities available for sale, net of taxes							6,531	6,531
Net change in unrealized gain (losses) on derivatives, net of taxes							(138)	(138)
Preferred stock dividend					(920)			(920)
Stock dividend to common stockholders'	1			819	(820)
Stock dividend to common stockholders', shares	146,485
Cash dividend to common stockholders'					(1,472)			(1,472)
Compensation expense, restricted stock awards				118				118
Accretion of preferred stock discount				111	(111)
Balance at Dec. 31, 2011	$ 79		$ 556	$ 75,967	$ 39,591	$ (5,076)	$ 7,366	$ 118,483
Balance, shares at Dec. 31, 2011	7,492,420	18,400

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Consolidated Balance Sheets [Abstract]
Loans receivable, allowance for loan losses	$ 11,262	$ 9,830
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	500,000	500,000
Preferred stock, shares issued	18,400	18,400
Preferred stock, shares outstanding	18,400	18,400
Preferred stock liquidation preference	$ 18,400,000	$ 18,400,000
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	15,000,000	15,000,000
Common stock, shares issued	7,895,336	7,737,879
Common stock, shares outstanding	7,492,420	7,334,963
Treasury stock, shares	402,916	402,916

XML

Repurchase Agreements:

12 Months Ended

Dec. 31, 2011

Repurchase Agreements [Abstract]

Repurchase Agreements:

(8) Repurchase Agreements:

In 2006, the Company 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, 2011, the Company provided investment securities with a market value and book value of $45.9 million as collateral for repurchase agreements. The maximum repurchase balances outstanding during the twelve month periods ending December 31, 2011, and December 31, 2010, was $46.7 million and $56.9 million, respectively.

At December 31, 2011, and December 31, 2010, the respective cost and maturities of the Company's repurchase agreements are as follows:

2011 Third Party	Balance		Average Cost			Maturity		Comments
Deutsch Bank	$	10,000		4.28	%		9/05/2014		Quarterly callable
Merrill Lynch		6,000		4.36	%		9/18/2016		Quarterly callable
Various customers		27,080		0.88	%				Overnight
Total	$	43,080		2.15	%

2010 Third Party	Balance		Average Cost			Maturity		Comments
Deutsch Bank	$	10,000		4.28	%		9/05/2014		Quarterly callable
Merrill Lynch		6,000		4.36	%		9/18/2016		Quarterly callable
Various customers		29,110		0.44	%				Overnight
Total	$	45,110		1.81	%

XML

Document And Entity Information (USD $)	12 Months Ended
	Dec. 31, 2011	Mar. 25, 2012	Jun. 30, 2010
Document And Entity Information [Abstract]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2011
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2011
Entity Registrant Name	HOPFED BANCORP INC
Entity Central Index Key	0001041550
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		7,493,975
Entity Well-known Seasoned Issuer	No
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Public Float			$ 55,721,821

XML

Fair Value Measurement:

12 Months Ended

Dec. 31, 2011

Fair Value Measurement [Abstract]

Fair Value Measurement:

(9) Fair Value Measurement:

ASC Topic 820, Fair Value Measurements and Disclosures 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. Although ASC 820 provides for fair value accounting, the Company did not elect the fair value option for any financial instrument not presently required to be 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.

The fair value of bank owned life insurance is determined by reducing the annual stated dividend payments of each insurance company by the annual cost of life insurance provided. 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.

The Company determines the fair value of impaired loans and other real estate owned by obtaining an appraisal on an annual basis on all properties. Management reduces the appraised values by the estimated cost to carry and sell the properties.

Assets and Liabilities Measured on a Recurring Basis

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

December 31, 2011 Description	Total carrying value in the consolidated balance sheet at December 31, 2011		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	$	383,782		—		382,789		993
Bank owned life insurance		9,135		—		9,135		—
Liabilities
Interest rate swap		1,297		—		1,297		—

December 31, 2010 Description	Total carrying value in the consolidated balance sheet at December 31, 2010		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	$	357,738		—		356,461		1,277
Bank owned life insurance		8,819		—		8,819		—
Liabilities
Interest rate swap		1,088		—		1,088		—

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

December 31, 2011 Description	Total carrying value in the consolidated balance sheet at December 31, 2011		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	$	2,258		—		—		2,258
Other assets owned		9		—		—		9
Impaired loans, net of reserve of $4,080		45,180		—		—		45,180

December 31, 2010 Description	Total carrying value in the consolidated balance sheet at 12/31/2010		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	$	9,806		—		—		9,806
Other assets owned		6		—		—		6
Impaired loans, net of reserve of $4,286		54,325		—		—		54,325

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, 2011 and 2010, (including the change in fair value) for assets and liabilities classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify 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.

	Year ended December 31,
	2011					2010
	Other Assets			Other Liabilities		Other Assets			Other Liabilities
Fair value, December 31,	$	1,277			—	$	1,426			—
Change in unrealized gains (losses) included in other comprehensive income for assets and liabilities still held at December 31,		(284	)		—		(149	)		—
Purchases, issuances and settlements, net		—			—		—			—
Transfers in and/or out of Level 3		—			—		—			—
Fair value, December 31,	$	993			—	$	1,277			—

The estimated fair values of financial instruments were as follows at December 31, 2011:

	Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and due from banks	$	44,389		44,389
Interest-earning deposits in the Federal Home Loan Bank		4,371		4,371
Federal Home Loan Bank stock		4,428		4,428
Securities available for sale		383,782		383,782
Loans receivable		556,360		585,734
Accrued interest receivable		6,183		6,183
Bank owned life insurance		9,135		9,135
Financial liabilities:
Deposits		800,095		811,415
Advances from Federal Home Loan Bank		63,319		69,206
Repurchase agreements		43,080		44,969
Subordinated debentures		10,310		10,099
Advances from borrowers for taxes and insurance		153		153
Market value of interest rate swap		1,297		1,297
Accrued interest payable		3,907		3,907
Off-balance-sheet liabilities:
Commitments to extend credit		—		—
Commercial letters of credit		—		—

The estimated fair values of financial instruments were as follows at December 31, 2010:

	Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and due from banks	$	54,042		54,042
Interest-earning deposits in the Federal Home Loan Bank		6,942		6,942
Federal Home Loan Bank stock		4,378		4,378
Securities available for sale		357,738		357,738
Loans receivable		600,215		612,694
Accrued interest receivable		6,670		6,670
Bank owned life insurance		8,819		8,819
Financial liabilities:
Deposits		826,929		835,465
Advances from Federal Home Loan Bank		81,905		85,209
Repurchase agreements		45,110		46,273
Subordinated debentures		10,310		10,092
Advances from borrowers for taxes and insurance		239		239
Market value of interest rate swap		1,088		1,088
Accrued interest payable		5,566		5,566
Off-balance-sheet liabilities:
Commitments to extend credit		—		—
Commercial letters of credit		—		—

Non-Financial Assets and Non-Financial Liabilities:

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during the reported periods include certain foreclosed assets which, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were re-measured at fair value through a write-down included in other non-interest expense. The fair value of a foreclosed asset is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs.

