<PAGE>
 
          HOPFED BANCORP, INC.



                                     [LOGO OF HOPFED BANCORP, INC. APPEARS HERE]
                                        



          ANNUAL REPORT
          -------------
              1998
<PAGE>
 
HOPFED BANCORP, INC.

HopFed Bancorp, Inc., a Delaware corporation (the "Company"), was organized by
Hopkinsville Federal Savings Bank (the "Bank") for the purpose of serving as the
holding company of the Bank.  On February 6, 1998, the Bank converted from
mutual to stock form as a wholly owned subsidiary of the Company.  In
conjunction with the conversion, the Company issued and sold 4,033,625 shares of
its common stock (the "Common Stock") at a price of $10.00 per share (the
"Purchase Price").

The Company is classified as a unitary savings and loan holding company subject
to regulation by the Office of Thrift Supervision ("OTS") of the Department of
the Treasury.  The primary activity of the Company is overseeing the business of
the Bank and investing the portion of the net proceeds retained by it from the
sale of Common Stock.

The Bank is a federal stock savings bank headquartered in Hopkinsville,
Kentucky, with branch offices in Hopkinsville, Murray, Cadiz and Elkton,
Kentucky. The Bank was incorporated in 1879 as a Kentucky chartered building and
loan association. In 1940, the Bank converted to a federal charter and obtained
federal insurance of accounts. In 1983, the Bank became a federal mutual savings
bank and adopted its current corporate title. The business of the Bank primarily
consists of attracting deposits from the general public and investing such
deposits in loans secured by one-to-four residential properties.

The executive offices of the Company and the Bank are located at 2700 Fort
Campbell Boulevard, Hopkinsville, Kentucky 42240. The telephone number is (502)
885-1171.

MARKET AND DIVIDEND INFORMATION

Since February 9, 1998, the Common Stock has been quoted on the Nasdaq Stock
Market under the symbol "HFBC." As of March 31, 1999, there were approximately
1,620 stockholders of record, excluding beneficial owners in nominee or street
name.

Following are the high and low stock prices of the Common Stock for the periods
indicated.

<TABLE>
<CAPTION>
                                                    Price Range Common Stock
                                                      High              Low
                                                      ----              ---
          <S>                                       <C>              <C>
          Year Ended December 31, 1998
           First Quarter                            $ 17.75          $  16.00
           Second Quarter                             22.00             17.75
           Third Quarter                              19.625            15.25
           Fourth Quarter                             18.875            16.0625
</TABLE>

Dividends of $0.075 per share were declared in each of the third and fourth
quarters.

Dividends, when and if paid, are subject to determination and declaration by the
Board of Directors in its discretion, which will take into account the Company's
consolidated financial condition and results of operations, the Bank's
regulatory capital requirements, tax considerations, economic conditions,
regulatory restrictions, other factors, and there can be no assurance that
dividends will be paid, or if paid, will continue to be paid in the future.  The
payment of future dividends by the Company will depend in large part upon the
Company's earnings on the proceeds from the conversion and the receipt of
dividends from the Bank, which is subject to various tax and regulatory
restrictions on the payment of dividends.

TABLE OF CONTENTS

<TABLE> 
<S>                                                        <C>
HopFed Bancorp, Inc........................................Inside Front Cover
Market and Dividend Information............................Inside Front Cover
Letter to Stockholders.......................................................1
Selected Financial Information and Other Data................................2
Management's Discussion and Analysis of
  Financial Condition and Results of Operations..............................5
Financial Statements.........................................................18
Corporate Information......................................Inside Back Cover  
</TABLE>
<PAGE>
 
                            LETTER TO STOCKHOLDERS


To Our Stockholders,

     1998 was an important year in the history of Hopkinsville Federal Savings
Bank! After serving the local area for 119 years as a mutual institution, in
February 1998 the Bank converted to the stock form of organization as a wholly
owned subsidiary of HopFed Bancorp, Inc. A total of 4,033,625 shares of common
stock were sold at a purchase price of $10.00 per share.

     The Company experienced a profitable year in 1998, earning $3.0 million,
which was a return on average assets of 1.29% and a return on average equity of
5.76%. In 1998, loans receivable, net increased to $108.8 million, compared to
$103.5 million in 1997 and $95.5 million in 1996.

     Asset quality is important to your Board of Directors and Management. The
Company continues to maintain high underwriting and investment standards. No
loans were charged off in 1998.

     The Company's interest rate spread increased to 2.07% for the year ended
December 31, 1998, from 1.93% and 1.35% for the years ended December 31, 1997
and 1996, respectively.

     The Directors, Management and Employees of HopFed Bancorp, Inc. appreciate
greatly your trust and support during our first year as a stock company. As a
locally owned financial institution, we are committed to serving our community
and meeting the challenges of the financial services industry, while continuing
our tradition of first class service to our customers.

                                          Sincerely,

                                          /s/ Bruce Thomas 

                                          Bruce Thomas
                                          President and Chief Executive Officer
<PAGE>
 
                 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 Financial Statements and accompanying Notes
appearing elsewhere in this Report.


<TABLE>
<CAPTION>
FINANCIAL CONDITION AND
   OTHER DATA                                                                       At December 31,
                                          -------------------------------------------------------------------------------------
                                                1998               1997               1996              1995             1994
                                                ----               ----               ----              ----             ----
<S>                                       <C>                    <C>                <C>               <C>              <C>
Total amount of:                                                     (Dollars in thousands)
 Assets..........................             $220,032           $343,995           $204,398          $212,598         $202,128
 Loans receivable, net...........              108,807            103,470             95,496            84,755           78,527
 Cash and due from banks.........                1,905              1,264              1,452             1,303            1,578
    Time deposits and
       interest-bearing deposits
       in FHLB...................                  214              5,945              2,000            12,550           38,200
 Federal funds sold..............                9,685            151,095                500             7,948            1,330
 Securities available for sale...               68,139             26,699              5,125             4,053            2,955
    Securities held to maturity:.
    FHLB securities..............               13,998             31,988             77,962            80,990           63,002
    Mortgage-backed securities...               13,356             19,578             17,984            17,563           13,343
 Deposits........................              154,816            320,633            183,827           194,775          185,699
 FHLB advances...................                   --                 --              1,317                --               --
 Total equity....................               61,134             19,936             16,824            16,002           14,930
-------------------------------------------------------------------------------------------------------------------------------
Number of:
 Real estate loans outstanding                   2,150              2,198              2,151             2,074            2,026
 Deposit accounts................               19,251             21,277             23,778            25,473           24,648
 Offices open....................                    5                  5                  5                 5                5
 

<CAPTION> 
OPERATING DATA                                                       Year Ended December 31,
                                          -------------------------------------------------------------------------------------
                                                1998               1997               1996              1995             1994
                                                ----               ----               ----              ----             ----
                                                                         (In thousands)
<S>                                       <C>                    <C>                <C>               <C>              <C> 
Interest income..................             $ 15,051           $ 14,311           $ 13,220          $ 12,472         $ 10,434
Interest expense.................                8,004              9,350              9,757            10,009            7,740
                                              --------           --------           --------          --------         --------
Net interest income before
 provision  for loan losses......                7,047              4,961              3,463             2,463            2,694
Provision for loan losses........                   20                 20                100                --               --
                                              --------           --------           --------          --------         --------
Net interest income..............                7,027              4,941              3,363             2,463            2,694
Non-interest income..............                  547                528                590               398              512
Non-interest expense.............                2,982              2,408              3,674(1)          2,246            2,339
                                              --------           --------           --------          --------         --------
Income before income taxes.......                4,592              3,061                279               615              867
Provision for income taxes.......                1,641              1,038                 84               203              287
                                              --------           --------           --------          --------         --------
Net income.......................             $  2,951           $  2,023           $    195(1)       $    412         $    580
                                              ========           ========           ========          ========         ========
</TABLE>
 
________________________
(1)  Includes payment to the SAIF of a one-time deposit insurance special
     assessment of $1.2 million ($812,000 net of tax) pursuant to legislation
     enacted to recapitalize the Savings Association Insurance Fund ("SAIF").
     See Note 13 of Notes to Financial Statements.

                                       2
<PAGE>
 
SELECTED QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                       First               Second             Third             Fourth
                                                      Quarter             Quarter            Quarter           Quarter
                                                   -----------          ----------         ----------        -----------
                                                                               (In thousands)
<S>                                                <C>                  <C>                <C>               <C> 
YEAR ENDED DECEMBER 31, 1997:
 Interest income                                       $3,271             $3,372              $3,368            $4,300      
 Net interest income after provision for                                                                                    
  losses on loans                                       1,030              1,177               1,147             1,587      
 Noninterest income                                       125                145                 134               124      
 Noninterest expense                                      616                547                 562               683      
 Net income (loss)                                        358                512                 477               676      
                                                                                                                            
YEAR ENDED DECEMBER 31, 1998:                                                                                               
 Interest income                                       $4,317             $3,592              $3,578            $3,564      
 Net interest income after provision for                                                                                    
  losses on loans                                       1,903              1,705               1,710             1,709      
 Noninterest income                                       135                145                 138               129      
 Noninterest expense                                      578                622                 594             1,188      
 Net income (loss)                                        968                794                 829               360      
</TABLE>

                                       3
<PAGE>
 
KEY OPERATING RATIOS


<TABLE> 
<CAPTION> 
                                                                        At or for the Year Ended December 31,
                                                                     ------------------------------------------
                                                                         1998           1997           1996
                                                                         ----           ----           ----
<S>                                                                  <C>               <C>            <C>
PERFORMANCE RATIOS
 Return on average assets (net income divided by average
  total assets)....................................................       1.29%          0.93%         0.09% (1)
 Return on average equity (net income divided by                                                     
  average total equity)............................................       5.76%         11.13%         1.19% (1)
 Interest rate spread (combined weighted average interest rate                                       
  earned less combined weighted average interest rate cost)........       2.07%          1.93%         1.35%
 Ratio of average interest-earning assets to average                                                 
  interest-bearing liabilities.....................................     130.08%        109.17%       107.29%
 Ratio of non-interest expense to average total assets.............       1.30%          1.10%         1.76%
 Ratio of net interest income after provision                                                        
  for loan losses to non-interest expense..........................     235.65%        205.19%        91.54%
 Efficiency ratio (noninterest expense divided by sum of net                                         
  interest income plus noninterest income).........................      39.26%         44.03%        92.94%
                                                                                                     
ASSET QUALITY RATIOS                                                                                 
 Nonperforming assets to total assets at end of period.............       0.13%          0.05%         0.13%
 Nonperforming loans to total loans at end of period...............       0.26%          0.16%         0.28%
 Allowance for loan losses to total loans at end of period.........       0.24%          0.23%         0.23%
 Allowance for loan losses to nonperforming loans at                                                 
  end of period....................................................      89.90%        145.40%        81.58%
 Provision for loan losses to total loans receivable, net..........       0.02%          0.02%         0.10%
 Net charge-offs to average loans outstanding......................        N/A(2)         N/A(2)      0.005%
                                                                                                     
CAPITAL RATIOS                                                                                       
 Total equity to total assets at end of period.....................      27.78%          5.80%         8.23%
 Average total equity to average assets............................      22.40%          8.33%         7.82%
</TABLE>
___________________ 
(1) Includes the effect of the payment in 1996 of a one-time deposit insurance
    special assessment of $1.2 million to the SAIF.  Excluding the effect of the
    SAIF assessment, the return on average assets would have been 0.48% and its
    return on average equity would have been 6.15%.
(2) Ratio is not applicable because there was no provision for loan losses or
    net charge-offs for this period.


<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS                                              December 31, 1998
                                                                 ------------------------------
                                                                    (Dollars in thousands)
<S>                                                              <C>                    <C>
 Tangible capital..............................................        $35,886            18.15%
  Less:  Tangible capital requirement..........................          2,965             1.50
                                                                       -------          -------
  Excess.......................................................        $32,921            16.65%
                                                                       =======          =======
                                                                 
 Core capital..................................................        $35,886            18.15%
 Less:  Core capital requirement...............................          7,907             4.00
                                                                       -------          -------
  Excess.......................................................        $27,979            14.15%
                                                                       =======          =======
                                                                 
 Total risk-based capital......................................        $36,143            17.80%
 Less:  Risk-based capital requirement.........................          5,769             8.00
                                                                       -------          -------
  Excess.......................................................        $30,374             9.80%
                                                                       =======          =======
</TABLE>

                                       4
<PAGE>
 
                    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, 1998, the Company recorded net income of
$3.0 million, a return on average assets of 1.29% and a return on average equity
of 5.76%. For the year ended December 31, 1997, the Company recorded net income
of $2.0 million, a return on average assets of 0.93% and a return on average
equity of 11.13%. For the year ended December 31, 1996, the Company recorded net
income of $195,000, a return on average assets of 0.09% and a return on average
equity of 1.19%. In 1996, the Federal Deposit Insurance Corporation ("FDIC") was
paid a special assessment of $1.2 million before taxes ($812,000 net of tax) to
recapitalize the SAIF. Excluding the effect of this one-time assessment in 1996,
the Company would have recorded net income of $1,007,000, a return on average
assets of 0.48% and a return on average equity of 6.15%.

     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 Company's net income also is affected by the
level of non-interest expenses such as compensation and employee benefits and
FDIC insurance premiums.

     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.

CURRENT BUSINESS STRATEGY

     Until 1996, the Company's primary focus was on asset growth by attracting
deposits. The Company determined that deposits were the most suitable source of
funding for the Bank because of their relative stability and the opportunity for
the Bank to offer other income-producing products to its depositors. To attract
deposits, the Company offered rates on accounts that were at or above then-
prevailing rates in its market area. As a result of this practice, the Company's
total assets increased each year until it reached $212.6 million at December 31,
1995. This strategy substantially increased the Company's interest expense and
reduced profitability.

     The Company, however, was unable to deploy the significant amount of funds
generated by this strategy solely through loan originations in its market area,
as reflected in the loan-to-deposit ratio of 43.5% at December 31, 1995. As a
result, the Company invested these funds in securities, primarily U.S.
government and agency securities and mortgage-backed securities. See "--
Asset/Liability Management." The yields on these investments were significantly
less than the yields obtained by the Company on its loan portfolio. The combined
lower weighted average yield on the Company's interest-earning assets, when
reduced by the relatively high cost of the Company's deposits due to the
Company's former deposit pricing strategy, tended to depress the Company's
overall profitability.

