10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2004

OR

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

For the transition period from                      to                     

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.)
2700 Fort Campbell Boulevard, Hopkinsville, KY	42240
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The registrant’s voting stock is traded on the NASDAQ Stock Market. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the price ($17.00 per share) at which the stock was sold on June 30, 2004, was approximately $58,326,303. For purposes of this calculation, the term “affiliate” refers to all executive officers and directors of the registrant and all stockholders beneficially owning more than 10% of the registrant’s Common Stock.

As of the close of business on March 15, 2005, 3,639,283 shares of the registrant’s Common Stock were outstanding.

Documents Incorporated By Reference

Part II:

Annual Report to Stockholders for the year ended December 31, 2004.

Part III:

Portions of the definitive proxy statement for the 2005 Annual Meeting of Stockholders.

PART I

ITEM 1. BUSINESS

In February 1998, HopFed Bancorp, Inc. (the “Company”) issued and sold 4,033,625 shares of common stock, par value $.01 per share (the “Common Stock”), in connection with the conversion of Hopkinsville Federal Savings Bank (the “Bank”) from a federal mutual savings bank to a federal stock savings bank and the issuance of the Bank’s capital stock to (the “Company”). The conversion of the Bank, the acquisition of all of the outstanding capital stock of the Bank by the Company and the issuance and sale of the Common Stock are collectively referred to herein as the “Conversion.” In February 2001, the Bank changed its name to Hopkinsville Federal Bank. On May 14, 2002, the Bank changed its name to Heritage Bank.

HopFed Bancorp, Inc.

HopFed Bancorp, Inc. was incorporated under the laws of the State of Delaware in May 1997 at the direction of the Board of Directors of the Bank for the purpose of serving as a savings and loan holding company of the Bank upon the acquisition of all of the capital stock issued by the Bank in the Conversion. The Company’s assets primarily consist of the outstanding capital stock of the Bank. The Company’s principal business is overseeing the business of the Bank. The Company has registered with the Office of Thrift Supervision (“OTS”) as a savings and loan holding company. See “Regulation – Regulation of the Company.”

As a holding company, the Company has greater flexibility than the Bank to diversify its business activities through existing or newly formed subsidiaries or through acquisition or merger with other financial institutions, although the Company currently does not have any plans, agreements, arrangements or understandings with respect to any such acquisitions or mergers. The Company is classified as a unitary savings and loan holding company and is subject to regulation by the OTS.

The Company’s executive offices are located at 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky 42240, and its main telephone number is (270) 885-1171.

Heritage Bank

The Bank is a federally chartered stock savings bank headquartered in Hopkinsville, Kentucky, with branch offices in Hopkinsville, Murray, Cadiz, Elkton, Fulton, Calvert City and Benton, Kentucky. The Bank was incorporated by the Commonwealth of Kentucky in 1879 under the name Hopkinsville Building and Loan Association. In 1940, the Bank converted to a federal mutual savings association and received federal insurance of its deposit accounts. In 1983, the Bank became a federal mutual savings bank. On May 14, 2002, the Bank changed its name from Hopkinsville Federal Bank to Heritage Bank. The primary market area of the Bank consists of the adjacent counties of Calloway, Christian, Todd, Trigg, Fulton, and Marshall located in southwestern Kentucky and Obion & Weakley counties located in northwestern Tennessee.

The business of the Bank primarily consists of attracting deposits from the general public and investing such deposits in loans secured by single family residential real estate and investment securities, including U.S. Government and agency securities, municipal and corporate bonds, collateralized mortgages obligations (CMO’s), and mortgage-backed securities. The Bank also originates single-family residential/construction loans and multi-family and commercial real estate loans, as well as loans secured by deposits, other consumer loans and commercial loans. The Bank emphasizes the origination of residential real estate loans with adjustable interest rates and other assets which are responsive to changes in interest rates and allow the Bank to more closely match the interest rate maturation of its assets and liabilities.

Growth Opportunities

In 2003, the Bank relocated retail offices in Calloway and Marshall County as well as opened a new office in Marshall County due to exceptional growth levels in both locations. Management believes that these two markets, in addition to Christian County, will continue to provide significant opportunities for growth.

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Christian County is the Company’s headquarters and its largest market. Christian County growth has been strong, both in commercial lending and demand deposit accounts. In 2004, Management announced plans to expand into the fast growing southern section of Hopkinsville, the county seat of Christian County. Construction on the new building will commence in the spring of 2005 with a projected completion date of July 2006. The facility will be a full service retail location as well as the future administrative home of the Company. The Company believes that long-term growth prospects in Christian County meet or exceed those of the Company’s other current markets due to the overall size of the market.

The following chart outlines the Bank’s market share in its four largest markets individually and its entire market overall at June 30, 2001, June 30, 2002, June 30, 2003 and June 30, 2004 according to information provided by the FDIC Market Share Report:

	At June 30
	2001		2002		2003		2004
Calloway	5.6	%	8.4	%	11.8	%	11.8	%
Christian	15.2	%	16.1	%	19.7	%	17.8	%
Fulton	49.7	%(a)	49.7	%(a)	51.9	%	55.0	%
Marshall	1.3	%	3.8	%	7.5	%	8.9	%
Overall	9.0	%(b)	10.7	%(b)	18.5	%	18.9	%

(a) Represents the market share reported by Old National Bank in Fulton County, Kentucky. These deposits were purchased by Heritage Bank in September 2002.

(b) The combined market share of Heritage Bank and Old National Bank’s Fulton County Office at June 30, 2001 and June 30, 2002 would have been 14.4% and 15.4% respectively.

The majority of the Bank’s markets continue to provide growth opportunities for both loans and deposits, as customers are dissatisfied with national and regional banks that have entered the market via acquisitions as well as economic growth in the Bank’s higher growth markets. The Bank’s new internet banking web site with free bill pay, www.bankwithheritage.com, has been a huge success with approximately 2,400 customers participating.

While there is ample opportunities for the Company to grow in its current markets, the Company may have the opportunity to expand into new markets by either branch acquisitions, the purchase of community banks, or new branches. These opportunities may present themselves as larger banks may decide to exit markets in Western Kentucky, Middle Tennessee and Western Tennessee. Management will continue to evaluate these opportunities when they become available and pursue those opportunities that fit into the business plan of the Company. Management anticipates that recent growth trends will continue as the Company seeks opportunities in new markets and improves its market share in existing markets.

On January 31, 2005, the Bank completed the purchase of a tract of land on the north side of Clarksville, Tennessee with plans to construct a retail banking facility on the site. Clarksville is the county seat of Montgomery County, Tennessee. Montgomery County has a population of approximately 135,000 (Source: 2000 Census) and is approximately 20 minutes south of the Company’s headquarters. Hopkinsville and Clarksville are becoming more of a homogeneous community and both communities are included in the Clarksville Metropolitan Statistical Area (“MSA”) .

The current growth prospects in Clarksville appear to exceed the prospects in any of the Company’s current markets due to several factors, including its proximity to the Fort Campbell Military Reservation, home of the Army’s 101^st Airborne Division and their approximate 30,000 activity duty troops, a diverse retail and industrial base, and the absence of a state income tax. Demographics in Montgomery County appear more conducive to growth, with a younger population and a higher household income than any market currently served by the Company. Montgomery County is approximately 50 miles north of Nashville, the Tennessee state capital with a MSA population of approximately 1.2 million. A growing housing market in Montgomery County is fueled by both an increase in troops stationed at Fort Campbell and by individuals working in Nashville seeking lower cost housing within a reasonable commute of Nashville.

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Heritage Solutions, a division of Fall & Fall Insurance in Murray, Kentucky, has diversified its product offering to include full mutual fund and brokerage services. By improving its product mix, Heritage Solutions provides a higher level of service to Heritage Bank customers.

Available Information

The Company’s filings with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto, are available on the Company’s website as soon as reasonably practicable after the reports are filed with or furnished to the SEC. Copies can be obtained free of charge in the “Investor Relations” section of the Company’s website at www.bankwithheritage.com.

Stock Repurchases

On September 20, 2000, the Company announced that its Board of Directors had approved the repurchase of up to 200,000 shares of its common stock. The stock repurchase program was completed in February 2001. On March 26, 2001, the Company announced that its Board of Directors had approved the repurchase of an additional 300,000 shares. The purchases are being made from time to time on the NASDAQ Stock Market at prices prevailing on that market or in privately negotiated transactions at management’s discretion, depending on market conditions, price of the Company’s common stock, corporate cash requirements and other factors. As of March 15, 2005, 208,909 shares of common stock had been repurchased. The Company did not repurchase any stock in 2004.

Lending Activities

General. The total gross loan portfolio totaled $360.1 million at December 31, 2004, representing 62.11% of total assets at that date. Substantially all loans are originated in the Bank’s market area. At December 31, 2004, $207.3 million, or 57.6% of the loan portfolio, consisted of one-to-four family, residential mortgage loans. Other loans secured by real estate include non-residential real estate loans, which amounted to $ 40.2 million, or 11.2% of the loan portfolio at December 31, 2004, and multi-family residential loans, which were $ 6.5 million, or 1.8% of the loan portfolio at December 31, 2004. At December 31, 2004, construction loans were $ 2.7 million, or 0.7% of the loan portfolio, and total consumer and commercial loans totaled $ 103.4 million, or 28.7% of the loan portfolio.

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Analysis of Loan Portfolio. Set forth below is selected data relating to the composition of the loan portfolio by type of loan at the dates indicated. At December 31, 2004, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below.

	2004				2003				2002				2001				2000
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
									(Dollars in thousands)
Type of Loan:
Real estate loans:
One-to-four family Residential	$	207,252	57.6	%	$	191,015	56.6	%	$	171,453	58.4	%	$	111,768	65.0	%	$	91,960	70.8	%
Multi-family residential		6,520	1.8	%		6,254	1.9	%		4,547	1.6	%		2,448	1.4	%		2,841	2.2	%
Construction		2,698	0.7	%		3,544	1.1	%		1,757	0.6	%		5,617	3.3	%		5,729	4.4	%
Non-residential (1)		40,231	11.2	%		39,615	11.7	%		32,368	11.0	%		18,445	10.7	%		21,695	16.7	%
Total real estate loans		256,701	71.3	%		240,428	71.3	%		210,125	71.6	%		138,278	80.4	%		122,225	94.1	%
Other loans:
Secured by deposits		3,121	0.9	%		3,062	0.9	%		3,003	1.0	%		2,191	1.3	%		2,720	2.1	%
Other consumer loans		33,287	9.2	%		43,147	12.8	%		44,238	15.1	%		16,455	9.6	%		3,971	3.1	%
Commercial loans		66,989	18.6	%		50,679	15.0	%		36,184	12.3	%		14,943	8.7	%		946	0.7	%
Total other loans		103,397	28.7	%		96,888	28.7	%		83,425	28.4	%		33,589	19.6	%		7,637	5.9	%
		360,098	100.0	%		337,316	100.0	%		293,550	100.0	%		171,867	100.0	%		129,862	100.0	%
Loans held for sale		—				—				—				928				—
Allowance for loan losses		3,273				2,576				1,455				923				708
Total	$	356,825			$	334,740			$	292,095			$	170,016			$	129,154

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

Loan Maturity Schedule. The following table sets forth certain information at December 31, 2004 regarding the dollar amount of loans maturing in the portfolio based on their contractual maturity dates. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

	Due during the year ending December 31,						Due after 3 through 5 years after December 31, 2005		Due after 5 through 10 years after December 31, 2005		Due after 10 through 15 years after December 31, 2005		Due after 15 years after December 31, 2005		Total
	2005		2006		2007
	(In thousands)
One-to-four family residential	$	1,248	$	1,535	$	1,947	$	4,871	$	30,713	$	42,487	$	124,451	$	207,252
Multi-family residential		1,003		—		33		107		411		2,928		2,038		6,520
Construction		836		94		—		52		77		141		1,498		2,698
Non-residential		4,403		574		907		2,288		11,875		10,403		9,781		40,231
Other		18,926		11,342		12,537		21,178		14,879		16,934		7,601		103,397
Total	$	26,416	$	13,545	$	15,424	$	28,496	$	57,955	$	72,893	$	145,369	$	360,098

The following table sets forth at December 31, 2004, the dollar amount of all loans due after December 31, 2005 which had predetermined interest rates and have floating or adjustable interest rates.

	Predetermined Rate		Floating or Adjustable Rate
	(In thousands)
One-to-four family residential	$	27,727	$	178,277
Multi-family residential		576		4,942
Construction		199		1,664
Non-residential		6,677		29,151
Other		40,490		43,980
Total	$	75,669	$	258,014

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Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the lender the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loan market rates are substantially lower than rates on existing mortgage loans.

Originations, Purchases and Sales of Loans. The Bank generally has authority to originate and purchase loans secured by real estate located throughout the United States. Consistent with its emphasis on being a community-oriented financial institution, the Bank conducts substantially all of its lending activities in its market area.

The following table sets forth certain information with respect to loan origination activity for the periods indicated.

	Year Ended December 31,
	2004		2003		2002
	(In thousands)
Loan originations:
One-to-four family residential	$	58,223	$	105,892	$	58,024
Multi-family residential		1,107		2,452		4,433
Construction		2,490		4,120		2,590
Non-residential		16,484		13,446		32,635
Other		69,168		77,805		55,701
Total loans originated		147,472		203,715		153,383
Loans obtained through acquisition:
One-to-four family residential		—		—		12,612
Multi-family residential		—		—		2,147
Construction		—		—		518
Non-residential		—		—		12,893
Other		—		—		13,443
Total loans purchased		—		—		41,613
Loan reductions:
Change in allowance for loan losses		697		1,121		532
Loans sold		10,106		26,774		15,368
Loan principal payments		114,584		133,175		57,017
Net increase in loan portfolio	$	22,085	$	42,645	$	122,079

Loan originations are derived from a number of sources, including existing customers, referrals by real estate agents, depositors and borrowers and advertising, as well as walk-in customers. Solicitation programs consist of advertisements in local media, in addition to occasional participation in various community organizations and events. Real estate loans are originated by the Bank’s loan personnel. All of the loan personnel are salaried, and are not compensated on a commission basis for loans originated. Loan applications are accepted at any of the Bank’s branches.

Loan Underwriting Policies. Lending activities are subject to written, non-discriminatory underwriting standards and to loan origination procedures prescribed by the Board of Directors and its management. Detailed loan applications are obtained to determine the ability of borrowers to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and confirmations. Loan requests exceeding loan officer limits must be approved by the loan committee or Board of Directors. In addition, the full Board of Directors reviews all loans on a monthly basis.

Generally, upon receipt of a loan application from a prospective borrower, a credit report and verifications are ordered to confirm specific information relating to the loan applicant’s employment, income and credit standing. If a proposed loan is to be secured by a mortgage on real estate, an appraisal of the real estate is undertaken by an appraiser approved by the Board of Directors and licensed or certified (as necessary) by the Commonwealth of Kentucky or the State of Tennessee.

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In the case of one-to-four family residential mortgage loans, except when the Bank becomes aware of a particular risk of environmental contamination, the Bank generally does not obtain a formal environmental report on the real estate at the time a loan is made. A formal environmental report may be required in connection with nonresidential real estate loans.

It is the Bank’s policy to record a lien on the real estate securing a loan and to obtain a title opinion from Kentucky counsel who provides that the property is free of prior encumbrances and other possible title defects. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood hazard area, pay flood insurance policy premiums.

The majority of real estate loan applications are underwritten and closed in accordance with the Bank’s own lending guidelines, which generally do not conform to secondary market guidelines. Although such loans may not be readily saleable in the secondary market, management believes that, if necessary, such loans may be sold to private investors.

The Bank offers a fixed rate loan program with maturities of 15, 20, and 30 years. These loans are underwritten and closed in accordance with secondary market standards. These loans are originated with the intent to sell on the secondary market. The Bank offers both servicing retained and servicing released products in an attempt to meet the needs of our customers. At December 31, 2004, the Bank’s loan servicing portfolio was approximately $41.0 million dollars.

The Bank is permitted to lend up to 100% of the appraised value of the real property securing a mortgage loan. The Bank is required by federal regulations to obtain private mortgage insurance on that portion of the principal amount of any loan that is greater than 90% of the appraised value of the property. Under its lending policies, the Bank will originate a one-to-four family residential mortgage loan for owner-occupied property with a loan-to-value ratio of up to 95%. For residential properties that are not owner-occupied, the Bank generally does not lend more than 80% of the appraised value. For all residential mortgage loans, the Bank may increase its lending level on a case-by-case basis, provided that the excess amount is insured with private mortgage insurance. Exceptions to this policy must be approved by the loan committee or the Board of Directors. At December 31, 2004, the Bank held approximately $4.4 million of 1-4 family residential mortgages with a loan to value ratio exceeding 90% without private mortgage insurance. At December 31, 2004, approximately $182,000 of these loans were past due more than 30 days and none of these loans were past due more than 90 days.

Under applicable law, with certain limited exceptions, loans and extensions of credit outstanding by a savings institution to a person at one time shall not exceed 15% of the institution’s unimpaired capital and surplus. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and surplus. Applicable law additionally authorizes savings institutions to make loans to one borrower, for any purpose, in an amount not to exceed the lesser of $30.0 million or 30% of unimpaired capital and surplus to develop residential housing, provided certain requirements are satisfied. Under these limits, the Bank’s loans to one borrower were limited to $8.5 million at December 31, 2004. At that date, the Bank had no lending relationships in excess of the loans-to-one-borrower limit. At December 31, 2004, the Bank’s largest lending relationship was approximately $7.0 million. The loans are to a local grain elevator. The loan proceeds are used in the normal course of business for a grain elevator and are secured by nonresidential real estate, inventory and accounts receivable. All loans within this relationship were current and performing in accordance with their terms at December 31, 2004.

Interest rates charged by the Bank on loans are affected principally by competitive factors, the demand for such loans and the supply of funds available for lending purposes. These factors are, in turn, affected by general economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and government budgetary matters.

One-to-four Family Residential Lending. The Bank historically has been and continues to be an originator of one-to-four family residential real estate loans in its market area. At December 31, 2004, one-to-four family residential mortgage loans totaled approximately $ 207.3 million, or 57.6% of the Bank’s loan portfolio. The Bank originated approximately $ 7.4 million in loans that were sold or may be sold in the secondary market with servicing retained and $2.7 million in loans were sold in the secondary market with servicing released. At December 31, 2004, the Bank had $272,000 in one-to-four family residential real estate loans past due more than ninety days.

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The Bank primarily originates residential mortgage loans with adjustable rates. As of December 31, 2004, 87.3% of one-to-four family mortgage loans in the Bank’s loan portfolio carried adjustable rates. Such loans are primarily for terms of 25 years, although the Bank does occasionally originate adjustable rate mortgages for 15, 20 and 30 year terms, in each case amortized on a monthly basis with principal and interest due each month. The interest rates on these mortgages are adjusted once per year, with a maximum adjustment of 1% per adjustment period and a maximum aggregate adjustment of 5% over the life of the loan. Prior to August 1, 1997, rate adjustments on the Bank’s adjustable rate loans were indexed to a rate which adjusted annually based upon changes in an index based on the National Monthly Median Cost of Funds, plus a margin of 2.75%. Because the National Monthly Median Cost of Funds is a lagging index, which results in rates changing at a slower pace than rates generally in the marketplace, the Bank changed to a one-year Treasury bill constant maturity (“One Year CMT), which the Bank believes reflects more current market information and thus allows the Bank to react more quickly to changes in the interest rate environment. In mid 2004, the Bank increased its margin on its adjustable rate loans to 3.00%. However, the vast majority of the current adjustable rate portfolio maintains a margin of 2.75% over the One Year CMT.

The retention of adjustable rate loans in the Bank’s portfolio helps reduce, but does not eliminate, the Bank’s exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable rate loans may increase due to increases in interest costs to borrowers. Further, although adjustable rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the initial fixed-rate period before the first adjustment and the lifetime interest rate adjustment limitations. This risk is heightened by the Bank’s practice of offering its adjustable rate mortgages with a 1% limitation on annual interest rate adjustments. Accordingly, there can be no assurance that yields on the Bank’s adjustable rate loans will fully adjust to compensate for increases in the Bank’s cost of funds. Finally, adjustable rate loans increase the Bank’s exposure to decreases in prevailing market interest rates, although the 1% limitation on annual decreases in the loans’ interest rate tends to offset this effect. In times of declining interest rates, borrowers often refinance into fixed rate loan products, limiting the Bank’s ability to significantly increase its interest rate margin on adjustable rate loans in a declining interest rate market.

The Bank also originates, to a limited extent, fixed-rate loans for terms of 10 and 15 years. Such loans are secured by first mortgages on one-to-four family, owner-occupied residential real property located in the Bank’s market area. Because of the Bank’s policy to mitigate its exposure to interest rate risk through the use of adjustable rate rather than fixed rate products, the Bank does not emphasize fixed-rate mortgage loans. Fixed rate mortgage loans originated by the Bank are loans that often do not qualify for the secondary market due numerous factors not related to credit quality. Typically, these products are not priced to be competitive with secondary market loans but to offer as an alternative if that option is not available. At December 31, 2004, 12.0% of the Bank’s loan portfolio consisted of fixed-rate mortgage loans. To further reduce its interest rate risk associated with such loans, the Bank may rely upon FHLB advances with similar maturities to fund such loans. See “— Deposit Activity and Other Sources of Funds — Borrowing.”

Neither the fixed rate nor the adjustable rate residential mortgage loans held in the Bank’s portfolio are originated in conformity with secondary market guidelines issued by FHLMC or FNMA. As a result, such loans may not be readily saleable in the secondary market to institutional purchasers. However, such loans may still be sold to private investors whose investment strategies do not depend upon loans that satisfy FHLMC or FNMA criteria. Further, given its high liquidity, the Bank does not currently view loan sales as a necessary funding source.

Construction Lending. The Bank engages in construction lending involving loans to individuals for construction of one-to four- family residential housing located within the Bank’s market area, with such loans converting to permanent financing upon completion of construction. Such loans are generally made to individuals for construction primarily in established subdivisions within the Bank’s market area. The Bank mitigates its risk with construction loans by imposing a maximum loan-to-value ratio of 95% for homes that will be owner-occupied and 80% for homes being built on a speculative basis. At December 31, 2004, the Bank’s loan portfolio included $2.7 million of loans secured by properties under construction, including construction/permanent loans structured to become permanent loans upon the completion of construction and interim construction loans structured to be repaid in full upon completion of construction and receipt of permanent financing.

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The Bank also makes loans to qualified builders for the construction of one-to-four family residential housing located in established subdivisions in the Bank’s market area. Because such homes are intended for resale, such loans are generally not converted to permanent financing at the Bank. All construction loans are secured by a first lien on the property under construction.

Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction/permanent loans may have adjustable or fixed interest rates and are underwritten in accordance with the same terms and requirements as the Bank’s permanent mortgages. Such loans generally provide for disbursement in stages during a construction period of up to six months, during which period the borrower is required to make payments of interest only. The permanent loans are typically 30-year adjustable rate loans, with the same terms and conditions otherwise offered by the Bank. Monthly payments of principal and interest commence the month following the date the loan is converted to permanent financing. Borrowers must satisfy all credit requirements that would apply to the Bank’s permanent mortgage loan financing prior to receiving construction financing for the subject property.

Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be confronted at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. The ability of a developer to sell developed lots or completed dwelling units will depend on, among other things, demand, pricing, availability of comparable properties and economic conditions. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers in the Bank’s market area, by requiring the involvement of qualified builders, and by limiting the aggregate amount of outstanding construction loans.

Multi-Family Residential and Non-Residential Real Estate Lending. The Bank’s multi-family residential loan portfolio consists of fixed and adjustable rate loans secured by real estate. At December 31, 2004, the Bank had $6.5 million of multi-family residential loans, which amounted to 1.8% of the Bank’s loan portfolio at such date. The Bank’s non-residential real estate portfolio generally consists of adjustable and fixed rate loans secured by first mortgages on commercial real estate, residential lots, and rental property. In each case, such property is located in the Bank’s market area. At December 31, 2004, the Bank had approximately $40.2 million of such loans, which comprised 11.2% of its loan portfolio. Multi-family residential real estate loans are underwritten with loan-to-value ratios up to 80% of the appraised value of the property. Non-residential real estate loans are underwritten with loan-to-value ratios up to 65% of the appraised value for raw land and 75% for land development loans.

Multi-family residential and non-residential real estate lending entails significant additional risks as compared with one-to-four family residential property lending. Multi-family residential and commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the real estate project, retail establishment or business. These risks can be significantly impacted by supply and demand conditions in the market for the office, retail and residential space, and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Bank generally limits itself to its market area or to borrowers with which it has prior experience or who are otherwise known to the Bank. It has been the Bank’s policy to obtain annual financial statements of the business of the borrower or the project for which multi-family residential real estate or commercial real estate loans are made. At December 31, 2004, there was $131,000 in non-residential mortgage loans delinquent by 90 days or more.

Consumer Lending. The consumer loans currently in the Bank’s loan portfolio consist of loans secured by savings deposits and other consumer loans. Savings deposit loans are usually made for up to 90% of the depositor’s savings account balance. The interest rate is approximately 2.0% above the rate paid on such deposit account serving as collateral, and the account must be pledged as collateral to secure the loan. Interest generally is billed on a quarterly basis. At December 31, 2004, loans on deposit accounts totaled $ 3.1 million, or 0.9% of the Bank’s loan portfolio. Other consumer loans include automobile loans, the amount and terms of which are determined by the loan committee, and home equity and home improvement loans, which are made for up to 100% of the value of the property.

9

Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and therefore are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 2004, there was $242,000 in consumer loans delinquent 90 days or more.

Commercial Lending. The Bank originates commercial loans on a secured and, to a lesser extent, unsecured basis. At December 31, 2004, the Bank’s commercial loans amounted to $ 67.0 million, or 18.6% of the Bank’s loan portfolio. The Bank’s commercial loans generally are secured by corporate assets. In addition, the Bank generally obtains guarantees from the principals of the borrower with respect to all commercial loans. At December 31, 2004, there was $8,000 in commercial loans delinquent 90 days or more.

Non-performing Loans and Other Problem Assets

The Bank’s non-performing loans totaled 0.18% of total loans at December 31, 2004. Loans are placed on a non-accrual status when the loan is past due in excess of 90 days or the collection of principal and interest is doubtful. The Bank places a high priority on contacting customers by telephone as a primary method of determining the status of delinquent loans and the action necessary to resolve any payment problem. The Bank’s management performs quality reviews of problem assets to determine the necessity of establishing additional loss reserves. The Bank’s total non-performing assets to total asset ratio was 0.13% at December 31, 2004.

Real estate acquired by the Bank as a result of foreclosure is classified as real estate owned until such time as it is sold. The Bank generally tries to sell the property at a price no less than its net book value; however, it will consider slight discounts to the appraised value to expedite the return of the funds to an earning status. When such property is acquired, it is recorded at its fair value less estimated costs of sale. Any required write-down of the loan to its appraised fair market value upon foreclosure is charged against the allowance for loan losses. Subsequent to foreclosure, in accordance with accounting principles generally accepted in the United States of America, a valuation allowance is established if the carrying value of the property exceeds its fair value net of related selling expenses. At December 31, 2004, the Bank’s other assets owned totaled $111,000. This amount represents management’s best estimate on the fair value of these assets.

10

The following table sets forth information with respect to the Bank’s non-performing assets at the dates indicated. No loans were recorded as restructured loans within the meaning of SFAS No. 15 at the dates indicated.

	At December 31,
	2004			2003			2002			2001			2000
	(Dollars in thousands)
Accruing loans which are contractually past due 90 days or more:
Residential real estate	$	—		$	—		$	—		$	330		$	371
Non-residential real estate		—			—			—			60			63
Consumer		20			—			—			12			—
Total		20			—			—		$	402		$	434
Non-Accrual Loans:
Residential real estate		272			836			497			—			—
Non residential real estate		131			—			90			—			—
Consumer		222			276			246			—			—
Commercial		8			32			—			149			—
Total non-performing Loans	$	653		$	1,144		$	833		$	551		$	434
Percentage of total loans		0.18	%		0.34	%		0.29	%		0.32	%		0.34	%

At December 31, 2004, the Bank had $653,000 in loans outstanding which were classified as non-accrual, 90 days past due or restructured but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and may result in disclosure as non-accrual, 90 days past due or restructured. At December 31, 2004, the Bank had $111,000 in other assets owned. Also, the Bank had impaired loans, as defined by SFAS 114 and 118, totaling approximately $911,000 at December 31, 2004.

Federal regulations require savings institutions to classify their assets on the basis of quality on a regular basis. An asset meeting one of the classification definitions set forth below may be classified and still be a performing loan. An asset is classified as substandard if it is determined to be inadequately protected by the current retained earnings and paying capacity of the obligor or of the collateral pledged, if any. An asset is classified as doubtful if full collection is highly questionable or improbable. An asset is classified as loss if it is considered uncollectible, even if a partial recovery could be expected in the future. The regulations also provide for a special mention designation, described as assets which do not currently expose a savings institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management’s close attention. Such assets designated as special mention may include non-performing loans consistent with the above definition. Assets classified as substandard or doubtful require a savings institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, a savings institution must either establish a specific allowance for loss in the amount of the portion of the asset-classified loss, or charge off such amount. Federal examiners may disagree with a savings institution’s classifications. If a savings institution does not agree with an examiner’s classification of an asset, it may appeal this determination to the OTS Regional Director. The Bank regularly reviews its assets to determine whether any assets require classification or re-classification. At December 31, 2004, the Bank had $2.28 million in assets classified as special mention, $814,000 in assets classified as substandard and $97,000 in assets classified as doubtful.

Allowance for Loan Losses. In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management’s policy to maintain an adequate allowance for loan losses based on, among other things, the Bank’s and the industry’s historical loan loss experience, evaluation of economic conditions, regular reviews of delinquencies and loan portfolio quality and evolving standards imposed by federal bank examiners. The Bank increases its allowance for loan losses by charging provisions for possible loan losses against the Bank’s income.

11

Management will continue to actively monitor the Bank’s asset quality and allowance for loan losses. Management will charge off loans and properties acquired in settlement of loans against the allowances for losses on such loans and such properties when appropriate and will provide specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowances for losses and believes such allowances are adequate, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations.

The Bank’s methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific assets as well as losses that have not been identified but can be expected to occur. Management conducts regular reviews of the Bank’s assets and evaluates the need to establish allowances on the basis of this review. Allowances are established by the Board of Directors on a quarterly basis based on an assessment of risk in the Bank’s assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, loan concentrations, the state of the real estate market, regulatory reviews conducted in the regulatory examination process and economic conditions generally. Specific reserves will be provided for individual assets, or portions of assets, when ultimate collection is considered improbable by management based on the current payment status of the assets and the fair value of the security. At the date of foreclosure or other repossession, the Bank would transfer the property to real estate acquired in settlement of loans initially at the lower of cost or estimated fair value and subsequently at the lower of book value or fair value less estimated selling costs. Any portion of the outstanding loan balance in excess of fair value less estimated selling costs would be charged off against the allowance for loan losses. If, upon ultimate disposition of the property, net sales proceeds exceed the net carrying value of the property, a gain on sale of other real estate would be recorded.

Banking regulatory agencies, including the OTS, have adopted a policy statement regarding maintenance of an adequate allowance for loan and lease losses and an effective loan review system. This policy includes an arithmetic formula for determining the reasonableness of an institution’s allowance for loan loss estimate compared to the average loss experience of the industry as a whole. Examiners will review an institution’s allowance for loan losses and compare it against the sum of: (i) 50% of the portfolio that is classified doubtful; (ii) 25% of the portfolio that is classified as substandard; and (iii) for the portions of the portfolio that have not been classified (including those loans designated as special mention), estimated credit losses over the upcoming 12 months given the facts and circumstances as of the evaluation date. This amount is considered neither a “floor” nor a “safe harbor” of the level of allowance for loan losses an institution should maintain, but examiners will view a shortfall relative to the amount as an indication that they should review management’s policy on allocating these allowances to determine whether it is reasonable based on all relevant factors.

12

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

	Year Ended December 31,
	2004			2003			2002			2001			2000
	(Dollars in thousands)
Balance at beginning of period	$	2,576		$	1,455		$	923		$	708		$	278
Loans charged off:
Commercial loans		(78	)		(178	)		(46	)		—			—
Consumer loans and overdrafts		(505	)		(401	)		(174	)		—			—
Residential real estate		(66	)		(77	)		(52	)		(7	)		(1	)
Total charge-offs		(649	)		(656	)		(272	)		(7	)		(1	)
Recoveries		146			27			9			—			—
Net loans charged off		(503	)		(629	)		(263	)		(7	)		(1	)
Provision for loan losses		1,200			1,750			795			222			431
Balance at end of period	$	3,273		$	2,576		$	1,455		$	923		$	708
Ratio of net charge-offs to average loans outstanding during the period		0.14	%		0.20	%		0.12	%		0.01	%		0.00	%

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

	At December 31,
	2004				2003				2002				2001
	Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
One-to-four family		525	57.6	%	$	303	56.6	%	$	249	58.4	%	$	138	65.0	%
Construction		52	0.7	%		49	1.1	%		33	0.6	%		50	3.3	%
Multi-family residential		160	1.8	%		127	1.9	%		51	1.6	%		60	1.4	%
Non-residential		655	11.2	%		616	11.7	%		341	11.0	%		210	10.7	%
Secured by deposits		—	0.9	%		—	0.9	%		—	1.0	%		—	1.3	%
Other loans		1,881	27.8	%		1,481	27.8	%		781	27.4	%		465	18.3	%
Total allowance for loan losses	$	3,273	100.0	%	$	2,576	100.0	%	$	1,455	100.0	%	$	923	100.0	%

	At December 31, 2000
	Amount		Percent of Loans in Each Category to Total Loans
	(In thousands)
One-to-four family	$	71	70.8	%
Construction		106	4.4	%
Multi-family residential		106	2.2	%
Non-residential		177	16.7	%
Secured by deposits		—	2.1	%
Other consumer loans		248	3.8	%
Total allowance for loan losses	$	708	100.0	%

13

Investment Activities

The Bank makes investments in order to maintain the levels of liquid assets required by regulatory authorities and manage cash flow, diversify its assets, obtain yield and to satisfy certain requirements for favorable tax treatment. The principal objective of the investment policy is to earn as high a rate of return as possible, but to consider also financial or credit risk, liquidity risk and interest rate risk. The investment activities of the Company and the Bank consist primarily of investments in U.S. Government agency securities, municipal and corporate bonds, CMO’s, and mortgage-backed securities. Typical investments include federally sponsored agency mortgage pass-through and federally sponsored agency and mortgage-related securities. Investment and aggregate investment limitations and credit quality parameters of each class of investment are prescribed in the Bank’s investment policy. The Company and the Bank perform analyses on mortgage-related securities prior to purchase and on an ongoing basis to determine the impact on earnings and market value under various interest rate and prepayment conditions. Securities purchases must be approved by the Bank’s President. The Board of Directors reviews all securities transactions on a monthly basis.

At December 31, 2004, securities with an amortized cost of $ 159.2 million and an approximate market value of $ 158.1 million were classified as available for sale. Management presently does not intend to sell such securities and, based on the current liquidity level and the access to borrowings through the FHLB of Cincinnati, management currently does not anticipate that the Company or the Bank will be placed in a position of having to sell securities with material unrealized losses.

At December 31, 2004, securities with an amortized cost of $22.8 million and an approximate market value of $22.7 million were classified as held to maturity. Securities designated as held to maturity are those assets which the Company or the Bank has both the ability and the intent to hold to maturity. Upon acquisition, securities are classified as to the Company’s or the Bank’s intent and a sale would only be affected due to deteriorating investment quality. The held to maturity investment portfolio is not used for speculative purposes and is carried at amortized cost. In the event securities are sold from this portfolio for other than credit quality reasons, all securities within the investment portfolio with matching characteristics may be reclassified as assets available for sale. Securities designated as “available for sale” are those assets which the Company or the Bank may not hold to maturity and thus are carried at market value with unrealized gains or losses, net of tax effect, recognized in stockholders’ equity.

Mortgage-Backed and Related Securities. Mortgage-backed securities represent a participation interest in a pool of one-to-four family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators through intermediaries that pool and repackage the participation interest in the form of securities to investors such as the Bank. CMO’s are a variation of mortgage-backed securities in which the mortgage pool is divided into specific classes, with different classes receiving different principal reduction streams based on numerous factors, including prepayments speeds. Such intermediaries may include quasi-governmental agencies such as FHLMC, FNMA and the Government National Mortgage Association (“GNMA”) which guarantees the payment of principal and interest to investors. Of the $ 47.9 million mortgage-backed security portfolio and $14.9 million CMO portfolio at December 31, 2004, approximately $ 3.8 million were originated through GNMA, approximately $ 36.7 million were originated through FNMA, approximately $ 19.7 million were originated through FHLMC, and approximately $2.6 million are Whole Loan CMO’s. Typically, the collateral in Whole Loan CMO’s include jumbo mortgages that exceeded the limits provided by federal agencies and do not have a federal government or agency guarantee. The issuers of Whole Loan CMO’s receive an AAA rating by credit rating agencies by providing an overabundance of collateral (125% to 150%) to secure these investments. In capital computations, Whole Loan CMO’s are risk rated 20%, the same of FNMA and FHLMC.

Mortgage-backed securities typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have similar maturities. The underlying pool of mortgages can be composed of either fixed-rate or adjustable-rate mortgage loans. Mortgage-backed securities generally are referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages.

14

The actual maturity of a mortgage-backed security varies, depending on when the mortgagors prepay or repay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the investment, thereby adversely affecting its yield to maturity and the related market value of the mortgage-backed security.

The yield is based upon the interest income and the amortization of the premium or accretion of the discount related to the mortgage-backed security. Premiums and discounts on mortgage-backed securities are amortized or accreted over the estimated term of the securities using a level yield method. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed security, and these assumptions are reviewed periodically to reflect the actual prepayment.

The actual prepayments of the underlying mortgages depend on many factors, including the type of mortgage, the coupon rate, the age of the mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates. The difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates is an important determinant in the rate of prepayments. During periods of falling mortgage interest rates, prepayments generally increase, and, conversely, during periods of rising mortgage interest rates, prepayments generally decrease. If the coupon rate of the underlying mortgage significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages. Prepayment experience is more difficult to estimate for adjustable-rate mortgage-backed securities.

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

	At December 31,
	2004		2003		2002
	(In thousands)
Securities available for sale:
FHLB and FHLMC stock	$	3,015	$	2,488	$	2,391
U. S. government and agency Securities		64,599		41,308		24,539
Mortgage-backed securities		61,571		66,947		58,489
Municipal bonds		23,781		28,523		11,803
Corporate bonds		5,200		4,233		5,910
Other		15		15		15
Securities held to maturity:
U.S. government and agency securities		21,546		13,339		—
Mortgage-backed securities		1,222		1,769		2,932
Total investment securities	$	180,949	$	158,622	$	106,079

The following table sets forth information on the scheduled maturities, amortized cost, market values and average yields for U.S. Government agency securities, corporate bonds and municipal securities in the investment portfolio at December 31, 2004. At such date, all of the agency securities were callable and/or due on or before December 31, 2007. At December 31, 2004, $ 21.3 of the callable agency securities are structure notes, where the interest rate paid on the bond increases significantly on a given date, making it more likely that the bond will be called at that date. At December 31, 2004, $ 14.3 million of municipal securities were callable and/or due between March 2005 and December 2014. The average yield for municipal securities are quoted as taxable equivalent. All corporate bonds were non callable.

	One Year or Less				One to Five Years				Five to Ten Years				After Ten Years				Total Investment Portfolio
	Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Average Yield		Carrying Value		Market Value		Average Yield
	(Dollars in thousands)
U.S. government and agency securities	$	—	—	%	$	18,862	3.70	%	$	52,867	4.14	%	$	14,416	5.16	%	$	86,145	$	86,074	4.22	%
Corporate bonds	$	—	—	%	$	5,200	4.47	%		—	—			—	—		$	5,200	$	5,200	4.47	%
Municipal bonds	$	35	4.46	%	$	1,480	4.14	%	$	11,653	4.72	%	$	10,613	5.58	%	$	23,781	$	23,781	5.06	%

15

Deposit Activity and Other Sources of Funds

General. Deposits are the primary source of the Bank’s funds for lending, investment activities and general operational purposes. In addition to deposits, the Bank derives funds from loan principal and interest repayments, maturities of investment securities and mortgage-backed securities and interest payments thereon. Although loan repayments are a relatively stable source of funds, deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds, or on a longer term basis for general corporate purposes. The Bank has access to borrow from the FHLB of Cincinnati, and the Bank will continue to have access to FHLB of Cincinnati advances. The Bank may rely upon retail deposits rather than borrowings as its primary source of funding for future asset growth.

Deposits. The Bank attracts deposits principally from within its market area by offering competitive rates on its deposit instruments, including money market accounts, passbook savings accounts, individual retirement accounts, and certificates of deposit which range in maturity from three months to five years. Deposit terms vary according to the minimum balance required and the length of time the funds must remain on deposit and the interest rate. Maturities, terms, service fees and withdrawal penalties for its deposit accounts are established by the Bank on a periodic basis. The Bank reviews its deposit mix and pricing on a weekly basis. In determining the characteristics of its deposit accounts, the Bank considers the rates offered by competing institutions, lending and liquidity requirements, growth goals and federal regulations. The Bank does not accept brokered deposits.

The Bank attempts to compete for deposits with other institutions in its market area by offering competitively priced deposit instruments that are tailored to the needs of its customers. Additionally, the Bank seeks to meet customers’ needs by providing convenient customer service to the community. Substantially all of the Bank’s depositors are Kentucky or Tennessee residents who reside in the Bank’s market area.

Savings deposits in the Bank at December 31, 2004 were represented by the various types of savings programs described below.

Interest Rate*	Minimum Term	Category	Minimum Amount		Balance		Percentage of Total Deposits
					(In thousands)
—  %	None	Non-interest bearing	$	100	$	32,214	7.4	%
0.6%*	None	NOW accounts		1,500		87,075	20.0	%
1.1%	None	Savings & money market		10		65,350	15.0	%
						184,639	42.4	%
		Certificates of Deposit
2.1%	3 months or less	Fixed-term, fixed rate		500		29,801	6.8	%
2.5%	3 to 12 months	Fixed-term, fixed-rate		500		67,406	15.5	%
3.5%	12 to 24-months	Fixed-term, fixed-rate		500		83,183	19.1	%
3.3%	24 to 36-months	Fixed-term, fixed-rate		500		33,008	7.5	%
3.7%	36 to 48-months	Fixed-term, fixed-rate		500		21,156	4.8	%
4.2%	48 to 60-months	Fixed-term, fixed rate		500		17,002	3.9	%
						251,556	57.6	%
					$	436,195	100.0	%

* Represents weighted average interest rate.

16

The following table sets forth, for the periods indicated, the average balances and interest rates based on month-end balances for interest-bearing demand deposits and time deposits.

	Year Ended December 31,
	2004						2003						2002
	Interest-bearing demand deposits			Time deposits			Interest-bearing demand deposits			Time deposits			Interest-bearing demand deposits			Time deposits
							(Dollars in thousands)
Average Balance	$	143,643		$	256,806		$	117,029		$	260,934		$	63,384		$	181,481
Average Rate		1.40	%		3.01	%		1.32	%		3.56	%		2.26	%		3.82	%

The following table sets forth the change in dollar amount of deposits in the various types of accounts offered by the Bank between the dates indicated.

	Balance at December 31, 2004		% of Deposits		Increase (Decrease) from December 31, 2003			Balance at December 31, 2003		% of Deposits		Increase (Decrease) from December 31, 2002
	(Dollars in thousands)
Non-interest bearing	$	32,214	7.4	%	$	4,866		$	27,348	6.6	%	$	8,228
Demand and NOW accounts		87,075	20.0	%		25,829			61,246	14.7	%		28,031
Savings & MMDA		65,350	15.0	%		(3,060	)		68,410	16.3	%		11,943
Other time deposits		251,556	57.6	%		(8,928	)		260,484	62.4	%		15,631
Total		436,195	100.00	%		18,707			417,488	100.0	%		63,833

	Balance at December 31, 2002		% of Deposits		Increase (Decrease) from December 31, 2001		Balance at December 31, 2001		% of Deposits
	(Dollars in thousands)
Non-interest bearing	$	19,120	5.4	%	$	11,904	$	7,216	3.6	%
Demand and NOW Accounts		33,215	9.4	%		20,796		12,419	6.2	%
Savings & MMDA.		56,467	16.0	%		15,072		41,395	20.6	%
Other time deposits		244,853	69.2	%		105,567		139,286	69.6	%
Total	$	353,655	100.0	%	$	153,339	$	200,316	100.0	%

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

	At December 31,
	2004		2003		2002
	(In thousands)
1.00 - 2.00%		56,745		57,772		7,406
2.01 - 4.00%		121,303		143,632		130,718
4.01 - 6.00%		68,585		46,309		77,765
6.01 - 8.00%		4,923		12,771		28,964
Total	$	251,556	$	260,484	$	244,853

17

The following table sets forth the amount and maturities of time deposits at December 31, 2004.

