Hopfed Bancorp (HFBC) 10-Q 2010 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

OR

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

Commission File Number:000-23667

HOPFED BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware	61-1322555
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4155 Lafayette Road, Hopkinsville, Kentucky	42240
(Address of principal executive offices)	(Zip Code)

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

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 ninety days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file or a non-accelerated filer. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act: (Check one)

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required and posted pursuant to Rule 405 of Regulation S-T (subsection 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    No  ¨

As of November 7, 2010, the Registrant had outstanding 7,334,963 shares of the Registrant’s Common Stock.

CONTENTS

HOPFED BANCORP, INC.

		PAGE
PART I.FINANCIAL INFORMATION
The unaudited consolidated condensed financial statements of the Registrant and its wholly owned subsidiaries are as follows:
Item 1.	Financial Statements
	Consolidated Condensed Statements of Financial Condition as of September 30, 2010 and December  31, 2009		2
	Consolidated Condensed Statements of Income (Loss) for the Three-Month and Nine-Month Periods Ended September 30, 2010 and September 30, 2009		4
	Consolidated Condensed Statements of Comprehensive Income for the Three-Month And Nine-Month Periods Ended September 30, 2010 and September 30, 2009		6
	Consolidated Condensed Statement of Stockholders’ Equity for the Nine-Month Period Ended September 30, 2010		7
	Consolidated Condensed Statements of Cash Flows for the Nine-Month Periods Ended September  30, 2010 and September 30, 2009		8
	Notes to Unaudited Consolidated Condensed Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44
Item 4.	Controls and Procedures		45
PART IIOTHER INFORMATION
Item 1.	Legal Proceedings		46
Item 1A.	Risk Factors		46
Item 2.	Unregistered Sales of Equity Securities		47
Item 3.	Defaults Upon Senior Securities		48
Item 4.	Removed and Reserved		48
Item 5.	Other Information		48
Item 6.	Exhibits		48
SIGNATURES			48

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition

(Dollars in Thousands)

	September 30, 2010		December 31, 2009
	(Unaudited)
Assets
Cash and due from banks	$	52,725		37,938
Interest-earning deposits in Federal Home Loan Bank		3,357		3,173
Cash and cash equivalents		56,082		41,111
Federal Home Loan Bank stock, at cost		4,378		4,281
Securities available for sale		389,063		289,691
Loans receivable, net of allowance for loan losses of $9,015 at September 30, 2010 and $8,851 at December 31, 2009		621,574		642,355
Accrued interest receivable		6,985		5,777
Real estate and other assets owned		2,646		1,883
Bank owned life insurance		8,738		8,475
Premises and equipment, net		24,612		25,328
Deferred tax assets		—		2,458
Intangible asset		892		1,168
Other assets		5,571		7,349
Total assets	$	1,120,541		1,029,876
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing accounts:	$	71,365		68,531
Interest-bearing accounts:
NOW accounts		134,391		105,821
Savings and money market accounts		64,398		60,409
Other time deposits		561,622		559,383
Total deposits		831,776		794,144
Advances from Federal Home Loan Bank		97,764		102,465
Repurchase agreements		53,467		36,060
Deferred tax liabilities		368		—
Subordinated debentures		10,310		10,310
Advances from borrowers for taxes and insurance		506		236
Dividends payable		601		454
Accrued expenses and other liabilities		6,513		6,258
Total liabilities		1,001,305		949,927

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

2

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Financial Condition, Continued

(Dollars in Thousands)

	September 30, 2010			December 31, 2009
	(Unaudited)
Stockholders’ equity
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 September 30, 2010 and December 31, 2009		—			—
Common stock, par value $.01 per share; authorized 15,000,000 shares; 7,737,879 issued and 7,334,963 outstanding at September 30, 2010; authorized 7,500,000 shares 4,253,633 issued and 3,738,078 outstanding at December 31, 2009 (a)		77			41
Common stock warrants (248,692 issued and outstanding)		556			556
Additional paid-in-capital		74,861			44,455
Retained earnings-substantially restricted		40,026			38,244
Treasury stock (at cost, 402,916 shares at September 30, 2010 and 515,555 shares at December 31, 2009)		(5,076	)		(6,495	)
Accumulated other comprehensive income, net of taxes		8,792			3,148
Total stockholders’ equity		119,236			79,949
Total liabilities and stockholders’ equity	$	1,120,541			1,029,876

(a) Shares have been restated to reflect stock dividends distributed through October 15, 2010.

The consolidated condensed statement of financial condition at December 31, 2009 has been derived from the audited financial statements of that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

3

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income (Loss)

(Dollars in Thousands)

(Unaudited)

	For the Three Month Periods Ended September 30,				For the Nine Month Periods Ended September 30,
	2010		2009		2010		2009
Interest and dividend income:
Loans receivable	$	9,396		9,898		29,027		29,238
Investment in securities, taxable		3,165		3,179		9,122		9,670
Nontaxable securities available for sale		635		428		1,809		1,090
Interest-earning deposits		—		—		—		8
Total interest and dividend income		13,196		13,505		39,958		40,006
Interest expense:
Deposits		4,313		5,237		13,405		16,037
Advances from Federal Home Loan Bank		818		1,032		2,500		3,108
Repurchase agreements		213		198		619		588
Subordinated debentures		193		168		557		446
Total interest expense		5,537		6,635		17,081		20,179
Net interest income		7,659		6,870		22,877		19,827
Provision for loan losses		1,332		1,379		2,801		3,315
Net interest income after provision for loan losses		6,327		5,491		20,076		16,512
Non-interest income:
Service charges		953		1,118		2,974		3,140
Merchant card income		180		153		519		450
Gain on sale of loans		204		69		391		189
Gain on sale of securities		1,060		114		1,786		1,581
Income from bank owned life insurance		85		73		263		220
Financial services commission		293		262		776		738
Gain on sale of other real estate owned		63		—		356		—
Other operating income		247		296		785		867
Total non-interest income		3,085		2,085		7,850		7,185

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

4

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Income (Loss), Continued

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

	For the Three Month Periods Ended September 30,					For the Nine Month Periods Ended September 30,
	2010		2009			2010		2009
Non-interest expenses:
Salaries and benefits	$	3,186		3,086			9,623		9,304
Occupancy expense		795		814			2,351		2,312
Data processing expense		705		666			2,101		1,936
State deposit tax		162		154			479		465
Intangible amortization expense		81		146			276		553
Impairment charge on goodwill		—		4,989			—		4,989
Professional services expense		335		242			932		777
Deposit insurance and examination expense		759		798			1,547		1,683
Advertising expense		262		333			774		976
Postage and communications expense		144		157			426		480
Supplies expense		95		91			287		262
Real estate owned expenses		36		12			218		96
Loss on sale of real estate		—		23			—		43
Other operating expenses		296		164			815		542
Total non-interest expense		6,856		11,675			19,829		24,418
Income before income tax expense		2,556		(4,099	)		8,097		(721	)
Income tax expense (benefit)		788		(1,484	)		2,398		(483	)
Net income (loss)		1,768		(2,615	)		5,699		(238	)
Less:
Dividend on preferred shares		232		232			688		688
Accretion dividend on preferred shares		28		28			83		83
Net income (loss) available to common stockholders	$	1,508		(2,875	)		4,928		(1,009	)
Net income (loss) available to common stockholders
Per share, basic	$	0.21		(0.79	)		0.99		(0.28	)
Per share, diluted	$	0.21		(0.79	)		0.99		(0.28	)
Cash dividend per share	$	0.08		0.12			0.32		0.36
Weighted average shares outstanding - basic (note 2)		7,271,119		3,643,150			4,988,602		3,637,144
Weighted average shares outstanding - diluted (note 2)		7,271,119		3,643,150			4,988,602		3,637,144

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

5

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Comprehensive Income

(Dollars in Thousands)

(Unaudited)

	For the Three Month Periods Ended September 30,						For the Nine Months Periods Ended September 30,
	2010			2009			2010			2009
Net income (loss)	$	1,768			(2,615	)		5,699			(238	)
Other comprehensive income, net of tax:
Unrealized gain on investment securities available for sale, net of tax effect of ($1,632) and ($2,233) for the three months ended September 30, 2010 and September 30, 2009, respectively; and ($3,777) and ($2,290) for the nine months ended September 30, 2010 and September 30, 2009, respectively.		3,169			4,335			7,332			5,266
Unrealized gain (loss) on derivatives, net of tax effect of $88 and $70 for the three month periods ending September 30, 2010 and September 30, 2009, respectively; and $262 and ($115) for the nine month periods ended September 30, 2010 and September 30, 2009, respectively.		(171	)		(136	)		(509	)		223
Reclassification adjustment for gains included in net income, net of tax effect of $361 and $39 for the three month periods ended September , 2010 and September 30, 2009, respectively; and $607 and $538 for the nine month periods ended September 30, 2010 and September 30, 2009, respectively.		(700	)		(75	)		(1,179	)		(1,043	)
Comprehensive income	$	4,066			1,509			11,343			4,208

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

6

HOPFED BANCORP, INC.

