Exhibit 13

                       1997 Annual Report to Stockholders
<PAGE>

















                        HARRINGTON FINANCIAL GROUP, INC.
                               1997 ANNUAL REPORT
<PAGE>
                                    CONTENTS

Financial Highlights

Selected Consolidated Financial Data

Management's Discussion and Analysis
of Financial Condition and Results
of Operations

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Changes in Stockholders' Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Independent Auditors' Report
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights

(Dollars in thousands except per share amounts)

For the Years Ended June 30,                                      1997          1996 
----------------------------                                   ----------    ----------
<S>                                                            <C>           <C>       
   Net interest income                                         $    8,066    $    5,480
   Income before tax provision and gain (loss) on securities        2,769         1,997
   Net realized and unrealized gain (loss) on securities              494
   Special SAIF assessment                                            830             0
   Net income                                                       2,002         1,223
   Return on average assets before special SAIF assessment           0.50%         0.37%
   Return on average assets after special SAIF assessment            0.39%         0.37%
   Return on average equity before special SAIF assessment          10.52%         9.49%
   Return on average equity after special SAIF assessment            8.34%         9.49%

At June 30
   Total assets                                                $  446,797    $  418,196
   Total loans                                                     93,958        65,925
   Total securities                                               318,480       321,897
   Total deposits                                                 136,175       135,143
   Stockholders' equity                                            24,994        23,117
   Common shares outstanding                                    3,256,738     3,256,738

Average Balances
   Assets                                                      $  507,407    $  329,938
   Loans                                                           78,545        52,399
   Core retail deposits                                           116,210        92,931
   Other deposits                                                  20,592        32,562
   Total deposits                                                 136,802       125,493

Per Share
   Net income                                                  $     0.61    $     0.57
   After tax income excluding special SAIF assessment                0.78          0.57
   Book value, fiscal year end                                       7.67          7.10
   Market price, fiscal year end                                   12.125         10.50

Asset Quality at June 30
   Non-performing assets to total assets                             0.25%         0.32%
   Loan loss reserves to non-performing loans                       63.39%        45.98%

Capital Ratios at June 30 (Harrington Bank)
   Tangible capital                                                  6.96%         6.27%
   Core capital                                                      6.96%         6.27%
   Risk-based capital                                               31.14%        30.10%
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

         The following table presents selected consolidated  financial and other
data of the Company for the five years in the period  ended June 30,  1997.  The
selected  consolidated  financial  data should be read in  conjunction  with the
Consolidated  Financial  Statements of the Company,  including the  accompanying
Notes, presented elsewhere herein.

(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
At or For the Year Ended June 30,                                     1997         1996         1995          1994         1993
---------------------------------                                     ----         ----         ----          ----         ----
<S>                                                             <C>           <C>           <C>           <C>           <C>      
Balance Sheet Data
   Securities held for trading and available for sale           $ 318,480     $ 321,897     $ 249,274     $ 174,347     $ 186,582
   Loans receivable-net                                            93,958        65,925        37,010        20,682        16,620
   Total assets                                                   446,797       418,196       300,174       211,688       220,095
   Deposits                                                       136,175       135,143       115,312       108,300        89,788
   Securities sold under agreements to repurchase                 245,571       219,067       130,217        54,651        83,709
   Federal Home Loan Bank advances                                 26,000        26,000        31,000        31,000        31,000
   Note payable                                                     9,995         8,998         9,200         7,880         7,431
   Stockholders' equity                                            24,994        23,117        10,361         5,926         5,294
   Stockholders' equity per share                                    7.67          7.10          5.28          4.20          3.75

Income Statement Data
   Interest income                                              $  34,474     $  23,484     $  17,560     $  13,607     $  12,746
   Interest expense                                                26,408        18,004        12,779         8,284         8,975
                                                                ---------     ---------     ---------     ---------     ---------
       Net interest income                                          8,066         5,480         4,781         5,323         3,771
   Provision for loan losses                                           92            (1)           15            (3)           66
                                                                ---------     ---------     ---------     ---------     ---------
   Net interest income after provision for loan losses              7,974         5,481         4,766         5,326         3,705
   Retail banking fees and other income                               239           256           238           267           249
                                                                ---------     ---------     ---------     ---------     ---------
   Total net revenue                                                8,213         5,737         5,004         5,593         3,954
   Operating expenses                                               5,444         3,740         3,167         2,519         2,749(2)
                                                                ---------     ---------     ---------     ---------     ---------
   Income before tax provision and gain (loss) on securities        2,769         1,997         1,837         3,074         1,205
                                                                ---------     ---------     ---------     ---------     ---------

   Gain (loss) on sale of securities held for trading              (1,623)        1,834            66        (2,169)         --
   Gain on sale of securities available for sale                     --            --            --             392         1,384
   Unrealized gain (loss) on securities held for trading            2,117        (1,960)        1,535           710          --
Permanent impairment of securities available for sale                --            --            (414)         (610)       (2,531)
                                                                ---------     ---------     ---------     ---------     ---------
       Net gain (loss) on securities                                  494          (126)        1,187        (1,677)       (1,147)
                                                                ---------     ---------     ---------     ---------     ---------
<PAGE>
<CAPTION>
At or For the Year Ended June 30,                                     1997         1996         1995          1994         1993
---------------------------------                                     ----         ----         ----          ----         ----
<S>                                                             <C>           <C>           <C>           <C>           <C>      
   Income before income tax provision and cumulative effect
       of change in accounting for deferred income taxes            3,263         1,871         3,024         1,397            58
   Income tax provision                                             1,261           648         1,171           391           188
                                                                ---------     ---------     ---------     ---------     ---------
   Income (loss) before cumulative effect of change in
      accounting for deferred income taxes                          2,002         1,223         1,853         1,006          (130)
   Cumulative effect of change in accounting for deferred
       income taxes (3)                                              --            --            --             (79)         --
                                                                ---------     ---------     ---------     ---------     ---------
   Net income (loss)                                            $   2,002     $   1,223     $   1,853     $     927     $    (130)
                                                                =========     =========     =========     =========     ========= 
   Net income (loss) per share                                  $    0.61     $    0.57     $    1.20     $    0.66     $   (0.09)
                                                                =========     =========     =========     =========     ========= 
   Cash dividends per share                                     $    0.03           N/A           N/A           N/A           N/A
                                                                =========     =========     =========     =========     ========= 
Performance Ratios
   Return on average assets (4)                                      0.50%         0.37%         0.76%         0.44%       -0.06%
   Return on average equity (4)                                     10.52          9.49         22.24         14.98         -2.67
   Interest rate spread                                              1.43          1.64          2.13          2.63          1.79
   Net interest margin                                               1.62          1.73          2.10          2.64          1.81
   Average interest-earning assets to average interest
      bearing liabilities                                          103.67        101.55         99.57        100.25        100.39
   Net interest income after provision for loan losses to total
      other expenses (4)                                           172.82        146.55        150.49        211.43        134.78
   Total other expenses to average total assets (4)                  0.91          1.13          1.30          1.19          1.27
   Full service offices                                                 4             3             2             2             1

Asset Quality Ratios (at end of period)
   Non-performing loans to total loans (5)                           0.36          0.40          0.95          2.70          3.00
   Non-performing assets to total assets (5)                         0.25          0.32          0.59          1.34          0.24
   Allowance for loan losses to total loans                          0.23          0.18          0.33          0.51          0.94
   Allowance for loan losses to total non-performing loans          63.39         45.98         34.57         18.96         29.71

Capital Ratios (6)
   Tangible capital ratio                                            6.96          6.27          6.12          6.07          5.58
   Core capital ratio                                                6.96          6.27          6.12          6.07          5.58
   Risk-based capital ratio                                         31.14         30.10         24.62         21.40         18.56
   Equity to assets at end of period                                 5.59          5.53          3.45          2.80          2.41
</TABLE>
<PAGE>
(1)  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  after  offering
     expenses were $11,437,000.

(2)  Includes a write-off of goodwill and core deposit of $663,000.

(3)  Reflects  the  Company's  adoption of  Statement  of  Financial  Accounting
     Standards  ("SFAS") No. 109,  "Accounting for Income Taxes," effective July
     1, 1993.

(4)  For comparability  purposes, the 1997 fiscal year ratios exclude the effect
     of the special SAIF assessment of $830,000.

(5)  Non-performing  loans consist of non-accrual  loans and accruing loans that
     are  contractually  past due 90 days or  more,  and  non-performing  assets
     consist of  non-performing  loans,  real estate  acquired by foreclosure or
     deed-in-lieu  thereof  and a single  non-agency  participation  certificate
     classified as substandard.

(6)  Regulatory  capital ratios apply to the Bank  (Harrington  Bank,  FSB) as a
     federally chartered savings bank.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         Harrington Financial Group, Inc.  ("Harrington" or the "Company") is an
Indiana-chartered,  registered  thrift holding company for Harrington  Bank, FSB
(the  "Bank").  The  following  financial  review  presents  an  analysis of the
Company's  operations and financial  position for the periods  presented in this
annual report.

GENERAL

        Harrington's  business strategy focuses on achieving  attractive returns
consistent with prudent risk management. Harrington has sought to implement this
strategy  by (i)  controlling  interest  rate risk by using  interest  rate risk
management  contracts to match the interest  rate  sensitivity  of its assets to
that  of  its  liabilities;  (ii)  controlling  credit  risk  by  maintaining  a
substantial  portion of the  Company's  assets in  mortgage-backed  and  related
securities  and  single-family  residential  loans;  (iii)  expanding its retail
banking  locations  and  product  offerings  in order  to build a strong  retail
franchise; and (iv) the pursuit of acquisition opportunities when appropriate.

        Harrington invests primarily in  mortgage-backed  and related securities
and  originates  (both  directly and through  correspondents)  loans  secured by
single-family  residences  located  primarily in Indiana.  While  Harrington has
greatly  expanded its portfolio of originated  mortgage  loans,  over 70% of its
assets currently consist of purchased  mortgage-backed  and related  securities.
Although  mortgage-backed  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  and  may  be  used  to  collateralize
borrowings or other  obligations  of the Company.  Management  believes that the
lower  operating  expenses and reduced credit and interest rate risk  associated
with  the   investment  in  securities   have  enhanced   Harrington's   overall
profitability  as well as its  ability  to remain  profitable  over a variety of
interest  rate  scenarios.  In addition,  the funds  invested in the  securities
portfolio can be quickly redeployed to pursue retail expansion  opportunities as
they arise.

        Harrington's  funding  strategy  focuses  on  accessing   cost-efficient
funding  sources,  including  securities  sold under  agreements to  repurchase,
retail and non-retail deposits and FHLB advances. The Company continues to build
a  community-oriented   retail  banking  operation  in  order  to  sustain  loan
originations  and deposit growth,  benefit from economies of scale, and generate
additional fee income.  Management's  primary goal is to increase  stockholders'
value, as measured on a risk-adjusted total return basis.