	Amount Due
	Less Than One Year		1-2 Years		2-3 Years		After 3 Years		Total
	(In thousands)
0.00 - 2.00%	$	43,818	$	2,675	$	10,250	$	2	$	56,745
2.01 - 4.00%		45,753		46,109		11,090		18,351		121,303
4.01 - 6.00%		2,926		34,186		11,668		19,805		68,585
6.01 - 8.00%		4,710		213		—		—		4,923
Total	$	97,207	$	83,183	$	33,008	$	38,158	$	251,556

The following table indicates the amount of the Bank’s certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2004.

Maturity Period	Certificates of Deposit
	(In millions)
Three months or less	$	7.7
Over three through six months		9.4
Over six through 12 months		10.9
Over 12 months		51.2
Total	$	79.2

Certificates of deposit at December 31, 2004 included approximately $79.2 million of deposits with balances of $100,000 or more, compared to $82.1 million and $61.7 million at December 31, 2003 and 2002, respectively. Such time deposits may be risky because their continued presence in the Bank is dependent partially upon the rates paid by the Bank rather than any customer relationship and, therefore, may be withdrawn upon maturity if another institution offers higher interest rates. The Bank may be required to resort to other funding sources such as borrowings or sales of its securities available for sale if the Bank believes that increasing its rates to maintain such deposits would adversely affect its operating results. At this time, the Bank does not believe that it will need to significantly increase its deposit rates to maintain such certificates of deposit and, therefore, does not anticipate resorting to alternative funding sources. See Note 7 of Notes to Financial Statements.

The following table sets forth the deposit activities of the Bank for the periods indicated.

	Year Ended December 31,
	2004		2003			2002
	(In thousands)
Deposits	$	404,418	$	415,711		$	348,196
Obtain through acquisition		—		—			96,532
Withdrawals		392,588		(359,372	)		(300,462	)
Net increase before interest credited		11,830		56,339			144,266
Interest credited		6,877		7,494			9,073
Net increase in deposits	$	18,707	$	63,833		$	153,339

In the unlikely event the Bank is liquidated after the Conversion, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the sole stockholder of the Bank, which is the Company.

Borrowings. Savings deposits historically have been the primary source of funds for the Bank’s lending, investments and general operating activities. The Bank is authorized, however, to use advances from the FHLB of Cincinnati to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Cincinnati functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions.

18

As a member of the FHLB System, the Bank is required to own stock in the FHLB of Cincinnati and is authorized to apply for advances. Advances are pursuant to several different programs, each of which has its own interest rate and range of maturities. The Bank has entered into a Cash Management Advance program with FHLB. See Note 8 of Notes to Financial Statements. Advances from the FHLB of Cincinnati were $81.3 million at December 31, 2004 and are secured by a blanket security agreement in which the Bank has pledged its 1-4 family first mortgage loans held in the Bank’s loan portfolio.

On September 25, 2003, the Company issued $10,310,000 in floating rate junior subordinated debentures with a thirty year maturity and callable at the Company’s discretion quarterly after September 25, 2008. The subordinated debentures are priced at a variable rate equal to the three month libor (London Inter Bank Offering Rate) plus 3.10%. At December 31, 3004, the three-month libor rate was 2.07%. The securities are immediately callable in the event of a change in tax or accounting law that has a significant negative impact to issuing these securities.

For regulator purposes, subordinated debentures may be treated as Tier I capital. Federal regulations limit the use of subordinated debentures to 25% of total Tier I capital. Discussions among regulatory agencies are underway that may limit the current and future use of subordinated debentures as Tier I capital. The Company’s decision to issue subordinated debentures was in part influenced by potential regulatory actions in the future. The Company anticipates above average growth to continue and anticipates a time in the future when capital ratios are lower and additional capital may be need.

In October of 2004, the Bank entered into a interest rate swap agreement with Compass Bank of Birmingham, Alabama. The agreement calls for the Bank to pay a fixed rate of 3.53% until September 25, 2008 on $10 million and receive payment equal to the three month libor. The Bank then completed an intercompany transaction that transferred the swap to the Company, providing an effective hedge for its variable rate subordinated debentures.

Subsidiary Activities

As a federally chartered savings bank, the Bank is permitted to invest an amount equal to 2% of its assets in subsidiaries, with an additional investment of 1% of assets where such investment serves primarily community, inner-city and community development purposes. The Bank’s lone subsidiary is Fall and Fall Insurance Agency (“Fall and Fall”) of Fulton, Kentucky. Fall & Fall was acquired in the Fulton acquisition on September 5, 2002. The Bank’s investment in the agency is approximately $380,000.

Competition

The Bank faces significant competition both in originating mortgage and other loans and in attracting deposits. The Bank competes for loans principally on the basis of interest rates, the types of loans it originates, the deposit products it offers and the quality of services it provides to borrowers. The Bank also competes by offering products which are tailored to the local community. Its competition in originating real estate loans comes primarily from other savings institutions, commercial banks and mortgage bankers making loans secured by real estate located in the Bank’s market area. Commercial banks, credit unions and finance companies provide vigorous competition in consumer lending. Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions.

At June 30, 2004, the Bank had an 18.93% share of the deposit market in its combined markets. The Bank’s most significant competition across its entire market area was Branch Bank & Trust of North Carolina with a 20.97% deposit market share, US Bank of Minnesota with a 7.33% deposit market share and Union Planters of Tennessee with an 8.92% deposit market share. In addition, each market contains other community banks that provide competitive products and services within individual markets.

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The Bank attracts its deposits through its nine offices primarily from the local community. Consequently, competition for deposits is principally from other savings institutions, commercial banks and brokers in the local community as well as from credit unions. The Bank competes for deposits and loans by offering what it believes to be a variety of deposit accounts at competitive rates, convenient business hours, a commitment to outstanding customer service and a well-trained staff. The Bank believes it has developed strong relationships with local realtors and the community in general.

The Bank is a community and retail-oriented financial institution. Management considers the Bank’s branch network and reputation for financial strength and quality customer service as its major competitive advantage in attracting and retaining customers in its market area. A number of the Bank’s competitors have been acquired by statewide/nationwide banking organizations. While the Bank is subject to competition from other financial institutions which may have greater financial and marketing resources, management believes the Bank benefits by its community orientation and its long-standing relationship with many of its customers.

Employees

As of December 31, 2004, the Company and the Bank had 117 full-time and 16 part-time employees, none of whom were represented by a collective bargaining agreement. Management considers the Bank’s relationships with its employees to be good.

Sarbanes–Oxley Act of 2002

In July 2002, the President of the United States signed the Sarbanes-Oxley Act of 2002 into law. The Sarbanes-Oxley Act provided for sweeping changes with respect to corporate governance, accounting policies and disclosure requirements for public companies, and also for their directors and officers. The Sarbanes-Oxley Act required the SEC to adopt new rules to implement the Act’s requirements. These requirements include new financial reporting requirements and rules concerning the chief executive and chief financial officers to certify certain financial and other information included in the company’s quarterly and annual reports. The rules also require these officers to certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the company’s disclosure controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. The certifications by the Company’s Chief Executive Officer and Chief Financial Officer of the financial statements and other information included in this Annual Report on Form 10-K have been filed as exhibits to this Form 10-K. See Item 9A (“Controls and Procedures”) hereof for the Company’s evaluation of disclosure controls and procedures.

Pursuant to Section 404 of the Sarbanes-Oxley Act, the Company will be required under rules adopted by the SEC to include in its annual reports a report by management on the Company’s internal control over financial reporting and an accompanying auditor’s report. In March 2005, the SEC extended the Section 404 compliance date for the Company and other non-accelerated filers. Under the extension, the Company must begin to comply with these requirements for its fiscal year ending December 31, 2006.

USA Patriot Act

In 2001, the President of the United States signed the USA Patriot Act into law. The USA Patriot Act authorizes new regulatory powers to combat international terrorism. The provisions that affect financial institutions most directly provide the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes. Among other things, the USA Patriot Act prohibits financial institutions from doing business with foreign “shell” banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions have to follow new minimum verification of identity standards for all new accounts and are permitted to share information with law enforcement authorities under circumstances that were not previously permitted.

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Regulation

General. The Bank is chartered as a federal savings bank under the Home Owners’ Loan Act, as amended (the “HOLA”), which is implemented by regulations adopted and administered by the OTS. As a federal savings bank, the Bank is subject to regulation, supervision and regular examination by the OTS. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including the Bank and the Company. Federal banking laws and regulations control, among other things, the Bank’s required reserves, investments, loans, mergers and consolidations, payment of dividends and other aspects of the Bank’s operations. The deposits of the Bank are insured by the BIF administered by the FDIC to the maximum extent provided by law. In addition, the FDIC has certain regulatory and examination authority over OTS-regulated savings institutions and may recommend enforcement actions against savings institutions to the OTS. The supervision and regulation of the Bank is intended primarily for the protection of the deposit insurance fund and the Bank’s depositors rather than for holders of the Company’s stock or for the Company as the holder of the stock of the Bank.

As a savings and loan holding company, the Company is registered with the OTS and subject to OTS regulation and supervision under the HOLA. The Company also is required to file certain reports with, and otherwise comply with the rules and regulations of, the Commission under the federal securities laws.

The following discussion is intended to be a summary of certain statutes, rules and regulations affecting the Bank and the Company. A number of other statutes and regulations have an impact on their operations. The following summary of applicable statutes and regulations does not purport to be complete and is qualified in its entirety by reference to such statutes and regulations.

Regulatory Capital. The OTS’ capital adequacy regulations require savings institutions such as the Bank to meet three minimum capital standards: a “core” capital requirement of 4% of adjusted total assets (or 3% if the institution is rated Composite 1 under the CAMELS examination rating system), a “tangible” capital requirement of 1.5% of adjusted total assets, and a “risk-based” capital requirement of 8% of total risk-based capital to total risk-weighted assets. In addition, the OTS has adopted regulations imposing certain restrictions on savings institutions that have a total risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total assets of less than 4%. See Note 15 of Notes to Consolidated Financial Statements.

Prompt Corrective Regulatory Action. Under the OTS prompt corrective action regulations, the federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet certain minimum capital requirements, including a leverage limit and a risk-based capital requirement. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to become undercapitalized. The federal banking regulators, including the OTS, have issued regulations that classify insured depository institutions by capital levels and provide that the applicable agency will take various prompt corrective actions to resolve the problems of any institution that fails to satisfy the capital standards.

Under the joint prompt corrective action regulations, a “well-capitalized” institution is one that is not subject to any regulatory order or directive to meet any specific capital level and that has or exceeds the following capital levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a ratio of Tier 1 capital to total assets (“leverage ratio”) of 5%. An “adequately capitalized” institution is one that does not qualify as “well capitalized” but meets or exceeds the following capital requirements: a total risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the institution has the highest composite examination rating. An institution not meeting these criteria is treated as “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” depending on the extent to which its capital levels are below these standards. An institution that fails within any of the three “undercapitalized” categories will be subject to certain severe regulatory sanctions required by OTS regulations. As of December 31, 2004, the Bank was “well-capitalized” as defined by the regulations.

21

Qualified Thrift Lender Test. The HOLA and OTS regulations require all savings institutions to satisfy one of two Qualified Thrift Lender (“QTL”) tests or to suffer a number of sanctions, including restrictions on activities. A savings institution must maintain its status as a QTL on a monthly basis in at least nine out of every 12 months. An initial failure to qualify as a QTL results in a number of sanctions, including the imposition of certain operating restrictions and a restriction on obtaining additional advances from its Federal Home Loan Bank.

If a savings institution does not re-qualify under the QTL test within the three-year period after it fails the QTL test, it would be required to terminate any activity not permissible for a national bank and repay as promptly as possible any outstanding advances from its Federal Home Loan Bank. In addition, the holding company of such an institution, such as the Company, would similarly be required to register as a bank holding company with the Federal Reserve Board. At December 31, 2004, the Bank qualified as a QTL.

Limitations on Capital Distributions. OTS regulations impose limitations upon capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. Under the OTS capital distribution regulations, a savings institution that (i) qualifies for expedited treatment of applications by maintaining one of the two highest supervisory examination ratings, (ii) will be at least adequately capitalized after the proposed capital distribution and (iii) and is not otherwise restricted by applicable law in making capital distributions may, without prior approval by the OTS, make capital distributions during a calendar year equal to its net income for such year plus its retained net income for the preceding two years. Capital distributions in excess of such amount would require prior OTS approval.

Under OTS regulations, the Bank would not be permitted to pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of the Bank at the time of the Conversion. In addition, under the prompt corrective action regulations of the OTS, the Bank would be prohibited from paying dividends if the Bank were classified as “undercapitalized” under such rules. See “— Prompt Corrective Regulatory Action.”

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

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

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

Reserve Requirements. Pursuant to regulations of the Federal Reserve Board (the “FRB”), all FDIC-insured depository institutions must maintain average daily reserves at specified levels against their transaction accounts. As of December 31, 2004, the Bank met these reserve requirements.

Federal Home Loan Bank System. The Federal Home Loan Bank System consists of 12 district Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board (“FHFB”). The Federal Home Loan Banks provide a central credit facility primarily for member institutions. As a member of the FHLB, the Bank is required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Bank was in compliance with this requirement, with an investment in FHLB stock at December 31, 2004 of $ 3.0 million.

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Regulation of the Company

The Company is a unitary savings and loan holding company subject to OTS regulation, supervision and examination. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries and may restrict or prohibit activities that are determined to represent a serious risk to the safety, soundness or stability of the Bank or any other subsidiary savings institution.

Under the HOLA, a savings and loan holding company is required to obtain the prior approval of the OTS before acquiring another savings institution or savings and loan holding company. A savings and loan holding company may not (i) acquire, with certain exceptions, more than 5% of a non-subsidiary savings institution or a non-subsidiary savings and loan holding company; or (ii) acquire or retain control of a depository institution that is not insured by the FDIC. In addition, while the Bank generally may acquire a savings institution by merger in any state without restriction by state law, the Company could acquire control of an additional savings institution in a state other than Kentucky only if such acquisition is permitted under the laws of the target institution’s home state or in a supervisory acquisition of a failing institution.

As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company were to acquire control of another savings institution as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF-insured savings institution) would become subject to such restrictions unless such other institutions each qualify as a QTL and were acquired in a supervisory acquisition.

If the Bank fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple savings and loan holding companies or their subsidiaries. In addition, within one year of such failure the Company would be required to register as, and would become subject to, the restrictions applicable to the bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple savings and loan holding company.

Forward-Looking Statements

This Annual Report on Form 10-K, including all documents incorporated herein by reference, contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words “believe,” “expect,” “seek,” and “intend” and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.

The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

At December 31, 2004, the Company estimates that is has approximately 2,700 shareholders, with 1,200 reported in the name of the shareholder and the remainder recorded in street name.

23

ITEM 2. PROPERTIES

The following table sets forth information regarding the Bank’s offices at December 31, 2004.

	Year Opened	Owned or Leased	Book Value (1)		Approximate Square Footage of Office
			(In thousands)
Main Office:
2700 Fort Campbell Boulevard Hopkinsville, Kentucky	1995	Owned	$	1,870	17,625
Branch Offices:
Downtown Branch Office 605 South Virginia Street Hopkinsville, Kentucky	1997	Owned	$	160	756
Murray Branch Office 210 N. 12th Street Murray, Kentucky	2003	Owned	$	1,065	3,650
Cadiz Branch Office 352 Main Street Cadiz, Kentucky	1998	Owned	$	381	2,200
Elkton Branch Office 536 W. Main Street Elkton, Kentucky	1976	Owned	$	114	3,400
Benton Branch Office 105 W. 5th Street Benton, Kentucky	2003	Owned	$	772	4,800
Calvert City Office 35 Oak Plaza Drive Calvert City, Kentucky	2003	Owned	$	460	1,100
Carr Plaza Office 607 N. Highland Drive Fulton, Kentucky	2002	Owned	$	85	800
Lake Street Office 306 Lake Street Fulton, Kentucky	2002	Owned	$	1,008	15,000
Fall & Fall Insurance Office 101 Main Street Fulton, Kentucky	2002	Owned	$	28	3,200
Heritage Solutions Office 301 N. 12th St., Suite E Murray, Kentucky	2004	Lease	$	15	1,300
Bypass Branch Office Lafayette Road & 68-80 Bypass Hopkinsville, Kentucky	2004	Owned	$	742	In Progress

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

24

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company or the Bank is a party to various legal proceedings incident to its business. At December 31, 2004, there were no legal proceedings to which the Company or the Bank was a party, or to which any of their property was subject, which were expected by management to result in a material loss to the Company or the Bank. There are no pending regulatory proceedings to which the Company or the Bank is a party or to which any of their properties is subject which are currently expected to result in a material loss.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

John E. Peck. Mr. Peck, 40, has served as President and Chief Executive Officer of the Company and the Bank since July 2000. Prior to that, he was President and Chief Executive Officer of United Commonwealth Bank and President of Firstar Bank-Calloway County.

Boyd M. Clark. Mr. Clark, 59, has served as Senior Vice President — Loan Administration of the Bank since 1995. Prior to his current position, Mr. Clark served as First Vice President of the Bank. He has been an employee of the Bank since 1973. Mr. Clark also serves as Vice President and Secretary of the Company. From May to July 2000, Mr. Clark served as Acting President of both the Company and the Bank.

Michael L. Woolfolk. Mr. Woolfolk, 51, has served as Executive Vice President and Chief Operations Officer of the Bank since August 2000. Prior to that, he was President of Firststar Bank–Marshall County, President and Chief Executive Officer of Bank of Marshall County and President of Mercantile Bank.

Billy C. Duvall. Mr. Duvall, 39, has served as Vice President, Chief Financial Officer and Treasurer of the Company and the Bank since June 1, 2001. Prior to that, he was an Auditor with Rayburn, Betts & Bates, P.C., independent public accountants and a Principal Examiner with the National Credit Union Administration.

Michael F. Stalls. Mr. Stalls, 53, has served as Vice President, Chief Credit Officer of the Bank since May 28, 2004. Prior to that, he was a Senior Lender at Regions Bank in Winchester, Tennessee for 18 years and Vice President of First Tennessee Bank in Knoxville, Tennessee.

All officers serve at the discretion of the boards of directors of the Company or the Bank. There are no known arrangements or understandings between any officer and any other person pursuant to which he or she was or is to be selected as an officer.

25

PART II

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

The information set forth under the caption “Market and Dividend Information” in the Company’s Annual Report to Stockholders for the year ended December 31, 2004 (Exhibit No. 13) is incorporated herein by reference.

The following table provides information about purchases by the Company during the quarter ended December 31, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total number of shares purchased	Average Price paid per share		Total Number of shares purchased as part of announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
October 1, 2004 through October 31, 2004	—	$	—	—	91,091
November 1, 2004 through November 30, 2004	—		—	—	91,091
December 1, 2004 through December 31, 2004	—		—	—	91,091
Total	—		—	—

On September 20, 2000, the Company announced that its Board of Directors had approved the repurchase of up to 200,000 shares of its common stock. The stock repurchase program was completed in February 2001. On March 26, 2001, the Company announced that its Board of Directors had approved the repurchase of an additional 300,000 shares. The purchases are being made from time to time on the Nasdaq Stock Market at prices prevailing on that market or in privately negotiated transactions at management’s discretion, depending on market conditions, price of the Company’s common stock, corporate cash requirements and other factors. As of December 31, 2004, a total of 208,909 shares of common stock had been repurchased under the current program. No shares were repurchased during the quarter ended December 31, 2004.

ITEM 6. SELECTED FINANCIAL DATA

The information set forth under the caption “Selected Financial Information and Other Data” in the Company’s Annual Report to Stockholders for the year ended December 31, 2004 (Exhibit No. 13) is incorporated herein by reference.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report to Stockholders for the year ended December 31, 2004 (Exhibit No. 13) is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity Analysis” in the Company’s Annual Report to Stockholders for the year ended December 31, 2004 (Exhibit No. 13) is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company’s Financial Statements together with the related notes and the report of Rayburn, Bates & Fitzgerald, P.C., independent public accountants, all as set forth in the Company’s Annual Report to Stockholders for the year ended December 31, 2004 (Exhibit No. 13) are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable

ITEM 9A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to insure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decision making regarding required disclosure. The Company, under the supervision and participation of its management, including the Company’s Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report pursuant to the Exchange Act. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that all material information required to be disclosed is this annual report has been accumulated and communicated to them in a manner appropriate to allow timely decisions regarding required disclosures. During the quarter ended December 31, 2004, the Company has hired external parties to review, assess, and recommend changes to the Company’s internal control over financial reporting. As a result, the Company has made operational and procedural improvements to internal controls that have improved the Company’s internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION

Not Applicable

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors of the Company is omitted from this Report as the Company will file a definitive proxy statement (the “Proxy Statement”) not later than 120 days after December 31, 2004, and the information included therein under “Proposal I — Election of Directors” is incorporated herein by reference. Information regarding the executive officers of the Company is included under separate caption in Part I of this Form 10-K

Information regarding Section 16(a) beneficial ownership reporting compliance is omitted from this Report as the Company will the Proxy Statement not later than 120 days after December 31, 2004, and the information included therein under “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

Information regarding audit committee financial expert compliance is omitted from this Report as the Company will file the Proxy Statement not later than 120 days after December 31, 2004, and the information contained therein under “Committees of the Board of Directors” is incorporated herein by reference.

The Company has adopted a code of ethics that applies to all directors and employees, including without exception, the principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is omitted from this Report as the Company will file the Proxy Statement not later than 120 days after December 31, 2004, and the information included therein under “Proposal I — Election of Directors” is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

Information required by this Item is omitted from this Report as the Company will file the Proxy Statement not later than 120 days after December 31, 2004, and the information included therein under “Voting Securities and Principal Holders Thereof” and “Proposal I – Election of Directors” is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item is omitted from this Report as the Company will file the Proxy Statement, not later than 120 days after December 31, 2004, and the information included therein under “Proposal I — Election of Directors” is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is omitted from this report as the Company will file the Proxy Statement not later than 120 days after December 31, 2004, and the information included therein under “Independent Auditors” is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) The following consolidated financial statements of the Company included in the Annual Report to Stockholders for the year ended December 31, 2004, are incorporated herein by reference in Item 8 of this Report. The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this Report, except as expressly provided herein.

1. Report of Independent Registered Public Accounting Firm.

2. Consolidated Balance Sheets - December 31, 2004 and 2003.

3. Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002.

4. Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2004, 2003 and 2002.

5. Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002.

6. Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002.

7. Notes to Consolidated Financial Statements.

(a)(2) All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

(a)(3) The following exhibits either are filed as part of this Report or are incorporated herein by reference:

Exhibit No. 2. Plan of Conversion of Hopkinsville Federal Savings Bank. Incorporated herein by reference to Exhibit No. 2 to Registrant’s Registration Statement on Form S-1 (File No. 333-30215).

Exhibit No. 3.1. Certificate of Incorporation. Incorporated herein by reference to Exhibit No. 3.1 to Registrant’s Registration Statement on Form S-1 (File No. 333-30215).

