UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                    For the fiscal year ended: June 30, 1998

                                       OR

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

                          Commission File No.: 0-27940

                        HARRINGTON FINANCIAL GROUP, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


                  Indiana                                 48-1050267
------------------------------------------         -------------------------
       (State or other jurisdiction                    (I.R.S. Employer
     of incorporation or organization)              Identification Number)

    722 East Main Street, P. O. Box 968
             Richmond, Indiana                               47375
------------------------------------------         --------------------------
           (Address of Principal                           (Zip Code)
            Executive Offices)

       Registrant's telephone number, including area code: (765) 962-8531

          Securities registered pursuant to Section 12(b) of the Act:
                                 Not Applicable

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

                    Common Stock (par value $0.125 per share)
                    -----------------------------------------
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE>
As of September 18, 1998,  the aggregate  value of the 848,888  shares of Common
Stock of the  Registrant  issued and  outstanding  on such date,  which excludes
2,364,229 shares held by all directors and executive  officers of the Registrant
as a group,  was  approximately  $7.7 million.  This figure is based on the last
known  trade  price of $9.125  per  share of the  Registrant's  Common  Stock on
September 18, 1998.

Number of shares of Common Stock outstanding as of September 18, 1998: 3,213,117

                       DOCUMENTS INCORPORATED BY REFERENCE

       List hereunder the following documents  incorporated by reference and the
Part of the Form 10-K into which the document is incorporated:

(1) Portions of the Annual Report to Stockholders for the fiscal year ended June
30, 1998 are incorporated into Parts II and IV.

(2)  Portions  of the  definitive  proxy  statement  for the  Annual  Meeting of
Stockholders are incorporated into Part III.
<PAGE>
PART I.

Item 1.         Business

General

         Harrington    Financial    Group,    Inc.   (the   "Company")   is   an
Indiana-chartered,  registered  thrift holding company for Harrington  Bank, FSB
(the  "Bank").  The Bank is a federally  chartered  savings bank which  conducts
business  through  seven  full-service  offices  located  in  Carmel,   Fishers,
Noblesville,   Indianapolis,  and  Richmond,  Indiana.  In  addition,  the  Bank
commenced  commercial  lending  operations  in the Kansas  City area  during the
fiscal  year ended June 30,  1998 and  opened  its first  full  service  banking
facility in Mission, Kansas in August 1998.

         The  Company  was  organized  in  March  1988 in  connection  with  its
acquisition  of the  Bank.  The  Bank  was  originally  organized  in 1889 as an
Indiana-chartered  savings  association  under  the name "The  Peoples  Home and
Savings  Association of Richmond,  Indiana." In 1936, the Bank obtained  federal
insurance and in 1984 adopted a federal charter and changed its name to "Peoples
Federal Savings  Association."  In 1985, the Bank converted from mutual to stock
form and, in March 1994,  changed its name to "Harrington  Bank, FSB." On May 6,
1996, the Company sold  1,265,000  shares of common stock at $10.00 per share to
investors  in  an  initial  public  offering  resulting  in  gross  proceeds  of
$12,650,000 to the Company.  Net proceeds to the Company after offering expenses
were $11,437,000. At June 30, 1998, the Company had total consolidated assets of
$484.4  million,   total  consolidated   borrowings  of  $279.9  million,  total
consolidated  deposits of $178.3 million,  and total consolidated  stockholders'
equity of $22.7 million.

         The Company was organized in March 1988 by certain  principals of Smith
Breeden Associates, Inc. ("Smith Breeden") for the sole purpose of acquiring the
Bank. This investor group purchased the Bank with the intention of expanding the
Bank's mortgage originations, investment and retail operations and improving the
Bank's return on equity.  The Company has contracted  with Smith Breeden for the
provision of consulting services regarding, among other things, providing advice
on  management  of its  investments  and  borrowings,  the  pricing of loans and
deposits,  and the use of various financial  instruments to reduce interest rate
risk.  Certain officers and directors of the Company and the Bank are principals
or affiliates of Smith Breeden.

         The Company's business strategy focuses on achieving attractive returns
consistent  with  prudent risk  management.  The Company has sought to implement
this strategy by (1) expanding  its banking  locations and product  offerings in
order to build a strong community  banking  franchise  through de novo branching
and the pursuit of acquisition opportunities; (2) controlling interest rate risk
by  matching  the  interest  rate  sensitivity  of its  assets  to  that  of its
liabilities; (3) controlling credit risk by maintaining a substantial portion of
the Company's assets in mortgage-backed and related securities and single-family
residential loans and by applying conservative underwriting standards and credit
risk  monitoring;   and  (4)  utilizing  excess  capital  balances  through  the
management of a hedged investment portfolio.
<PAGE>
Highlights of the principal elements of the Company's business strategy are as
follows:

       Expand Banking Locations and Product  Offerings.  An integral part of the
       Company's    strategy   is   to   increase   the   Bank's   emphasis   on
       opportunistically  expanding products, services and banking locations for
       business and retail  customers in markets where the Company's  management
       and directors have market knowledge and customer relationship  potential.
       A total of six new banking  locations  were opened  since May 1994,  with
       three being opened in fiscal year 1998.  The  Company's  primary  lending
       emphasis is on the origination (both directly and through correspondents)
       of loans  secured by first  liens on  single-family  (one-to-four  units)
       residences.  Originations of such loans have increased from $41.6 million
       during  fiscal 1996 to $87.7 million  during fiscal 1998.  See "- Lending
       Activities."  In  addition,  the  Company's  retail  deposits  (including
       transaction  accounts and retail  certificates of deposit) have increased
       from $112.4 million or 83.1% of total deposits at June 30, 1996 to $166.8
       million or 93.6% of total  deposits at June 30,  1998.  See "- Sources of
       Funds - Deposits." The Company  believes that  single-family  residential
       loan  originations  generally offer attractive risk adjusted returns and,
       with  respect to direct  originations,  allow the Company to  establish a
       relationship  with the underlying  borrower which the Company can utilize
       to cross-sell additional products and services. In addition,  the Company
       believes  that  retail  deposits  are a  cost-effective  source of funds,
       provide an additional  source of fee income,  and also permit the further
       cross-selling  of  additional  products and services.  Consequently,  the
       Company  expects to continue to focus on  increasing  its retail  deposit
       base and its portfolio of single-family  residential loans.  Furthermore,
       the  Company  has  developed  a  commercial  lending  division to provide
       funding to commercial borrowers and to increase business deposits.  Since
       1994,  the Company has also  offered  trust and  investment  services for
       individuals and retirement vehicles.

       Control Interest Rate Risk. The Company attempts to manage its assets and
       liabilities  in order to maintain a  portfolio  which  produces  positive
       returns in either an increasing or decreasing  interest rate environment.
       The  Company  has sought to control  interest  rate risk both  internally
       through the management of the  composition of its assets and  liabilities
       and  externally  through  the  utilization  of interest  rate  contracts.
       Interest  rate   contracts,   along  with  mortgage   backed   derivative
       securities,  are purchased  with the  intention of protecting  the market
       value of the Bank's portfolio and net interest income.

       Control Credit Risk. In order to limit the Company's  credit exposure and
       as part of its  strategy to earn a positive  interest  rate  spread,  the
       Company maintains a substantial  portion of its assets in mortgage-backed
       and related securities,  which are primarily issued or guaranteed by U.S.
       Government   agencies   or   government   sponsored   enterprises,    and
       single-family   residential  loans.  At  June  30,  1998,  the  Company's
       investment in mortgage-backed  and related securities  amounted to $287.0
       million or 98.4% of the  Company's  securities  portfolio  (both held for
       trading and available for sale) and 59.2% of the Company's  total assets.
       In addition,  as of such date, the Company's  investment in single-family
       residential  loans  amounted to $154.3  million or 31.9% of total assets.
       See "- Lending" and "- Investment Activities."
<PAGE>
       Utilize  Excess Capital  Balances.  The Company  utilizes  excess capital
       balances  through  the  management  of  a  hedged  investment   portfolio
       primarily   consisting   of   mortgage   backed   securities.    Although
       mortgage-backed  securities  often  carry lower  yields than  traditional
       mortgage  loans,  such securities  generally  increase the quality of the
       Company's  assets, as they have underlying  insurance or guarantees,  are
       more  liquid  than  individual   mortgage  loans,  and  may  be  used  to
       collateralize  borrowings or other obligations of the Company.  The funds
       invested in the securities  portfolio can be quickly redeployed to pursue
       community bank expansion opportunities as they arise.

         The Company,  as a  registered  savings and loan  holding  company,  is
subject  to  examination  and  regulation  by the  Office of Thrift  Supervision
("OTS")  and is subject  to  various  reporting  and other  requirements  of the
Securities and Exchange Commission  ("SEC").  The Bank, as a federally chartered
savings bank, is subject to comprehensive regulation and examination by the OTS,
as its chartering  authority and primary  regulator,  and by the Federal Deposit
Insurance  Corporation  ("FDIC"),  which  administers  the  Savings  Association
Insurance Fund ("SAIF"), which insures the Bank's deposits to the maximum extent
permitted by law. The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Indianapolis,  which is one of the 12  regional  banks which  comprise  the FHLB
System.  The Bank is further subject to regulations of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters.  See "- Supervision
and Regulation."

Investment Advisor

         Smith Breeden is a money management and consulting firm involved in (1)
money  management for separate  accounts such as corporate,  state and municipal
pensions,  endowments and mutual funds, (2) financial institution consulting and
investment  advice,  and (3) equity  investments.  Smith Breeden  specializes in
mortgage-backed and related securities,  interest rate risk management,  and the
application of option pricing to loans and investments.  Smith Breeden currently
advises, or manages on a discretionary basis, assets totaling  approximately $22
billion.  The firm has acted as a consultant to banks,  thrifts and governmental
agencies  charged  with  the  regulation  of  financial   institutions  and  the
resolution of troubled thrifts.

         Smith Breeden was  co-founded in 1982 by Douglas T. Breeden and Gregory
Smith, who retired in 1988. Dr. Breeden is Chairman of the Board of the Company.
He previously  served on the faculty at  Massachusetts  Institute of Technology,
the University of Chicago,  Stanford University,  where he obtained his Ph.D. in
Finance,  and Duke  University's  Fuqua School of Business.  He is editor of the
Journal of Fixed Income.
------------------------

         Since  1988,  Smith  Breeden and  certain of its  principals  have been
involved in making equity  investments in financial  institutions in tandem with
the application of its expertise in banking and investment  management.  Certain
of the  principals  of Smith  Breeden  are  investors  in other banks and thrift
institutions.
<PAGE>
         Smith  Breeden is based in Chapel  Hill,  North  Carolina,  and employs
approximately  75 people in its main office and its  offices in  Overland  Park,
Kansas, Dallas, Texas and Boulder, Colorado.

Lending Activities

         General. At June 30, 1998, the Bank's net loan portfolio totaled $163.5
million,  representing  approximately  33.8% of the Company's  $484.4 million of
total  assets at that date.  In addition to  utilizing  option-adjusted  pricing
analysis in order to manage the Company's investment portfolio, the Company also
uses such analysis to price its loan  originations  and ascertain the net spread
expected to be earned  with  respect to the Bank's  loan  portfolio.  The Bank's
primary  focus with  respect to its lending  operations  continues  to be in the
direct  origination and servicing of single-family  residential  mortgage loans.
Since  fiscal  1995,  the  Bank  has  also  been  active  in  originating  whole
residential  mortgage  loans through  correspondents  which meet its pricing and
credit quality  objectives.  In the latter part of fiscal year 1998, the Company
initiated the development of a commercial loan division to broaden and diversify
its product  offerings  and  customer  base.  The Company  anticipates  that the
commercial loan portfolio,  consisting of real estate and business lending, will
expand during the upcoming  fiscal years.  Currently,  substantially  all of the
Bank's loan portfolio  consists of conventional  loans, which are loans that are
neither insured by the Federal Housing  Administration nor partially  guaranteed
by the Department of Veterans Affairs.

         The risks associated with residential mortgage lending are well-defined
and  controllable.  Credit risk is controlled  through the  adherence,  with few
exceptions,  to secondary market underwriting guidelines. A strong internal loan
review program monitors compliance with the Bank's underwriting standards, which
is reflected by the low level of non-performing  assets.  See - "Asset Quality -
Non-Performing  Assets." Market risk is controlled by a disciplined  approach to
pricing  and by regular  monitoring  and  hedging of the  institution's  overall
sensitivity to interest rate changes.

         As a  federally  chartered  savings  institution,  the Bank has general
authority  to  originate  and  purchase  loans  secured by real  estate  located
throughout the United States. Notwithstanding this nationwide lending authority,
the Company  estimates that at June 30, 1998,  approximately 78% of the loans in
the Bank's  portfolio  are secured by  properties  located or made to  customers
residing in its primary  market  area,  which  consists of Wayne,  Hamilton  and
Marion counties in eastern and central Indiana and contiguous counties.

         Although the Bank has historically  originated loans with lesser dollar
balances  than  are  permitted  by  federal  regulations,  current  loans-to-one
borrower  limitations  may  restrict  its  ability to do business  with  certain
customers.  A  savings  institution  generally  may not  make  loans  to any one
borrower and related  entities in an amount which exceeds 15% of its  unimpaired
capital and surplus,  although  loans in an amount equal to an additional 10% of
unimpaired  capital and surplus may be made to a borrower if the loans are fully
secured  by  readily  marketable  securities.  At  June  30,  1998,  the  Bank's
regulatory limit on loans-to-one  borrower was $5.0 million and its five largest
<PAGE>
loans or groups of loans-to-one borrower, including related entities, aggregated
$2.1 million, $743,000,  $725,000, $650,000 and $635,000. All five of the Bank's
largest  loans or  groups  of loans  are  secured  primarily  by  commercial  or
single-family  residential  real estate and were  performing in accordance  with
their terms at June 30, 1998.
<PAGE>
         Loan  Portfolio  Composition.   The  following  table  sets  forth  the
composition of the Bank's loan portfolio by type of loan at the dates indicated.