Consolidated Condensed Statement of Stockholders’ Equity

For the Nine Month Period Ended September 30, 2010

(Dollars in Thousands, Except Share Amounts)

(Unaudited)

	Shares						Common		Additional								Accumulated Other			Total
	Common Stock		Preferred Stock		Common Stock		Stock Warrants		Capital Surplus		Retained Earnings			Treasury Stock			Comprehensive Income			Stockholders Equity
Balance at December 31, 2009		3,594,620		18,400	$	41		556		44,455		38,244			(6,495	)		3,148			79,949
Restricted stock awards		9,751		—		—		—		—		—			—			—			—
Exercise of stock options, net		3,800		—		—		—		—		—			—			—			—
Common stock issuance at $9.00 / share (includes 112,639 shares of treasury stock with an average cost of $12.60 / share		3,583,334		—		35		—		28,917		—			1,419			—			30,371
Net income		—		—		—		—		—		5,699			—			—			5,699
Compensation expense, restricted stock awards		—		—		—		—		103		—			—			—			103
Net change in unrealized gain on securities available for sale, net of income taxes of ($3,170)		—		—		—		—		—		—			—			6,153			6,153
Net change in unrealized gain (loss) on derivatives, net of income taxes of $262		—		—		—		—		—		—			—			(509	)		(509	)
Stock dividend to common stockholders		143,458		—		1		—		1,303		(1,304	)		—			—			—
Dividend to preferred stockholder		—		—		—		—		—		(690	)		—			—			(690	)
Accretion of preferred stock discount		—		—		—		—		83		(83	)		—			—			—
Cash dividend to common stockholders		—		—		—		—		—		(1,840	)		—			—			(1,840	)
Balance September 30, 2010		7,334,963		18,400	$	77		556		74,861		40,026			(5,076	)		8,792			119,236

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements

7

HOPFED BANCORP, INC.

Consolidated Condensed Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

	For the Nine Month Periods
	Ended September 30,
	2010			2009
Cash flows from operating activities:
Net cash provided by operating activities	$	8,674		$	5,532
Cash flows from investing activities
Proceeds from calls and maturities of securities held to maturity		—			448
Proceeds from sales, calls and maturities of securities available for sale		145,250			99,953
Purchase of securities available for sale		(234,394	)		(150,995	)
Net (increase) decrease in loans		14,448			(23,565	)
Purchase of Federal Home Loan Bank stock		(97	)		(231	)
Proceeds from sale of foreclosed assets		2,961			344
Purchase of premises and equipment		(467	)		(326	)
Net cash used in investing activities		(72,299	)		(74,372	)
Cash flows from financing activities:
Net increase in demand deposits		35,393			11,107
Net increase in time deposits		2,239			41,269
Increase in advances from borrowers for taxes and insurance		270			232
Advances from Federal Home Loan Bank		39,000			61,895
Repayment of advances from Federal Home Loan Bank		(43,701	)		(66,600	)
Net increase in repurchase agreements		17,407			4,246
Sale of common stock		28,952			—
Sale of treasury stock		1,419			—
Dividend paid on preferred stock		(690	)		(621	)
Dividends paid		(1,693	)		(1,291	)
Net cash provided by financing activities		78,596			50,237
Increase (decrease) in cash and cash equivalents		14,971			(18,603	)
Cash and cash equivalents, beginning of period		41,111			37,075
Cash and cash equivalents, end of period	$	56,082			18,472
Supplemental disclosures of Cash Flow Information:
Interest paid	$	9,026			10,294
Income taxes paid	$	3,250			1,801
Supplemental disclosures of non-cash investing and financing activities:
Loans charged off	$	2,898			1,334
Foreclosures and in substance foreclosures of loans during period	$	3,532			1,025
Net unrealized gains on investment securities classified as available for sale	$	9,323			6,398
Decrease in deferred tax asset related to unrealized gains on investments	$	(3,170	)		(2,175	)
Dividends declared and payable	$	575			432
Issue of unearned restricted stock	$	92			10

See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

8

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

HopFed Bancorp, Inc. (the “Company”) was formed at the direction of Heritage Bank, formerly Hopkinsville Federal Savings Bank (the “Bank”), to become the holding company of the Bank upon the conversion of the Bank from a federally chartered mutual savings bank to a federally chartered stock savings bank. The conversion was consummated on February 6, 1998. The Company’s primary assets are the outstanding capital stock of the converted Bank, and its sole business is that of the converted Bank. The Bank owns 100% of the stock of Fall and Fall Insurance Agency (Fall & Fall) of Fulton, Kentucky. Fall & Fall sells life and casualty insurance to both individuals and businesses. The majority of Fall & Fall’s customer base is within the geographic footprint of the Bank.

The Bank operates a mortgage division, Heritage Mortgage Services, in Clarksville, Tennessee with agents located in several of its markets. The Bank has a financial services division, Heritage Solutions, with offices in Murray, Kentucky, Kingston Springs, Tennessee and Pleasant View, Tennessee. Heritage Solution agents travel throughout western Kentucky and middle Tennessee offering fixed and variable annuities, mutual funds and brokerage services.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for fair representation have been included. The results of operations and other data for the three and nine-month periods ended September 30, 2010, are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2010.

The accompanying unaudited financial statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The accounting policies followed by the Company are set forth in the Summary of Significant Accounting Policies in the Company’s December 31, 2009 Consolidated Financial Statements.

9

(2) INCOME PER SHARE

The following schedule reconciles the numerators and denominators of the basic and diluted income per share (“IPS”) computations for the three and nine-month periods ended September 30, 2010 and September 30, 2009. Diluted common shares arise from the potentially dilutive effect of the Company’s stock options and warrants outstanding.

	Three Month Periods Ended
	September 30, 2010		September 30, 2009
Basic IPS:
Net income (loss) available to common stockholders	$	1,508,000	$	(2,875,000	)
Average common shares outstanding (a)		7,271,119		3,643,150
Net income (loss) per share available to common stockholders, basic	$	0.21	$	(0.79	)
Diluted IPS:
Net income (loss) available to common stockholders	$	1,508,000	$	(2,875,000	)
Average common shares outstanding (a)		7,271,119		3,643,150
Dilutive effect of stock options		—		—
Average diluted shares outstanding (a)		7,271,119		3,643,150
Net income (loss) per share available to common stockholders, diluted	$	0.21	$	(0.79	)
	Nine Month Periods Ended
	September 30, 2010		September 30, 2009
Basic IPS:
Net income (loss) available to common stockholders	$	4,928,000	$	(1,009,000	)
Average common shares outstanding (a)		4,988,602		3,637,144
Net income (loss) per share available to common stockholders, basic	$	0.99	$	(0.28	)
Diluted IPS:
Net income (loss) available to common stockholders	$	4,928,000	$	(1,009,000	)
Average common shares outstanding (a)		4,988,602		3,637,144
Dilutive effect of stock options		—		—
Average diluted shares outstanding (a)		4,988,602		3,637,144
Net income (loss) per share available to common stockholders, diluted	$	0.99	$	(0.28	)

(a) Share data has been restated to reflect stock dividends distributed through October 15, 2010.

10

(3) STOCK COMPENSATION

The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of approximately $31,000 and $103,000 for the three and nine month periods ended September 30, 2010, respectively. The Company incurred compensation cost related to the HopFed Bancorp, Inc. 2004 Long Term Incentive Plan of $37,000 and $114,000 for the three and nine month periods ended September 30, 2009, respectively. The Company issued 9,751 shares of restricted stock during the nine month period ended September 30, 2010. The Company did not issue any restricted stock during the three month period ended September 30, 2010. The table below provides a detail of the Company’s future compensation expense related to restricted stock vesting at September 30, 2010:

	Future
Year Ending December 31,	Expense
2010	$	30,731
2011		104,399
2012		66,222
2013		33,433
2014		10,181
Total	$	244,966

The compensation committee may make additional awards of restricted stock, thereby increasing the future expense related to this plan. In addition, award vesting may be accelerated due to certain events as outlined in the restricted stock award agreement. Any acceleration of vesting will change the timing of, but not the aggregate amount of, compensation expense incurred.