Exhibit No. 3.2. Bylaws. Incorporated herein by reference to Exhibit No. 3.2 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

Exhibit No. 10.1. HopFed Bancorp, Inc. Management Recognition Plan. Incorporated herein by reference to Exhibit 99.1 to Registration Statement on Form S-8 (File No. 333-79391).

Exhibit No. 10.2. HopFed Bancorp, Inc. 1999 Stock Option Plan. Incorporated herein by reference to Exhibit 99.2 to Registration Statement on Form S-8 (File No. 333-79391).

Exhibit No. 10.3. Employment Agreement by and between Hopkinsville Federal Savings Bank and John E. Peck. Incorporated herein by reference to Exhibit No. 10.2 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.

Exhibit No. 10.4. Employment Agreement by and between HopFed Bancorp, Inc. and John E. Peck. Incorporated herein by reference to Exhibit No. 10.1 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.

29

Exhibit 10.5. HopFed Bancorp, Inc. 2000 Stock Option Plan. Incorporated herein by reference to Exhibit 10.10 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.

Exhibit 10.6. Employment Agreement by and between HopFed Bancorp, Inc. and Billy C. Duvall. Incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001.

Exhibit 10.7. Employment Agreement by and between Hopkinsville Federal Bank and Billy C. Duvall. Incorporated herein by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001.

Exhibit 10.8. Employment Agreement by and between HopFed Bancorp, Inc. and Michael L. Woolfolk. Incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002.

Exhibit 10.9. Employment Agreement by and between Heritage Bank and Michael L. Woolfolk.. Incorporated herein by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002.

Exhibit 10.10. Fulton Division Acquisition Agreement dated as of March 1, 2002, by and between Old National Bank and Hopkinsville Federal Bank. Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated March 1, 2002.

Exhibit 10.11 HopFed Bancorp, Inc. 2004 Long Term Incentive Plan. Incorporated herein by reference to Exhibit 99.3 to Registration Statement on Form S-8 (File No. 0495-117956) dated August 5, 2004.

Exhibit No. 13. Annual Report to Stockholders Except for those portions of the Annual Report to Stockholders for the year ended December 31, 2004, which are expressly incorporated herein by reference, such Annual Report is furnished for the information of the Commission and is not to be deemed “filed” as part of this Report.

Exhibit No. 14. Code of Ethics. Incorporated herein by reference to Exhibit 14 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

Exhibit No. 21. Subsidiaries of the Registrant.

Exhibit No. 23.1. Consent of Rayburn, Bates & Fitzgerald, P.C.

Exhibit No. 31.1 Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a – 14(a) or 15d – 14(a).

Exhibit No. 31.2 Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a – 14(a) or 15d – 14(a).

Exhibit No 32.1. Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

30

Exhibit No 32.2. Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

(b) Reports on Form 8-K. Current Report on Form 8-K, dated October 23, 2003, reporting under Item 12 (“Results of Operations and Financial Condition”) results of operations for the three and nine months ended September 30, 2003.

(c) Exhibits to this Form 10-K are attached or incorporated by reference as stated above.

(d) None.

31

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorized.

	HOPFED BANCORP, INC.
	(Registrant)
Date: March 31, 2005	By:	/s/ John E. Peck
		John E. Peck
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.

DATE: SIGNATURE AND TITLE:
/s/ John E. Peck John E. Peck Director, President and Chief Executive Officer (Principal Executive Officer)	March 31, 2005
/s/ Billy C. Duvall Billy C. Duvall Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	March 31, 2005
/s/ WD Kelley WD Kelley Chairman of the Board	March 31, 2005
/s/ Boyd M. Clark Boyd M. Clark Director, Vice President and Secretary	March 31, 2005
/s/ Walton G. Ezell Walton G. Ezell Director	March 31, 2005
/s/ Gilbert E. Lee Gilbert E. Lee Director	March 31, 2005

32

/s/ Harry J. Dempsey Harry J. Dempsey Director	March 31, 2005
/s/ Kerry Harvey Kerry Harvey Director	March 31, 2005
/s/ Thomas I. Miller Director	March 31, 2005

33

EX-13

Exhibit 13

SELECTED FINANCIAL INFORMATION AND OTHER DATA

The following summary of selected financial information and other data does not purport to be complete and is qualified in its entirety by reference to the detailed information and Consolidated Financial Statements and accompanying Notes appearing elsewhere in this Report.

	At December 31,
	2004		2003		2002		2001		2000
	(Dollars in thousands)
Financial Condition and Other Data
Total amount of:
Assets	$	579,731	$	531,465	$	427,502	$	285,639	$	229,958
Loans receivable, net		356,825		334,740		292,095		170,016		129,154
Loans held for sale		—		—		—		928		—
Cash and due from banks		17,357		12,958		9,288		3,941		2,227
Interest-bearing deposits in Federal Home Loan Bank (FHLB)		42		35		905		39		50
Federal funds sold		850		2,185		3,840		690		1,530
Securities available for sale		158,181		143,514		103,147		100,519		84,269
Securities held to maturity:
U.S. Government agency securities		21,546		13,339		—		—		—
Mortgage-backed Securities		1,222		1,769		2,932		4,462		7,796
Deposits		436,195		417,488		353,655		200,316		165,604
FHLB advances		81,319		54,353		23,623		38,747		17,040
Subordinated debentures		10,310		10,310		—		—		—
Total stockholders’ equity		49,373		47,238		46,878		43,589		45,362
Number of:
Real estate loans outstanding		4,805		4,048		3,216		2,248		2,075
Deposit accounts		48,071		43,069		36,868		18,178		18,778
Offices open		9		9		8		6		5
	Year Ended December 31,
	2004		2003		2002		2001		2000
	(Dollars in thousands)
Operating Data
Interest and dividend income	$	26,381	$	24,743	$	20,042	$	17,562	$	16,343
Interest expense		12,537		12,379		9,420		9,752		9,112
Net interest income before provision for loan losses		13,844		12,364		10,622		7,810		7,231
Provision for loan losses		1,200		1,750		795		222		431
Net interest income		12,644		10,614		9,827		7,588		6,800
Non-interest income		3,038		3,499		2,312		717		509
Non-interest expense		10,008		9,044		5,199		5,493		3,270
Income before income taxes		5,674		5,069		6,940		2,812		4,039
Provision for income taxes		1,683		1,574		2,346		973		1,373
Net income	$	3,991	$	3,495	$	4,594	$	1,839	$	2,666

1

Selected Quarterly Information (Unaudited)

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(Dollars in thousands)
Year Ended December 31, 2004:
Interest income	$	6,294	$	6,592	$	6,769	$	6,726
Net interest income after provision for losses on loans		3,029		3,238		3,307		3,070
Noninterest income		792		705		846		695
Noninterest expense		2,396		2,395		2,577		2,640
Net income		947		1,041		1,065		938
Year Ended December 31, 2003:
Interest income	$	5,905	$	6,192	$	6,237	$	6,409
Net interest income after provision for losses on loans		2,472		2,646		2,695		2,801
Noninterest income		1,015		905		883		696
Noninterest expense		2,023		2,812		2,032		2,177
Net income		996		505		1,046		948

2

Key Operating Ratios

	At or for the Year Ended December 31,
	2004		2003		2002
Performance Ratios
Return on average assets (net income divided by average total assets)	0.71	%	0.72	%	1.37	%
Return on average equity (net income divided by average total equity)	8.32	%	7.40	%	9.99	%
Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)	2.50	%	2.47	%	2.85	%
Ratio of average interest-earning assets to average interest-bearing liabilities	108.51	%	110.48	%	116.52	%
Ratio of non-interest expense to average total assets	1.76	%	1.86	%	1.55	%
Ratio of net interest income after provision for loan losses to non-interest expense	126.34	%	117.36	%	189.02	%
Efficiency ratio (noninterest expense divided by sum of net interest income plus noninterest income)	63.09	%	57.01	%	40.20	%
Asset Quality Ratios
Nonperforming assets to total assets at end of period	0.13	%	0.27	%	0.19	%
Nonperforming loans to total loans at end of period	0.18	%	0.34	%	0.29	%
Allowance for loan losses to total loans at end of period	0.91	%	0.76	%	0.50	%
Allowance for loan losses to nonperforming loans at end of period	501.23	%	225.17	%	174.67	%
Provision for loan losses to total loans receivable, net	0.33	%	0.52	%	0.27	%
Net charge-offs to average loans outstanding	0.14	%	0.20	%	0.12	%
Capital Ratios
Total equity to total assets at end of period	8.52	%	8.89	%	10.97	%
Average total equity to average assets	8.49	%	9.72	%	13.68	%

Regulatory Capital

	December 31, 2004
	(Dollars in thousands)
	Bank		Company
Tangible capital	$	52,899	$	54,924
Less: Tangible capital requirement		8,605		8,624
Excess		44,294		46,300
Core capital	$	52,899	$	54,924
Less: Core capital requirement		22,946		22,983
Excess		29,953		31,941
Total risk-based capital	$	56,172	$	58,198
Less: Risk-based capital requirement		26,898		27,053
Excess		29,274		31,145

3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

This discussion relates to the financial condition and results of operations of the Company, which became the holding company for the Bank in February 1998. The principal business of the Bank consists of accepting deposits from the general public and investing these funds primarily in loans and in investment securities and mortgage-backed securities. The Bank’s loan portfolio consists primarily of loans secured by residential real estate located in its market area.

For the year ended December 31, 2004, the Company recorded net income of $4.0 million, a return on average assets of 0.71% and a return on average equity of 8.32%. For the year ended December 31, 2003, the Company recorded net income of $3.5 million, a return on average assets of 0.72% and a return on average equity of 7.40%. For the year ended December 31, 2002 the Company recorded net income of $4.6 million, a return on average assets of 1.37% and a return on average equity of 9.99%.

The Company’s net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loan, investment securities and mortgage-backed securities portfolios and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (“interest rate spread”) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. To a lesser extent, the level of non-interest expenses such as compensation, employee benefits, data processing expenses, local deposit and federal income taxes also affect the Company’s net income.

The operations of the Company and the entire thrift industry are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Company’s market area.

Aggregate Contractual Obligations

	Maturity by Period
December 31, 2004 (In thousands)	Less than 1 year		Greater than 1 year to 3 years	Greater than 3 years to 5 years	Greater than 5 years	Total
Deposits	$	281,846	116,191	38,158	—	436,195
FHLB borrowings		20,639	18,352	16,995	25,333	81,319
Subordinated debentures		—	—	—	10,310	10,310
Lease commitments		33	42	14	—	89
Purchase obligations		6,430	2,960	—	—	9,390
Total	$	308,948	137,545	55,167	35,643	537,303

Deposits represent non-interest bearing, money market, savings, NOW, certificates of deposit and all other deposits held by the Company. Amounts that have an indeterminate maturity period are included in the less than one-year category above.

4

FHLB borrowings represent the amounts that are due to FHLB of Cincinnati. All amounts have fixed maturity dates with the exception of $18 million in convertible securities that may be called after the three month LIBOR exceeds 4.60%. The convertible advance has a prepayment penalty of $867,000 at December 31, 2004. Management does not anticipate calling these advances at this time.

Subordinated debentures represent the amount borrowed in a private pool trust preferred issuance on September 25, 2003. The debentures are priced at the three-month LIBOR plus 3.10%, currently 5.17%. The debentures re-price and pay interest quarterly and have a thirty-year final maturity. The debentures may be called at the issuer’s discretion on a quarterly basis after five years.

Lease commitments represent the total minimum lease payments under noncancelable operating leases.

Purchase obligations represent the total anticipated cost for non-cancelable operating contracts and fixed asset purchases. In October of 2004, the Company entered into an agreement with Design Engineers Inc. (DEI) to construct a 26,000 square foot operations center in Hopkinsville, Kentucky. The anticipated cost of the project is $6.4 million with an anticipated completion date of the end of the second quarter 2006. The majority of the construction cost is allocated to 2005.

In December of 2004, the Company made an offer to purchase land in Clarksville, Tennessee that was accepted by the buyer. The property cost approximately $560,000 and the sale closed on January 31, 2005.

The most significant operating contract is for the Company’s data processing services, which re-prices monthly based on the number of accounts and other operational factors. Estimates have been made to include reasonable growth projections. This contract expires in 2006.

Off Balance Sheet Arrangements

	Maturity by Period
December 31, 2004 (In thousands)	Less than 1 year		Greater than 1 year to 3 years	Greater than 3 years to 5 years	Greater than 5 years	Total
Standby letters of credit	$	870	—	—	—	870
Unused lines of credit		6,638	7,024	846	5,631	20,139
Total	$	7,508	7,024	846	5,631	21,009

Standby letters of credit represent commitments by the Company to repay a third party beneficiary when a customer fails to repay a loan or debt instrument. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with stand by letters of credit because funding for these obligations could be required immediately.

Unused lines of credit represent commercial and residential equity lines of credit with maturities ranging from one to fifteen years.

Accounting for Derivative Instruments and Hedging Activities

In October of 2004, Heritage Bank entered into a receive fixed pay variable swap transaction in the amount of $10 million with Compass Bank of Birmingham in which Heritage Bank will pay Compass a fixed rate of 3.53% quarterly for four years while Compass will pay Heritage Bank a rate equal to the three month London Interbank Offering Rate (“Libor”). Heritage Bank has signed an inter-company transfer with the Company that allows the Company to convert its variable rate subordinated debenture issuance to a fixed rate. The critical terms of the interest rate swap match the term of the corresponding variable rate subordinated debt issuance. All components of the derivative instrument’s gain or loss are included in the assessment of hedge effectiveness. There were no fair-value hedging gains or losses, as a result of hedge ineffectiveness, recognized for the three or twelve months ended December 31, 2004. The Company recognized an increase in interest expense of $22,000 for the three months ended December 31, 2004 related to the interest rate swap.

5

Quantitative and Qualitative Disclosure about Market Risk

Quantitative Aspects of Market Risk. The principal market risk affecting the Company is risk associated with interest rate volatility (interest rate risk). The Company does not maintain a trading account for any class of financial instrument nor does it engage in hedging activities or purchase high-risk derivative instruments. The Company is not subject to foreign currency exchange rate risk or commodity price risk. Substantially all of the Company’s interest rate risk is derived from the Bank’s lending and deposit taking activities. This risk could result in reduced net income, loss in fair values of assets and/or increases in fair values of liabilities due to upward changes in interest rates.

Qualitative Aspects of Market Risk The Company’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between assets and liabilities maturities and interest rates. The principal element in achieving this objective is to increase the interest-rate sensitivity of the Company’s interest-earning assets by retaining for its portfolio loans with interest rates subject to periodic adjustment to market conditions. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of its interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Bank promotes demand accounts and certificates of deposit with primarily terms of up to five years.

Asset / Liability Management

Key components of a successful asset/liability strategy are the monitoring and managing of interest rate sensitivity of both the interest-earning asset and interest-bearing liability portfolios. The Company has employed various strategies intended to minimize the adverse affect of interest rate risk on future operations by providing a better match between the interest rate sensitivity between its assets and liabilities. In particular, the Company’s strategies are intended to stabilize net interest income for the long-term by protecting its interest rate spread against increases in interest rates. Such strategies include the origination of adjustable-rate mortgage loans secured by one-to-four family residential real estate, and, to a lesser extent, multi-family real estate loans and the origination of other loans with interest rates that are more sensitive to adjustment based upon market conditions than long-term, fixed-rate residential mortgage loans. For the year ended December 31, 2004, approximately $181.0 million of the $207.3 million of one-to-four family residential loans originated by the Company (comprising 87.3% of such loans) had adjustable rates.

The U.S. government agency securities generally are purchased for a term of fifteen years or less. Securities may or may not have call options. A security with call options improves the yield on the security but also has little or no positive price convexity. Non-callable securities or securities with one time calls offer less yield but more positive price convexity and an improved predictability of cash flow. Generally, securities with the greater call options (continuous and quarterly) are purchased only during times of extremely low interest rates. The reasons for purchasing these securities generally focus on the fact that a non callable or one time call is of little value if rates are exceptionally low. Due to their lack of positive price convexity, these securities are more likely classified as held to maturity.

At December 31, 2004, no securities were due within one year, approximately $18.9 million were due in one to five years, approximately $52.8 million were due in five to ten years and approximately $14.4 million were due after ten years. However, at December 31, 2004, $80.8 million of these securities had a call provision, which authorizes the issuing agency to prepay the securities at face value at certain pre-established dates. If, prior to their maturity dates, market interest rates decline below the rates paid on the securities, the issuing agency may elect to exercise its right to prepay the securities. At December 31, 2004, all of these securities are callable and/or due prior to December 31, 2007. The weighted average life of the agency bond portfolio is approximately 3.6 years and the modified duration of the agency bond portfolio is approximately 3.1 years.

6

The municipal bond portfolio largely consists of local school district bonds with the guarantee of the state of Kentucky or out of state bonds insured by private companies. At December 31, 2004, the Company has $23.8 million in municipal bonds. These bonds were purchased to provide long-term income stability and higher tax equivalent yields to a small portion of the investment portfolio. At December 31, 2004, approximately $14.3 million of the Company’s municipal bond portfolio is callable with call dates ranging from January 2006 to December 2014. The call dates are staggered to eliminate the excessive cash flows within any one-year period. At December 31, 2004, $35,000 was due in less than one year, $1.5 were due within one to five years, $11.7 million were due in five to ten years and approximately $10.6 million were due after ten years. At December 31, 2004, approximately $4.6 million of municipal bonds had a call date between one and five years and approximately $ 9.7 million in more than five years. At December 31, 2004, the average life of the municipal bond portfolio is approximately 8.6 years and the modified duration of the municipal bond portfolio is approximately 6.9 years.

At December 31, 2004, the Company held $5.2 million in corporate bonds. The Company conducts a financial analysis similar to that of a loan customer for each corporate bond purchased. All corporate bonds purchased by the Bank bonds are investment grade and mature by October 31, 2009 while providing yields that are attractive as compared to U.S. Government and agency bonds of similar maturities. The Company owns no callable corporate bonds. At December 31, 2004, the average life of the corporate bond portfolio is approximately 3.2 years and the modified duration of the corporate bond portfolio is approximately 2.8 years.

In the last two years, management has attempted to maximize investment yields without taking unacceptable levels of interest rate risk. Various methods have been used to accomplish this objective. One method involves the purchasing of selective agency and municipal bonds at above market coupon rates (and paying a premium for these bonds). If these investments are not called, the interest income on the bonds increase substantially due to the full amortization of the premium. At December 31, 2004, approximately $7.1 million in agency bonds purchased at a significant premium are callable in 2005, approximately $3.0 million are callable in 2006 and approximately $8.2 million are callable in 2007. At December 31, 2004, approximately $2.7 million in municipal bonds purchased at a significant premium are callable in one to five years and $2.7 million are callable from five to ten years.

A second method of managing interest rate risk is purchasing structured notes. These notes are typically long term callable bonds in which the interest rate increases at a predetermined rate unless the note is called. At December 31, 2004, the Company owns approximately $21.3 million in structured agency bonds, all of which may be called in 2005. However, the likelihood of the bonds being called is greater when the interest rate paid on the structured note increases. At December 31, 2004, approximately $6.9 million in agency structured notes are scheduled to re-price upwards by 2.0% in 2006, approximately $5.0 million are scheduled to re-price upwards by 2% in 2007, approximately $8.4 million are scheduled to re-price upwards by 2% in 2008, and approximately $1.0 million are scheduled to re-price upwards by 2% in 2009.

Mortgage-backed securities entitle the Company to receive a pro rata portion of the cash flow from an identified pool of mortgages. Although mortgage-backed securities generally offer lesser yields than the loans for which they are exchanged, mortgage-backed securities present lower credit risk by virtue of the guarantees that back them, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Company. Further, mortgage-backed securities provide a monthly stream of both interest and principal, thereby providing the Company with a cash flow to reinvest at current market rates and limit the Company’s interest rate risk.

At December 31, 2004, the Company held approximately $47.9 million in fixed rate mortgage backed securities with an average life of approximately 4.3 years and a modified duration of approximately 3.7 years. The Company held approximately $1.9 million in adjustable rate mortgage backed securities with an average life of approximately 4.4 years and a modified duration of approximately 3.6 years.

At December 31, 2004, the Company held approximately $14.9 million in Collateral Mortgage Obligations (CMO). A CMO is a form of mortgage-backed security that has a structured payment stream based on various factors and does not necessarily remit monthly principal on a pro-rata basis. At December 31, 2004, the Company’s CMO portfolio had an average life of approximately 2.9 years and a modified duration of approximately 2.7 years. For more information regarding investment securities, see Note 3 of Notes to Consolidated Financial Statements.

7

Interest Rate Sensitivity Analysis

The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates on interest earning assets and interest bearing liabilities do not change at the same speed, to the same extent or on the same basis. As part of its effort to manage interest rate risk, the Bank monitors its net portfolio value (NPV), a methodology adopted by the OTS to assist the Bank in assessing interest rate risk.

Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning assets and other assets and outgoing cash flows on interest-bearing liabilities and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV, which would result from a theoretical 200 basis point (1 basis point equals .01%) change in market rates. Both a 300 basis point increase in market interest rates and a 100 basis point decrease in market interest rates are considered.

The following table presents the Bank’s NPV at December 31, 2004, as calculated by the OTS, based on information provided to the OTS by the Bank.

Change In Rates	Net Portfolio Value							NPV as % of PV of Assets
	$ Amount		$ Change			% Change		NPV Ratio		Change
			(Dollars in thousands)
+300 bp	$	48,915	$	(19,741	)	(29	)%	8.85	%	(281	) bp
+200 bp		57,691		(10,965	)	(16	)%	10.19	%	(148	) bp
+100 bp		64,810		(3,846	)	(6	)%	11.20	%	(47	) bp
0 bp		68,656		—		—		11.67	%	—
-100 bp		67,767		(889	)	(1	)%	11.41	%	(26	) bp

Due to the low level of interest rates at December 31, 2004, the OTS did not measure outputs associated with an interest rate decline of less than 100 basis points.

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

Pre-Shock NPV Ratio: NPV as % of Present Value of Assets	11.67	%
Exposure Measure: Post-Shock NPV Ratio	10.19	%
Sensitivity Measure: Change in NPV Ratio	148	bp

The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. The computations do not contemplate any actions the Bank could undertake in response to changes in interest rates.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific period if it will mature or re-price within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or re-pricing within a specific time period and the amount of interest-bearing liabilities maturing or re-pricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities, and is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. At December 31, 2004, the Company had a negative one-year or less interest rate sensitivity gap of 10.45% of total interest-earning assets. Generally, during a period of rising interest rates, a negative gap position would be expected to adversely affect net interest income while a positive gap position would be expected to result in an increase in net interest income. Conversely during a period of falling interest rates, a negative gap would be expected to result in an increase in net interest income and a positive gap would be expected to adversely affect net interest income.

