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

                                   FORM 10-K

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

                    For the fiscal year ended: June 30, 2000

                                       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. [ X ]

As of September 25, 2000,  the aggregate  value of the 931,808  shares of Common
Stock of the  Registrant  issued and  outstanding  on such date,  which excludes
2,228,112 shares held by all directors and executive  officers of the Registrant
as a group,  was  approximately  $5.8 million.  This figure is based on the last
known  trade  price  of $6.25  per  share of the  Registrant's  Common  Stock on
September 25, 2000.

Number  of  shares  of  Common  Stock  outstanding  as of  September  25,  2000:
3,159,920.

                       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, 2000 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  nine  full-service  offices  located  in  Carmel,   Fishers,
Noblesville,  Indianapolis,  and  Richmond,  Indiana,  and Mission,  Kansas.  In
addition,  the Bank  opened its first full  service  banking  facility in Chapel
Hill, North Carolina in July of 1999.

         The Company was  incorporated  on March 3, 1988 to acquire and hold all
of the outstanding  common stock 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, 2000, the Company had total consolidated assets of
$435.2  million,   total  consolidated   borrowings  of  $48.0  million,   total
consolidated  deposits of $361.2 million,  and total consolidated  stockholders'
equity of $16.3 million.

         The  Company  was  organized  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  community  banking and investment  operations,  and improving the Bank's
return on equity.  The  Company  has  contracted  with Smith  Breeden to provide
investment   advisory   services  and  interest  rate  risk  analysis.   Certain
stockholders  and directors of the Company are also principals of Smith Breeden.
Smith Breeden has a commercial loan outstanding with the Bank at June 30, 2000.

         Harrington's  business strategy focuses on achieving attractive returns
consistent with prudent risk management. Harrington has sought to implement this
strategy by: (1) expanding its banking  locations and product offerings in order
to build a strong community  banking  franchise;  (2) controlling  interest rate
risk by matching  the  interest  rate  sensitivity  of its assets to that of its
liabilities;  (3)  controlling  credit risk by  originating  well-collateralized
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.

Highlights of the principal  elements of the Company's  business strategy are as
follows:

o      Expand Banking Locations and Product  Offerings.  An integral part of the
       Company's  strategy has been to expand  opportunistically  the  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 eight  new
       banking  locations  have been opened since May 1994,  and the  Commercial
       Loan  Division  was  developed  in the spring of 1998.  With the  primary
       expansion  complete,  the  Company is focused on  efficiency  and revenue
       enhancement to improve profitability.

       In March 2000,  the Company  reached a  definitive  agreement to sell the
       Bank's two southern  Indianapolis  branches.  The Company determined that
       the branches did not strategically fit with its market development on the
       north side of Indianapolis in Hamilton County.  On September 8, 2000, the
       Company  sold  deposits  and  certain  assets of the two  branch  banking
       locations.  The Company sold $43.5 million of  deposits,  $.04 million of
       office properties and equipment,  and paid  approximately  $41.7 million.
       The sale resulted in a pre-tax gain of approximately $1.4 million.


                                       2
<PAGE>



       The Company's  lending emphasis is on the origination of loans secured by
       first and second liens on  single-family  (one to four units)  residences
       and commercial real estate, equipment, inventory, and receivables lending
       through its Commercial  Loan  Division.  In fiscal year 2000, the Company
       originated $10.7 million in single family related loans, $12.6 million in
       consumer  related loans,  and $53.9 million in commercial  related loans.
       Total loans have  increased to $271.0 million at June 30, 2000 from $94.0
       million at June 30, 1997.

       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 is  focusing  on  increasing  its retail  deposit  base while
       controlling deposit cost. Core deposits (total consolidated deposits less
       public funds deposits and brokered  deposits) were $334.4 million at June
       30, 2000 and have increased from $123.5 million at June 30, 1997.

       The Company also formed Harrington  Wealth Management  Company ("HWM") in
       February 1999. HWM is a strategic  alliance  between the Bank (51% owner)
       and Los Padres Bank (49%  owner),  a  federally  chartered  savings  bank
       located in California.  HWM provides trust,  investment  management,  and
       custody services for individuals and institutions.

o      Control Interest Rate Risk. The Company attempts to manage its assets and
       liabilities  in order to  maintain a  portfolio  that  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 asset and  liabilities
       and  externally  through  the  utilization  of interest  rate  contracts.
       Interest rate  contracts  are purchased  with the intention of protecting
       the market value of the Bank's portfolio and net interest income.

o      Control Credit Risk. In order to limit the Company's credit exposure, the
       Company  originates and adds to portfolio  well-secured  residential  and
       commercial loans and maintains strict  underwriting  standards.  As such,
       non-performing  loans  have  remained  relatively  low,  with  only
       $180,000 or 0.07% of total loans at June 30, 2000.

o      Utilize  Excess Capital  Balances.  The Company  utilizes  excess capital
       balances  through  the  management  of  a  hedged  investment   portfolio
       primarily  consisting of mortgage backed  securities and corporate bonds.
       Although  these  securities  often  carry lower  yields than  traditional
       loans,  such securities  generally  increase the quality of the Company's
       assets,  are  more  liquid  than  individual  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.

         During  fiscal  year  2000,  the  Company  marked  almost  all  of  its
investment  securities  and related  interest rate contracts to market either in
earnings (trading  portfolio) or in equity (available for sale portfolio).  This
method of  accounting  was  consistent  with the  Company's  strategy  of active
portfolio  management  and provided the Company with the  flexibility  to adjust
quickly the mix of its interest  earning  assets in response to changing  market
conditions or to take advantage of community banking growth opportunities.  With
the growth in the core  retail and  commercial  banking  business,  the level of
assets  subject to mark-to-market  accounting  has declined.

         In summary, the Company continues to build a community-oriented banking
operation in order to sustain loan originations and deposit growth, benefit from
economies  of  scale,  and  generate  additional  fee and net  interest  income.
Management's  primary goal is to increase  stockholders'  value as measured on a
risk-adjusted total return basis.

                                       3
<PAGE>


Investment Advisor

         Smith  Breeden is a money  management  and  consulting  firm  providing
investment  management  services  to  taxable  and  tax-exempt  clients  such as
corporate,  state and municipal pension funds,  university endowments and mutual
fund  investors  and  consulting  and  investment  advisory  services to taxable
financial institutions. 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 or advisory basis, assets totaling over $29 billion. Over the past
18 years, 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 made
equity  investments in financial  institutions that apply the firm's approach to
banking and  investment  management.  Certain of the principals of Smith Breeden
are  investors in a number of banks and thrift  institutions.  Smith  Breeden is
based in Chapel Hill, North Carolina, and employs approximately 60 people in its
main office and its office in Boulder, Colorado.
Lending Activities

         General. At June 30, 2000, the Bank's net loan portfolio totaled $271.0
million,  representing  approximately  62.3% of the Company's  $435.2 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
continues to directly originate and service  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.   The  Company's
origination of commercial  mortgage and commercial and industrial loans provides
further  diversification  of business lines and fulfills a critical component of
the Company's community banking strategy.

         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.  In  addition,  the
commercial   real  estate  loans  and   collateralized   commercial   loans  are
underwritten  to comply with stringent  internal  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, 2000,  approximately 87% of the loans in
the Bank's  portfolio are to customers  located in the immediate market areas of
its offices in Richmond and Indianapolis, Indiana as well as Mission, Kansas and
Chapel Hill, North Carolina.