     In 1996, the Company revised its business strategy to emphasize increased
profitability over asset growth by attracting deposits on a less aggressive
basis through a reduction in overall deposit rates. This reduction caused a
deposit run-off during 1996 of approximately $10.9 million in higher-costing
deposits. This run-off contributed to a reduction in the Company's total assets
to $204.4 million at December 31, 1996 from $212.6 million at December 31, 1995.
Deposits as a percentage of average assets decreased from 92.4% at December 31,
1995, to 87.8% at December 31, 1996. Deposits as a percentage of average assets
were 147.0% at December 31, 1997, primarily as a result of subscriptions for
Common Stock in the conversion. At December 31, 1998, deposits as a percentage
of average assets were 67.7%. In addition, the Company 

                                       5
<PAGE>
 
has continued its emphasis on the origination of adjustable rate loans in its
market area. In 1996, average loans increased $9.9 million, or 12.0%, from the
1995 average. In 1997, average loans increased $7.1 million, or 7.7%, from the
1996 average. And in 1998, average loans increased $6.7 million, or 6.8%, from
the 1997 average. Despite the Company's reduced emphasis on deposit-gathering,
the Company remains well positioned to meet its liquidity needs.

     As a result of the Company's revised business strategy, the Company's
interest rate spread increased to 2.07% for the year ended December 31, 1998 and
1.93% for the year ended December 31, 1997, compared to 1.35% for the year ended
December 31, 1996. During 1996, the Bank was required to pay a one-time deposit
insurance assessment of $1.2 million ($812,000 net of taxes) to the FDIC`. See
Note 13 of Notes to Financial Statements. This special assessment was imposed on
all SAIF-insured financial institutions in September 1996. Including this
special SAIF assessment, the Company's net income, return on average assets and
return on average equity for 1996 were $195,000, 0.09%, and 1.19%, respectively.
Excluding the after-tax effect of this one-time assessment, the Company's 1996
net income, return on average assets and return on average equity would have
been $1,007,000, 0.48% and 6.15%, respectively.

     The Company's profitability in the year ended December 31, 1998 also was
primarily attributable to its current business strategy. The Company's net
income, return on average assets and return on average equity were $3.0 million,
1.29% and 5.76%, respectively, for the year ended December 31, 1998. See
"Selected Financial Information and Other Data."

     The results to date which are attributable to the Company's current
business strategy are not necessarily indicative of future results. The Company
and the Bank are in the process of preparing an updated Business Plan which
will, among other things, evaluate their current business strategy and financial
condition, as well as post-conversion operating results. Strategies to be
considered include, but are not limited to, diversification of business,
dividend policy and repurchases of shares of Common Stock. It is expected that
the revised Business Plan will be completed in the second quarter of 1999.

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,
1998, approximately $15.8 million of the one-to-four family residential loans
originated by the Company (comprising 64.73% of such loans) had adjustable
rates.

     The Company used excess funds to invest in U.S. government and agency
securities and mortgage-backed securities. Such investments have been made in
order to manage interest rate risk, as well as to diversify the Company's
assets, manage cash flow, obtain yields and maintain the minimum levels of
qualified and liquid assets required by regulatory authorities.

     The U.S. government and agency securities consist of notes issued by the
FHLB System and other government agencies. These securities generally are
purchased for a term of five years or less, and are fixed-term, fixed rate
securities, callable securities or securities which provide for interest rates
to increase at specified intervals to pre-established rates, and thus improve
the spread between the cost of funds and yield on investments. At December 31,
1998, approximately $20.0 million of the securities were due in one year or less
and approximately $17.0 million were due in one to five years. However, at
December 31, 1998, approximately $17.0 million of these securities had call
provisions which authorize 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, 1998, all of these securities are callable and/or due prior to
December 31, 1999. It is currently anticipated that any funds available from a
prepayment would be reinvested into those U.S. government and agency securities
or mortgage-backed securities which the Company believes to be the most
appropriate investments at that time, assuming lending opportunities are not
then available. Notwithstanding their call feature, it is believed that
investments in callable securities, which have improved the portfolio yield over
alternative fixed yield, fixed maturity investments, have been beneficial.

                                       6
<PAGE>
 
     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, since they are primarily adjustable rate, mortgage-
backed securities are helpful in limiting the Company's interest rate risk. For
more information regarding investment securities, see Note 2 of Notes to
Financial Statements.

INTEREST RATE SENSITIVITY ANALYSIS

     The Company's profitability is affected by fluctuations in interest rates.
A sudden and substantial increase 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 200 basis point increase in
market interest rates and a 200 basis point decrease in market interest rates
are considered.

     The following table presents the Bank's NPV at December 31, 1998, as
calculated by the OTS, based on information provided to the OTS by the Bank.

<TABLE> 
<CAPTION> 
   Change             Net Portfolio Value            NPV as % of PV of Assets 
              ----------------------------------    --------------------------
  In Rates    $ Amount    $ Change      % Change    NPV Ratio           Change
  --------    --------    --------      --------    ---------           ------
                     (Dollars in thousands)                                   
  <S>         <C>         <C>           <C>         <C>                <C> 
  +400 bp     $39,643     $-5,630         -12%        20.21%           -182bp 
  +300 bp      41,926      -3,347          -7%        20.03%           -100bp 
  +200 bp      43,598      -1,675          -4%        21.59%            -44bp 
  +100 bp      44,602        -671          -1%        21.87%            -15bp 
     0 bp      45,273                                 22.03%                  
  -100 bp      46,192         919          +2%        22.27%            +24bp 
  -200 bp      47,519       2,245          +5%        22.66%            +63bp 
  -300 bp      49,049       3,776          +8%        23.11%           +108bp 
  -400 bp      50,368       5,094         +11%        23.47%           +144bp  
 </TABLE> 
 
         Interest Rate Risk Measures:  200 Basis Point (bp) Rate Shock

      Pre-Shock NPV Ratio:  NPV as % of PV of Assets.............  22.03%
      Exposure Measure:  Post-Shock NPV Ratio....................  21.59%
      Sensitivity Measure:  Change in NPV Ratio..................    44bp

     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.

                                       7
<PAGE>
 
     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 reprice within that period.  The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing 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, 1998, the Company had a positive one-year
interest rate sensitivity gap of 22.59% 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.

     The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 which are expected
to mature or reprice in each of the time periods shown.

<TABLE>
<CAPTION>
                                                      Over One        Over Five       Over Ten 
                                         One Year     Through          Through         Through        Over Fifteen
                                         or Less     Five Years       Ten Years      Fifteen Years        Years          Total
                                         -------     ----------       ---------      -------------        -----          -----
                                                                     (Dollars in thousands)           
<S>                                      <C>         <C>              <C>            <C>              <C>               <C> 
Interest-earning assets:                                                                              
 Loans:                                                                                               
    One-to-four family................   $ 72,974     $  1,673        $ 2,855           $ 8,803         $ 2,305       $ 88,610
    Multi-family residential..........      1,539           --             --                --              --          1,539
    Construction......................      3,599           --             --                --              --          3,599
    Non-residential...................      8,193           --             --                --              --          8,193
    Secured by deposits...............      2,280           --             --                --              --          2,280
    Other consumer....................      1,340        3,213             33                --              --          4,586
   Time deposits and interest                                                                                    
   bearing deposits in FHLB...........        214           --             --                --              --            214
   Federal funds sold.................      9,686           --             --                --              --          9,686
   Securities.........................     29,875       17,048             --                --              --         46,923
   Mortgage-backed securities.........     31,192       13,665            895                54           2,764         48,570
                                         --------     --------        -------           -------         -------       --------
     Total............................   $160,892     $ 35,599        $ 3,783           $ 8,857         $ 5,069       $214,200
                                         --------     --------        -------           -------         -------       --------
                                                                                                                 
 Interest-bearing liabilities:                                                                                   
   Deposits...........................   $112,498     $ 39,588             --                --              --       $152,086
                                         --------     --------        -------           -------         -------       --------
                                                                                                                 
 Interest sensitivity gap.............   $ 48,394     $ (3,989)       $ 3,783           $ 8,857         $ 5,069       $ 62,114
                                         ========     ========        =======           =======         =======       ========
 Cumulative interest sensitivity                                                                                 
   gap................................   $ 48,394     $ 44,405        $48,188           $57,045         $62,114       $ 62,114
                                         ========     ========        =======           =======         =======       ========
 Ratio of interest-earning assets                                                                             
   to interest-bearing liabilities....     143.02%       89.92%           N/A               N/A             N/A         140.84%
                                         ========     ========        =======           =======         =======       ========
 Ratio of cumulative gap to                                                                                      
   total interest-earning assets......      22.59%       20.73%         22.50%            26.63%          29.00%         29.00%
                                         ========     ========        =======           =======         =======       ========
</TABLE>

     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 repricing date.
Further, it is assumed that fixed maturity deposits are not withdrawn prior to
maturity and that other deposits are withdrawn or repriced within one year.
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 repricing 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.
 

                                       8
<PAGE>
 
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 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.

<TABLE>
<CAPTION>
                                                    At December 31, 1998
                                             ---------------------------------
                                                                 Weighted      
                                             Balance        Average Yield/Cost 
                                             -------        ------------------ 
                                                    (Dollars in thousands)
<S>                                          <C>            <C> 
Interest-earning assets:                    
 Loans receivable, net...................    $108,807                 7.62%
 Securities available for sale...........      68,139                 3.73%
 Securities held to maturity.............      27,354                 6.31%
 Time deposits and other interest-                                  
   bearing cash deposits.................       9,900                 4.68%
                                             --------               ------
   Total interest-earning assets.........     214,200                 6.08%
Non-interest-earning assets..............       5,832               
                                             --------               
 Total assets............................    $220,032               
                                             ========               
                                                                    
Interest-bearing liabilities:                                       
 Deposits................................    $152,085                 4.70%
Non-interest-bearing liabilities.........       6,814               
                                             --------               
   Total liabilities.....................     158,899              
Common stock.............................          40               
Additional paid-in capital...............      39,546               
Retained earnings........................      18,984               
Unallocated ESOP shares..................      (2,933)              
Accumulated other comprehensive                                     
 income..................................    $  5,496               
                                             --------               
   Total liabilities and equity..........    $220,032              
                                             ========               
                                                                    
Interest rate spread.....................                             1.38%
                                                                    ------
Ratio of interest-earning assets                                    
 interest-bearing liabilities............                           144.59%
                                                                    ======
</TABLE>

                                                   (Continued on following page)

                                       9
<PAGE>
 
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                          ------------------------------------------------------------------------------
                                                           1998                                     1997            
                                          -------------------------------------     ------------------------------------ 
                                           Average                     Average       Average                   Average    
                                           Balance      Interest     Yield/Cost      Balance     Interest     Yield/Cost 
                                           -------      --------     ----------      -------     --------     ----------
                                                                                            (Dollars in thousands)  
<S>                                       <C>           <C>          <C>             <C>         <C>          <C>       
Interest-earning assets:                                                                                                  
 Loans receivable, net.................    $105,837     $ 8,279          7.82%       $ 99,126     $ 7,607          7.67%  
 Securities available for sale.........      48,539       2,418          4.98%         11,405         412          3.61%  
 Securities held to maturity...........      36,777       2,360          6.42%         75,307       4,706          6.25%  
 Time deposits and other                                                                                                  
  interest-bearing cash                                                                                                   
  deposits.............................      32,480       1,994          6.13%         27,233       1,586          5.82%  
                                           --------     -------                      --------     -------                 
  Total interest-earning                                                                                                  
                                                                                                                          
   assets..............................     223,633      15,051          6.73%        213,071      14,311          6.72%  
                                                        -------        ------                     -------        ------    
Non-interest-earning assets............       5,143                                     5,119                              
                                           --------                                  --------                              
 Total assets..........................    $228,776                                  $218,190                              
                                           ========                                  ========                              
                                                                                                                           
Interest-bearing liabilities:                                                                                              
 Deposits..............................    $171,922       8,004          4.65%       $195,019     $ 9,341          4.79%  
 Borrowings............................          --          --            --%            161           9          5.59%  
                                           --------     -------        ------        --------     -------                 
  Total interest-bearing                                                                                                  
   liabilities.........................     171,922       8,004          4.65%        195,180       9,350          4.79%  
                                                        -------        ------                     -------        ------   
Non-interest-bearing liabilities.......       5,629                                     4,829                              
                                           --------                                  --------                              
  Total liabilities....................     177,551                                   200,009                              
Common stock...........................          32                                        --                              
Additional paid-in capital.............      31,492                                        --                              
Retained earnings......................      18,174                                    15,510                              
Unallocated ESOP shares................      (2,582)                                       --                              
Accumulated other                                                                                                          
 comprehensive income..................       4,109                                     2,671                              
                                           --------                                  --------                              
  Total liabilities and                                                                                                    
   equity..............................    $228,776                                  $218,190                              
                                           ========                                  ========                              
Net interest income....................                 $ 7,047                                   $ 4,961                  
                                                        =======                                   =======                  
Interest rate spread...................                                  2.07%                                     1.93%  
                                                                       ======                                    ======   
Net yield on interest-earning                                                                                             
 Assets................................                                  3.15%                                     2.33%   
                                                                       ======                                    ======    
Ratio of average interest-earning                                                                                         
 assets to average interest-                                                                                              
 bearing liabilities...................                                130.08%                                   109.17%  
                                                                       ======                                    ======   
                                                                                                               
<CAPTION> 
                                           --------------------------------------
                                                           1996
                                           --------------------------------------
                                           Average                      Average
                                           Balance      Interest       Yield/Cost
                                           -------      --------       ----------
<S>                                        <C>          <C>            <C>
Interest-earning assets:                           
 Loans receivable, net.................   $ 92,066      $ 6,824            7.41%
 Securities available for sale.........      4,372          151            3.45%
 Securities held to maturity...........     98,139        5,624            5.73%
 Time deposits and other                           
  interest-bearing cash                            
  deposits.............................      9,459          621            6.75%
                                          --------      ------- 
  Total interest-earning                           
   assets..............................    204,036       13,220            6.48%
                                                        -------          ------
Non-interest-earning assets............      5,310 
                                          -------- 
 Total assets..........................   $209,346 
                                          ======== 
                                                   
Interest-bearing liabilities:                      
 Deposits..............................   $189,837      $ 9,732            5.13%
 Borrowings............................        329           25            7.59%
                                          --------      -------
  Total interest-bearing                           
   liabilities.........................    190,166        9,757            5.13%
                                                        -------          ------
Non-interest-bearing liabilities.......      2,816 
                                          -------- 
  Total liabilities....................    192,982 
Common stock...........................         -- 
Additional paid-in capital.............         -- 
Retained earnings......................     14,578 
Unallocated ESOP shares................         -- 
Accumulated other                                  
 comprehensive income..................      1,786 
                                          -------- 
  Total liabilities and                            
   equity..............................   $209,346 
                                          ======== 
Net interest income....................                 $ 3,463
                                                        =======
Interest rate spread...................                                    1.35%
                                                                         ======
Net yield on interest-earning                      
 Assets................................                                    1.70%
                                                                         ======
Ratio of average interest-earning                  
 assets to average interest-                                           
 bearing liabilities...................                                  107.29%
                                                                         ====== 
</TABLE> 

                                       10
<PAGE>
 
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).

