(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.

•

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 redemption 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 June 30, 2016, are summarized below:

Description

Total carrying
value in the
consolidated
balance sheet at
June 30, 2016

Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

(Dollars in Thousands)

Assets

Available for sale securities

232,585

2,006

228,601

1,978

The assets and liabilities measured at fair value on a recurring basis at December 31, 2015, are summarized below

Description

Total carrying
value in the
consolidated
balance sheet at
December 31, 2015

Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

(Dollars in Thousands)

Assets

Available for sale securities

237,177

2,000

233,312

1,865

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for June 30, 2016:


Description	Total carrying value in the consolidated balance sheet at June 30, 2016		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Assets
Other real estate and other assets owned	$	772		—		—	$	772
Impaired loans, net of reserve of $463	$	2,036		—		—	$	2,036

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for December 31, 2015:


Description	Total carrying value in the consolidated balance sheet at December 31, 2015		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Assets
Other real estate and other assets owned	$	1,736		—		—	$	1,736
Impaired loans, net of reserve of $630	$	3,319		—		—	$	3,319

The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the six month periods ended June 30, 2016, and June 30, 2015, (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.


	2016				2015
Six month period ended June 30,	Other Assets		Other Liabilities		Other Assets		Other Liabilities
	(Dollars in Thousands)
Fair value, January 1,	$	1,865		—		1,489		—
Change in unrealized gains included in other comprehensive income for assets and liabilities still held at June 30,		97		—		306		—
Accretion of previous discounted amounts		16				8
Purchases, issuances and settlements, net		—		—		—		—
Transfers in and/or out of Level 3		—		—		—		—

Fair value, June 30,	$	1,978		—		1,803		—

The estimated fair values of financial instruments were as follows at June 30, 2016:


							Using
					Quoted Prices		Significant
					In Active Markets		Other		Significant
			Estimated		for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
	Amount		Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Financial Assets:
Cash and due from banks	$	14,826		14,826	$	14,826		—		—
Interest-earning deposits		3,545		3,545		3,545		—		—
Securities available for sale		232,585		232,585		2,006		228,601		1,978
Federal Home Loan Bank stock		4,428		4,428		—		4,428		—
Loans held for sale		1,637		1,637		—		1,637		—
Loans receivable		560,759		558,305		—		—		558,305
Accrued interest receivable		3,781		3,781		—		3,781		—
Financial liabilities:
Deposits		699,627		689,981		—		689,981		—
Advances from borrowers for taxes and insurance		1,167		1,167		—		1,167		—
Advances from Federal Home Loan Bank		11,000		11,018		—		11,018		—
Repurchase agreements		47,582		47,632		—		47,632		—
Subordinated debentures		10,310		10,099		—		—		10,099

The estimated fair values of financial instruments were as follows at December 31, 2015:


							Using
					Quoted Prices		Significant
					In Active Markets		Other		Significant
			Estimated		for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
	Amount		Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Financial Assets:
Cash and due from banks	$	46,926		46,926	$	46,926		—		—
Interest-earning deposits		7,772		7,772		7,772		—		—
Securities available for sale		237,177		237,177		2,000		233,312		1,865
Federal Home Loan Bank stock		4,428		4,428		—		4,428		—
Loans held for sale		2,792		2,792		—		2,792		—
Loans receivable		556,349		552,981		—		—		552,981
Accrued interest receivable		4,139		4,139		—		4,139		—
Financial liabilities:
Deposits		739,406		724,877		—		724,877		—
Advances from borrowers for taxes and insurance		614		614		—		614		—
Advances from Federal Home Loan Bank		15,000		14,985		—		14,985		—
Repurchase agreements		45,770		45,931		—		45,931		—
Subordinated debentures		10,310		10,099		—		—		10,099