(8)	FAIR VALUE OF ASSETS AND LIABILITIES

In September 2006, the FASB issued ASC 820-10, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value. The statement establishes a fair value hierarchy which requires an entity to maximize the use of observable input and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

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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.

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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.

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

The fair values of securities available for sale are determined by a matrix pricing, which is a mathematical technique that is widely used in the industry to value debt securities without exclusively using quoted prices for the individual securities in the Company’s portfolio but rather by relying on the securities relationship to other benchmark quoted securities. Impaired loans are valued at the net present value of expected payments using the fair value of any assigned collateral. The values for bank owned life insurance are obtained from stated values from the respective insurance companies. The liability associated with the Company’s derivative is obtained from a quoted value supplied by our correspondent banker. The value of real estate owned is obtained from appraisals completed on properties at the time of acquisition and annually thereafter.

Assets and Liabilities Measured on a Recurring Basis

The assets and liabilities measured at fair value on a recurring basis at March 31, 2014, are summarized below:


March 31, 2014	Total carrying value in the		Quoted Prices In Active		Significant Other		Significant
Description	consolidated balance sheet at March 31, 2014		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets

Available for sale securities	$	341,538		—		340,049		1,489

Bank owned life insurance	$	9,764		—		9,764		—

Liabilities

Interest rate swap	$	675		—		675		—

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


December 31, 2013	Total carrying value in the consolidated		Quoted Prices In Active Markets for		Significant Other Observable		Significant Unobservable
Description	balance sheet at December 31, 2013		Identical Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets
Available for sale securities	$	318,910		—		317,421		1,489
Bank owned life insurance	$	9,677		—		9,677		—

Liabilities
Interest rate swap	$	750		—		750		—

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for March 31, 2014:


March 31, 2014	Total carrying value in the consolidated		Quoted Prices In Active Markets for		Significant Other Observable		Significant Unobservable
Description	balance sheet at March 31, 2014		Identical Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
	(Dollars in Thousands)
Assets

Other real estate owned	$	1,680		—		—	$	1,680

Impaired loans, net of reserve of $2,016	$	37,029		—		—	$	37,029

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


December 31, 2013	Total carrying value in the		Quoted Prices In Active		Significant Other		Significant
Description	consolidated balance sheet at December 31, 2013		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets
Other real estate owned	$	1,674		—		—	$	1,674

Impaired loans, net of reserve of $1,929	$	40,715		—		—	$	40,715

The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the three month periods ended March 31, 2014, and March 31, 2013, (including the change in fair value) for assets and liabilities classified by HopFed Bancorp, Inc. within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify an asset or liability within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 assets and liabilities typically include, in addition to the unobservable or level 3 components, observable components (that is components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.


	2014				2013
Three month period ended March 31,	Other Assets		Other Liabilities		Other Assets		Other Liabilities
	(Dollars in Thousands)
Fair value, January 1,	$	1,489		—		1,489		—
Change in unrealized losses included in other comprehensive income for assets and liabilities still held at March 31,				—		—		—
Purchases, issuances and settlements, net		—		—		—		—
Transfers in and/or out of Level 3		—		—		—		—

Fair value, March 31,	$	1,489		—		1,489		—

The estimated fair values of financial instruments were as follows at March 31, 2014:


			Estimated Fair Value		Quoted Prices In Active Markets for Identical Assets Level 1		Using Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3

	Carrying Amount
	(Dollars in Thousands)
Financial Assets:
Cash and due from banks	$	25,449		25,449	$	25,449		—		—
Interest-earning deposits		8,730		8,730		8,730		—		—
Securities available for sale		341,538		341,538		—		340,049		1,489
Federal Home Loan Bank stock		4,428		4,428		—		4,428		—
Loans receivable		535,951		539,482		—		—		539,482
Accrued interest receivable		4,447		4,447		—		4,447		—
Bank owned life insurance		9,764		9,764		—		9,764		—
Financial liabilities:
Deposits		761,526		761,328		—		761,328		—
Advances from borrowers for taxes and insurance		572		572		—		572		—
Advances from Federal Home Loan Bank		41,280		44,865		—		44,865		—
Repurchase agreements		50,129		50,910		—		50,910		—
Subordinated debentures		10,310		10,091		—		—		10,091
Off-balance-sheet liabilities:
Commitments to extend credit		—		—		—		—		—
Commercial letters of credit		—		—		—		—		—
Market value of interest rate swap		675		675		—		675		—

The estimated fair values of financial instruments were as follows at December 31, 2013:


	Carrying Amount		Estimated Fair Value		Quoted Prices In Active Markets for Identical Assets Level 1		Using Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3



	(Dollars in Thousands)
Financial Assets:
Cash and due from banks	$	37,229		37,229	$	37,229		—		—
Interest-earning deposits		18,619		18,619		18,619		—		—
Securities available for sale		318,910		318,910		—		317,421		1,489
Federal Home Loan Bank stock		4,428		4,428		—		4,428		—
Loans receivable		543,632		546,319		—		—		546,319
Accrued interest receivable		5,233		5,233		—		5,233		—
Bank owned life insurance		9,677		9,677		—		9,677		—
Financial liabilities:
Deposits		762,997		763,605		—		763,605		—
Advances from borrowers for taxes and insurance		521		521		—		521		—
Advances from Federal Home Loan Bank		46,780		51,010		—		51,010		—
Repurchase agreements		52,759		53,712		—		53,712		—
Subordinated debentures		10,310		10,099		—		—		10,099
Off-balance-sheet liabilities:										—
Commitments to extend credit		—		—		—		—		—
Commercial letters of credit		—		—		—		—		—
Market value of interest rate swap		750		750		—		750		—