11

(4) SECURITIES

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 September 30, 2010, the Company has 22 securities with unrealized losses. The carrying amount of securities and their estimated fair values at September 30, 2010 is as follows:

	September 30, 2010
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Restricted:
FHLB stock	$	4,378		—		—			4,378
Unrestricted:
U.S. government and agency securities:
Agency debt securities	$	170,874		6,563		(148	)		177,289
Taxable municipal bonds		16,016		596		(9	)		16,603
Tax free municipal bonds		64,929		3,682		(8	)		68,603
Trust preferred securities		2,000		—		(723	)		1,277
Mortgage-backed securities:
GNMA		36,034		1,376		(52	)		37,358
FNMA		29,909		1,718		—			31,627
FHLMC		21,737		493		(23	)		22,207
NON-AGENCY CMOs		7,027		127		(194	)		6,960
AGENCY CMOs		25,803		1,336		—			27,139
	$	374,329		15,891		(1,157	)		389,063

12

The carrying amount of securities and their estimated fair values at December 31, 2009 is as follows:

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

13

The scheduled maturities of debt securities available for sale at September 30, 2010 were as follows:

			Estimated
	Amortized		Fair
September 30, 2010	Cost		Value
	(Dollars in Thousands)
Due within one year	$	580		595
Due in one to five years		4,249		4,345
Due in five to ten years		24,760		25,612
Due after ten years		105,004		109,229
		134,593		139,781
Amortizing agency bonds		119,226		123,991
Mortgage-backed securities		120,510		125,291
Total unrestricted securities available for sale	$	374,329		389,063

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

			Estimated
	Amortized		Fair
December 31, 2009	Cost		Value
	(Dollars in Thousands)
Due within one year	$	—		—
Due in one to five years		2,827		2,850
Due in five to ten years		19,595		19,695
Due after ten years		86,639		87,350
		109,061		109,895
Amortizing agency bonds		61,502		64,414
Mortgage-backed securities		113,717		115,382
Total unrestricted securities available for sale	$	284,280		289,691

14

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of September 30, 2010 are as follows:

	Less than 12 months					12 months or longer					Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
	(Dollars in Thousands)
Available for sale
U.S. government and agency securities:
Agency debt securities	$	26,140		(148	)		—		—			26,140		(148	)
Taxable municipals		1,049		(9	)		—		—			1,049		(9	)
Tax free municipals		718		(8	)		—		—			718		(8	)
Trust preferred securities		—		—			1,277		(723	)		1,277		(723	)
Mortgage-backed securities:
GNMA		7,115		(51	)		—		—			7,115		(51	)
FNMA		122		(1	)		—		—			122		(1	)
FHLMC		5,426		(23	)		—		—			5,426		(23	)
NON-AGENCY CMOs		—		—			2,259		(194	)		2,259		(194	)
AGENCY CMOs		—		—			—		—			—		—
Total Available for Sale	$	40,570		(240	)		3,536		(917	)		44,106		(1,157	)

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2009 are as follows:

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

15

At September 30, 2010, securities with a book value of approximately $117.3 million and a market value of approximately $122.6 million were pledged to various municipalities for deposits in excess of FDIC limits as required by law. In addition, securities with a book value of $14.0 million and a market value of $15.4 million are pledged as collateral to the Federal Home Loan Bank of Cincinnati. The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Bank’s name totaling $31.5 million secured by the Bank’s loan portfolio to secure additional municipal deposits.

At September 30, 2010, securities with a book and market value of approximately $37.5 million were sold under agreements to repurchase from various customers. Furthermore, the Company has two wholesale repurchase agreements with third parties secured by investments with a combined book value of $18.1 million and a market value of $19.1 million. One repurchase agreement is in the amount of $6.0 million and has a maturity of September 18, 2016 and is currently callable on a quarterly basis and has a fixed rate of interest of 4.36%. The second repurchase agreement, in the amount of $10.0 million, has a maturity of September 5, 2014, is currently callable quarterly and has a fixed rate of interest of 4.28%.

16

(5) LOANS

Set forth below is selected data relating to the composition of the loan portfolio by type of loan at September 30, 2010, and December 31, 2009. At September 30, 2010 and December 31, 2009, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

	09/30/10			09/30/10			12/31/09			12/31/09
	Balance			Percent			Balance			Percent
	(Dollars in Thousands, Except Percentages)
Real estate loans:
One-to-four family (closed end) first mortgages	$	185,936			29.5	%	$	195,665			30.0	%
Second mortgages (closed end)		7,409			1.2	%		7,616			1.2	%
Home equity lines of credit		40,383			6.4	%		37,542			5.8	%
Multi-family		42,073			6.7	%		46,325			7.1	%
Construction		23,291			3.7	%		33,216			5.1	%
Commercial real estate		260,270			41.3	%		254,067			39.0	%
Total mortgage loans		559,362			88.8	%		574,431			88.2	%
Loans secured by deposits		3,931			0.6	%		4,075			0.6	%
Other consumer loans		15,082			2.4	%		17,908			2.8	%
Commercial loans		51,905			8.2	%		54,531			8.4	%
Total other loans		70,918			11.2	%		76,514			11.8	%
Total loans, gross		630,280			100.0	%		650,945			100.0	%
Deferred loan cost, net of income		309						261
Less allowance for loan losses		(9,015	)					(8,851	)
Total loans	$	621,574					$	642,355

17

The Bank assigns an industry standard NAICS code to each loan in the Bank’s portfolio. By assigning a standard code to each type of loan, management can more readily determine concentrations in risk by industry, location and loan type. This information is most useful when analyzing the Bank’s commercial real estate loan portfolio. At September 30, 2010, and December 31, 2009, the Bank’s commercial real estate portfolio was made up of the following loan types:

	Balance		Balance
	09/30/10		12/31/09
	(Dollars in Thousands)
Land & development	$	60,931		64,519
Construction		5,246		8,406
Manufacturing		5,423		3,884
Professional, Technical		2,479		3,495
Retail Trade		13,576		14,902
Other Services		20,586		18,461
Finance & Insurance		149		196
Agricultural, Forestry, Fishing & Hunting		37,232		34,007
Real Estate and Rental and Leasing		49,432		42,662
Wholesale Trade		13,019		8,805
Arts, Entertainment & Recreation		5,940		6,368
Accommodations / Food Service		26,796		23,442
Healthcare and Social Assistance		10,629		11,149
Educational Services		39		453
Transportation & Warehousing		1,753		1,825
Information		3,155		3,379
Public Administration		58		30
Non-industry		361		4,145
Admin Support / Waste Mgmt		3,466		3,939
Total	$	260,270		254,067

The allowance for loan losses totaled $9.0 million at September 30, 2010, $8.9 million at December 31, 2009, and $8.4 million at September 30, 2009. The ratio of the allowance for loan losses to total loans was 1.43% at September 30, 2010, 1.36% at December 31, 2009 and 1.28% at September 30, 2009. The following table indicates the type and level of non-performing loans at the periods indicated below:

	9/30/2010			12/31/2009			9/30/2009
	(Dollars in Thousands)
One-to-four family	$	1,953			1,399			1,392
Home equity lines of credit		6			—			41
Multi-family		8,414			4,851			1,165
Construction		—			572			179
Land		296			3,503			4,179
Non-residential real estate		1,272			490			272
Consumer loans		9			27			43
Commercial loans		—			367			—
Total non-performing loans	$	11,950			11,209			7,271
Non-performing loans to total loans ratio		1.90	%		1.72	%		1.12	%

18

The Bank does not originate loans it considers sub-prime and is not aware of any exposure to the additional credit concerns associated with sub-prime lending in either the Company’s loan or investment portfolios. The Company does have a significant amount of construction and land development loans. Management reports to the Company’s Board of Directors on the status of the Company’s specific construction and development loans as well as the market trends in those markets in which the Company actively participates.

The Company’s annualized net charge off ratios for the nine-month periods ended September 30, 2010, September 30, 2009, and the year ended December 31, 2009, was 0.55%, 0.21% and 0.23%, respectively. The ratios of allowance for loan losses to non-performing loans at September 30, 2010, September 30, 2009, and December 31, 2009, were 75.4%, 115.1% and 79.0%, respectively. The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods ended:

	Nine Months Ended						Year Ended
	09/30/10			09/30/09			12/31/09
	(Dollars in Thousands)
Beginning balance, allowance for loan loss	$	8,851		$	6,133		$	6,133
Loans charged off:
Commercial loans		(2,271	)		(412	)		(412	)
Consumer loans and overdrafts		(342	)		(476	)		(661	)
Residential loans		(284	)		(446	)		(763	)
Total charge offs		(2,897	)		(1,334	)		(1,836	)
Recoveries
Commercial loans		104			43			44
Consumer loans and overdrafts		146			213			251
Residential loans		10			59			60
Total recoveries		260			315			355
Net charge offs		(2,637	)		(1,019	)		(1,481	)
Provision for loan loss		2,801			3,315			4,199
Ending balance	$	9,015		$	8,429		$	8,851
Ratio of net charge offs to average outstanding loans during the period		0.55	%		0.21	%		0.23	%

The determination of the allowance for loan losses is based on management’s analysis, performed on a quarterly basis. Various factors are considered, including the market value of the underlying collateral, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical loss experience, delinquency trends and prevailing economic conditions. Although management believes its allowance for loan losses is adequate, there can be no assurance that additional allowances will not be required or that losses on loans will not be incurred.