<TABLE>
<CAPTION>
                                                                           June 30,
                                    --------------------------------------------------------------------------------- 
                                              1998                           1997                         1996              
                                    --------------------------  ---------------------------      --------------------   
                                      Amount        Percent        Amount           Percent      Amount       Percent        
                                      ------        -------        ------           -------      ------       -------        
                                                                    (Dollars in Thousands)

<S>                                  <C>               <C>        <C>               <C>         <C>            <C>           
Single-family residential (1)        $154,336          94.6%      $91,140           97.2%       $64,899        97.8%        
Commercial real estate (2)              3,522           2.2           258            0.3            441         0.7            
                                     --------          ----       --------         -----        -------       -----         
     Total real estate loans          157,858          96.8        91,398           97.5         65,340        98.5         
Collateralized commercial loans         1,201           0.7            --             --             --          -- 
Consumer loans:
     Deposit secured                      221           0.1           252            0.2            267         0.4         
     Home improvement/equity            3,536           2.2         2,136            2.3            732         1.1         
     Other                                253           0.2            --             --             --          --         
                                     --------          ----       --------         -----        -------       -----         
       Total consumer loans             4,010           2.5         2,388            2.5            999         1.5         
                                     --------          ----       --------         -----        -------       -----         
         Total loans                  163,069         100.0%       93,786          100.0%        66,339       100.0%        
                                                      =====                        =====                      =====         
Less:
     Unamortized push-down
       accounting adjustment (3)         (113)                       (136)                         (182)                    
     Unamortized discount on loans        --                          --                             (7)                    
     Undisbursed funds (4)                 (6)                         (9)                         (420)                    
     Deferred loan origination
       (fees) costs                       956                         530                           315                     
     Allowance for loan losses           (360)                       (213)                         (120)                    
                                     --------                    --------                       -------                     
       Net loans                     $163,546                     $93,958                       $65,925                     
                                     ========                    ========                       =======                     
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                            June 30,
                                       ------------------------------------------------     
                                                1995                        1994                 
                                       ----------------------      --------------------      
                                        Amount       Percent       Amount       Percent            
                                             
<S>                                     <C>             <C>        <C>           <C>     
Single-family residential (1)           $35,998         96.1%      $20,525       96.6%   
Commercial real estate (2)                  711          1.9           349        1.6  
                                        -------        -----       -------      -----  
     Total real estate loans             36,709         98.0        20,874       98.2  
Collateralized commercial loans              --           --            --         --  
Consumer loans:                                                                        
     Deposit secured                        255          0.7           150        0.7  
     Home improvement/equity                498          1.3           210        1.0  
     Other                                   --           --            17        0.1  
                                        -------        -----       -------      -----  
       Total consumer loans                 753          2.0           377        1.8  
                                        -------        -----       -------      -----  
         Total loans                     37,462        100.0%       21,251      100.0% 
                                                       =====                    =====  
Less:                                                                                  
     Unamortized push-down                                                             
       accounting adjustment (3)           (350)                      (419)             
     Unamortized discount on loans          (13)                       (19)             
     Undisbursed funds (4)                  (43)                        (8)             
     Deferred loan origination                                                         
       (fees) costs                          75                        (17)             
     Allowance for loan losses             (121)                      (106)            
                                        -------                    -------             
       Net loans                        $37,010                    $20,682             
                                        =======                    =======             
                                           
</TABLE>
--------- 
(1)  Includes  single-family  residential  construction loans. At June 30, 1998,
     the Bank had no construction loans in process.

(2)  Includes $224,000,  $258,000,  $291,000, $321,000, and $349,000 of mortgage
     revenue bonds secured by commercial  real estate at each of the  respective
     dates.

(3)  Reflects  the  balance  of the  fair  value  adjustments  made on the  loan
     portfolio as a result of the  completion in September 1988 of the Company's
     acquisition  of the Bank,  which  acquisition  was  accounted for under the
     purchase method of accounting.

(4)  Includes   undisbursed   funds   relating  to   single-family   residential
     construction loans.
<PAGE>
         Contractual  Principal  Repayments  and Interest  Rates.  The following
table sets forth  certain  information  at June 30,  1998  regarding  the dollar
amount of loans  maturing  in the  Bank's  total  loan  portfolio,  based on the
contractual terms to maturity, before giving effect to net items.
<TABLE>
<CAPTION>

                                                  Due After       Due After
                                 Due in One      One to Five   Five or More
                                Year or Less       Years           Years           Total
                                ------------       -----           -----           -----
                                                    (In Thousands)
<S>                              <C>             <C>             <C>             <C>     
Single-family residential        $     21        $    418        $153,897        $154,336
Commercial ..............             681             568           3,474           4,723
Consumer ................             395             340           3,275           4,010
                                 --------        --------        --------        --------
     Total ..............        $  1,097        $  1,326        $160,646        $163,069
                                 ========        ========        ========        ========
</TABLE>
         The following  table sets forth the dollar amount of all loans,  before
net items,  due after one year from June 30,  1998,  which  have fixed  interest
rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>

                                                       Floating or
                                       Fixed Rates   Adjustable-Rates      Total
                                       -----------   ----------------      -----
                                                     (In Thousands)
<S>                                     <C>             <C>             <C>     
Single-family residential ......        $112,072        $ 42,243        $154,315
Commercial .....................           3,940             102           4,042
Consumer .......................           1,471           2,144           3,615
                                        --------        --------        --------
    Total ......................        $117,483        $ 44,489        $161,972
                                        ========        ========        ========
</TABLE>

         Origination,  Purchase and Sale of Loans. The lending activities of the
Bank are subject to the written,  non-discriminatory  underwriting standards and
loan  origination  procedures  established  by the Bank's Board of Directors and
management.  Loan  originations are obtained by a variety of sources,  including
referrals  from real  estate  brokers,  builders,  existing  customers,  walk-in
customers, loan officers and advertising.  In its marketing, the Bank emphasizes
its community ties,  customized  personal  service,  competitive  rates,  and an
efficient  underwriting and approval process.  Property valuations are performed
by independent outside appraisers approved by the Bank's Board of Directors. The
Bank requires title,  hazard and, to the extent  applicable,  flood insurance on
all security property.

         Mortgage  loan  applications  are reviewed by Bank  employees  who have
approval  authority  up  to  designated  limits.  All  loans  in  excess  of  an
individual's designated limits are referred to the Bank's Loan Committee,  which
has approval  authority  for all loans up to $1.0 million.  Any loans  exceeding
$1.0 million (of which, at June 30, 1998, there was one) must be approved by the
Board of Directors of the Bank. In addition,  the Board of Directors of the Bank
ratifies all loans originated and purchased by the Bank.

         The  single-family   residential  loans  originated  by  the  Bank  are
generally made on terms,  conditions and documentation  which permit the sale to
the Federal  Home Loan 
<PAGE>
Mortgage  Corporation  ("FHLMC"),  the  Federal  National  Mortgage  Association
("FNMA") and other institutional  investors in the secondary market. From fiscal
1991  to  fiscal  1993,  the  Bank  sold  substantially  all of  its  fixed-rate
single-family  residential  loans to FNMA in the secondary  market as a means of
generating  fee  income  as well as  providing  additional  funds  for  lending,
investing and other  purposes.  Sales of loans were generally  under terms which
did not provide any  recourse  to the Company by the  purchaser  in the event of
default  on the loan by the  borrower.  With  respect  to such loan  sales,  the
Company  generally  retained  responsibility  for  collecting and remitting loan
payments,  inspecting the properties,  making certain insurance and tax payments
on behalf of borrowers and otherwise servicing the loans it sold, and received a
fee for performing  these services.  At June 30, 1998, the Company was servicing
$3.4 million of loans for others.

         During fiscal year 1994,  the Bank  initiated  programs to increase its
portfolio of  single-family  residential  loans in accordance with its community
banking expansion.  In addition,  during fiscal 1995, the Bank began originating
single-family residential loans through a correspondent mortgage banking company
headquartered  in Indianapolis,  Indiana.  During fiscal 1997, the Bank expanded
its correspondent  relationships with an additional  mortgage banking company in
Indianapolis,  Indiana and a company in Overland Park, Kansas. The Bank plans to
expand further its  single-family  residential loan portfolio through the use of
additional  correspondent  mortgage  banking  companies in the future.  The Bank
requires that all loans  originated  through  correspondents  be underwritten in
accordance with its underwriting guidelines and standards.  The Bank reviews the
loans for adherence to its  underwriting  standards prior to acceptance from the
correspondent. Such loans are obtained with servicing released.

         The  following  table sets forth the loan  origination  activity of the
Company during the periods indicated.
<TABLE>
<CAPTION>
                                                 Year Ended June 30,
                                      ------------------------------------------ 
                                        1998             1997             1996
                                      --------         --------         --------
                                                 (Dollars in Thousands)
<S>                                   <C>              <C>              <C>     
Direct loan originations:
  Single-family residential ..        $ 39,772         $ 12,615         $ 18,895
  Commercial .................           4,506             --               --
  Consumer ...................           4,355            2,931            1,246
                                      --------         --------         --------
    Total loans originated
      directly ...............          48,633           15,546           20,141
Originations by
  correspondents (1) .........          47,921           24,545           22,721
                                      --------         --------         --------
    Total loans originated ...          96,554           40,091           42,862
Loan principal reductions ....         (27,271)         (12,644)         (13,985)
                                      --------         --------         --------
Net increase in loan portfolio        $ 69,283         $ 27,447         $ 28,877
                                      ========         ========         ========
</TABLE>
--------
(1)      Consisted solely of single-family residential loans.

         Single-Family  Residential  Real Estate  Loans.  Historically,  savings
institutions such as the Bank have concentrated  their lending activities on the
origination  of loans  secured 
<PAGE>
primarily by first mortgage liens on existing single-family  residences. At June
30, 1998,  $154.3 million or 94.6% of the Bank's total loan portfolio  consisted
of single-family  residential real estate loans,  substantially all of which are
conventional loans.

         The Bank offers fixed-rate  single family  residential loans with terms
of 10 to 30 years.  Such loans are amortized on a monthly  basis with  principal
and interest due each month. Generally, the value of fixed-rate loans fluctuates
inversely  with  changes in  interest  rates.  Consequently,  if left  unhedged,
long-term fixed-rate  single-family  residential loans would increase the Bank's
interest rate risk. However,  the Bank believes that its sophisticated asset and
liability  management  techniques provide the Bank with a competitive  advantage
and allow for the Bank to  continue  to offer  fixed-rate  residential  mortgage
loans over a variety of interest rate scenarios.

         Since the early 1980s, the Bank has also been offering  adjustable-rate
single-family  residential  mortgage  loans.  Such  loans  generally  have up to
30-year terms and an interest rate which adjusts after one,  three or five years
in accordance with a designated index (the weekly average yield on U.S. Treasury
securities  adjusted  to a constant  comparable  maturity  of one year,  as made
available by the Federal Reserve  Board).  Such loans currently have a 2% cap on
the amount of any increase or decrease in the interest  rate per year,  and a 6%
limit on the amount by which the interest rate can increase or decrease over the
life of the loan. In addition,  the Bank's  adjustable-rate  loans are currently
not convertible into fixed-rate loans and do not contain  prepayment  penalties.
Approximately  25.9% of the  single-family  residential loans in the Bank's loan
portfolio at June 30, 1998 had adjustable interest rates.

         Adjustable-rate  mortgage loans decrease but do not eliminate the risks
associated  with changes in interest rates.  Because  periodic and lifetime caps
limit the interest rate adjustments, the value of adjustable-rate mortgage loans
also  fluctuates  inversely  with  changes in  interest  rates.  In  addition as
interest rates increase,  the required payments by the borrower  increase,  thus
increasing the potential for default.

         The demand for adjustable-rate  loans in the Bank's primary market area
has been a function of several  factors,  including the level of interest rates,
the  expectations  of changes in the level of interest  rates and the difference
between  the  interest  rates and loan fees  offered  for  fixed-rate  loans and
adjustable-rate  loans.  The relative  amount of fixed-rate and  adjustable-rate
residential  loans that can be originated  at any time is largely  determined by
the demand for each in a competitive environment.

         Pursuant to underwriting  guidelines adopted by the Board of Directors,
the Bank will  generally  lend up to 95% of the appraised  value of the property
securing a single-family  residential loan. However,  the Bank generally obtains
private mortgage insurance on the principal amount that exceeds 80% of appraised
value of the security property.

         Although the Bank does not emphasize  the  origination  of  residential
construction  loans, in recent years the Bank has occasionally  originated loans
in its primary market area to construct  single-family  residences.  At June 30,
1998, the Bank had no construction loans in process.
<PAGE>
         Commercial Real Estate Loans. At June 30, 1998, $3.5 million or 2.2% of
the Bank's total loan  portfolio  consisted of loans secured by commercial  real
estate.  At June 30,  1998,  the Bank's  commercial  real estate loan  portfolio
included term loans secured by commercial buildings located within the Company's
primary market areas.

         Commercial real estate lending entails  different and significant risks
when compared to single-family  residential lending because such loans typically
involve  large  loan  balances  to single  borrowers  and  because  the  payment
experience on such loans is typically  dependent on the successful  operation of
the  project or the  borrower's  business.  During the latter part of the fiscal
year,  the Bank  developed a commercial  lending  division by  implementing  the
necessary  policies,  operating  procedures,  loan  systems  and hiring  support
personnel.  These  loans  are  made  in  conformance  with  strict  underwriting
guidelines and adherence to the Bank's policies.

         Collateralized Commercial Loans. At June 30, 1998, $1.2 million or 0.7%
of the Bank's total loan portfolio consisted of collateralized commercial loans.
These collateralized loans consist of both term loans as well as lines of credit
which are secured by business assets or stock.

         As  previously   mentioned,   the  Bank's  recent  development  of  the
commercial  lending  division  allows for the  origination  of  non-real  estate
business  loans in strict  compliance  with the Bank's  underwriting  standards.
Collateralized  commercial  lending also entails different and significant risks
in relation to single-family residential lending,

         Consumer Loans. The Bank is authorized to make loans for a wide variety
of personal or consumer purposes.  The Bank has been originating  consumer loans
in recent years in order to provide a wider range of  financial  services to its
customers and because such loans  generally  have higher  interest  spreads than
mortgage loans. The consumer loans offered by the Bank include home equity loans
and lines of credit,  home improvement  loans and deposit account secured loans.
At June 30,  1998,  $4.0  million  or 2.5% of the Bank's  total  loan  portfolio
consisted of consumer loans.

         Home equity loans and lines of credit are originated by the Bank for up
to 90% of the appraised  value,  less the amount of any existing  prior liens on
the property.  The Bank also offers home improvement  loans in amounts up to 95%
of the  appraised  value,  less the amount of any  existing  prior  liens on the
property,  provided the loan is guaranteed by an approved  insurer.  Home equity
loans and home  improvement  loans have a maximum term of twenty years and carry
fixed interest rates.  Home equity lines of credit have a maximum repayment term
of 10 years,  a five-year  term with respect to draws,  and carry interest rates
which adjust monthly in accordance  with a designated  prime rate. The Bank will
secure each of these types of loans with a mortgage on the property (generally a
second mortgage) and will originate the loan even if another  institution  holds
the first mortgage.  At June 30, 1998, home equity loans and lines of credit and
home  improvement  loans  totaled  $3.5  million  or 88.2% of the  Bank's  total
consumer loan portfolio.