                                       4
<PAGE>


         Although the Bank has historically  originated loans with lesser dollar
balances than the maximum 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,  2000,  the  Bank's
regulatory limit on loans-to-one  borrower was $4.0 million and its five largest
loans or groups of loans-to-one borrower, including related entities, aggregated
$3.3 million,  $3.1 million,  $3.0 million,  $3.0 million and $2.6 million.  All
five of the Bank's  largest  loans or groups of loans are secured  primarily  by
commercial  real estate or  commercial  business  assets and were  performing in
accordance with their terms at June 30, 2000.



                                       5
<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>
 (Dollars in Thousands)                                                         June 30,
                                              ------------------------------------------------------------------------
                                                     2000                       1999                      1998
                                               ------------------       --------------------       -------------------
                                               Amount    Percent        Amount       Percent       Amount      Percent
                                               ------    -------        ------       -------       ------      -------
<S>                                           <C>          <C>         <C>            <C>         <C>          <C>
Single-family residential (1)                 $181,414      66.7%      $216,511        83.5%      $154,336      94.6%
Commercial real estate (2)                      16,098       5.9         16,707         6.4          3,522        2.2
                                               -------      ----        -------        ----         ------       ----
           Total real estate loans             197,512      72.6        233,218        89.9        157,858       96.8
Collateralized commercial loans                 57,063      21.0         17,071         6.6          1,201        0.7
Consumer loans:
  Deposit secured                                  364       0.1            426         0.2            221        0.1
  Home improvement/equity                       14,248       5.3          5,443         2.1          3,536        2.2
  Automobile                                     2,371       0.9          2,811         1.1             13          -
  Other                                            373       0.1            369         0.1            240        0.2
                                                  ----      ----           ----        ----           ----       ----
           Total consumer loans                 17,356       6.4          9,049         3.5          4,010        2.5
                                               -------      ----         ------        ----         ------     ------
             Total loans                       271,931     100.0%       259,338       100.0%        163,069     100.0%
                                              ========    ======        =======       =====         =======     =====
Less:

  Unamortized push-down accounting
    adjustment (3)                                 (22)                     (54)                      (113)
  Unamortized discount on loans                      -                        -                          -
  Undisbursed funds (4)                            (80)                      (2)                        (6)
  Deferred loan origination (fees) costs           549                    1,260                        956
  Allowance for loan losses                     (1,408)                    (868)                      (360)
                                              --------                  -------                   --------
Net loans                                     $270,970                 $259,674                   $163,546
                                              ========                 =========                  ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>                                                        June 30,
                                               --------------------------------------------
                                                          1997                      1996
                                               ------------------        ------------------
                                               Amount     Percent        Amount     Percent
                                               ------     -------        ------     -------
<S>                                           <C>           <C>          <C>          <C>
Single-family residential (1)                 $91,140       97.2%        $64,899      97.8%
Commercial real estate (2)                        258        0.3            441        0.7
                                                 ----       ----           ----       ---
           Total real estate loans             91,398       97.5         65,340       98.5
Collateralized commercial loans                     -          -             -
Consumer loans:
  Deposit secured                                 252        0.2            267        0.4
  Home improvement/equity                       2,136        2.3            732        1.1
  Automobile                                        -          -              -          -
  Other                                             -          -              -          -
                                                   --         --             --         -
           Total consumer loans                 2,388        2.5            999        1.5
                                               ------       ----           ----       ----
             Total loans                       93,786      100.0%          66,339    100.0%
                                              =======      ======          ======    =====
Less:

  Unamortized push-down accounting
    adjustment (3)                               (136)                     (182)
  Unamortized discount on loans                     -                        (7)
  Undisbursed funds (4)                            (9)                     (420)
  Deferred loan origination (fees) costs          530                       315
  Allowance for loan losses                      (213)                     (120)
                                              ------                    -------
Net loans                                     $93,958                   $65,925
                                             ========                   =======


</TABLE>
(1)    Includes single-family  residential construction loans. At June 30, 2000,
       the Bank had  $196,000 in  single-family  residential  and $75 million in
       commercial real estate construction loans in process.

(2)    Includes $0, $63,000,  $224,000,  $258,000 and $291,000 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 construction loans.



                                       6
<PAGE>


Contractual  Principal  Repayments and Interest Rates.  The following table sets
forth certain  information at June 30, 2000 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
                                 ------------   -----        -----        -----
                                            (Dollars In Thousands)
<S>                                <C>         <C>         <C>         <C>
 Single-family residential         $ 12,866    $ 14,474    $154,074    $181,414
 Commercial                          43,577       3,323      26,261      73,161
 Consumer                             8,961       4,961       3,434      17,356
                                   --------    --------    --------    --------
            Total                  $ 65,404    $ 22,758    $183,769    $271,931
                                   ========    ========    ========    ========
 </TABLE>


         The following  table sets forth the dollar amount of all loans,  before
net items,  due after one year from June 30,  2000,  which  have fixed  interest
rates or which have floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                      Floating or
                                        Fixed Rates Adjustable-Rates     Total
                                        ----------- ----------------     -----
                                                (Dollars In Thousands)
<S>                                      <C>            <C>            <C>
 Single-family residential               $152,968       $ 15,580       $168,548
 Commercial                                29,584           --           29,584
 Consumer                                   7,732            663          8,395
                                         --------       --------       --------
            Total                        $190,284       $ 16,243       $206,527
                                         ========       ========       ========

</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, 2000,  there were none) 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  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, 2000, the Company was servicing
$24.2 million of loans for others.

                                      7
<PAGE>


         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   correspondent   mortgage  banking
companies.  Currently,  the Bank is utilizing mortgage banking companies located
in Indianapolis,  Indiana and Overland Park,  Kansas. 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,
                                         -------------------------------------
                                            2000           1999          1998
                                                  (Dollars in Thousands)
 Direct loan originations:
<S>                                      <C>           <C>           <C>
   Single-family residential             $  10,706     $  66,644     $  39,772
   Commercial                               53,988        51,585         4,506
   Consumer                                 12,613         9,967         4,355
                                         ---------     ---------     ---------
     Total loans originated directly        77,307       128,196        48,633
 Originations by correspondents (1)            509        39,523        47,921
                                         ---------     ---------     ---------
   Total loans originated                   77,816       167,719        96,554
 Loan principal reductions                 (65,223)      (71,450)      (27,271)
                                         ---------     ---------     ---------
 Net increase in loan portfolio          $  12,593     $  96,269     $  69,283
                                         =========     =========     =========
</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  primarily  by first  mortgage  liens on existing
single-family  residences.  At June 30,  2000,  $181.4  million  or 66.7% 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  15.4% of the  single-family  residential loans in the Bank's loan
portfolio at June 30, 2000 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.


                                       8
<PAGE>


         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.

         In fiscal year 2000,  the Bank  implemented a Residential  Construction
Lending Program.  The program was designed to finance the construction of single
family residential dwellings.  The loans are underwritten following underwriting
guidelines  that  qualify  the loans to be sold in the  secondary  market,  even
though the loans may be held in the Bank's loan portfolio. At June 30, 2000, the
Bank had $196,000 in  single-family  residential  and $7.5 million in commercial
real estate construction loans in process.