19

A loan is considered to be impaired when management determines that it is possible 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. At September 30, 2010, December 31, 2009 and September 30, 2009 the Company’s impaired loans totaled $39.2 million, $35.5 million and $30.5 million, respectively. At September 30, 2010, December 31, 2009, and September 30, 2009, the Company’s reserve for impaired loans totaled $3.1 million, $2.5 million and $1.5 million, respectively.

A summary of the Company’s impaired loans, including their respective regulatory classification and their respective specific reserve at September 30, 2010, is summarized below:

							Specific
September 30, 2010	Substandard		Doubtful		Total		Loss Reserve
	(Table in thousands)
One-to-four family first mortgages	$	5,356		458		5,814		338
One-to-four family second mortgages		143		—		143		—
Home equity lines of credit		212		161		373		35
Multi-family		8,293		—		8,293		2,010
Construction		1,338		303		1,641		50
Land		9,137		—		9,137		8
Non-residential real estate		11,456		581		12,037		205
Consumer loans		805		—		805		197
Commercial loans		948		18		966		213
Total at September 30, 2010	$	37,688		1,521		39,209		3,056

A summary of the Company’s impaired loans and their respective reserve at December 31, 2009, is summarized below:

December 31, 2009	Substandard		Doubtful		Total		Loss Reserve
	(Table in Thousands)
One-to-four family first mortgages	$	3,825		37		3,862		365
Home equity lines of credit		165		—		165		—
Multi-family		10,038		39		10,077		1004
Construction		1,850		—		1,850		217
Land		6,067		24		6,091		178
Non-residential real estate		7,837		75		7,912		323
Consumer loans		78		—		78		23
Commercial loans		5,119		380		5,499		402
Total at December 31, 2009	$	34,979		555		35,534		2,512

20

On a periodic basis, Heritage Bank may chose to modify the terms of certain loans. These modifications may originate from a borrower who is having a difficult time meeting their financial obligations. The Bank may chose to temporarily or permanently modify the terms of the loan to assist the borrower and avoid foreclosure. The Bank’s decision to modify lending terms is dependent on whether we deem the customer’s financial situation correctable, the likelihood that the loan’s collateral may decline in value and/or its condition may deteriorate during the term of the modification and that the modification is likely to assist both the customer and Bank avoid future collection issues, including foreclosure:

A summary of the Company’s loans classified as Troubled Debt Restructurings (TDR’s) that are reported as performing at September 30, 2010, and December 31, 2009, is below:

	9/30/2010		12/31/2009
	(Dollars in Thousands)
One-to-four family first mortgages	$	2,753		656
Home equity lines of credit		126		94
Multi-family		247		4,908
Construction		1,641		1,077
Land		512		—
Non-residential real estate		3,450		1,062
Consumer loans		56		10
Commercial loans		1,065		15
Total performing TDR’s	$	9,850		7,822

21

(6) OTHER REAL ESTATE OWNED

The Company’s other real estate and other assets owned represent properties and personal collateral acquired through customer loan defaults. The property is recorded at the lower of cost or fair value less estimated cost of to sell and carrying cost at the date acquired. Any difference between the book value and estimated market value is recognized as a charge off through the allowance for loan loss account. Additional other real estate owned 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.

At September 30, 2010, December 31, 2009, and September 30, 2009, the Company had balances in other real estate and other assets owned consisting of the following:

	September 30, 2010			December 31, 2009			September 30, 2009
	(Dollars in Thousands)
One-to-four family mortgages	$	326			438			210
Multi-family		575			425			425
Construction		702			468			—
Land		565			225			323
Non-residential real estate		470			312			508
Consumer assets owned by bank		8			15			—
Commercial loans		—			—			—
Total other real estate and assets owned		2,646			1,883			1,466
Total non-performing loans		11,950			11,209			7,271
Total non-performing assets	$	14,596			13,092			8,737
Non-performing asset / Total assets		1.30	%		1.27	%		0.86	%

At September 30, 2010, the Company has held no properties in other real estate and other assets owned for more than nine months.

22

(7) INVESTMENTS IN AFFILIATED COMPANIES

Investments in affiliated companies accounted for under the equity method consist of 100% of the common stock of HopFed Capital Trust 1 (“Trust”), a wholly-owned statutory business trust. The Trust was formed on September 25, 2003. Summary financial information for the Trust follows (dollars in thousands):

Summary Statements of Financial Condition

	At September 30, 2010		At December 31, 2009
Asset - investment in subordinated debentures issued by Hopfed Bancorp, Inc.	$	10,310	$	10,310
Liabilities		—		—
Stockholder’s equity – trust preferred securities		10,000		10,000
Common stock (100% Owned by HopFed Bancorp, Inc.)		310		310
Total stockholders’ equity	$	10,310	$	10,310

Summary Income Statements

	Three Month Periods Ended  September 30,				Nine Month Periods Ended September 30,
	2010		2009		2010		2009
Income – interest income from subordinated debentures issued by HopFed Bancorp, Inc.	$	98	$	95	$	270	$	313
Net income	$	98	$	95	$	270	$	313

Summary Statement of Stockholders’ Equity

	Trust							Total
	Preferred		Common		Retained			Stockholders’
	Securities		Stock		Earnings			Equity
Beginning balances, December 31, 2009	$	10,000		310		—			10,310
Net income		—		—		270			270
Dividends:
Trust preferred securities		—		—		(262	)		(262	)
Common paid to HopFed Bancorp, Inc.		—		—		(8	)		(8	)
Ending balances, September 30, 2010	$	10,000		310		—			10,310

23

(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 was effective for fiscal years beginning after November 15, 2007. 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.

• 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 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 on 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.

24

Assets and Liabilities Measured on a Recurring Basis

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

	Total carrying value		Quoted Prices		Significant
September 30, 2010	in the consolidated		In Active		Other		Significant
	condensed Statement of		Markets for		Observable		Unobservable
	Financial Position at		Identical Assets		Inputs		Inputs
Description	September 30, 2010		(Level 1)		(Level 2)		(Level 3)
Assets
Available for sale securities	$	389,063		—		387,786	$	1,277
Bank owned life insurance		8,738		—		8,738		—
Liabilities
Interest rate swap		1,414		—		1,414		—
	Total carrying value		Quoted Prices		Significant
	in the consolidated		In Active		Other		Significant
December 31, 2009	condensed Statement of		Markets for		Observable		Unobservable
	Financial Position at		Identical Assets		Inputs		Inputs
Description	December 31, 2009		(Level 1)		(Level 2)		(Level 3)
Assets
Available for sale securities	$	289,691		—		288,265	$	1,426
Bank owned life insurance		8,475		—		8,475		—
Liabilities
Interest rate swap		643		—		643		—

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for September 30, 2010:

			Quoted Prices		Significant
September 30, 2010	Total carrying value in		In Active		Other		Significant
	the consolidated condensed		Markets for		Observable		Unobservable
	Statement of Financial Condition		Identical Assets		Inputs		Inputs
Description	at September 30, 2010		(Level 1)		(Level 2)		(Level 3)
Assets
Other real estate owned	$	2,638		—		—	$	2,638
Other assets owned		8		—		—		8
Impaired loans, net of reserve of $3,056		36,153		—		—		36,153

25

The assets and liabilities measured at fair value on a non-recurring basis are summarized below for December 31, 2009:

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

The table below includes a roll-forward of the consolidated condensed statement of financial condition items for the nine-month periods ended September 30, 2010 and September 30, 2009, (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.

	2010					2009
Nine month period ended September 30,	Other Assets			Other Liabilities		Other Assets		Other Liabilities
	(Dollars in Thousands)
Fair value, January 1,	$	1,426			—	$	1,623		—
Change in unrealized gains (losses) included in other comprehensive income for assets and liabilities still held at September 30,		(149	)		—		31		—
Purchases, issuances and settlements, net		—			—		—		—
Transfers in and/or out of Level 3		—			—		—		—
Fair value, September 30,	$	1,277			—	$	1,654		—

26

The estimated fair values of financial instruments were as follows at September 30, 2010:

	Carrying Amount		Estimated Fair Value
Financial assets:
Cash and due from banks	$	52,725		52,725
Interest-earning deposits in Federal Home Loan Bank		3,357		3,357
Securities available for sale		389,063		389,063
Federal Home Loan Bank stock		4,378		4,378
Loans receivable		621,574		638,769
Accrued interest receivable		6,985		6,985
Bank owned life insurance		8,738		8,738
Financial liabilities:
Deposits		831,776		841,488
Advances from borrowers for taxes and insurance		506		506
Advances from Federal Home Loan Bank		97,764		103,565
Repurchase agreements		53,467		55,318
Subordinated debentures		10,310		10,067
Market value of interest rate swap		1,414		1,414
Off-balance-sheet liabilities:
Commitments to extend credit		—		—
Commercial letters of credit		—		—

27

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

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

(9) ISSUANCE OF PREFERRED SHARES

On December 12, 2008, HopFed Bancorp issued and sold 18,400 shares of preferred stock to the United States Treasury (Treasury) for $18,400,000 pursuant to the Capital Purchase Program. The Company also issued 243,816 common stock warrants to the Treasury as a condition to its participation in the Capital Purchase Program. The warrants have an exercise price of $11.32 each and are immediately exercisable. The warrants expire in 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.