8

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2004, which are expected to mature or reprice in each of the time periods shown.

	One Year or Less			Over One Through Five Years			Over Five Through Ten Years			Over Ten Through Fifteen Years			Over Fifteen Years			Total
							(Dollars in thousands)
Interest-earning assets:
Loans:
One-to-four family	$	120,550		$	59,655		$	19,762		$	4,377		$	2,383		$	206,727
Multi-family residential		3,014			1,628			1,661			57			—			6,360
Construction		1,491			1,155			—			—			—			2,646
Non-residential		22,931			8,125			5,699			2,677			144			39,576
Secured by deposits		1,934			1,147			40			—			—			3,121
Other loans		44,938			42,808			7,380			1,933			1,336			98,395
Time deposits and interest-bearing deposits in FHLB		42			—			—			—			—			42
Federal funds sold		850			—			—			—			—			850
Securities		10,143			64,575			33,599			6,580			3,259			118,156
Mortgage-backed securities		15,764			28,807			13,692			2,871			1,659			62,793
Total		221,657			207,900			81,833			18,495			8,781			538,666
Interest-bearing liabilities:
Deposits		249,632			154,349			—			—			—			403,981
Borrowed funds		29,310			28,352			33,967			—			—			91,629
Total		278,942			182,701			33,967			—			—			495,610
Interest sensitivity gap	$	(57,285	)	$	25,199		$	47,866		$	18,495		$	8,781		$	43,056
Cumulative interest sensitivity Gap	$	(57,285	)	$	(32,086	)	$	15,780		$	34,275		$	43,056		$	43,056
Ratio of interest-earning assets to Interest-bearing liabilities		79.46	%		113.79	%		240.92	%		—			—			108.69	%
Ratio of cumulative gap to total interest-earning assets		(10.45	)%		(5.96	)%		2.93	%		6.36	%		7.99	%		7.99	%

The preceding table was prepared based upon the assumption that loans will not be repaid before their respective contractual maturities, except for adjustable rate loans, which are classified, based upon their next re-pricing date. Further, it is assumed that fixed maturity deposits are not withdrawn prior to maturity and other deposits are withdrawn or re-priced within one year. Mortgage-backed securities are classified based on their lifetime prepayment speeds. Current prepayments speeds are much faster than lifetime averages and shorten the maturity and yields of mortgage-backed securities. Management of the Company does not believe that these assumptions will be materially different from the Company’s actual experience. However, the actual interest rate sensitivity of the Company’s assets and liabilities could vary significantly from the information set forth in the table due to market and other factors.

The retention of adjustable-rate mortgage loans in the Company’s portfolio helps reduce the Company’s exposure to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to borrowers as a result of re-pricing adjustable-rate mortgage loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrowers.

9

Average Balance, Interest and Average Yields and Rates

The following table sets forth certain information relating to the Company’s average interest-earning assets and average interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods and at the date indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of daily balances has caused any material difference in the information presented.

The table also presents information for the periods and at the date indicated with respect to the difference between the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities, or “interest rate spread,” which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution’s net interest income is its “net yield on interest-earning assets,” which is its net interest income divided by the average balance of interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.

	At December 31, 2004
	Balance			Weighted Average Yield/Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net	$	356,825		5.62	%
Non taxable securities available for sale		23,781		5.37	%*
Taxable securities available for sale		134,400		3.88	%
Securities held to maturity		22,768		4.48	%
Time deposits and other interest- bearing cash deposits		892		2.21	%
Total interest-earning assets		538,666		5.18	%
Non-interest-earning assets		41,065
Total assets	$	579,731
Interest-bearing liabilities:
Deposits	$	403,981		2.61	%
FHLB borrowings		81,319		3.28	%
Subordinated debentures		10,310		5.17	%
Total interest-bearing liabilities		495,610		2.78	%
Non-interest-bearing liabilities		34,748
Total liabilities		530,358
Common stock		40
Additional paid-in capital		25,863
Retained earnings		29,145
Treasury stock		(4,857	)
Unearned restricted stock		(131	)
Accumulated other comprehensive loss		(687	)
Total liabilities and equity	$	579,731
Interest rate spread				2.40	%
Ratio of interest-earning assets to interest-bearing liabilities				108.69	%

* Tax equivalent yield at the Company’s 34% tax bracket and an estimated annual cost of funds of approximately 2.50%

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	Year Ended December 31,
	2004						2003							2002
							(Dollars in Thousands)
	Average Balance			Interest	Average Yield/Cost		Average Balance			Interest		Average Yield/Cost		Average Balance			Interest		Average Yield/Cost
Interest-earning assets:
Loans receivable, net	$	347,806		19,307	5.55	%	$	315,126		$	19,332	6.14	%	$	223,733		$	15,200	6.79	%
Taxable securities AFS		126,420		4,964	3.93	%		108,440			4,196	3.87	%		80,288			4,145	5.16	%
Non taxable securities AFS		27,521		1,414	5.14	%		19,539			970	4.96	%		6,853			401	5.81	%
Securities held to maturity		22,845		1,084	4.75	%		10,308			467	4.53	%		3,641			291	7.99	%
Time deposits and other interest-bearing cash deposits		2,983		43	1.44	%		6,751			74	1.10	%		8,075			127	1.57	%
Total interest-earning Assets		527,575		26,812	5.08	%		460,164			25,039	5.44	%		322,590			20,164	6.25	%
Non-interest-earning assets		37,202						25,588							13,595
Total assets		564,777					$	485,752						$	336,185
Interest-bearing liabilities:
Deposits		400,449		9,753	2.44	%	$	377,963			10,896	2.88	%	$	244,865			8,090	3.30	%
Borrowings		85,772		2,784	3.36	%		38,558			1,483	3.85	%		31,997			1,330	4.16	%
Total interest-bearing liabilities		486,221		12,537	2.58	%		416,521			12,379	2.97	%		276,862			9,420	3.40	%
Non-interest-bearing liabilities		30,581						22,001							13,326
Total liabilities		516,802						438,522							290,188
Common stock		40						40							40
Additional paid-in capital		25,788						25,714							25,714
Retained earnings		27,638						26,411							24,552
Unearned restricted shares		(65	)					—							—
Treasury stock		(4,857	)					(4,857	)						(4,854	)
Accumulated other comprehensive income (loss)		(569	)					(78	)						545
Total liabilities and Equity	$	564,777					$	485,752						$	336,185
Net interest income				14,275						$	12,660						$	10,744
Interest rate spread					2.50	%*						2.47	%*						2.85	%*
Net interest margin					2.71	%*						2.75	%*						3.33	%*
Ratio of average interest-earning assets to average interest-bearing liabilities					108.51	%						110.48	%						116.52	%
Using a 34% tax rate.
The tax equivalent adjustment was $431, $296 and $122 for 2004, 2003 and 2002 respectively

11

Rate Volume Analysis

The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume from year to year multiplied by the average rate for the prior year) and (ii) change in rate (changes in the average rate from year to year multiplied by the prior year’s volume).

	Year Ended December 31,
	2004 vs. 2003							2003 vs. 2002
	Increase (Decrease) due to							Increase (Decrease) due to
	Rate			Volume		Total Increase (Decrease)		Rate			Volume			Total Increase (Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	(1,841	)	1,816		(25	)	$	(2,074	)	$	6,206		$	4,132
Securities available for sale, taxable		70		698		768			(1,402	)		1,453			51
Securities available for sale, non taxable		40		404		444			(168	)		737			569
Securities held to maturity		20		597		617			(357	)		533			176
Other interest-earning assets		23		(54	)	(31	)		(32	)		(21	)		(53	)
Total interest-earning assets		(1,688	)	3,461		1,773			(4,033	)		8,908			4,875
Interest-bearing liabilities:
Deposits		(1,690	)	547		(1,143	)		(1,586	)		4,392			2,806
Borrowings		(267	)	1,568		1,301			(120	)		273			153
Total interest- bearing liabilities		(1,957	)	2,115		158			(1,706	)		4,665			2,959
Increase (decrease) in net interest income	$	269		1,346		1,615		$	(2,327	)		4,243			1,916

Critical Accounting Policies and Estimates

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on appropriate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involved the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan losses. The Company’s allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors included the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrower’s sensitivity to economic conditions throughout the southeast and particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of the loan portfolio, its methodology accordingly may change. In addition, it may report materially different amounts for the provision for loan losses in the statement of operations if management’s assessment of the above factors change in future periods. This discussion and analysis should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein. Although management believes the levels of the allowance for loan losses as of both December 31, 2004 and 2003 were adequate to absorb inherent losses in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

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The Company also considers it policy on non-accrual loans as a critical accounting policy. Loan are placed on non-accrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 91 days or more. Any unpaid interest previously accrued on these loans is reserved for as part of management’s evaluation of the allowance for loan loss account.

Comparison of Financial Condition at December 31, 2004 and December 31, 2003

The Company’s total assets increased by $48.2 million, from $531.5 million at December 31, 2003 to $579.7 million at December 31, 2004. Federal funds sold decreased from $2.2 million at December 31, 2003 to $850,000 at December 31, 2004. Securities held to maturity increased $7.6 million due to certain new purchases being classified as held to maturity. The available for sale portfolio increased $14.6 million.

The Company’s net loan portfolio increased by $22.1 million during the year ended December 31, 2004. Net loans totaled $356.8 and $334.7 at December 31, 2004 and December 31, 2003, respectively. The increase in the loan activity during the year ended December 31, 2004 was due to industry consolidation in key market areas, lower interest rates spurring refinancing activity, an improved local economy, and continued aggressive marketing efforts. For the year ended December 31, 2004, the Company’s average yield on loans was 5.55%, compared with 6.14% for the year ended December 31, 2003.

At December 31, 2004, the Company’s investments classified as held to maturity were carried at an amortized cost of $22.7 million and had an estimated fair market value of $22.7 million, and its securities classified as available for sale had an estimated fair market value of $158.2 million. See Note 3 of Notes to Consolidated Financial Statements.

The allowance for loan losses totaled $3.3 million at December 31, 2004, an increase of $697,000 from the allowance for loan losses of $2.6 million at December 31, 2003. The ratio of the allowance for loan losses to loans was 0.91% and 0.76% at December 31, 2004 and 2003, respectively. Also, at December 31, 2004, the Company’s non-accrual loans were $653,000, or 0.18% of total loans, compared to $1.1 million, or 0.34% of total loans, at December 31, 2003. The Company’s ratio of allowance for loan losses to non-performing loans at December 31, 2004 and 2003 was 501.23% and 225.17%, respectively.

Comparison of Operating Results for the Years Ended December 31, 2004 and 2003

Net Income. The Company’s net income for the year ended December 31, 2004 was $4.0 million compared to $3.5 million for the year ended December 31, 2003.

Net Interest Income. Net interest income for the year ended December 31, 2004 was $13.8 million, compared to $12.4 million for the year ended December 31, 2003. The increase in net interest income for the year ended December 31, 2004 was the result of loan and investment portfolio growth. For the year ended December 31, 2004, the Company’s tax equivalent average yield on total interest-earning assets was 5.08% compared to 5.44% for the year ended December 31, 2003, and its average cost of interest-bearing liabilities was 2.58%, compared to 2.97% for the year ended December 31, 2003. As a result, the Company’s tax equivalent interest rate spread for the year ended December 31, 2004 was 2.50%, compared to 2.47% for the year ended December 31, 2003 and its tax equivalent net interest margin was 2.71% for the year ended December 31, 2004, compared to 2.75% for the year ended December 31, 2003.

Interest Income. Interest income increased $1.6 million from $24.7 million to $26.4 million, or by 6.6% during the year ended December 31, 2004 compared to 2003. The increase was attributable to an increase in loan and investment volume, offsetting a declining yield on such interest-earning assets. The average balance on securities held to maturity increased $12.5 million, from $10.3 million at December 31, 2003 to $22.8 million at December 31, 2004. The average balance on taxable securities available for sale increased $18.0 million, from $108.4 million at December 31, 2003 to $126.4 million at December 31, 2004. The average balance of non-taxable securities available for sale increased $8.0 million, from $19.5 million at December 31, 2003 to $27.5 million at December 31, 2004. Average time deposits and other interest-bearing cash deposits decreased $3.8 million, from $6.8 million at December 31, 2003 to $3.0 million at December 31, 2004. Overall, average total interest-earning assets increased $67.4 million from December 31, 2003 to December 31, 2004.

Interest Expense. Interest expense increased to $12.5 million for the year ended December 31, 2004 compared to $12.4 million for 2003. The increase in interest expense was attributable to an increase in the average balances of both deposit and Federal Home Loan Bank (“FHLB”) borrowings. The average cost of average interest-bearing liabilities declined from 2.97% for the year ended December 31, 2003 to 2.58% for the year ended

13

December 31, 2004. Over the same period, the average balance of interest bearing deposits increased from $378.0 million for the year ended December 31, 2003 to $400.4 million at December 31, 2004. The average balance of FHLB borrowings increased from $36.0 million for the year ended December 31, 2003 to $75.4 million for the year ended December 31, 2004. The average cost of FHLB borrowings declined from 3.80% for the year ended December 31, 2003 to 3.04% for the year ended December 31, 2004.

Provision for Loan Losses. The Company determined that an additional $1.2 million in provision for loan losses was required for the year ended December 31, 2004. For the year ended December 31, 2003, the Company determined that a provision for loan losses of $1.75 million was required.

Non-Interest Income. Non-interest income decreased by $461,000 for the year ended December 31, 2004 to $3.0 million, compared to $3.5 million for the year ended December 31, 2003. The decline in non-interest income is the result of lower gains on the sale of both fixed rate loans and securities. Both of these declines are directly related to the higher level of market interest rates in 2004 as compared to the market level of rates in mid-2003. Gains on loans and securities declined from $1.2 million for the year ended December 31, 2003 to $405,000 for the year ended December 31, 2004.

Non-Interest Expense. Total non-interest expense for the year ended December 31, 2004 was $10.0 million, compared to $9.0 million in 2003. The increase was the result of the Company hiring additional staff to fund both increased business activity as well as to increase operational staff to assist with Sarbanes-Oxley compliance and increased professional services expense due to additional audit fees and related outside work necessary for Sarbanes-Oxley. The Company anticipates that its continuing efforts to comply with Sarbanes-Oxley will result in approximately $200,000 of operating expenses per year in 2005 and beyond. See Notes 2 and 12 of Notes to Consolidated Financial Statements.

Income Taxes. The effective tax rate for the year ended December 31, 2004 was 29.7%, compared to 31.2% for 2003. The decline in the Company’s effective tax rate is the result of a larger balance in municipal bonds and increased income from bank owned life insurance.

Comparison of Operating Results for the Years Ended December 31, 2003 and 2002

Net Income. The Company’s net income for the year ended December 31, 2003 was $3.5 million compared to $4.6 million for the year ended December 31, 2002.

Net Interest Income. Net interest income for the year ended December 31, 2003 was $12.4 million, compared to $10.6 million for the year ended December 31, 2002. The increase in net interest income for the year ended December 31, 2003 was the result of loan and investment portfolio growth and a decline in the Company’s cost of funds. For the year ended December 31, 2003, the Company’s average yield on total interest-earning assets was 5.44%, compared to 6.25% for the year ended December 31, 2002, and its average cost of interest-bearing liabilities was 2.97%, compared to 3.40% for the year ended December 31, 2002. As a result, the Company’s interest rate spread for the year ended December 31, 2003 was 2.47%, compared to 2.85% for the year ended December 31, 2002 and its net interest margin was 2.75% for the year ended December 31, 2003, compared to 3.33% for the year ended December 31, 2002.

Interest Income. Interest income increased $4.7 million from $20.0 million to $24.7 million, or by 23.5% during the year ended December 31, 2003 compared to 2002. The increase was attributable to an increase in loan volume as funded by growth in deposit volume and an increase in FHLB borrowings, which offset a declining yield on such interest-earning assets. The average balance on securities held to maturity increased $6.7 million, from $3.6 million at December 31, 2002 to $10.3 million at December 31, 2003. The average balance on taxable securities available for sale increased $28.1 million, from $80.3 million at December 31, 2002 to $108.4 million at December 31, 2003. The average balance of non-taxable securities available for sale increased $12.6 million, from $6.9 million at December 31, 2002 to $19.5 million at December 31, 2003. Average time deposits and other interest-bearing cash deposits declined $1.3 million, from $8.1 million at December 31, 2002 to $6.8 million at December 31, 2003. Overall, average total interest-earning assets increased $137.6 million from December 31, 2002 to December 31, 2003.

Interest Expense. Interest expense increased to $12.4 million for the year ended December 31, 2003 compared to $9.4 million for 2002. The increase in interest expense was attributable to an increased level of deposits, FHLB borrowings and the issuance of subordinated debentures.

14

The average cost of average interest-bearing liabilities declined from 3.40% for the year ended December 31, 2002 to 2.97% for the year ended December 31, 2003. Over the same period, the average balance of deposits increased from $244.9 million for the year ended December 31, 2002 to $378.0 million at December 31, 2003.

Provision for Loan Losses. The Company determined that an additional $1,750,000 in provision for loan losses was required for the year ended December 31, 2003. For the year ended December 31, 2002, the Company determined that a provision for loan losses of $795,000 was required.

Non-Interest Income. Non-interest income for the year ended December 31, 2003 was $3.5 million, compared to $2.3 million for the year ended December 31, 2002. At December 31, 2003, fee income from service charges increased $451,000 to $1.2 million from $711,000 for the year ended December 31, 2002. At December 31, 2003, gains from the sale of loans increased $394,000 to $552,000, from $158,000 at December 31, 2002. This increase was the result of lower mortgage rates and a surge of refinancing activity.

Non-Interest Expense. Total non-interest expense for the year ended December 31, 2003 was $9.0 million, compared to $5.2 million in 2002. The increase was the result of the Company’s acquisition of two retail banking branches and Fall & Fall Insurance Agency in Fulton, Kentucky in September of 2002. The Company relocated banking facilities in Murray, Kentucky and Benton, Kentucky and opened a new location in Calvert City, Kentucky. The Company also incurred a $990,000 settlement expense to close its defined benefit pension plan. See Notes 2 and 12 of Notes to Consolidated Financial Statements.

Income Taxes. The effective tax rate for the year ended December 31, 2003 was 31.2%, compared to 33.8% for 2002. The decline in the effective tax rate is the result of an increase in average holdings of municipal bonds.

Liquidity and Capital Resources

The Company’s primary business is that of the Bank. Management believes dividends that may be paid from the Bank to the Company will provide sufficient funds for the Company’s current and anticipated needs; however, no assurance can be given that the Company will not have a need for additional funds in the future. The Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company.

Capital Resources. At December 31, 2004, the Bank exceeded all regulatory minimum capital requirements. For a detailed discussion of the OTS’ regulatory capital requirements, and for a tabular presentation of the Bank’s compliance with such requirements, see Note 15 of Notes to Consolidated Financial Statements.

Liquidity. Liquidity management is both a daily and long-term function of business management. If the Bank requires funds beyond its ability to generate them internally, the Bank believes that it could borrow funds from the FHLB. At December 31, 2004, the Bank had outstanding advances of $81.3 million from the FHLB. The Bank can immediately borrow an additional $30.0 million from the FHLB and can borrow an additional $29.0 million with the purchase of additional capital stock. See Note 8 of Notes to Consolidated Financial Statements.

Subordinated Debentures Issuance. On September 25, 2003, the Company issued $10,310,000 of subordinated debentures in a private placement offering. The securities have a thirty-year maturity and are callable at the issuer’s discretion on a quarterly basis beginning five years after issuance. The securities are priced at a variable rate equal to the three-month libor (London Interbank Offering Rate) plus 3.10%. Interest is paid and the rate of interest may change on a quarterly basis. The Company’s subsidiary, a federal chartered thrift supervised by the Office of Thrift Supervision (OTS) may recognize the proceeds of trust preferred securities as capital. OTS regulations provide that 25% of Tier I capital may consist of trust preferred proceeds. See Note 10 of Notes to Consolidated Financial Statements.

The Bank’s primary sources of funds consist of deposits, repayment of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, and funds provided from operations. While scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions and competition. The Bank uses its liquidity resources principally to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, to maintain liquidity, and to meet operating expenses. Management believes that loan repayments and other sources of funds will be adequate to meet the Bank’s liquidity needs for the immediate future.

15

A portion of the Bank’s liquidity consists of cash and cash equivalents. At December 31, 2004, cash and cash equivalents totaled $18.2 million. The level of these assets depends upon the Bank’s operating, investing and financing activities during any given period.

Cash flows from operating activities for the years ended December 31, 2002, 2003 and 2004 were $6.3 million, $3.5 million, and $4.4 million, respectively.

Cash flows from investing activities were a net use of funds of $47.3 million, $105.5 million and $34.9 million in 2004, 2003 and 2002, respectively. A principal use of cash in this area has been purchases of securities available for sale of $83.2 million offset by proceeds from sales, calls and maturities of securities available for sale of $68.2 million during 2004. Also, management classified certain investment purchases as held-to maturity in 2004, resulting in a $25.0 million use of funds. At the same time, the investment of cash in loans was $23.3 million in 2004, $44.7 million in 2003 and $80.1 in 2002. Purchases of securities available for sale exceeded maturities and sales by $15.0 million in 2004 and $42.1 million in 2003. Maturities and sales of securities available for sale exceeded purchases of such securities by $43.1 in 2002.

At December 31, 2004, the Bank had $21.3 million in outstanding commitments to originate loans and unused lines of credit of $20.1 million. The Bank anticipates that it will have sufficient funds available to meet its current loan origination and lines of credit commitments. Certificates of deposit, which are scheduled to mature in one year or less totaled $97.2 million at December 31, 2004. Based on historical experience, management believes that a significant portion of such deposits will remain with the Bank.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Bank’s operations.

Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, changes in interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Forward-Looking Statements

Management’s discussion and analysis includes certain forward-looking statements addressing, among other things, the Bank’s prospects for earnings, asset growth and net interest margin. Forward-looking statements are accompanied by, and identified with, such terms as “anticipates,” “believes,” “expects,” “intends,” and similar phrases. Management’s expectations for the Bank’s future involve a number of assumptions and estimates. Factors that could cause actual results to differ from the expectations expressed herein include: substantial changes in interest rates, and changes in the general economy; changes in the Bank’s strategies for credit-risk management, interest-rate risk management and investment activities. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized.

16

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Financial Statements

December 31, 2004, 2003 and 2002

Table of Contents

	Page Number
Report of Independent Registered Public Accounting Firm	1
Consolidated Balance Sheets as of December 31, 2004 and 2003	2-3
Consolidated Statements of Income for the Years ended December 31, 2004, 2003 and 2002	4-5
Consolidated Statements of Comprehensive Income for the Years ended December 31, 2004, 2003 and 2002	6
Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2004, 2003 and 2002	7
Consolidated Statements of Cash Flows for the Years ended December 31, 2004, 2003 and 2002	8-9
Notes to Consolidated Financial Statements	10-52

17

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

of HopFed Bancorp, Inc.