         Commercial Real Estate Loans.  At June 30, 2000,  $16.1 million or 5.9%
of the Bank's total loan portfolio consisted of loans secured by commercial real
estate.  At June 30,  2000,  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 1998
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, 2000,  $57.1 million or
21.0% 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,  2000,  $17.4  million  or 6.4% 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, 2000, home equity loans and lines of credit and
home  improvement  loans  totaled  $14.2  million or 82.1% of the  Bank's  total
consumer loan portfolio.


                                       9
<PAGE>

         The Bank  currently  offers loans  secured by deposit  accounts,  which
amounted to $364,000 or 2.1% of the Bank's total consumer loan portfolio at June
30,  2000.  Such  loans  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, 2000, these other loans
amounted to $2.7 million or 15.8% 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
write-down 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 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.

         Automobiles  acquired through  repossession are carried at the lower of
the  loan's  unpaid  principal  balance  (cost) or fair  value  based on current
National  Automobile Dealers Association  valuation,  adjusted for any damage or
vandalism.  A loan  charge-off  is  recorded  for any  write-down  in the loan's
carrying  value to fair  value  at the date of  transfer.  Loss  provisions  are
recorded if the fair value of the  automobile  subsequently  declines  below the
value  determined at the recording date. After  repossession,  costs relating to
holding the automobile 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. At June 30, 2000, the Bank had one
loan  designated  as a troubled  debt  restructuring.  The Bank did not have any
troubled debt restructurings in the prior periods presented.

                                       10
<PAGE>
<TABLE>
<CAPTION>
                                                                              June 30,
                                                          -----------------------------------------------
                                                             2000    1999       1998     1997       1996
                                                           ------    ------    ------    ------    ------
                                                                        (Dollars in Thousands)
<S>                                                        <C>       <C>       <C>       <C>       <C>
 Non-accruing loans:
   Single-family residential                               $  151    $   70    $  285    $  336    $  261
   Consumer                                                    29         6
   Commercial                                                --        --        --        --        --
                                                           ------    ------    ------    ------    ------
   Total non-accruing loans                                   180        76       285       336       261
 Accruing loans greater than 90 days
   delinquent                                                --        --        --        --        --
                                                           ------    ------    ------    ------    ------
            Total non-performing loans                        180        76       285       336       261
 Real estate owned                                                                 18
 Repossessed automobiles                                        3        22
 Other non-performing assets (1)                              378       502       587       789     1,088
                                                           ------    ------    ------    ------    ------
            Total non-performing assets                    $  561    $  600    $  890    $1,125    $1,349
                                                           ======    ======    ======    ======    ======
            Total non-performing loans as a percentage
               of total loans                                0.07 %    0.03 %    0.17 %    0.36 %    0.40 %
                                                           ======    ======    ======    ======    ======
            Total non-performing assets as a percentage
              of total assets                                0.13 %    0.13 %    0.18 %    0.25 %    0.32 %
                                                           ======    ======    ======    ======    ======
Troubled debt restructurings                               $2,054    $    -    $    -    $    -    $    -
                                                           ======    ======    ======    ======    ======
 </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, 2000, 1999, 1998, 1997 and 1996 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  $6,000,   $1,000,   $15,000,   $6,000  and  $6,000,
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.  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, 2000 consisted of $2.5 million
of assets classified as substandard  (including $2,122,000 of loans and $378,000
of  securities)  and fifteen  loans in the amount of $96,000 were  classified as
doubtful.  In  addition,  at June 30,  2000,  $759,000 of the Bank's  loans were
designated special mention.

         The $378,000 of securities  classified as  substandard at June 30, 2000
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, 2000,
approximately  13.5% 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

                                       11
<PAGE>

senior classes.  As of June 30, 2000, the pool had cumulative realized losses of
$23.6  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,  2000.  The  security is  currently  held in the Bank's
available for sale  portfolio and its $378,000  carrying  value at June 30, 2000
reflects $42,000 of net unrealized gains 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 Office of Thrift Supervision  ("OTS"),
in conjunction  with the Office of the Comptroller of the Currency,  the Federal
Deposit Insurance  Corporation ("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 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."

                                       12
<PAGE>


         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,
                                           -------------------------------------------------------------
                                              2000         1999          1998        1997        1996
                                                           (Dollars in Thousands)
<S>                                        <C>          <C>           <C>          <C>         <C>
 Total loans outstanding, net              $ 270,970    $ 259,674     $ 163,546    $ 93,958    $  65,925
                                           =========    =========     =========    ========    =========
 Average loans outstanding, net            $ 275,454    $ 223,174     $ 116,982    $ 78,545    $  52,399
                                           =========    =========     =========    ========    =========
 Balance at beginning of period            $     868    $     360     $     213    $    120    $     121
 Charge-offs:
   Single-family residential                    --           --            --          --           --
   Commercial real estate                       --           --            --          --           --
   Consumer                                       49         --            --          --           --
                                           ---------    ---------     ---------    --------    ---------
            Total charge-offs                     49
 Recoveries:
   Single-family residential                    --              1          --          --           --
   Consumer                                        2         --            --          --           --
                                           ---------    ---------     ---------    --------    ---------
            Total recoveries                       2            1          --          --           --
                                           ---------    ---------     ---------    --------    ---------
 Net charge-offs                                  47           (1)
 Provision (recovery) for loan losses            587          509           147          93           (1)
                                           ---------    ---------     ---------    --------    ---------
 Balance at end of period                  $   1,408    $     868     $     360    $    213    $     120
                                           =========    =========     =========    ========    =========
 Allowance for loan losses as a percent
   of total loans outstanding                  0.5 %        0.3 %     0.2 %        0.2 %           0.2 %
                                           =========    =========     =========    ========    =========
 Ratio of net charge-offs to average
   loans outstanding                           0.0 %        0.0 %     0.0 %        0.0 %           0.0 %
                                           =========    =========     =========    ========    =========
 </TABLE>

         The  Bank  established  provisions  (recoveries)  for  loan  losses  of
$587,000,  $509,000,  $147,000, $93,000 and $(1,000) during the years ended June
30, 2000, 1999,  1998, 1997 and 1996,  respectively.  During such periods,  loan
charge-offs (net of recoveries) amounted to $47,000,  $(1,000),  $0, $0, and $0,
respectively.  The increases in the provision for loan losses during the periods
presented were due to substantial growth in the Company's mortgage, consumer and
commercial loan portfolios.



                                       13
<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,
                                     --------------------------------------------------------------------------------------------
                                             2000                    1999                    1998                    1997
                                     ---------------------  ----------------------  ---------------------   ---------------------
                                              Percent of              Percent of              Percent of              Percent of
                                             Loans in Each           Loans in Each          Loans in Each          Loans in Each
                                              Category to             Category to             Category to            Category to
                                     Amount   Total Loans    Amount   Total Loans    Amount   Total Loans   Amount   Total Loans
                                     ------   -----------    ------   -----------    ------   -----------   ------   -----------
                                                                        (Dollars in Thousands)
 Single-family residential loans     $   93         6.6%    $  377         43.4%    $  302         83.9%    $  188         97.2%
 Commercial loans                     1,098        78.0        411         47.4         43         11.9         10          0.3
 Consumer loans                         217        15.4         80          9.2         15          4.2         15          2.5
                                      ------      ------    ------       ------      ------     ------      ------       ------
            Total                    $1,408      100.00%     $  868      100.00%     $  360     100.00%     $  213       100.00%
                                     ======      ======      ======      ======      ======     ======      ======       ======

<CAPTION>
                                            1996
                                      ---------------------
                                               Percent of
                                              Loans in Each
                                               Category to
                                      Amount   Total Loans
                                      ------   -----------

<S>                                    <C>         <C>
 Single-family residential loans       $   95      97.8%
 Commercial loans                          10       0.7
 Consumer loans                            15       1.5
                                       ------    ------
            Total                      $  120    100.00%
                                       ======    ======
 </TABLE>





                                       14
<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  $30.0  million  in any one
transaction.  For  purchases  or sales  greater  than $30.0  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 may 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 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.
Substantially  all of these  securities  and their  related  interest  rate risk
management  contracts are classified as trading or available for sale securities
and,  pursuant to SFAS 115, are reported at fair value with unrealized gains and
losses included in earnings or equity, respectively.