         To reduce the institution's exposure to interest rate risk, the Company
utilizes interest rate risk management contracts and mortgage-backed  derivative
securities in conjunction  with regular  adjustments  to the  composition of the
Company's  investment  portfolio.  Harrington marks a substantial portion of its
assets and interest  rate  contracts to market in order to fully account for the
market  value  changes in the  Company's  investment  portfolio.  This method of
accounting  is  consistent  with  Harrington's   strategy  of  active  portfolio
management  and provides the Company with the  flexibility to quickly adjust the
mix of its interest-earning  assets in response to changing market conditions or
to take advantage of retail growth opportunities.

         The Company recognizes that marking  substantially all of its assets to
market  subjects  Harrington  to  potential  earnings  volatility.  Market value
volatility is not unique to Harrington as most unhedged  financial  institutions
have even greater volatility in market values. The difference is that Harrington
reflects the changes in market  values  directly in  earnings,  while most other
institutions do not.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

         In addition to historical  information,  forwarding-looking  statements
are  contained  herein  that are subject to risks and  uncertainties  that could
cause  actual  results  to  differ   materially  from  those  reflected  in  the
forward-looking statements. Factors that could cause future results to vary from
current  expectations,  include,  but are not limited to, the impact of economic
conditions  (both  generally  and  more  specifically  in the  markets  in which
Harrington operates),  the impact of competition for Harrington's customers from
other providers of financial services,  the impact of government legislation and
regulation  (which  changes from time to time and over which  Harrington  has no
control),  and other risks  detailed in this Annual  Report and in  Harrington's
other Securities and Exchange Commission  filings.  Readers are cautioned not to
place  undue  reliance  on  these  forward-looking  statements,   which  reflect
management's  analysis  only as of the date  hereof.  Harrington  undertakes  no
obligation  to publicly  revise  these  forward-looking  statements,  to reflect
events or  circumstances  that  arise  after  the date  hereof.  Readers  should
carefully review the risk factors described in other documents  Harrington files
from time to time with the  Securities  and Exchange  Commission,  including the
Quarterly  Reports on Form 10-Q to be filed by  Harrington  in 1997 and 1998 and
any Current Reports on Form 8-K filed by Harrington.

ASSET AND LIABILITY MANAGEMENT

        In  general,  financial  institutions  are  negatively  affected  by  an
increase  in  interest  rates to the extent  that  interest-bearing  liabilities
mature or  reprice  more  rapidly  than  interest-earning  assets.  The  lending
activities of savings institutions have historically  emphasized the origination
of long-term,  fixed-rate  loans secured by  single-family  residences,  and the
primary source of funds of such  institutions  has been deposits,  which largely
mature or are subject to repricing within a shorter period of time.

        This  factor has  historically  caused  the  income and market  value of
portfolio equity ("MVPE") of savings institutions to be more volatile than other
financial  institutions.  MVPE  is  defined  as  the  net  present  value  of an
institution's  existing assets,  liabilities and off-balance sheet  instruments.
While having  liabilities  that reprice more frequently than assets is generally
beneficial to net interest income and market value of portfolio  equity in times
of  declining  interest  rates,  such an  asset/liability  mismatch is generally
detrimental during periods of rising interest rates.

        The  Company's   management   believes  that  its  asset  and  liability
management strategy,  as discussed below, provides Harrington with a competitive
advantage over other financial institutions. Harrington's ability to effectively
hedge  its  interest  rate  exposure  through  the  use  of  various   financial
instruments  allows the  Company to acquire  loans and  investments  which offer
attractive net risk-adjusted spreads whether the individual loans or investments
are fixed-rate or  adjustable-rate  or short-term or long-term.  Similarly,  the
Company can choose a cost-effective  source of funds and subsequently  engage in
an interest  rate swap or other  hedging  transaction  so that the interest rate
sensitivities of its interest-earning  assets and  interest-bearing  liabilities
are generally matched.

        Harrington's asset and liability  management  strategy is formulated and
monitored by the Boards of Directors of both the Company and Bank, the Company's
wholly-owned  subsidiary.  The  Boards'  written  policies  and  procedures  are
implemented by the Investment  Committee of the Bank,  which is comprised of the
Chief Executive Officer,  Chief Financial Officer, Chief Investment Officer, and
three outside  directors.  The  Investment  Committee  meets at least monthly to
review, among other things, the sensitivity of the Bank's assets and liabilities
to interest rate changes,  the book and market values of assets and  liabilities
with the resulting  unrealized  gains and losses,  the past month's purchase and
sale activity and maturities of investments and borrowings.

        The Investment  Committee also consults with the Chief Operating Officer
of the Bank regarding  retail pricing and funding  decisions with respect to the
Bank's overall asset and liability  composition.  In accordance  therewith,  the
Investment  Committee  reviews the Bank's liquidity,  cash flow needs,  interest
rate sensitivity of investments, deposits and borrowings, core deposit activity,
current market conditions and interest rates on both a local and national level.

        Harrington has contracted with Smith Breeden  Associates,  Inc.  ("Smith
Breeden")  for the  provision  of  consulting  services  regarding,  among other
things,  the management of its investments and borrowings,  the pricing of loans
and deposits,  and the use of various  financial  instruments to reduce interest
rate risk.  Smith Breeden is a consulting firm which renders  investment  advice
and asset and liability management services to financial institutions, corporate
and government pension plans,  foundations and government  agencies  nationally.
Certain directors of the Company and the Bank are principals of Smith Breeden.

        The  Investment  Committee  regularly  reviews  interest  rate  risk  by
utilizing  analyses  prepared  by Smith  Breeden  with  respect to the impact of
alternative  interest  rate  scenarios on net interest  income and on the Bank's
market value of portfolio equity. The Investment Committee also reviews analyses
prepared by Smith Breeden  concerning the impact of changing market  volatility,
prepayment forecast error,  changes in option-adjusted  spreads and non-parallel
yield curve shifts.

        MVPE  analysis  is used  by  regulatory  authorities  for  assessing  an
institution's  interest rate risk.  The extent to which assets will gain or lose
value net of the gains or losses of liabilities  and/or  interest rate contracts
determines the  appreciation or depreciation in equity on a market-value  basis.
Such market value  analysis is intended to evaluate the impact of immediate  and
sustained  parallel  interest  rate shifts upon the market  value of the current
balance sheet.

        In the  absence of the  Company's  hedging  activities,  the MVPE of the
Company  would  decline  as a result of a general  increase  in market  rates of
interest.  This decline would be due to the market values of Harrington's assets
being generally more sensitive to interest rate fluctuations than are the market
values of the Company's liabilities due to Harrington's  investment in generally
longer-term assets which are funded with shorter-term liabilities. Consequently,
the elasticity (i.e., the change in the market value of an asset or liability as
a result of a change in interest rates) of  Harrington's  assets is greater than
the elasticity of its liabilities.

        Accordingly,  the  primary  goal of  Harrington's  asset  and  liability
management  policy is to  effectively  increase the  elasticity of the Company's
liabilities and/or  effectively  contract the elasticity of the Company's assets
so that the  respective  elasticities  are matched as closely as possible.  This
elasticity   adjustment  can  be   accomplished   internally  by   restructuring
Harrington's  balance  sheet,  or externally by adjusting  the  elasticities  of
Harrington's  assets  and/or  liabilities  through  the  use  of  interest  rate
contracts,  such as interest  rate swaps,  collars,  caps,  floors,  options and
futures.  Harrington's strategy is to hedge either internally through the use of
longer-term   certificates  of  deposits,   FHLB  advances  and  mortgage-backed
derivative  securities  or externally  through the use of various  interest rate
contracts.

        External hedging involves the use of interest rate swaps, collars, caps,
floors,  options and futures.  The notional  amount of interest  rate  contracts
represents the underlying amount on which periodic cash flows are calculated and
exchanged  between  counterparties.  However,  this  notional  amount  does  not
necessarily represent the principal amount of securities which would effectively
be hedged by that interest rate contract.

        In selecting  the type and amount of interest  rate contract to utilize,
the Company  compares the  elasticity  of a  particular  contract to that of the
securities  to be  hedged.  An  interest  rate  contract  with  the  appropriate
offsetting  elasticity  may have a notional  amount much  greater  than the face
amount of the securities being hedged.

        An interest  rate swap is an agreement  where one party  (generally  the
Company) agrees to pay a fixed rate of interest on a notional  principal  amount
to a second party (generally a broker) in exchange for receiving from the second
party  a  variable  rate  of  interest  on  the  same  notional   amount  for  a
predetermined  period of time.  No actual assets are exchanged in a swap of this
type and  interest  payments are  generally  netted.  These swaps are  generally
utilized  by  Harrington  to  synthetically   convert   fixed-rate  assets  into
adjustable-rate assets without having to sell or transfer the underlying assets.

        At June 30,  1997,  Harrington  was a party to nine  interest  rate swap
agreements in its trading  portfolio.  The agreements had an aggregate  notional
amount of $267.5 million and maturities  from September 1997 to April 2001. With
respect to these  agreements,  Harrington makes fixed interest  payments ranging
from 4.55% to 6.58% and  receives  payments  based upon the  three-month  London
Interbank Offered Rate ("LIBOR").

        The net expense  (income)  relating to Harrington's  interest rate swaps
held in the trading portfolio was $330,000, $(168,000) and $(113,000) during the
years ended June 30, 1997, 1996 and 1995,  respectively.  The approximate market
value of the interest rate swaps which are  maintained in the trading  portfolio
was $581,000 and $620,000 as of June 30, 1997 and 1996, respectively.

        The Company also has one swap whereby it pays a floating  rate (based on
three-month LIBOR) and receives a fixed rate of 6.96%. Harrington's floating-pay
swap,  which has a  notional  amount of $7.5  million,  is not  included  in the
Company's  trading  portfolio.  This swap is used to modify  the  interest  rate
sensitivity of certain certificates of deposit issued by the Bank.

        The  net  (income)  relating  to  Harrington's  floating-pay  swaps  was
$(130,000), $(129,000) and $(158,000) during the years ended June 30, 1997, 1996
and 1995,  respectively.  This income is netted against  interest expense in the
Company's Consolidated Statements of Income. The approximate market value of the
Company's  floating-pay  interest  rate swaps  (which are not  reflected  in the
Company's financial statements) was $91,000 and $110,000 as of June 30, 1997 and
1996, respectively.

        An interest rate cap or an interest  rate floor  consists of a guarantee
given by the issuer (i.e., a broker),  to the purchaser (i.e., the Company),  in
exchange for the payment of a premium.  This  guarantee  states that if interest
rates rise above (in the case of a cap) or fall below (in the case of a floor) a
specified  rate on a specified  interest rate index,  the issuer will pay to the
purchaser the difference  between the then current market rate and the specified
rate on a notional principal amount. No funds are actually borrowed or repaid.