Hopkinsville, Kentucky

We have audited the accompanying consolidated balance sheets of HopFed Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and 2003 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HopFed Bancorp, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

/s/ Rayburn, Bates & Fitzgerald, P.C.

Brentwood, Tennessee

January 28, 2005

F-1

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2004 and 2003

(Dollars in Thousands)

	2004		2003
Assets
Cash and due from banks (notes 7 and 11)	$	17,357	12,958
Interest-earning deposits in Federal Home Loan Bank		42	35
Federal funds sold		850	2,185
Cash and cash equivalents		18,249	15,178
Securities available for sale (note 3)		158,181	143,514
Securities held to maturity, market value of $ 22,721 for 2004 and $15,104 for 2003, respectively (note 3)		22,768	15,108
Loans receivable, net of allowance for loan losses of $3,273 for 2004 and $2,576 for 2003, respectively (note 4)		356,825	334,740
Accrued interest receivable		3,053	2,849
Premises and equipment, net (note 5)		6,700	6,006
Deferred tax assets (note 13)		702	652
Intangible asset (notes 2 and 6)		1,755	2,133
Goodwill (note 6)		3,689	3,689
Bank owned life insurance		6,896	6,628
Other assets		913	968
Total assets	$	579,731	531,465
Liabilities and Stockholders’ Equity
Liabilities:
Deposits: (note 7)
Non-interest-bearing accounts	$	32,214	27,348
Interest-bearing accounts:
NOW accounts		87,075	61,246
Savings and money market accounts		65,350	68,410
Other time deposits		251,556	260,484
Total deposits		436,195	417,488
Advances from Federal Home Loan Bank (note 8)		81,319	54,353
Subordinated debentures (note 10)		10,310	10,310
Advances from borrowers for taxes and insurance		301	199
Dividends payable		437	435
Accrued expenses and other liabilities (note 12)		1,796	1,442
Total liabilities		530,358	484,227

See accompanying notes to consolidated financial statements.

F-2

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets (Continued)

December 31, 2004 and 2003

(Dollars in Thousands)

	2004			2003
Stockholders’ equity (notes 12, 15, 16 and 17):
Preferred stock, par value $.01 per share; authorized - 500,000 shares; none issued or outstanding at December 31, 2004 and 2003	$	—		—
Common stock, par value $.01 per share; authorized - 7,500,000 shares; 4,048,192 issued and 3,639,283 outstanding at December 31, 2004 and 4,039,305 issued and 3,630,396 outstanding at December 31, 2003		40		40
Additional paid-in capital		25,863		25,714
Retained earnings-substantially restricted		29,145		26,897
Treasury stock (at cost, 408,909 shares at December 31, 2004 and December 31, 2003)		(4,857	)	(4,857	)
Unearned restricted stock		(131	)	—
Accumulated other comprehensive loss, net of taxes		(687	)	(556	)
Total stockholders’ equity		49,373		47,238
Total liabilities and stockholders’ equity	$	579,731		531,465

Commitments and contingencies (notes 9, 11, and 14)

See accompanying notes to consolidated financial statements.

F-3

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

For the Years ended December 31, 2004, 2003 and 2002

(Dollars in Thousands)

	2004		2003	2002
Interest and dividend income:
Loans receivable	$	19,307	19,332	15,200
Securities available for sale		4,964	4,196	4,145
Securities held to maturity		1,084	467	291
Nontaxable securities available for sale		983	674	279
Interest-earning deposits in Federal Home Loan Bank		43	74	127
Total interest and dividend income		26,381	24,743	20,042
Interest expense:
Deposits (note 7)		9,753	10,896	8,090
Advances from Federal Home Loan Bank		2,295	1,364	1,330
Subordinated debentures		489	119	—
Total interest expense		12,537	12,379	9,420
Net interest income		13,844	12,364	10,622
Provision for loan losses (note 4)		1,200	1,750	795
Net interest income after provision for loan losses		12,644	10,614	9,827
Non-interest income:
Service charges		1,302	1,162	711
Gain on sale of loans		99	552	158
Realized gain on sale of premises and equipment, net		—	—	112
Realized gain from sale of securities available for sale		306	634	568
Other operating income		1,331	1,151	763
Total non-interest income		3,038	3,499	2,312
Non-interest expenses:
Salaries and benefits (note 12)		5,166	5,241	2,806
Deposit insurance premium		62	61	36
Occupancy expense (note 5)		759	652	436
Data processing		876	639	418
State tax		417	383	132
Realized loss on sale of equipment		13	—	—
Other operating expenses		2,715	2,068	1,371
Total non-interest expense		10,008	9,044	5,199

See accompanying notes to consolidated financial statements.

F-4

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income, Continued

December 31, 2004, 2003 and 2002

(Dollars in Thousands, Except Per Share Amount)

	2004		2003	2002
Income before income tax expense	$	5,674	5,069	6,940
Income tax expense (note 13)		1,683	1,574	2,346
Net income	$	3,991	3,495	4,594
Earnings per share (note 17):
Basic	$	1.10	0.96	1.26
Fully diluted	$	1.09	0.96	1.26
Weighted average shares outstanding - basic		3,634,904	3,630,396	3,630,668
Weighted average shares outstanding - diluted		3,663,751	3,653,974	3,636,480

See accompanying notes to consolidated financial statements.

F-5

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Years ended December 31, 2004, 2003 and 2002

(Dollars in Thousands)

	2004			2003		2002
Net income	$	3,991		3,495		4,594
Other comprehensive income, net of tax (note 21):
Unrealized gain (loss) on investment securities available for sale, net of tax		26		(1,013	)	680
Unrealized gain on derivatives, net of tax		45		—		—
Reclassification adjustment for gains included in net income		(202	)	(418	)	(375	)
Comprehensive income	$	3,860		2,064		4,899

See accompanying notes to consolidated financial statements.

F-6

HopFed Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Years ended December 31, 2004, 2003 and 2002

(Dollars in Thousands, Except Share Amounts)

	Common Shares		Common Stock		Additional Paid-in Capital	Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Unearned Restricted Stock		Total Equity
Balance, December 31, 2001	3,631,538		$	40	25,714	22,110		(4,845	)	570		—		43,589
Net income	—			—	—	4,594		—		—				4,594
Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $157	—			—	—	—		—		305				305
Purchase of treasury stock	(1,142	)		—	—	—		(12	)	—				(12	)
Dividends ($0.44 per share)	—			—	—	(1,598	)	—		—				(1,598	)
Balance, December 31, 2002	3,630,396			40	25,714	25,106		(4,857	)	875		—		46,878
Net income	—			—	—	3,495		—		—				3,495
Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $737	—			—	—	—		—		(1,431	)			(1,431	)
Dividends ($0.47 per share)	—			—	—	(1,704	)	—		—				(1,704	)
Balance, December 31, 2003	3,630,396			40	25,714	26,897		(4,857	)	(556	)	—		47,238
Net income						3,991								3,991
Restricted stock awards	8,887				149							(149	)
Net change in unrealized gains (losses) on securities available for sale, net of income taxes of $91										(176	)			(176	)
Net change in unrealized gain (losses) on derivatives, net of taxes of $23										45				45
Compensation expense, restricted stock awards												18		18
Purchase of treasury stock
Dividends ($0.48 per share)						(1,743	)							(1,743	)
Balance, December 31, 2004	3,639,283		$	40	25,863	29,145		(4,857	)	(687	)	(131	)	49,373

See accompanying notes to consolidated financial statements.

F-7

HopFed Bancrop, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Years ended December 31, 2004, 2003 and 2002

(Dollars in Thousands)

	2004			2003		2002
Cash flows from operating activities:
Net income	$	3,991		3,495		4,594
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,200		1,750		795
Depreciation		346		319		236
Amortization of intangible assets		378		378		126
Amortization (accretion) of investment premiums and discounts, net		719		238		399
Provision (benefit) for deferred income taxes		18		38		(28	)
Stock dividends on Federal Home Loan Bank stock		(118	)	(97	)	(107	)
Compensation expense, restricted stock grants		18
Increase in cash surrender value of bank owned life insurance		(268	)	(94	)	—
Gain on sale of securities available for sale		(306	)	(634	)	(568	)
Gain on sales of loans		(99	)	(552	)	(158	)
Proceeds from sales of loans		10,205		27,326		15,526
Originations of loans sold		(10,106	)	(26,774	)	(15,368	)
Loss on sale of fixed assets		13		—		—
(Increase) decrease in:
Accrued interest receivable		(204	)	(520	)	(924	)
Other assets		182		(126	)	638
Increase (decrease) in:
Accrued expenses and other liabilities		354		(1,247	)	(747	)
Net cash provided by operating activities		6,323		3,500		4,414
Cash flows from investing activities:
Proceeds from calls and maturities of securities held to maturity		17,546		6,365		1,585
Proceeds from sales, calls and maturities of securities available for sale		68,186		113,986		78,533
		(24,989	)	(18,512	)	—
Purchases of securities held to maturity		(83,221	)	(156,057	)	(35,477	)
Purchase of securities available for sale		(23,343	)	(44,667	)	(80,109	)
Net increase in loans		(409	)	—		—
Purchase of Federal Home Loan Bank stock		—		—		42
Proceeds from sale of foreclosed asset		32		63		—
Proceeds from sales of premises and equipment		(1,085	)	(1,429	)	(795	)
Purchases of premises and equipment		—		(4,987	)	—
Purchase of bank owned life insurance unconsolidated subsidiary		—		(310	)	—
Purchase of branch location, net of funds received		—		—		1,304
Net cash used in investing activities		(47,283	)	(105,548	)	(34,917	)

See accompanying notes to consolidated financial statements.

F-8

HopFed Bancrop, Inc. and Subsidiaries

Consolidated Statements of Cash Flows, Continued

For the Years ended December 31, 2004, 2003 and 2002

(Dollars in Thousands)

	2004			2003		2002
Cash flows from financing activities:
Net increase in demand deposits, savings, money market, NOW accounts and time deposits	$	18,707		63,833		56,590
(Decrease) increase in advance payments by borrowers for taxes and insurance		102		(12	)	10
Advances from Federal Home Loan Bank		126,850		36,850		21,000
Repayment of advances from Federal Home Loan Bank		(99,884	)	(6,120	)	(36,124	)
Purchase of treasury stock		—		—		(12	)
Proceeds from issuance of subordinated debentures		—		10,310		—
Dividends paid		(1,744	)	(1,668	)	(1,598	)
Net cash provided by financing activities		44,031		103,193		39,866
Increase (decrease) in cash and cash equivalents		3,071		1,145		9,363
Cash and cash equivalents, beginning of period		15,178		14,033		4,670
Cash and cash equivalents, end of period	$	18,249		15,178		14,033
Supplemental disclosures of Cash Flow Information:
Interest paid	$	12,516		12,370		9,023
Income taxes paid	$	1,800		1,610		2,545
Supplemental Disclosures of Non-cash Investing and Financing Activities:
Foreclosures and in substance foreclosures of loans during year	$	104		272		42
Net unrealized gains on investment securities classified as available for sale	$	(265	)	(2,168	)	462
Increase in deferred tax liability related to unrealized gains on investments	$	91		737		(157	)
Dividends declared and payable	$	437		435		399
Issue of unearned restricted stock	$	149		—		—

See accompanying notes to consolidated financial statements.

F-9

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements,

December 31, 2004, 2003 and 2002

(1) Summary of Significant Accounting Policies:

Nature of Operations and Customer Concentration

HopFed Bancorp, Inc. (the Corporation) is a bank holding company incorporated in the state of Delaware. The Company’s principal business activities are conducted through it’s wholly-owned subsidiary, Heritage Bank (the Bank), which is a federally chartered savings bank engaged in the business of accepting deposits and providing mortgage, consumer, construction and commercial loans to the general public through its retail banking offices. The Bank’s business activities are primarily limited to western Kentucky. The Bank is subject to competition from other financial institutions. Deposits at the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation (FDIC). The Bank is subject to comprehensive regulation, examination and supervision by the Office of Thrift Supervision (OTS) and the FDIC.

A substantial portion of the Bank’s loans are secured by real estate in the West Kentucky market. In addition, foreclosed real estate is located in this same market. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate is susceptible to changes in local market conditions.

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowances for losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation, the Bank and its wholly-owned subsidiary Fall & Fall Insurance (collectively the Company) for all periods. Significant inter-company balances and transactions have been eliminated in consolidation under the equity method.

Accounting

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices in the banking industry.

F-10

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

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

Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and revenues and expenses for the year. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties.

Cash and Cash Equivalents

Cash and cash equivalents are defined as cash on hand, amounts due on demand from banks, interest-earning deposits in the Federal Home Loan Bank and federal funds sold with maturities of three months or less.

Securities

The Company reports debt, readily-marketable equity, mortgage-backed and mortgage related securities in one of the following categories: (i) “held to maturity” (management has a positive intent and ability to hold to maturity) which are to be reported at cost, adjusted for premiums and discounts that are recognized in interest income; (ii) “trading” (held for current resale) which are to be reported at fair value, with unrealized gains and losses included in earnings; and (iii) “available for sale” (all other debt, equity, mortgage-backed and mortgage related securities) which are to be reported at fair value, with unrealized gains and losses reported net of tax as a separate component of stockholders’ equity. At the time of new security purchases, a determination is made as to the appropriate classification. Realized and unrealized gains and losses on trading securities are included in net income. Unrealized gains and losses on securities available for sale are recognized as direct increases or decreases in stockholders’ equity, net of any tax effect. Cost of securities sold is recognized using the specific identification method.

Loans Receivable

Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and discounts.

Discounts on home improvement and consumer loans are recognized over the lives of the loans using the interest method. Loan origination fee income is recognized as received and direct loan origination costs are expensed as incurred. Statement of Financial Accounting Standards (SFAS) 91, Nonrefundable Fees & Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, requires the recognition of loan origination fee income over the life of the loan and the recognition of certain direct loan origination costs over the life of the loan. However, deferral of such fees and costs would not have a material effect on the consolidated financial statements.

F-11

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

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

Loans Receivable (Continued)

Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management’s periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received while the loan is classified as nonaccrual. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of interest and principal.

The Bank provides an allowance for loan losses and includes in operating expenses a provision for loan losses determined by management. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. Management believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and has taken into account the views of its regulators and the current economic environment.

Loans are considered to be impaired when, in management’s judgment, principal or interest is not collectible according to the contractual terms of the loan agreement. When conducting loan evaluations, management considers various factors such as historical loan performance, the financial condition of the borrower and adequacy of collateral to determine if a loan is impaired.

The measurement of impaired loans generally is based on the present value of future cash flows discounted at the historical effective interest rate, except that collateral-dependent loans generally are measured for impairment based on the fair value of the collateral. When the measured amount of an impaired loan is less than the recorded investment in the loan, the impairment is recorded as a charge to income and a valuation allowance which is included as a component of the allowance for loan losses.

Fixed Rate Mortgage Originations

In June of 2001, The Bank began to originate fixed rate first mortgage loans for customers in its local markets and selling these loans on the secondary market with the Bank retaining mortgage servicing rights. For the year ended December 31, 2004, the Bank maintained a servicing portfolio of approximately $41.0 million. For the years ended December 31, 2002, 2003 and 2004, the Bank has reviewed the value of the mortgage servicing asset as well as the operational cost associated with servicing the portfolio. After this review, the Bank has determined that the value of its mortgage servicing rights are not material to the Company’s Financial Statements.

F-12

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

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

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are carried at the lower of cost or fair value less selling expenses. Costs of improving the assets are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management, and any adjustments to value are recognized in the current period’s operations.

Revenue Recognition

Mortgage loans held for sale are generally delivered to secondary market investors under firm sales commitments entered into prior to the closing of the individual loan. Loan sales and related gains or losses are recognized at settlement. Loan fees earned for the servicing of secondary market loans are recognized as earned.

Interest income on loans receivable is reported on the interest method. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due more than 90 days. Interest continues to accrue on loans over 90 days past due if they are well secured and in the process of collection.

Income Taxes

Income taxes are accounted for through the use of the asset and liability method. Under the asset and liability method, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates would be recognized in income in the period that includes the enactment date. The Company files its federal income tax return on a consolidated basis with its subsidiaries. All taxes are accrued on a separate entity basis.

Operating Segments

The Company’s continuing operations include one primary segment, retail banking. The retail banking segment involves the origination of commercial, residential and consumer loans as well as the collections of deposits in nine branch offices.

Premises and Equipment

Land, land improvements, buildings, and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Buildings and land improvements are depreciated generally by the straight-line method, and furniture and equipment are depreciated under accelerated methods over the estimated useful lives of the assets. The estimated useful lives used to compute depreciation are as follows:

Land improvements	5-15 years
Buildings	40 years
Furniture and equipment	5-15 years

Goodwill

Beginning January 1, 2002 with the adoption of SFAS 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized, but instead tested for impairment at least annually.

F-13

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

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

Intangible Assets

The intangible assets for insurance contracts and core deposits are amortized using the straight-line method over the estimated period of benefit of seven years. The Company periodically evaluates the recoverability of the intangible assets and takes into account events or circumstances that warrant a revised estimate of the useful lives or indicates that impairment exists.

Advertising

The Company expenses the production cost of advertising as incurred.

Financial Instruments

The Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and commercial letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.

Derivative Instruments:

In 2004, Heritage Bank entered into a swap transaction in the amount of $10 million with Compass Bank of Birmingham in which Heritage Bank will pay Compass a fixed rate of 3.53% quarterly for four years while Compass will pay Heritage Bank a rate equal to the three month London Interbank Offering Rate (“Libor”). Heritage Bank has signed an inter-company transfer with the Company that allows the Company to convert its variable rate subordinated debenture issuance to a fixed rate. The critical terms of the interest rate swap match the term of the corresponding variable rate subordinated debt issuance. All components of the derivative instrument’s gain or loss are included in the assessment of hedge effectiveness.

Under guidelines of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended, all derivative instruments are required to be carried at fair value on the balance sheet. SFAS 133 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 SFAS 133.

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. Using these guidelines, The Bank and Company has documented the use of the above- mentioned swap as a cash flow hedge.

F-14

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

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

Derivatives: (Continued)

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 balance sheet with corresponding offsets recorded in the balance sheet. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense recorded on the hedged asset or liability.

Under both the fair value and cash flow hedge methods, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately in the income statement. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instrument has been highly effective in offsetting changes in the fair values or cash flows of the hedged items and whether they are expected to be highly effective in the future. If it is determined a derivative instrument has not been, or will not continue to be highly effective as a hedge, hedged accounting is discontinued. SFAS 133 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 year ended December 31, 2004. The Company recognized $22,000 in interest expense for the year ended December 31, 2004 related to the interest rate swap.

Fair Values of Financial Instruments

SFAS 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. Accordingly, such estimates involve uncertainties and matters of judgment and therefore cannot be determined with precision. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Fair Values of Financial Instruments

The following are the more significant methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments:

F-15

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

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

Fair Values of Financial Instruments: (Continued)

Cash and cash equivalents

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate those assets’ fair values, because they mature within 90 days or less and do not present credit risk concerns.

Available-for-sale and held-to-maturity securities

Fair values for investment securities available-for-sale and held-to-maturity are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans receivable

The fair values for loans receivable are estimated using discounted cash flow analysis which considers future re-pricing dates and estimated repayment dates, and further using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics.

Accrued interest receivable

Fair value is estimated to approximate the carrying amount because such amounts are expected to be received within 90 days or less and any credit concerns have been previously considered in the carrying value.

Deposits

The fair values disclosed for deposits with no stated maturity such as demand deposits, interest-bearing checking accounts and savings accounts are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair values for certificates of deposit and other fixed maturity time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on such type accounts to a schedule of aggregated contractual maturities on such time deposits.

Advances from the Federal Home Loan Bank

The fair value of these advances is estimated by discounting the future cash flows of these advances using the current rates at which similar advances could be obtained.

Off-Balance-Sheet Instruments

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

F-16

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

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

Fair Values of Financial Instruments (Continued)

Earnings Per Share

Earnings per share (EPS) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (CSE). CSE consists of dilutive stock options granted through the Company’s stock option plan. Common stock equivalents which are considered anti-dilutive are not included for the purposes of this calculation.

Stock Options

The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by SFAS 123, Accounting for Stock-Based Compensation. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS 123 requires entities which continue to apply the provisions of APB Opinion No. 25 to provide pro-forma earnings per share disclosure for stock option grants made in 1995 and subsequent years as if the fair value based method defined in SFAS 123 had been applied. SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB No. 123, provides that an entity that has transitioned to the accounting treatment prescribed by SFAS 123 may use the intrinsic value method in lieu of the fair value based method for determining the fair value of stock options at the date of grant. SFAS 148 requires disclosure in addition to SFAS 123 if APB opinion No. 25 is currently being applied.

The Company applies APB Opinion No. 25 and related interpretations in accounting for the plan. No compensation cost has been recognized for the plan because the stock option price is equal to or greater than the fair value at the grant date. Following is a reconciliation of reported and pro forma net income and earnings per share had compensation cost for the plan been determined based on the fair value of SFAS 123, Accounting for Stock-Based Compensation, as amended:

F-17

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands) Except Per Share Amounts

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

Stock Options (Continued)

	Year Ended December 31,
	2004			2003		2002
Net income as reported	$	3,991		3,495		4,594
Total stock-based employee compensation expense determined under fair value based method for all awards granted, net of related tax effects		(91	)	(105	)	(62	)
Pro forma net income	$	3,900		3,390		4,532

	Year Ended December 31,
	2004		2003	2002
Earnings per share:
Basic - as reported	$	1.10	0.96	1.26
Basic - pro forma		1.07	0.93	1.25
Diluted - as reported	$	1.09	0.96	1.26
Diluted - pro forma		1.06	0.93	1.25

Effect of New Accounting Pronouncements

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. SFAS 153 amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for nonmonetary asset exchanges occurring in the fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material impact on the Company’s financial position, results of operations and cash flow.

F-18

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

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

Effect of New Accounting Pronouncements (Continued)

In December 2004, the FASB issued SFAS 123, Accounting for Stock-Based Compensation. SFAS 123R establishes accounting requirements for share-based compensation to employees and carries forward prior guidance on share-based for awards to non-employees. The provisions of this statement will become effective July 1, 2005 for all equity awards granted after the effective date. On July 1, 2004, the Company adopted the provisions of SFAS 123 and began recognizing compensation expense ratable in the income statement, based on the estimated fair value of all awards granted to employees after January 1, 2004. SFAS 123R requires an entity to estimate the number of awards expected to actual vest, exclusive of awards expected to be forfeited. Currently, the Company recognizes forfeitures as they occur. The adopting of this standard is not expected to have a material effect on financial condition, the results of operations, and cash flows.