         Mortgage-Backed and Related Securities. At June 30, 2000, the Company's
mortgage-backed  and related  securities  portfolio  (including  $6.4 million of
mortgage-backed  derivative  securities)  amounted to $121.7 million or 99.9% of
the Company's  securities  portfolio and 28.0% 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.

         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

                                       15
<PAGE>

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, 2000, $6.4 million or 5.3% 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 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.


                                       16
<PAGE>


         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,
2000,  $35.6  million  or 29.2% 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.



                                       17
<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>

 (Dollars in Thousands)                                                               June 30,
                                                ----------------------------------------------------------------------------------
                                                           2000                         1999                           1998
                                                ------------------------     ------------------------      -----------------------
                                                  Amortized      Fair         Amortized        Fair         Amortized       Fair
                                                    Cost         Value          Cost           Value          Cost          Value
                                                ---------     ---------      ---------      ---------      ---------     ---------
<S>                                              <C>           <C>            <C>            <C>            <C>           <C>
 Securities held for trading:
 FHLMC participation certificates                $  14,921     $  14,378      $  69,114      $  67,850      $  50,555     $  51,229
  FNMA participation certificates                    8,830         8,462         28,034         27,599         57,252        58,244
 GNMA participation certificates                    24,662        24,531         37,986         38,116        142,951       144,219
 Commercial participation certificates                --            --           34,896         33,808         17,540        17,788
 Non-agency participation certificates                --            --             --             --            1,884         1,875
                                                 ---------     ---------      ---------      ---------      ---------     ---------
   Total mortgage-backed securities                 48,413        47,371        170,030        167,373        270,182       273,355
                                                 ---------     ---------      ---------      ---------      ---------     ---------
 Collateralized mortgage obligation                  5,609         5,586         10,738         11,069         10,930        11,414
 Residuals                                             139           179            205            226            309           364
 Interest-only strips                                  631           257            818            377          1,118           518
 Principal only strips                                 306           392            403            506            599           718
                                                 ---------     ---------      ---------      ---------      ---------     ---------
 Total mortgage-backed derivative securities         6,685         6,414         12,164         12,178         12,956        13,014
                                                 ---------     ---------      ---------      ---------      ---------     ---------
 Interest rate swaps                                  --             (18)                         (175)                        (397)
 Interest rate collar                                    3             2              4              4             38           (22)
 Interest rate caps                                   --            --            1,744            587          2,384           227
 Interest rate floors                                 --            --            3,821          4,382          3,410         4,440
 Options                                               181           113            298            328             68            50
 Futures                                              --             (41)                       (1,611)                        (257)
                                                 ---------     ---------      ---------      ---------      ---------     ---------
 Total interest rate contracts                         184            56          5,867          3,515          5,900         4,041
                                                 ---------     ---------      ---------      ---------      ---------     ---------
 Equity securities                                       6            11             69            134             99           199
                                                 ---------     ---------      ---------      ---------      ---------     ---------
 Total securities held for trading               $  55,288     $  53,852      $ 188,130      $ 183,200      $ 289,137     $ 290,609
                                                 =========     =========      =========      =========      =========     =========
  Securities available for sale:
 GNMA certificates                               $  63,806     $  63,321      $    --        $    --        $    --       $    --
 Commercial mortgage backed securities                 353           353           --             --             --            --
     Non-agency participation certificates             336           378      $     461      $     502      $     605     $     587
                                                 ---------     ---------      ---------      ---------      ---------     ---------
       Total mortgage-backed securities             64,495        64,052            461            502            605           587
    Municipal bonds                                   --            --             --             --              319           335
                                                 ---------     ---------      ---------      ---------      ---------     ---------
 Total securities available for sale             $  64,495     $  64,052      $     461      $     502      $     924     $     922
                                                 =========     =========      =========      =========      =========     =========
 Securities held to maturity:
   Mortgage-backed securities                    $   3,821     $   3,835      $    --        $    --        $    --       $    --
   FNMA-stock                                            1             5           --             --             --            --
   Mortgage revenue bonds                               35            35           --             --             --            --
                                                 ---------     ---------      ---------      ---------      ---------     ---------
 Total securities held to maturity               $   3,857     $   3,875      $    --        $    --        $    --       $    --
                                                 =========     =========      =========      =========      =========     =========
 </TABLE>

                                       18
<PAGE>

The  following  table  sets  forth the fair  value of the  Company's  securities
activities for the periods indicated:

<TABLE>
<CAPTION>
                                                                              At of For the Years Ended June 30,
                                                                           ---------------------------------------
                                                                              2000           1999           1998
                                                                           ---------      ---------      ---------
                                                                                     (Dollars in Thousands)
<S>                                                                        <C>            <C>            <C>
 Beginning balance                                                         $ 183,702      $ 291,531      $ 318,480
                                                                           ---------      ---------      ---------
 Mortgage-backed securities purchased-held for trading                       319,196        776,200        653,403
 Collateralized mortgage obligations purchased-held for trading                 --             --             --
 Mortgage-backed derivative securities purchased-held for trading               --            1,777           --
 Interest rate contracts purchased-held for trading                              138          2,283          1,808
 Mortgage backed securities purchased - available for sale                    74,407           --             --
 Equity securities purchased-held for trading                                   --             --            2,000
                                                                           ---------      ---------      ---------
            Total securities purchased                                       393,741        780,260        657,211
 Less:
   Sale of mortgage-backed securities-held for trading                       434,847        830,228        634,099
   Sale of collateralized mortgage obligations - held for trading               --             --           15,335
   Sale of mortgage-backed derivative securities-held for trading               --            1,720            628
   Sale of interest rate contracts - held for trading                           --             --              113
   Sale of equity securities - held for trading                                   64             30          2,205
                                                                           ---------      ---------      ---------
            Total securities sold                                            434,911        831,978        652,380
                                                                           ---------      ---------      ---------
 Less proceeds from maturities of securities                                  17,935         51,865         28,697
 Realized gain(loss) on sale of securities held for trading                   (4,498)         4,755           (775)
 Unrealized gain (loss) on securities held for trading                         3,494         (6,402)          (930)
 Change in net unrealized gain (loss) on securities available for sale          (484)            25             56
 Amortization of premium                                                      (1,334)        (2,624)        (1,434)
                                                                           ---------      ---------      ---------
 Ending balance                                                            $ 121,775      $ 183,702      $ 291,531
                                                                           =========      =========      =========
</TABLE>
         At June 30, 2000, 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, 2000, of the $121.7 million of
mortgage-backed  and related  securities  held by the  Company,  an aggregate of
$14.1  million were  secured by  fixed-rate  mortgage  loans and an aggregate of
$107.6 million were secured by adjustable-rate mortgage loans.