On September 22, 2010, the Board of Directors declared a 2% common stock dividend to be paid to shareholders of record on September 30, 2010. As a result of the common stock dividend, total shares outstanding increased by 143,458. In addition, the Company is obligated to adjust the number and strike price of warrants issued to the United States Treasury under the Capital Purchase Program. The new warrant balance is 248,692.32 shares and the new strike price is $11.098.

28

(10) STOCK OPTIONS

At September 30, 2010, all stock options outstanding were issued under the Hopfed Bancorp, Inc. 1999 Stock Option Plan. At September 30, 2010, the Company can no longer issue options under this plan. The remaining 80,000 options are fully vested and outstanding until their maturity date. At September 30, 2010, the strike price of all options exceed the current market price of HopFed Bancorp, Inc. stock.

The following is a summary of stock options outstanding at September 30, 2010:

Exercise Price		Average Remaining Life (Years)			Outstanding Options		Options Exercisable
$	12.08		1.9			10,200		10,200
	12.08		0.7			51,000		51,000
	16.99		3.7	��		20,400		20,400
$	13.31		1.6			81,600		81,600

On February 26, 2010, a total 30,000 fully vested stock options under the 2000 Stock Option Plan were exercised at a price of $11.45 per share by CEO John Peck. Mr. Peck chose to complete a cashless exercise, receiving 3,800 shares of the Company’s common stock in exchange for his options.

(11) DERIVATIVE INSTRUMENTS

Under guidelines of FASB ASC 815, Derivative and Hedging Activities, as amended, all derivative instruments are required to be carried at fair value on the consolidated statement of financial position. 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 statement of financial position with corresponding offsets recorded in the consolidated statement of financial position.

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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 nine-month period ended September 30, 2010 or the year ended December 31, 2009.

In October of 2008, the Bank entered into an interest rate swap agreement for a term of seven years and an amount of $10 million. The Bank will pay a fixed rate of 7.27% for seven years and receive an amount equal to the three-month London Interbank Lending Rate (LIBOR) plus 3.10%. The interest rate swap is classified as a cash flow hedge by the Bank and will be tested quarterly for effectiveness. At December 31, 2009 and September 30, 2010, the cost of the Bank to terminate the cash flow hedge was approximately $643,000 and $1,414,000, respectively.

(12) REGULATORY AGREEMENT

On April 30, 2010, the Company and its wholly owned subsidiary, Heritage Bank, each entered into an informal Memorandum of Understanding “MOU” with its primary regulator, the Office of Thrift Supervision (“OTS”). The agreement requires the Company to obtain prior written approval prior to the declaration of a common stock dividend or to receiving a cash dividend from its Bank subsidiary. The Company may continue to pay other normal operating expenses, and may pay interest on HopFed Capital Trust 1 and dividends on preferred stock held by the United States Department of Treasury without regulatory approval if the Bank maintains a Tier 1 Capital Ratio of 8.00% and a Total Risk Based Capital Ratio of 12.00%. At September 30, 2010, the Bank’s Tier 1 Ratio was 9.07% and its Total Risk Based Capital was 15.87%.

Under the Bank MOU, among other things, the Bank has agreed to the following: (1) the Bank will not declare or pay any dividends or make other capital distributions, or commit to pay dividends or make other capital distributions, without prior OTS approval; (2) the Bank will adopt a concentration risk reduction plan to reduce the outstanding balance of commercial real estate loans relative to core capital and the allowance for loan losses; and (3) the Bank will not increase brokered deposits without prior OTS approval.

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In addition, the MOUs identify actions, policies and procedures to be taken and adopted by the Board of Directors and management of the Company and the Bank, as appropriate, to ensure maintenance of adequate liquidity, monitor and report compliance with the MOUs and certain applicable regulations, reduce the level of classified assets, and correct certain deficiencies and weaknesses identified by the OTS. The MOUs will remain in effect until modified or terminated by the OTS. The Company and the Bank do not expect the actions and limitations required by the MOUs to change their business strategy in any material respect.

The Board of Directors and management of each of the Company and the Bank have taken various actions to comply with the terms and conditions of the MOUs, and will continue to take all actions believed to be necessary for compliance. The Board and management will continue to work closely with the OTS in order to comply with the terms and conditions of the MOUs and are committed to addressing and resolving any and all issues presented in the MOUs.

(13) PUBLIC OFFERING OF COMMON STOCK

On June 16, 2010, the Company entered into an underwriting agreement with Howe Barnes Hoefer & Arnett as sole underwriter for the sale of 3,333,334 shares of its common stock, par value $0.01 per share in a public offering. In addition, pursuant to the Underwriting Agreement, the Company granted the underwriters an option to purchase up to 500,000 additional shares of Common Stock. The public offering price was $9.00 per share. The net proceeds of the public offering, after underwriting discounts and commissions, were approximately $28.2 million. The public offering closed on June 23, 2010.

On July 16, 2010, Howe Barnes Hoefer & Arnett elected to exercise its over-allotment option and purchased an additional 250,000 shares of the Company’s common stock. The Company received net proceeds of approximately $2,137,500 from the sale of the additional 250,000 shares.

(14) SUBSEQUENT EVENT

On November 2, 2010, First Financial Service Corporation (FFKY) filed an 8-K disclosing its intent to defer regularly scheduled interest payments on its junior subordinated notes. Heritage Bank, the wholly owned subsidiary of HopFed Bancorp, Inc., owns $2 million of FFKY junior subordinated notes. FFKY may defer interest payments for up to 20 consecutive quarterly periods without default or penalty. At September 30, 2010, the Company’s net interest income included approximately $6,664 in accrued interest income that will not be collected as anticipated. The amount of uncollected interest recorded at September 30, 2010, is not material to the Company’s results of operations. On November 3, 2010, the Company reversed all previously accrued but unpaid interest and will discontinue the accrual of interest on the notes until further notice.

The Company has completed an initial credit review of FFKY. This review included review of all publically available regulatory filings for both FFKY and its bank subsidiary, First Financial of Kentucky. At this time, it is management’s opinion that the Company’s investment in FFKY junior subordinated notes is not materially impaired. The Company will continue to monitor all available information concerning the financial condition of FFKY.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The consolidated condensed financial statements as of September 30, 2010, and December 31, 2009, and for the three and nine-month periods ended September 30, 2010, and September 30, 2009, included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereon included in the Company’s 2009 Annual Report to Stockholders on Form 10-K.

Certain of the Company’s accounting policies are important to the presentation of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances, which could affect these material judgments, include, but are not limited to, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities and other financial instruments and assessing other than temporary impairments of securities.

Comparison of Financial Condition at September 30, 2010 and December 31, 2009

Total assets increased from $1.03 billion at December 31, 2009 to $1.12 billion at September 30, 2010. Securities available for sale increased from $289.7 million at December 31, 2009 to $389.1 million at September 30, 2010. At September 30, 2010 and December 31, 2009, securities classified as “available for sale” had an amortized cost of $374.3 million and $284.3 million, respectively.

The Company did not have any federal funds sold at September 30, 2010 and December 31, 2009. The Company has chosen to maintain additional cash balances in non-interest bearing demand deposit accounts due to both the very low earnings rate on overnight funds as well as the unlimited FDIC coverage available on non-interest demand deposit accounts. The Company’s holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock, at cost was $4.3 million at December 31, 2009 and $4.4 million at September 30, 2010. Total FHLB borrowings declined $4.7 million, from $102.5 million at December 31, 2009 to $97.8 million at September 30, 2010. Total repurchase balances increased from $36.1 million at December 31, 2009 to $53.5 million at September 30, 2010.

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Loan portfolio growth was negative during the nine month period ended September 30, 2010. Net loans totaled $621.6 million and $642.4 million at September 30, 2010 and December 31, 2009, respectively. Loan demand is weak for consumer, agricultural and commercial loan products. Given the current weakness in the economy, the Company remains highly selective in both its underwriting standards and types of loans being originated.

At September 30, 2010, deposits increased to $831.8 million from $794.1 million at December 31, 2009. The average cost of all deposits during the three-month periods ended September 30, 2010 and September 30, 2009 and the year ended December 31, 2009, was 2.04%, 2.71% and 2.74%, respectively. The average cost of all deposits during the nine-month periods ended September 30, 2010 and September 30, 2009, was 2.15% and 2.84%, respectively. Management continually evaluates the investment alternatives available to customers and adjusts the pricing on its deposit products to more actively manage its funding costs while remaining competitive in its market area. Given weak loan demand and poor investment alternatives, the Company has chosen to reduce its balances of higher costing time deposits. In the third quarter, the Company reduced its time deposit balances by approximately $11.6 million, consisting largely of institutional and brokered deposits. The Company’s anticipates a further reduction in both FHLB borrowing balances and brokered deposits in the fourth quarter of 2010.