         The Bank  currently  offers loans  secured by deposit  accounts,  which
amounted to $221,000 or 5.5% of the Bank's total consumer loan portfolio at June
30,  1998.  Such  loans  
<PAGE>
are originated for up to 95% of the deposit account balance,  with a hold placed
on the account restricting the withdrawal of the account balance.

         During  fiscal year 1998,  the Bank expanded its consumer loan products
to include automobile and personal loans. As of June 30, 1998, these other loans
amounted to $253,000 or 6.3% of the Bank's total consumer loan portfolio.

         Consumer loans  generally have shorter terms and higher  interest rates
than mortgage  loans but generally  involve more credit risk than mortgage loans
because of the type and nature of the collateral. In addition,  consumer lending
collections are dependent on the borrower's continuing financial stability,  and
thus are more likely to be adversely affected by job loss, divorce,  illness and
personal  bankruptcy.  The Bank believes that the generally higher yields earned
on consumer loans  compensate for the increased credit risk associated with such
loans,  and the Company  intends to continue to offer consumer loans in order to
provide a full range of services to its customers.


Asset Quality

         Loan Delinquencies. When a borrower fails to make a required payment on
a loan,  the Bank attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made following the fifteenth day after a
payment  is due,  at which  time a late  payment  is  assessed.  In most  cases,
deficiencies  are cured promptly.  If a delinquency  extends beyond 15 days, the
loan and payment  history is reviewed  and efforts are made to collect the loan.
While  the Bank  generally  prefers  to work  with  borrowers  to  resolve  such
problems,  when the account becomes 90 days delinquent,  the Bank does institute
foreclosure or other proceedings, as necessary, to minimize any potential loss.

         Non-Performing  Assets.  All loans are reviewed on a regular  basis and
are  placed on  non-accrual  status  when,  in the  opinion of  management,  the
probability  of  collection  of additional  interest is deemed  insufficient  to
warrant  further  accrual.  As a matter  of  policy,  the Bank  does not  accrue
interest on loans past due 90 days or more except  when the  estimated  value of
the  collateral  and  collection  efforts are deemed  sufficient  to ensure full
recovery. The Bank provides an allowance for the loss of uncollected interest on
all  non-accrual  loans.  Impaired  loans covered  under  Statement of Financial
Accounting  Standards ("SFAS") No. 114 and No. 118 are defined by the Company to
consist  of  non-accrual  commercial  loans  which  have not  been  collectively
evaluated for  impairment.  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  until,  in
management's  judgment,  the  borrower's  ability to make periodic  interest and
principal  payments  returns to normal,  in which case the loan is  returned  to
accrual status.

         Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid  principal  balance  (cost) or fair value less  estimated  selling
expenses  at the  date  of  transfer.  A loan  charge-off  is  recorded  for any
writedown  in the loan's  carrying  value to fair value at the date of transfer.
Real  estate  loss  provisions  are  recorded  if  the  properties'  fair  value
subsequently  declines  below the value  determined  at the  recording  date. In
determining the
<PAGE>
lower of cost or fair value at  acquisition,  costs relating to development  and
improvement  of property are  considered.  Costs relating to holding real estate
acquired through foreclosure, net of rental income, are charged against earnings
as incurred.

         The following table sets forth the amounts and categories of the Bank's
non-performing assets at the dates indicated. The Bank did not have any troubled
debt restructuring at any of the periods presented.
<TABLE>
<CAPTION>
                                                                         June 30,
                                    --------------------------------------------------------------------------------
                                        1998             1997             1996            1995             1994
                                    -------------    -------------    -------------   --------------   -------------
                                                                (Dollars in Thousands)
<S>                                          <C>             <C>              <C>             <C>               <C>   
Non-accruing loans:
    Single-family residential                $ 285           $  336           $  261          $  350            $  559 
    Commercial real estate                      --               --               --              --                -- 
                                              ----           ------           ------          ------            ------  
    Total non-accruing loans                   285              336              261             350               559 
Accruing loans greater than                                                                                            
    90 days delinquent                          --               --               --              --                -- 
                                              ----           ------           ------          ------            ------  
      Total non-performing loans               285              336              261             350               559 
Real estate owned                               18               --               --              --                -- 
Other non-performing assets (1)                587              789            1,088           1,415             2,282 
                                              ----            ------           ------          ------            ------ 
      Total non-performing assets            $ 890           $1,125           $1,349          $1,765            $2,841 
                                             =====           ======           ======          ======            ====== 
      Total non-performing loans                                                                                       
        as a  percentage  of total loans      0.17%            0.36%            0.40%           0.95%             2.70%
                                              ====             ====             ====            ====              ==== 
      Total non-performing assets                                                                                      
        as a percentage of total assets       0.18%            0.25%            0.32%           0.59%             1.34%
                                              ====             ====             ====            ====              ==== 
</TABLE>                                     
------------------ 
(1)  Consists  of a  non-agency  participation  certificate.  See "-  Classified
     Assets."

         The  interest  income  that would have been  recorded  during the years
ended June 30, 1998, 1997, 1996, 1995 and 1994 if the Bank's  non-accrual  loans
at the end of such  periods  had been  current in  accordance  with their  terms
during  such  periods  was  $15,000,   $6,000,   $6,000,  $13,000  and  $26,000,
respectively.

         Classified  Assets.  Federal  regulations  require  that  each  insured
savings  institution  classify its assets on a regular  basis.  In addition,  in
connection with  examinations of insured  institutions,  federal  examiners have
authority to identify  problem assets and, if appropriate,  classify them. There
are three  classifications  for problem  assets:  "substandard,"  "doubtful" and
"loss."  Substandard  assets  have  one  or  more  defined  weaknesses  and  are
characterized  by the distinct  possibility  that the insured  institution  will
sustain some loss if the  deficiencies  are not corrected.  Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses  make  collection  or  liquidation  in full on the basis of currently
existing  facts,  conditions  and  values  questionable,  and  there  is a  high
possibility of loss. An asset classified loss is considered uncollectible and of
such  little  value  that  continuance  as an  asset of the  institution  is not
warranted.   Another  category   designated   "special  mention"  also  must  be
established  and maintained for assets which do not currently  expose an insured
institution  to a  sufficient  degree  of  risk  to  warrant  classification  as
substandard,  doubtful or loss.  Assets  classified as  substandard  or doubtful
require the institution to establish  general  allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish  specific  allowances  for loan  losses  in the  amount of 100% of the
portion of the asset classified loss, or charge-off such amount.
<PAGE>
General loss  allowances  established to cover possible losses related to assets
classified   substandard   or  doubtful  may  be  included  in   determining  an
institution's  regulatory capital,  while specific valuation allowances for loan
losses do not qualify as regulatory capital.

         The Bank's  classified assets at June 30, 1998 consisted of $817,000 of
assets  classified as substandard  (including  $230,000 of loans and $587,000 of
securities) and no loans classified as doubtful.  In addition, at June 30, 1998,
$1.9 million of the Bank's loans were designated special mention.

         The $587,000 of securities  classified as  substandard at June 30, 1998
relates to a single non-agency participation  certificate which was purchased by
the Bank during  fiscal 1991.  The security was issued by a savings  institution
located in Huntington Beach,  California and the underlying mortgages consist of
six-month  adjustable-rate  notes  (priced  off of LIBOR)  which are  secured by
single-family  properties located in southern  California.  As of June 30, 1998,
approximately  23.9% of the underlying  mortgages were at least 30 days past due
and/or in foreclosure or already  foreclosed upon by the servicer.  The security
was structured into both senior and  subordinate  classes and the Bank owns only
senior classes.  As of June 30, 1998, the pool had cumulative realized losses of
$23.0  million  which were  initially  absorbed by certain  credit  supports and
subsequently  absorbed by subordinate  certificate  holders.  Currently,  senior
certificate  holders  (such as the Bank) are  having to absorb the  losses.  The
credit supports,  which totaled $11.0 million at the date of issuance,  had been
depleted  as of June 30,  1998.  The  security is  currently  held in the Bank's
available for sale  portfolio and its $587,000  carrying  value at June 30, 1998
reflects  $18,000 of net  unrealized  losses as of such date as well as $414,000
and $253,000 of write-downs  with respect to such security which were recognized
by the Bank during fiscal 1995 and 1994, respectively.

         Allowance  for Loan Losses.  It is  management's  policy to maintain an
allowance for estimated  losses on loans based upon the estimated net realizable
value of the underlying collateral, general economic conditions, particularly as
they relate to the Bank's market area,  historical  loss  experience,  and other
factors related to the collectibility of the loan portfolio. Although management
believes   that  it  uses  the  best   information   available   to  make   such
determinations,  future  adjustments to the allowance may be necessary,  and net
income could be significantly  affected,  if circumstances  differ substantially
from the assumptions used in making the initial determinations.

         Effective December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency,  the FDIC and the Federal Reserve Board, issued
an  Interagency  Policy  Statement  on the  Allowance  for Loan and Lease Losses
("Policy  Statement").  The  Policy  Statement  includes  guidance  (1)  on  the
responsibilities  of  management  for the  assessment  and  establishment  of an
adequate allowance and (2) for the agencies'  examiners to use in evaluating the
adequacy  of  such  allowance  and  the  policies  utilized  to  determine  such
allowance.  The Policy Statement also sets forth  quantitative  measures for the
allowance with respect to assets  classified  substandard  and doubtful and with
respect  to  the  remaining   portion  of  an   institution's   loan  portfolio.
Specifically,  the  Policy  Statement  sets  forth  the  following  quantitative
measures  which  examiners  may  use  to  determine  the  reasonableness  of  an
allowance:  (1) 50% of the portfolio that is classified doubtful; (2) 15% of the
portfolio  that is  
<PAGE>
classified  substandard  and (3) for the portions of the portfolio that have not
been classified (including loans designated special mention),  estimating credit
losses  over  the  upcoming  twelve  months  based on  facts  and  circumstances
available on the  evaluation  date.  While the Policy  Statement sets forth this
quantitative measure, such guidance is not intended as a "floor" or "ceiling."

         The following table sets forth an analysis of the Bank's  allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
                                                                 Year Ended June 30,
                                   ----------------------------------------------------------------------------------
                                        1998            1997           1996             1995               1994
                                    -------------   -------------   ------------    ---------------    --------------
                                                                 (Dollars in Thousands)
<S>                                  <C>              <C>             <C>             <C>                 <C>    
   Total loans outstanding, net      $163,546         $93,958         $65,925         $37,010             $20,682
                                     ========         =======         =======         =======             =======
   Average loans outstanding, net    $116,982         $78,545         $52,399         $25,467             $19,369
                                     ========         =======         =======         =======             =======
   Balance at beginning of period    $    213         $   120         $   121         $   106             $   156
   Charge-offs:
     Single-family residential             --              --              --              --                   2
     Commercial real estate (1)            --              --              --              --                  45
     Consumer                              --              --              --              --                  --
                                      -------         -------         -------         -------             -------
       Total charge-offs                   --              --              --              --                  47
   Recoveries:
    Single-family residential              --               1              --              --                  --
     Consumer                              --              --              --              --                  --
                                      -------         -------         -------         -------             -------
       Total recoveries                    --               1              --              --                  --
                                      -------         -------         -------         -------             -------
   Net charge-offs                         --              (1)             --              --                  47
   Provision (recovery) for loan          147              92              (1)             15                  (3)
                                     --------         -------         -------         -------             -------
   losses
   Balance at end of period          $    360         $   213         $   120        $    121             $   106
                                     ========         =======         =======        ========             =======
   Allowance for loan losses as a
     percent of total loans
     outstanding                          0.2%            0.2%            0.2%            0.3%                0.5%
                                          ===             ===             ===             ===                 ===
   Ratio of net charge-offs to
     average loans outstanding              --%             --%             --%             --%               0.2%
                                          ====            ====            ====            ====                ===
</TABLE>
------------- 

(1)  The $45,000  charge-off  during  fiscal 1994 related to a mortgage  revenue
     bond secured by commercial real estate.

         The  Bank  established  provisions  (recoveries)  for  loan  losses  of
$147,000,  $92,000,  $(1,000),  $15,000 and $(3,000) during the years ended June
30, 1998,  1997,  1996, 1995 and 1994  respectively.  During such periods,  loan
charge-offs (net of recoveries)  amounted to $0, $(1,000),  $0, $0, and $47,000,
respectively.  The increases in the provision for loan losses during the periods
presented  were  due to  substantial  growth  in  the  Company's  mortgage  loan
portfolio.
<PAGE>
The following  table sets forth  information  concerning  the  allocation of the
Bank's allowance for loan losses by loan categories at the dates indicated.
<TABLE>
<CAPTION>
                                                                            June 30,
                                       --------------------------------------------------------------------------------  
                                              1998                        1997                          1996              
                                       ------------------------    -----------------------      -----------------------  
                                                    Percent of                 Percent of                    Percent of        
                                                     Loans in                   Loans in                      Loans in         
                                                       Each                       Each                          Each           
                                                    Category to                Category to                   Category to       
                                        Amount      Total Loans    Amount      Total Loans       Amount      Total Loans       
                                        ------      -----------    ------      -----------       ------      -----------       
                                                                   (Dollars in Thousands)
<S>                                      <C>            <C>          <C>            <C>           <C>            <C>       
Single-family  residential loans.        $302           83.9%        $188           97.2%         $ 95           97.8%     
Commercial real estate loans ....          43           11.9           10            0.3            10            0.7      
Consumer loans ..................          15            4.2           15            2.5            15            1.5      

     Total ......................        $360          100.0%        $213          100.0%         $120          100.0%     
                                         ====          =====         ====          =====          ====          =====      
<CAPTION>
                                      ------------------------------------------------------       
                                             1995                         1994                     
                                      -------------------------   --------------------------       
                                                    Percent of                   Percent of              
                                                     Loans in                     Loans in               
                                                       Each                         Each                 
                                                   Category to                  Category to                          
                                      Amount       Total Loans    Amount        Total Loans 
                                      ------       -----------    ------        ----------- 
<S>                                    <C>            <C>          <C>            <C>    
Single-family  residential loans.                       
Commercial real estate loans.....      $ 96           96.1%        $ 91           96.6% 
Consumer loans ..................        10            1.9           --            1.6   
     Total ......................        15            2.0           15            1.8   
                                                                                  
                                       $121          100.0%        $106          100.0%  
                                       ====          =====         ====          =====   
</TABLE>
<PAGE>
Investment Activities

         General.  The Company's  securities  portfolio is managed by investment
officers in accordance  with a  comprehensive  written  investment  policy which
addresses  strategies,  types and levels of allowable  investments  and which is
reviewed and approved by the Bank's Board of Directors on an annual  basis.  The
management of the securities  portfolio is set in accordance  with the direction
of the Bank's Investment  Committee.  In addition,  the Bank has entered into an
agreement  with Smith  Breeden  whereby  Smith  Breeden  has been  appointed  as
investment  advisor  with  respect to the  management  of the Bank's  securities
portfolio.  With the  assistance of Smith  Breeden,  the Bank's Chief  Executive
Officer and Chief Investment  Officer execute various  transactions with respect
to the portfolio and are responsible  for informing the Investment  Committee of
the types of investments available,  the status and performance of the portfolio
and current  market  conditions.  The  investment  officers are  authorized  to:
purchase  or sell  any  securities  as well as  commitments  to  hedge  eligible
investments;  purchase or sell eligible  investments under repurchase or reverse
repurchase  agreements;  execute hedging  strategies  approved by the Investment
Committee;  pledge  securities owned as collateral for public agency deposits or
repurchase  accounts or agreements;  and lend securities to approved  dealers in
government  securities or approved  commercial banks. Any one investment officer
has the  authority to purchase or sell  securities up to $5.0 million in any one
transaction and acting  together,  two members of the Investment  Committee have
authority  to  purchase  or  sell  securities  up to  $10.0  million  in any one
transaction.  For  purchases  or sales  greater  than $10.0  million,  the prior
approval of a majority  of the  Investment  Committee  is  required.  Investment
officers are also  authorized  to invest  excess  liquidity  in approved  liquid
investment vehicles. In addition, both the Investment Committee and the Board of
Directors of the Bank ratify all securities purchased and sold by the Bank.