The following table presents foreclosed assets that were re-measured and reported at fair value:

	2011			2010			2009
Beginning balance	$	9,812			1,883			875
Foreclosed assets measured at initial recognition:
Carrying value of foreclosed assets prior to acquisition		4,591			15,848			2,614
Charge-offs recognized in the allowance for loan loss		(843	)		(4,343	)		(704	)
Proceeds from sale of foreclosed assets		(9,590	)		(3,897	)		(902	)
Gains (losses) on REO included in non-interest expense		(1,703	)		321			—
Fair value	$	2,267			9,812			1,883

XML

Consolidated Statements Of Income (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010		Dec. 31, 2009
Interest and dividend income
Loans receivable	$ 33,493	$ 38,037		$ 38,921
Securities available for sale	10,465	11,911		12,635
Securities held to maturity				12
Non-taxable securities available for sale	2,263	2,457		1,565
Interest-earning deposits	19	12		8
Total interest and dividend income	46,240	52,417		53,141
Interest expense:
Deposits (note 6)	14,207	17,384		20,833
Advances from Federal Home loan Bank	2,557	3,292		4,070
Repurchase agreements	909	831		767
Subordinated debentures	742	739		642
Total interest expense	18,415	22,246		26,312
Net interest income	27,825	30,171		26,829
Provision for loan losses (note 3)	5,921	5,970		4,199
Net interest income after provision for loan losses	21,904	24,201		22,630
Non-interest income:
Service charges	3,813	3,922		4,222
Merchant card income	768	698		612
Mortgage origination income	720	590		271
Realized gain from sale of securities available for sale, net (note 2)	2,897	3,504		2,715
Other than temporary impairment on investments (note 2)	(155)			(200)
Income from bank owned life insurance	316	344		481
Financial services commission	894	971		983
Other operating income	940	1,077		1,141
Total non-interest income	10,193	11,106		10,225
Non-interest expenses:
Salaries and benefits (note 12)	13,266	12,762		12,240
Occupancy expense (note 4)	3,269	3,158		3,074
Data processing expense	2,645	2,807		2,595
State deposit tax	627	640		619
Intangible amortization (note 5)	291	358		650
Goodwill impairment (note 5)				4,989
Professional services	1,372	1,225		1,002
Advertising expense	1,235	1,115		1,304
Postage and communications expense	549	557		616
Supplies expense	399	404		363
Deposit insurance and examination fees	2,021	2,107		2,026
Loss on sale of assets	145
Loss (gain) on sale of real estate owned	1,703	(321)
Expenses related to real estate owned	276	264		241
Other operating expenses	895	1,102		764
Total non-interest expense	28,693	26,178		30,483
Income before income tax expense	3,404	9,129		2,372
Income tax expense (note 13)	484	2,613		397
Net income	2,920	6,516		1,975
Less: Dividend on preferred shares	920	920		920
Accretion dividend on preferred shares	111	111		111
Net income available for common shareholders	$ 1,889	$ 5,485		$ 944
Earnings per share available to common stockholders (note 18):
Basic	$ 0.25	$ 0.96		$ 0.25
Fully diluted	$ 0.25	$ 0.96		$ 0.25
Weighted average shares outstanding-basic	7,460,294	5,732,495	[1]	3,714,195	[1]
Weighted average shares outstanding-diluted	7,460,294	5,732,495	[1]	3,714,195	[1]

[1] Weighted average shares outstanding (basic and diluted) for 2009 adjusted to reflected 2% stock dividend paid to shareholders of record on September 30, 2010 and October 3, 2011. Weighted average shares outstanding (basic and diluted) for 2010 adjusted to reflected 2% stock dividend paid to shareholders of record on October 3, 2011.

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Loans Receivable, Net:

12 Months Ended

Dec. 31, 2011

Loans Receivable, Net [Abstract]

Loans Receivable, Net:

The components of loans receivable in the consolidated balance sheets as of December 31, 2011, and December 31, 2010, were as follows:

	12/31/2011		12/31/2011			12/31/2010		12/31/2010
	Amount		Percent			Amount		Percent
Real estate loans:
One-to-four family (closed end) first mortgages	$	171,192		30.2	%	$	182,671		30.0	%
Home equity lines of credit		38,694		6.8	%		40,191		6.6	%
Junior lien		6,209		1.1	%		6,196		1.0	%
Multi-family		33,739		5.9	%		29,416		4.8	%
Construction		11,931		2.1	%		23,361		3.8	%
Land		52,338		9.2	%		60,063		9.9	%
Non-residential real estate		183,485		32.3	%		195,285		32.0	%
Total mortgage loans		497,588		87.6	%		537,183		88.1	%
Consumer loans		15,110		2.7	%		18,060		3.0	%
Commercial loans		54,673		9.7	%		54,439		8.9	%
Total other loans		69,783		12.4	%		72,499		11.9	%
Total loans, gross		567,371		100.0	%		609,682		100.0	%
Deferred loan cost, net of income		251					363
Less allowance for loan losses		11,262					9,830
Total loans	$	556,360				$	600,215

The Company's loan portfolio balance has declined in each of the last two years. The decline is the result of a combination of factors, including a weak economy, both locally and nationally. In 2010 and 2011, unemployment in the Company's market area ranged from 9% to 13%. The Company's MOU with its former regulator, the OTS, restricted the Company's ability to grow its owner occupied commercial real estate loan portfolio.

The Company's loan portfolio includes a significant amount of loans secured by raw land and commercial real estate. These loans have come under increased regulatory scrutiny due to the potential for higher levels of losses. At December 31, 2011, the performance of the Company's land and commercial real estate loans has been satisfactory.

In 2010, the credit quality of the Company's multi-family loan portfolio began to experience an increase in delinquency and losses as compared to other segments of the loan portfolio due to the deployment of the more than 10,000 army personnel from the 101^st Airborne at Fort Campbell, Kentucky, to the Middle East, reducing the number of potential renters in the Company's largest market. In the first half of 2011, the deployed troops returned to Fort Campbell, thus creating a strong demand for multi-family real estate properties. This demand allowed the Company to sell a large portion of its other real estate owned.

