HopFed Bancorp, Inc. Reports Operating Results for the Fourth Quarter of 2018

HopFed Bancorp, Inc. HFBC (the "Company"), the holding company for Heritage Bank USA, Inc. (the "Bank"), today reported operating results for the three and twelve month periods ended December 31, 2018. For the three month period ended December 31, 2018, net income was $1.6 million, or $0.26 per share, compared to $1.2 million, or $0.20 per share, for the three month period ended September 30, 2018, and a net loss of $178,000, or ($0.03) per share, for the three month period ended December 31, 2017. For the twelve month period ending December 31, 2018, net income was $5.7 million, or $0.91 per share, compared to $3.3 million, or $0.53 per share, for the twelve month period ended December 31, 2017.

Commenting on the results for the three month period ended December 31, 2018, John E. Peck, President and Chief Executive Officer, said, "Improvements in net income were driven by lower non-interest expenses. For the three month period ended December 31, 2018, non-interest expenses were $6.7 million compared to $7.5 million and $7.8 million for the three month periods ended September 30, 2018 and December 31, 2017, respectively.

The improvements in the Company's results of operations for the twelve month period ended December 31, 2018, compared to the twelve month period ended December 31, 2017, were the result of higher levels of net interest income, slightly lower levels of non-interest expenses and a reduced federal income tax rate. Operating results for the three and twelve month periods ended December 31, 2017, were negatively affected by passage of The Tax Cut and Jobs Act of 2017 signed into law in December 2017 that provided for significant reductions in the Company's federal income tax rate. In December of 2017, the reduction in corporate tax rates required the Company to reduce our deferred tax assets by $980,000 through an increase in our federal income tax expense. For the three and twelve month periods ended December 31, 2017, the increase in the Company's federal income tax expense reduced net income by approximately $0.15 per share."

Financial Highlights

• On January 7, 2019, the Company issued a joint press release with First Financial Corporation ("THFF") announcing the execution of a definitive merger agreement under which the Company will merge with and into THFF. The Company filed an 8-K/A with the Securities and Exchange Commission ("SEC") on January 9, 2019, providing greater details on the terms of the merger. A copy of the joint press release is available on the Company's website at www.bankwithheritage.com and the SEC's website www.sec.gov.

• At December 31, 2018, net loans totaled $658.8 million, representing an increase of $21.7 million compared to December 31, 2017. At December 31, 2018, total loans originated and outstanding in Company's three loan production offices were $95.5 million compared to $72.1 million at December 31, 2017.
• At December 31, 2018, non-accrual loans were $1.4 million compared to $1.3 million at December 31, 2017. At December 31, 2018, loans classified as substandard were $14.3 million compared to $10.8 million at December 31, 2017.
• The Company's net interest margin for the three month period ended December 31, 2018, was 3.35% compared to 3.41% for each of the three month periods ended September 30, 2018 and December 31, 2017, respectively. The Company's net interest margin for the twelve month periods ended December 31, 2018 and December 31, 2017 were 3.41% and 3.38%, respectively.

Results of Operations

In the three month periods ended December 31, 2018, September 30, 2018 and December 31, 2017, interest income was $9.5 million, $9.3 million and $8.5 million, respectively. The improvements in interest income are the result of a $27.7 million increase in the average balance of loans for the three month period ended December 31, 2018, compared to the three month period ended December 31, 2017. Link quarter improvements in interest income are the result of a 25 basis point increase in the New York Prime Rate. Improvements in interest income were more than offset by higher funding cost due to an increase in short term interest rates. The Company's interest expense increased by $930,000 for the three month period ended December 31, 2018, compared to the three month period ended December 31, 2017, and by $265,000 on a linked quarter basis. For the three month periods ended December 31, 2018, September 30, 2018 and December 31, 2017, net interest income was $7.0 million, $7.1 million and $7.0 million, respectively.

For the three month period ended December 31, 2018, non-interest income was $1.8 million, representing declines of $77,000 and $52,000 compared to the three month periods ended September 30, 2018 and December 31, 2017, respectively. For the three month period ended December 31, 2018, the decline in non-interest income over comparable periods is largely the result of lower mortgage origination income, which declined by $50,000 on a linked quarter basis and $86,000 compared to the three month period ended December 31, 2017.