Comparison of Operating Results for the Nine Months Ended September 30, 2010 and 2009

Net Income. Net income available to common shareholders for the nine months ended September 30, 2010 was $4,928,000, compared to a net loss available to common shareholders of $1,009,000 for the nine months ended September 30, 2009. The Company’s results of operations for the nine month period ended September 30, 2009 were adversely affected by a $5.0 million goodwill impairment charge.

Net Interest Income. Net interest income for the nine month period ended September 30, 2010 was $22.9 million, compared to $19.8 million for the nine month period ended September 30, 2009. The increase in net interest income for the nine months ended September 30, 2010 as compared to September 30, 2009 was largely due to decline in interest expense on deposits, offsetting declines in the yields on interest earning assets. For the nine-month period ended September 30, 2010, income on tax exempt securities increased to $1.8 million, from $1.1 million for the nine month period ended September 30, 2009.

For the nine month period ended September 30, 2010, the Company’s interest income from loans receivable declined by approximately $200,000, to $29.0 million, as compared to the nine month period ended September 30, 2009. For the nine months ended September 30, 2010, the tax equivalent yield on total interest earning assets declined to 5.56%, from 5.87% for the nine-month period ended September 30, 2009. The decline in net yields is the result of the continued low interest rate environment in which the Company currently operates.

For the nine month periods ended September 30, 2010 and September 30, 2009, the Company’s cost of interest bearing liabilities was 2.50% and 3.15%, respectively. The lower cost of interest bearing liabilities was the result of lower short term interest rates.

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Average Balances, Yields and Interest Expenses. The table below summarizes the overall effect of changes in both interest rates and the average balances of interest earning assets and liabilities for the nine month periods ended September 30, 2010 and September 30, 2009. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate nine-month periods.

Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $832 for September 30, 2010, and $488 for September 30, 2009, for a tax equivalent rate using a cost of funds rate of 2.50% for September 30, 2010 and 3.00% for September 30, 2009. The table adjusts tax-free loan income by $42 for September 30, 2010 and $35 for September 30, 2009, for a tax equivalent rate using the same cost of funds rate:

	Average Balance 9/30/2010		Income and Expense 9/30/2010			Average Rates 9/30/2010			Average Balance 9/30/2009		Income and Expense 9/30/2009			Average Rates 9/30/2009
	(Dollars in Thousands, Except Percentages)
Loans	$	635,118	$	29,069			6.10	%	$	628,965	$	29,273			6.21	%
Investments AFS taxable		282,627		9,122			4.30	%		253,903		9,658			5.07	%
Investment AFS tax free		61,776		2,641			5.70	%		33,647		1,578			6.25	%
Investment held to maturity		—		—			—			375		12			4.27	%
Federal funds		—		—			—			4,156		8			0.26	%
Total interest earning assets		979,521		40,832			5.56	%		921,046		40,529			5.87	%
Other assets		99,898								81,383
Total assets	$	1,079,419							$	1,002,429
Retail time deposits	$	492,589		10,542			2.85	%	$	469,012		12,891			3.66	%
Brokered deposits		84,415		1,564			2.47	%		69,742		1,945			3.72	%
Now accounts		123,816		1,203			1.30	%		92,660		1,091			1.57	%
MMDA and savings accounts		62,745		96			0.20	%		59,241		110			0.25	%
FHLB borrowings		94,081		2,500			3.54	%		122,190		3,108			3.39	%
Repurchase agreements		41,652		619			1.98	%		30,473		588			2.57	%
Subordinated debentures		10,310		557			7.20	%		10,310		446			5.77	%
Total interest bearing liabilities		909,608		17,081			2.50	%		853,628		20,179			3.15	%
Non-interest bearing deposits		68,434								61,291
Other liabilities		5,032								6,281
Shareholders equity		96,345								81,229
Total liabilities and shareholder equity	$	1,079,419							$	1,002,429
Net interest income			$	23,751							$	20,350
Interest rate spread							3.06	%							2.72	%
Net yield on interest earning assets				3.23	%							2.95	%

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Interest Income. For the nine months ended September 30, 2010 and September 30, 2009, the Company’s total interest income was $40.0 million. As loan demand has slowed down, the Company continues to have a greater dependency on investment income. The average balance of loans receivable increased from $629.0 million for the nine months ended September 30, 2009 to $635.1 million for the nine months ended September 30, 2010, and increase of $6.1 million. The ratio of average interest-earning assets to average interest-bearing liabilities declined from 107.90% for the nine months ended September 30, 2009 to 107.69% for the nine months ended September 30, 2010.

Interest Expense. Interest expense declined approximately $3.1 million for the nine months ended September 30, 2010 as compared to the same period in 2009. The decline was attributable to lower market interest rates and the re-pricing of higher costing deposits, offsetting a $56.0 million increase in the average balance of total interest bearing liabilities as compared to September 30, 2009. The average cost of interest-bearing retail deposits declined from 3.03% for the nine month period ended September 30, 2009 to 2.32% for the nine months ended September 30, 2010. Over the same period, the average balance of interest bearing retail deposits increased $58.3 million, from $620.9 million for the nine months ended September 30, 2009 to $679.2 million for the nine months ended September 30, 2010. The average cost of brokered deposits declined from 3.72% for the nine months ended September 30, 2009 to 2.47% for the nine months ended September 30, 2010. Over the same period, the average balance of brokered deposits increased $14.7 million, from $69.7 million for the nine months ended September 30, 2009 to $84.4 million for the nine months ended September 30, 2010. The average cost of all deposits declined from 2.84% for the nine months ended September 30, 2009, to 2.15% for the nine months ended September 30, 2010.

The average balance of funds borrowed from the FHLB declined $28.1 million, from $122.1 million for the nine months ended September 30, 2009, to $94.0 million for the nine months ended September 30, 2010. The average cost of borrowed funds from the FHLB increased from 3.39% for the nine months ended September 30, 2009, to 3.54% for the nine months ended September 30, 2010. The average balance of repurchase agreements increased from $30.4 million for the nine months ended September 30, 2009, to $41.6 million for the nine months ended September 30, 2010. The average cost of repurchase agreements declined from 2.57% for the nine months ended September 30, 2009, to 1.98% for the nine months ended September 30, 2010. The reduction in the cost of repurchase agreements is limited due to two long term agreements with third parties that are fixed. The repurchase agreements, totaling $16 million, had a weighted average cost of 4.31% for the nine months ended September 30, 2010.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition and prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $2.8 million in provision for loan loss was required for the nine months ended September 30, 2010, compared to a $3.3 million in provision for loan loss expense for the nine months ended September 30, 2009.

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Non-Interest Income. There was a $665,000 increase in non-interest income in the nine months ended September 30, 2010 as compared to the same period in 2009. For the nine-month period ended September 30, 2010, income from financial services was $776,000 compared to $738,000 for the same period in 2009. For the nine month period ended September 30, 2010, the Company realized gains on the sale of investments totaling $1,786,000, as compared to $1,581,000 for the nine month period ended September 30, 2009. For the nine month period ended September 30, 2010, the Company realized gains on the sale of real estate owned totaling $356,000. No gains on the sale of other real estate were realized for the nine month period ended September 30, 2009. For the nine month period ended September 30, 2010, the Company experienced a $166,000 decline in service charge income as compared to September 30, 2009.

Non-Interest Expenses. There was a $4.6 million decline in total non-interest expenses in the nine months ended September 30, 2010 compared to the same period in 2009. The most significant variance was a $5.0 million goodwill impairment charge taken in 2009. For the nine months ended September 30, 2010, compensation expense increased to $9.6 million compared to $9.3 million for the nine months ended September 30, 2009. Other non-interest expenses that increased more than $100,000 for the nine months ended September 30, 2010 includes data processing expenses and professional services expenses.

Income Taxes. The effective tax rate for the nine months ended September 30, 2010 was 29.6%, or $2.4 million, compared to a tax benefit of $483,000 for the same period in 2009.

Comparison of Operating Results for the Three Months Ended September 30, 2010 and 2009

Net Income. Net income available for common shareholders to the three months ended September 30, 2010 was $1,508,000, compared to a net loss available to common shareholders of $2,875,000 for the three months ended September 30, 2009. The Company’s results for the three and nine month periods ending September 30, 2009 were adversely affected by a $5.0 million goodwill impairment charge. Without the impairment charge, net of related taxes, the Company’s net income available to common shareholders for the three month period ended September 30, 2009 would have been $418,000. Additional improvements in the Company’s operating results are the result of an improved net interest margin and higher levels of interest earning assets.

