(9)	Fair Value Measurement:

In September 2006, FASB issued ASC Topic 820, Fair Value Measurements and Disclosures. ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable input and minimize the use of unobservable inputs when measuring fair value. 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.

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

Assets and Liabilities Measured on a Recurring Basis

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


December 31, 2014	Total carrying value in the consolidated		Quoted Prices In Active Markets for		Significant Other Observable		Significant Unobservable
Description	balance sheet at December 31, 2014		Identical Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets
Available for sale securities	$	303,628		—		302,139		1,489
Liabilities
Interest rate swap	$	390		—		390		—

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
Liabilities
Interest rate swap	$	750		—		750		—

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


December 31, 2014	Total carrying value in the		Quoted Prices In Active		Significant Other		Significant
Description	consolidated balance sheet at 12/31/2014		Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets
Other real estate owned	$	1,927		—		—		1,927
Impaired loans, net of allowance of $1,514	$	35,853		—		—		35,853

December 31, 2013	Total carrying value in the		Quoted Prices In Active		Significant Other		Significant
Description	consolidated balance sheet at 12/31/2013		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 allowance of $1,929	$	40,715		—		—		40,715

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, 2014 and 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 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,
	2014				2013
	Other		Other		Other		Other
	Assets		Liabilities		Assets		Liabilities
Fair value, December 31,	$	1,489		—	$	1,489		—
Change in unrealized gains (losses) included in other comprehensive income for assets and liabilities still held at December 31,		—		—		—		—
Other than temporary impairment charge		—		—		—		—
Purchases, issuances and settlements, net		—		—		—		—
Transfers in and/or out of Level 3		—		—		—		—

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

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


	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
Financial Assets:
Cash and due from banks	$	34,389		34,389	$	34,389		—		—
Interest-earning deposits		6,050		6,050		6,050		—		—
Securities available for sale		303,628		303,628		—		302,139		1,489
Federal Home Loan Bank stock		4,428		4,428		—		4,428		—
Loans held for sale		1,444		1,444		—		1,444		—
Loans receivable		539,264		537,493		—		—		537,493
Accrued interest receivable		4,576		4,576		—		4,576		—
Financial liabilities:
Deposits		731,308		714,750		—		714,750		—
Advances from borrowers for taxes and insurance		513		513		—		513		—
Advances from Federal Home Loan Bank		34,000		34,217		—		34,217		—
Repurchase agreements		57,358		57,688		—		57,688		—
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		390		390		—		390		—

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
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		—
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		—

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 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.

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


	Years Ended December 31,
	2014			2013			2012
Beginning balance	$	1,674			1,548			2,267
Foreclosed assets measured at initial recognition:
Carrying value of foreclosed assets prior to acquisition		1,816			1,535			2,634
Proceeds from sale of foreclosed assets		(1,118	)		(908	)		(2,738	)
Charge-offs recognized in the allowance for loan loss		(237	)		(361	)		(349	)
Gains (losses) on REO included in non-interest expense		(208	)		(140	)		(266	)

Fair value	$	1,927			1,674			1,548