Loans serviced for the benefit of others totaled approximately $59.2 million, $56.3 million and $42.1 million at December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, approximately $22.3 million of the $59.2 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. The servicing rights associated with these loans are not material to the Company's consolidated financial statements. 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.

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.

The Company conducts annual reviews on all loan relationships above $1.0 million to ascertain the borrowers continued ability to service their debt as agreed. In addition to the credit relationships mentioned above, management may classify any credit relationship once it becomes aware of adverse credit trends for that customer. Typically, the annual review consists of updated financial statements for borrowers and any guarantors, a review of the borrower's credit history with the Company and other creditors, and current income tax information. As a result of this review, management will classify loans based on their credit risk. Additionally, the Company provides a risk grade for all loans past due more than sixty days. The Company uses the following risk definitions for risk grades:

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

Watch loans are acceptable credits: (1) that need continual monitoring, such as out-of territory or asset-based loans (since the Company does not have an asset-based lending department), or (2) with a marginal risk level to business concerns and individuals that; (a) have exhibited favorable performance in the past, though currently experiencing negative trends; (b) are in an industry that is experiencing volatility or is declining, and their performance is less than industry norms; and (c) are experiencing unfavorable trends in their financial position, such as one-time net losses or declines in asset values. These marginal borrowers may have early warning signs of problems such as occasional overdrafts and minor delinquency.

If considered marginal, a loan would be a "watch" until financial data demonstrated improved performance or further deterioration to a "substandard" grade usually within a 12-month period. In the table on page 65, Watch loans are included with satisfactory loans and classified as Pass.

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

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

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

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

Loans by classification type and the related valuation allowance amounts at December 31, 2011, were as follows:

	Pass		Special Mention		Impaired Loans				Total		Specific Allowance for  Impairment		Allowance for Performing  loans
					Substandard		Doubtful
					(Dollars in Thousands)
December 31, 2011
One-to-four family mortgages	$	153,375		9,434		8,153		230		171,192		728		1,912
Home equity lines of credit		36,528		1,694		233		239		38,694		131		277
Junior lien		4,778		622		809		—		6,209		180		97
Multi-family		20,715		7,073		5,951		—		33,739		26		1,175
Construction		9,943		213		1,775		—		11,931		14		125
Land		17,570		24,714		9,055		999		52,338		924		408
Non-residential real estate		142,190		25,077		16,101		117		183,485		1,374		2,297
Consumer loans		14,399		268		423		20		15,110		80		182
Commercial loans		45,509		4,009		5,034		121		54,673		623		709
Total	$	445,007		73,104		47,534		1,726		567,371		4,080		7,182

Loans by classification type and the related valuation allowance amounts at December 31, 2010, were as follows:

	Pass		Special Mention		Impaired Loans				Total		Specific Allowance for  Impairment		Allowance for Performing  loans
					Substandard		Doubtful
					(Dollars in Thousands)
December 31, 2010
One-to-four family mortgages	$	165,864		8,121		8,388		298		182,671		350		747
Home equity lines of credit		39,129		499		333		230		40,191		77		135
Junior lien		5,514		495		187		—		6,196		105		41
Multi-family		26,098		—		3,017		301		29,416		178		1,844
Construction		16,164		3,292		3,702		203		23,361		108		549
Land		29,858		16,930		13,275		—		60,063		588		277
Non-residential real estate		160,995		11,089		22,780		421		195,285		2,540		1,485
Consumer loans		17,488		205		367		—		18,060		85		23
Commercial loans		47,016		2,314		5,092		17		54,439		255		443
Total	$	508,126		42,945		57,141		1,470		609,682		4,286		5,544

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2011, were as follows:

	At December 31, 2011						For the year ended December 31, 2011
Impaired loans with no recorded allowance	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
One-to-four family mortgages	$	5,144		5,300		—		5,814		220
Home equity line of credit		181		181		—		312		5
Junior lien		469		469		—		287		14
Multi-family		5,059		5,059		—		2,797		242
Construction		1,589		1,589		—		1,437		63
Land		7,513		7,513		—		10,777		446
Non-residential real estate		9,458		11,530		—		10,410		312
Consumer loans		75		75		—		92		4
Commercial loans		480		584		—		2,244		33
Total	$	29,968		32,300		—		34,170		1,339
	At December 31, 2011						For the year ended December 31, 2011
Impaired loans with recorded allowance:	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
One-to-four family mortgages	$	3,239		3,239		728		3,563		183
Home equity line of credit		291		291		131		399		13
Junior lien		340		340		180		703		16
Multi-family		892		892		26		1,962		15
Construction		186		186		14		1,222		11
Land		2,541		2,541		924		3,261		157
Non-residential real estate		6,760		6,760		1,374		10,833		360
Consumer loans		368		368		80		344		3
Commercial loans		4,675		4,675		623		2,671		27
Total	$	19,292		19,292		4,080		24,958		785
Total impaired loans	$	49,260		51,592		4,080		59,128		2,124

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2010, were as follows:

	At December 31, 2010						For the year ended December 31, 2010
Impaired loans with no recorded allowance:	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
One-to-four family mortgages	$	7,097		7,097		—		3,863		352
Home equity line of credit		419		419		—		207		15
Junior lien		—		—		—		156		10
Multi-family		1,456		1,456		—		389		31
Construction		1,238		1,238		—		1,480		38
Land		11,175		11,175		—		10,282		328
Non-residential real estate		13,194		13,194		—		10,242		808
Consumer loans		51		51		—		459		1
Commercial loans		4,576		4,576		—		1,721		73
Total	$	39,206		39,206		—		28,799		1,656

	At December 31, 2010						For the year ended December 31, 2010
Impaired loans with recorded allowance:	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
One-to-four family mortgages	$	1,589		1,589		350		1,059		88
Home equity line of credit		144		144		77		156		6
Junior lien		187		187		105		75		5
Multi-family		1,862		1,862		178		6,828		18
Construction		2,667		2,667		108		1,202		176
Land		2,100		2,100		588		573		92
Non-residential real estate		10,007		10,007		2,540		3,537		720
Consumer loans		316		316		85		613		1
Commercial loans		533		533		255		353		34
Total	$	19,405		19,405		4,286		14,396		1,140
Total impaired loans	$	58,611		58,611		4,286		43,195		2,796