Net Interest Income. Net interest income for the three month period ended September 30, 2010 was $7.7 million, compared to $6.9 million for the three month period ended September 30, 2009. The increase in net interest income for the three months ended September 30, 2010 as compared to September 30, 2009 was largely due to an $1.1 million decline in interest expense. For the three months ended September 30, 2010, the tax equivalent yield on total interest earning assets declined to 5.34% from 5.86% for the three-month period ended September 30, 2009. For the three month periods ended September 30, 2010 and September 30, 2009, the Company’s cost of interest bearing liabilities was 2.40% and 3.05%, respectively. The lower cost of interest bearing liabilities was the result of lower short term interest rates and the re-pricing of time deposits.

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Average Balances, Yields and Interest Expenses. The table below summarizes the overall effect of changes in both interest rates and the average balances of interest earning assets and liabilities for the three month periods ended September 30, 2010 and September 30, 2009. Yields on assets and cost of liabilities are derived by dividing income or expense by the average daily balances of interest earning assets and liabilities for the appropriate three-month periods.

Average balances for loans include loans classified as non-accrual, net of the allowance for loan losses. The table adjusts tax-free investment income by $292 for September 30, 2010, and $192 for September 30, 2009, for a tax equivalent rate using a cost of funds rate of 2.40% for September 30, 2010 and 3.00% for September 30, 2009. The table adjusts tax-free loan income by $10 for September 30, 2010 and $9 for September 30, 2009, for a tax equivalent rate using the same cost of funds rate:

	Average Balance 9/30/2010		Income & Expense 9/30/2010			Average Rates 9/30/2010			Average Balance 9/30/2009		Income & Expense 9/30/2009			Average Rates 9/30/2009
	(Dollars in Thousands, Except Percentages)
Loans	$	623,398	$	9,406			6.04	%	$	640,902	$	9,907			6.18	%
Investments AFS taxable		320,891		3,165			3.95	%		254,786		3,177			4.99	%
Investment AFS tax free		67,111		927			5.53	%		39,819		620			6.23	%
Investment Held to maturity		—		—			—			259		2			3.09	%
Total interest earning assets		1,011,400		13,498			5.34	%		935,766		13,706			5.86	%
Other assets		104,919								83,943
Total assets	$	1,116,319							$	1,019,709
Retail time deposits	$	487,998		3,337			2.74	%	$	475,652		4,155			3.49	%
Brokered deposits		83,632		488			2.33	%		74,140		656			3.54	%
Now accounts		140,826		431			1.22	%		100,344		396			1.58	%
MMDA and savings accounts		62,920		57			0.36	%		59,504		30			0.20	%
FHLB borrowings		89,874		818			3.64	%		119,373		1,032			3.46	%
Repurchase agreements		46,459		213			1.83	%		29,473		198			2.69	%
Subordinated debentures		10,310		193			7.49	%		10,310		168			6.52	%
Total interest bearing liabilities		922,019		5,537			2.40	%		868,796		6,635			3.05	%
Non-interest bearing deposits		69,962								63,090
Other liabilities		5,503								6,829
Stockholders’ equity		118,835								80,994
Total liabilities and stockholders’ equity	$	1,116,319							$	1,019,709
Net interest income			$	7,961							$	7,071
Interest rate spread							2.94	%							2.81	%
Net yield on interest earning assets				3.15	%							3.02	%

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Interest Income. For the three months ended September 30, 2010, the Company’s total interest income was $13.2 million, as compared to $13.5 million for the three months ended September 30, 2009. The decline is primarily the result in a lower average balance of loans outstanding as compared to the same period in 2009. The average balance of loans receivable declined $17.5 million, to $623.4 million, for the three months ended September 30, 2010 from $640.9 million for the three months ended September 30, 2009. For the three month period ended September 30, 2010, the average tax equivalent yield on loans was 6.04%, as compared to 6.18% for the three month period ended September 30, 2009. The ratio of average interest-earning assets to average interest-bearing liabilities decreased from 107.71% for the three months ended September 30, 2009 to 109.69% for the three months ended September 30, 2010.

Interest Expense. Interest expense declined approximately $1.1 million for the three months ended September 30, 2010 as compared to the same period in 2009. The decline was attributable to lower market interest rates and the re-pricing of higher costing deposits, offsetting a $53.2 million increase in the average balance of total interest bearing liabilities as compared to September 30, 2009. The average cost of interest-bearing retail deposits declined from 2.88% for the three months ended September 30, 2009 to 2.21% for the three months ended September 30, 2010. Over the same period, the average balance of interest bearing retail deposits increased $56.2 million, from $635.5 million for the three months ended September 30, 2009 to $691.7 million for the three months ended September 30, 2010. The average cost of brokered deposits declined from 3.54% for the three months ended September 30, 2009 to 2.33% for the three month period ended September 30, 2010. Over the same period, the average balance of brokered deposits increased $9.5 million, from $74.1 million for the three months ended September 30, 2009 to $83.6 million for the three months ended September 30, 2010. The average cost of all deposits declined from 2.71% for the three months ended September 30, 2009, to 2.04% for the three months ended September 30, 2010.

The average balance of funds borrowed from the FHLB declined $29.5 million, from $119.4 million for the three months ended September 30, 2009, to $89.9 million for the three months ended September 30, 2010. The average cost of borrowed funds from the FHLB increased from 3.46% for the three months ended September 30, 2009, to 3.64% for the three months ended September 30, 2010. The average balance of repurchase agreements increased from $29.5 million for the three months ended at September 30, 2009, to $46.5 million for the three months ended September 30, 2010. The average cost of repurchase agreements declined from 2.69% for the three months ended September 30, 2009, to 1.83% for the three months ended September 30, 2010. The reduction in the cost of repurchase agreements is limited due to two long term agreements with third parties that are fixed. The repurchase agreements, totaling $16 million, had a weighted average cost of 4.31% for the three months ended September 30, 2010.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including general economic conditions, loan portfolio composition, prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. The Company determined that an additional $1.3 million provision for loan loss was required for the three months ended September 30, 2010, compared to a $1.4 million provision for loan loss expense for the three months ended September 30, 2009.

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Non-Interest Income. There was a $1.0 million increase in non-interest income in the three months ended September 30, 2010 as compared to the same period in 2009. For the three-month period ended September 30, 2010, service charge income was $953,000, a decline of $165,000 over the same period in 2009. For the three months ended September 30, 2010, income from financial services was $293,000, compared to $262,000 for the same period in 2009. For the three month period ended September 30, 2010, the Company realized gains on the sale of securities totaling $1.1 million, as compared to $114,000 for the three months ended September 30, 2009. For the three month period ended September 30, 2010, the Company recognized a $63,000 gain on the sale of other real estate owned. The Company recognized a $23,000 loss on the sale of real estate owned during the three month period ended September 30, 2009.

Non-Interest Expenses. There was a $4.8 million decline in total non-interest expenses in the three months ended September 30, 2010 compared to the same period in 2009. For the three months ended September 30, 2010, compensation expense was the only non-interest expense item to increase by more the $100,000 as compared to the three month period ended September 30, 2009. The Company’s $5.0 million goodwill impairment charge at September 30, 2009 is the most significant reason for the decline in non-interest expenses in the three month period ended September 30, 2010.

Income Taxes. The effective tax rate for the three months ended September 30, 2010 was 30.8%, or $788,000, compared to a tax benefit of $1.5 million for the same period in 2009.

Liquidity and Capital Resources. The Company has no business other than that of the Bank. Management believes that dividends that may be paid by the Bank to the Company will provide sufficient funds for its current 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. The Company is required to seek approval from the Office of Thrift Supervision prior to the declaration of a dividend to common shareholders.

The Bank’s principal sources of funds for operations are deposits from its primary market areas, principal and interest payments on loans, proceeds from maturing investment securities and cash flow from amortizing investments. The Company estimates that its CMO and mortgage backed security portfolio will provide more than $5 million in cash flow over the remaining three months of 2010. Additional cash flows from agency securities are highly dependent on market interest rates. However, management anticipates that approximately $15 million in agency securities will be called due to their one time call feature and relatively high coupon rate.

As discussed in Note 12 of Notes to Unaudited Consolidated Condensed Financial Statements section of this report, the Bank may not increase the amount of brokered deposits outstanding without prior written approval from the OTS Regional Director. The Bank uses brokered deposits to supplement its asset liability need for longer term deposits at reasonable prices. In addition to the coupon rate listed below, brokered deposits carry an additional 0.25% that includes the cost of selling and servicing the deposits. The Company includes this cost as an interest expense on its income statement.