         Other  Securities.  Other  securities  owned by the Company at June 30,
2000 include various interest rate risk management contracts, including interest
rate swaps, collars, caps, floors, options and futures and equity securities. At
June 30, 2000, the carrying  value of the Company's  interest rate contracts and
equity securities amounted to $56,000 and $11,000,  respectively.  See Note 2 to
the Notes to Consolidated Financial Statements.

                                       19
<PAGE>


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 demand  deposit
accounts  ("DDA"),  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,  2000,  non-retail
deposit  accounts  totaled $26.8  million or 7.4% of the Bank's total  deposits.
These non-retail  deposits consist largely of jumbo  certificates of deposit and
inverse  variable-rate  certificates  (which are obtained through brokers).  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.  Retail deposits  increased $13.6 million,
from  $320.8  million  at June 30,  1999 to  $334.4  million  at June 30,  2000,
primarily due to the Company's  strategy of rapidly building a community banking
franchise  which  included the opening of the Chapel Hill,  NC branch in July of
1999.



                                       20
<PAGE>

         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>
(Dollars in Thousands)                                                      June 30,
                                          ------------------------------------------------------------------------------
                                                  2000                        1999                       1998
                                          -----------------------     -----------------------    -----------------------
                                                       Percent of                  Percent of                 Percent of
                                          Amount       Deposits        Amount      Deposits      Amount       Deposits
                                          ------       --------        ------      --------      ------       --------
<S>                                      <C>          <C>             <C>          <C>           <C>           <C>
 Transaction accounts:
   NOW and DDA                           $ 37,879        10.5%        $ 16,911         5.1%      $  8,202         4.6%
   Savings accounts                        35,646         9.9           33,163        10.0         31,076        17.4
   Money market deposit accounts           62,159        17.2          137,463        41.2          2,705         1.5
                                         --------       -----         --------       -----       --------       -----
         Total transaction accounts       135,684        37.6          187,537        56.3         41,983        23.5
                                         --------       -----         --------       -----       --------       -----
 Certificates of deposit:
   Within 1 year                          162,795        45.0%        $126,592        38.0        113,237        63.5
   1-2 years                               37,936        10.5            9,543         2.9         13,169         7.4
   2-3 years                               11,586         3.2            4,730         1.4          3,570         2.0
   3-4 years                                2,431         0.7            2,867         0.8          3,198         1.8
   Over 4 years                            10,809         3.0            1,976         0.6          3,154         1.8
                                         --------       -----         --------       -----       --------       -----
          Total certificate accounts      225,557        62.4          145,708        43.7        136,328        76.5
                                         --------       -----         --------       -----       --------       -----
          Total deposits                 $361,241       100.0%        $333,245       100.0%      $178,311       100.0%
                                         ========       =====         ========       =====       ========       =====
 </TABLE>
         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>

   (Dollars in Thousands)                                                   June 30,
                                              -----------------------------------------------------------------------
                                                      2000                    1999                    1998
                                              -----------------------  ---------------------   ----------------------
                                                           Percent of             Percent of               Percent of
                                              Amount       Deposits    Amount     Deposits      Amount     Deposits
<S>                                           <C>            <C>        <C>            <C>     <C>            <C>
 Total retail certificates                    $198,367       54.9%      $134,027       40.2%   $126,096       70.7%
                                              --------       ----       --------       ----    --------       ----
    Non-retail certificates:
     Jumbo certificates                         23,368        6.5          7,440        2.2       2,752        1.5
     Inverse variable-rate certificates          2,706        0.7          2,907        0.9       5,250        3.0
   Non-brokered out-of-state deposits            1,116        0.3          1,334        0.4       2,131        1.2
   Brokered deposits                              --       --               --       --              99        0.1
                                              --------       ----       --------       ----    --------       ----
        Total non-retail certificates (1)       27,190        7.5         11,681        3.5      10,232        5.8
                                              --------       ----       --------       ----    --------       ----
 Total certificates of deposit                $225,557       62.4%      $145,708       43.7%   $136,328       76.5%
                                              ========       ====       ========       ====    ========       ====
 </TABLE>

(1)      Of the Company's  $27.2 million of non-retail  certificates  as of June
         30, 2000,  $8.5 million was  scheduled to mature in six months or less,
         $15.2 million was scheduled to mature in 7-12 months,  $3.1 million was
         scheduled to mature in 13-36  months and $0.4 million was  scheduled to
         mature in over 36 months.



                                       21
<PAGE>


         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>

(Dollars in Thousands)                                        Year Ended June 30,
                                     ---------------------------------------------------------------------
                                             2000                    1999                  1998
                                     ---------------------   ---------------------   ---------------------
                                       Average    Average     Average     Average    Average      Average
                                       Balance   Rate Paid    Balance    Rate Paid   Balance     Rate Paid
                                       -------   ---------    -------    ---------   -------     ---------
<S>                                  <C>             <C>     <C>             <C>     <C>             <C>
 NOW and DDA accounts                $ 31,090        3.3%    $ 13,050        2.3%    $  6,788        2.5%
 Savings accounts                      33,291        4.1       30,520        4.2       25,188        4.3
 Money market deposits accounts       105,441        4.9       73,256        4.8        2,713        4.7
 Certificates of deposit              186,308        5.7      156,262        5.7      117,073        5.9
                                     --------        ---     --------        ---     --------        ---
 Total deposit                       $356,130        5.1%    $273,088        5.2%    $151,762        5.5%
                                     ========        ===     ========        ===     ========        ===
 </TABLE>
         The following  table sets forth the deposit  account  activities of the
Bank during the periods indicated.

<TABLE>
<CAPTION>
                                                                Year Ended June 30,
                                                       ----------------------------------
                                                          2000          1999         1998
                                                               (Dollars in Thousands)
<S>                                                    <C>           <C>          <C>
Deposits                                               $ 292,808     $878,151     $264,182
Withdrawals                                             283,014      742,612      230,421
                                                        --------     --------     -------
Net increase (decrease) before interest credited          9,794       135,539       33,761
                                                          ------
Interest credited                                        18,202       19,395        8,375
                                                         -------      -------       -----
           Deposit activity                            $ 27,996     $154,934     $ 42,136
                                                       =========    =========    ========
</TABLE>
         The following  table shows the interest  rate and maturity  information
for the Bank's certificates of deposit at June 30, 2000.



<TABLE>
<CAPTION>
                                               Maturity Date
                       ----------------------------------------------------------------
                         One Year      Over         Over           Over
Interest Rate           or Less     1-2 Years    2-3 Years        3 Years       Total
                                           (Dollars in Thousands)
<S>                    <C>           <C>           <C>           <C>           <C>
 3.00% or less         $     28      $    182      $   --        $      3      $    213
 3.01 - 5.00%             7,444           428           660           415         8,947
 5.01 - 7.00%           139,375        33,785        10,547        11,064       194,771
 7.01 - 9.00%            15,273         3,541           379         1,758        20,951
 9.01% or greater           675          --            --            --             675
                       --------      --------      --------      --------      --------
 Total                 $162,795      $ 37,936      $ 11,586      $ 13,240      $225,557
                       ========      ========      ========      ========      ========
 </TABLE>


                                       22
<PAGE>
         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,
2000.