        Similarly,  an interest rate collar is a combination  of a purchased cap
and a written  floor at different  strike rates.  Accordingly,  an interest rate
collar  requires no payments if interest rates remain within a specified  range,
but will  require the  Company to be paid if  interest  rates rise above the cap
rate or require the Company to pay if interest  rates fall below the floor rate.
Consequently,  interest  rate caps are a means of reducing  interest  expense by
placing a ceiling on the cost of  floating-rate  liabilities,  or offsetting the
caps on the coupons inherent in the Company's adjustable rate mortgage loans and
securities.  Interest  rate floors  permit  Harrington  to maintain  its desired
interest rate spread in the event that falling  interest rates lead to increased
prepayments with respect to the Company's mortgage-backed and related securities
portfolio requiring reinvestment at lower rates.

        At June 30, 1997,  Harrington  held seven interest rate cap  agreements,
twelve  interest  rate floor  agreements  and one  interest  rate  collar in its
trading  portfolio.  These contracts,  which expire from July 1997 to June 2004,
have an aggregate notional amount of approximately  $412.3 million. The interest
rate cap agreements provide for a payment, depending on the particular contract,
whenever the defined floating-rate exceeds 6.5% to 9.0%.
The interest rate floor agreements provide for a payment, depending
on the particular contract, whenever the defined floating rate is less than 5.0%
to 7.5%.  The interest rate collar  provides for a payment  whenever the defined
floating rate is greater than 10.25% or less than 5.25%.

        The aggregate net expense  (income)  relating to the Company's  interest
rate caps,  collars  and floors held in the trading  portfolio  was  $(370,000),
$(220,000)  and  $58,000  during the years ended June 30,  1997,  1996 and 1995,
respectively.  The approximate market value of Harrington's  interest rate caps,
collars  and floors  which are  maintained  in the  trading  portfolio  was $5.1
million and $6.0 million as of June 30, 1997 and 1996, respectively.

        Harrington  also has one  interest  rate cap with a  notional  amount of
$30.0 million which is not held in the Company's  trading  portfolio.  This cap,
which  matures in May 2001,  is  triggered  whenever the defined  floating  rate
exceeds 7.0%.  The  instrument is used to  effectively  cap at 7.0% the interest
rate on the Company's  floating-rate  borrowings  from the FHLB.  Net expense on
this cap was  $178,000,  $25,000 and $0 for the years ended June 30, 1997,  1996
and 1995,  respectively.  The approximate  market value of the cap, which is not
reflected in the Company's  financial  statements,  was $351,000 and $747,000 at
June 30, 1997 and 1996, respectively.

        Interest  rate  futures  are  commitments  to  either  purchase  or sell
designated instruments at a future date for a specified price. Futures contracts
are generally traded on an exchange,  are marked to market daily and are subject
to initial and maintenance margin requirements. Harrington generally uses 91-day
Eurodollar  certificates of deposit contracts  ("Eurodollar  futures contracts")
which are priced off LIBOR as well as Treasury Note and Bond futures  contracts.
The Company will from time to time agree to sell a specified number of contracts
at a  specified  date.  To close out a contract,  Harrington  will enter into an
offsetting position to the original transaction.

        If  interest  rates  rise,  the  value of the  Company's  short  futures
positions increases.  Consequently,  sales of futures contracts serve as a hedge
against rising interest rates. At June 30, 1997,  Harrington had sold Eurodollar
and  Treasury  Note  futures  contracts  with an  aggregate  notional  amount of
approximately $1.5 billion.  The Company had total gains (losses) on its futures
contracts of $(3.9)  million,  $1.9 million,  and $(2.0)  million for the fiscal
years ended June 30, 1997, 1996 and 1995, respectively.

        Options are contracts which grant the purchaser the right to buy or sell
the  underlying  asset  by a  certain  date  for a  specified  price.  Generally
Harrington  will  purchase  options on  financial  futures to hedge the changing
elasticity  exhibited  by mortgage  loans and  mortgage-backed  securities.  The
changing elasticity results from the ability of a borrower to prepay a mortgage.
As market  interest  rates  decline,  borrowers  are more likely to prepay their
mortgages,  shortening  the  elasticity of the  mortgages.  Consequently,  where
interest  rates are declining,  the value of mortgage  loans or  mortgage-backed
securities  will  increase at a slower rate than would be expected if  borrowers
did not have the ability to prepay their mortgages.

        Harrington,  therefore,  generally purchases  out-of-the-money calls and
puts so that the increase in value of the options  resulting  from interest rate
movements offsets the reductions in MVPE resulting from the changing  elasticity
inherent in the Company's  balance sheet.  At June 30, 1997,  Harrington had 779
purchased options  contracts with an aggregate  notional amount of approximately
$77.9 million.  The net expense relating to the Company's  options contracts was
$770,000,  $640,000, and $148,000 during the years ended June 30, 1997, 1996 and
1995,  respectively.  The  approximate  market  value of the  Company's  options
contracts which are maintained in the trading  portfolio was $24,000 and $65,000
as of June 30, 1997 and 1996, respectively.

        The  following  table  summarizes  the  periodic  exchanges  of interest
payments with  counterparties  including the  amortization  of premiums paid for
interest  rate  contracts as discussed  above.  Such  payments and  amortization
amounts are accounted for as  adjustments  to the yields of securities  held for
trading, and are reported as a separate component of interest income.

<TABLE>
<CAPTION>
(Dollars in thousands)

Years Ended June 30,                             1997         1996         1995
--------------------                            -----        -----        ----- 

<S>                                             <C>          <C>          <C>  
Interest rate contract
 (income) expense:
   Swaps                                        $ 330        $(168)       $(113)
   Caps, floors, and collars                     (370)        (220)          58
   Options                                        770          640          148
                                                -----        -----        ----- 
   Net interest expense on
    interest rate contracts                     $ 730        $ 252        $  93
                                                =====        =====        =====
</TABLE>
        The above  table does not  include  realized  and  unrealized  gains and
losses with respect to the market value of interest rate  contracts  held in the
trading portfolio. Such gains and losses are generally offset by fluctuations in
the market  value of the  Company's  assets held for  trading.  All realized and
unrealized gains and losses pertaining to interest rate contracts in the trading
portfolio are reported as other income in the Company's Consolidated  Statements
of Income.

         Harrington is subject to the risk that its counterparties  with respect
to various interest rate contracts (such as swaps, collar, caps, floors, options
and futures) may default at or prior to maturity of a particular instrument.  In
such a case,  the Company might be unable to recover any  unrealized  gains with
respect to a particular contract.

        To reduce this potential  risk, the Company  generally deals with large,
established investment brokerage firms when entering into these transactions. In
addition,  if the  Company  enters  into an interest  rate  contract  with a non
AA-rated (or above) entity and the Company has an  unrealized  gain with respect
to such contract, the Company generally requires the entity to post some form of
collateral  to secure its  obligations.  Furthermore,  the  Company has a policy
whereby it limits its unsecured  exposure to any one  counterparty to 25% of the
Bank's equity  during any  two-month  period and 35% of the Bank's equity during
any one-month period.

        The  Office  of  Thrift   Supervision   ("OTS")   requires  each  thrift
institution to calculate the estimated change in the institution's MVPE assuming
an instantaneous, parallel shift in the Treasury yield curve of 100 to 400 basis
points  either  up or down  in 100  basis  point  increments.  The  OTS  permits
institutions  to perform this MVPE analysis using their own internal model based
upon  reasonable  assumptions.  The Company  retains  Smith Breeden to assist in
performing the required  calculation  of the  sensitivity of its market value to
changes in interest rates.

        In  estimating  the market value of mortgage  loans and  mortgage-backed
securities,  the Company utilizes various prepayment  assumptions which vary, in
accordance with historical  experience,  based upon the term,  interest rate and
other  factors with respect to the  underlying  loans.  At June 30, 1997,  these
prepayment  assumptions  varied  from 4% to 27%  for  fixed-rate  mortgages  and
mortgage-backed  securities  and  varied  from  14% to 32% for  adjustable  rate
mortgages and mortgage-backed  securities.  For deposit accounts with no defined
maturity date, the Company assumes a decay rate which ranged,  at June 30, 1997,
from 5% to 70%.
<PAGE>
        The  following  table  sets  forth  at  June  30,  1997,  the  estimated
sensitivity of the Bank's MVPE to parallel yield curve shifts using Harrington's
internal market value calculation. The table demonstrates the sensitivity of the
Bank's  assets  and  liabilities  both  before  and after the  inclusion  of its
interest rate contracts.
<TABLE>
<CAPTION>
(Dollars in thousands)
Change in
Interest Rates (In Basis Points)(1)         -400         -300         -200        -100        -- 
                                          --------     --------     --------     --------    ----
<S>                                       <C>          <C>          <C>          <C>          <C>
Market value gain (loss) of assets        $ 29,306     $ 22,909     $ 17,011     $ 10,174     -- 
Market value gain (loss) of liabilities     (7,028)      (5,352)      (3,657)      (1,813)    -- 
                                          --------     --------     --------     --------    ----
Market value gain (loss) of net
  assets before interest rate contracts     22,278       17,557       13,354        8,361     -- 

Market value gain (loss)
  of interest rate contracts               (11,253)     (11,213)     (10,372)      (7,029)    -- 
                                          --------     --------     --------     --------    ----
Total change in MVPE(2)                   $ 11,025     $  6,344     $  2,982     $  1,332     -- 
                                          ========     ========     ========     ========    ====    

Change in MVPE as a percent of:
  MVPE(2)                                     34.3%        19.8%         9.3%         4.1%    -- 
  Total assets of the Bank                     2.5%         1.4%         0.7%         0.3%    -- 
<CAPTION>
          
                                              +100         +200         +300         +400
                                            --------     --------     --------     -------- 
<S>                                         <C>          <C>          <C>          <C>      
Market value gain (loss) of assets          $(14,345)    $(30,974)    $(48,481)    $(66,047)
Market value gain (loss) of liabilities        1,707        3,313        4,865        6,363
                                            --------     --------     --------     -------- 
Market value gain (loss) of net
  assets before interest rate contracts      (12,638)     (27,661)     (43,616)     (59,684)

Market value gain (loss)
  of interest rate contracts                  10,229       24,490       39,800       55,205
                                            --------     --------     --------     -------- 
Total change in MVPE(2)                     $ (2,409)    $ (3,171)    $ (3,816)    $ (4,479)
                                            ========     ========     ========     ======== 

Change in MVPE as a percent of:
  MVPE(2)                                       (7.5)%       (9.9)%      (11.9)%      (14.0)%
  Total assets of the Bank                      (0.5)%       (0.7)%       (0.9)%       (1.0)%
</TABLE>

(1)  Assumes  an  instantaneous   parallel  change  in  interest  rates  at  all
     maturities.