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At September 30, 2010, the Bank’s brokered deposits consisted of the following:

Date Of Issue		Coupon Rate			Current Balance		Next Maturity Date
	10/2/2009		0.70	%	$	4,000,000		10/2/2010
	7/15/2008		4.25	%	$	3,009,000		10/15/2010
	9/29/2008		4.25	%	$	5,000,000		3/29/2011
	9/29/2010		0.20	%	$	2,088,000		6/29/2011
	10/23/2009		1.65	%	$	2,020,000		10/24/2011
	2/16/2010		1.00	%	$	4,000,000		11/16/2011
	2/16/2010		1.00	%	$	2,000,000		12/16/2011
	9/22/2009		2.00	%	$	5,077,000		3/22/2012
	9/29/2010		0.60	%	$	2,076,000		6/30/2012
	10/16/2009		2.30	%	$	3,011,000		10/16/2012
	3/3/2010		1.75	%	$	2,032,000		3/4/2013
	1/22/2010		2.20	%	$	3,092,000		7/22/2013
	3/2/2010		2.00	%	$	3,204,000		9/2/2013
	10/26/2009		2.00	%	$	5,215,000		10/28/2013
	9/22/2010		1.15	%	$	2,144,000		3/22/2014	(1)
	7/1/2009		2.75	%	$	9,802,000		7/1/2014
	8/11/2009		3.00	%	$	5,095,000		8/11/2014	(1)
	9/22/2009		2.00	%	$	7,003,000		9/22/2014
	3/9/2010		2.00	%	$	5,078,000		3/9/2015
	7/26/2010		1.25	%	$	4,093,000		7/26/2015	(1)
	9/22/2010		1.25	%	$	2,372,000		9/22/2020	(1)
	Total				$	81,411,000

(1) Denotes brokered deposit with rising rate feature in which the Company has a call option.

The Bank must satisfy three capital standards: a ratio of core capital to adjusted total assets of 4.0%, a tangible capital standard expressed as 1.5% of total adjusted assets, and a combination of core and “supplementary” capital equal to 8.0% of risk-weighted assets. At September 30, 2010, the Bank exceeded all regulatory capital requirements.

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The table below presents certain information relating to the Company’s and Bank’s capital compliance at September 30, 2010:

	Company					Bank
	Amount		Percent			Amount		Bank
	(Dollars in Thousands)
Tangible Capital	$	119,863		10.83	%	$	98,018		9.07	%
Core Capital	$	119,863		10.83	%	$	98,018		9.07	%
Risk Based Capital	$	125,808		19.04	%	$	103,962		15.87	%

At September 30, 2010, the Bank had outstanding commitments to originate loans totaling $5.2 million and undisbursed commitments on loans outstanding of $35.9 million. Management believes that the Bank’s sources of funds are sufficient to fund all of its outstanding commitments. Certificates of deposits scheduled to mature in one year or less from September 30, 2010, totaled $298.8 million. Management believes that a significant percentage of such deposits will remain with the Bank.

The Bank’s FHLB borrowings are secured by a blanket security agreement pledging the Bank’s 1-4 family first mortgage loans and non-residential real estate loans. At September 30, 2010, the Bank has pledged all eligible 1-4 family first mortgages, home equity lines of credit and non-residential real estate loans that may be pledged under this agreement.

At September 30, 2010, the Bank has outstanding borrowings of $97.8 million from the FHLB with maturities ranging twenty-eight days to eight years and three months. In the next six months, the Bank has $25 million of FHLB borrowings that will mature with a weighted average rate of 2.60%. A schedule of FHLB borrowings at September 30, 2010 is provided below:

Outstanding Balance		Rate			Maturity		Note
		(Dollars in thousands)
$	10,000		0.18	%		10/25/10
	5,000		2.14	%		12/10/10
	10,000		5.26	%		02/14/11
	5,000		2.56	%		12/09/11
	5,000		1.82	%		12/16/12
	3,596		3.30	%		06/01/13	Monthly Principal Payments
	5,000		2.32	%		12/30/13
	1,233		3.19	%		04/14/14	Monthly Principal Payments
	5,000		3.15	%		12/11/14
	4,000		5.34	%		03/17/16
	7,000		4.25	%		05/01/17	Quarterly callable
	10,000		4.56	%		06/28/17	Quarterly callable
	10,000		4.26	%		08/17/17	Quarterly callable
	16,935		3.13	%		01/01/19	Monthly Principal Payments
$	97,764		3.30	%		4.3 years

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At September 30, 2010, the Bank had $36.7 million in additional borrowing capacity with the FHLB which includes an overnight line of credit and $8 million in overnight borrowing capacity from the Company’s correspondent bank.

The Bank’s exposure to credit loss in the event of non-performance 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 Bank uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

At September 30, 2010, the Company has the following off-balance sheet commitments (in thousands):

Standby letters of credit	$	1,591
Unused home equity lines of credit	$	30,319
Unused commercial lines of credit	$	11,627

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Forward-Looking Statements

This Quarterly Report on Form 10-Q 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.

Effect of New Accounting Standards

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

In January 2010, the FASB issued Accounting Standards Update No. 201-06,Improving Disclosures about Fair Value Measurements. The new guidance clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a “gross” presentation of activities (purchases, sales, and settlements) within the Level 3 roll-forward reconciliation, which will replace the “net” presentation format; and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements. This guidance is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll-forward information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years. The Company adopted the fair value disclosures guidance on January 1, 2010, except for the gross presentation of the Level 3 roll-forward information which is not required to be adopted by the Company until January 1, 2011.

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On January 1, 2010, the FASB amended Accounting Standards Update No. 810 by issuing Update 2010-10 to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 was effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

In July 2010, FASB issued Accounting Standards Update 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.The objective of this disclosure guidance is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of the Company’s loan portfolio. The new disclosure requirements will be required for both quarterly and annual reporting periods after December 15, 2010. The Company is currently assessing the impact of this disclosure on its consolidated financial statements.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The actual results of the Company’s asset liability management analysis are highly dependent on the prepayment speed of mortgage backed securities and collateralized mortgage obligations. The United States Treasury’s policy of purchasing longer dated Treasury bonds has the result of lowering mortgage loan rates, allowing more consumers to refinance their mortgages and pay-off their current mortgage, resulting in higher prepayment speeds on mortgage investment products.

The effects of rising interest rates are discussed throughout Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Actual results for the year ending December 31, 2010 will differ from simulations due to timing, magnitude, and the frequency or interest rate changes, market conditions, management strategies, and the timing of the Company’s cash receipts and disbursements.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), an evaluation was carried out with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) and 15 d-14(c) under the Exchange Act) as of the end of the quarter ended September 30, 2010.

Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the three months ended September 30, 2010 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud will be detected.

The Company is subject to Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management to assess and report on the effectiveness of the Company’s internal controls over financial reporting.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. Section 989G of the law states that non-accelerated files (the Company is currently a non-accelerated filer) are now exempt from the requirement of the Sarbanes-Oxley Act’s Section 404(b) that requires the Company’s external auditor to attest to the Company’s assessment of internal controls over financial reporting. The annual measurement period for this exemption is June 30^th of each year.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended September 30, 2010, that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

No material pending proceedings

Item 1A. Risk Factors

Except as set forth below, there have been no material changes to our risk factors as previously disclosed in Part 1, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2009:

Legislation was enacted on July 21, 2010 that will implement sweeping changes to the current bank regulatory structure. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) will eliminate the Office of Thrift Supervision. The Comptroller of the Currency (the primary federal regulator for national banks) will become the primary federal regulator of the Bank. The Board of Governors of the Federal Reserve System (the^“Federal Reserve^”) will have exclusive authority to regulate all bank and thrift holding companies. As a result, the Company will become subject to supervision by the Federal Reserve Board as opposed to the Office of Thrift Supervision. These changes to our regulators will occur on the transfer date, which is expected to be one year from the enactment of the Dodd-Frank Act (unless extended by up to six months).

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).

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Regulatory Matters

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. Among other things, 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.

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 the Company from the Bank. The ability of the Bank to pay dividends to the Company, as well as the Company’s ability to pay dividends to its shareholders, is limited by regulatory and legal restrictions and the need to maintain sufficient capital at the Bank. The MOU with the OTS restricts the Company from declaring or paying any dividends or other capital distributions to common shareholders without prior OTS approval.

This dividend restriction does not apply to cash dividends on currently outstanding shares of 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 ratio of 12.00%. At September 30, 2010, the Bank’s Tier 1 core capital ratio was 9.0% and its total risk based capital ratio was 15.87%. The Company may also decide to limit the payment of dividends even when it has the legal ability to pay them in order to retain earnings for use in its business. The Company is restricted from paying dividends if it has deferred payments of the interest on, or an event of default has occurred with respect to, its trust preferred securities or Series A Preferred Stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None

(b) None

(c) None

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Item 3. Defaults Upon Senior Securities

None

Item 4. Removed and Reserved

Item 5. Other Information

None

Item 6. Exhibits

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for John E. Peck, Chief Executive Officer.
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Billy C. Duvall, Chief Financial Officer.
32.1	Certification Pursuant to Section 18 U.S.C. Section 1350 for John E. Peck, Chief Executive Officer.
32.2	Certification Pursuant to Section 18 U.S.C. Section 1350 for Billy C. Duvall, Chief Financial Officer.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HOPFED BANCORP, INC.
Date: November 12, 2010	/s/ John E. Peck
	John E. Peck
	President and Chief Executive Officer
Date: November 12, 2010	/s/ Billy C. Duvall
	Billy C. Duvall
	Senior Vice President, Chief Financial Officer and Treasurer

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