 Certificates of deposit maturing in quarter ending:
<TABLE>
<CAPTION>

                                                                        Amount
                                                                (Dollars in Thousands)

<S>                                                                    <C>
September 30, 2000                                                     $ 22,027
December 31, 2000                                                        10,536
March 31, 2001                                                            4,761
After March 31, 2001                                                     19,918
                                                                       --------
  Total certificates of deposit with balances of $100,000 or more      $ 57,242
                                                                       ========
</TABLE>


         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,
                                                                      -------------------------------------
                                                                         2000          1999         1998
                                                                              (Dollars in Thousands)
 FHLB advances:
<S>                                                                   <C>           <C>           <C>
   Average balance outstanding                                        $ 15,540      $ 36,172      $ 27,488
   Maximum amount outstanding at any month-end during the period        40,000        40,000        64,000
   Balance outstanding at end of period                                  7,000        40,000        26,000
   Average interest rate during the period                               5.5 %         6.9 %         6.7 %
   Average interest rate at end of period                                6.9 %         4.9 %         5.6 %

 Securities sold under agreements to repurchase:
   Average balance outstanding                                        $ 52,466      $213,428      $319,579
   Maximum amount outstanding at any month-end during the period       102,953       334,160       342,094
   Balance outstanding at end of period                                 28,038        60,198       240,396
   Average interest rate during the period                               5.4 %         5.4 %         5.6 %
   Average interest rate at end of period                                6.3 %         4.9 %         5.7 %
  </TABLE>




         The Company  obtains both  fixed-rate and  variable-rate  long-term and
short-term  advances  from the Federal Home Loan Bank  ("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 specific mortgages pledged
as collateral.

         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. At June 30, 2000 and 1999, the Company had advances with the Federal
Home Loan Bank  ("FHLB")  of  Indianapolis  in the  amount of $7.0  million at a
weighted  average  interest rate of 6.9% and $40.0 million at a weighted average
interest rate of 4.9%, respectively.


                                       23
<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.

         At June 30, 2000, the Company  maintained a $13,000,000  term loan from
Firstar Bank Midwest,  N.A. (formerly Mercantile  Bancorporation,  Inc. and Mark
Twain Bank) of which  $12,995,000  was outstanding as of June 30, 2000. The loan
facility matures in January 2001 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,
1999, the total balance of the loan facility was $14.0 million.

Subsidiaries

         In February 1999, the Bank formed Harrington Wealth Management  Company
("HWM"), which provides trust,  investment management,  and custody services for
individuals and institutions.  HWM is a strategic alliance between the Bank (51%
owner) and Los Padres Bank (49%  owner),  a  federally  chartered  savings  bank
located in California.  HWM is an operating subsidiary of the Bank and, as such,
is restricted to engage in activities  that the Bank can engage in directly.  As
of June 30, 2000, HWM administered 124 trust/fiduciary  accounts, with aggregate
assets of  approximately  $48.4  million at such  date,  a portion of which were
formerly  administered by Harrington Investment Management and Trust Services, a
separate  division of the Bank. The Bank's  investment in HWM is not material to
its operations or financial  condition.  The accompanying  consolidated  balance
sheet  includes  100  percent  of the  assets and  liabilities  of HWM,  and the
ownership of Los Padres Bank is recorded as "Minority  interest." The results of
operations include 100 percent of the revenues and expenses of HWM from the date
of  formation,  and the  ownership  of Los Padres Bank is recorded as  "Minority
interest" net of income taxes. See Note 1 to the Notes to Consolidated Financial
Statements.

         The Bank is  permitted  to invest up to 2% of its assets in the capital
stock of, or  secured  or  unsecured  loans to,  service  corporations,  with an
additional  investment  of 1% of assets  when  such  additional  investments  is
utilized primarily for community development  purposes.  The Bank's only service
corporation, 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 service  corporation is not material to
its operations or financial condition.


                                       24
<PAGE>


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.  Certain federal
banking laws have been recently  amended.  See "Supervision  and  Regulation-The
Company-Financial Modernization."

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. The Company
is further 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 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
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.
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 controls only one
subsidiary  savings  institution  on or before May 4, 1999 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.

         As a general  rule,  multiple  savings and loan holding  companies  are
subject to  restrictions  which do not apply to unitary savings and loan holding
companies. They could not commence or continue any business activity other than:
(1) those  permitted  for a bank holding  company under section 4(c) of the Bank
Holding  Company Act (unless the Director of the OTS by regulation  prohibits or
limits such 4(c) activities);  (2) furnishing or performing  management services
for a subsidiary  savings  institution;  (3)  conducting an insurance  agency or
escrow  business;  (4)  holding,  managing,  or  liquidating  assets owned by or
acquired  from  a  subsidiary  savings  institution;  (5)  holding  or  managing
properties used or occupied by a subsidiary savings  institution;  (6) acting as
trustee under deeds of trust; or (7) engaging in those activities  authorized by
regulation as of March 5, 1987 to be permissible  for multiple  savings and loan
holding companies. 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 Section 11 of the HOLA
and 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,  Section 11 of the HOLA  prohibits a savings  institution  from (1)
making a loan or other  extension  of credit  to an  affiliate,  except  for any


                                       25
<PAGE>

affiliate  which engages only in certain  activities  which are  permissible for
bank holding  companies,  or (2)  purchasing or investing 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 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, 2000,  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.

         Financial Modernization.  Under the Gramm-Leach-Bliley Act enacted into
law on November 12, 1999,  no company may acquire  control of a savings and loan
holding  company  after May 4,  1999,  unless the  company  is  engaged  only in
activities  traditionally  permitted  to a  multiple  savings  and loan  holding
company or newly permitted to a financial  holding company under Section 4(k) of
the Bank Holding Company Act.  Existing  savings and loan holding  companies and
those formed  pursuant to an application  filed with the OTS before May 4, 1999,
may engage in any activity  including  non-financial  or  commercial  activities
provided such companies control only one savings and loan association that meets
the Qualified Thrift Lender test. Corporate  reorganizations are permitted,  but
the transfer of  grandfathered  unitary  thrift  holding  company status through
acquisition is not permitted.

                                       26

<PAGE>


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  January  24,  2000.  The  Bank was 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.

         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.

         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings  institutions to satisfy minimum capital  standards:  risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
institutions  must  meet  each of  these  standards  in order  to be  deemed  in
compliance  with OTS  capital  requirements.  In  addition,  the OTS may require
savings institutions to maintain capital above the minimum capital levels.

         All savings  institutions  are  required  to meet a minimum  risk-based
capital  requirement of total capital (core capital plus supplementary  capital)
equal to 8% of risk-weighted  assets (which includes the credit risk equivalents
of certain  off-balance  sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of core
capital. A savings  institution is also required to maintain tangible capital in
an amount at least equal to 1.5% of its adjusted total assets.