For the three month period ended December 31, 2018, total non-interest expenses were $6.7 million, a decline of $788,000 and $1.1 million compared to the three month periods ended September 30, 2018 and December 31, 2017, respectively. For the three and twelve month periods ended December 31, 2018, professional services expense declined by $232,000 on a linked quarter basis and $838,000 compared to three month period ended December 31, 2017. In the twelve month period ended December 31, 2018, professional services expenses declined by $605,000 compared to the twelve month period ended December 31, 2017. The decline in professional services is largely the result of a shareholder lawsuit and shareholder demand letters. All activist shareholder issues were resolved in 2018, thereby reducing our legal expenses. On a linked quarter basis, salary and benefit expense are lower due to seasonal factors and reduced levels of incentive bonuses paid for loan production and growth.

For the twelve month period ended December 31, 2018, interest income was $36.7 million, representing an increase of $2.9 million compared to the twelve month period ended December 31, 2017. The improved level of interest income was largely the result of a $35.8 million increase in the average balance of loans and an increase in the Prime Rate. However, a $2.2 million increase in interest expense limited the overall benefits of higher net interest income levels. For the twelve month period ended December 31, 2018, net interest income was $28.6 million, an increase of $765,000 compared to December 31, 2017.

Total non-interest income declined by $213,000 in the twelve month period ended December 31, 2018, compared to the twelve month period ended December 31, 2017. For the twelve month period ended December 31, 2018, income from bank owned life insurance was $179,000 lower compared to the twelve month period ended December 31, 2017, due to the payment of a death benefit in March 2017. For the twelve month period ended December 31, 2018, other operating income was $632,000, a reduction of $443,000 compared to the twelve month period ended December 31, 2017. A significant portion of this variance is the result of a one-time payment of $225,000 in 2017. For the twelve month period ended December 31, 2018, gains on the sale of securities increased by $384,000 compared to the twelve month period ended December 31, 2017, largely as a result of an issuer calling a trust preferred security in June of 2018 in which the Company previously recognized a $400,000 impairment charge.

This information is preliminary and based on company data available at the time of the presentation.

Results of Operations (continued)

For the twelve month period ended December 31, 2018, total non-interest expenses were $29.4 million, a decline of $546,000 compared to the twelve month period ended December 31, 2017. For the twelve month period ended December 31, 2018, professional services expense were $1.7 million compared to $2.3 million for the twelve month period ended December 31, 2017. For the twelve month period ended December 31, 2018, data processing expenses were $3.2 million compared to $2.9 million for the twelve month period ended December 31, 2017.

Balance Sheet

At December 31, 2018, total assets were $931.4 million, compared to $917.5 million at December 31, 2017. For the twelve month period ended December 31, 2018, the Company reduced its securities portfolio by $14.0 million to fund loan growth of $21.4 million. The competition for deposits remains aggressive and expensive, resulting in higher interest expense on deposits and a $14.2 million decline in total deposits. Lower deposit balances were offset by a $14.7 million increase in retail repurchase agreements as larger retail customers sought higher rates and alternatives to FDIC insurance coverage limits. A summary of loans outstanding by type at December 31, 2018 and December 31, 2017 is as follows:

Asset Quality

The table below provides a history of the Company's significant credit quality metrics for the dates listed below:

The Company

HopFed Bancorp, Inc. is the holding company for Heritage Bank USA, Inc. ("Heritage Bank"), a Kentucky state chartered commercial bank. Heritage Bank has eighteen offices in western Kentucky and middle Tennessee and loan production offices in the Tennessee communities of Nashville, Murfreesboro and Brentwood. The Company offers a broad line of financial services and products with the personalized focus of a community banking organization. More information about HopFed Bancorp and Heritage Bank is located on its website www.bankwithheritage.com.

Forward-Looking Information

Information contained in this press release, other than historical information, may be considered forward-looking in nature and is subject to various risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on the Company's operating results, performance or financial condition are competition and the demand for the Company's products and services, and other factors as set forth in filings with the Securities and Exchange Commission. The Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations. Certain tabular presentations may not reconcile because of rounding.

This information is preliminary and based on company data available at the time of the presentation.

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