In March 2004, FASB Emerging Issues Task Force (EITF) released Issue 03-01, Meaning of Other Than Temporary Impairment, which addressed other-than-temporary impairment of certain debt and equity investments. The recognition and measurement requirements of Issue 03-01, and other disclosure requirements not already implemented, were effective for periods beginning after June 15, 2004. In September 2004, the FASB staff issued FASB Staff Position (FSP) EITF 03-1-1, which delayed the effective date for certain measurement and recognition guidance contained in Issue 03-1, The FSP requires the application of pre-existing other-than-temporary guidance during the period of delay until a final consensus is reached. Management does not anticipate the issuance of the final consensus will have a material impact on the financial condition, the results of operations, or cash flows.

In March 2004, the SEC issued Staff Accounting Bulletin 105 (SAB 105), Application of Accounting Principles to Loan Commitment stating that the fair value of loan commitments is to be accounted for as a derivative instrument under SFAS 133, but the valuation of such commitment should not consider expected future cash flows related to servicing of the future loan. The Company adopted SAB 105 in January 2004. Management does not anticipate the issuance of SAB 105 will have a material impact on financial condition, the results of operations, or cash flows.

In December 2003, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 requires acquired loans, including debt securities, to be recorded at the amount of the purchaser’s initial investment and prohibits carrying over valuation allowances from the seller for those individually evaluated loans that have evidence of determination in credit quality since origination, and it is probable all contractual cash flows on the loan will be unable to be collected. SOP 03-3 also requires the excess of all undiscounted cash flows expected to be collected at acquisition over the purchaser’s initial investment to be recognized as interest income on the level-yield basis over the life of the loan. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life, while subsequent decreases are recognized as impairment.

F-19

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

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

Effect of New Accounting Pronouncements (Continued)

Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of SOP 03-3. The guidance is effective for loans acquired in fiscal years beginning after December 31, 2004 and is not expected to have a material impact on financial condition, results of operations, or cash flows.

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The statement amends and clarifies accounting for derivative instruments, including certain derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the Company’s financial position, results of operations or cash flow.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s financial position, results of operations or cash flow.

In November 2002, the FASB issued Interpretation (FIN) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantee of Indebtedness of Others, which elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The interpretation also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This adoption of FIN 45 did not have a material impact on the consolidated financial statements.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities, which clarifies the application of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinate financial support from other parties. The effects of FIN 46 did not have a material impact on the consolidated financial statements.

Reclassification

Certain 2003 and 2002 amounts have been reclassified to conform to the December 31, 2004 presentation.

F-20

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(2) Acquisition:

The Bank completed the purchase of the operating assets and assumed the deposits and certain liabilities of the Fulton, Kentucky division of Old National Bank (Fulton Division) and Fall and Fall Insurance (Fall and Fall), a full service insurance agency on September 5 and 6, 2002. The Company believes that this acquisition enhances its position in the markets of northwestern Tennessee and southwestern Kentucky.

The consolidated statement of income of the Company for the year ended December 31, 2002, includes the results of operations for the Fulton Division and Fall and Fall from the September 5, 2002 acquisition date. The acquisition resulted in approximately $3.7 million of goodwill, $2.5 million of core deposit intangible assets and $128,000 of other intangible assets, all of which are deductible for tax purposes. The amount allocated to the core deposit intangible was determined by an independent valuation and is being amortized over the estimated useful life of seven years using the straight-line method. The amount allocated to other intangibles represents the identified intangible asset for insurance contracts from Fall and Fall. This intangible asset is being amortized over the estimated useful life of seven years using the straight-line method.

The following condensed balance sheet discloses amounts assigned to each major asset and liability caption at the date of acquisition:

Assets:
Cash and due from banks	$	1,304
Securities available for sale		45,002
Loans		41,879
Premises and equipment		1,085
Goodwill		3,689
Intangible assets		2,637
Bank owned life insurance		1,547
Other assets		657
Total assets	$	97,800
Liabilities:
Deposits	$	96,750
Accrued expenses and other liabilities		1,050
Total liabilities	$	97,800

F-21

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands, Except Per Share Amounts)

(2) Acquisition: (Continued)

The following represents supplemental pro forma disclosure required by SFAS 141, Business Combinations, for the year ended December 31, 2002, of interest income, non-interest income, net income and earnings per share as though the business combination had been completed as of January 1, 2002.

	For the Year Ended December 31, 2002
Interest income	$	22,877
Non-interest income		2,868
Net income		4,615
Earnings per share:
Basic		1.27
Diluted		1.27

F-22

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(3) Securities:

Securities, which consist of debt and equity investments, have been classified in the consolidated balance sheets according to management’s intent. The carrying amount of securities available for sale and their estimated fair values follow:

	December 31, 2004
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Estimated Fair Value
Restricted:
FHLB stock	$	3,015	—	—		3,015
Intrieve stock		15				15
		3,030	—	—		3,030
Unrestricted:
U.S. government and agency securities:
Agency debt securities		65,114	114	(628	)	64,600
Corporate bonds		5,260	—	(60	)	5,200
Municipal bonds		23,764	296	(279	)	23,781
Mortgage-backed securities:
GNMA		2,739	3	(6	)	2,736
FNMA		31,319	13	(410	)	30,922
FHLMC		13,092	31	(120	)	13,003
CMOs		14,970	16	(77	)	14,909
		156,258	473	(1,580	)	155,151
	$	159,288	473	(1,580	)	158,181

F-23

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(3) Securities: (Continued)

	December 31, 2003
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Estimated Fair Value
Restricted:
FHLB stock	$	2,488	—	—		2,488
Intrieve stock		15	—	—		15
		2,503	—	—		2,503
Unrestricted:
U.S. government and agency securities:
Agency debt securities	$	41,634	273	(599	)	41,308
Corporate bonds		4,164	69	—		4,233
Municipal bonds		28,453	402	(332	)	28,523
Mortgage-backed securities:
GNMA		3,709	5	(20	)	3,694
FNMA		35,225	61	(475	)	34,811
FHLMC		12,244	53	(129	)	12,168
CMOs		16,424	94	(244	)	16,274
		141,853	957	(1,799	)	141,011
	$	144,356	957	(1,799	)	143,514

The scheduled maturities of debt securities available for sale at December 31, 2004 and 2003 were as follows:

	Amortized Cost		Estimated Fair Value
2004
Due within one year	$	35	35
Due in one to five years		22,711	22,667
Due in five to ten years		54,082	53,580
Due after ten years		17,310	17,299
		94,138	93,581
Mortgage-backed securities		62,120	61,570
Total unrestricted securities available for sale	$	156,258	155,151

F-24

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(3) Securities: (Continued)

	Amortized Cost		Estimated Fair Value
2003
Due within one year	$	35	35
Due in one to five years		13,133	13,317
Due in five to ten years		43,875	43,588
Due after ten years		17,208	17,124
		74,251	74,064
Mortgage-backed securities		67,602	66,947
Total unrestricted securities available for sale	$	141,853	141,011

FHLB stock is an equity interest in the Federal Home Loan Bank. Intrieve stock is an equity interest in Intrieve, Incorporated, the Bank’s data processing service center. These stocks do not have readily determinable fair values because ownership is restricted and a market is lacking. FHLB stock and Intrieve stock are classified as restricted investment securities, carried at cost and evaluated for impairment.

The estimated fair value and unrealized loss amounts of temporarily impaired investments as of December 31, 2004 are as follows:

	Less than 12 months				12 months or longer			Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value	Unrealized Losses		Estimated Fair Value	Unrealized Losses
Held to maturity
U.S. government and agency securities:
Agency debt securities	$	5,245	(41	)	6,397	(48	)	11,642	(89	)
Available for sale
U.S. government and agency securities:
Agency debt securities		24,308	(246	)	20,414	(382	)	44,722	(628	)
Corporate bonds		5,200	(60	)	—	—		5,200	(60	)
Municipal bonds		3,457	(41	)	8,820	(238	)	12,277	(279	)
Mortgage-backed securities:
GNMA					2,230	(6	)	2,230	(6	)
FNMA		6,722	(12	)	21,703	(398	)	28,425	(410	)
FHLMC		6,902	(32	)	4,010	(88	)	10,912	(120	)
CMOs		3,598	(20	)	7,704	(57	)	11,302	(77	)
Total available for sale		50,187	(411	)	64,881	(1,169	)	115,068	(1,580	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluations. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At December 31, 2004, the Company has 113 securities with unrealized losses. Management believes these unrealized losses relate to changes in interest rates and not credit quality. Management also believes the Company has the ability to hold these securities until maturity, or for the foreseeable future and therefore no declines are deemed to be other than temporary.

F-25

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(3) Securities: (Continued)

Certain securities, with amortized cost of $85.4 million and estimated fair value of $84.9 million at December 31, 2004 were pledged as collateral as permitted or required by law.

During 2004, the Company sold investment securities classified as available-for-sale for proceeds of $39.5 million resulting in gross gains of $366,000 and gross losses of $60,000. The Company sold investment securities classified as available-for-sale for proceeds of $61.2 million resulting in gross gains of $735,000 and gross losses of $101,000 during 2003. The Company sold investments securities classified as available-for-sale for proceeds of $56.8 million resulting in gross gains of $584,000 and gross losses of $16,000 during 2002.

The carrying amount of securities held to maturity and their estimated fair values follow:

	December 31, 2004
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Estimated Fair Value
Held to maturity securities
U.S. government and agency securities:
Agency debt securities	$	21,546	18	(89	)	21,475
Mortgage-backed securities:
GNMA		1,093	23	—		1,116
FNMA		129	1	—		130
		1,222	24	—		1,246
	$	22,768	42	(89	)	22,721

	December 31, 2003
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Estimated Fair Value
Held to maturity securities
Agency debt securities		13,339	19	(74	)	13,284
Mortgage-backed securities:
GNMA	$	1,632	50	—		1,682
FNMA		137	1	—		138
		1,769	51	—		1,820
	$	15,108	70	(74	)	15,104

F-26

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(3) Securities: (Continued)

The scheduled maturities of debt securities held to maturity at December 31, 2004 were as follows:

	Amortized Cost		Estimated Fair Value
Due within one year	$	—	—
Due in one to five years		2,875	2,881
Due in five to ten years		10,941	10,938
Due after ten years		7,730	7,656
		21,546	21,475
Mortgage-backed securities		1,222	1,246
Total unrestricted securities held to maturity	$	22,768	22,721

(4) Loans Receivable, Net:

The Company originates most fixed rate loans for immediate sale to the Federal Home Loan Mortgage Corporation (FHLMC) or other investors. Generally, the sale of such loans is arranged at the time the loan application is received through commitments.

The components of loans receivable in the consolidated balance sheets as of December 31, 2004 and 2003 were as follows:

	2004		2003
Real estate loans:
One-to-four family	$	207,252	191,015
Multi-family		6,520	6,254
Construction		2,698	3,544
Non-residential		40,231	39,615
Total mortgage loans		256,701	240,428
Loans secured by deposits		3,121	3,062
Other consumer loans		33,287	43,147
Commercial loans		66,989	50,679
		360,098	337,316
Less:
Less allowance for loan losses		3,273	2,576
	$	356,825	334,740

Loans serviced for the benefit of others totaled approximately $41.0 million, $40.6 million and $16.7 million at December 31, 2004, 2003 and 2002, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow amounts, disbursing payments to investors and foreclosure processing.

F-27

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(4) Loans Receivable, Net: (Continued)

Qualified one-to-four family first mortgage loans are pledged to the Federal Home Loan Bank of Cincinnati as discussed in note 8.

Impaired loans and related valuation allowance amounts at December 31, 2004 and 2003 were as follows:

	2004		2003
Recorded investment	$	911	1,144
Valuation allowance	$	252	227

The average recorded investment in impaired loans for the years ended December 31, 2004, 2003 and 2002 was $1,078,000, $789,000, and $869,000, respectively. Interest income recognized on impaired loans was not significant during the years ended December 31, 2004, 2003 and 2002.

An analysis of the change in the allowance for loan losses for the years ended December 31, 2004, 2003 and 2002 follows:

	2004			2003		2002
Balance at beginning of year	$	2,576		1,455		923
Loans charged off		(649	)	(656	)	(272	)
Recoveries		146		27		9
Provision for loan losses		1,200		1,750		795
Balance at end of year	$	3,273		2,576		1,455

Nonperforming loans totaled $653,000 and $1,144,000 at December 31, 2004 and 2003, respectively. Other assets owned totaled $111,000 and $271,000 at December 31, 2004 and 2003, respectively. Interest income foregone on such loans was not significant during 2004, 2003 and 2002. The Company is not committed to lend additional funds to borrowers whose loans have been placed on a non-accrual basis.

There were $20,000 and $0 in loans three months or more past due still accruing interest as of December 31, 2004 and 2003.

The Company originates loans to officers and directors at terms substantially identical to those available to other borrowers. Loans to officers and directors at December 31, 2004 and 2003 were approximately $5,731,000 and $4,868,000, respectively. At December 31, 2004, funds committed that were undisbursed to officers and directors approximated $659,000.

F-28

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(4) Loans Receivable, Net: (Continued)

The following summarizes activity of loans to officers and directors for the year ended December 31, 2004 and 2003:

	2004			2003
Balance at beginning of period	$	4,868		$	5,049
New loans		2,391			1,850
Principal repayments		(1,528	)		(2,031	)
Balance at end of period	$	5,731		$	4,868

(5) Premises and Equipment:

Components of premises and equipment included in the consolidated balance sheets as of December 31, 2004 and 2003 consisted of the following:

	2004		2003
Land	$	1,424	1,101
Land improvements		113	107
Buildings		4,574	4,574
Construction in process		419	—
Furniture and equipment		1,778	1,684
		8,308	7,466
Less accumulated depreciation		1,608	1,460
	$	6,700	6,006

Depreciation expense was approximately $346,000, $319,000, and $236,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

(6) Intangible Assets:

Goodwill is tested for impairment on an annual basis and as events or circumstances change that would more likely than not reduce fair value below its carrying amount. The Company completed its review and determined there was no impairment of goodwill as of December 31, 2004 and 2003.

F-29

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(6) Intangible Assets: (Continued)

The changes in the carrying amounts of other intangible assets for the years ended December 31, 2004 and 2003 are as follows:

	Core Deposit Intangible			Insurance Contracts Intangible		Total
Balance, January 1, 2002	$	—		—		—
Fulton Division acquisition		2,509		—		2,509
Fall and Fall acquisition		—		128		128
Amortization		(120	)	(6	)	(126	)
Balance, December 31, 2002		2,389		122		2,511
Amortization		(360	)	(18	)	(378	)
Balance, December 31, 2003	$	2,029		104		2,133
Amortization		(360	)	(18	)	(378	)
Balance, December 31, 2004	$	1,669		86		1,755

The estimated amortization expense for intangible assets for the subsequent five years is as follows:

	Core Deposit Intangible		Insurance Contracts Intangible	Total
2005	$	360	18	378
2006		360	18	378
2007		360	18	378
2008		360	18	378
2009		229	14	243
	$	1,669	86	1,755

(7) Deposits:

At December 31, 2004, the scheduled maturities of other time deposits were as follows:

2005	$	97,207
2006		83,183
2007		33,008
2008		21,156
2009		17,002
	$	251,556

F-30

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands, Except Percentages)

(7) Deposits: (Continued)

The amount of other time deposits with a minimum denomination of $100,000 was approximately $79,230,000 and $82,135,000 at December 31, 2004 and 2003, respectively.

Interest expense on deposits for the years ended December 31, 2004, 2003 and 2002 is summarized as follows:

	2004		2003	2002
Demand and NOW accounts	$	1,289	655	385
Money market accounts		248	460	187
Savings		457	459	920
Other time deposits		7,759	9,322	6,598
	$	9,753	10,896	8,090

The Bank maintains clearing arrangements for its demand, NOW and money market accounts with Compass Bank. The Bank is required to maintain certain cash reserves in its account to cover average daily clearings. At December 31, 2004, average daily clearings were approximately $3,300,000.

(8) Advances from Federal Home Loan Bank:

FHLB advances are summarized as follows:

	December 31,
	2004				2003
Type of Advances	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Fixed-rate	$	81,319	3.20	%	$	54,353	3.19	%

Scheduled maturities of FHLB advances as of December 31, 2004 are as follows:

Years Ended December 31,
2005	$	20,639
2006-2009		35,347
2010-2014		25,333
	$	81,319

The Bank has an approved line of credit of $30 million at December 31, 2004 which is secured by a blanket agreement to maintain residential first mortgage loans with a principal value of 125% of the outstanding advances and has a variable interest rate. The Company can increase its borrowings from the FHLB by approximately $29 million at December 31, 2004.

F-31

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(9) Financial Instruments:

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

	December 31
	2004		2003
Commitments to extend credit	$	21,300	8,486
Standby letters of credit		870	837
Unused lines of credit		20,139	10,630

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter-party. Collateral held varies but may include property, plant, and equipment and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most guarantees extend from one to two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

The fair value of standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments and the present creditworthiness of such

F-32

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(9) Financial Instruments: (Continued)

counterparties. Such commitments have been made on terms which are competitive in the markets in which the Company operates, thus, the fair value of standby letters of credit equals the carrying value for the purposes of this disclosure. The maximum potential amount of future payments that the Company could be required to make under the guarantees totaled $870,000 at December 31, 2004.

The estimated fair values of financial instruments were as follows at December 31, 2004:

	Carrying Amount		Estimated Fair Value
Financial assets:
Cash and due from banks	$	17,357	17,357
Interest-earning deposits in Federal Home Loan Bank		42	42
Federal funds sold		850	850
Securities available for sale		158,181	158,181
Securities held to maturity		22,768	22,721
Loans receivable		356,825	347,398
Accrued interest receivable		3,053	3,053
Bank owned life insurance		6,896	6,896
Financial liabilities:
Deposits		436,195	435,815
Advances from borrowers for taxes and insurance		301	301
Advances from Federal Home Loan Bank		81,319	78,967
Subordinated debentures		10,310	10,310
Off-balance-sheet liabilities:
Commitments to extend credit		—	—
Commercial letters of credit		—	—
Derivatives		68	68

F-33

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(9) Financial Instruments: (Continued)

The estimated fair values of financial instruments were as follows at December 31, 2003:

	Carrying Amount		Estimated Fair Value
Financial assets:
Cash and due from banks	$	12,958	12,958
Interest-earning deposits in Federal Home Loan Bank		35	35
Federal funds sold		2,185	2,185
Securities available for sale		143,514	143,514
Securities held to maturity		15,108	15,104
Loans receivable		334,740	337,666
Accrued interest receivable		2,849	2,849
Bank owned life insurance		6,628	6,628
Financial liabilities:
Deposits		417,488	423,832
Advances from borrowers for taxes and insurance		199	199
Advances from Federal Home Loan Bank		54,353	53,382
Subordinated debentures		10,310	10,310
Off-balance-sheet liabilities:
Commitments to extend credit		—	—
Commercial letters of credit		—	—

(10) Subordinated Debentures:

On September 25, 2003, the Company formed HopFed Capital Trust I (the Trust). The Trust is a statutory trust formed under the laws of the state of Delaware. In September 2003, the Trust issued variable rate capital securities with an aggregate liquidation amount of $10,000,000 ($1,000 per preferred security) to a third-party investor. The Company then issued floating rate junior subordinated debentures aggregating $10,310,000 to the Trust. The junior subordinated debentures are the sole assets of the Trust. The junior subordinated debentures and the capital securities pay interest and dividends, respectively, on a quarterly basis. The variable interest rate is the three-month LIBOR plus 3.10% adjusted quarterly (5.17% at December 31, 2004). These junior subordinated debentures mature in 2033, at which time the capital securities must be redeemed. The junior subordinated debentures and capital securities can be redeemed contemporaneously, in whole or in part, beginning October 8, 2008 at a redemption price of $1,000 per capital security.

The Company has provided a full-irrevocable and unconditional guarantee on a subordinated basis of the obligations of the Trust under the capital securities in the event of the occurrence of an event of default, as defined in such guarantee. Debt issuance cost and underwriting fees of $190,000 were capitalized related to the offering and are being amortized over the estimated life of the junior subordinated debentures. The trust agreement contains provisions that enable the Company to defer making interest payments for a period of up to five years.

F-34

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(11) Concentrations of Credit Risk:

Most of the Bank’s business activity is with customers located within the western part of the Commonwealth of Kentucky. The majority of the loans are collateralized by a one-to-four family residence. The Bank requires collateral for all loans.

The distribution of commitments to extend credit approximates the distribution of loans outstanding. The contractual amounts of credit-related financial instruments such as commitments to extend credit and commercial letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless.

Cash and cash equivalents with financial institutions exceeded the insurance coverage as of December 31, 2004 and 2003. The excess balance of such items as of December 31, 2004 and 2003 was $13.6 million and 11.5 million, respectively.

(12) Employee Benefit Plans:

Pension Plan

The Bank had maintained a defined benefit pension plan covering substantially all of its employees who satisfy certain age and service requirements. The benefits were based on years of service and the employee’s average earnings which were computed using the five consecutive years prior to retirement that yield the highest average. The Bank’s funding policy was to contribute annually, actuarially determined amounts to finance the plan benefits.

During September 2001, the Bank Board of Directors authorized management to terminate the plan effective December 31, 2001. This action resulted in the Company recognizing a pretax curtailment loss of approximately $1.4 million. During 2003, termination of the plan was completed with distribution of all plan assets. A settlement loss of $990,000 was incurred during 2003.

The following table sets forth the plan’s funded status and amounts recognized in the consolidated balance sheets at December 31:

	2003			2002
Change in benefit obligation:
Benefit obligation at beginning of year	$	2,643		$	2,633
Service cost		—			—
Interest costs		52			195
Actuarial loss		—			10
Benefits paid		(3,685	)		(195	)
Settlements		990			—
Benefit obligation at end of year		—			2,643

F-35

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands, Except Percentages)

(12) Employee Benefit Plans: (Continued)

Pension Plan (Continued)

	2003			2002
Change in plan assets
Fair value of plan assets at beginning of year	$	1,415			1,244
Actual return on plan assets		52			55
Employers contributions		2,218			311
Benefits paid		(3,685	)		(195	)
Fair value of plan assets at end of year		—			1,415
Funded status					(1,228	)
Unrecognized net asset		—			16
Accrued pension cost	$	—		$	(1,244	)

Weighted average assumptions used to develop the net periodic pension cost were:

	2002
Discount rate	6.75	%
Expected long-term rate of return on assets	7.00	%
Rate of increase in compensation levels	N/A

The components of net periodic pension cost for the years ended December 31, were as follows:

	2003		2002
Service cost	$	—	—
Interest cost on projected benefit obligation		52	195
Expected return on plan assets		—	(85	)
Amortization of transitional asset		—	(6	)
Amortization of prior service cost		—	—
Amortization of net loss		—	42
Net periodic pension cost	$	52	146

F-36

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(12) Employee Benefit Plans: (Continued)

Stock Option Plan

On February 24, 1999, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 1999 Stock Option Plan (Option Plan) which was subsequently approved at the 1999 Annual Meeting of Stockholders. Under the Option Plan, the Option Committee has discretionary authority to grant stock options and stock appreciation rights to such employees, directors and advisory directors as the committee shall designate. The Option Plan reserved 403,362 shares of common stock for issuance upon the exercise of options or stock appreciation rights.