The average recorded investment in impaired loans for the years ended December 31, 2011, 2010 and 2009 was $59.1 million, $43.2 million and $27.7 million, respectively. Interest income recognized on impaired loans for the years ended December 31, 2011 and December 31, 2010 was $2.1 million and $2.8 million, respectively. The following table provides a detail of the Company's activity in the allowance for loan loss account by loan type for the year ended December 31, 2011:

Year ended December 31, 2011	Balance 12/31/2010		Charge off 2011			Recovery 2011		General Provision 2011			Specific Provision 2011			Ending Balance 12/31/2011
One-to-four family mortgages	$	1,097		(758	)		139		1,687			475			2,640
Home equity line of credit		212		(123	)		—		245			74			408
Junior liens		146		(27	)		1		79			78			277
Multi-family		2,022		(89	)		—		26			(758	)		1,201
Construction		657		(353	)		—		(91	)		(74	)		139
Land		865		(308	)		30		353			392			1,332
Non-residential real estate		4,025		(2,645	)		84		1,114			1,093			3,671
Consumer loans		108		(371	)		112		425			(12	)		262
Commercial loans		698		(201	)		20		305			510			1,332
	$	9,830		(4,875	)		386		4,143			1,778			11,262

The following table provides a detail of the Company's activity in the allowance for loan loss account allocated by loan type for the year ended December 30, 2010:

Year ended December 31, 2010	Balance 12/31/2009		Charge off 2010			Recovery 2010		General Provision 2010			Specific Provision 2010			Ending Balance 12/31/2010
One-to-four family mortgages	$	1,827		(403	)		10		(418	)		81			1,097
Home equity line of credit		245		(61	)		1		9			18			212
Junior liens		137		—			5		(20	)		24			146
Multi-family		1,344		(1,605	)		85		299			1,899			2,022
Construction		514		(751	)		—		392			502			657
Land		935		(265	)		3		61			131			865
Non-residential real estate		2,295		(1,252	)		—		1,695			1,287			4,025
Consumer loans		317		(472	)		184		66			13			108
Commercial loans		1,237		(481	)		11		(39	)		(30	)		698
	$	8,851		(5,290	)		299		2,045			3,925			9,830

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 allowance for loan losses account by management 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.

Non-accrual loans totaled $6.1 million and $5.0 million at December 31, 2011, and December 31, 2010, respectively. All non-accrual loans noted below are classified as either substandard or doubtful. Interest income foregone on such loans totaled $246,000 at December 31, 2011, $243,000 at December 31, 2010 and $679,000 at December 31, 2009, respectively. 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, 2011, December 31, 2010 and December 31, 2009. For the years ended December 31, 2011, and December 31, 2010, the components of the Company's balances of non-accrual loans are as follow:

	December 31,
	2011			2010
One-to-four family (closed end) first mortgages	$	2,074			1,559
Home equity lines of credit		134			103
Junior liens Multi-family		101 —			—   301
Construction		—			1,541
Land		1,330			363
Non-residential real estate		2,231			1,043
Consumer loans		9			23
Commercial loans		254			97
Total non-performing loans	$	6,133			5,030
Non-accrual loans to total loans ratio		1.08	%		0.82	%

The table below presents past due balances at December 31, 2011, by loan classification allocated between performing and non-performing:

	Currently Performing		30 - 89 Days Past  Due		Non-accrual Loans		Special Mention		Impaired Loans Currently Performing				Total
									Substandard		Doubtful
	(Dollars in Thousands)
One-to-four family mortgages	$	153,375		628		2,074		9,163		5,722		230		171,192
Home equity line of credit		36,528		5		134		1,664		134		229		38,694
Junior liens		4,778		312		101		521		497		—		6,209
Multi-family		20,715		—		—		7,073		5,951		—		33,739
Construction		9,943		107		—		213		1,668		—		11,931
Land		17,570		237		1,330		24,714		7,488		999		52,338
Non-residential real estate		142,190		487		2,231		24,782		13,678		117		183,485
Consumer loans		14,399		28		9		268		386		20		15,110
Commercial loans		45,509		506		254		4,003		4,385		16		54,673
Total	$	445,007		2,310		6,133		72,401		39,909		1,611		567,371

The table below presents past due balances at December 31, 2010, by loan classification allocated between performing and non-performing:

	Currently Performing		30 - 89 Days Past  Due		Non-accrual Loans		Special Mention		Impaired Loans Currently Performing				Total
									Substandard		Doubful
	(Dollars in Thousands)
One-to-four family mortgages	$	162,840		3,024		1,559		8,121		7,032		95		182,671
Home equity line of credit		39,087		42		103		499		260		200		40,191
Junior liens		5,514		—		—		495		187		—		6,196
Multi-family		25,852		246		301		—		2,716		301		29,416
Construction		15,351		813		1,541		3,292		2,364		—		23,361
Land		29,270		588		363		16,930		12,912		—		60,063
Non-residential real estate		156,997		3,998		1,043		11,089		21,737		421		195,285
Consumer loans		17,351		137		23		205		344		—		18,060
Commercial loans		46,676		340		97		2,314		4,995		17		54,439
Total	$	498,938		9,188		5,030		42,945		52,547		1,034		609,682

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

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

• The restructuring constitutes a concession

• The debtor is experiencing financial difficulties

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

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

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

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

A summary of the Company's loans classified as Troubled Debt Restructuring (TDR's) that are reported as performing and non-performing at December 31, 2011 and December 31, 2010 is below:

TDR by loan type:	2011			2010
One-to-four family mortgages	$	2,521			4,013
Home equity line of credit		—			33
Junior lien		857			—
Multi-family		—			246
Construction		—			1,541
Land		941			512
Non-residential real estate		3,367			3,915
Consumer loans		33			69
Commercial loans		125			700
Total TDR	$	7,844			11,029
Less:
TDR in non-accrual status:
One-to-four family mortgages		(1,410	)		(1,181	)
Home equity line of credit		—			—
Junior lien		(100	)		—
Multi-family		—			—
Construction		—			(1,338	)
Land		—			(512	)
Non-residential real estate		(1	)		—
Consumer loans		(1	)		—
Commercial loans		(105	)		—
Total performing TDR	$	6,227			7,998

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, 2011 and December 31, 2010, were approximately $10,917,000 and $11,641,000, respectively. At December 31, 2011, funds committed that were undisbursed to officers and directors approximated $677,000.