(2)  Based on the Bank's pre-tax MVPE of $32.1 million at June 30, 1997.
<PAGE>
        The  table  set  forth  above  does not  purport  to show the  impact of
interest rate changes on Harrington's equity under generally accepted accounting
principles.  Market value changes only impact the Company's  income statement or
the  balance  sheet (i) to the extent  the  affected  instruments  are marked to
market,  and (ii) over the life of the  instruments  as an  impact  on  recorded
yields.

         Since a large  portion of  Harrington's  assets is  recorded  at market
value,  the  following  table is  included to show the  estimated  impact on the
Company's  equity of  instantaneous,  parallel  shifts in the yield  curve.  The
assets and interest  rate  contracts  included in the table below are only those
which are either  classified by the Company as held for trading or available for
sale and,  therefore,  reflected  at market  value.  Consequently,  Harrington's
liabilities,  which are reflected at cost,  are not included in the table below.
All amounts are shown net of taxes, with an estimated tax rate of 39.0%.
<TABLE>
<CAPTION>
(Dollars in thousands)
Change in
Interest Rates (In Basis Points)                        -400         -300         -200        -100        --  
                                                      --------     --------     --------     --------   ------
<S>                                                   <C>          <C>          <C>          <C>        <C>   
After tax market value gain (loss) of assets          $ 13,895     $ 10,739     $  7,870     $  4,654     --  
After tax market value gain (loss) of
  interest rate contracts                               (7,006)      (6,890)      (6,303)      (4,231)    --  
                                                      --------     --------     --------     --------   ------
After tax gain (loss) in equity                       $  6,889     $  3,849     $  1,567     $    423     --  
                                                      ========     ========     ========     ========   ======      

After tax gain (loss) in equity as a percent of the
   company's equity at June 30, 1997                      27.6%        15.4%         6.3%         1.7%    --  
<CAPTION>
(Dollars in thousands)
Change in
Interest Rates (In Basis Points)                        +100         +200         +300         +400
                                                      --------     --------     --------     -------- 
<S>                                                   <C>          <C>          <C>          <C>      
After tax market value gain (loss) of assets          $ (6,703)    $(14,591)    $(22,963)    $(31,402)
After tax market value gain (loss) of
  interest rate contracts                                6,052       14,414       23,346       32,322
                                                      --------     --------     --------     -------- 
After tax gain (loss) in equity                       $   (651)    $   (177)    $    383     $    920
                                                      ========     ========     ========     ========

After tax gain (loss) in equity as a percent of the
   company's equity at June 30, 1997                      (2.6)%       (0.7)%        1.5%         3.7%
</TABLE>
<PAGE>
CHANGES IN FINANCIAL CONDITION

         General. At June 30, 1997, Harrington's total assets amounted to $446.8
million,  as compared to $418.2  million at June 30, 1996. The increase in total
assets  was  primarily  due to a  $28.0  million  increase  in the  Bank's  loan
portfolio.

         Cash and Interest-Bearing  Deposits. Cash and interest-bearing deposits
amounted  to  $9.5  million  and  $17.1  million  at June  30,  1997  and  1996,
respectively.  Harrington  actively manages its cash and cash equivalents  based
upon the Company's operating, investing and financing activities. Based upon the
Company's current size, cash and cash equivalents  generally  fluctuate within a
range of $5.0 million to $20.0 million.  Harrington generally attempts to invest
its excess liquidity into higher yielding assets such as loans or securities.

         Securities  Held for Trading and Available for Sale. In order to reduce
the Company's credit risk exposure and to earn a positive  interest rate spread,
Harrington  maintains a substantial portion of its assets in mortgage-backed and
related securities,  which are primarily issued or guaranteed by U.S. Government
agencies or government sponsored enterprises. Almost all of these securities and
their related interest rate risk management contracts are classified as held for
trading and,  pursuant to SFAS 115,  are reported at fair value with  unrealized
gains and losses  included in  earnings.  The  remainder of the  securities  are
classified as available for sale and thus also reported at fair value,  but with
unrealized  gains and losses  excluded from  earnings and reported  instead as a
separate component of stockholders' equity.

         Securities held for trading (consisting of mortgage-backed  securities,
mortgage-backed  derivative  securities,  interest  rate  contracts  and  equity
securities)  amounted to $317.4  million and $319.8 million at June 30, 1997 and
1996, respectively. Securities classified as available for sale (consisting of a
non-agency  mortgage-backed  security and  municipal  bonds)  declined from $2.1
million at June 30, 1996 to $1.1 million at June 30, 1997.

         Loans  Receivable.  At June  30,  1997,  loans  receivable  (net of the
Company's  allowance for loan losses) amounted to $94.0 million,  an increase of
42.5%  over  the  June  30,  1996  total  of  $65.9   million.   Harrington  has
significantly   increased  its  retail  banking  operations,   particularly  the
origination (both directly and through correspondent mortgage banking companies)
of single-family residential loans. Loans originated through correspondents must
meet the same pricing and underwriting standards as loans originated internally.

         Allowance for Loan Losses. At June 30, 1997, Harrington's allowance for
loan losses totaled $213,000, compared to $120,000 at June 30, 1996. At June 30,
1997, the Company's allowance  represented  approximately 0.2% of the total loan
portfolio and 63.4% of total non-performing loans, as compared to 0.2% and 46.0%
at June  30,  1996.  The  ratio  of total  non-performing  loans to total  loans
amounted to 0.4% at June 30, 1997 and 1996, which reflects Harrington's emphasis
on maintaining low credit risk with respect to its operations.

         Although  Harrington  management  believes  that its allowance for loan
losses at June 30, 1997 was adequate based on facts and circumstances  available
to it (including the historically low level of loan  charge-offs),  there can be
no assurances  that  additions to the allowance  will not be necessary in future
periods, which could adversely affect the Company's results of operations.

         Deposits. At June 30, 1997, deposits totaled $136.2
million,  as compared to $135.1  million as of June 30,  1996.  Retail  deposits
increased $11.1 million, from $112.4 million at June 30, 1996, to $123.5 million
at June 30, 1997,  primarily due to  Harrington's  program of retail  expansion.
Non-retail  deposits  declined by $10.0  million  during the same period,  for a
total increase in deposits of $1.1 million.

         Borrowings.  At June 30, 1997, reverse repurchase agreements and dollar
rolls (both of which are securities sold under  agreements to repurchase and are
accounted  for as a financing)  totaled  $245.6  million,  as compared to $219.1
million as of June 30, 1996.

         Advances from the FHLB of Indianapolis remained stable at $26.0 million
as of June 30, 1997 and 1996. At June 30, 1997, the FHLB advances were scheduled
to mature in fiscal 1998,  with an average  interest  rate  thereon of 5.8%,  as
compared to 5.4% at June 30, 1996.

         The Company's  note payable  amounted to $10.0 million and $9.0 million
at June 30,  1997 and 1996,  respectively.  The note  payable  relates to a loan
facility  which was used to  refinance,  to a  significant  extent,  the  unpaid
balance  of a $10.0  million  acquisition  loan  which  financed  the  Company's
acquisition of the Bank.

         Stockholders' Equity. Stockholders' equity increased from $23.1 million
at June 30,  1996 to $25.0  million  at June 30,  1997.  This  increase  was due
primarily to $2.0 million of net income recognized during fiscal 1997, which was
partially  offset by the payment of the Company's  first  quarterly  dividend of
$.03 per share, or $98,000 in total, on May 30, 1997.

RESULTS OF OPERATIONS

         Summary of Earnings.  Harrington reported net income of $2.0 million or
$0.61 per share for the year ended June 30,  1997  compared  to $1.2  million or
$0.57  per  share for the year  ended  June 30,  1996.  This  $779,000  or 63.7%
increase  in net income was due  primarily  to a $2.6  million  increase  in net
interest  income,  which was  partially  offset by a $1.7  million  increase  in
operating  expenses  which  includes  the  Savings  Association  Insurance  Fund
("SAIF") special  assessment of $830,000,  and a $613,000 increase in the income
tax provision.

         Net income for the year ended June 30, 1996,  was $1.2 million or $0.57
per share,  compared to $1.9  million or $1.20 per share for the year ended June
30, 1995. The $630,000 or 34.0% decrease in net income was due to a $1.7 million
decrease in the net realized and unrealized gain on the trading  portfolio and a
$573,000  increase in other expense,  which were partially  offset by a $699,000
increase  in net  interest  income  and a  $523,000  decrease  in the income tax
provision.

         Average Balances, Net Interest Income and Yields Earned and Rates Paid.
The following  table presents for the periods  indicated the total dollar amount
of interest from average  interest-earning  assets and the resultant  yields, as
well as the interest expense on average interest-bearing liabilities,  expressed
both in  dollars  and rates,  and the net  interest  margin.  The table does not
reflect any effect of income  taxes.  All average  balances are based on average
month end  balances  for the  Company and average  daily  balances  for the Bank
during the periods presented.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended June 30,                                      1997                                       1996                
-------------------------------------------------------------------------------------------------------------------------
                                              Average                  Yield/        Average                      Yield/ 
                                              Balance       Interest   Rate (1)      Balance          Interest    Rate   
                                             ----------------------------------------------------------------------------
Interest-Earning Assets:
<S>                                          <C>            <C>        <C>           <C>              <C>         <C>    
   Interest-bearing deposits                 $ 22,727       $ 1,197      5.27%       $ 14,520         $   780       5.37%
   Securities held for trading (2)            390,867        26,808      6.86         243,862          18,034       7.40 
   Securities available for sale (3)            1,375           133      9.67           2,672             194       7.26 
   Loans receivable, net (4)                   78,545         6,087      7.75          52,399           4,276       8.16 
   Federal Home Loan Bank stock                 3,179           249      7.83           2,533             200       7.90
                                             --------       -------    ------        --------         -------     ------ 
   Total interest-earning assets              496,693        34,474      6.94%        315,986          23,484       7.43%

Non-interest-earning assets                    10,714                                  13,952                            
                                             --------                                --------                            
   Total assets                              $507,407                                $329,938                            
                                             ========                                ========                            


Interest-Bearing Liabilities:
   Deposits:
     NOW and checking accounts              $   4,697           124      2.64%       $  3,813             110       2.88%
     Savings accounts                          20,463           844      4.12          15,922             613       3.85 
Money market deposit accounts                   1,886            82      4.35           1,777              77       4.33 
Certificates of deposit                       109,756         6,416      5.85         103,981           6,351       6.11 
                                             --------       -------    ------        --------         -------     ------ 
   Total deposits                             136,802         7,466      5.46         125,493           7,151       5.70 
   Securities sold under agreements
       to repurchase                          306,034        16,391      5.36         148,523           8,352       5.62 
    Federal Home Loan Bank advances            26,089         1,644      6.30          27,586           1,596       5.79 
    Note payable                               10,168           907      8.92           9,553             905       9.47 
                                             --------       -------    ------        --------         -------     ------ 