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                    -----------------------------------------------------------------------------------------------
                                                     1998 vs. 1997                                         1997 vs. 1996
                                    ---------------------------------------------    ----------------------------------------------
                                               Increase                                          Increase                         
                                          (Decrease) due to                                  (Decrease) due to                    
                                    ---------------------------                      ------------------------------               
                                                                   Total Increase                                    Total Increased
                                         Rate         Volume         (Decrease)            Rate          Volume        (Decrease) 
                                      -----------  -------------   -------------       -------------  ------------     ---------
                                                                                                                       
                                                                 
<S>                                   <C>          <C>            <C>                     <C>            <C>             <C>
                                                                            (Dollars in thousands)
Interest-earning assets:
 Loans receivable.............            $  157        $   515           $   672               $  260         $   523   $    783 
 Securities available for
  sale........................               665          1,341             2,006                   18             243        261
 Securities held to
  maturity....................                62         (2,408)           (2,346)                 390          (1,308)      (918)
 Other interest-earning
  assets......................               102            306               408                 (203)          1,168        965 
                                          ------        -------           -------               ------         -------     ------ 
  Total interest-
   earning assets.............            $  986        $  (246)          $   740               $  465         $   626     $1,091 
                                          ------        -------           -------               ------         -------     ------  
 
Interest-bearing liabilities:
 Deposits.....................            $ (231)       $(1,106)          $(1,337)              $ (657)        $   266     $ (391)
 Borrowings...................                --             (9)               (9)                  --             (16)       (16)
                                          ------        -------           -------               ------         -------     ------
  Total interest-
   bearing liabilities........            $ (231)       $(1,115)          $(1,346)              $ (657)        $   250     $ (407)
                                          ------        -------           -------               ------         -------     ------ 
 
Increase in net
 interest income..............            $1,217        $   869           $ 2,086               $1,122         $   376     $1,498
                                          ======        =======           =======               ======         =======     ======
</TABLE>

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997

   The Company's total assets decreased by $124.0 million, or 36.1%, from $344.0
million at December 31, 1997 to $220.0 million at December 31, 1998, primarily
as a result of a reduction in federal funds sold from $151.1 million at December
31, 1997 to $9.7 million at December 31, 1998, primarily due to the expenditure
of funds received in the conversion. At December 31, 1998, deposits decreased to
$154.8 million from $320.6 million at December 31, 1997, a net decrease of
$165.8 million, or 51.7%. This reduction reflected two factors: primarily the
use of deposits to purchase stock in the conversion and continuation of the
Company's strategy to price deposits less aggressively. The Company's average
cost of deposits for the year ended December 31, 1998 was 4.65%, compared to
4.79% for the year ended December 31, 1997.

   The loan portfolio increased by $5.3 million, or 5.2%, during the year ended
December 31, 1998. Net loans totaled $108.8 million and $103.5 million at
December 31, 1998 and 1997, respectively. The increase in the loan activity
during the year ended December 31, 1998 was primarily due to the Company's
efforts to expand its loan originations and reduce the proportion of its
interest-earning assets not invested in loans. For the year ended December 31,
1998, the Company's average yield on loans was 7.82%, compared to 7.67% for the
year ended December 31, 1997.

   At December 31, 1998, the investment portfolio included securities classified
as "held to maturity" carried at amortized cost of $27.4 million and an
estimated fair market value of $27.6 million and securities classified as
"available for sale" with an estimated fair market value of $68.1 million,
including Federal Home Loan Mortgage Corporation ("FHLMC") stock with a fair
market value of $8.0 million.

   The allowance for loan losses totaled $258,000 at December 31, 1998, compared
to $237,000 at December 31, 1997. As of those dates, the Company's non-
performing loans were $287,000 and $163,000, respectively, or 0.26% and 0.16% of
total loans, respectively. At December 31, 1998, the ratio of the allowance for
loan losses to loans was 89.90%, compared to 145.50% at December 31, 1997. The
determination of the allowance for loan losses is based on management's
analysis, performed on a quarterly basis. Various factors are considered,
including the market value of the underlying collateral, growth and composition
of the loan portfolio, the relationship of the allowance for loan losses to
outstanding loans, historical

                                       11
<PAGE>
 
loss experience, delinquency trends and prevailing economic conditions. Although
management believes its allowance for loan losses is adequate, there can be no
assurance that additional allowances will not be required or that losses on
loans will not be incurred. The Company has had minimal losses on loans in prior
years. See Note 3 of Notes to Financial Statements.

   Premises and equipment, net, increased by $208,000 from December 31, 1997 to
December 31, 1998. Land increased from $538,000 at December 31, 1997 to $543,000
at December 31, 1998. These increases were due to the relocation of the Cadiz
branch to a new facility constructed during the year. See Note 4 of Notes to
Financial Statements.

   The Company's other assets decreased $214,000, to $225,000 at December 31,
1998, from $439,000 at December 31, 1997, principally due to prepaid conversion
expenses in the prior year.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996

   The Company's total assets increased by $139.6 million, from $204.4 million
at December 31, 1996 to $344.0 million at December 31,1997.  Federal funds sold
increased from $500,000 at December 31, 1996 to $151.1 million at December 31,
1997, primarily due to funds received in connection with the conversion.
Securities held to maturity declined $44.4 million due to various issues
maturing.  A portion of such funds was reinvested in securities available for
sale, which increased $21.6 million.

   In 1997, the Company continued to price its deposits less aggressively in an
effort to reduce its overall cost of funds.  At December 31, 1997 deposits
increased to $320.6 million from $183.8 million at December 31, 1996, a net
increase of $136.8 million, primarily as a result of subscriptions for the
Common Stock in the conversion.  The Company's average cost of deposits for the
year ended December 31, 1997 was 4.79%, compared to 5.13% for the year ended
December 31, 1996.

   The Company's loan portfolio increased by $8.0 million during the year ended
December 31, 1997.  Net loans totaled $103.5 million and $95.5 million at
December 31, 1997 and December 31, 1996, respectively.  The increase in the loan
activity during the year ended December 31, 1997 was due to the Company's
efforts to increase its loan originations using funds currently held in
investment securities.  For the year ended December 31, 1997, the Company's
average yield on loans was 7.67%, compared to 7.41% for the year ended December
31, 1996.

   At December 31, 1997, the Company's investments classified as "held to
maturity" were carried at amortized cost of $51.6 million and had an estimated
fair market value of $52.0 million, and its securities classified as "available
for sale" had an estimated fair market value of $26.7 million, including FHLMC
stock with an estimated fair market value of $5.2 million.  See Note 2 of Notes
to Financial Statements.

   The allowance for loan losses totaled $237,000 at December 31, 1997, an
increase of $20,000 from the allowance of $217,000 at December 31, 1996.  The
ratio of the allowance for loan losses to loans was 0.23% at each of December
31, 1997 and 1996.  Also at December 31, 1997, the Company's non-performing
loans were $163,000, or 0.16% of total loans, compared to $266,000, or 0.28% of
total loans, at December 31, 1996, and the Company's ratio of allowance for loan
losses to non-performing loans at December 31, 1997 and December 31, 1996 was
145.50% and 81.58%, respectively.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

   NET INCOME.  The Company's net income for the year ended December 31, 1998
was $3.0 million, compared to $2.0 million for the year ended December 31, 1997.
The increase in net income for the year resulted primarily from the Company's
repositioning funds into higher yielding assets as well as a decline in the cost
of funds.

   NET INTEREST INCOME.  Net interest income for the year ended December 31,
1998 was $7.0 million, compared to $5.0 million for the year ended December 31,
1997.  The increase in net interest income for the year ended December 31, 1998
was primarily due to a lower cost of funds and a higher yield on interest-
earning assets.  For the year ended December 31, 1998, the average yield on
total interest-earning assets was 6.73%, compared to 6.72% for the year ended
December 31, 1997, and its average cost of interest-bearing liabilities was
4.65%, compared to 4.79% for the year ended December 31, 1997.  As a result, the
interest rate spread for the year ended December 31, 1998 was 2.07%, compared to
1.93% for the year ended December 31, 1997, and its net yield on interest-
earning assets was 3.15% for the year ended December 31, 1998, compared to 2.33%
for the year ended December 31, 1997.

   INTEREST INCOME.  Interest income increased by $740,000 from $14.3 million to
$15.1 million, or by 5.2%, during 1998 compared to 1997.  This increase
primarily resulted from an increase in the average yield on the loan portfolio,
which was 7.82% for 1998 compared to 7.67% for 1997, as well as an increase in
the average balance of loans to $105.8 million in 

                                       12
<PAGE>
 
1998 compared to $99.1 million in 1997.

   INTEREST EXPENSE.  Interest expense decreased $1.3 million, or 14.4%, to $8.0
million for the year ended December 31, 1998 from $9.4 million for the year
ended December 31, 1997.  The Company's strategy of less aggressively pricing
its deposit products resulted in a decrease in its cost of funds as well as a
reduction in the level of interest-bearing liabilities due to an outflow of
higher cost deposits.  At December 31, 1998, total deposits were $154.8 million,
compared to $320.6 million at December 31, 1997, a decrease of 51.7%.

   PROVISION FOR LOAN LOSSES.  The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy.  Such evaluation
considers numerous factors, including general economic conditions, loan
portfolio composition, prior loss experience, the estimated fair value of the
underlying collateral and other factors that warrant recognition.  The Company
determined that a provision for loan loss of $20,000 was appropriate for the
year ended December 31, 1998.  The Company determined not to increase the level
of the provision for loan losses, which was $20,000 in 1997.

   INCOME TAXES.  The Company's effective tax rate for the year ended December
31, 1998 was 34.9%, compared to 33.9% for 1997.  The increase in income tax
expense of $602,000 in 1998 compared to 1997 was due to an increase in income.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

   NET INCOME.  The Company's net income for the year ended December 31, 1997
was $2.0 million compared to $195,000  for the year ended December 31, 1996.
The increase in net earnings for the year resulted primarily from an improvement
in the Company's net yield on interest-earning assets and a decrease in SAIF
insurance premiums, offset in part by an increase in income taxes.

   NET INTEREST INCOME.  Net interest income for the year ended December 31,
1997 was $5.0 million, compared to $3.5 million for the year ended December 31,
1996.  The increase in net interest income for the year ended December 31, 1997
was primarily due to a lower cost of funds and a higher yield on interest-
earning assets.  For the year ended December 31, 1997, the Company's average
yield on total interest-earning assets was 6.72%, compared to 6.48% for the year
ended December 31, 1996, and  its average cost of interest-bearing liabilities
was 4.79%, compared to 5.13% for the year ended December 31, 1996.  As a result,
the Company's interest rate spread for the year ended December 31, 1997 was
1.93%, compared to 1.35% for the year ended December 31, 1996, and its net yield
on interest-earning assets was 2.33% for the year ended December 31, 1997,
compared to 1.70% for the year ended December 31, 1996.

   INTEREST INCOME.  Interest income increased by $1.1 million from $13.2
million to $14.3 million, or by 8.3%, during the year ended December, 1997
compared to 1996.  This increase primarily resulted from a continued strategic
shift from investment securities to higher-yielding loans.  The average balance
of securities held to maturity declined $22.8 million, from $98.1 million at
December 31, 1996, to $75.3 million at December 31, 1997.  Average time deposits
and other interest-bearing cash deposits increased $17.7 million, from $9.5
million at December 31, 1996 to $27.2 million at December 31, 1997.  Overall,
average total interest-earning assets increased $8.9 million from December 31,
1996 to December 31, 1997.  The strategic repositioning of the balance sheet
into higher-yielding assets resulted in an increase in the average yield on
interest-earning assets from 6.48% at December 31, 1996, to 6.72% at December
31, 1997.  In addition, the ratio of interest-earning assets to interest-bearing
liabilities increased from 107.29% for the year ended December 31, 1996 to
109.17% for the year ended December 31, 1997.

   INTEREST EXPENSE.  Interest expense decreased to $9.4 million for the year
ended December 31, 1997, compared to $9.8 million for 1996.  The decrease was
primarily attributable to a lower cost of funds.  The average cost of average
interest bearing liabilities declined from 5.13% for the year ended December 31,
1996 to 4.79% for the year ended December 31, 1997.  Over the same period, the
average balance of deposits increased from $189.8 million for the year ended
December 31, 1996 to $195.0 million at December 31, 1997.

   PROVISION FOR LOAN LOSSES.  The Company determined that an additional $20,000
provision for loan loss was required for the year ended December 31, 1997.  For
the year ended December 31, 1996, the Company determined that a $100,000
provision was warranted.

                                       13
<PAGE>
 
   NON-INTEREST EXPENSE.  Total non-interest expense in the year ended December
31, 1997 was $2.4 million, compared to $3.7 million in 1996.  A decrease in FDIC
deposit insurance premiums of $1.6 million offset increases in other non-
interest expenses.