The following summarizes activity of loans to officers and directors and their affiliates for the years ended December 31, 2011, and December 31, 2010:

	2011			2010
Balance at beginning of period	$	11,641			9,892
New loans		2,940			4,284
Principal repayments		(3,664	)		(2,535	)
Balance at end of period	$	10,917		$	11,641

XML

Securities:

12 Months Ended

Dec. 31, 2011

Securities [Abstract]

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 and their estimated fair values follow:

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Restricted:
FHLB stock	$	4,428		—		—			4,428
Available for Sale:
U.S. government and agency securities	$	171,141		3,511		(65	)		174,587
Tax free municipal bonds		60,432		4,623		—			65,055
Taxable municipal bonds		12,846		1,059		—			13,905
Trust preferred securities		2,000		—		(1,007	)		993
Mortgage-backed securities:
GNMA		30,427		1,413		(19	)		31,821
FNMA		59,195		2,101		(1	)		61,295
FHLMC		15,108		491		—			15,599
NON-AGENCY CMOs		2,012		7		(223	)		1,796
AGENCY CMOs		18,163		568		—			18,731
	$	371,324		13,773		(1,315	)		383,782

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Restricted:
FHLB stock	$	4,378		—		—			4,378
Available for Sale:
U.S. government and agency securities	$	163,365		2,921		(1,882	)		164,404
Tax free municipal bonds		64,967		481		(1,055	)		64,393
Taxable municipal bonds		17,037		105		(350	)		16,792
Trust preferred securities		2,000		—		(723	)		1,277
Mortgage-backed securities:
GNMA		30,325		873		(184	)		31,014
FNMA		27,324		1,247		(23	)		28,548
FHLMC		19,059		413		(29	)		19,443
NON-AGENCY CMOs		3,711		38		(205	)		3,544
AGENCY CMOs		27,388		1,039		(104	)		28,323
	$	355,176		7,117		(4,555	)		357,738

The scheduled maturities of debt securities available for sale at December 31, 2011, and December 31, 2010, were as follows:

2011	Amortized Cost		Estimated Fair Value
Due within one year	$	461		464
Due in one to five years		6,844		6,929
Due in five to ten years		24,471		26,153
Due after ten years		72,460		75,804
		104,236		109,350
Amortizing agency bonds		142,183		145,190
Mortgage-backed securities		124,905		129,242
Total securities available for sale	$	371,324		383,782

2010	Amortized Cost		Estimated Fair Value
Due within one year	$	778		773
Due in one to five years		6,699		6,772
Due in five to ten years		21,825		22,069
Due after ten years		88,180		86,836
		117,482		116,450
Amortizing agency bonds		129,887		130,416
Mortgage-backed securities		107,807		110,872
Total securities available for sale	$	355,176		357,738

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, 2011, 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 securities:
Agency debt securities	$	20,422		(54	)		2,007		(11	)		22,429		(65	)
Taxable municipals		—		—			—		—			—		—
Tax free municipals		—		—			—		—			—		—
Trust preferred securities		—		—			993		(1,007	)		993		(1,007	)
Mortgage-backed securities:
GNMA		1,925		(19	)		—		—			1,925		(19	)
FNMA		—		—			81		(1	)		81		(1	)
FHLMC		—		—			—		—			—		—
NON-AGENCY CMOs		—		—			1,494		(223	)		1,494		(223	)
AGENCY CMOs		—		—			—		—			—		—
Total Available for Sale	$	22,347		(73	)		4,575		(1,242	)		26,922		(1,315	)

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, 2011, the Company has nine 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 has reduced the book balance of two private label CMO's as follows:

CUSIP	Description	Current Par Value		Current Moody's Credit Rating	2011 Impairment Charge		2009 Impairment Charge		Total Impairment Charge
362290AC2	GSR 2007 TR-AR12	$	984,098	CC	$	65,500	$	180,000	$	245,500
12638PCQ0	CSMC 2007-3 4A15	$	719,907	Caa3	$	89,500	$	20,000	$	109,500

In June of 2008, the Company purchased $2 million par value of a private placement subordinated debenture issued by First Financial Services Corporation. The debenture is a thirty year security with a coupon rate of 8.00%. First Financial Services Corporation is a NASDAQ listed commercial bank holding company trading under the symbol FFKY and located in Elizabethtown, Kentucky. In October of 2010, FFKY informed the owners of its subordinated trust, including the Company, that it was deferring the dividend payments for up to five years as prescribed by the trust. FFKY has suffered significant asset quality issues that have resulted in negative earnings since 2009 and have negatively impacted FFKY's capital position.

Currently, FFKY is under a Consent Order issued jointly by the Kentucky State Department of Financial Institutions and the FDIC. The consent order requires FFKY to increase its Tier 1 Capital Ratio to 8% and its Total Risk Based Capital Ratio to 12.00%. At September 30, 2010, FFKY had not met the capital goals established by their regulators but remains "Adequately Capitalized" in accordance with FDIC guidelines.

The Company continues to monitor all quarterly reports issued by both FFKY and its bank subsidiary to determine if the investment in the subordinated trust is other than temporarily impaired. At December 31, 2011, the Company has determined, based on the suspension of the dividend, that the investment is not other than temporarily impaired and has taken a $1.0 million reduction in other comprehensive income related to the lack of current cash flow from the debenture. The Company has further determined, based on the financial trends and capital position of FFKY and its bank subsidiary, that the Company's investment in the subordinated debenture is not permanently impaired at this time.

On February 9, 2012, FFKY announced the sale of four branch offices located in Indiana to a local financial institution. At December 31, 2011, the branches held approximately $117.2 million in deposits and $35.4 million in loans. FFKY anticipates realizing a net gain of approximately $3.4 million on this transaction based on the financial information at December 31, 2011. This transaction is projected to increase the Tier 1 Capital of FFKY to 6.75% from 5.87%. The transaction is expected to close in the third quarter of 2012. The Company will continue to monitor all available public information as well as maintain a dialogue with the management team of FFKY to ascertain the future business prospects of FFKY and the Company's investment.

During 2011, the Company sold investment securities classified as available for sale for proceeds of $115.2 million resulting in gross gains of $3.2 million and gross losses of $335,000. During 2010, the Company sold investment securities classified as available for sale for proceeds of $103.8 million resulting in gross gains of $3.5 million and gross losses of $30,000. 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.

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, 2011, the Bank pledged investments with a book value of $124.2 million and a market value of approximately $133.0 million to various municipal entities as required by law. The Bank has pledged various investments with a book value of $5.8 million and a market value of $6.0 million to the Federal Home Loan Bank of Cincinnati to provide for a higher level of available borrowings. In addition, the Bank has provided $32.8 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.