         The  Company  invests in a  portfolio  of  mortgage-backed  securities,
mortgage-backed derivative securities,  interest rate risk management contracts,
equity  securities  and  municipal  bonds.  In  selecting   securities  for  its
portfolio,  the  Company  employs  option-adjusted  pricing  analysis  with  the
assistance of Smith Breeden in order to ascertain the net  risk-adjusted  spread
expected to be earned with respect to the various investment  alternatives.  The
nature of this  analysis  is to quantify  the costs  embedded in the yield of an
investment,  such as the duration matched funding cost, the costs of the options
embedded in the investment's cash flows (such as a borrower's  ability to prepay
a mortgage) and  servicing  costs.  The  objective of the  Company's  investment
management  process is to select  investments  with the greatest net spreads and
actively manage the underlying risks of these investments.

         The Company  actively  manages  its  securities  portfolio  in order to
enhance net interest and net market value on a risk-adjusted basis. As a result,
the  Company  continuously   monitors  the  net  risk-adjusted  spreads  of  its
investments  and compares them with the spreads  available with respect to other
securities in the market.  Accordingly, as market conditions fluctuate (e.g., as
risk-adjusted spreads narrow), the Company will sell individual securities prior
to their maturity and reinvest the proceeds into new investments which generally
carry wider  risk-adjusted  spreads.  The Company's  securities  portfolio  also
contains various interest rate risk management  contracts (such as interest 
<PAGE>
rate swaps,  collars,  caps,  floors,  options and futures)  which are primarily
utilized to hedge the Company's  interest rate exposure in the trading portfolio
and which require active  management in order to respond to changing  prepayment
rates on the mortgage securities. The investment portfolio,  although hedged for
interest  rate risk,  is still  susceptible  to adverse  changes in the  spreads
between the yields on mortgage  securities  and the related  Treasury  and LIBOR
based hedges with the potential for  significant  earnings  volatility  from net
mark-to-market changes. That is, the Company designates substantially all of the
investment portfolio as securities held for trading and, therefore, reflects the
market value changes of these  investments,  net of hedges,  in the statement of
operations.

         In recognition of the Company's  business strategy of actively managing
its  securities   portfolio,   during  fiscal  1994,  the  Company  reclassified
substantially  all of its  securities as held for trading.  Pursuant to SFAS No.
115, securities classified as trading securities are reported at fair value with
unrealized gains and losses included in earnings,  and securities  classified as
available for sale are  similarly  reported at fair value,  but with  unrealized
gains and losses  excluded  from  earnings  and  instead  reported as a separate
component of stockholders' equity.

         Mortgage-Backed and Related Securities. At June 30, 1998, the Company's
mortgage-backed  and related  securities  portfolio  (including $12.3 million of
mortgage-backed  derivative  securities)  amounted to $287.0 million or 98.4% of
the  Company's  securities  portfolio  (both held for trading and  available for
sale) and 59.2% of the Company's total assets.  By investing in  mortgage-backed
and related securities,  management seeks to achieve a targeted  option-adjusted
spread over applicable funding costs.

         The  Company  invests  in  mortgage-backed   and  related   securities,
including mortgage participation  certificates,  which are insured or guaranteed
by U.S. Government agencies and government sponsored  enterprises,  and CMOs and
real estate mortgage investment conduits ("REMICs").  Mortgage-backed securities
(which also are known as mortgage  participation  certificates  or  pass-through
certificates)  represent a participation  interest in a pool of single-family or
multi-family mortgages,  the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S. Government
agencies and  government  sponsored  enterprises)  that pool and  repackage  the
participation  interests in the form of  securities,  to  investors  such as the
Company.  Such U.S.  Government agencies and government  sponsored  enterprises,
which  guarantee the payment of principal  and interest to investors,  primarily
include the FHLMC,  the FNMA and the Government  National  Mortgage  Association
("GNMA").

         Mortgage-backed  securities  typically are issued with stated principal
amounts,  and the  securities  are backed by pools of mortgages  that have loans
with  interest  rates that are within a range and have varying  maturities.  The
characteristics  of the  underlying  pool of  mortgages,  (i.e.,  fixed-rate  or
adjustable-rate)  as well as prepayment  risk, are passed on to the  certificate
holder.  The term of a mortgage-backed  pass-through  security thus approximates
the term of the underlying mortgages.
<PAGE>
         The Company's mortgage-backed derivative securities include CMOs, which
include  securities  issued by entities which have qualified  under the Internal
Revenue Code as REMICs. CMOs and REMICs  (collectively CMOs) have been developed
in  response  to  investor  concerns  regarding  the  uncertainty  of cash flows
associated  with the  prepayment  option  of the  underlying  mortgagor  and are
typically issued by governmental agencies,  government sponsored enterprises and
special  purpose  entities,  such  as  trusts,   corporations  or  partnerships,
established by financial  institutions or other similar institutions.  A CMO can
be  collateralized  by loans or  securities  which are insured or  guaranteed by
FNMA, FHLMC or GNMA. In contrast to pass-through  mortgage-backed securities, in
which cash flow is received pro rata by all security holders, the cash flow from
the  mortgages  underlying  a CMO is  segmented  and paid in  accordance  with a
predetermined  priority to investors holding various CMO classes.  By allocating
the principal and interest cash flows from the underlying  collateral  among the
separate CMO classes,  different classes of bonds are created, each with its own
stated   maturity,   estimated   average  life,   coupon  rate  and   prepayment
characteristics.

         The  Company's  mortgage-backed   derivative  securities  also  include
mortgage-backed   residuals  and   interest-only  and   principal-only   strips.
Mortgage-backed  residuals  consist of certificates of particular  tranches of a
CMO  whereby  the  principal  repayments  and  prepayments  with  respect to the
underlying  pool of loans are generally not allocated to the residual  until all
other  certificates or tranches have been fully paid and retired.  Interest-only
strips are a  particular  class of  mortgage-backed  derivative  security  which
receives and pays only  interest with respect to the  underlying  pool of loans,
while  principal-only  strips  receive  and pay only  principal  repayments  and
prepayments. As a result of the foregoing, mortgage-backed derivative securities
often  exhibit   elasticity  and  convexity   characteristics   (i.e.,   respond
differently  to changes in  interest  rates)  which the  Company  can utilize to
internally hedge other  components of the Company's  portfolio of assets against
interest rate risk.

         The OTS has issued a  statement  of policy  which  states,  among other
things,  that mortgage derivative products (including CMOs and CMO residuals and
stripped  mortgage-backed  securities such as interest-only  and  principal-only
strips) which possess average life or price volatility materially different from
benchmark fixed-rate 30-year mortgage-backed  securities are "high risk mortgage
securities,"  and must be carried  in the  institution's  trading  account or as
assets held for sale, and therefore marked to market on a regular basis. At June
30,  1998,  $12.7  million  or 4.4%  of the  securities  held  in the  Company's
portfolio consisted of such "high risk mortgage  securities," as defined in such
policy  statement.  However,  the Bank is in  compliance  with  this OTS  policy
statement since all of such securities are held in the Company's trading account
and marked to market on a regular basis in accordance  with  generally  accepted
accounting principles.

         Like  most  fixed-income   securities,   mortgage-backed   and  related
securities are subject to interest rate risk. However,  unlike most fixed-income
securities,  the mortgage loans underlying a mortgage-backed or related security
generally  may be prepaid at any time without  penalty.  The ability to prepay a
mortgage  loan  generally  results in  significantly  increased  price and yield
volatility (with respect to mortgage-backed  and related securities) than is the
case with non-callable  fixed-income  securities.  Furthermore,  mortgage-backed
derivative  securities often are more
<PAGE>
sensitive  to  changes  in  interest  rates  and  prepayments  than  traditional
mortgage-backed securities and are, therefore, even more volatile. Nevertheless,
the Company  attempts to hedge against both interest rate and  prepayment  risk.
Although,  as stated,  no  assurances  can be given that  these  hedges  will be
effective.

         Although  mortgage-backed  and  related  securities  often  carry lower
yields than traditional  mortgage loans, such securities  generally increase the
quality  of  the  Company's  assets  by  virtue  of the  securities'  underlying
insurance or guarantees,  are more liquid than individual  mortgage loans (which
enhances the Company's ability to actively manage its portfolio) and may be used
to  collateralize  borrowings or other  obligations of the Company.  At June 30,
1998,  $248.5  million or 85.3% of the  Company's  mortgage-backed  and  related
securities  were pledged to secure  various  obligations of the Company (such as
reverse repurchase agreements and interest rate swaps). In addition, in relation
to  the   Company   maintaining   a   substantial   portion  of  its  assets  in
mortgage-backed and related securities,  the Company has been able to maintain a
relatively  low  level  of  operating  expenses.  Furthermore,   mortgage-backed
derivative  securities are often utilized by the Company to internally hedge its
interest  rate  exposure  and can be  attractive  alternatives  to  other  hedge
vehicles when their option-adjusted spreads are abnormally wide.
<PAGE>
         The following  table sets forth  information  relating to the amortized
cost and fair value of the Company's  securities held for trading and securities
available for sale portfolios.
<TABLE>
<CAPTION>
                                                                                     June 30,
                                             ---------------------------------------------------------------------------------- 
                                                         1998                         1997                          1996
                                             -------------------------    -------------------------    ------------------------ 
                                               Amortized      Fair         Amortized         Fair       Amortized         Fair
                                                 Cost         Value           Cost           Value        Cost           Value
                                              ---------     ---------      ---------      ---------     ---------      ---------
                                                                                  (In Thousands)
<S>                                           <C>           <C>            <C>            <C>           <C>            <C>      
  Securities held for trading:
    FHLMC participation .................     $  50,555     $  51,229      $  41,194      $  41,516     $  83,329      $  83,384
  certificates
    FNMA participation ..................        57,252        58,244         68,800         69,355        66,182         65,997
  certificates
    GNMA participation ..................       142,951       144,219        165,894        168,102       153,048        154,240
  certificates
    Commercial participation
      certificates ......................        17,540        17,788             --             --            --             --
                                              ---------     ---------      ---------      ---------     ---------      ---------
    Non-agency participation
      certificates ......................         1,884         1,875          2,545          2,502         3,209          3,154
                                              ---------      ---------      ---------     ---------      ---------      ---------
      Total mortgage-backed securities...       270,182       273,355        278,433        281,475       305,768        306,775
                                              ---------      ---------      ---------     ---------      ---------      ---------
    Collateralized mortgage obligations..        10,930        11,414         25,789         26,032         6,131          6,379
    Residuals ...........................           309           364            508          1,036           707            778
    Interest-only strips ................         1,118           518          2,028          1,449         3,442          2,792
    Principal only strips ...............           599           718            821            860         1,028          1,010
                                              ---------     ---------      ---------      ---------     ---------      ---------
      Total mortgage-backed
        derivative securities ...........        12,956        13,014         29,146         29,377        11,308         10,959
                                              ---------     ---------      ---------      ---------     ---------      ---------
    Interest rate swaps .................            --          (397)            --            581            --            620
    Interest rate collar ................            38           (22)            50             (8)           83             (8)
    Interest rate caps ..................         2,384           227          3,025          1,545         3,692          3,074
    Interest rate floors ................         3,410         4,440          3,916          3,541         2,535          2,970
    Options .............................            68            50             78             24            54             65
    Futures .............................          --            (257)          --              356          --             (784)
                                              ---------      ---------      ---------     ---------      ---------      ---------
      Total interest rate contracts......         5,900         4,041          7,069          6,039         6,364          5,937
                                              ---------      ---------      ---------     ---------      ---------      ---------
    Equity securities ...................            99           199            305            464           496            550
                                              ---------      ---------     ---------      ---------      ---------     ---------
      Total securities held for trading .     $ 289,137     $ 290,609      $ 314,953      $ 317,355     $ 323,936      $ 324,221
                                              =========     =========      =========     =========      =========      =========
  Securities available for sale:
    Non-agency participation
      certificates ......................     $     605     $     587      $     866      $     790     $   1,141      $   1,088
                                              ---------     ---------      ---------      ---------     ---------      ---------
      Total mortgage-backed securities ..           605           587            866            790         1,141          1,088
     Municipal bonds ....................           319           335            317            335           921            962
                                              ---------     ---------      ---------      ---------     ---------      ---------
      Total securities available for sale     $     924     $     922      $   1,183      $   1,125     $   2,062      $   2,050
                                              =========     =========      =========      =========     =========      =========
</TABLE>
<PAGE>
The  following  table  sets  forth the fair  value of the  Company's  securities
activities  (both  held for  trading  and  available  for sale) for the  periods
indicated:
<TABLE>
<CAPTION>
                                                          At or For the Years
                                                           Ended June 30,
                                               ---------------------------------------- 
                                                 1998            1997            1996
                                               ---------      ---------      ---------
                                                            (In Thousands)