                                       27
<PAGE>


         In March 1999, the federal banking  agencies  amended their  risk-based
and leverage capital standards to make uniform their regulations. In particular,
the agencies  made  risk-based  capital  treatments  for  construction  loans on
pre-sold  residential  properties,  real estate loans secured by junior liens on
1-to 4-family residential properties, and investments in mutual funds consistent
among the  agencies,  and  simplified  and made  uniform  the  agencies'  Tier 1
leverage capital standards.  The most highly-rated  institutions must maintain a
minimum  Tier 1  leverage  ratio of 3.0  percent,  with all  other  institutions
required to maintain a minimum  leverage  ratio of 4.0  percent.  (In  addition,
under the prompt corrective  action  provisions of the OTS regulations,  all but
the most highly-rated  institutions must maintain a minimum leverage ratio of 4%
in order to be adequately  capitalized.  See "--Prompt  Corrective Action.") The
OTS  regulations  now  state  that  higher-than-minimum  capital  levels  may be
required if warranted,  and that  institutions  should  maintain  capital levels
consistent with their risk exposures.

         The OTS  regulations  provide that minimum  capital  levels higher than
those provided in the  regulations  may be established by the OTS for individual
savings  institutions,  upon a  determination  that  the  savings  institution's
capital  is or may  become  inadequate  in  view of its  circumstances.  The OTS
regulations   provide  that  higher  individual   minimum   regulatory   capital
requirements  may be appropriate in  circumstances  where,  among others:  (1) a
savings  institution  has a high  degree of  exposure  to  interest  rate  risk,
prepayment  risk,  credit  risk,  concentration  of credit risk,  certain  risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings institution is growing,  either internally
or through acquisitions,  at such a rate that supervisory problems are presented
that  are not  dealt  with  adequately  by OTS  regulations;  and (3) a  savings
institution may be adversely  affected by activities or condition of its holding
company, affiliates,  subsidiaries or other persons or savings institutions with
which it has significant business relationships.  The Bank is not subject to any
such individual minimum regulatory capital requirement.

         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.

         Prompt  Corrective  Action.  Under  Section 38 of the  Federal  Deposit
Insurance Act ("FDIA"),  each federal banking agency was required to implement a
system of prompt  corrective  action for  institutions  which it regulates.  The
federal  banking  agencies,  including the OTS,  adopted  substantially  similar
regulations  to implement  Section 38 of the FDIA,  effective as of December 19,
1992.  Under  the  regulations,  an  institution  is  deemed  to  be  (1)  "well
capitalized" if it has total  risk-based  capital of 10.0% or more, has a Tier 1
risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of
5.0% or more and is not subject to any order or final capital  directive to meet
and maintain a specific capital level for any capital  measure,  (2) "adequately
capitalized" if it has a total risk-based  capital ratio of 8.0% or more, a Tier
1 risk-based  capital ratio of 4.0% or more and a Tier 1 leverage  capital ratio
of 4.0% or more  (3.0%  under  certain  circumstances)  and  does  not  meet the
definition  of  "well  capitalized,"  (3)  "undercapitalized"  if it has a total
risk-based  capital  ratio that is less than 8.0%, a Tier 1  risk-based  capital
ratio  that is less than 4.0% or a Tier 1  leverage  capital  ratio that is less
than   4.0%   (3.0%   under   certain    circumstances),    (4)   "significantly
undercapitalized"  if it has a total risk-based  capital ratio that is less than
6.0%,  a Tier 1  risk-based  capital  ratio  that is less  than 3.0% or a Tier 1
leverage   capital   ratio   that  is  less  than   3.0%  and  (5)   "critically
undercapitalized"  if it has a ratio of tangible  equity to total assets that is
equal  to or  less  than  2.0%.  Section  38 of the  FDIA  and  the  regulations
promulgated  thereunder also specify circumstances under which a federal banking
agency may reclassify a well capitalized  institution as adequately  capitalized
and may require an adequately  capitalized  institution  or an  undercapitalized
institution to comply with  supervisory  actions as if it were in the next lower
category   (except   that   the  FDIC  may  not   reclassify   a   significantly
undercapitalized institution as critically undercapitalized).

         An institution  generally must file a written capital  restoration plan
which meets specified  requirements  with an appropriate  federal banking agency
within 45 days of the date that the institution  receives notice or is deemed to
have  notice  that it is  undercapitalized,  significantly  undercapitalized  or
critically   undercapitalized.   A  federal  banking  agency  must  provide  the
institution with written notice of approval or disapproval  within 60 days after
receiving a capital restoration plan, subject to extensions by the agency.

                                       28
<PAGE>


         An institution  which is required to submit a capital  restoration plan
must  concurrently  submit a performance  guaranty by each company that controls
the  institution.  Such guaranty shall be limited to the lesser of (1) an amount
equal to 5.0% of the institution's  total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (2) the amount
necessary to restore the relevant  capital  measures of the  institution  to the
levels required for the institution to be classified as adequately  capitalized.
Such a guarantee  shall expire  after the federal  banking  agency  notifies the
institution  that  it has  remained  adequately  capitalized  for  each  of four
consecutive  calendar  quarters.  An institution which fails to submit a written
capital  restoration  plan within the requisite  period,  including any required
performance  guarantee(s),  or fails in any  material  respect  to  implement  a
capital  restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.

         Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA (1)  restricting  payment of
capital  distributions  and management  fees, (2) requiring that the appropriate
federal  banking agency monitor the condition of the institution and its efforts
to restore its capital,  (3) requiring submission of a capital restoration plan,
(4) restricting the growth of the  institution's  assets and (5) requiring prior
approval of certain expansion proposals.  The appropriate federal banking agency
for an  undercapitalized  institution  also may take any number of discretionary
supervisory  actions  if the  agency  determines  that any of these  actions  is
necessary  to resolve the  problems  of the  institution  at the least  possible
long-term  cost to the  deposit  insurance  fund,  subject in  certain  cases to
specified procedures.  These discretionary supervisory actions include requiring
the  institution to raise  additional  capital;  restricting  transactions  with
affiliates;  restricting  interest  rates paid by the  institution  on deposits;
requiring  replacement of senior executive  officers and directors;  restricting
the activities of the institution and its affiliates;  requiring  divestiture of
the institution or the sale of the institution to a willing  purchaser;  and any
other supervisory action that the agency deems appropriate. These and additional
mandatory  and  permissive  supervisory  actions  may be taken  with  respect to
significantly undercapitalized and critically undercapitalized institutions.

         At June 30, 2000, the Bank was deemed a "well capitalized"  institution
for purposes of the above  regulations  and as such was not subject to the above
mentioned restrictions.

         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, 2000,  the Bank's  liquidity
ratio was 24.37%.

         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.

         In January 1999, the OTS amended its capital distribution regulation to
bring such  regulations  into greater  conformity with the other bank regulatory
agencies.  Under  the  regulation,  certain  savings  institutions  would not be
required to file with the OTS. Specifically,  savings institutions that would be
well capitalized  following a capital  distribution  would not be subject to any
requirement  for notice or  application  unless the total  amount of all capital
distributions,  including any proposed capital distribution,  for the applicable
calendar  year would  exceed an amount  equal to the savings  institution's  net
income for that year to date plus the savings institution's  retained net income
for the  preceding  two years.  Because the Bank is a subsidiary of the Company,
the regulation,  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 regulation  will adversely  affect
its ability to make capital distributions.


                                       29
<PAGE>


         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, 2000, the qualified thrift
investments of the Bank were approximately 77.8% of its portfolio assets.

         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, 2000,  the Company had a $7.0 million FHLB  advance.  See "- Sources of
Funds - Borrowings."