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Real Estate And Other Assets Owned:

12 Months Ended

Dec. 31, 2011

Real Estate And Other Assets Owned [Abstract]

Real Estate And Other Assets Owned:

(14) Real Estate and Other Assets Owned:

The Company's real estate and other assets owned balances at December 31, 2011, and December 31, 2010, represent properties and personal collateral acquired by the Bank through customer loan defaults. 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 real estate 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, 2011, and December 31, 2010, the composition of the Company's balance in both real estate and other assets owned are as follows:

	December 31,
	2011		2010
One-to-four family mortgages	$	480		534
Multi-family		905		7,266
Construction		465		624
Land		248		482
Non-residential real estate		160		900
Consumer assets owned by bank		9		6
Total other assets owned	$	2,267		9,812

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Subordinated Debentures:

12 Months Ended

Dec. 31, 2011

Subordinated Debentures [Abstract]

Subordinated Debentures:

(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 (3.58% at December 31, 2011). These junior subordinated debentures mature in 2033, at which time the capital securities must be redeemed. The junior subordinated debentures and capital securities became redeemable 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.

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Deposits:

12 Months Ended

Dec. 31, 2011

Deposits [Abstract]

Deposits:

(6) Deposits:

At December 31, 2011, the scheduled maturities of other time deposits were as follows:

Year Ending:
2012	$	234,515
2013		126,870
2014		50,626
2015		31,407
2016 and thereafter		76,570
	$	519,988

The amount of other time deposits with a minimum denomination of $100,000 was approximately $272.5 million and $289.1 million at December 31, 2011, and December 31, 2010, respectively. At December 31, 2011, directors, members of senior management and their affiliates had deposits in the Bank of approximately $1.9 million.

Interest expense on deposits for the years ended December 31, 2011, December 31, 2010 and December 31, 2009 is summarized as follows:

	2011		2010		2009
Demand and NOW accounts	$	1,435		1,553		1,450
Money market accounts		108		113		59
Savings		114		130		120
Other time deposits		12,550		15,588		19,204
	$	14,207		17,384		20,833

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, 2011, average daily clearings were approximately $5.7 million.

At December 31, 2011, the Company had approximately $358,000 of deposit accounts in overdraft status and thus has been reclassified to loans on the accompanying consolidated balance sheet. At December 31, 2010, the Company had approximately $307,000 of deposit accounts in overdraft status and thus has been reclassified to loans on the accompanying consolidated balance sheet. At December 31, 2011, and December 31, 2010, the Company had deposits classified as brokered deposits totaling $56.3 million and $75.7 million, respectively. At December 31, 2011 and December 31, 2010, the Company had CDARS deposits totaling $2.1 million and $15.7 million, respectively.

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Premises And Equipment:

12 Months Ended

Dec. 31, 2011

Premises And Equipment [Abstract]

Premises And Equipment:

(4) Premises and Equipment:

Components of premises and equipment included in the consolidated balance sheets as of December 31, 2011 and December 31, 2010, consisted of the following:

	2011		2010
Land	$	5,560		5,560
Land improvements		558		504
Buildings		20,206		20,170
Furniture and equipment		6,765		6,257
		33,089		32,491
Less accumulated depreciation		9,658		8,202
Premises and equipment, net	$	23,431		24,289

Depreciation expense was approximately $1,569,000, $1,586,000 and $1,548,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

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Intangible Assets:

12 Months Ended

Dec. 31, 2011

Intangible Assets [Abstract]

Intangible Assets:

(5) 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.

The amount of other intangible assets and the changes in the carrying amounts of other intangible assets for the years ended December 31, 2011, December 31, 2010 and December 31, 2009:

	Core Deposits Intangible
Balance, December 31, 2008	$	1,818
Amortization		(650	)
Balance December 31, 2009		1,168
Amortization		(358	)
Balance December 31, 2010		810
Amortization		(291	)
Balance, December 31, 2011	$	519

The estimated amortization expense for intangible assets for the subsequent years at December 31, 2011, is as follows:

Year Ending	Core Deposit Intangible
2012	$	227
2013		162
2014		97
2015		33
Total	$	519

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Advances From Federal Home Loan Bank:

12 Months Ended

Dec. 31, 2011

Advances From Federal Home Loan Bank [Abstract]

Advances From Federal Home Loan Bank:

(7) Advances from Federal Home Loan Bank:

Federal Home Loan Bank advances are summarized as follows:

	December 31,
	2011					2010
Types of Advances	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Fixed-rate	$	63,319		3.64	%	$	81,905		3.75	%

Scheduled maturities of FHLB advances as of December 31, 2011 are as follows:

Years Ending December 31,	Fixed Rate		Average Cost
2012	$	5,000		1.82	%
2013		6,950		2.59	%
2014		5,728		3.16	%
2015		—		—
2016		4,000		5.34	%
Thereafter		41,641		3.93	%
Total	$	63,319		3.64	%

The Bank has an approved line of credit of $30.0 million at the FHLB of Cincinnati, 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, 2011, the Bank has immediate access to $40.1 million of credit at the FHLB. 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 $5.8 million and a market value of $6.0 million. 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, 2011.

At December 31, 2011, the Bank pledged investment securities with a book balance of $124.2 million and a market value of $133.0 million to various municipalities. In addition to the pledged securities, the Bank has issued $32.75 million in letters of credit issued by the Federal Home Loan Bank of Cincinnati as collateral for select municipality deposits.

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Employee Benefit Plans:

12 Months Ended

Dec. 31, 2011

Employee Benefit Plans [Abstract]

Employee Benefit Plans:

(12) Employee Benefit Plans:

Stock Option Plan

The following is a summary of stock options outstanding at December 31, 2011:

Exercise Price		Weighted Average Remaining Life (Years)		Outstanding Options		Options Exercisable
$	11.85		0.7		10,404		10,404
	16.77		2.4		20,808		20,808
$	15.06		1.8		31,212		31,212

The total amount of options outstanding and the exercise price of options were adjusted to reflect a 2% stock dividend paid to stockholders' of record on September 30, 2010, and October 3, 2011.

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, 2011, the Company can no longer issue options under this option plan. The remaining 31,212 options are fully vested and outstanding until their maturity date.

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. At December 31, 2011, all options having been granted under the 2000 Option Plan have been exercised.