   INCOME TAXES.  The effective tax rate for the year ended December 31, 1997
was 33.9%, compared to 30.3% for 1996.  The increase in income tax expense of
$954,000 in 1997 compared to 1996 was due to an increase in income.

LIQUIDITY AND CAPITAL RESOURCES

   The Company has no business other than that of the Bank and investing the net
conversion proceeds retained by it.  Management believes that the net proceeds
retained by the Company, earnings on such proceeds, principal and interest
payments on the ESOP loan, together with dividends that may be paid from the
Bank to the Company, will provide sufficient funds for its initial operations
and liquidity 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, 1998, 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 13 of Notes to 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, 1998, the Bank had no outstanding advances from the FHLB.  See Note
6 of Notes to Financial Statements.

   The Company'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 Company 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 Company's liquidity needs for the immediate future.

   In addition, the Bank is required to maintain minimum levels of liquid assets
as defined by OTS regulations.  This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings.  The required
minimum ratio is currently 4%.  The Bank has historically maintained a level of
liquid assets in excess of regulatory requirements.  The Bank's liquidity ratios
at December 31, 1998, 1997 and 1996 were 53.87%, 65.36% and 45.63%,
respectively.

   A portion of the Company's liquidity consists of cash and cash equivalents.
At December 31, 1998, cash and cash equivalents totaled $1.9 million.  The level
of these assets depends upon the Bank's operating, investing and financing
activities during any given period.

   Although operating activities have historically generated a declining amount
of cash flows, cash flows from operating activities increased during the years
ended December, 1997 and 1998.  For the years ended December 31, 1996, 1997 and
1998, such cash flows were $112,000, $2.4 million and $2.9 million,
respectively.  The results for 1996 were primarily attributable to lower net
income as the Company pursued a strategy of increasing its deposit base through
the payment of above-market interest rates.  This higher interest expense was
not offset by the Company's adjustable rate mortgage loans, which were offered
at then-lower market rates.  Further, interest rates on the loans were adjusted
based upon a lagging interest rate index, while deposit rates were subject to
adjustment on a weekly basis.  The Company discontinued its deposit pricing
strategy in 1996, which contributed to the increase in the Company's interest
rate spread to 2.07% for 1998, from 1.93% for 1997 and 1.35% for 1996.  Cash
flows from operating activities for 1996 were more than offset by a decrease in
net income as a result of the required payment of the one-time SAIF assessment
of $1.2 million.  See Note 13 of Notes to Financial Statements.

   Cash flows from investing activities increased and became a net source of
funds due to the emphasis on the investment of available funds in loans rather
than in securities held-to-maturity.  The principal source of cash flows in this
area has been proceeds from the maturities of held-to-maturity securities, the
volume of which reflects the prior emphasis on investments in such securities
over loans.  These proceeds were a source of cash flows of $44.0 million for
1996, 

                                       14
<PAGE>
 
$50.3 million for 1997 and $24.2 million for 1998.  At the same time, the
investment of cash in loans was $5.4 million in 1998, $8.0 million in 1997 and
$10.8 million in 1996, while purchases of held-to-maturity securities were $5.9
million in 1997 and $41.4 million in 1996.  There were no purchases of held-to-
maturity securities in 1998.  Further, the Company has re-positioned the
investment of its excess funds to enhance their availability.  Funds not
immediately invested in loans are sold on the federal funds market, which
permits the Company to earn a favorable rate of interest while maintaining daily
access to such funds.  Although the Company continues to acquire held-to-
maturity securities using funds from loan repayments and proceeds from
maturities of similar securities, the liquidity position avoids the need to
consider the sale of such securities prior to maturity to satisfy lending or
other operational commitments.  At December 31, 1998, in addition to the
liquidity of its federal funds sold and other assets, which were 53.87% of
deposits and short-term borrowings, the Bank had available an unused $10.1
million line of credit with the FHLB of Cincinnati.

   The Company's financing activities have changed from a provider of cash to a
user of cash due to the removal of the emphasis on the growth of its deposit
base.  As part of this strategy, which began during 1996, the Company permitted
the run-off of higher-costing time deposits by offering only market rates of
interest on maturing deposits rather than above-market rates under its previous
pricing strategy.  As a result of the current strategy, cash was required to
fund net withdrawals of time deposits in amounts of $13.1 million in 1996, $7.8
million in 1997 and $16.5 million in 1998.  Because of the Company's ability to
generate cash flows from its financing activities and the availability of its
other liquid assets, the Company does not anticipate any difficulty in funding
future withdrawals of such time deposits as they come due.

   At December 31, 1998, the Bank had $464,789 in outstanding commitments to
originate loans.  The Bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments. Certificates of
deposit which are scheduled to mature in one year or less totaled $62.9 million
at December 31, 1998.  Based on historical experience, management believes that
a significant portion of such deposits will remain with the Bank.

   Another source of liquidity is net proceeds from the conversion.  Following
the completion of the conversion, the Bank received 50% of the net proceeds from
the conversion or approximately $19.7 million, which are being used for the
Bank's business activities.

IMPACT OF INFLATION AND CHANGING PRICES

   The financial statements and notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, 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.

THE YEAR 2000 PROBLEM

   The Company is aware of the current concerns throughout the business
community of reliance upon computer software that does not properly recognize
the Year 2000 in date formats, often referred to as the "Year 2000 Problem." The
Year 2000 Problem is the result of software being written using two digits
rather than four digits to define the applicable year (i.e., "98" rather than
"1998"). A failure by a business to properly identify and correct a Year 2000
Problem in its operations could result in system failures or miscalculations. In
turn, this could result in disruptions of operations, including among other
things a temporary inability to process transactions, or otherwise engage in
routine business transactions on a day-to-day basis.

   Operations of the Company depend on the successful operation on a daily basis
of its computer systems and a third party service bureau's equipment and
software.  In its analysis of these systems, equipment and software, a plan of
action has been put in place by the Bank to minimize its risk exposure to the
Year 2000 Problem.  As part of the plan, an oversight committee has been set up
to monitor Year 2000 compliance.

   The Company's service provider has successfully completed the renovation of
its equipment as well as Phase One and Phase Two of its proxy tests involving
the participation of member institutions transmitting within a test institution
created for this purpose.  Phase Three of these tests is due to be completed
April 30, 1999.  Institution transmission tests were held in November 1998 with
satisfactory results.  The service provider has contracted with a recovery site
in Philadelphia to cover Year 2000 contingencies and will conduct Business
Recovery Tests on April 25, 1999 to ensure proper transmission with member
institutions.  The service provider believes its systems and equipment will be
well prepared for the Year 2000 Problem.

                                       15
<PAGE>
 
   The Company has completed its renovation of computer equipment, assessment of
mission-critical systems, review of tests, and contingency planning.  Due to its
preparations and the preparations of its service provider, a high level of
confidence exists within the management of the Company that disruptions to
normal business operations due to the Year 2000 Problem will be minimal.
However, the risk of system failures cannot be eliminated.  Also, the Company
cannot guarantee the performance of third parties as to which it has material
relationships.

   As of March 31, 1999, the Company had incurred approximately $42,000 in
direct compliance costs associated with the Year 2000 Problem.  The Company
estimates that $45,000 will approximate total direct compliance costs through
the Year 2000.  The Company does not separately track internal costs incurred
for Year 2000 compliance, such costs are principally related to payroll
expenditures.  Funding for such costs has been and will be derived from normal
operating cash flow.

IMPACT OF NEW ACCOUNTING STANDARDS

   Pensions and Other Postretirement Benefits.  In February 1998, the FASB
issued Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"),
which changes current financial-statement disclosure requirements from those
that were required under SFAS 87 "Employers' Accounting for Pensions," SFAS 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."

   Some of the more significant effects of SFAS 132 are that it:  (i)
standardizes the disclosure requirements for pensions and other postretirement
benefits and presents them on one footnote; (ii) requires that additional
information be disclosed regarding changes in the benefit obligation and fair
values of plan assets; (iii) eliminates certain disclosures that are no longer
considered useful, including general descriptions of the plans; (iv) permits the
aggregation of information about certain plans; and (v) provides reduced
disclosure requirements for nonpublic entities.

   SFAS 132 does not change the existing measurement or recognition provisions
of the above standards and is effective for fiscal years beginning after
December 15, 1997, though early application is permitted.  The Company adopted
SFAS 132 with no material impact on the Company's financial statements.

   Accounting for Derivatives and Hedging Activities.  In June 1998, the FASB
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999, and
establishes accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.  It
also establishes the conditions under which a derivative should be designated as
hedging a specific type of exposure and requires the Company to establish at the
inception of the hedge the method and measurement approach used to assess its
effectiveness.  The Company does not believe the adoption of SFAS 133 will have
a significant impact on its financial statements and disclosures.

   Mortgage-Backed Securities.  In October 1998, the FASB issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" ("SFAS 134"), an amendment of FASB Statement No.
65.  SFAS 134 requires that after an entity securitizes mortgage loans held for
sale, it must classify the resulting retained mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments.  However, a mortgage banking enterprise must classify as trading
any retained mortgage-backed securities that it commits to sell before or during
the securitization process.  SFAS 134 conforms (1) the accounting for securities
that have been retained after the securitization of mortgage loans by a mortgage
banking enterprise with (2) the accounting for securities that have been
retained after the securitization of other types of assets by a non-mortgage
banking enterprise.  This statement is effective for the first fiscal quarter
after December 15, 1998.  However, since the Company and the Bank do not
securitize mortgage loans, the Company does not anticipate any financial
statement impact from adopting this statement.

PROPOSED BENEFIT PLANS

   The Board of Directors of the Company has adopted the HopFed Bancorp, Inc.
1999 Stock Option Plan (the "Option Plan") and the HopFed Bancorp, Inc.
Management Recognition Plan (the "MRP"), both of which are subject to
stockholder approval.  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 reserves 403,362 shares of Common Stock for issuance
upon the exercise of options or stock appreciation rights.  Under the 

                                       16
<PAGE>
 
MRP, up to 161,345 shares of Common Stock may be awarded to selected directors,
advisory directors and employees. Neither the Company nor the Bank will receive
any monetary consideration for the granting of awards under the Option Plan and
the MRP. The Company will receive the exercise price for shares of Common Stock
issued to Option Plan participants upon the exercise of their options, and will
receive no monetary consideration upon the exercise of stock appreciation
rights. Under applicable accounting standards, if the MRP is approved by the
Company's stockholders, the Company must recognize compensation expense based on
the fair market value of the Common Stock on the date the MRP awards are
granted, with such amount being amortized over the expected vesting period for
the award. In February 1999, subject to stockholder approval of the plans, 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 and awarded
161,342 shares of Common Stock under the MRP based on a fair market value of
$20.75 per share.

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.

                                       17
<PAGE>

 
                           [LETTERHEAD APPEARS HERE]


                         INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Stockholders of
Hopfed Bancorp, Inc.


We have audited the accompanying consolidated statements of financial condition
of Hopfed Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit 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 subsidiary as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.


/s/ YORK, NEAL & CO. HOPKINSVILLE, LLP

Hopkinsville, Kentucky
March 30, 1999

                                      18
<PAGE>
 
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                          DECEMBER 31, 1998 AND 1997
 
<TABLE>
<CAPTION>

                                          1998                1997
                                         ------              ------
                                      <C>                <C> 
<S>                                    ASSETS
Cash and due from banks               $  1,904,620       $  1,263,868
Time deposits                                 -             2,000,000
Interest-earning deposits in
  Federal Home Loan Bank                   214,166          3,944,621
Federal funds sold                       9,685,000        151,095,000
Securities available for sale           68,139,383         26,698,853
Securities held to maturity, market
  value of $27,633,452 and $51,963,937
  for 1998 and 1997, respectively       27,354,099         51,566,329
Loans receivable, net of allowance
  for loan losses of $257,744 and
   $237,444 for 1998
    and 1997, respectively             108,806,634        103,470,161
Accrued interest receivable              1,157,252          1,183,808
Premises and equipment, net              2,546,349          2,333,475
Other assets                               224,711            438,913
                                      ------------       ------------    
 
     Total assets                     $220,032,214       $343,995,028
                                      ============       ============

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
<S>                                   <C>               <C>
  Noninterest-bearing accounts        $  2,730,676       $  1,963,073
  Interest-bearing accounts:
    Demand / NOW accounts                8,624,089          9,483,478
    Money market accounts               30,771,443         42,064,189
    Passbook savings                    10,194,223        148,080,134
    Other time deposits                102,495,354        119,041,727
                                      ------------       ------------
    Total deposits                     154,815,785        320,632,601
Advances from borrowers
  for taxes and insurance                  165,799            171,519
Federal income taxes payable:
  Current                                     -               360,231
  Deferred                               3,268,965          1,963,852
Dividends payable                          302,524               -
Accrued expenses and other liabilities     345,195            930,748
                                      ------------       ------------
    Total liabilities                  158,898,268        324,058,951
                                      ------------       ------------
Stockholders' Equity:
  Common stock par value $.01 per
   share;
    7,500,000 shares authorized;
    4,033,625 issued and outstanding        40,336           -
  Additional paid in capital            39,546,434           -
  Retained earnings-substantially
   restricted                           18,983,884         16,613,308
  Unallocated ESOP shares               (2,932,666)          -
  Accumulated other comprehensive
  income                                 5,495,958          3,322,769
                                      ------------       ------------
    Total stockholders' equity          61,133,946         19,936,077
                                      ------------       ------------
 
    Total liabilities and
     stockholders' equity             $220,032,214       $343,995,028
                                      ============       ============
</TABLE>
                    THE ACCOMPANYING NOTES ARE AN INTEGRAL
               PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
                

                                19             
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
 
 
                                           1998         1997         1996
                                        -----------  -----------  -----------
<S>                                     <C>          <C>          <C>
 
Interest income:
 Loans receivable                       $ 8,279,744  $ 7,606,685  $ 6,823,842
 Securities available for sale            2,418,597      412,355      150,814
 Securities held to maturity              2,359,611    4,705,678    5,623,854
 Time deposits                            1,993,546    1,586,451      621,041
                                        -----------  -----------  -----------
 