<S>                                            <C>            <C>            <C>      
Beginning balance ........................     $ 318,480      $ 321,897      $ 249,274
                                               ---------      ---------      ---------
  Mortgage-backed securities purchased ...       653,403        890,623        385,542
    held for trading
  Collateralized mortgage obligations
    purchased - held for trading .........          --           19,823            --
  Mortgage-backed derivative securities ..          --             --              495
    purchased - held for trading
  Interest rate contracts purchased - held
    for trading ..........................         1,808          3,320          4,161
  Equity securities purchased -
    held for trading .....................         2,000           --              545
                                               ---------      ---------      ---------
                                                                             ---------
    Total securities purchased ...........       657,211        913,766        390,743
                                               ---------      ---------      ---------
Less:
  Sale of mortgage-backed securities -
     held for trading ....................       634,099        887,468        276,482
   Sale of collateralized mortgage
    obligations - held for trading .......        15,335           --            7,798
  Sale of mortgage-backed derivative
    securities - held for trading ........           628            625          3,642
  Sale of interest rate contracts -
    held for trading .....................           113            132          1,973
  Sale of equity securities -
    held for trading .....................         2,205            204            314
                                               ---------      ---------      ---------
    Total securities sold ................       652,380        888,429        290,209
                                               ---------      ---------      ---------
Less proceeds from maturities of
  securities                                      28,697         27,277         25,829

Realized gain (loss) on sale of
  securities held for trading ............          (775)        (1,623)         1,834
                                                                   
Unrealized gain (loss) on securities
  held for trading .......................          (930)         2,117         (1,960)
                                                                                  
Change in net unrealized gain (loss) on
  securities available for sale ..........            56            (46)           (69)

Amortization of premium                           (1,434)        (1,925)        (1,887)
                                               ---------      ---------      ---------
Ending balance ...........................     $ 291,531      $ 318,480      $ 321,897
                                               =========      =========      =========
</TABLE>
<PAGE>
         At June 30, 1998, the contractual  maturity of substantially all of the
Company's  mortgage-backed  or related securities was in excess of twenty years.
The actual  maturity of a  mortgage-backed  or related  security is usually less
than  its  stated  maturity  due to  prepayments  of the  underlying  mortgages.
Prepayments  that  are  faster  than  anticipated  may  shorten  the life of the
security and affect its yield to  maturity.  The yield to maturity is based upon
the interest income and the  amortization of any premium or discount  related to
the security.  In accordance  with  generally  accepted  accounting  principles,
premiums and  discounts are  amortized  over the  estimated  lives of the loans,
which  decrease and  increase  interest  income,  respectively.  The  prepayment
assumptions used to determine the amortization period for premiums and discounts
can significantly  affect the yield of the  mortgage-backed or related security,
and these assumptions are reviewed  periodically to reflect actual  prepayments.
Although prepayments of underlying  mortgages depend on many factors,  including
the type of mortgages,  the coupon rate, the age of mortgages,  the geographical
location of the underlying real estate collateralizing the mortgages and general
levels of market  interest rates,  the difference  between the interest rates on
the underlying mortgages and the prevailing mortgage interest rates generally is
the most significant  determinant of the rate of prepayments.  During periods of
falling mortgage interest rates, if the coupon rate of the underlying  mortgages
exceeds  the  prevailing  market  interest  rates  offered for  mortgage  loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related  security.  At June 30, 1998, of the $287.0 million of
mortgage-backed  and related  securities  held by the  Company,  an aggregate of
$120.4  million were secured by  fixed-rate  mortgage  loans and an aggregate of
$166.6 million were secured by adjustable-rate mortgage loans.

         Other  Securities.  Other  securities  owned by the Company at June 30,
1998 include various interest rate risk management contracts, including interest
rate swaps, collars,  caps, floors,  options and futures,  equity securities and
municipal bonds. At June 30, 1998, the carrying value of the Company's  interest
rate contracts,  equity securities and municipal bonds amounted to $4.0 million,
$199,000 and $335,000,  respectively. The municipal bonds held by the Company at
June 30, 1998 were scheduled to mature  between two and three years.  See Note 2
to the Notes to Consolidated Financial Statements.

Sources of Funds

         General. The Company will consider various sources of funds to fund its
investing and lending activities and evaluates the available sources of funds in
order to reduce the Company's overall funding costs.  Deposits,  securities sold
under agreements to repurchase,  advances from the FHLB of  Indianapolis,  notes
payable, and sales,  maturities and principal repayments on loans and securities
have  been the  major  sources  of funds for use in the  Company's  lending  and
investing activities, and for other general business purposes. Management of the
Company  closely  monitors  rates and terms of  competing  sources of funds on a
daily basis and utilizes the source which it believes to be cost effective.

         Deposits.  The Bank  attempts to price its deposits in order to promote
deposit  growth and offers a wide array of deposit  products in order to satisfy
its customers'  needs.  The Bank's current deposit  products  include  statement
savings accounts,  negotiable order of withdrawal ("NOW") and 
<PAGE>
checking  accounts,  money market deposit accounts,  fixed-rate,  fixed-maturity
retail  certificates  of  deposit  ranging in terms from seven days to 10 years,
individual   retirement  accounts,   and  non-retail   certificates  of  deposit
consisting  of jumbo  (generally  greater than  $95,000)  certificates,  inverse
variable-rate certificates and brokered certificates of deposit.

         The Bank's retail deposits are generally obtained from residents in its
primary market area. The principal methods currently used by the Bank to attract
deposit  accounts  include  offering a wide variety of value-added  products and
services and competitive interest rates. The Bank utilizes traditional marketing
methods to attract new customers and savings  deposits,  including various forms
of  advertising.  Management  estimates  that as of June  30,  1998,  non-retail
deposit  accounts  totaled $11.5  million or 6.5% of the Bank's total  deposits.
These  non-retail  deposits  consist  largely of jumbo  certificates of deposit,
inverse  variable-rate  certificates  (which are obtained  through  brokers) and
brokered  deposits.  The Bank's jumbo certificates of deposit and other deposits
are also obtained through the posting of deposit rates on national  computerized
bulletin  boards  at no cost  to the  Bank.  The  Bank's  inverse  variable-rate
certificates  carry rates which  fluctuate  inversely  with respect to the three
month LIBOR rate. For example, if LIBOR rates of interest increase, the rates on
the inverse variable-rate  certificates would decrease, while if market rates of
interest  decrease,  the rates on the inverse  variable-rate  certificates would
increase.  As a result, the Bank would generally be paying a higher rate on such
certificates  during a  declining  interest  rate  environment.  The Bank offers
inverse  variable-rate  certificates  when they represent a lower cost source of
funds to comparable duration funding sources.

         The  following  table  shows  the  distribution  of and  certain  other
information relating to the Bank's deposits by type as of the dates indicated.
<TABLE>
<CAPTION>
                                                                   June 30,
                                     ------------------------------------------------------------------------- 
                                             1998                    1997                     1996
                                     ----------------------  -----------------------   ----------------------- 
                                                 Percent of               Percent of               Percent of
                                     Amount       Deposits   Amount        Deposits    Amount       Deposits
                                     ------       --------   ------        --------    ------       --------
                                                             (Dollars in Thousands)
<S>                                 <C>            <C>     <C>               <C>      <C>              <C> 
Transaction accounts:
  NOW and checking ............     $  8,202         4.6%   $  4,778           3.5%   $  4,529           3.4%
  Savings accounts ............       31,076        17.4      20,523          15.1      17,342          12.8
  Money market deposit accounts        2,705         1.5       1,930           1.4       1,576           1.2    
                                    --------       -----    --------         -----    --------         ----- 
    Total transaction accounts.       41,983        23.5      27,231          20.0      23,447          17.4
                                    --------       -----    --------         -----    --------         ----- 

Certificates of deposit:
  Within 1 year ...............      113,237        63.5      74,586          54.8      75,343          55.7
  1-2 years ...................       13,169         7.4      19,437          14.3      19,890          14.7
  2-3 years ...................        3,570         2.0       7,486           5.5       8,093           6.0
  3-4 years ...................        3,198         1.8       1,845           1.3       2,636           2.0
  Over 4 years ................        3,154         1.8       5,590           4.1       5,734           4.2
                                    --------       -----    --------         -----    --------         ----- 
    Total certificate accounts       136,328        76.5     108,944          80.0     111,696          82.6
                                    --------       -----    --------         -----    --------         ----- 
    Total deposits ............     $178,311       100.0%   $136,175         100.0%   $135,143         100.0%
                                    ========       =====    ========         =====    ========         ===== 
</TABLE>
<PAGE>
         The  following  table  shows  the  distribution  of and  certain  other
information  relating  to the  Bank's  certificates  of  deposit as of the dates
indicated.
<TABLE>
<CAPTION>
                                                             June 30,
                                 ------------------------------------------------------------------- 
                                         1998                   1997                   1996
                                 ---------------------  ---------------------  ---------------------  
                                            Percent of             Percent of             Percent of
                                  Amount     Deposits    Amount     Deposits    Amount     Deposits
                                  ------     --------    ------     --------    ------     --------
<S>                              <C>            <C>     <C>            <C>     <C>            <C>  
Total retail certificates ..     $126,096       70.7%   $ 96,946       71.2%   $ 89,462       66.2%
                                 --------       ----    --------       ----    --------       ---- 
   Non-retail certificates:
   Jumbo certificates ......        2,752        1.5       2,420        1.8       6,041        4.4
   Inverse variable-rate
     certificates ..........        5,250        3.0       6,218        4.6       8,423        6.2
   Non-brokered out-of-state
     deposits ..............        2,131        1.2       3,064        2.2       7,276        5.4
   Brokered deposits .......           99        0.1         296        0.2         494        0.4
                                 --------       ----    --------       ----    --------       ---- 
     Total non-retail
      certificates (1) .....       10,232        5.8      11,998        8.8      22,234       16.4
                                 --------       ----    --------       ----    --------       ---- 
Total certificates of
deposit ....................     $136,328       76.5%   $108,944       80.0%   $111,696       82.6%
                                 ========       ====    ========       ====    ========       ==== 
</TABLE>
-------- 
(1)      Of the Company's  $10.2 million of non-retail  certificates  as of June
         30, 1998,  $2.7 million was  scheduled to mature in six months or less,
         $2.9 million was  scheduled to mature in 7-12 months,  $1.2 million was
         scheduled to mature in 13-36  months and $3.4 million was  scheduled to
         mature in over 36 months.

         The following  table presents the average  balance of each deposit type
and the average rate paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
                                                                Year Ended June 30,
                                   -------------------------------------------------------------------------------- 
                                            1998                         1997                         1996
                                   -------------------------- ---------------------------  ------------------------ 
                                    Average        Average       Average       Average       Average       Average
                                    Balance       Rate Paid      Balance      Rate Paid      Balance      Rate Paid
                                    -------       ---------      -------      ---------      -------      ---------
                                                                 (Dollars in Thousands)
<S>                                <C>                 <C>      <C>               <C>       <C>                <C> 
NOW and checking
   accounts                        $  6,788            2.5%     $  4,697          2.6%      $  3,813           2.9%
Savings accounts                     25,666            4.4        20,463          4.1         15,922           3.9
Money market deposit
   accounts                           2,235            4.5         1,886          4.4          1,777           4.3
Certificates of deposit             117,073            5.9       109,756          5.9        103,981           6.1
                                   --------                     --------                    --------               
   Total deposits                  $151,762            5.5%     $136,802          5.5%      $125,493           5.7%
                                   ========            ===      ========          ===       ========           === 
</TABLE>
<PAGE>
         The following  table sets forth the deposit  account  activities of the
Bank during the periods indicated.
<TABLE>
<CAPTION>
                                                    Year Ended June 30,
                                          --------------------------------------
                                             1998          1997           1996
                                          ---------     ---------      ---------
                                                      (In Thousands)
<S>                                       <C>           <C>            <C>      
Deposits ............................     $ 264,182     $ 208,032      $ 213,601
Withdrawals .........................       230,421       212,517        197,550
                                          ---------     ---------      ---------
Net increase (decrease) before
     interest credited ..............        33,761        (4,485)        16,051
Interest credited ...................         8,375         5,517          3,780
                                          ---------     ---------      ---------

Net increase in deposits ............     $  42,136     $   1,032      $  19,831
                                          =========     =========      =========
</TABLE>
         The following  table shows the interest  rate and maturity  information
for the Bank's certificates of deposit at June 30, 1998.
<TABLE>
<CAPTION>
                                                                  Maturity Date
                      ------------------------------------------------------------------------------------------------ 
 Interest Rate        One Year or Less      Over 1-2 Years       Over 2-3 Years       Over 3 Years             Total
 -------------        ----------------      --------------       --------------       ------------             -----
                                                            (Dollars in Thousands)
<S>                     <C>                   <C>                   <C>                 <C>                 <C>        
3.00% or less           $      --             $     --              $    --             $     9             $       9 
                        
3.01 - 5.00%                9,877                  953                   55                 172                11,057
5.01 - 7.00%              100,665               11,050                2,725               3,757               118,197
7.01 - 9.00%                2,384                1,158                  117               2,414                 6,073
9.01% or greater              311                    8                  673                 --                    992
                        ---------             --------              -------             -------             ---------

Total                   $ 113,237             $ 13,169              $ 3,570             $ 6,352             $ 136,328
                        =========             ========              =======             =======             =========
</TABLE>
         The   following   table  sets  forth  the   maturities  of  the  Bank's
certificates of deposit having principal amounts of $100,000 or more at June 30,
1998.
<TABLE>
<CAPTION>
              Certificates of deposit maturing
                     in quarter ending:                              Amount
                     ------------------                              ------
                                                                 (In Thousands)
<S>                                                                <C>     
September 30, 1998                                                  $ 10,942
December 31, 1998                                                      5,700
March 31, 1999                                                         2,907
After March 31, 1999                                                   5,554
                                                                    --------
  Total certificates of deposit with
   balances of $100,000 or more                                     $ 25,103
                                                                    ========
</TABLE>
<PAGE>
         Borrowings.   The  following  table  sets  forth  certain   information
regarding the borrowings of the Company at or for the dates indicated.
<TABLE>
<CAPTION>
                                                     At or For the Year Ended June 30,
                                                    ------------------------------------- 
                                                      1998          1997          1996
                                                    --------      --------      --------
                                                             (Dollars in Thousands)
<S>                                                 <C>           <C>           <C>     
FHLB advances:
  Average balance outstanding .................     $ 27,488      $ 26,089      $ 27,586
  Maximum amount outstanding at
    any month-end during the period ...........       64,000        29,300        31,000
  Balance outstanding at end of period ........       26,000        26,000        26,000
  Average interest rate during the
    period ....................................          6.7%          6.3%          5.8%
  Average interest rate at end of period ......          5.6%          5.8%          5.4%

Securities sold under agreements to repurchase:
  Average balance outstanding .................     $319,579      $306,034      $148,523
  Maximum amount outstanding at
    any month-end during the period ...........      342,094       343,427       219,067
  Balance outstanding at end of period ........      240,396       245,571       219,067
  Average interest rate during the
    period ....................................          5.6%          5.4%          5.6%
  Average interest rate at end of period ......          5.7%          5.5%          5.2%
</TABLE>

         The Company  obtains both  fixed-rate and  variable-rate  long-term and
short-term  advances from the FHLB of Indianapolis  upon the security of certain
of its  residential  first  mortgage  loans and other assets,  provided  certain
standards  related  to  creditworthiness  of the Bank  have  been  met.  FHLB of
Indianapolis  advances are  available  for general  business  purposes to expand
lending and investing  activities.  Borrowings  have generally been used to fund
the purchase of mortgage-backed and related securities or lending activities and
have been collateralized with a blanket pledge agreement of the Bank's assets.