The Company will receive the exercise price for shares of common stock issued to Option Plan participants upon the exercise of their option, and will receive no monetary consideration upon the exercise of stock appreciation rights. The Board of Directors granted options to purchase 403,360 shares of common stock under the Option Plan at an exercise price of $20.75 per share, which was the fair market value on the date of the grant. As a result of the special dividend of $4.00 per share paid in December, 1999, and in accordance with plan provisions, the number of options and the exercise price has been adjusted to 480,475 and $17.42 respectively. The options granted to participants became vested and exercisable as follows: 50% on date of grant and 50% on January 1, 2000 (subject to immediate vesting upon certain events, including death or normal retirement of participant).

On May 31, 2000, the Board of Directors of the Company adopted the HopFed Bancorp, Inc. 2000 Stock Option Plan (the “2000 Option Plan”). Under the 2000 Option Plan, the option committee has discretionary authority to grant stock options to such employees as the committee shall designate. The 2000 Option Plan reserves 40,000 shares of common stock for issuance upon the exercise of options. The Company will receive the exercise price for shares of common stock issued to 2000 Option Plan participants upon the exercise of their option. The Board of Directors has granted options to purchase 40,000 shares of common stock under the 2000 Option Plan at an exercise price of $10.00 per share, which was the fair market value on the date of the grant.

The options granted became vested and exercisable as follows: 25% on May 31, 2001, 25% on May 31, 2002, 25% on May 31, 2003 and 25% on May 31, 2004 (subject to immediate vesting upon certain events, including death or normal retirement of participant).

F-37

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(12) Employee Benefit Plans: (Continued)

Stock Option Plan (Continued)

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

	Number of Shares		Weighted Average Exercise Price
Options outstanding, January 1, 2002	402,309		$	16.05
Granted	—
Exercised	—
Forfeited	—
Options outstanding, December 31, 2002	402,309			16.05
Granted	—
Exercised	—
Forfeited	(148,557	)		17.42
Options outstanding, December 31, 2003	253,752			15.05
Granted	20,000			17.34
Exercised	—
Forfeited	—
Options outstanding, December 31, 2004	273,752			15.22

The following is a summary of stock options outstanding at December 31, 2004:

Exercise Price		Weighted Average Remaining Contractual Life (Years)	Options Outstanding	Options Exercisable
$	17.42	3.2	153,752	153,752
	12.33 17.34	5.8 9.4	60,000 20,000	42,500 —
	10.00	5.4	40,000	40,000
	15.22	4.7	273,752	236,252

The weighted average fair value of options granted during December 31, 2004 was $4.36 per share. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: volatility of 15%,

F-38

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(12) Employee Benefit Plans: (Continued)

Stock Option Plan (Continued)

a risk free interest rate of 4.25%, expected dividend yield of 2.77% and an expected life of nine and one half years for options granted during the year ended December 31, 2004.

Hopfed Bancorp, Inc. 2004 Long Term Incentive Plan

On February 18, 2004, the Board of Directors of the Company adopted the HopFed Bancorp, Inc 2004 Long Term Incentive Plan (the “Plan”), which was subsequently approved at the 2004 Annual Meeting of Stockholders. Under the Plan, the Compensation Committee has discretionary authority to grant up to 200,000 shares in the form of restricted stock grants, options, and stock appreciation rights to such employees, directors and advisory directors as the committee shall designate. The grants vest in equal installments over a four year period. Grants may vest immediately upon specific events, including a change of control of the Company, death or disability of award recipient, termination of employment of the recipient by the Company without cause.

Awards are recognized as an expense to the Company in accordance with the vesting schedule. Awards in which the vesting is accelerated must be recognized as an expense immediately. Awards are valued at the closing stock price on the day the award is granted. In 2004, the Compensation Committee granted a total of 8,887 shares in restricted stock with a market value of $149,000. The Company recognized $18,000 in compensation expense in 2004.

401(K) Plan

During 2002, the Bank initiated a 401(k) retirement program. The plan is available to all employees who meet minimum eligibility requirements. Participants may generally contribute up to 15% of earnings, and in addition, management will match employee contributions up to 4%. Expense related to Company contributions amounted to $229,000 and $208,000 in 2004 and 2003, respectively.

Deferred Compensation Plan

During the third quarter of 2002, the Company purchased assets and assumed the liabilities relating to a nonqualified deferred compensation plan for certain employees of the Fulton division. The Company owns single premium life insurance policies on the life of each participant and is the beneficiary of the policy value. When a participant retires, the benefits accrued for each participant will be distributed to the participant in equal installments for 15 years. The Company expense both 2003 and 2004 amounted to $19,000.

The Deferred Compensation Plan also provides the participant with life insurance coverage, which is a percentage of the net death proceeds for the policy, if any, applicable to the participant.

F-39

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands, Except Percentages)

(13) Income Taxes:

The provision for income taxes for the years ended December 31, 2004, 2003 and 2002 consisted of the following:

	2004		2003		2002
Current
Federal	$	1,665	$	1,536	2,374
State		—		—	—
		1,665		1,536	2,374
Deferred		18		38	(28	)
	$	1,683	$	1,574	2,346

Total income tax expense for the years ended December 31, 2004, 2003 and 2002 differed from the amounts computed by applying the federal income tax rate of 34 percent to income before income taxes as follows:

	2004			2003			2002
Expected federal income tax expense at statutory tax rate	$	1,929		$	1,723		2,360
Effect of nontaxable interest income		(324	)		(213	)	(94	)
Other		78			64		80
Total federal income tax expense	$	1,683			1,574		2,346
Effective rate		29.7	%		31.2	%	33.8	%

The components of deferred taxes as of December 31, 2004 and 2003 are summarized as follows:

	2004			2003
Deferred tax liabilities:
FHLB stock dividends	$	(610	)	(573	)
		(610	)	(573	)
Deferred tax assets:
Bad debt reserves		888		876
Accrued interest expense		4		4
Accrued expenses		43		59
Unrealized depreciation on securities available for sale		377		286
		1,312		1,225
Net deferred tax asset	$	702		652

F-40

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(13) Income Taxes (Continued):

The Small Business Protection Act of 1996, among other things, repealed the tax bad debt reserve method for thrifts effective for taxable years beginning after December 31, 1995. For each of the years ended December 31, 2003 and 2002, the Bank recaptured approximately $146,000 of tax bad debt reserves into taxable income. Thrifts such as the Bank may now only use the same tax bad debt reserve method that is allowed for commercial banks. A thrift with assets greater than $500 million can no longer use the reserve method and may only deduct loan losses as they actually arise (i.e., the specific charge-off method).

The portion of a thrift’s tax bad debt reserve that is not recaptured (generally pre-1988 bad debt reserves) under the 1996 law is only subject to recapture at a later date under certain circumstances. These include stock repurchase redemptions by the thrift or if the thrift converts to a type of institution (such as a credit union) that is not considered a bank for tax purposes. However, no further recapture would be required if the thrift converted to a commercial bank charter or was acquired by a bank. The Bank does not anticipate engaging in any transactions at this time that would require the recapture of its remaining tax bad debt reserves. Therefore, retained earnings at December 31, 2004 and 2003 includes approximately $4,027,000 which represents such bad debt deductions for which no deferred income taxes have been provided.

(14) Commitments and Contingencies:

In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements.

The Bank had open loan commitments at December 31, 2004 and 2003 of approximately $21,300,000 and $8,486,000, respectively. Of these amounts, approximately $2,073,000 and $2,012,000 as of December 31, 2004 and 2003, respectively, were for fixed rate loans. The interest rates for the fixed rate loan commitments ranged from 4.75% to 6.50% and 5.00% to 6.13% for December 31, 2004 and 2003, respectively. Unused lines of credit were approximately $20,139,000 and $10,630,000 as of December 31, 2004 and 2003, respectively.

The Company and the Bank have agreed to enter into employment agreements with certain officers, which provide certain benefits in the event of their termination following a change in control of the Company or the Bank. The employment agreements provide for an initial term of three years. On each anniversary of the commencement date of the employment agreements, the term of each agreement may be extended for an additional year at the discretion of the Board. In the event of a change in control of the Company or the Bank, as defined in the agreement, the officers shall be paid an amount equal to two times the officer’s base salary as defined in the employment agreement.

F-41

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(14) Commitments and Contingencies (Continued):

The Company and the Bank have entered into commitments to rent facilities and lease operating equipment that are noncancelable. At December 31, 2004, future minimal lease and rental commitments were as follows:

2005	$	33,000
2006	$	20,250
2007	$	22,200
2008	$	14,000

The Company and the Bank have entered into noncancelable purchase obligations and fixed asset purchases. In October 2004, the Company entered into an agreement with Design Engineers, Inc. (“DEI”) to construct a 26,000 square foot retail bank and operations center in Hopkinsville, Kentucky. The anticipated cost of the project is $6.4 million with an anticipated completion date at the end of the second quarter of 2006. The Company anticipates that more than 50% of the cost of the project will be incurred in 2005.

In December 2004, the Company made an offer to purchase land in Clarksville, Tennessee that was accepted by the buyer. The property cost approximately $560,000 and the sale closed January 31, 2005.

In the normal course of business, the Bank and Company have entered into operating contracts necessary to conduct the Company’s daily business. The most significant operating contract is for the Bank’s data processing services. This monthly cost associated with this contract is variable based on the number of accounts and usage but averages approximately $80,000 per month. This contract expires in 2006.

In addition, the Bank is a defendant in legal proceedings arising in connection with its business. It is the best judgment of management that neither the financial position nor results of operations of the Bank will be materially affected by the final outcome of these legal proceedings.

(15) Regulatory Matters:

The Company is a unitary thrift holding company and, as such, is subject to regulation, examination and supervision by the Office of Thrift Supervision (OTS).

The Bank is also subject to various regulatory requirements administered by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements.

F-42

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(15) Regulatory Matters (Continued):

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to adjusted total assets (as defined), and of total capital (as defined) and Tier 1 to risk weighted assets (as defined). Management believes, as of December 31, 2004 and 2003, that the Bank meets all capital adequacy requirements to which it is subject.

The most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total, tangible and core capital ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution’s category.

F-43

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2004 and 2003 are presented below (dollars in thousands):

	Company Actual				Bank Actual				Required for Capital Adequacy Purposes				Required to be Categorized as Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2004
Tangible capital to adjusted total assets	$	54,924	9.6	%	$	52,899	9.2	%	$	8,605	1.50	%		N/A	N/A
Core capital to adjusted total assets	$	54,924	9.6	%	$	52,899	9.2	%	$	22,946	4.00	%	$	28,683	5.00	%
Total capital to risk weighted assets	$	58,198	17.3	%	$	56,172	16.7	%	$	26,898	8.00	%	$	33,622	10.00	%
Tier I capital to risk weighted assets	$	54,924	16.3	%	$	52,899	15.7	%		N/A	N/A		$	20,173	6.00	%
As of December 31, 2003
Tangible capital to adjusted total assets	$	52,258	9.9	%	$	49,971	9.6	%	$	7,852	1.50	%		N/A	N/A
Core capital to adjusted total assets	$	52,258	9.9	%	$	49,971	9.6	%	$	20,939	4.00	%	$	26,174	5.00	%
Total capital to risk weighted assessment	$	54,834	17.1	%	$	52,547	16.5	%	$	25,489	8.00	%	$	31,862	10.00	%
Tier I capital to risk weighted assets	$	52,258	16.3	%	$	49,971	15.7	%		N/A	N/A		$	19,117	6.00	%

F-44

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(16) Stockholders’ Equity:

The Company’s sources of income and funds for dividends to its stockholders are earnings on its investments and dividends from the Bank. The Bank’s primary regulator, the OTS, has regulations that impose certain restrictions on payment of dividends to the Company. Current regulations of the OTS allow the Bank (based upon its current capital level and supervisory status assigned by the OTS) to pay a dividend of up to 100% of net income to date during the calendar year plus the retained income for the preceding two years.

The Bank must provide OTS with 30 days prior notice to the payment of the dividend. Any capital distribution in excess of this amount would require supervisory approval. Capital distributions are further restricted should the Bank’s capital level fall below the fully phased-in capital requirements of the OTS. In no case will the Bank be allowed to make capital distributions reducing equity below the required balance of the liquidation account. For the year ended December 31, 2004, the Bank paid a $2,000,000 dollar dividend to the Company. No dividends were paid by the Bank to the Company during the year ended December 31, 2003 and 2002.

OTS regulations also place restrictions after the conversion on the Company with respect to repurchases of its common stock. With prior notice to the OTS, the Company is allowed to repurchase its outstanding shares. The Company has requested and received regulatory approval to acquire a total of 500,000 shares of its outstanding common stock. As of December 31, 2004, 408,909 shares had been repurchased at an average price of $11.88 per share.

(17) Earnings Per Share:

Earnings per share of common stock are based on the weighted average number of basic shares and dilutive shares outstanding during the year.

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

	Years Ended December 31,
	2004	2003	2002
Basic earnings per share:
Weighted average common shares	3,634,904	3,630,396	3,630,668
Diluted earnings per share:
Weighted average common shares	3,634,904	3,630,396	3,630,668
Diluted effect of stock options	28,847	23,578	5,812
Weighted average common and incremental shares	3,663,751	3,653,974	3,636,480

F-45

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(18) Condensed Parent Company Only Financial Statements:

The following condensed balance sheets as of December 31, 2004 and 2003 and condensed statements of income and cash flows for the years ended December 31, 2004, 2003 and 2002 of the parent company only should be read in conjunction with the consolidated financial statements and the notes thereto.

Consolidated Balance Sheets:

	2004			2003
Assets:
Cash and due from banks	$	47		21
Receivable from subsidiary		1,004		138
Federal funds sold		850		2,185
Investment in subsidiary		36,651		34,375
Prepaid expenses and other assets		807		499
Total assets	$	39,359		37,218
Liabilities and equity
Liabilities:
Dividends payable		437		435
Interest payable		126		120
Subordinated debentures		10,310		10,310
Total liabilities		10,873		10,865
Equity:
Common stock		40		40
Additional paid-in capital		21,591		21,442
Retained earnings		12,530		10,284
Treasury stock		(4,857	)	(4,857	)
Unearned restricted stock		(131	)	—
Accumulated other comprehensive		(687	)	(556	)
Total equity		28,486		26,353
Total liabilities and equity	$	39,359		37,218

F-46

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

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

Condensed Income Statements:

	2004			2003		2002
Interest and dividend income
Dividend income	$	2,014		—		—
Time deposits		13		22		4
Total interest and dividend income		2,027		22		4
Interest expense		479		119		—
Non-interest expenses		242		117		132
Total expenses		721		236		132
Income (Loss) before income taxes and equity in undistributed earnings of subsidiary		1,306		(214	)	(128	)
Income tax benefit		(233	)	(73	)	(43	)
Income (Loss) before equity in undistributed earnings of subsidiary		1,539		(141	)	(85	)
Equity in undistributed earnings of subsidiary		2,452		3,636		4,679
Net income	$	3,991		3,495		4,594

F-47

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

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

Condensed Statement of Cash Flows:

	2004			2003		2002
Cash flows from operating activities:
Net income	$	3,991		3,495		4,594
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in undistributed earnings of subsidiary		(2,452	)	(3,636	)	(4,679	)
Increase (decrease) in:
Current income taxes payable		(166	)	(69	)	(42	)
Accrued expenses		6		118		—
Net cash (used in) provided by operating activities		1,379		(92	)	(127	)
Cash flows for investing activities:
Prepaid and other assets		(78	)	(499	)	—
Investment in subsidiary		—		(8,000	)	—
Investment in Trust		—		(310	)	—
(Advance for) payment on receivable from subsidiary		(866	)	—		4,000
Net (increase) decrease in federal funds sold		1,335		255		(2,250	)
Net cash provided by (used in) investing activities		391		(8,554	)	1,750
Cash flows from financing activities:
Subordinated debenture issue		—		10,310		—
Purchase of treasury stock		—		—		(12	)
Dividends paid		(1,744	)	(1,668	)	(1,598	)
Net cash used in financing activities		(1,744	)	8,642		(1,610	)
Net increase (decrease) in cash		26		(4	)	13
Cash at beginning of year		21		25		12
Cash at end of year	$	47		21		25

F-48

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(19) Investments in Affiliated Companies: (Unaudited)

Investments in affiliated companies accounted for under the equity method consist of 100% of the common stock of HopFed Capital Trust I (“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 Balance Sheet

	At Dec. 31, 2004		At Dec. 31, 2003
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 stockholder’s equity		10,310		10,310
Total liabilities and stockholder’s equity	$	10,310	$	10,310

Summary Income Statement

	Years Ended Dec. 31,
	2004		2003
Income – Interest income from subordinated debentures issued by HopFed Bancorp, Inc.	$	478	$	119
Net Income	$	478	$	119

Summary Statement of Stockholder’s Equity

	Trust Preferred Securities		Common Stock		Retained Earnings			Total Stockholder’s Equity
Beginning balances, December 31, 2003	$	10,000	$	310	$	—		$	10,310
Retained earnings:
Net income		—		—		478			478
Dividends:
Trust preferred securities		—		—		(464	)		(464	)
Common dividends paid to HopFed Bancorp, Inc.		—		—		(14	)		(14	)
Total retained earnings		—		—		—			—
Ending balances, December 31, 2004	$	10,000	$	310	$	—		$	10,310

F-49

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands, Except Per Share and Share Amounts)

(20) Quarterly Results of Operations: (Unaudited)

Summarized unaudited quarterly operating results for the years ended December 31, 2004 and 2003 are as follows:

	First Quarter		Second Quarter	Third Quarter	Fourth Quarter
December 31, 2004:
Interest income	$	6,294	6,592	6,769	6,726
Interest expense		2,965	3,054	3,162	3,356
Net interest income		3,329	3,538	3,607	3,370
Provision for loan losses		300	300	300	300
Net interest income after provision for loan losses		3,029	3,238	3,307	3,070
Noninterest income		792	705	846	695
Noninterest expense		2,396	2,395	2,577	2,640
Income before income taxes		1,425	1,548	1,576	1,125
Income taxes		478	507	511	187
Net income	$	947	1,041	1,065	938
Basic earnings per share	$	0.26	0.29	0.29	0.26
Diluted earnings per share	$	0.26	0.28	0.29	0.26
Weighted average shares outstanding:
Basic		3,630,396	3,631,515	3,638,152	3,639,283
Diluted		3,661,397	3,659,691	3,665,525	3,667,646

F-50

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands, Except Per Share and Share Amounts)

(20) Quarterly Results of Operations: (Unaudited) (Continued)

December 31, 2003:
Interest income	$	5,905	6,192	6,237	6,409
Interest expense		3,033	3,096	3,092	3,158
Net interest income		2,872	3,096	3,145	3,251
Provision for loan losses		400	450	450	450
Net interest income after provision for loan losses		2,472	2,646	2,695	2,801
Noninterest income		1,015	905	883	696
Noninterest expense		2,023	2,812	2,032	2,177
Income before income taxes		1,464	739	1,546	1,320
Income taxes		468	234	500	372
Net income	$	996	505	1,046	948
Basic earnings per share	$	0.27	0.14	0.29	0.26
Diluted earnings per share	$	0.27	0.14	0.29	0.26
Weighted average shares outstanding:
Basic		3,630,396	3,630,396	3,630,396	3,630,396
Diluted		3,646,737	3,654,347	3,657,996	3,653,974

(21) Comprehensive Income:

SFAS 130, Reporting Comprehensive Income, established standards for reporting comprehensive income. Comprehensive income includes net income and other comprehensive net income which is defined as non-owner related transactions in equity. The following table sets forth the amounts of other comprehensive income included in equity along with the related tax effect for the years ended December 31, 2004, 2003 and 2002:

	Pre-Tax Amount			Tax Benefit (Expense)		Net of Tax Amount
December 31, 2004:
Unrealized holding losses for the period	$	108		(37	)	71
Reclassification adjustments for gains included in net income		(306	)	104		(202	)
	$	(198	)	67		(131	)

F-51

HopFed Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

December 31, 2004, 2003 and 2002

(Table Amounts in Thousands)

(21) Comprehensive Income: (Continued)

	Pre-Tax Amount			(Expense) Benefit		Net of Tax Amount
December 31, 2003:
Unrealized holding losses for the period	$	(1,534	)	521		(1,013	)
Reclassification adjustments for gains included in net income		(634	)	216		(418	)
	$	(2,168	)	737		(1,431	)
December 31, 2002:
Unrealized holding gains for the period	$	1,030		(350	)	680
Reclassification adjustments for gains included in net income		(568	)	193		(375	)
	$	462		(157	)	305

F-52

EX-21

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

	Percentage Owned		Jurisdiction of Incorporation
Heritage Bank	100	%	United States
HopFed Capital Trust I	100	%	Delaware

SUBSIDIARIES OF HERITAGE BANK

	Percentage Owned		Jurisdiction of Incorporation
Fall & Fall Insurance, Inc.	100	%	Kentucky

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in registration statement No. 333-79391 on Form S-8 of HopFed Bancorp, Inc. and subsidiaries of our report dated January 28, 2005, relating to the consolidated balance sheets of Hopfed Bancorp, Inc., and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004, which report appears in the Annual Report on Form 10-K of Hopfed Bancorp, Inc. and subsidiaries.

/s/ Rayburn, Bates & Fitzgerald, P.C.

Brentwood, Tennessee

Date: March 30, 2005

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, John E. Peck, certify that:

(1) I have reviewed this annual report on Form 10-K of HopFed Bancorp, Inc.;

(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrants internal control over financial reporting; and

(5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2005	/s/ John. E. Peck
	John E. Peck, Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Billy C. Duvall, certify that:

(1) I have reviewed this annual report on Form 10-K of HopFed Bancorp, Inc.;

(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrants internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information ; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2005	/s/ Billy C. Duvall
	Billy C. Duvall, Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of HopFed Bancorp, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John E. Peck, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and the result of operations of the Company.

Date: March 31, 2005

/s/ John E. Peck

John E. Peck, Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to HopFed Bancorp, Inc. and will be retained by HopFed Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The information furnished herein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of HopFed Bancorp, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Billy C. Duvall, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and the result of operations of the Company.

Date: March 31, 2005

/s/ Billy C. Duvall

Billy C. Duvall, Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to HopFed Bancorp, Inc. and will be retained by HopFed Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The information furnished herein shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.