   Total interest income                 15,051,498   14,311,169   13,219,551
                                        -----------  -----------  -----------
 
Interest expense:
 Deposits                                 8,003,911    9,340,884    9,731,511
 Other borrowed funds                             -        9,336       25,022
                                        -----------  -----------  -----------
 
   Total interest expense                 8,003,911    9,350,220    9,756,533
                                        -----------  -----------  -----------
 
Net interest income                       7,047,587    4,960,949    3,463,018
 
Provision for loan losses                    20,300       20,000      100,000
                                        -----------  -----------  -----------
 
   Net interest income after
    provision for loan losses             7,027,287    4,940,949    3,363,018
                                        -----------  -----------  -----------
 
Noninterest income:
 NOW account fees                           168,153      150,640      156,584
 Loan fees                                  228,949      207,706      259,665
 Service charges                             84,852       82,807      112,251
 Other                                       65,300       86,566       61,363
                                        -----------  -----------  -----------
 
   Total noninterest income                 547,254      527,719      589,863
                                        -----------  -----------  -----------
 
Noninterest expenses:
 Salaries and benefits                    1,959,406    1,479,118    1,261,090
 Deposit insurance premium                  151,701      120,084    1,701,758
 Occupancy expense                          188,093      211,986      215,101
 Data processing                            117,368      113,941       86,674
 Other                                      565,844      482,716      409,043
                                        -----------  -----------  -----------
 
   Total noninterest expense              2,982,412    2,407,845    3,673,666
                                        -----------  -----------  -----------
 
Income before income taxes                4,592,129    3,060,823      279,215
 Income tax expense                       1,640,707    1,038,254       84,681
                                        -----------  -----------  -----------
 
Net income                              $ 2,951,422  $ 2,022,569  $   194,534
                                        ===========  ===========  ===========
 
Earnings per share since conversion:
     Basic                                      .80
     Fully diluted                              .80
</TABLE>
                    THE ACCOMPANYING NOTES ARE AN INTEGRAL
               PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
                                      

                                      20

     
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
                For the years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                         Additional                Unallocated    Accumulated Other    
                                              Common       Paid-in    Retained     Common Stock     Comprehensive      Total      
                                              Stock        Capital    Earnings     Held by ESOP       Income           Equity     
                                           -----------  -----------   -----------  ------------   ----------------  ------------   
<S>                                        <C>          <C>           <C>          <C>            <C>               <C>           
BALANCE, JANUARY 1, 1996                   $     -      $     -       $14,396,205  $     -         $1,605,936       $16,002,141  
Comprehensive income:
   Net income                                                             194,534
   Net change in unrealized gains
      on securities available-for-sale,
      net of taxes of $339,986                                                                        626,873
   Total comprehensive income                                                                                           821,407 
                                           -----------  -----------   -----------  ------------   ----------------  ------------ 
 
BALANCE, DECEMBER 31, 1996                       -            -        14,590,739        -          2,232,809        16,823,548
Comprehensive income:
   Net income                                                           2,022,569
   Net change in unrealized gains
      on securities available-for-sale,
      net of taxes of $561,495                                                                      1,089,960
   Total comprehensive income                                                                                         3,112,529
                                           -----------  -----------   -----------  ------------   ----------------  ------------  
 
BALANCE, DECEMBER 31, 1997                       -            -        16,613,308        -          3,322,769        19,936,077
Comprehensive income:
   Net income                                                           2,951,422
   Net change in unrealized gains
      on securities available-for-sale,
      net of taxes of $1,119,410                                                                    2,173,189
   Total comprehensive income                                                                                         5,124,611
Issuance of common stock                       40,336    39,334,954                                                  39,375,290
Purchase of common stock by ESOP                                                     (3,226,900)                     (3,226,900)
Release and allocation of common stock
   held by ESOP                                             211,480                     294,234                         505,714
Cash dividends paid $.075 per share
   net of dividends on ESOP shares
   applied to ESOP debt                                                  (580,846)                                     (580,846)
                                           -----------  -----------   -----------  ------------   ----------------  ------------  
 
BALANCE, DECEMBER 31, 1998                 $   40,336   $39,546,434   $18,983,884  $ (2,932,666)   $5,495,958       $61,133,946
                                           ===========  ===========   ===========  =============  ================  ============  
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       21
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE> 
<CAPTION> 
                                                                   1998                     1997                    1996       
                                                                -----------             ------------             ----------     
<S>                                                             <C>                     <C>                      <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                  $   2,951,422           $   2,022,569            $  194,534  
    Adjustments to reconcile net income to net                                                                              
    cash provided by operating activities:                                                                                  
        Provision for loan losses                                      20,300                  20,000               100,000 
        Depreciation                                                  110,518                 130,337               117,094 
        Accretion of investment                                                                                             
         security discounts                                           (40,113)                (48,539)               (5,499)
    Provision (benefit) for deferred income taxes                     182,541                (244,697)               49,864 
    Stock dividend                                                   (127,200)               (118,500)             (107,500)
    Gain on sale of equipment                                          (6,527)                 (4,741)               (8,265)
    Earned ESOP shares                                                211,480                                               
    (Increase) decrease in:                                                                                                 
      Accrued interest receivable                                      26,556                 106,600              (229,434)
      Other assets                                                    214,202                (142,190)             (227,470)
    Increase (decrease) in:                                                                                                 
      Current income taxes payable                                   (360,231)                360,231                  --   
      Dividends payable                                               302,524                    --                    --   
      Accrued expenses and other liabilities                         (555,551)                343,814               228,752 
                                                                -------------           -------------            ---------- 
     Net cash provided by operating activities                      2,929,921               2,424,884               112,076 
                                                                -------------           -------------            ----------  

CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                       
    Net decrease in time deposits                                   2,000,000                    --               5,000,000 
    Net (increase) decrease in interest-                                                                                    
     bearing deposits in FHLB                                       3,730,455              (3,944,621)            5,550,000 
    Net (increase) decrease in federal funds sold                 141,410,000            (150,595,000)            7,448,000 
    Proceeds from maturities of held-to-maturity securities        24,229,625              50,336,539            44,010,074 
    Purchases of held-to-maturity securities                             --                (5,909,005)          (41,398,090)
    Proceeds from maturities of available-for-sale securities      12,565,393                  81,009                  --   
    Purchases of available-for- sale securities                   (50,590,246)            (19,895,099)              (15,000)
    Net increase in loans                                          (5,356,773)             (8,036,005)          (10,840,515)
    Purchases of premises/equipment                                  (327,565)               (258,961)             (108,724)
    Proceeds from sale of premises/equipment                           10,700                 132,766                14,132 
                                                                -------------           -------------            ----------  
     Net cash provided by (used in) investing activities          127,671,589            (138,088,377)            9,659,877 
                                                                -------------           -------------            ----------  

CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                       
    Net increase (decrease) in demand                                                                                       
     deposits, savings and NOW deposits                          (149,270,443)            144,631,967             2,115,765 
    Net increase (decrease) in time deposits                      (16,546,373)             (7,826,732)          (13,063,588)
    Increase (decrease) in advance payments                                                                                 
     by borrowers  for taxes and insurance                             (5,720)                (12,601)                7,567 
    Net increase (decrease) in other borrowed funds                      --                (1,317,000)            1,317,000 
    Issuance of common stock                                       36,148,390                    --                    --   
    Net dividends paid                                               (580,846)                   --                    --   
    Payments on loan to ESOP                                          294,234                    --                    --   
                                                                -------------           -------------            ----------  
     Net cash provided by (used in) financing activities         (129,960,758)            135,475,634            (9,623,256)
                                                                -------------           -------------            ----------  

Increase (decrease) in cash and cash equivalents                      640,752                (187,859)              148,697 
                                                                                                                            
Cash and cash equivalents, beginning of period                      1,263,868               1,451,727             1,303,030 
                                                                -------------           -------------            ----------  
                                                                                                                            
Cash and cash equivalents, end of period                        $   1,904,620           $   1,263,868         $   1,451,727 
                                                                =============           =============         ============= 
                                                                                                                            
Interest paid                                                   $   8,503,476           $   9,128,049         $   9,557,312 
                                                                =============           =============         ============= 
                                                                                                                            
Income taxes paid                                               $   1,600,231           $     670,074         $     285,991  
                                                                =============           =============         ============= 
</TABLE> 

                  THE ACCOMPANYING NOTES ARE AN INTEGRAL 
               PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
                                       

                                       22
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accounting and reporting policies of Hopfed Bancorp, Inc. (the
     "Company") and subsidiary conform with generally accepted accounting
     principles and to general practice within the banking industry. The
     following is a description of the more significant policies which the
     Company follows in preparing and presenting its consolidated financial
     statements.

     A.   BASIS OF PRESENTATION

          The accompanying consolidated financial statements include the amounts
          of the Company and its wholly-owned subsidiary, Hopkinsville Federal
          Savings Bank (the "Bank"). All significant intercompany transactions
          and balances are eliminated in consolidation.

          As more fully discussed in Note 1.b., the Company, a Delaware
          corporation, was organized by the Bank for the purpose of acquiring
          all the capital stock of the Bank pursuant to the conversion of the
          Bank from a federally chartered mutual savings bank to a federally
          chartered stock savings bank. The Company is subject to the financial
          reporting requirements of the Securities and Exchange Act of 1934, as
          amended.

     B.   ORGANIZATION/FORM OF OWNERSHIP

          The Bank was originally founded as a mutual savings bank in 1879.
          Effective February 6, 1998, the Bank converted from a federally
          chartered mutual savings bank to a federally chartered stock savings
          bank, as a wholly-owned subsidiary of a holding company chartered
          under Delaware law for the purpose of acquiring control of the Bank
          following consummation of the Bank's conversion. The Company completed
          its initial public offering on February 6, 1998 and issued 4,033,625
          shares of common stock resulting in proceeds of $39,375,290, net of
          expenses totaling $960,960. The Company loaned $3,226,900 to the ESOP
          which purchased 322,690 shares of the Company's stock in the initial
          public offering.

          The Bank established, in accordance with the requirements of the
          Office of Thrift Supervision (OTS), a liquidation account for
          $18,732,503, the amount of the Bank's net worth as of the date of the
          latest statement of financial condition, September 30, 1997, appearing
          in the IPO prospectus supplement. The liquidation account will be
          maintained for the benefit of eligible deposit account holders who
          maintain their deposit accounts in the Bank after conversion.

          In the event of a complete liquidation (and only in such an event) and
          prior to any payment to stockholders, each eligible deposit account
          holder will be entitled to receive a liquidation distribution from the
          liquidation account in an amount proportionate to the depositor's
          current adjusted balance for deposit accounts held before any
          liquidation. Except for the repurchase of stock and payment of
          dividends by the Bank, the existence of the liquidation account will
          not restrict the use or application of such net worth.

          The Bank may not declare or pay a cash dividend on or repurchase any
          of its capital stock if the effect thereof would cause the Bank's net
          worth to be reduced below the capital requirements imposed by the OTS.

                                       23
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDAIRY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     C.   CASH AND CASH EQUIVALENTS

          For the purpose of presentation in the consolidated statements of cash
          flows, cash and cash equivalents are defined as those amounts included
          in the consolidated statements of financial condition "cash and due
          from banks".

     D.   SECURITIES HELD TO MATURITY

          Bonds, notes and debentures for which the Bank has the positive intent
          and ability to hold to maturity are reported at cost, adjusted for
          premiums and discounts that are recognized in interest income over the
          period to maturity using the level yield method.

          Declines in the fair value of individual held-to-maturity securities
          below their cost that are other than temporary result in write-downs
          of the individual securities to their fair value. The write-downs are
          included in earnings as realized losses.

     E.   SECURITIES AVAILABLE FOR SALE

          Available-for-sale securities consist of bonds, notes, debentures, and
          certain equity securities not classified as trading securities nor as
          held-to-maturity securities.

          Unrealized holding gains and losses, net of tax, on available-for-sale
          securities are reported as a net amount in other comprehensive income.

          Gains and losses on the sale of available-for-sale securities are
          determined using the specific identification method.

          Declines in the fair value of individual available-for-sale securities
          below their cost that are other than temporary result in write-downs
          of the individual securities to their fair value. The write-downs are
          included in earnings as realized losses.

          Premiums and discounts are recognized in interest income over the
          period to maturity using the level yield method.

     F.   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 Standard
          ("SFAS") No. 91 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 financial
          statements.

                                       24
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     F.   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 generally accepted
          accounting principles and has taken into account the views of its
          regulators and the current economic environment.

     G.   FORECLOSED REAL ESTATE

          Real estate properties acquired through, or in lieu of, loan
          foreclosure are carried at the lower of cost or fair value less cost
          to sell. Costs of developing such real estate are capitalized, whereas
          costs relating to holding the property are expensed. Valuations are
          periodically performed by management, and any adjustments to value are
          made through an allowance for losses.

     H.   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.

     I.   PREMISES AND EQUIPMENT

          Land is carried at cost. 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:

                                       25
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     I.   PREMISES AND EQUIPMENT (CONTINUED)

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

     J.   FINANCIAL INSTRUMENTS

          In the ordinary course of business the Bank has entered into off-
          balance-sheet financial instruments consisting of commitments to
          extend credit, etc. Such financial instruments are recorded in the
          financial statements when they are funded or related fees are incurred
          or received.

     K.   FAIR VALUES OF FINANCIAL INSTRUMENTS

          The following methods and assumptions were used by the Bank in
          estimating fair values of financial instruments as disclosed herein:

          CASH AND SHORT TERM INSTRUMENTS.  The carrying amounts of cash and
          short term instruments approximate their fair value.

          AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES.  Fair values for
          securities are based on quoted market prices.

          LOANS RECEIVABLE.  For variable rate loans that reprice annually and
          have no significant change in credit risk, fair values are based on
          carrying values. Fair values for fixed rate mortgage loans and fixed
          rate commercial loans are estimated using discounted cash flow
          analyses, using interest rates currently being offered for loans with
          similar terms to borrowers of similar credit quality.