         Advances  from the FHLB of  Indianapolis  are made  pursuant to several
different credit programs,  each of which has its own interest rate and range of
maturities. The Company currently has one variable-rate advance from the FHLB of
Indianapolis  which matures in 1998. At June 30, 1998, the Company had a FHLB of
Indianapolis  advance  in the  amount of $26.0  million  at a  weighted  average
interest rate of 5.7%.
<PAGE>
         The  Company  also  obtains  funds  from  the  sales of  securities  to
investment   dealers  under  agreements  to  repurchase   ("reverse   repurchase
agreements").  In a reverse repurchase agreement  transaction,  the Company will
generally sell a mortgage-backed security agreeing to repurchase either the same
or a  substantially  identical  security  (i.e.,  "dollar rolls") on a specified
later date  (generally  not more than 90 days) at a price that is generally less
than the original  sales price.  The  difference  in the sale price and purchase
price is the spread  between the mortgage  cash flows and the implied  financing
rate. The mortgage-backed  securities underlying the agreements are delivered to
the dealers who arrange the  transactions.  For  agreements in which the Company
has agreed to repurchase  substantially  identical  securities,  the dealers may
sell, loan or otherwise dispose of the Company's securities in the normal course
of their operations;  however,  such dealers or third party custodians safe-keep
the securities which are to be specifically  repurchased by the Company. Reverse
repurchase  agreements  represent  a  competitive  cost  funding  source for the
Company.  Nevertheless,  the  Company is subject to the risk that the lender may
default at  maturity  and not return the  collateral.  The amount at risk is the
value of the collateral which exceeds the balance of the borrowing.  In order to
minimize this potential risk, the Company normally deals with large, established
investment  brokerage  firms  when  entering  into these  transactions.  Reverse
repurchase  transactions are accounted for as financing arrangements rather than
as sales of such securities, and the obligation to repurchase such securities is
reflected as a liability in the Consolidated Financial Statements.

         In April 1993,  the Company  entered into a $10.0 million loan facility
with an unrelated  financial  institution.  This  facility,  as amended in 1997,
includes a $10.0 million term loan (the "Refinancing  Loan") and a non-revolving
line of credit of $5.0 million. Proceeds from the Refinancing Loan were utilized
to repay the unpaid balance of a $10.0 million loan that the Company obtained in
1988 in connection with its acquisition of the Bank, reduce the average interest
rate paid on such indebtedness and increase the  capitalization of the Bank. The
loan  facility  matures in June 2000 and carries an  interest  rate equal to the
prime rate  published in the Wall Street  Journal.  The loan  facility  requires
quarterly interest-only repayments with the unpaid principal balance outstanding
payable  in full at  maturity.  The loan  facility  is  secured by (1) a general
pledge  agreement  between the parties pursuant to which the Company has pledged
100% of the outstanding stock of the Bank; (2) a security  agreement between the
parties pursuant to which the Company has provided a blanket  security  interest
in all of its  assets;  and (3) the  assignment  of life  insurance  policies on
Messrs.  Breeden  and  Cerny by the  Company  in the  aggregate  amount of $1.25
million.  At June 30,  1998,  the total  balance of the loan  facility was $13.5
million.


Trust and Fiduciary Services

         The  Company  also  provides  a full  range  of  trust  and  investment
services,  and acts as executor or  administrator  of estates and as trustee for
various  types of trusts.  Trust and  investment  services  are offered  through
Harrington Investment Management and Trust Services ("Trust Department"),  which
was  created in  December  1994 as a  separate  division  of the Bank.  Services
offered  include  financial  services  related  to  trusts  and  estates,  money
management,  custodial services and pension and employee benefits consulting and
plan  administration.  As of June 30, 
<PAGE>
1998,  the  Trust  Department  administered   approximately  54  trust/fiduciary
accounts, with aggregate assets of $37.4 million at such date.

Subsidiaries

         The Bank is  permitted  to invest up to 2% of its assets in the capital
stock of, or secured or unsecured  loans to,  subsidiary  corporations,  with an
additional  investment  of 1% of assets  when  such  additional  investments  is
utilized  primarily  for  community  development   purposes.   The  Bank's  only
subsidiary,  Pine Tree Mortgage Corp., is an inactive corporation formed in 1987
to originate  mortgage  loans in North  Carolina  and has  conducted no business
since 1988.  The Bank's  investment  in the  subsidiary  is not  material to its
operations or financial condition.

Supervision and Regulation

         Set forth below is a brief  description  of those laws and  regulations
which,  together  with  the  descriptions  of  laws  and  regulations  contained
elsewhere  herein,  are deemed  material to an investor's  understanding  of the
extent to which the Company and the Bank are regulated.  The  description of the
laws and regulations hereunder,  as well as descriptions of laws and regulations
contained  elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.

The Company

         General.  The Company is a registered  savings and loan holding company
within the meaning of the Home Owners' Loan Act ("HOLA"),  and is subject to OTS
regulations,   examinations,   supervision  and  reporting  requirements.  As  a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Company and affiliates thereof.

         Activities  Restrictions.  Although there are generally no restrictions
on the  activities  of a savings and loan holding  company  which holds only one
subsidiary savings institution under applicable OTS regulations, the Company may
be  considered  to be a  multiple  savings  and  loan  holding  company  because
principals and affiliates of Smith Breeden may be deemed for regulatory purposes
to control both the Company and Harrington  West Financial  Group, a savings and
loan  holding  company  which owns all of the  outstanding  common  stock of Los
Padres Savings Bank, F.S.B., Los Padres, California.

         Multiple savings and loan holding companies are subject to restrictions
which do not apply to unitary  savings and loan holding  companies.  Among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not a savings  institution shall commence or continue for a limited period of
time after  becoming a multiple  savings and loan holding  company or subsidiary
thereof any  business  activity,  upon prior  notice to, and no objection by the
OTS,  other  than:  (1)  furnishing  or  performing  management  services  for a
subsidiary  savings  institution;  (2) conducting an insurance  agency or escrow
business; (3) holding, managing, or liquidating assets
<PAGE>
owned by or  acquired  from a  subsidiary  savings  institution;  (4) holding or
managing  properties used or occupied by a subsidiary savings  institution;  (5)
acting  as  trustee  under  deeds of trust;  (6)  engaging  in those  activities
authorized  by  regulation  as of March 5, 1987 to be  permissible  for multiple
savings and loan  holding  companies;  or (7) unless the  Director of the OTS by
regulation  prohibits  or limits such  activities  for savings and loan  holding
companies,   those  activities  authorized  by  the  Federal  Reserve  Board  as
permissible for bank holding companies.  Those activities described in (7) above
also must be approved by the Director of the OTS prior to being  engaged in by a
multiple savings and loan holding company.  The Company does not believe that if
the OTS designates it as a multiple thrift holding  company,  such a designation
will limit its ability to conduct its normal business operations.

         In  addition,  if the  Director  of the OTS  determines  that  there is
reasonable  cause to believe that the continuation by a savings and loan holding
company of an  activity  constitutes  a serious  risk to the  financial  safety,
soundness or stability of its subsidiary savings  institution,  the Director may
impose such  restrictions  as deemed  necessary to address such risk,  including
limiting (1) payment of dividends by the savings  institution;  (2) transactions
between the savings  institution and its  affiliates;  and (3) any activities of
the savings institution that might create a serious risk that the liabilities of
the  holding   company  and  its  affiliates  may  be  imposed  on  the  savings
institution.

         Limitations  on  Transactions  with  Affiliates.  Transactions  between
savings  institutions  and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company or
entity which  controls,  is  controlled  by or is under common  control with the
savings institution. In a holding company context, the parent holding company of
a  savings  institution  (such  as the  Company)  and any  companies  which  are
controlled  by  such  parent  holding  company  are  affiliates  of the  savings
institution.  Generally,  Sections 23A and 23B (1) limit the extent to which the
savings  institution or its  subsidiaries  may engage in "covered  transactions"
with any one affiliate to an amount equal to 10% of such  institution's  capital
stock and surplus,  and contain an aggregate limit on all such transactions with
all  affiliates  to an amount equal to 20% of such capital stock and surplus and
(2) require that all such transactions be on terms substantially the same, or at
least as favorable,  to the  institution  or  subsidiary as those  provided to a
non-affiliate.  The term  "covered  transaction"  includes  the making of loans,
purchase of assets,  issuance of a guarantee and other similar transactions.  In
addition  to the  restrictions  imposed  by  Sections  23A and 23B,  no  savings
institution may (1) loan or otherwise extend credit to an affiliate,  except for
any affiliate  which engages only in activities  which are  permissible for bank
holding companies,  or (2) purchase or invest in any stocks, bonds,  debentures,
notes or similar  obligations of any affiliate,  except for affiliates which are
subsidiaries of the savings institution.

         In addition,  Sections 22(h) and (g) of the Federal  Reserve Act places
restrictions   on  loans  to  executive   officers,   directors   and  principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a  greater  than  10%  stockholder  of a  savings  institution,  and  certain
affiliated  interests  of  either,  may not  exceed,  together  with  all  other
outstanding  loans  to  such  person  and  affiliated  interests,   the  savings
institution's  loans  to  one  borrower  limit  (generally  equal  to 15% of the
institution's unimpaired capital and surplus).  Section 22(h) also requires that
loans to directors,  executive  officers and principal  stockholders  be made on
terms  substantially  the same as 
<PAGE>
offered in comparable  transactions  to other persons  unless the loans are made
pursuant to a benefit or  compensation  program that (1) is widely  available to
employees of the  institution  and (2) does not give preference to any director,
executive officer or principal  stockholder,  or certain affiliated interests of
either,  over other  employees of the savings  institution.  Section  22(h) also
requires  prior board  approval for certain  loans.  In addition,  the aggregate
amount of extensions of credit by a savings  institution to all insiders  cannot
exceed the institution's  unimpaired capital and surplus.  Furthermore,  Section
22(g) places additional restrictions on loans to executive officers. At June 30,
1998, the Bank was in compliance with the above restrictions.

         Restrictions  on  Acquisitions.  Except  under  limited  circumstances,
savings and loan holding companies are prohibited from acquiring,  without prior
approval  of  the  Director  of the  OTS,  (1)  control  of  any  other  savings
institution or savings and loan holding company or substantially  all the assets
thereof or (2) more than 5% of the  voting  shares of a savings  institution  or
holding  company  thereof  which is not a  subsidiary.  Except  with  the  prior
approval  of the  Director  of the OTS,  no director or officer of a savings and
loan holding  company or person owning or controlling by proxy or otherwise more
than  25%  of  such  company's   stock,  may  acquire  control  of  any  savings
institution,  other  than a  subsidiary  savings  institution,  or of any  other
savings and loan holding company.

         The Director of the OTS may only approve acquisitions  resulting in the
formation of a multiple  savings and loan holding company which controls savings
institutions in more than one state if (1) the multiple savings and loan holding
company involved controls a savings  institution which operated a home or branch
office  located in the state of the  institution  to be  acquired as of March 5,
1987;  (2)  the  acquirer  is  authorized  to  acquire  control  of the  savings
institution  pursuant to the  emergency  acquisition  provisions  of the Federal
Deposit  Insurance Act  ("FDIA");  or (3) the statutes of the state in which the
institution to be acquired is located  specifically  permit  institutions  to be
acquired  by the  state-chartered  institutions  or  savings  and  loan  holding
companies  located in the state where the  acquiring  entity is located (or by a
holding company that controls such state-chartered savings institutions).

         Under the Bank Holding  Company Act of 1956, the Federal  Reserve Board
is authorized  to approve an  application  by a bank holding  company to acquire
control of a savings  institution.  In  addition,  a bank  holding  company that
controls  a  savings  institution  may  merge  or  consolidate  the  assets  and
liabilities of the savings  institution with, or transfer assets and liabilities
to, any  subsidiary  bank which is a member of the BIF with the  approval of the
appropriate federal banking agency and the Federal Reserve Board. As a result of
these  provisions,   there  have  been  a  number  of  acquisitions  of  savings
institutions by bank holding companies in recent years.

The Bank

         General.  The  OTS has  extensive  authority  over  the  operations  of
federally  chartered savings  institutions.  As part of this authority,  savings
institutions  are required to file periodic reports with the OTS and are subject
to periodic examinations by the OTS. The last regulatory examination of the Bank
by the OTS was conducted beginning on May 27, 1997. The Bank was 
<PAGE>
not required to make any material  changes to its operations as a result of such
examination.  The investment and lending  authority of savings  institutions are
prescribed by federal laws and regulations, and such institutions are prohibited
from  engaging in any  activities  not  permitted by such laws and  regulations.
Those laws and regulations  generally are applicable to all federally  chartered
savings institutions and may also apply to state-chartered savings institutions.
Such  regulation  and  supervision  is primarily  intended for the protection of
depositors.

         The OTS' enforcement  authority over all savings institutions and their
holding  companies  includes,  among other  things,  the ability to assess civil
money  penalties,  to issue  cease and desist or removal  orders and to initiate
injunctive actions.  In general,  these enforcement actions may be initiated for
violations  of laws and  regulations  and  unsafe or  unsound  practices.  Other
actions or inactions  may provide the basis for  enforcement  action,  including
misleading or untimely reports filed with the OTS.