   Total interest-bearing liabilities         479,093        26,408      5.51%        311,155          18,004       5.79%

Non-interest bearing liabilities                4,307                                   5,894                            
                                             --------                                --------                            
   Total liabilities                          483,400                                 317,049                            
Stockholders' equity                           24,007                                  12,889                            
                                             --------                                --------                            
Total liabilities and stockholders'
   equity                                    $507,407                                $329,938                            
                                             ========                                ========                            

Net interest income; interest
   rate spread (5)                                         $ 8,066      1.43%                         $ 5,480       1.64%
                                                           =======      ====                          =======       ==== 

Net interest margin (5)(6)                                              1.62%                                       1.73%
                                                                        ====                                        ==== 
Average interest-earning assets
   to average interest-bearing
   liabilities                                                        103.67%                                     101.55%
                                                                      ======                                      ====== 
<PAGE>
<CAPTION>
(Dollars in thousands)
Years Ended June 30,                                       1995
-----------------------------------------------------------------------------
                                             Average                  Yield/
                                             Balance       Interest   Rate
                                             --------------------------------
Interest-Earning Assets:
<S>                                          <C>           <C>        <C>     
   Interest-bearing deposits                 $ 11,493      $   603      5.25%   
   Securities held for trading (2)            185,014       14,332      7.75    
   Securities available for sale (3)            3,110          250      8.04     
   Loans receivable, net (4)                   25,467        2,223      8.73     
   Federal Home Loan Bank stock                 2,172          152      7.00
                                             --------      -------    ------ 
   Total interest-earning assets              227,256       17,560      7.73%

Non-interest-earning assets                    15,654                       
                                             --------                        
   Total assets                              $242,910                        
                                             ========                        


Interest-Bearing Liabilities:
   Deposits:
     NOW and checking accounts              $$  3,352           94      2.80%
     Savings accounts                          16,068          568      3.53
Money market deposit accounts                   2,147           88      4.10
Certificates of deposit                        99,443        5,904      5.94
                                             --------      -------    ------ 
   Total deposits                             121,010        6,654      5.50
   Securities sold under agreements
       to repurchase                           68,277        3,654      5.35
    Federal Home Loan Bank advances            31,051        1,722      5.55
    Note payable                                7,890          749      9.49
                                             --------      -------    ------ 

   Total interest-bearing liabilities         228,228       12,779      5.60%

Non-interest bearing liabilities                6,349    
                                             --------                        
   Total liabilities                          234,577
Stockholders' equity                            8,333
                                             --------                        
Total liabilities and stockholders'
   equity                                    $242,910
                                             ========

Net interest income; interest
   rate spread (5)                                         $ 4,781     2.13%
                                                           =======     ==== 

Net interest margin (5)(6)                                             2.10%
                                                                       ==== 
Average interest-earning assets
   to average interest-bearing
   liabilities                                                        99.57%
                                                                      ===== 
</TABLE>
<PAGE>

(1)  At June 30,  1997,  the  yields  earned  and rates  paid  were as  follows:
     interest-bearing  deposits,  5.30%;  securities  held for  trading,  6.67%;
     securities  available for sale, 7.84%;  loans  receivable,  net 7.56%; FHLB
     stock,  7.73%;  total  interest-earning  assets,  6.85%;  deposits,  5.48%;
     securities  sold under  agreements to  repurchase,  5.47%;  FHLB  advances,
     5.78%; note payable,  8.65%;  total  interest-bearing  liabilities,  5.57%;
     interest rate spread, 1.28%.

(2)  Both the interest and yields earned on the Company's  securities  portfolio
     reflect the net interest  expense incurred with respect to various interest
     rate contracts (such as interest rate swaps, collars, caps, floors, options
     and  futures)  which were  utilized to hedge the  Company's  interest  rate
     exposure.  During the years  ended June 30,  1997,  1996 and 1995,  the net
     costs of hedging the  Company's  interest rate exposure with respect to its
     securities  held for trading  amounted  to  $730,000 or 0.37%,  $252,000 or
     0.21% and $93,000 or 0.05%, respectively.

(3)  The average  balance  reflects  the carrying  value of  available  for sale
     investments  net of the  average  valuation  allowance  related to a single
     non-agency  participation  certificate of $276,000,  $447,000, and $272,000
     for the years ended June 30, 1997, 1996 and 1995, respectively.

(4)  Net of deferred  loan fees,  loan  discounts  and  undisbursed  loan funds.
     Includes  nonaccrual  loans.  Interest on nonaccrual loans is recorded when
     received.

(5)  Excluding the costs of hedging the Company's  interest rate exposure (which
     has  effectively  reduced  the yields  earned on the  Company's  securities
     portfolio), the Company's interest rate spread amounted to 1.58%, 1.72% and
     2.17%,  and the Company's net interest margin amounted to 1.77%,  1.81% and
     2.14% for the years ended June 30, 1997, 1996 and 1995, respectively.


(6)  Net   interest   margin  is  net   interest   income   divided  by  average
     interest-earning assets.
<PAGE>
   Rate/Volume  Analysis - The  following  table  describes  the extent to which
changes in interest rates and changes in volume of  interest-related  assets and
liabilities  have affected the Company's  interest  income and interest  expense
during the periods indicated.  For each category of interest-earning  assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume  (change in volume  multiplied  by prior year rate),  (ii)
changes in rate  (change in rate  multiplied  by prior year  volume),  and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been  allocated in proportion to the absolute  dollar  amounts of the
changes due to rate and volume.

<TABLE>
<CAPTION>
Years Ended June 30,                                      1997 vs. 1996                                    1996 vs. 1995
------------------------------------------------------------------------------------------------------------------------------------
                                                            Increase                                 Increase
                                                           (Decrease)             Total             (Decrease)              Total
                                                             Due to              Increase             Due to               Increase
                                                        Rate         Volume                      Rate         Volume      (Decrease)
                                                      --------      --------      --------     --------      --------      --------
<S>                                                   <C>           <C>           <C>          <C>           <C>           <C>     
Interest-earning assets:
  Interest-bearing deposits                           $    (16)     $    433      $    417     $     15      $    162      $    177
  Securities held for trading and
     securities available for sale                      (1,377)       10,090         8,713         (700)        4,346         3,646
  Loans receivable, net                                   (225)        2,036         1,811         (154)        2,207         2,053
  Federal Home Loan Bank stock                              (2)           51            49           21            27            48
                                                      --------      --------      --------     --------      --------      --------
     Total interest-earning assets                    $ (1,620)     $ 12,610        10,990     $   (818)     $  6,742         5,924
                                                      ========      ========      ========     ========      ========      ========
Interest-bearing liabilities:
   NOW and checking accounts                          $    (10)     $     24            14     $      3      $     13            16
   Savings accounts                                         46           185           231           50            (5)           45
   Money market deposit accounts                             5             5             5          (16)          (11)
   Certificates of deposit                                (279)          344            65          173           274           447
                                                      --------      --------      --------     --------      --------      --------
     Total deposits                                       (243)          558           315          231           266           497
   Securities sold under agreements
     to repurchase                                        (415)        8,454         8,039          194         4,504         4,698
   Federal Home Loan Bank advances                         138           (90)           48           72          (198)         (126)
   Note payable                                            (54)           56             2           (2)          158           156
                                                      --------      --------      --------     --------      --------      --------
     Total interest-bearing liabilities               $   (574)     $  8,978         8,404     $    495      $  4,730         5,225
                                                      ========      ========      ========     ========      ========      ========
Increase in net
     interest income                                                              $  2,586                                  $   699
                                                                                  ========                                 ========
</TABLE>
<PAGE>
         Net Interest Income. Net interest income is determined by the Company's
interest  rate spread  (i.e.,  the  difference  between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing  liabilities)
and  the  relative  amounts  of  interest-earning  assets  and  interest-bearing
liabilities.  For the year ended June 30, 1997, Harrington's net interest income
increased by $2.6 million or 47.2% to $8.1  million,  compared to the year ended
June 30, 1996.  The increase was primarily due to a $180.7  million  increase in
the amount of average interest-earning assets.

         The growth in asset size is a major component of Harrington's strategic
plan. As capital is raised, the proceeds are invested initially in the Company's
securities portfolio.  As retail expansion opportunities become available and as
mortgage loans are originated, these funds will be redeployed in those sectors.

         The  increase  in net  interest  income  caused  by  asset  growth  was
partially  offset by a 21 basis point  decline in the  Company's  interest  rate
spread  during  the year,  from  1.64% to  1.43%.  Interest  rate  spread is the
difference  between interest income as a percentage of  interest-earning  assets
and  interest  expense as a percentage  of  interest-bearing  liabilities.  This
decline  was  primarily  due  to  the  Bank  investing  the  capital  raised  in
Harrington's  initial  public  stock  offering  in  mortgage-backed  and related
securities,  which earn somewhat lower option-adjusted spreads than the mortgage
loans in the  Company's  portfolio.  The 49 basis point decline in the Company's
average yield on interest-earning assests from 7.43% to 6.94% during fiscal 1997
was  partially  offset  by a 28 basis  point  decrease  in the  average  cost of
interest-bearing   liabilities,  from  5.79%  to  5.51%.  These  decreases  were
primarily  caused by an overall  decline in the level of interest  rates  during
fiscal 1997.

         For the year ended June 30,  1996,  Harrington's  net  interest  income
amounted to $5.5  million,  compared to $4.8 million for the year ended June 30,
1995. The $699,000 increase was primarily due to a $88.7 million increase in the
average amount of  interest-earning  assets,  which was partially offset by a 49
basis point  decline in the  Company's  interest rate spread during fiscal 1996,
from 2.13% to 1.64%.  During fiscal 1996,  the average cost of  interest-bearing
liabilities  increased 19 basis  points,  from 5.60% to 5.79%,  due to a general
increase in the level of interest rates.

         Provision for Loan Losses.  The provision for loan losses is charged to
earnings  to bring the total  allowance  to a level  considered  appropriate  by
management  based  on the  estimated  net  realizable  value  of the  underlying
collateral,  general  economic  conditions,  particularly  as they relate to the
Company's market area, historical loan loss experience and other factors related
to  the  collectibility  of  the  Company's  loan  portfolio.  While  management
endeavors  to use the best  information  available  in making  its  evaluations,
future  allowance  adjustments  may be necessary if economic  conditions  change
substantially from the assumptions used in making the evaluations.

         Harrington  established  provisions  (recoveries)  for loan  losses  of
$92,000,  $(1,000),  and $15,000 during the years ended June 30, 1997,  1996 and
1995,  respectively.  During such respective  periods,  loan charge-offs (net of
recoveries)  amounted to $(1,000),  $0 and $0,  respectively.  The provision for
loan  losses was  significantly  increased  during  fiscal  1997  because of the
substantial increase in the Company's mortgage loan portfolio. The allowance for
loan losses as a percentage of total non-performing loans was 63.4% and 46.0% at
June 30,  1997 and  1996,  respectively.  The  allowance  for loan  losses  as a
percentage of total loans was 0.2% at June 30, 1997 and 1996.