          DEPOSIT LIABILITIES.  The fair values disclosed for demand deposits
          are, by definition, equal to the amount payable on demand at the
          reporting date (that is, their carrying amounts). The carrying amounts
          of variable rate, fixed-term money market accounts approximate their
          fair values at the reporting date. Fair values for fixed rate
          certificates of deposits (CD's) are estimated using a discounted cash
          flow calculation that applies interest rates currently being offered
          on certificates of deposit to a schedule of aggregated expected annual
          maturities on time deposits.

          ADVANCES FROM BORROWERS FOR TAXES AND LICENSES.  The carrying amounts
          of advances from borrowers approximate their fair value.

          OTHER BORROWED FUNDS.  The carrying amounts of other borrowed funds
          approximate their fair values since such borrowings mature within 90
          days.

          ACCRUED INTEREST.  The carrying amounts of accrued interest
          approximate their fair values.

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

                                       26
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       December 31, 1998, 1997 and 1996


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     L.   ESTIMATES

          The preparation of financial statements in conformity with generally
          accepted accounting principles requires management to make estimates
          and assumptions that affect the reported amounts of assets and
          liabilities and disclosures of contingent assets and liabilities at
          the date of the consolidated financial statements and the reported
          amounts of revenues and expenses during the reporting period. Actual
          results could differ from those estimates.

     M.   EARNINGS PER SHARE

          Earnings per share is computed by dividing net income by the weighted
          average number of shares of common stock and dilutive common stock
          equivalents outstanding, adjusted for the unallocated portion of
          shares held by the Employee Stock Ownership Plan (ESOP). Since the
          conversion, basic and fully diluted weighted average common stock
          outstanding was 3,711,025 shares, (adjusted for unallocated ESOP
          shares).

2.   SECURITIES

     Securities, which consist of debt and equity investments, have been
     classified in the consolidated statements of financial condition according
     to management's intent. The carrying amount of securities and their
     approximate fair values follow:

<TABLE>
<CAPTION>
                                                                      Gross        Gross     Estimated
                                                       Amortized   Unrealized   Unrealized     Market
                                                         Cost         Gains       Losses        Value
                                                      -----------  -----------  -----------  -----------
     <S>                                              <C>          <C>          <C>          <C>
     AVAILABLE-FOR-SALE SECURITIES                   
     December 31, 1998:                              
     Restricted:                                     
        FHLB stock                                    $ 1,852,600  $         -  $        -   $ 1,852,600
        Intrieve stock                                     15,000            -           -        15,000
                                                      -----------   ----------    --------   -----------
                                                        1,867,600            -           -     1,867,600
                                                      -----------   ----------    --------   -----------
     Unrestricted:                                   
     FHLMC stock                                          120,508    7,871,480           -     7,991,988
     U.S. government and agency securities:          
        FHLB investment securities                      7,000,000       50,310           -     7,050,310
        FFCB                                           15,995,265       20,000           -    16,015,265
     Mortgage-backed securities:                     
        GNMA                                           16,800,955      205,697           -    17,006,652
        FNMA                                            8,575,909       57,131           -     8,633,040
        FHLMC                                           9,451,937      132,567      (9,976)    9,574,528
                                                      -----------   ----------    --------   -----------
                                                       57,944,574    8,337,185      (9,976)   66,271,783
                                                      -----------   ----------    --------   -----------
                                                      $59,812,174   $8,337,185    $ (9,976)  $68,139,383
                                                      ===========   ==========    ========   ===========
                                                     
     December 31, 1997:                              
      Restricted:                                    
        FHLB stock                                    $ 1,725,400  $         - $         -   $ 1,725,400
        Intrieve stock                                     15,000            -           -        15,000
                                                      -----------   ----------    --------   -----------
                                                        1,740,400            -           -     1,740,400
                                                      -----------   ----------    --------   -----------
     Unrestricted:                                   
     FHLMC stock                                          120,508    5,048,516           -     5,169,024
     U.S. government and agency securities:          
        FHLB investment securities                     13,000,000       13,590     (13,140)   13,000,450
     Mortgage-backed securities:                     
        GNMA                                            2,941,488       18,518           -     2,960,006
        FNMA                                            1,888,484            -     (18,489)    1,869,995
        FHLMC                                           1,973,954            -     (14,976)    1,958,978
                                                      -----------   ----------    --------   -----------
                                                       19,924,434    5,080,624     (46,605)   24,958,453
                                                      -----------   ----------    --------   -----------
                                                      $21,664,834   $5,080,624    $(46,605)  $26,698,853
                                                      ===========   ==========    ========   ===========
</TABLE>

                                       27
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996


2.   SECURITIES (CONTINUED)

     The scheduled maturities of securities available-for-sale at December 31,
     1998 were as follows:

<TABLE>
<CAPTION>
 
                                    Amortized      Fair     
                                      Cost         Value   
                                   -----------  -----------
     <S>                           <C>          <C>        
     Due in one year or less       $15,995,265  $16,015,265
     Due in one to five years        7,000,000    7,050,310
                                   -----------  -----------
                                                           
                                    22,995,265   23,065,575
                                                           
     Mortgage-backed securities     34,828,801   35,214,220
                                   -----------  -----------
                                                           
                                   $57,824,066  $58,279,795
                                   ===========  =========== 
</TABLE>

     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. 

<TABLE>
<CAPTION>
                                                                   Gross        Gross      Estimated
                                                     Amortized   Unrealized  Unrealized     Market
                                                       Cost        Gains       Losses        Value
                                                    -----------  ----------  -----------  -----------
<S>                                                 <C>          <C>         <C>          <C>
     HELD-TO-MATURITY SECURITIES                  
                                                  
     December 31, 1998:                           
                                                  
     U.S. government and agency securities:       
       FHLB investment                            
         Securities                                 $13,997,542    $  5,098   $  (1,410)  $14,001,230
                                                    -----------    --------   ---------   -----------
                                                  
     Mortgage-backed                              
     securities:                                  
        GNMA                                         11,900,966     242,338         (30)   12,143,274
        FNMA                                          1,455,591      33,357           -     1,488,948
                                                    -----------    --------   ---------   -----------
                                                     13,356,557     275,695         (30)   13,632,222
                                                    -----------    --------   ---------   -----------
                                                  
                                                    $27,354,099    $280,793   $  (1,440)  $27,633,452
                                                    ===========    ========   =========   ===========
                                                  
     
     December 31, 1997:                           
                                                  
     U.S. government and agency securities:       
      FHLB investment                             
       securities                                   $31,988,246    $    620   $(149,486)  $31,839,380
                                                    -----------    --------   ---------   -----------
                                                  
      Mortgage-backed                             
      securities:                                 
       GNMA                                          17,814,021     520,959      (1,014)   18,333,966
       FNMA                                           1,764,062      34,932      (8,403)    1,790,591
                                                    -----------    --------   ---------   -----------
                                                     19,578,083     555,891      (9,417)   20,124,557
                                                    -----------    --------   ---------   -----------
 
                                                    $51,566,329    $556,511   $(158,903)  $51,963,937
                                                    ===========    ========   =========   ===========
</TABLE>

                                       28
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996


2.   SECURITIES (CONTINUED)

     The scheduled maturities of securities held-to-maturity at December 31,
     1998, were as follows:

<TABLE>
<CAPTION>
                                   Amortized      Fair
                                     Cost         Value
                                  -----------  -----------
     <S>                                       <C>
     Due in one year or less      $ 3,999,938  $ 4,001,880
                                   
     Due in one to five years       9,997,604    9,999,350
                                  -----------  -----------
                                   
                                   13,997,542   14,001,230
                                   
     Mortgage-backed securities    13,356,557   13,632,222
                                  -----------  -----------
                                    
                                  $27,354,099  $27,633,452
                                  ===========  ===========
</TABLE>

3.   LOANS RECEIVABLE

     The components of loans in the consolidated statements of financial
     condition as of December 31, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
                                                     1998           1997
                                                 -------------  -------------
     <S>                                         <C>            <C>
     Real estate loans:                        
       One-to-four family                        $ 88,954,630   $ 83,228,850
       Multi-family                                 1,538,864      2,359,742
       Construction                                 4,625,527      5,165,962
       Non-residential                              8,260,156      7,593,053
                                                 ------------   ------------
          Total mortgage loans                    103,379,177     98,347,607
                                                 ------------   ------------
     Consumer loans:                           
       Loans secured by deposits                    2,279,709      3,080,749
       Other consumer loans                         4,586,487      4,298,236
                                                 ------------   ------------
          Total consumer loans                      6,866,196      7,378,985
                                                 ------------   ------------
                                                  110,245,373    105,726,592
     Less:                                     
      Undisbursed portion of mortgage loans        (1,180,995)    (2,018,987)
                                                 ------------   ------------
     Total loans                                  109,064,378    103,707,605
     Less allowance for loan losses                  (257,744)      (237,444)
                                                 ------------   ------------
 
                                                 $108,806,634   $103,470,161
                                                 ============   ============
</TABLE>

                                       29
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOILDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996


3.   LOANS RECEIVABLE (CONTINUED)

     An analysis of the change in the allowance for loan losses for the years
     ended December 31, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                      1998      1997
                                    --------  --------
     <S>                            <C>       <C>
     Balance at beginning of year   $237,444  $217,444
                                   
     Loans charged off                     -         -
     Recoveries                            -         -
                                    --------  --------
                                   
      Net loans charged off                -         -
                                   
     Provision for loan            
     losses                           20,300    20,000
                                    --------  --------
                                   
     Balance at end of year         $257,744  $237,444
                                    ========  ========
</TABLE>

4.   PREMISES AND EQUIPMENT

     Components of properties and equipment included in the consolidated
     statements of financial condition as of December 31, 1998 and 1997
     consisted of the following:

<TABLE>
<CAPTION>
                                   1998         1997
                                -----------  -----------
     <S>                        <C>          <C>
 
     Land                       $  543,013   $  537,870
     Land improvements              74,861       73,661
     Buildings                   2,061,675    1,760,092
     Furniture and equipment       583,189      500,152
     Construction in progress            -       83,325
                                ----------   ----------
                                 3,262,738    2,955,100
     Less accumulated         
     depreciation                 (716,389)    (621,625)
                                ----------   ----------
 
                                $2,546,349   $2,333,475
                                ==========   ==========
</TABLE>

     Depreciation expense was $110,518, $130,337 and $117,094 for the years
     ended December 31, 1998, 1997 and 1996, respectively.

                                       30
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996

5.   DEPOSITS

     At December 31, 1998, the scheduled maturities of other time deposits were
     as follows:
 
<TABLE> 
          <S>                           <C> 
          1999                          $ 62,907,960
          2000                            31,154,359
          2001                             4,854,787
          2002                             2,933,853
          2003                               644,395
                                        ------------
                                                    
                                        $102,495,354
                                        ============ 
</TABLE> 

     The amount of other time deposits with a minimum denomination of $100,000
     was $7,161,825 and $8,118,952 at December 31, 1998 and 1997, respectively.
     Deposits in excess of $100,000 are not federally insured.

     Interest expense on deposits for the years ended December 31, 1998, 1997,
     and 1996 is summarized as follows:
 
<TABLE> 
<CAPTION> 
                                           1998        1997        1996   
                                        ----------  ----------  ----------
       <S>                              <C>         <C>         <C>       
       Demand / NOW accounts            $  222,674  $  212,759  $  207,088
       Money market accounts             1,346,675   1,619,467   1,625,405
       Passbook savings                    673,383     794,300     302,052
       Other time deposits               5,761,179   6,714,358   7,596,966
                                        ----------  ----------  ----------
                                                                          
                                        $8,003,911  $9,340,884  $9,731,511
                                        ==========  ==========  ========== 
</TABLE>

     The Bank maintains clearing arrangements for its demand, NOW and money
     market accounts with the Federal Home Loan Bank of Cincinnati.  The Bank is
     required to maintain certain cash reserves in its account to cover average
     daily clearings.  At December 31, 1998, average daily clearings were
     approximately $523,741.

6.   OTHER BORROWED FUNDS

     During 1996, the Bank entered into a Cash Management Advance (CMA) program
     with the Federal Home Loan Bank. This program is a source of overnight
     liquidity to address day-to-day cash needs. The program has a term of up to
     90 days and bears interest at a variable rate equal to the FHLB cost of
     funds (7.15% at December 31, 1996). At December 31, 1996, the Bank could
     have borrowed up to $25,000,000 under this program and the amount was
     collateralized by a FHLB investment security. As of December 31, 1996, the
     amount owed on the advance was $1,317,000. The amount was repaid in full
     during 1997. At December 31, 1998 and 1997, the Bank could borrow up to
     $10,100,000 under the CMA program and the amount would be collateralized by
     FHLB investment securities. The balance owed at December 31, 1998 and 1997
     was zero.

                                       31
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND  1996

7.  FINANCIAL INSTRUMENTS

    The Bank 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 and commercial
    letters of credit.  Those instruments involve, to varying degrees, elements
    of credit and interest rate risk in excess of the amount recognized in the
    statements of financial condition.  The contract or notional amounts of
    those instruments reflect the extent of the Bank's involvement in particular
    classes of financial instruments.

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

    Unless noted otherwise, the Bank does not require collateral or other
    security to support financial instruments with credit risk.

    COMMITMENTS TO EXTEND CREDIT.  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
    some of the commitments are expected to expire without being drawn upon, the
    total commitment amounts do not necessarily represent future cash
    requirements.  The Bank's experience has been that most loan commitments are
    drawn upon by customers.  The Bank has offered standby letters of credit on
    a limited basis.  As of December 31, 1998, the Bank has not been requested
    to advance funds on any of the standby letters of credit.