         Insurance  of  Accounts.  The  deposits  of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and are
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
is  authorized  to  conduct  examinations  of,  and  to  require  reporting  by,
FDIC-insured  institutions.  It also may prohibit any  FDIC-insured  institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious  threat  to the FDIC.  The FDIC  also has the  authority  to  initiate
enforcement  actions  against  savings  institutions,  after  giving  the OTS an
opportunity to take such action.

         Both the SAIF and Bank Insurance Fund ("BIF") are statutorily  required
to be capitalized to a ratio of 1.25% of insured reserve  deposits.  The BIF met
its required  capitalization  levels in 1995 and, as a result,  most BIF insured
banks have been paying significantly lower premiums than SAIF institutions.  The
legislation  enacted by the U.S. Congress,  which was signed by the President on
September 30, 1996, has  recapitalized  the SAIF by a one-time  charge of $0.657
for each $100 of  assessable  deposits  held at March 31,  1995.  Although  this
resulted in pre-tax expense of $830,000  recognized in the Company's earnings in
fiscal  year 1997,  future  earnings  will be  enhanced  due to lower  insurance
premiums.  The Bank's insurance premiums,  which had amounted to $0.23 for every
$100 of assessable deposits, were reduced to $0.065 for every $100 of assessable
deposits beginning on January 1, 1997.

         The FDIC may terminate the deposit insurance of any insured  depository
institution,  including  the Bank,  if it  determines  after a hearing  that the
institution  has engaged or is engaging in unsafe or unsound  practices or is in
an unsafe  or  unsound  condition  to  continue  operations,  or if the  insured
depository  institution  or any of its  directors or trustees  have violated any
applicable law, regulation,  order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance  temporarily  during the hearing
process for the permanent  termination of insurance,  if the  institution has no
tangible  capital.  If insurance of accounts is terminated,  the accounts at the
institution at the time of the termination,  less subsequent withdrawals,  shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
<PAGE>
         Regulatory Capital Requirements. Federally insured savings institutions
are  required to maintain  minimum  levels of  regulatory  capital.  The OTS has
established  capital  standards  applicable to all savings  institutions.  These
standards generally must be as stringent as the comparable capital  requirements
imposed  on  national  banks.  The OTS  also is  authorized  to  impose  capital
requirements  in excess  of these  standards  on  individual  institutions  on a
case-by-case basis.

         Current OTS capital standards  require savings  institutions to satisfy
three  different   capital   requirements.   Under  these   standards,   savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3.0% of adjusted total assets and
"total" capital (a combination of core and "supplementary"  capital) equal to at
least 8.0% of  "risk-weighted"  assets.  For  purposes of the  regulation,  core
capital generally consists of common  stockholders'  equity (including  retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity  accounts of fully  consolidated  subsidiaries,  certain
nonwithdrawable  accounts  and  pledged  deposits  and  "qualifying  supervisory
goodwill."  Tangible  capital is given the same  definition  as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings  institution's  intangible assets, with only a limited exception
for  purchased  mortgage  servicing  rights.  The Bank had no  goodwill or other
intangible  assets at June 30, 1998. Both core and tangible  capital are further
reduced  by  an  amount  equal  to  a  savings  institution's  debt  and  equity
investments in  subsidiaries  engaged in activities not  permissible to national
banks (other than  subsidiaries  engaged in  activities  undertaken as agent for
customers  or  in  mortgage   banking   activities  and  subsidiary   depository
institutions or their holding  companies).  At June 30, 1998, there were no such
adjustments to the Bank's regulatory capital.

         In determining  compliance with the risk-based capital  requirement,  a
savings  institution  is allowed to include both core capital and  supplementary
capital in its total capital,  provided that the amount of supplementary capital
included does not exceed the savings  institution's core capital.  Supplementary
capital generally consists of hybrid capital  instruments;  perpetual  preferred
stock which is not eligible to be included as core  capital;  subordinated  debt
and intermediate-term preferred stock; and general allowances for loan losses up
to a maximum of 1.25% of  risk-weighted  assets.  In  determining  the  required
amount of risk-based capital, total assets,  including certain off-balance sheet
items,  are  multiplied by a risk weight based on the risks inherent in the type
of assets.  The risk weights  assigned by the OTS for  principal  categories  of
assets  are (1) 0% for cash and  securities  issued  by the U.S.  Government  or
unconditionally backed by the full faith and credit of the U.S. Government;  (2)
20%  for   securities   (other   than   equity   securities)   issued   by  U.S.
Government-sponsored agencies and mortgage-backed securities issued by, or fully
guaranteed  as to principal  and  interest  by, FNMA or FHLMC,  except for those
classes with residual characteristics or stripped  mortgage-related  securities;
(3) 50% for prudently  underwritten  permanent  one- to  four-family  first lien
mortgage loans not more than 90 days delinquent and having a loan-to-value ratio
of not more than 80% at  origination  unless insured to such ratio by an insurer
approved by FNMA or FHLMC, qualifying residential bridge loans made directly for
the construction of one- to four-family  residences and qualifying  multi-family
residential  loans; and (4) 100% for all other loans and investments,  including
consumer  loans,  commercial  loans,  and one- to four-family  residential  real
estate loans more than 90 days delinquent, and for repossessed assets.
<PAGE>
         Any savings  institution that fails any of the capital  requirements is
subject to possible  enforcement  actions by the OTS or the FDIC.  Such  actions
could  include a  capital  directive,  a cease and  desist  order,  civil  money
penalties,  the  establishment of restrictions on the  institution's  operations
(including growth), termination of federal deposit insurance and the appointment
of a conservator  or receiver.  The OTS' capital  regulation  provides that such
actions, through enforcement proceedings or otherwise, could require one or more
of a variety of corrective actions.

         Liquidity  Requirements.  The Bank is required under applicable federal
regulations to maintain  specified levels of "liquid"  investments as defined by
the OTS. As of November 24, 1997, the required level of such liquid  investments
was  changed  from 5% to 4% of certain  liabilities  as  defined by the OTS.  In
addition to the change in the percentage of required level of liquid assets, the
OTS also modified its definition of investments that are considered liquid. As a
result of this change,  the level of assets  eligible for  regulatory  liquidity
calculations  increased  considerably.  At June 30, 1998,  the Bank's  liquidity
ratio was 15.6%.

         Capital Distributions.  OTS regulations govern capital distributions by
savings  institutions,  which  include  cash  dividends,  stock  redemptions  or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other  transactions  charged to the capital account of a savings  institution to
make capital distributions.  Generally, the regulation creates a safe harbor for
specified levels of capital  distributions  from  institutions  meeting at least
their minimum capital requirements,  so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings  institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.

         Generally,  a savings  institution  that before and after the  proposed
distribution  meets or exceeds its fully phased-in capital  requirements (Tier 1
institutions) may make capital  distributions  during any calendar year equal to
the higher of (1) 100% of net income for the calendar  year-to-date  plus 50% of
its "surplus  capital ratio" at the beginning of the calendar year or (2) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is  defined to mean the  percentage  by which the  institution's  ratio of total
capital to assets exceeds the ratio of its fully phased-in  capital  requirement
to  assets.  "Fully  phased-in  capital  requirement"  is  defined  to  mean  an
institution's  capital requirement under the statutory and regulatory  standards
applicable  on  December  31,  1994,  as  modified  to  reflect  any  applicable
individual minimum capital requirement imposed upon the institution.  Failure to
meet fully  phased-in  or minimum  capital  requirements  will result in further
restrictions on capital  distributions,  including possible  prohibition without
explicit OTS approval.  In order to make distributions under these safe harbors,
Tier 1  institutions  such as the Bank must submit 30 days written notice to the
OTS prior to making the  distribution.  The OTS may  object to the  distribution
during that 30-day period based on safety and soundness concerns.

         On January 7, 1998,  the OTS published a notice of proposed  rulemaking
to amend its capital  distribution  regulation.  Under the  proposal,  a savings
institution that would remain at least  "adequately  capitalized"  following the
capital distribution and that meets other specified  requirements,  would not be
required  to provide  any notice or  application  to the OTS for cash  dividends
below a specified amount. A savings  institution is "adequately  capitalized" if
it has a 
<PAGE>
total  risk-based  capital  ratio of 8.0% or more, a Tier 1  risk-based  capital
ratio of 4.0% or more, a Tier 1 leverage capital ratio of 4.0% or more (or 3% or
more if the savings  institution is assigned a composite  rating of 1), and does
not meet the definition of "well capitalized."  Because the Bank is a subsidiary
of the Company, the proposal,  however, would require the Bank to provide notice
to the OTS of its intent to make a capital  distribution,  unless an application
is  otherwise  required.  The Bank  does not  believe  that  the  proposal  will
adversely  affect its  ability to make  capital  distributions  if it is adopted
substantially as proposed.

         Loans to One Borrower.  The permissible amount of loans-to-one borrower
now  generally  follows the national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied that standard only
to  commercial  loans made by  federally  chartered  savings  institutions.  The
national bank standard generally does not permit loans-to-one borrower to exceed
15% of unimpaired capital and unimpaired surplus. Loans in an amount equal to an
additional 10% of unimpaired  capital and unimpaired surplus also may be made to
a borrower if the loans are fully secured by readily marketable securities. If a
savings institution's aggregate lending limitation is less than $500,000,  then,
notwithstanding   the   aforementioned   aggregate   limitation,   such  savings
institution may have total loans and extensions of credit,  for any purpose,  to
one borrower  outstanding at one time not to exceed  $500,000.  For  information
about the largest borrowers from the Bank, see "- Lending Activities."

         Branching  by  Federal   Savings   Institutions.   OTS  policy  permits
interstate  branching  to  the  full  extent  permitted  by  statute  (which  is
essentially  unlimited).   Generally,  federal  law  prohibits  federal  savings
institutions  from  establishing,  retaining or  operating a branch  outside the
state  in  which  the  federal  institution  has  its  home  office  unless  the
institution meets the IRS' domestic building and loan test (generally,  60% of a
thrift's assets must be housing-related)  ("IRS Test"). The IRS Test requirement
does not apply if,  among  other  things,  the law of the state where the branch
would be  located  would  permit  the branch to be  established  if the  federal
savings  institution  were  chartered  by the state in which its home  office is
located.  Furthermore,  the OTS will evaluate a branching  applicant's record of
compliance   with  the  Community   Reinvestment   Act  of  1977   ("CRA").   An
unsatisfactory   CRA  record  may  be  the  basis  for  denial  of  a  branching
application.

         Qualified Thrift Lender Test. All savings  institutions are required to
meet a QTL test to avoid certain restrictions on their operations. Under Section
2303 of the Economic  Growth and Regulatory  Paperwork  Reduction Act of 1996, a
savings  association can comply with the QTL test by either meeting the QTL test
set forth in the HOLA and  implementing  regulations or qualifying as a domestic
building and loan association as defined in Section  7701(a)(19) of the Internal
Revenue Code of 1986,  as amended  ("Code").  The QTL test set forth in the HOLA
requires a thrift  institution to maintain 65% of portfolio  assets in Qualified
Thrift Investments  ("QTIs").  Portfolio assets are defined as total assets less
intangibles,  property  used  by a  savings  institution  in  its  business  and
liquidity investments in an amount not exceeding 20% of assets.  Generally, QTIs
are residential  housing related assets.  At June 30, 1998, the qualified thrift
investments of the Bank were approximately 94.3% of its portfolio assets.
<PAGE>
         A  savings  institution  that  does not meet the QTL test  must  either
convert  to a bank  charter or comply  with the  following  restrictions  on its
operations:  (1) the  institution may not engage in any new activity or make any
new  investment,  directly or indirectly,  unless such activity or investment is
permissible  for a national  bank; (2) the branching  powers of the  institution
shall be restricted to those of a national bank; (3) the  institution  shall not
be eligible to obtain any advances  from its FHLB;  and (4) payment of dividends
by the institution  shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the savings
institution  ceases to be a QTL, it must cease any  activity  and not retain any
investment  not  permissible  for a  national  bank and  immediately  repay  any
outstanding FHLB advances (subject to safety and soundness considerations).

         Accounting  Requirements.  Applicable  OTS accounting  regulations  and
reporting  requirements  apply the following  standards:  (1) regulatory reports
will incorporate  generally accepted accounting principles ("GAAP") when GAAP is
used  by  federal  banking  agencies;  (2)  savings  institution   transactions,
financial  condition  and  regulatory  capital must be reported and disclosed in
accordance with OTS regulatory  reporting  requirements that will be at least as
stringent as for national  banks;  and (3) the Director of the OTS may prescribe
regulatory reporting requirements more stringent than GAAP whenever the Director
determines  that such  requirements  are  necessary to ensure the safe and sound
reporting and operation of savings institutions.

         Federal  Home  Loan  Bank  System.  The Bank is a member of the FHLB of
Indianapolis,  which  is one of 12  regional  FHLBs  that  administers  the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or  central  bank for its  members  within  its  assigned  region.  It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB  System.  It makes loans to members  (i.e.,  advances) in  accordance  with
policies and  procedures  established  by the Board of Directors of the FHLB. At
June 30, 1998,  the Company had a $26.0 million FHLB advance.  See "- Sources of
Funds Borrowings."

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis  in an amount equal to at least 1% of its aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year. At June 30, 1998,  the Bank had $4.9 million in FHLB
stock, which was in compliance with this requirement.

         The FHLBs are required to provide funds for the  resolution of troubled
savings  institutions  and to contribute to affordable  housing programs through
direct loans or interest subsidies on advances targeted for community investment
and  low-  and  moderate-income  housing  projects.   These  contributions  have
adversely  affected  the  level of FHLB  dividends  paid in the  past and  could
continue to do so in the future.  These contributions also could have an adverse
effect on the value of FHLB stock in the future.

         Federal  Reserve  System.   The  Federal  Reserve  Board  requires  all
depository  institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking  accounts) and non-personal time deposits.
As of June 30, 1998, the Bank was in compliance with this  requirement.  Because
required   reserves  must  be  maintained  in  the  form  of  vault  cash  or  a
<PAGE>
noninterest-bearing  account  at a  Federal  Reserve  Bank,  the  effect of this
reserve requirement is to reduce an institution's earning assets.

Federal Taxation

         General.  The Company and Bank are subject to the generally  applicable
corporate tax provisions of the Code, and Bank is subject to certain  additional
provisions  of the Code which  apply to  thrifts  and other  types of  financial
institutions.  The following  discussion of federal taxation is intended only to
summarize  certain pertinent federal income tax matters material to the taxation
of the Company  and the Bank and is not a  comprehensive  discussion  of the tax
rules applicable to the Company and Bank.