         Other  Income.  Other income is  comprised of two distinct  components:
gains  and  losses on the  Company's  investment  portfolios,  and fee and other
income from retail bank  operations.  Gains or losses on assets and hedges which
have been sold are reported as realized gains or losses,  and market value gains
or losses on assets and  hedges  which  remain in the  Company's  portfolio  are
reported as unrealized gains or losses.

         Management's  goal is to  attempt  to offset  any  change in the market
value of its  securities  portfolio  with the change in the market  value of the
interest  rate  risk  management   contracts  and   mortgage-backed   derivative
securities  utilized  by the Company to hedge its  interest  rate  exposure.  In
addition,  management  attempts to produce an overall  gain with  respect to its
securities  portfolio through the use of option-adjusted  pricing analysis.  The
Company  utilizes  such  analysis to select  securities  with wider  spreads for
purchase and to select  securities to sell for a gain as spreads tighten (net of
the gain or loss recognized with respect to related interest rate contracts).

         However, the use of mark-to-market accounting for the trading portfolio
can cause volatility in reported earnings due to short-term  fluctuations in the
market  value  of the  securities  relative  to that of the  hedge  instruments.
Harrington  accepts this volatility and realizes that a major benefit of marking
assets to market is that it provides  shareholders with more timely  information
on the economic  value of the Company's  portfolio and it allows  flexibility in
the  management  of the  Company's  assets to capitalize on growth or investment
opportunities.
<PAGE>
         The following table sets forth  information  regarding other income for
the periods  shown.
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended  June 30,                             1997        1996        1995
--------------------------------------------------------------------------------
<S>                                             <C>         <C>         <C>    
Gain (loss) on sale of securities
    held for trading                            $(1,623)    $ 1,834     $    66
Unrealized gain (loss) on securities
    held for trading                              2,117      (1,960)      1,535

Permanent impairment of
    securities available for sale                                          (414)

Other(1)                                            239         256         238
                                                -------     -------     -------
   Total other income                           $   733     $   130     $ 1,425
                                                =======     =======     =======
</TABLE>

(1)  Consists  primarily  of loan  servicing  fees  and late  charges,  checking
     account fees, trust and investment  management  service fees, rental income
     and other miscellaneous fees.

         Total other  income  amounted  to $733,000  for the year ended June 30,
1997.  This total consisted of a net realized and unrealized gain of $494,000 on
the trading  portfolio,  plus fee and other retail bank income of $239,000.  The
gain on the trading portfolio net of hedges reflects only a portion of the total
income  produced  from this  portfolio  in fiscal  1997.  Total income from this
portfolio consists of both interest income and net realized and unrealized gains
and losses on the  investments  and  hedges.  The net gain in fiscal 1997 can be
attributed to such factors as opportunistic  trades between fixed and adjustable
rate  securities at favorable  relative  option  adjusted  spreads,  the general
tightening of mortgage spreads to the related hedge instruments,  and the use of
a higher mix of interest rate swaps to financial  futures in hedging that shifts
a portion of hedge  expense  from the  trading  portfolio  gain to net  interest
income.

         Total other  income  amounted  to $130,000  for the year ended June 30,
1996.  This total was  comprised of fee and other retail bank income of $256,000
which  was  reduced  by a net  realized  and  unrealized  loss  of  $126,000  on
securities  held for trading.  The securities  loss resulted from changes in the
market values of  mortgage-backed  securities  which were not entirely offset by
changes in the market  values of the  interest  rate  contracts  in the  trading
portfolio.

         Total other income  amounted to $1.4 million during the year ended June
30, 1995,  primarily due to $1.6 million of net realized and unrealized gains on
securities held for trading. This gain was partially offset by a $414,000 charge
relating to the permanent  impairment of securities  classified as available for
sale,  specifically  a  non-agency   participation   certificate  secured  by  a
significant amount of delinquent single-family residential loans.
<PAGE>
         Other  Expense.  In  order  to  enhance  the  Company's  profitability,
management strives to maintain a low level of operating expenses relative to its
peer group.  During the years ended June 30,  1997,  1996 and 1995,  total other
expense, excluding the special SAIF assessment, as a percentage of average total
assets amounted to 0.9%, 1.1%, and 1.3%, respectively.  The following table sets
forth certain information regarding other expense for the periods shown.
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended June 30,                               1997        1996        1995
--------------------------------------------------------------------------------
<S>                                               <C>         <C>         <C>   
Salaries and employee benefits                    $2,174      $1,776      $1,470
Premises and equipment                               532         466         414
Special SAIF assessment                              830                         
FDIC insurance premiums                              180         276         260
Marketing                                            136         200         122
Computer services                                    165         143         112
Consulting fees                                      281         232         195
Other (1)                                          1,146         647         594
                                                  ------      ------      ------
   Total other expenses                           $5,444      $3,740      $3,167
                                                  ======      ======      ======
</TABLE>

(1)  Consists  primarily  of costs  relating  to  postage,  forms and  supplies,
     professional  fees,   supervisory   assessments  and  other   miscellaneous
     expenses.

         The principal  category of  Harrington's  other expense is salaries and
employee  benefits,  which  increased by $398,000 or 22.4% and $306,000 or 20.8%
during fiscal 1997 and 1996, respectively.  A major cause of these increases was
the continuing implementation of Harrington's retail expansion strategy. A total
of  three  new  banking   locations   were  opened  since  May,  1994,  and  the
administrative  support at the home office was  increased as well.  In addition,
new employees  were hired in connection  with the growth in the Bank's  mortgage
lending operations.

         Premises  and  equipment  expense  increased  by  $66,000  or 14.2% and
$52,000 or 12.6%  during  fiscal 1997 and 1996,  respectively.  The  increase in
premises  and  equipment  expense  during the periods was  primarily  due to the
opening of new branches during fiscal years 1997 and 1996.

         During  the  year  ended  June 30,  1997,  all  SAIF-insured  financial
institutions  were  required to pay a special  assessment to  recapitalize  that
fund.  Harrington's  special assessment,  which was based on the Bank's level of
deposits at March 31, 1995, was $830,000.  However,  beginning  January 1, 1997,
the Bank's FDIC insurance rate dropped from 23 basis points to 6 basis points on
its deposits.  Excluding the special SAIF  assessment,  FDIC insurance  premiums
decreased  $96,000 or 34.8% for fiscal  1997  compared  to fiscal  1996.  During
fiscal  1996,  FDIC  insurance  premiums  increased  $16,000  or 6.2% due to the
increase in the Bank's deposit base.

         Harrington  incurred  marketing  expense  of  $136,000,  $200,000,  and
$122,000 during the years ended June 30, 1997, 1996 and 1995, respectively.  The
fluctuations in marketing  expense during the periods  reflected the advertising
costs associated with the opening of the Bank's new branch offices during fiscal
1997 and 1996.

         Computer  services expense increased by $22,000 or 15.4% and $31,000 or
27.7%  during  fiscal 1997 and 1996,  respectively.  Computer  services  expense
relates  to the fees  paid by  Harrington  to a third  party  who  performs  the
Company's data  processing  functions as well as to the third party servicer who
performs  the  back-office  functions  with respect to the  Company's  trust and
investment management services.  The increase in expense for the years presented
relates  primarily  to the  increase in the number of deposit and loan  accounts
held by Harrington.

         Harrington  has  contracted  with Smith  Breeden to provide  investment
advisory services and interest rate risk analysis.  Certain  stockholders of the
Company  are also  principals  of Smith  Breeden.  The  consulting  fees paid by
Harrington to Smith Breeden during the years ended June 30, 1997, 1996 and 1995,
which are based on the Company's asset size, amounted to $281,000, $232,000, and
$195,000, respectively.

         Income Tax Provision.  The Company  incurred income tax expense of $1.3
million,  $648,000,  and $1.2 million during the years ended June 30, 1997, 1996
and 1995,  respectively.  The  Company's  effective  tax rate amounted to 38.6%,
34.6%,  and  38.7%  during  the  years  ended  June 30,  1997,  1996  and  1995,
respectively. The Company's effective tax rate for the year ended June 30, 1996,
was lower than the effective  rates for fiscal years 1997 and 1995 primarily due
to increased  permanent  differences  relative to the level of pre-tax income in
fiscal 1996.

LIQUIDITY

         The Bank is required under applicable  federal  regulations to maintain
specified levels of "liquid"  investments in qualifying types of U.S. Government
and  government  agency   obligations  and  other  similar   investments  having
maturities  of five years or less.  Such  investments  are intended to provide a
source of  relatively  liquid funds upon which the Bank may rely if necessary to
fund deposit  withdrawals and for other  short-term  funding needs. The required
level of such liquid  investments  is  currently  5% of certain  liabilities  as
defined by the OTS.

         The  regulatory  liquidity of the Bank was 5.25% at June 30,  1997,  as
compared to 5.53% at June 30, 1996.  At June 30, 1997,  the Bank's liquid assets
as  defined  by the OTS  totaled  approximately  $23.4  million,  which was $1.1
million in excess of the current OTS minimum requirement.

         The Bank  maintains  liquid  assets  at a level  believed  adequate  to
support  its normal  operations,  including  funding  loans and  paying  deposit
withdrawals.  Cash flow projections are regularly reviewed and updated to ensure
that  adequate  liquidity is  maintained.  Cash for these  purposes is generated
through the sale or maturity of securities,  the receipt of loan  payments,  and
increases  in  deposits  and  borrowings.  While the  level of loan and  deposit
activity is not entirely  under the control of the Bank,  the sale of securities
and  increases  in  borrowings  are entirely at the Bank's  discretion  and thus
provide a ready source of cash when needed.

         As a member of the FHLB  System,  the Bank may borrow  from the FHLB of
Indianapolis.  FHLBadvances  may be  obtained  on very  short  notice due to the
Bank's blanket  collateral  agreement  with the FHLB. In addition,  the Bank can
pledge  securities  for  collateralized  borrowings  such as reverse  repurchase
agreements  and  quickly  obtain  cash  whenever  needed.   In  the  opinion  of
management,  Harrington has sufficient cash flow and borrowing  capacity to meet
current and anticipated funding commitments.

         The Bank's liquidity,  represented by cash and cash  equivalents,  is a
result of its  operating,  investing and financing  activities.  During the year
ended June 30,  1997,  there was a net decrease of $7.6 million in cash and cash
equivalents. The major uses of cash during the year were purchases of securities
for the  trading  portfolio  of $913.8  million  and loan  originations,  net of
repayments, of $28.1 million. Partially offsetting these uses of cash, the major
sources of cash  provided  during the year included  $888.4  million in proceeds
from sales of securities held for trading and a net increase of $26.5 million in
reverse repurchase agreements.