    The estimated fair values of financial instruments were as follows at
    December 31, 1998:

<TABLE>
<CAPTION>
                                                 Carrying        Fair
                                                  Amount        Value
                                               ------------  ------------
    <S>                                        <C>           <C>
    Financial assets:
      Cash and due from banks                  $  1,904,620  $  1,904,620
      Interest-earning deposits in FHLB             214,166       214,166
      Federal funds sold                          9,685,000     9,685,000
      Securities available for sale              68,139,383    68,139,383
      Securities held to maturity                27,354,099    27,633,452
      Loans receivable                          108,806,634   108,646,609
      Accrued interest receivable                 1,157,252     1,157,252
    Financial liabilities:
      Deposit liabilities                       154,815,785   154,987,013
      Advances from borrowers for
       taxes and insurance                          165,799       165,799
    Off-balance-sheet assets (liabilities):
      Commitments to extend credit                               (464,789)
      Commercial letters of credit                               (679,744)
</TABLE> 

                                       32
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOILDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996

7.  FINANCIAL INSTRUMENTS (CONTINUED)

    The estimated fair values of financial instruments were as follows at
    December 31, 1997:

<TABLE>
<CAPTION>
                                                  Carrying          Fair
                                                   Amount          Value
                                               --------------  --------------
    <S>                                        <C>             <C>
    Financial assets:
      Cash and due from banks                  $   1,263,868   $   1,263,868
      Time deposits                                2,000,000       2,000,000
      Interest-earning deposits in FHLB            3,944,621       3,944,621
      Federal funds sold                         151,095,000     151,095,000
      Securities available for sale               26,698,853      26,698,853
      Securities held to maturity                 51,566,329      51,963,937
      Loans receivable                           103,470,161     103,386,125
      Accrued interest receivable                  1,183,808       1,183,808
    Financial liabilities:
      Deposit liabilities                       (320,632,601)   (320,581,341)
      Advances from borrowers for
       taxes and insurance                          (171,519)       (171,519)
    Off-balance-sheet assets (liabilities):
      Commitments to extend credit                                  (856,810)
      Commercial letters of credit                                  (350,194)
</TABLE> 

8.  SIGNIFICANT GROUP 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 on deposit with financial institutions and federal funds sold exceeded
    the insurance coverage as of December 31, 1998 and 1997.  The carrying
    amount and bank balance of such items as of December 31, 1998 and 1997 was
    as follows:

<TABLE>
<CAPTION>
 
                                         1998          1997
                                     ------------  -------------
      <S>                            <C>           <C>
      Carrying amount                $10,655,165   $157,805,353
                                     ===========   ============
 
      Bank balance                     9,783,412    157,270,109
 
      Amount covered by insurance       (422,374)      (366,906)
                                     -----------   ------------
 
      Amount not collateralized      $ 9,361,038   $156,903,203
                                     ===========   ============
</TABLE>

                                       33
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996

9.  ACCOUNTING FOR PENSION COSTS AND OTHER POSTRETIREMENT BENEFITS9.

    PENSION PLAN

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

    The following table sets forth the plan's funded status and amounts
    recognized in the consolidated statements of financial condition at December
    31:

<TABLE>
<CAPTION>
                                                                               1998          1997                     
                                                                           -----------   -----------
         <S>                                                               <C>           <C>                             
         Change in benefit obligation                                                                                 
           Benefit obligation at beginning of year                          $2,176,248    $1,908,695                  
           Service cost                                                         74,924        67,026                  
           Interest cost                                                       151,986       142,868                  
           Actuarial loss                                                       86,252       297,851                  
           Benefits paid                                                             -      (240,192)                  
                                                                            ----------    ----------                  
                                                                                                                      
           Benefit obligation at end of year                                 2,489,410     2,176,248                  
                                                                            ----------    ----------                  
                                                                                                                      
         Change in plan assets                                                                                        
           Fair value of plan assets at beginning of year                    1,421,158     1,414,661                  
           Actual return on plan assets                                         93,803        58,357                  
           Employer contributions                                              151,115       188,332                  
           Benefits paid                                                             -      (240,192)                  
                                                                            ----------    ----------                  
                                                                                                                      
           Fair value of plan assets at end of year                          1,666,076     1,421,158                  
                                                                            ----------    ----------                  
                                                                                                                      
         Funded status                                                        (823,334)     (755,090)                  
         Unrecognized net asset                                                (49,002)      (56,262)                  
         Unrecognized prior service cost                                       102,281       120,514                  
         Unrecognized net loss                                                 643,762       572,126                  
                                                                            ----------    ----------                  
                                                                                                                      
           Accrued pension cost                                             $ (126,293)   $ (118,712)                  
                                                                            ==========    ==========                   
</TABLE> 

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

<TABLE> 
<CAPTION> 
                                                                               1998          1997         1996                 
                                                                            ----------    ----------    ---------                   

      <S>                                                                   <C>           <C>           <C> 
      Discount rate                                                               7.00%         7.00%        7.50%                  
      Expected long-term rate of                                                                                                 
         return on assets                                                         7.25%         8.00%        8.00%                  
      Rate of increase in                                                                                                        
         compensation levels                                                      4.50%         4.50%        4.50%                  

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

<TABLE> 
<CAPTION> 
                                                                               1998          1997         1996                     
                                                                            ----------    ----------    ---------                  
          <S>                                                               <C>           <C>           <C>  
          Service cost                                                      $   74,924    $   67,026    $  79,562                  
          Interest cost on projected benefit obligation                        151,986       142,868      131,247                  
          Expected return on plan assets                                      (112,256)     (120,164)    (105,231)                  
          Amortization of transitional asset                                    (7,260)       (7,995)      (7,995)                  
          Amortization of prior service cost                                    18,233        18,233       18,233                  
          Amortization of net loss                                              33,069         9,388        7,335                  
                                                                            ----------    ----------    ---------                  
                                                                                                                                   
          Net periodic pension cost                                         $  158,696    $  109,356    $ 123,151                  
                                                                            ==========    ==========    =========                   

</TABLE>

                                       34
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996

                                        
9.  ACCOUNTING FOR PENSION COSTS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)

    EMPLOYEE STOCK OWNERSHIP PLAN

    The Company has a noncontributory employee stock ownership plan (ESOP) for
    those employees who meet the eligibility requirements of the plan.  Eligible
    employees are those who have attained the age of 21 and completed one year
    of service.

    The ESOP trust borrowed $3,226,900 in 1998 through a ten-year loan from the
    Company and used the proceeds to purchase 322,690 shares of the common stock
    at a price of $10.00 per share.  Note principal payments are a sum equal to
    at least one eighth of the original loan principal amount annually plus
    interest paid semiannually at prime rate.  The note balance outstanding at
    December 31, 1998 was $2,932,666.  Shares purchased are held in a suspense
    account for allocation among the participants as the loan is paid.
    Contributions to the ESOP and shares released from the loan collateral will
    be in an amount proportional to repayment of the ESOP loan.

    The ESOP is to be funded by contributions made by the Company or the Bank in
    cash or shares of Common Stock with no cost to participants.  Contributions
    to the ESOP and shares released from the suspense account will be allocated
    among participants on the basis of their annual wages subject to federal
    income tax withholding, plus any amounts withheld under a plan qualified
    under Sections 125 or 401(k) of the Code and sponsored by the Company or the
    Bank.  Participants must be employed at least 500 hours in a calendar year
    in order to receive an allocation.  A participant becomes vested in his or
    her right to ESOP benefits upon his or her completion of three years of
    service.  Dividends paid on allocated shares are expected to be paid to
    participants or used to repay the ESOP loan, and dividends on unallocated
    shares are expected to be used to repay the ESOP loan.

    At December 31, 1998, shares allocated and remaining in suspense were as
    follows:

<TABLE>
          <S>                               <C>  
          Number of Shares
            Released and allocated              29,423
            Suspense                           293,267
 
          Fair Value
            Released and allocated          $  505,714
            Suspense                         5,040,520
</TABLE>

    The expense recorded by the Company is based on cash contributed to the ESOP
    during the year in amounts determined by the Board of Directors, ($270,032)
    plus divideds applied to the ESOP debt ($41,597), plus the excess of fair
    value of shares released and allocated over the ESOP's cost of those shares
    ($194,085).  The Company's ESOP compensation costs exclude interest which is
    eliminated in consolidation.

                                       35
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996


9.  ACCOUNTING FOR PENSION COSTS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)

    MANAGEMENT RECOGNITION PLAN AND 1999 STOCK OPTION PLAN

    On February 24, 1999, the board of directors of Hopfed Bancorp, Inc.
    approved the Management Recognition Plan (MRP) and the 1999 Stock Option
    Plan, both of which are subject to approval by the stockholders. The purpose
    of the MRP is to enable the Company and the Bank to retain personnel of
    experience and ability in key positions of responsibility.  The MRP
    committee shall make plan share awards only to employees and directors.  The
    MRP committee will determine which employees will be granted discretionary
    plan share awards and the number of shares covered by each plan share award.
    On the effective date, 161,345 shares will be subject to automatic plan
    share awards to directors and employees as provided in the MRP document.
    One-third of plan share awards become vested on the plan's effective date,
    one-third on January 1, 2000 and one-third on January 1, 2001.  The purpose
    of the 1999 Stock Option Plan is to advance the interests of the Company
    through providing key employees and directors of the Company and the Bank
    with the opportunity to acquire shares of stock.  The 1999 Stock Option Plan
    reserves 403,362 shares of common stock for issuance upon exercise of
    options or stock appreciation rights.  The stock option committee shall have
    the discretion to make grants of options and stock appreciation rights to
    employees and directors.

10. INCOME TAXES

    The provision for income taxes for the years ended December 31, 1998, 1997
    and 1996 consisted of the following:

<TABLE>
<CAPTION>
                       1998        1997        1996
                    ----------  -----------  --------
       <S>          <C>         <C>          <C> 
       Current:
         Federal    $1,421,164  $1,282,951    $34,817
         State          37,002           -          -
                    ----------  ----------    -------
                     1,458,166   1,282,951     34,817
       Deferred        182,541    (244,697)    49,864
                    ----------  ----------    -------
 
                    $1,640,707  $1,038,254    $84,681
                    ==========  ==========    =======
</TABLE>

    Total income tax expense for the years ended December 31, 1998, 1997 and
    1996 differed from the amounts computed by applying the U.S. federal income
    tax rate of 34 percent to income before income taxes as follows:

<TABLE>
<CAPTION>
                                                1998         1997        1996
                                             ----------   ----------   --------
       <S>                                   <C>          <C>          <C>      
       Expected federal income tax
        expense at statutory tax rate        $1,561,324   $1,040,680   $ 94,933
       State income taxes                       (12,581)
       Dividends received                       (14,077)     (11,716)   (10,284)
       Fair market value difference
        of allocated ESOP shares                 71,903            -          -
       Other                                     (2,864)       9,290         32
                                             ----------   ----------   --------
 
       Total federal income tax expense      $1,603,705   $1,038,254   $ 84,681
                                             ==========   ==========   ========
 
       Effective rate                              34.9%        33.9%      30.3%
                                             ==========   ==========   ========
</TABLE>

                                       36
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996


10. INCOME TAXES (CONTINUED)

    The components of deferred taxes as of December 31, 1998 and 1997 are
    summarized as follows:

<TABLE>
<CAPTION>
                                               1998          1997
                                           -----------   -----------
<S>                                        <C>           <C>
    Deferred tax liabilities:
      FHLB stock dividends                 $  (357,283)  $  (327,352)
      Bad debt reserves                       (162,238)     (218,939)
      Unrealized appreciation
       on securities available for sale     (2,831,251)   (1,699,721)
                                           -----------   -----------
                                            (3,350,772)   (2,246,012)
                                           -----------   -----------
    Deferred tax assets:
      Pension cost                              42,940        67,418
      Accrued interest expense                  23,006       192,947
      Accrued professional fees                 15,861        21,795
                                           -----------   -----------
                                                81,807       282,160
                                           -----------   -----------
 
    Net deferred tax liability             $(3,268,965)  $(1,963,852)
                                           ===========   ===========
</TABLE>

    Thrift institutions, in determining taxable income, were previously allowed
    special bad debt deductions based on specified experience formulae or on a
    percentage of taxable income before such deductions.  In August 1996, the
    President signed the Small Business Protection Act of 1996 that, among other
    things, repealed the tax bad debt reserve method for thrifts effective for
    taxable years beginning after December 31, 1995.  As a result, thrifts must
    recapture into taxable income the amount of their post-1987 tax bad debt
    reserves over a six-year period beginning after 1995.  This recapture could
    be deferred for up to two years if the thrift satisfied a residential loan
    portfolio test, and the Bank qualified for that deferral.  For the year
    ended December 31, 1998, the Bank recaptured $146,467 of the $878,800 total
    recapture of tax bad debt reserves into taxable income.  A similar amount
    will be recaptured in each of the years 1999 through 2003.  The recapture
    does not have any effect on the Bank's financial statements because the
    related tax expense has already been accrued.

    Thrifts such as the Bank may now only use the same tax bad debt reserve
    method that is allowed for banks.  Accordingly, a thrift with assets of $500
    million or less may only add to its tax bad debt reserves based upon its
    moving six-year average experience of actual loan losses (i.e., the
    experience method).  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 Bank expects to
    continue to use the reserve 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, 1998 and 1997 includes approximately
    $4,027,400 which represents such bad debt deductions for which no deferred
    income taxes have been provided.

                                       37
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      December 31, 1998 and 1997 and 1996

                                        
11. RELATED PARTIES

    The Bank has entered into transactions with its directors and their
    affiliates (related parties).  The aggregate amount of loans to such related
    parties at December 31, 1998 and December 31, 1997, was $302,259 and
    $263,792, respectively. During 1998, new loans to such related parties
    amounted to $69,914 and repayments amounted to $31,447.  During 1997, new
    loans to such related parties amounted to $55,760 and repayments amounted to
    $22,458.

12. 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 financial statements.

    The Bank had open loan commitments at  December 31, 1998 and 1997 of
    $464,789 and $856,810 respectively.  Of these amounts $267,252 and $147,000
    as of December 31, 1998 and 1997, respectively, were for fixed rate loans.
    The interest rates for the fixed rate loan commitments ranged from 7.375% to
    8.50% and 7.88% to 9.00% for  December 31, 1998 and 1997, respectively.

13. REGULATORY MATTERS

    The Financial Institutions Reform Recovery and Enforcement Act of 1989
    ("FIRREA"), which instituted major reforms in the operation and supervision
    of the savings and loan industry, contains provisions for capital standards.
    These standards require savings institutions to have a minimum regulatory
    tangible capital (as defined in the regulation) equal to 1.50% of adjusted
    total assets and a minimum 3.00% core capital (as defined) of adjusted total
    assets.  Additionally, savings institutions are required to meet a total
    risk-based capital requirement of 8.00%.