         Year. The Company files a consolidated federal income tax return on the
basis of a fiscal  year  ending on June 30.  The  Company's  federal  income tax
returns for the tax years ended June 30, 1995 forward are open under the statute
of limitations and are subject to review by the IRS.

         Bad Debt Reserves.  Prior to the enactment,  on August 20, 1996, of the
Small  Business  Job  Protection  Act of 1996 (the "Small  Business  Act"),  for
federal income tax purposes,  thrift  institutions  such as the Bank,  which met
certain  definitional tests primarily relating to their assets and the nature of
their  business,  were  permitted to establish tax reserves for bad debts and to
make  annual  additions  thereto,   which  additions  could,   within  specified
limitations,  be  deducted  in  arriving  at their  taxable  income.  The Bank's
deduction with respect to "qualifying  loans," which are generally loans secured
by certain interest in real property, could be computed using an amount based on
a six-year moving average of the Bank's actual loss experience (the  "Experience
Method"),  or a percentage  equal to 8.0% of the Bank's taxable income (the "PTI
Method"),  computed  without  regard  to  this  deduction  and  with  additional
modifications  and  reduced  by the  amount  of any  permitted  addition  to the
non-qualifying reserve.

         Under the Small  Business Act, the PTI Method was repealed and the Bank
will be required to use the Experience Method of computing  additions to its bad
debt reserve for taxable years  beginning with the Bank's taxable year beginning
July 1, 1996. In addition,  the Bank will be required to recapture  (i.e.,  take
into taxable income) over a six-year  period,  beginning with the Bank's taxable
year  beginning July 1, 1996, the excess of the balance of its bad debt reserves
(other than the  supplemental  reserve) as of June 30, 1996 over (a) the greater
of the balance of such  reserves as of June 30, 1988 or (b) an amount that would
have been the  balance of such  reserves as of June 30, 1996 had the Bank always
computed the additions to its reserves  using the  Experience  Method.  However,
under the Small Business Act such recapture  requirements  will be suspended for
each of the two  successive  taxable years  beginning  July 1, 1996 in which the
Bank originates a minimum amount of certain  residential loans during such years
that is not less than the average of the principal amounts of such loans made by
the Bank  during its six  taxable  years  preceding  July 1, 1996.  The Bank has
delayed the timing of this  recapture for taxable years 1998 and 1997 as certain
residential  loan test  requirements  were met. The six year recovery period for
the excess reserves will begin in taxable year 1999.
<PAGE>
State Taxation

         The State of Indiana  imposes a franchise  tax on the  "adjusted  gross
income"  of  financial  institutions  at a fixed  rate of 8.5% per  annum.  This
franchise tax is imposed in lieu of the gross income tax,  adjusted gross income
tax, and  supplemental  net income tax  otherwise  imposed on certain  corporate
entities. "Adjusted gross income" is computed by making certain modifications to
an institution's  federal taxable income.  Tax-exempt interest,  for example, is
included in the savings  association's  adjusted  gross  income and the bad debt
deduction  is  limited  to actual  charge-offs  for  purposes  of the  financial
institutions tax.
<PAGE>
Item 2.           Properties

         The Company's  principal  executive  office is located at 722 East Main
Street,  Richmond,  Indiana,  47374.  The  following  table sets  forth  certain
information with respect to the offices and other properties of the Bank at June
30, 1998.
<TABLE>
<CAPTION>
                                                              Net Book Value
   Description/Address             Leased/Owned               of Property(1)             Deposits
   -------------------             ------------               --------------             --------
                                                                           (In Thousands)

<S>                                   <C>                          <C>                     <C>    
 Main Office                          Owned                        $ 1,679                 $63,269
 722 East Main Street
 Richmond, Indiana

 Carmel Branch (2)                    Leased (3)                        96                  59,175
 11592 Westfield Boulevard
 Carmel, Indiana

 Fishers Branch (4)                   Owned                            904                  20,722
 7150 East 116th Street
 Fishers, Indiana

 Noblesville Branch (5)               Owned                            895                  11,792
 107 West Logan Street
 Noblesville, Indiana

 Geist Branch (6)                     Owned                            954                   7,050
 9775 Fall Creek Road
 Indianapolis, Indiana

 Thompson Road Branch (7)             Leased (8)                        32                   5,976
 5249 East Thompson Road
 Indianapolis, Indiana

 Stop 11 Branch (9)                   Leased (10)                      155                  10,327
 1121 East Stop 11 Road
 Indianapolis, Indiana

 Shawnee Mission Branch (11)          Leased (12)                       16                      --
 6300 Nall Road
 Shawnee Mission, Kansas

 Chapel Hill Branch (13)              Leased (14)                        4                      --
 Suite 271 The Europa Center
 Chapel Hill, NC
</TABLE>
 ------------------------- 
(1)      Includes leasehold improvements.
(2)      Branch opened in May 1994.
<PAGE>
(3)      The lease  expires in June 2008 and may be extended  for an  additional
         ten years provided that proper notice is timely given.
(4)      Branch opened in December 1995.
(5)      Branch opened in June 1997.
(6)      Branch opened in December 1997
(7)      Branch opened in January 1998.
(8)      The lease expires in January 2003 and has three options for  additional
         terms of five years each.
(9)      Branch opened in February 1998.
(10)     The lease expires in November 2000 and has three options for additional
         terms of five years each.
(11)     In process; branch opened in August 1998.
(12)     The lease expires in December 2010 and has four options for  additional
         terms of five years each.
(13)     Branch is expected to open in March 1999.
(14)     The lease expires five years after branch opens for business.


Item 3.           Legal Proceedings.

         There are no material legal proceedings to which the Company is a party
 or to which any of their property is subject.

Item 4.           Submission of Matters to a Vote of Security Holders.

         Not applicable.

PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder 
                  Matters.

         Shares of the Company's  common stock are traded  nationally  under the
symbol "HFGI" on the Nasdaq National Market.  The following table sets forth the
high,  low and  closing  sales  prices for the common  stock as  reported by the
Nasdaq Stock Market,  as well as the dividends  paid,  for fiscal years 1998 and
1997:
<TABLE>
<CAPTION>
                                               Stock Price per Share
                                      ------------------------------------------                 
                                       High              Low              Close           Dividends
                                       ----              ---              -----           ---------
<S>                                   <C>              <C>                <C>               <C>  
1998
     First quarter                    $13.50           $ 11.00            $13.00            $0.03
     Second quarter                    13.75             12.00             13.00             0.03
     Third quarter                    13.125            11.125            11.375             0.03
     Fourth quarter                    11.75             10.75             11.25             0.03

1997
     First quarter                    $11.00            $ 9.50           $10.125               --
     Second quarter                    10.75             10.00             10.75               --
     Third quarter                     11.00              9.75             11.00               --
     Fourth quarter                   12.375             10.50            12.125            $0.03

</TABLE>
<PAGE>
         There  have been no stock  dividends,  stock  splits or  reverse  stock
splits. Payment of future dividends is subject to a declaration by the Company's
Board of Directors.  Factors considered in determining the size of dividends are
the amount and  stability of profits,  adequacy of  capitalization  and expected
asset and liability growth of the Bank.

         At September 18, 1998 the Company had  approximately 65 stockholders of
record.

Item 6.           Selected Financial Data.

         The information  required herein is incorporated by reference from page
14 of the Registrant's 1998 Annual Report.

Item 7.           Management's Discussion and Analysis of Financial Condition 
                  and Results of Operations.

        The information  required herein is incorporated by reference from pages
15 to 28 of the Registrant's 1998 Annual Report.

Item 7A.          Quantitative and Qualitative Disclosures About Market Risk

        The information  required herein is incorporated by reference from pages
16 to 20 of the Registrant's 1998 Annual Report.

Item 8.           Financial Statements and Supplementary Data.

        The information  required herein is incorporated by reference from pages
29 to 56 of the Registrant's 1998 Annual Report.

Item 9.           Changes in and Disagreements on Accounting and 
                  Financial Disclosure.

        Not applicable.

PART III

Item 10.          Directors and Executive Officers of the Registrant.

         The information required herein is incorporated by reference from pages
2 to 10, and 12 of the  Registrant's  Proxy  Statement  dated September 22, 1998
("Proxy Statement").
<PAGE>
Item 11.          Executive Compensation.

        The information  required herein is incorporated by reference from pages
13 to 21 of the Registrant's Proxy Statement.

Item 12.       Security Ownership of Certain Beneficial Owners and Management.

        The information  required herein is incorporated by reference from pages
10 to 12 of the Registrant's Proxy Statement.

Item 13.       Certain Relationships and Related Transactions.

        The information  required herein is incorporated by reference from pages
18 and 19 of the Registrant's Proxy Statement.

<PAGE>
PART IV

Item 14.       Exhibits, Financial Statement Schedules and Reports on Form 8-K.

        (a)    Document filed as part of this Report.

               (1)    The  following  documents are filed as part of this report
                      and  are   incorporated   herein  by  reference  from  the
                      Registrant's 1998 Annual Report.

        Independent Auditors' Report.

        Consolidated Balance Sheets as of June 30, 1998 and 1997.

        Consolidated Statements of Operations for the Years Ended June 30, 1998,
1997 and 1996.

        Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996.

        Consolidated Statements of Cash Flows for the Years Ended June 30, 1998,
1997 and 1996.

        Notes to Consolidated Financial Statements.

               (2)    All  schedules   for  which   provision  is  made  in  the
                      applicable  accounting  regulation of the  Securities  and
                      Exchange  Commission  are  omitted  because  they  are not
                      applicable or the required  information is included in the
                      Consolidated Financial Statements or notes thereto.

<PAGE>
               (3)(a) The  following  exhibits  are  filed as part of this  Form
                      10-K, and this list includes the Exhibit Index.

No.                                       Description
---                                       -----------
 
3.1                 Amended and Restated Articles of Incorporation of Harrington
                    Financial Group, Inc.1/
             
3.2                 Amended and Restated Bylaws of Harrington  Financial  Group,
                    Inc.1/                     

10.1                Stock Option Plan of Harrington Financial Group, Inc.1/*/ 

10.2                Loan Agreement between Financial  Research  Corporation (now
                    Harrington Financial Group, Inc.) and Mark Twain Kansas Bank
                    (now Mercantile Bancorporation, Inc.), dated April 14, 1994,
                    First Amendment and Loan Agreement  between such parties and
                    Smith Breeden Associates, Inc. and Douglas T. Breeden, dated
                    July 21, 1995.1/

10.2.1              Second  Amendment and Loan  Modification  Agreement  between
                    Harrington  Financial Group, Inc. and Mark Twain Kansas City
                    Bank (now Mercantile  Bancorporation,  Inc.), dated July 26,
                    1996 (modifies version set forth in Exhibit 10.2) 2/

10.2.2              Third  Amendment  and Loan  Modification  Agreement  between
                    Harrington  Financial Group, Inc. and Mark Twain Kansas City
                    Bank (now Mercantile  Bancorporation,  Inc.),  dated January
                    13, 1997  (modifies  version set forth in Exhibits  10.2 and
                    10.2.1)3/

10.3                Investment   Advisory   Agreement  between  Peoples  Federal
                    Savings  Association  (now  Harrington  Bank, FSB) and Smith
                    Breeden Associates,  Inc. dated April 1, 1992, as amended on
                    March 1,  1995.1/

10.4                Lease Agreement on Carmel Branch Office Facility,  set forth
                    in Assignment of Lease,  between NBD Bank,  N.A. and Peoples
                    Federal Savings Association, dated November 8, 1993.1/

10.5                Trust  Services  Agreement  dated  September 30, 1994 by and
                    between   Harrington   Bank,   FSB  and  the  Midwest  Trust
                    Company.1/

10.6                Trust Services Agreement dated April 30, 1998 by and between
                    Harrington Bank, FSB and INFOVISA.  13 1998 Annual Report to
                    Stockholders   specified   portion   (pp.   12-56)   of  the
                    Registrant's  Annual  Report  to  Stockholders  for the year
                    ended June 30, 1998.

21                  Subsidiaries  of the  Registrant - Reference is made to Item
                    1. "Business" for the Required information

23                  Consent of Deloitte & Touche LLP

27                  Financial Data Schedule
<PAGE>
---------------  
1/   Incorporated  by  reference  from the  Registration  Statement  on Form S-1
     (Registration No. 333-1556) filed by the Registrant with the Securities and
     Exchange Commission ("SEC") on February 20, 1996, as amended.

2/   Incorporated by reference from the Form 10-K for the fiscal year ended June
     30, 1996 filed by the Registrant with the SEC on September 30, 1996. -

3/   Incorporated by reference from the Form 10-K for the fiscal year ended June
     30, 1997 filed by the Registrant with the SEC on September 29, 1997. -

*/   Management contract or compensatory plan or arrangement.

               (3)(b)  Reports filed on Form 8-K.

               None.

<PAGE>

                                   SIGNATURES

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


                                                HARRINGTON FINANCIAL GROUP, INC.



                                                By:   /s/ Craig J. Cerny
                                                      ------------------
                                                      Craig J. Cerny
                                                      President


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


/s/ Craig J. Cerny                                           September 24, 1998
------------------
Craig J. Cerny
President (Principal Executive Officer)


/s/ Twana L. Cheek                                           September 24, 1998
------------------ 
Twana L. Cheek
Principal Financial & Accounting Officer


/s/ Douglas T. Breeden                                       September 24, 1998
---------------------- 
Douglas T. Breeden
Chairman of the Board


/s/ Russell Breeden III                                      September 24, 1998
----------------------- 
Russell Breeden III
Director

<PAGE>
/s/ William F. Quinn                                         September 24, 1998
-------------------- 
William F. Quinn
Director


/s/ Daniel C. Dektar                                         September 24, 1998
-------------------- 
Daniel C. Dektar
Director


/s/ Marianthe Mewkill                                        September 24, 1998
---------------------
Marianthe Mewkill
Director


/s/ Michael J. Giarla                                        September 24, 1998
---------------------
Michael J. Giarla
Director


/s/ Stephen A. Eason                                         September 24, 1998
--------------------- 
Stephen A. Eason
Director


/s/ Lawrence E. Golaszewski                                  September 24, 1998
--------------------------- 
Lawrence E. Golaszewski
Director


/s/ David F. Harper                                          September 24, 1998
-------------------
David F. Harper
Director


/s/ Stanley J. Kon                                           September 24, 1998
------------------
Stanley J. Kon
Director


/s/ John J. McConnell                                        September 24, 1998
--------------------- 
John J. McConnell
Director