INFLATION AND CHANGING PRICES

         The Consolidated Financial Statements and related data presented herein
have been prepared in accordance with generally accepted accounting  principles,
which require the  measurement  of financial  position and operating  results in
terms of historical dollars (except with respect to securities which are carried
at market value),  without  considering changes in the relative purchasing power
of  money  over  time  due  to  inflation.  Unlike  most  industrial  companies,
substantially  all of the assets and  liabilities of the Company are monetary in
nature.  As a  result,  interest  rates  have a more  significant  impact on the
Company's performance than the effects of general levels of inflation.  Interest
rates do not necessarily  move in the same direction or in the same magnitude as
the prices of goods and services.

RECENT ACCOUNTING PRONOUNCEMENTS

         The Financial Accounting Standards Board has issued Statement Nos. 125,
128, 130, and 131 that the Company will be required to adopt in future  periods.
See Note 1 to the consolidated  financial  statements for further  discussion of
these pronouncements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except share data)
June 30,                                                                                                   1997              1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                    <C>                <C>      
ASSETS
  Cash                                                                                                 $   1,207          $   1,036
  Interest-bearing deposits (Note 13)                                                                      8,309             16,107
    Total cash and cash equivalents                                                                        9,516             17,143
  Securities held for trading - at fair value (amortized cost of
    $314,953 and $319,562) (Notes 2, 8, 13)                                                              317,355            319,847
  Securities available for sale - at fair value (amortized cost of
    $1,183 and $2,062) (Note 2)                                                                            1,125              2,050
  Due from brokers                                                                                        11,308              4,374
  Loans receivable (net of allowance for loan losses of
    $213 and $120) (Note 3)                                                                               93,958             65,925
  Interest receivable, net (Note 4)                                                                        2,080              1,807
  Premises and equipment, net (Note 5)                                                                     4,424              3,105
  Federal Home Loan Bank of Indianapolis stock - at cost                                                   4,852              2,645
  Income taxes receivable (Note 10)                                                                        1,118               --
  Other                                                                                                    1,061              1,300
                                                                                                       ---------          ---------
TOTAL ASSETS                                                                                           $ 446,797          $ 418,196
                                                                                                       =========          =========
LIABILITIES AND STOCKHOLDERS' EQUITY

  Deposits (Note 6)                                                                                    $ 136,175          $ 135,143
  Securities sold under agreements to repurchase (Note 7)                                                245,571            219,067
  Federal Home Loan Bank advances (Note 8)                                                                26,000             26,000
  Interest payable on securities sold under agreements to repurchase (Note 7)                                300                115
  Other interest payable                                                                                     787              1,855
  Note payable (Note 9)                                                                                    9,995              8,998
  Advance payments by borrowers for taxes and insurance                                                      585                392
  Deferred income taxes, net (Note 10)                                                                     1,249                663
  Accrued income taxes payable (Note 10)                                                                                        115
  Deferred compensation payable (Note 12)                                                                     89                119
  Accrued expenses payable and other liabilities                                                           1,052              2,612
                                                                                                       ---------          ---------
    Total liabilities                                                                                    421,803            395,079
                                                                                                       ---------          ---------

<PAGE>

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except share data)
June 30,                                                                                                   1997              1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                    <C>                <C>      
COMMITMENTS AND CONTINGENCIES (NOTES 13, 14, 16)

STOCKHOLDERS' EQUITY (NOTES 1, 10, 11, 12, 16):
  Preferred Stock ($1 par value) Authorized and unissued -
   5,000,000 shares
  Common Stock:
   Voting ($.125 par value) Authorized - 10,000,000 shares
    issued and outstanding 3,256,738 shares                                                                  407                407
  Additional paid-in capital                                                                              15,623             15,623
  Unrealized loss on securities available for sale, net of deferred
   taxes of $23 and $4                                                                                       (35)                (8)
  Retained earnings                                                                                        8,999              7,095
                                                                                                       ---------          ---------
       Total stockholders' equity                                                                         24,994             23,117
                                                                                                       ---------          ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                             $ 446,797          $ 418,196
                                                                                                       =========          =========
</TABLE>



See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share data)
Years Ended June 30,                                                                          1997           1996            1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>             <C>             <C>     
INTEREST INCOME:
  Securities held for trading                                                              $ 27,538        $ 18,286        $ 14,421
  Net interest expense on interest rate contracts maintained in
     the trading portfolio (Note 13)                                                           (730)           (252)            (93)
  Securities available for sale                                                                 133             194             254
  Loans receivable (Note 3)                                                                   6,087           4,276           2,223
  Dividends on Federal Home Loan Bank of Indianapolis stock                                     249             200             152
  Deposits                                                                                    1,197             780             603
                                                                                           --------        --------        --------
                                                                                             34,474          23,484          17,560
                                                                                           --------        --------        --------
INTEREST EXPENSE:
  Deposits (Notes 6, 13)                                                                      7,466           7,151           6,654
  Federal Home Loan Bank advances (Note 8)                                                    1,644           1,596           1,722
  Short-term borrowings (Note 7)                                                             16,391           8,352           3,654
  Long-term borrowings (Note 9)                                                                 907             905             749
                                                                                           --------        --------        --------
                                                                                             26,408          18,004          12,779
                                                                                           --------        --------        --------
NET INTEREST INCOME                                                                           8,066           5,480           4,781
PROVISION (CREDIT) FOR LOAN LOSSES (NOTE 3)                                                      92              (1)             15
                                                                                           --------        --------        --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                                           7,974           5,481           4,766
                                                                                           --------        --------        --------
OTHER INCOME (LOSS):
  Gain (loss) on sale of securities held for trading (Note 2, 13)                            (1,623)          1,834              66
  Unrealized gain (loss) on securities held for trading (Notes 2, 13)                         2,117          (1,960)          1,535
  Permanent impairment of securities available for sale (Note 2)                               --              --              (414)
  Other                                                                                         239             256             238
                                                                                           --------        --------        --------
                                                                                                733             130           1,425
                                                                                           --------        --------        --------

<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share data)
Years Ended June 30,                                                                          1997           1996            1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>             <C>             <C>     
OTHER EXPENSE:
  Salaries and employee benefits (Note 12)                                                    2,174           1,776           1,470
  Premises and equipment expense (Note 5)                                                       532             466             414
  SAIF assessment (Note 16)                                                                     830
  FDIC insurance premiums                                                                       180             276             260
  Marketing                                                                                     136             200             122
  Computer services                                                                             165             143             112
  Consulting fees (Note 15)                                                                     281             232             195
  Other                                                                                       1,146             647             594
                                                                                           --------        --------        --------
                                                                                              5,444           3,740           3,167
                                                                                           --------        --------        --------

INCOME BEFORE INCOME TAX PROVISION                                                            3,263           1,871           3,024

INCOME TAX PROVISION (NOTE 10)                                                                1,261             648           1,171
                                                                                           --------        --------        --------

NET INCOME                                                                                 $  2,002        $  1,223        $  1,853
                                                                                           ========        ========        ========

EARNINGS PER SHARE (NOTE 1)                                                                $   0.61        $   0.57        $   1.20
                                                                                           ========        ========        ========
</TABLE>


See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in thousands except share data)
                                                                                Additional   Unrealized                    Total
                                                         Shares       Common     Paid-in        Gain        Retained   Stockholders'
                                                       Outstanding    Stock      Capital       (Loss)       Earnings       Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>          <C>          <C>           <C>           <C>      
BALANCES, JULY 1, 1994                                   176,548    $     176    $   1,730                  $   4,019     $   5,925
  Stock split 4 for 1                                    529,644                                                                 
  Issuance of common stock under
    equity offering (Note 16)                            263,821           66        2,355                                    2,421
  Stock options exercised (Note 12)                       10,800            3           98                                      101
  Net income                                                                                                    1,853         1,853
  Net change in unrealized gain (loss)
     on securities available for sale,
     net of deferred tax of $36                                                               $      61                          61
                                                       ---------    ---------    ---------    ---------     ---------     ---------
BALANCES, JUNE 30, 1995                                  980,813          245        4,183           61         5,872        10,361

  Stock split 2 for 1                                    980,813                                                                 
  Stock options exercised (Note 12)                       30,112            4          161                                      165

  Issuance of common stock under initial
    public offering (Note 1)                           1,265,000          158       11,279                                   11,437
  Net income                                                                                                    1,223         1,223
  Net change in unrealized gain (loss)
    on securities available for sale,
    net of deferred tax of $(4)                                                                                   (69)          (69)
                                                       ---------    ---------    ---------    ---------     ---------     ---------
BALANCES, JUNE 30, 1996                                3,256,738          407       15,623           (8)        7,095        23,117
  Net income                                                                                                    2,002         2,002
  Cash dividends declared on common stock
    ($0.03 per share)                                                                                             (98)          (98)
  Net change in unrealized gain (loss)
    on securities available for sale,
    net of deferred tax of $(23)                                                                                  (27)          (27)
                                                       ---------    ---------    ---------    ---------     ---------     ---------
BALANCES, JUNE 30, 1997                                3,256,738    $     407    $  15,623    $     (35)    $   8,999     $  24,994
                                                       =========    =========    =========    =========     =========     =========
</TABLE>

See notes to consolidated financial statements.