    The Bank is also subject to the provisions of the Federal Deposit Insurance
    Corporation Improvement Act of 1991 ("FDICIA").  FDICIA includes significant
    changes to the legal and regulatory environment for insured depository
    institutions, including reductions in insurance coverage for certain kinds
    of deposits, increased supervision by the Federal regulatory agencies,
    increased reporting requirements for insured institutions, and new
    regulations concerning reporting on internal controls, accounting and
    operations.

    FDICIA's prompt corrective action regulations define specific capital
    categories based on an institution's capital ratios.  The capital
    categories, in declining order, are "well capitalized", "adequately
    capitalized", "undercapitalized", "significantly undercapitalized", and
    "critically undercapitalized."  Institutions categorized as
    "undercapitalized" or worse are subject to certain restrictions, including
    the requirement to file a capital plan with OTS, and increased supervisory
    monitoring, among other things.  Other restrictions may be imposed on the
    institution either by the OTS or by the FDIC, including requirements to
    raise additional capital, sell assets, or sell the entire institution.

                                       38
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND  1996


13. REGULATORY MATTERS (CONTINUED)

    The following chart delineates the categories as defined in the FDICIA
    legislation:

<TABLE>
<CAPTION>
                                           Tier I Risk-    Total Risk-
                           Core Capital   Based Capital   Based Capital
                          --------------  --------------  --------------
    <S>                   <C>             <C>             <C>
    "Well capitalized"              5.0%            6.0%           10.0%
    "Adequately
    capitalized"                    4.0%            4.0%            8.0%
    "Undercapitalized"    Less than 4.0%  Less than 4.0%  Less than 8.0%
    "Significantly
    undercapitalized"     Less than 3.0%
    Less than 3.0%        Less than 6.0%
</TABLE> 

    At December 31, 1998, the Bank's core, tier I risk-based, and total risk-
    based capital ratios were 20.36%, 49.76%, and 50.11%, respectively. The
    following is a calculation of the Bank's regulatory capital (in thousands)
    at December 31, 1998:

<TABLE>
<CAPTION>
                                               Tier I                         Total
                                                Risk-                         Risk-
                                       GAAP     Based   Tangible     Core     Based
                                      Capital  Capital   Capital   Capital   Capital
                                      -------  -------  ---------  --------  --------
    <S>                               <C>      <C>      <C>        <C>       <C>
 
    GAAP capital, as reported         $41,369  $41,369   $41,369   $41,369   $41,369
                                      =======
 
    Unrealized gains on certain
    available-for- sale securities                   -    (5,483)   (5,483)   (5,483)
 
    General valuation allowance                      -         -         -       257
                                               -------   -------   -------   -------
 
    Regulatory capital                         $41,369   $35,886   $35,886   $36,143
                                               =======
 
    Minimum capital requirement %                           1.50%     4.00%     8.00%
 
    Minimum capital requirement $                          2,965     7,907     5,769
                                                         -------   -------   -------
 
    Regulatory capital excess                            $32,921   $27,979   $30,374
                                                         =======   =======   =======
</TABLE>

   At December 31, 1997, the Bank's core, tier  I risk-based, and total risk-
   based risk-based capital ratios were 4.9%, 19.5%, and 16.5%, respectively.
   The following is a calculation of the Bank's regulatory capital (in
   thousands) at December 31, 1997:

<TABLE>
<CAPTION>
                                               Tier I                          Total
                                                Risk-                           Risk-
                                       GAAP     Based   Tangible     Core       Based
                                      Capital  Capital   Capital    Capital    Capital
                                      -------  -------  ---------  ---------  ---------
    <S>                               <C>      <C>      <C>        <C>        <C>
    GAAP capital, as reported         $19,936  $19,936   $19,936    $19,936    $19,936
                                      =======
 
    Unrealized gains on certain
    available-for- sale securities                   -    (3,323)    (3,323)    (3,323)
 
    General valuation allowance                      -         -          -        237
                                               -------   -------    -------   --------
 
    Regulatory capital                         $19,936    16,613     16,613     16,850
                                               =======
 
    Minimum capital requirement %                           1.50%      3.00%      8.00%
 
    Minimum capital requirement $                          5,110     10,221      8,172
                                                         -------    -------   --------
 
    Regulatory capital excess                            $11,503    $ 6,392    $ 8,678
                                                         =======    =======   ========
</TABLE>

                                       39
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996


13. REGULATORY MATTERS (CONTINUED)

    The OTS risk-based capital regulation also includes an interest rate risk
    ("IRR") component that requires savings institutions with greater than
    normal IRR, when determining compliance with the risk-based capital
    requirements, to maintain additional total capital.  The OTS has, however,
    indefinitely deferred enforcement of its IRR requirements.  Under the
    regulation, a savings institution's IRR is measured in terms of the
    sensitivity of its "net portfolio value" to changes in interest rates.  A
    savings institution is considered to have a "normal" level of IRR exposure
    if the decline in its net portfolio value after an immediate 200 basis point
    increase or decrease in market interest rates is less than 2% of the current
    estimated economic value of its assets.  If the OTS determines in the future
    to enforce the regulation's IRR requirements, a savings institution with a
    greater than normal IRR would be required to   DEDUCT FROM TOTAL CAPITAL,
    FOR PURPOSES OF CALCULATING ITS RISK-BASED CAPITAL REQUIREMENT, AN AMOUNT
    EQUAL TO ONE HALF THE DIFFERENCE BETWEEN THE INSTITUTION'S MEASURED IRR AND
    2%, MULTIPLIED BY THE ECONOMIC VALUE OF THE INSTITUTION'S TOTAL ASSETS.
    MANAGEMENT DOES NOT BELIEVE THAT THIS REGULATION, WHEN ENFORCED, WILL HAVE A
    MATERIAL IMPACT ON THE BANK.

    The United States Congress passed legislation that resulted in an assessment
    on all Savings Association Insurance Fund ("SAIF") insured deposits in order
    to recapitalize the SAIF Fund.  This one-time assessment amounted to
    approximately 66 basis points on SAIF assessable deposits held as of March
    31, 1995.  The assessment was payable no later than November 30, 1996 and
    amounted to approximately $1.23 million for the Bank.  Such amount was
    charged to earnings at September 30, 1996.

14. YEAR 2000 ISSUES

    The approach of the year 2000 presents potential problems to entities such
    as the Bank, which utilize computers.  Many computer systems in use today,
    particularly older computers and computer programs, may not be able to
    properly interpret dates after December 31, 1999 because they use only two
    digits to indicate the year in a date.  For example, the year 2000 could be
    interpreted as the year 1900 by such systems.  As a result, the systems
    could produce inaccurate data, or not function at all.

    The Bank has begun assessment of the ability of each system to properly
    perform, and is implementing corrective measures when deficiencies are
    found.

    The Bank is also exposed to potential risk if customers, third party payors
    and vendors suffer year 2000-related difficulties and are unable to fulfill
    obligations to the Bank.

15. HOPFED BANCORP, INC.

    The following condensed statements of financial condition as of December 31,
    1998 and condensed statements of income and cash flows for the period
    February 6, 1998 through December 31, 1998 of the parent company only should
    be read in conjunction with the consolidated financial statements and the
    notes thereto.

                                       40
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996
                                        

15.     HOPFED BANCORP, INC. (CONTINUED)

                  CONDENSED STATEMENT OF FINANCIAL CONDITION
                               DECEMBER 31, 1998

<TABLE>
<CAPTION>
        ASSETS
        <S>                                         <C>   
          Cash and due from banks                   $   112,094
          Federal funds sold                            485,000
          Securities available for sale              16,015,265
          Accrued interest receivable                   220,503
          Other assets                                   14,770
          Investment in subsidiary                   19,707,645
          Note receivable-ESOP                        3,226,900
                                                    -----------
             Total assets                           $39,782,177
                                                    ===========
 
        LIABILITIES AND EQUITY
 
          Liabilities:
          Federal income taxes payable:
             Deferred                               $     6,800
          Dividends payable                             302,524
                                                    -----------
             Total liabilities                          309,324
                                                    -----------
 
        Equity:
          Common stock                                   40,336
          Additional paid in capital                 39,382,349
          Retained earnings                              36,968
          Accumulated other comprehensive income         13,200
                                                    -----------
             Total equity                            39,472,853
                                                    -----------
             Total liabilities and equity           $39,782,177
                                                    ===========
</TABLE>

                         CONDENSED STATEMENT OF INCOME
           FOR THE PERIOD FEBRUARY 6, 1998 THROUGH DECEMBER 31, 1998

<TABLE>
        <S>                                       <C> 
        Interest income
            Loans receivable                      $  246,482
            Securities available for sale            502,884
            Time deposits                            320,040
                                                  ----------
 
            Total interest income                  1,069,406
                                                  ----------
 
          Noninterest expenses
            Salaries and benefits                     41,597
            Other                                     45,765
                                                  ----------
 
            Total noninterest expenses                87,362
                                                  ----------
 
          Income before income taxes                 982,044
 
          Income tax expense                         364,230
                                                  ----------
 
          Net income                              $  617,814
                                                  ==========
</TABLE>

                                       41
<PAGE>
 
                      HOPFED BANCORP, INC. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       DECEMBER 31, 1998, 1997 AND 1996
                                        
15.  HOPFED BANCORP, INC. (CONTINUED)

                       CONDENSED STATEMENT OF CASH FLOWS
           FOR THE PERIOD FEBRUARY 6, 1998 THROUGH DECEMBER 31, 1998

<TABLE>
          <S>                                                                       <C>  
          Cash flows from operating activities
            Net income                                                              $    617,814
            Adjustments to reconcile net income to
             net cash provided by operating activities
            Accretion of investment security discounts                                   (11,048)
            Earned ESOP shares                                                            17,395
            (Increase) decrease in:
             Accrued interest receivable                                                (220,503)
             Other assets                                                                (14,770)
            Increase (decrease) in:
             Deferred income taxes payable                                                 6,800
             Dividends payable                                                           302,524
                                                                                    ------------
               Net cash provided by operating activities                                 698,212
                                                                                    ------------
 
          Cash flows for investing activities
            Investment in subsidiary                                                 (19,707,645)
            Purchase of available for sale securities                                (15,991,017)
            Federal funds sold                                                          (485,000)
                                                                                    ------------
 
               Net cash used in investing activities                                 (36,183,662)
                                                                                    ------------
 
          Cash flows from financing activities
            Issuance of common stock                                                  36,178,390
            Dividends paid                                                              (580,846)
                                                                                    ------------
 
               Net cash provided by financing activities                              35,597,544
                                                                                    ------------
 
               Net increase in cash                                                      112,094
 
          Cash at beginning of year                                                            -
                                                                                    ------------
 
          Cash at end of year                                                       $    112,094
                                                                                    ============
</TABLE>

                                       42
<PAGE>
 
                             CORPORATE INFORMATION

================================================================================

                       DIRECTORS AND EXECUTIVE OFFICERS
                                        
    
            WD KELLEY                                    BOYD M. CLARK        
      Chairman of the Board                     Vice President and Secretary of
            Retired                                the Company and Senior Vice 
                                                President - Loan Administration
                                                            the Bank           
                                                                               
            BRUCE THOMAS                               CLIFTON H. COCHRAN    
      President and Chief Executive                         Retired          
   Officer of the Company and the Bank                                         
                                                                               
            PEGGY R. NOEL                                WALTON G. EZELL    
   Vice President, Chief Financial Officer                   Farmer          
      and Treasurer of the Company and                                        
  Executive Vice President, Chief Financial           JOHN NOBLE HALL, JR. 
   Officer and Chief Operations Officer of                  Retired         
                the Bank                 


--------------------------------------------------------------------------------
 
                                  MAIN OFFICE
 
                         2700 Fort Campbell Boulevard
                     Hopkinsville, KY 42240 (502/885-1171)
 
                                BRANCH OFFICES

          Downtown Branch Office                     Murray Branch Office
        605 South Virginia Street                    7th and Main Streets
  Hopkinsville, KY 42240 (502/885-1171)         Murray, KY 42071 (502/753-7921)
 
          Cadiz Branch Office                        Elkton Branch Office
            352 Main Street                            West Main Street
    Cadiz, KY 42211 (502/522-6638)               Elkton, KY 42220 (502/265-5628)
                                        
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                              GENERAL INFORMATION
<S>                                   <C>                                           <C>
INDEPENDENT ACCOUNTANTS               ANNUAL MEETING                                ANNUAL REPORT ON FORM 10-K A COPY 
York, Neel & Co.--                    The 1999 Annual Meeting of Stockholders       OF THE COMPANY'S 1998 ANNUAL REPORT
 Hopkinsville, LLP                    will be held on May 12, 1999 at 3:00          ON FORM 10-K WILL BE FURNISHED WITHOUT
1113 Bethel Street                    p.m. at Hopkinsville Federal Savings          CHARGE TO STOCKHOLDERS AS OF THE RECORD
Hopkinsville, KY 42240                Bank, 2700 Fort Campbell Boulevard,           DATE FOR THE 1999 ANNUAL MEETING UPON
                                      Hopkinsville, KY                              WRITTEN REQUEST TO THE SECRETARY, HOPFED
                                                                                    BANCORP, INC., 2700 FORT CAMPBELL 
GENERAL COUNSEL                       TRANSFER AGENT                                BOULEVARD, HOPKINSVILLE, KY 42240
Deatherage, Myers, Self & Lackey      Registrar and Transfer Company                
701 South Main Street                 10 Commerce Drive                          
Hopkinsville, KY 42241                Cranford, NJ 07016                         
 
 
SPECIAL COUNSEL
Kutak Rock
1101 Connecticut Avenue, N.W.
Washington, D.C. 20036
</TABLE>
<PAGE>
 
                                                                          HOPFED
                              [LOGO APPEARS HERE]


                             HOPFED BANCORP, INC. 
                             -------------------
                2700 Fort Campbell Blvd - Hopkinsville, KY 42240
                                 502-885-1171