                                       30
<PAGE>


         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, 2000,  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, 2000, the Bank was in compliance with this  requirement.  Because
required reserves must be maintained in the form of vault cash or a non-interest
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, 1996 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 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 began in taxable year 1999.


                                       31
<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.




                                       32
<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, 2000.

<TABLE>
<CAPTION>

                                                       Net Book Value
           Description/Address         Leased/Owned    of Property(1)            Deposits
------------------------------------   -------------  -------------------    ------------------
                                                          (In Thousands)

<S>                                       <C>                <C>                   <C>
Main Office                              Owned               $1,550                $78,668
722 East Main Street
Richmond, Indiana

Carmel Branch (2)                        Leased (3)               78                 62,407
11592 Westfield Boulevard
Carmel, Indiana

Fishers Branch (4)                       Owned                   856                 24,641
7150 East 116th Street
Fishers, Indiana

Noblesville Branch (5)                   Owned                   805                 26,073
107 West Logan Street
Noblesville, Indiana

Geist Branch (6)                         Owned                   906                 14,196
9775 Fall Creek Road
Indianapolis, Indiana

Thompson Road Branch (7)                 Leased (8)               18                  9,262
5249 East Thompson Road
Indianapolis, Indiana

Stop 11 Branch (9)                       Leased (10)             147                 27,276
1121 East Stop 11 Road
Indianapolis, Indiana

Shawnee Mission Branch (11)             Leased (12)              126                 75,060
6300 Nall Road
Shawnee Mission, Kansas

Chapel Hill Branch (13)                  Leased (14)              81                 43,658
Suite 271 The Europa Center
Chapel Hill, NC

Executive Offices                        Leased (15)              21                    N/A
10801 Mastin Blvd. Suite 740
Overland Park, KS
</TABLE>

------------------------------------------
(1)      Includes leasehold improvements.
(2)      Branch opened in May 1994.
(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


                                       33
<PAGE>

(7)      Branch opened in January 1998. Branch sold September 8, 2000
(8)      The lease expires in January 2003 and has three options for additional
         terms of five years each. Lease assigned to purchaser on September 8,
         2000.
(9)      Branch opened in February 1998. Branch sold September 8, 2000
(10)     The lease expires in February 2001 and has three options for additional
         terms of five years each. Lease assigned to purchaser on September 8,
         2000.
(11)     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 opened in July 1999.
(14)     The lease expires in July 2004.
(15)     The lease expires in March 2004.


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.




                                       34
<PAGE>


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 2000 and
1999:

                                              Stock Price per  Share
                                              ----------------------

                             High          Low           Close       Dividends
                             ----          ---           -----       ---------
2000
     First quarter          $8.00        $7.125         $7.500        $0.03
     Second quarter         7.750         6.875          7.188         0.03
     Third quarter          7.250         5.500          6.250         0.03
     Fourth quarter         6.500         5.500          6.500         0.03

1999
     First quarter        $11.500       $ 8.375         $9.000        $0.03
     Second quarter         9.000         7.750          8.000         0.03
     Third quarter          8.875         7.500          7.875         0.03
     Fourth quarter         8.500         7.125          7.250         0.03


         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 25, 2000 the Company had  approximately 65 stockholders of
record.

Item 6.       Selected Financial Data.

       The information  required herein is incorporated by reference from page
   1   of the Registrant's 2000 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
2 to 17 of the Registrant's 2000 Annual Report.

Item 7A.      Quantitative and Qualitative Disclosures About Market Risk

        The information  required herein is incorporated by reference from pages
11 to 16 of the Registrant's 2000 Annual Report.

Item 8.       Financial Statements and Supplementary Data.


        The information  required herein is incorporated by reference from pages
18 to 50 of the Registrant's 2000 Annual Report.

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


        Not applicable.



                                       35
<PAGE>

PART III

Item 10.      Directors and Executive Officers of the Registrant.

         The information required herein is incorporated by reference from pages
2 to 8, and 11 of the  Registrant's  Proxy  Statement  dated  September 28, 2000
("Proxy Statement").

Item 11.      Executive Compensation.

         The information required herein is incorporated by reference from pages
12 to 22 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
9 to 11 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.



                                       36
<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 2000 Annual Report.

        Independent Auditors' Report.

        Consolidated Balance Sheets as of June 30, 2000 and 1999.

        Consolidated Statements of Operations for the Years Ended June 30, 2000,
        1999 and 1998.

        Consolidated Statements of Changes in Stockholders' Equity for the Years
        Ended June 30, 2000, 1999 and 1998.

        Consolidated Statements of Cash Flows for the Years Ended June 30, 2000,
        1999 and 1998.

        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.

 .



                                       37
<PAGE>




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

<TABLE>
<CAPTION>


No.                                                 Description
--------    -----------------------------------------------------------------------------------------

<S>         <C>
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        Amended and Restated Stock Option Plan of Harrington Financial Group, Inc.*/
                                                                                      - -
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/
                                                                         --
10.2.3      Fourth Amendment and Loan Modification Agreement between Harrington Financial Group, Inc.
            and Mark Twain Kansas City Bank (now FIRSTAR Bank Midwest, N.A.), dated June 30, 2000
            (modifies version set forth in Exhibits 10.2, 10.2.1 and 10.2.2)
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. 4/
10.7        Terms of Employment between Harrington Bank, FSB and Lawrence T. Loeser dated January 25,
            1999.5/*/
13          2000 Annual Report to Stockholders specified portion (pp. 1-50) of the Registrant's
            Annual Report to Stockholders for the year ended June 30, 2000.
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
</TABLE>



                                       38
<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.

4   Incorporated  by  reference  from the Form 10-K for the fiscal  year ended
    June 30, 1998 filed by the Registrant with the SEC on September 28, 1998.

5   Incorporated  by  reference  from the Form 10-Q for the  quarterly  period
    ended March 31, 1999 filed by the Registrant with the SEC on May 17, 1999.


*   Management contract or compensatory plan or arrangement. -

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

               None.


                                       39
<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 and Chief Executive Officer


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


/s/ Craig J. Cerny                         September 28, 2000
------------------
Craig J. Cerny
President (Principal Executive Officer)
and Chief Executive Officer

/s/ John E. Fleener                        September 28, 2000
-------------------
John E. Fleener
Chief Financial Officer


/s/ Douglas T. Breeden                     September 28, 2000
--------------------------
Douglas T. Breeden
Chairman of the Board


/s/ Russell Breeden III                    September 28, 2000
--------------------------
Russell Breeden III
Director


/s/ Daniel C. Dektar                       September 28, 2000
--------------------------
Daniel C. Dektar
Director


/s/ Marianthe Mewkill                      September 28, 2000
--------------------------
Marianthe Mewkill
Director


                                       40
<PAGE>


/s/ Michael J. Giarla                      September 28, 2000
--------------------------
Michael J. Giarla
Director


/s/ Stephen A. Eason                       September 28, 2000
--------------------------
Stephen A. Eason
Director


/s/ Sharon E. Fankhauser                   September 28, 2000
--------------------------
Sharon E. Fankhauser
Director


/s/ David F. Harper                        September 28, 2000
--------------------------

David F. Harper
Director


/s/ Stanley J. Kon                         September 28, 2000
--------------------------
Stanley J. Kon
Director


/s/ John J. McConnell                      September 28, 2000
--------------------------
John J. McConnell
Director



                                       41