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

	Number of Shares			Weighted Average Exercise Price
Options outstanding, December 2008		263,752		$	15.41
Granted		—			—
Exercised		—			—
Forfeited		(153,752	)		17.42
Options outstanding, December 2009		110,000			12.61
Granted		—
Exercised		(30,000	)		10.00
Forfeited		—			—
Adjusted for 2% stock dividend		1,600			—
Options outstanding, December 2010		81,600			13.32
Granted		—			—
Exercised		—			—
Forfeited		(51,000	)		12.10
Adjusted for 2% stock dividend		612			—
Options outstanding, December 2011		31,212		$	15.06

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

The fair value at the grant date of the vested options outstanding at December 31, 2011, is $138,000 for options issued under the 1999 plan.

At December 31, 2011, the strike price for all outstanding options exceeds the current trading price of the Company's common stock.

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. For the year ended December 31, 2011, the Compensation Committee granted 10,972 shares of restricted stock with a market value of $87,000. For the year ended December 31, 2010, the Compensation Committee granted 9,751 shares of restricted stock with a market value of $92,000. For the year ended December 31, 2009, the Compensation Committee granted a total of 9,571 shares with a market value of $92,600. The Company recognized $118,000, $134,000, and $151,000 in compensation expense in 2011, 2010 and 2009, respectively.

The remaining compensation expense to be recognized at December 31, 2011 is as follows:

Year Ending December 31,	Compensation Expense Approximate Future
(Dollars in thousands)
2012	$	88
2013		55
2014		27
2015		9

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, 2011, the Company has 117,957 restricted shares available from the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan that may be awarded.

Stock Options

At December 31, 2011, the Company's ability to issue additional options under the 1999 Stock Option Plan has expired. Additional stock option information at December 31, 2011, includes:

	Outstanding Options		Weighted Average Exercise Price		Weighted Average Remaining Term		Aggregate Intrinsic Value
Exercisable and outstanding, December 31, 2011		31,212	$	15.06		1.8 years	$	—

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 $532,000, $611,000, and $617,000 in 2011, 2010 and 2009, respectively. The reduction in expense related to the 401K program in 2011 was the offset of approximately $100,000 in Company contributions forfeited by employees who are no longer employed at the bank and have not met the full vesting requirements of the plan.

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 2010 and 2009 amounted to $19,000 annually. The plan is now fully funded and no additional expenses will be recognized. 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, 2011, the accrued value of all deferred compensation contacts is approximately $379,000. The Company is currently making cash remittances of approximately $29,000 per year on deferred compensation contracts.

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Stockholders' Equity:

12 Months Ended

Dec. 31, 2011

Stockholders' Equity [Abstract]

Stockholders' Equity:

(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 OCC, has regulations that impose certain restrictions on payment of dividends to the Corporation. Current regulations of the OCC allow the Bank (based upon its current capital level and supervisory status assigned by the OCC) 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. Due to the presence of a Memorandum of Understanding and Agreement between the Company and the OCC and the Federal Reserve Bank, we must seek approval from Federal Reserve Bank prior to declaring future cash common stock dividends and seek approval from the OCC prior to the payment of a cash dividend from the Bank to the Corporation.

Federal Reserve regulations also place restrictions after the conversion on the Company with respect to repurchases of its common stock. With prior notice to the Federal Reserve, the Company is allowed to repurchase its outstanding shares. In August 2006, under the supervision of the OTS, 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 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. The Company reissued 112,639 shares of Treasury Stock as part of the stock offering discussed below. At December 31, 2011, the Company holds 402,916 shares of treasury stock at an average price of $12.60 per share.

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 had an exercise price of $11.32 each and were 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. As a result of a 2% stock dividend paid to shareholders of record at September 30, 2010, total warrants issued was adjusted to 248,692 and the warrant strike price was adjusted to $11.098. As a result of a 2% stock dividend paid to shareholders of record at October 3, 2011, total warrants issued was adjusted to 253,666 and the warrant strike price was adjusted to $10.88.

In June and July of 2010, the Company sold a total of 3,583,334 shares of common stock in a public offering with net proceeds of $30.4 million. In June 1010, the Company invested $10.0 million into the Bank.

On September 16, 2010, and September 21, 2011, respectively, the Company declared a 2% stock dividend payable to shareholders of record on September 30, 2010 and October 3, 2011. The stock dividend was paid on October 18, 2010, and October 18, 2011, resulting in the issuance of 143,458 shares of common stock in October of 2010 and 146,485 share of common stock in October 2011. As discussed earlier, both the price and amount of all outstanding options and common stock warrants were adjusted accordingly.

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.

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 the Bank.

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Consolidated Statements Of Income (Parenthetical)	12 Months Ended
	Dec. 31, 2010	Dec. 31, 2009
Adjusted to reflect common stock dividend paid to shareholders	2.00%	2.00%
Adjusted to reflect common stock dividend paid to shareholders record date	Oct. 03, 2011	Sep. 30, 2010
Dividend Paid [Member]
Adjusted to reflect common stock dividend paid to shareholders record date		Oct. 03, 2011

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Summary Of Significant Accounting Policies:

12 Months Ended

Dec. 31, 2011

Summary Of Significant Accounting Policies [Abstract]

Summary Of Significant Accounting Policies:

(1) Summary of Significant Accounting Policies:

Nature of Operations and Customer Concentration

HopFed Bancorp, Inc. (the Corporation) is a bank 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).

As part of the enactment of the Dodd-Frank Financial Reform Act of 2010, the Corporation and Bank's former regulator, the Office of Thrift Supervision, was eliminated on July 21, 2011. The Bank is currently subject to comprehensive regulation, examination and supervision by the Office of Comptroller of the Currency (OCC) and the FDIC. Supervision of the Corporation is conducted by the Federal Reserve.

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.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation, the Bank and its wholly-owned subsidiaries Fall & Fall Insurance and Fort Webb, LLC. (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.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE) under accounting principles generally accepted in the United States. Voting interest entities are entities are entities in which the total equity investment is a risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decision about the entity's activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, VIE's are entities in which it has all, or at least a majority of, the voting interest. A controlling financial interest in a VIE is present when an enterprise has both the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The subsidiary Fort Webb LLC is a VIE for which the Company is not the primary beneficiary. Accordingly, its accounts are not included in the Company's consolidated financial statements.

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) "trading" (held for current resale) which are to be reported at fair value, with unrealized gains and losses included in earnings; and (ii) "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. The Company does not classify any portion of its securities portfolio as held to maturity.

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. The Company has determined that callable bonds purchased at a premium have a high likelihood of being called, and 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.

Other Than Temporary Impairment

A decline in the fair value of any available-for-sale 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.

Restricted Stock

Other securities, such as Federal Home Loan Bank (FHLB) stock are recorded at cost, as it is not actively traded and are reviewed for impairment at least annually.

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 Company 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 Company'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.

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 and loans classified as temporary debt restructured 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 may be based on the present value of future cash flows discounted at the historical effective interest rate. However, the majority of the Company's problem loans become collateral dependent at the time they are judged to be impaired. Therefore, the measurement of impaired requires the Company to obtain a new appraisal to obtain the fair value of the collateral. The appraised value is then discounted to an estimated of the Company's net realizable value, reducing the appraised value by the amount of holding and selling costs. 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 Company's recent charge off history, the Company'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 Company must be mindful of its local economy and the current loan portfolio mix.

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 division 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, 2011, the Bank maintained a servicing portfolio of one to four family real estate loans of approximately $22.3 million. For the years ended December 31, 2011, and December 31, 2010, 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.

Mortgage loans held for sale are generally delivered to secondary market investors under best efforts 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.

Real Estate and Other Assets Owned

Assets acquired through, or in lieu of, loan foreclosure or repossession 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 (no less than annually) 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.

Revenue Recognition

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, placed in non-accrual status, or payments are past due more than 90 days. Interest earned as reported as income is reversed on any loans classified as non-accrual 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.

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 was charged off.

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. On an annual basis, the Company 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.

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 sheets. 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, 2011, 2010 and 2009.

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, 2011, the cost of the Bank to terminate the cash flow hedge is approximately $1,297,000.

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 securities

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

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.

Letters of Credit

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.

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.

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.

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.

Restricted Stock

The fair value of restricted stock is recorded at cost as this is the contractual redemption amount subject to certain restrictions.

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%.

Off-Balance-Sheet Instruments

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

Dividend Restrictions

The Company is not permitted to pay a dividend to common shareholders if it fails to make a quarterly interest payment to the holders of the Company's subordinated debentures or fails 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 Comptroller of the Currency (OCC). Any restrictions imposed by the OCC would effectively limit the Company's ability to pay a dividend to its common stockholders as discussed in note 17.

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 available to common shareholders by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income available to common shareholders 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.

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. 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 for the years ended December 31, 2011, December 31, 2010, and December 31, 2009, or $0.14 per share (basic and fully diluted) for the year ended December 31, 2011, $0.18 per share (basic and fully diluted) for the year ended December 31, 2010, and $0.28 per share (basic and fully diluted) for the year ended December 31, 2009.

Stock Compensation

The implementation of ASC 718, Compensation – Stock Compensation, had no effect on the Company's net income or earnings per share for the year ended December 31, 2011, 2010 and 2009, respectively.

The Company utilized the Black-Scholes 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, 2011, the number of options outstanding and the weighted average exercise price of options have been adjusted for the 2% stock dividend paid to stockholders of record on September 30, 2010, and October 3, 2011.

Reclassifications

Certain items in prior financial statements have been reclassified to conform to the current presentation.

Effect of New Accounting Pronouncements

In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 provides enhanced disclosures related to the credit quality of financing receivables and the allowance for credit losses, and provides that new and existing disclosures should be disaggregated based on how an entity develops its allowance for credit losses and how it manages credit exposures.

Under the provisions of ASU 2010-20, additional disclosures required for financing receivables include information regarding the aging of past due receivables, credit quality indicators, and modifications of financing receivables. The provisions of ASU 2010-20 were effective for periods ending after December 15, 2010, with the exception of the amendments to the roll-forward of the allowance for credit losses which are effective for periods beginning after December 15, 2010. Comparative disclosures are required only for periods ending subsequent to initial adoption. HopFed Bancorp adopted the provisions of ASU 2010-20 and has provided the required disclosures in the consolidated financial statements provided herein.

In 2010, the FASB issued ASU 2010-11, Scope Exception Related to Embedded Credit Derivatives. ASU 2010-11 amends ASC 815 to provide clarifying language regarding when embedded credit derivative features are not considered embedded derivatives subject to potential bifurcation and separate accounting. The provisions of ASU 2010-11 are effective for periods beginning after June 15, 2010, and require re-evaluation of certain preexisting contracts to determine whether the accounting for such contracts is consistent with the amended guidance in ASU 2010-11. If the fair value option is elected for an instrument upon adoption of the amendments to ASC 815, re-evaluation of such preexisting contracts is not required. The adoption of this standard did not impact the operating results of the Company.

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

ASU 2011-01 - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 ("ASU 2011-01"). ASU 2011-01 temporarily delayed the effective date of the disclosures surrounding troubled debt restructurings in Update 2010-20 for public companies. The Financial Accounting Standards Board ("FASB") deliberated on what constitutes a troubled debt restructuring and coordinated that guidance with the effective date of the new disclosures, which are effective for interim and annual periods ending after June 15, 2011.

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

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in United States of America generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (Topic 820) – Fair Value Measurement (ASU 2011-04), to provide consistent definition of the fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 is effective for reporting periods ending after March 30, 2012, and will be applied prospectively. The Company is currently evaluating the impact of ASU 2011-04.

In September 2011, the FASB issued ASU No. 2011-8, Intangibles – Goodwill and other, regarding testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting until is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill reporting unit is more than its carrying amount, the two-step goodwill impairment test is not required. The new guidance is effective on January 1, 2012. The Company does not anticipate that the implementation of ASU 2011-8 will have a material impact on our consolidated financial statements of income, condition and cash flow.

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

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Earnings Per Share:

12 Months Ended

Dec. 31, 2011

Earnings Per Share [Abstract]

Earnings Per Share:

(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 and stock options outstanding are not included in the dilutive earnings per share computations because they would be anti-dilutive. Earnings per share numbers in 2010 and 2009 were adjusted to reflect a 2% stock dividend paid in 2010 and 2011.

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

	Years Ended December 31,
	2011		2010		2009
Basic earnings per share:
Weighted average common shares		7,460,294		5,620,093		3,569,969
Adjustment for stock dividend		—		112,402		144,226
Weighted average common shares		7,460,294		5,732,495		3,714,195
Weighted average common and incremental shares		7,460,294		5,732,495		3,714,195

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Concentrations Of Credit Risk:

12 Months Ended

Dec. 31, 2011

Concentrations Of Credit Risk [Abstract]

Concentrations Of Credit Risk:

(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 2011 and 2010, Heritage Bank chose not to transfer balances to an overnight federal funds account.

At December 31, 2011, all cash and cash equivalents are deposited with either Compass Bank, the Federal Reserve 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 second highest rating available by all rating agencies. At December 31, 2011, total FHLB deposits were approximately $4.4 million, none of which is insured by the FDIC.