<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended June 30,                                                                           1997          1996           1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>            <C>            <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                                $   2,002      $   1,223      $   1,853
  Adjustments to reconcile net income to net cash used in operating activities:
         Provision (credit) for loan losses                                                        92             (1)            15
         Depreciation                                                                             235            210            176
         Premium and discount amortization on securities, net                                   1,925          1,887          1,485
         Amortization of premiums and discounts on loans receivable                                 9            (37)          (132)
         (Gain) loss on sale of securities held for trading                                     1,623         (1,834)           (66)
         Unrealized (gain) loss on securities held for trading                                 (2,117)         1,960         (1,535)
         Permanent impairment of securities available for sale                                   --             --              414
         Deferred income tax provision                                                            605           (913)           673
         Increase in interest receivable                                                         (273)          (454)           (41)
         Increase (decrease) in interest payable                                                 (883)           278            219
         Decrease in accrued income taxes                                                        (115)           (80)          (254)
         Purchases of securities held for trading                                            (913,766)      (390,743)      (510,309)
         Increase in amounts due from brokers                                                  (6,934)        (4,374)          --
         Proceeds from maturities of securities held for trading                               26,398         25,407         15,798
         Proceeds from sales of securities held for trading                                   888,429        290,209        419,340
         (Increase) decrease in other assets                                                      239            640         (1,511)
         Increase in income taxes receivable                                                   (1,118)          --             --
         Increase (decrease) in accrued expenses                                               (1,590)         2,374           (642)
         Increase in other liabilities                                                            193            128            124
                                                                                            ---------      ---------      ---------
     Net cash used in operating activities                                                     (5,046)       (74,120)       (74,393)
                                                                                            ---------      ---------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Federal Home Loan Bank of Indianapolis stock                                     (2,207)          (145)          (657)
  Proceeds from maturities of securities available for sale                                       879            422            574
  Loan originations, net of principal repayments                                              (28,134)       (28,877)       (16,211)
  Purchases of premises and equipment                                                          (1,554)          (923)          (411)
                                                                                            ---------      ---------      ---------
     Net cash used in investing activities                                                    (31,016)       (29,523)       (16,705)
                                                                                            ---------      ---------      ---------

(continued)
<PAGE>
<CAPTION>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
Years Ended June 30,                                                                           1997          1996           1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>            <C>            <C>      
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposits                                                                      1,032         19,831          7,011
  Increase in securities sold under agreements to repurchase                                   26,504         88,850         75,565
  Proceeds from issuance of common stock under equity offering                                   --             --            2,421
  Proceeds from issuance of common stock under initial public offering                           --           11,437           --
  Proceeds from stock options exercised                                                          --              165            101
  Proceeds from Federal Home Loan Bank advances                                                 3,300         10,000           --
  Proceeds from note payable                                                                    2,300            800          1,900
  Principal repayments on Federal Home Loan Bank advances                                      (3,300)       (15,000)          --
  Principal repayments on note payable                                                         (1,303)        (1,002)          (600)
  Dividends paid on common stock                                                                  (98)          --             --
                                                                                            ---------      ---------      ---------
    Net cash provided by financing activities                                                  28,435        115,081         86,398
                                                                                            ---------      ---------      ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                           (7,627)        11,438         (4,700)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                 17,143          5,705         10,405
                                                                                            ---------      ---------      ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                                    $   9,516      $  17,143      $   5,705
                                                                                            =========      =========      =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid for interest                                                                    $  25,434      $  18,354      $  12,562
  Cash paid for income taxes                                                                    1,889          1,600            753
</TABLE>


See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Business of the Company - Harrington  Financial  Group,  Inc. ("HFG" or
the "Company") is a savings and loan holding  company  incorporated  on March 3,
1988 to acquire and hold all of the outstanding common stock of Harrington Bank,
FSB (the "Bank"),  a federally  chartered savings bank with principal offices in
Richmond,  Indiana and branch locations in Hamilton County,  Indiana.  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.

         Basis of Presentation - The consolidated  financial  statements include
the  accounts of HFG and the Bank.  All  significant  intercompany  accounts and
transactions  have been eliminated.  The preparation of financial  statements in
conformity with generally accepted accounting  principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

         Cash and Cash  Equivalents  - All  highly  liquid  investments  with an
original maturity of three months or less are considered to be cash equivalents.

         Securities  Held for Trading  and  Available  for Sale -  Statement  of
Financial   Accounting   Standards  (SFAS)  No.  115,   Accounting  for  Certain
Investments in Debt and Equity Securities addresses the accounting and reporting
for investments in equity securities that have readily  determinable fair values
and all investments in debt  securities.  SFAS No. 115 requires these securities
to be classified in one of three categories and accounted for as follows:

     o     Debt  securities that the Company has the positive intent and ability
           to hold to maturity are classified as  "securities  held to maturity"
           and reported at amortized cost.

     o     Debt and equity securities that are acquired and held principally for
           the purpose of selling  them in the near term with the  objective  of
           generating  economic  profits  on  short-term  differences  in market
           characteristics  are classified as "securities  held for trading" and
           reported at fair value,  with unrealized gains and losses included in
           earnings.

     o     Debt and equity  securities not classified as either held to maturity
           or trading  securities are  classified as  "securities  available for
           sale" and reported at fair value,  with unrealized  gains and losses,
           after  applicable  taxes,  excluded  from  earnings and reported in a
           separate component of stockholders' equity.  Declines in the value of
           debt securities and marketable  equity securities that are considered
           to be other than temporary are recorded as a permanent  impairment of
           securities available for sale in the statement of income.

         Premiums and discounts are amortized over the contractual  lives of the
related  securities  using  the  level  yield  method.  Purchases  and  sales of
securities are recorded in the balance sheet on the trade date. Gains and losses
from  security  sales or disposals  are  recognized  as of the trade date in the
statement  of income for the period in which  securities  are sold or  otherwise
disposed of. The Company also enters into forward  contracts to purchase or sell
securities held for trading.  Changes in the fair value of the forward  contract
are recognized in earnings as they occur.  Securities  purchased or sold under a
forward contract are recorded at their fair values at the settlement date .

         The Company's trading portfolio consists of mortgage-backed securities,
mortgage-backed  security  derivatives,  equity  securities  and  interest  rate
contracts,  which accordingly are carried at fair value. Realized and unrealized
changes in fair values are recognized in other income in the period in which the
changes  occur.  Interest  income  from  trading  activities  is included in the
statement of income as a component of net interest income.

      The Company's available for sale portfolio consists of municipal bonds and
a non-agency participation certificate.

         Fair values of  securities  are based on quoted market prices or dealer
quotes.  Where  such  quotes  are not  available,  estimates  of fair  value  of
securities are based upon a number of assumptions such as prepayments  which may
shorten  the  life  of  such  securities.  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.  While  management  endeavors to use the
best information available in determining prepayment assumptions, actual results
could differ from those assumptions.

         Financial  Instruments Held for Asset and Liability Management Purposes
- Effective  June 30,  1995,  the Bank adopted the  provisions  of SFAS No. 119,
Disclosure About Derivative Instruments and Fair Value of Financial Instruments.
The statement addresses  disclosures of derivative financial instruments such as
futures,  forward  rate  agreements,   interest  rate  swap  agreements,  option
contracts and other financial instruments with similar characteristics. SFAS No.
119 requires  disclosures  about  amounts and the nature and terms of derivative
financial  instruments  regardless  of whether they result in  off-balance-sheet
risk or accounting  loss. The Bank has  incorporated  the  requirements  of this
statement in Note 13.

         The Bank is party to a variety of interest rate contracts consisting of
interest  rate  futures,  options,  caps,  swaps,  floors  and  collars  in  the
management  of the  interest  rate  exposure  of its  trading  portfolio.  These
financial  instruments are included in the trading portfolio and are reported at
market value with realized and unrealized gains and losses on these  instruments
recognized in other income (see Note 2).

         The Bank enters into certain other  interest rate swap  agreements as a
means of managing the interest  rate exposure of certain  inverse  variable rate
deposits.  The  Bank  also  entered  into an  interest  rate  cap  agreement  to
effectively  fix the  interest  rate on  floating-rate  Federal  Home  Loan Bank
advances.  These  interest rate  agreements  are accounted for under the accrual
method.  Under this  method,  the  differential  to be paid or received on these
interest  rate  agreements  is  recognized  over the lives of the  agreements in
interest  expense.  Changes in market  value of  interest  rate swaps and of the
interest rate cap  accounted  for under the accrual  method are not reflected in
the accompanying  financial statements.  Realized gains and losses on terminated
interest rate swaps  accounted  for under the accrual  method are deferred as an
adjustment to the carrying  amount of the designated  instruments  and amortized
over  the  remaining  original  life  of  the  agreements.   If  the  designated
instruments are disposed of, the fair value of the interest rate swap,  interest
rate  cap  or  unamortized   deferred  gains  or  losses  are  included  in  the
determination  of the gain or loss on the  disposition of such  instruments.  To
qualify for such  accounting,  the  interest  rate swaps are  designated  to the
inverse  variable  rate  deposits and the interest rate cap is designated to the
Federal Home Loan Bank advances which alter the designated instruments' interest
rate characteristics.

         Due  from  Brokers  consists  of  amounts   receivable  from  sales  of
securities  in which the  transactions  have not settled as of the balance sheet
date.

         Loans  Receivable  are  carried at the  principal  amount  outstanding,
adjusted  for  premiums or discounts  which are  amortized  or accreted  using a
level-yield  method. The Company adopted SFAS No. 114 and No. 118, Accounting by
Creditors for Impairment of a Loan and Income  Recognition and  Disclosures,  as
amended, effective July 1, 1995. These statements require that impaired loans be
measured  based on the  present  value of future  cash flows  discounted  at the
loan's effective  interest rate or the fair value of the underlying  collateral,
and specifies  alternative methods for recognizing interest income on loans that
are  impaired or for which there are credit  concerns.  For purposes of applying
these standards,  impaired loans have been defined as all nonaccrual  commercial
loans which have not been collectively  evaluated for impairment.  The Company's
policy for income  recognition was not affected by adoption of these  standards.
An  impaired   loan  is  charged  off  by  management  as  a  loss  when  deemed
uncollectible  although  collection  efforts continue and future  recoveries may
occur.  The  adoption of SFAS No. 114 and No. 118 did not have any effect on the
total reserve for credit losses or related provision.  At June 30, 1997 and June
30, 1996, the Company had no impaired loans required to be disclosed  under SFAS
No. 114 and No. 118.

         Discounts and premiums on purchased  residential  real estate loans are
amortized  to income  using the  interest  method over the  remaining  period to
contractual maturity.

         Nonrefundable  origination fees net of certain direct origination costs
are  deferred  and  recognized,  as a yield  adjustment,  over  the  life of the
underlying loan.

         Allowance  for Losses - A provision  for  estimated  losses on loans is
charged  to  operations  based upon  management's  evaluation  of the  potential
losses. Such an evaluation,  which includes a review of all loans for which full
collectibility may not be reasonably  assured,  considers,  among other matters,
the estimated net realizable value of the underlying collateral,  as applicable,
economic conditions,  historical loan loss experience and other factors that are
particularly  susceptible to changes that could result in a material  adjustment
in the  near  term.  While  management  endeavors  to use the  best  information
available  in  making  its  evaluations,  future  allowance  adjustments  may be
necessary if economic conditions change  substantially from the assumptions used
in making the evaluations.

         Interest  Receivable  -  Interest  income  on  securities  and loans is
accrued  according to the  contractual  terms of the underlying  asset including
interest  rate,  basis  and  date of last  payment.  Income  on  derivatives  of
mortgage-backed  securities is recorded based on projected  cashflows  using the
median of major brokers' prepayment  assumptions for the underlying  securities.
The Bank  provides an allowance  for the loss of  uncollected  interest on loans
which are more than 90 days past due. 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.

         Premises   and   Equipment   are  carried  at  cost  less   accumulated
depreciation.   Depreciation  is  computed  on  the  straight-line  method  over
estimated  useful lives ranging from 3 to 40 years.  Maintenance and repairs are
expensed as incurred while major  additions and  improvements  are  capitalized.
Gains and losses on dispositions are included in current operations.

         Federal  Income  Taxes - The Company and its wholly-  owned  subsidiary
file a  consolidated  tax  return.  Deferred  income tax assets and  liabilities
reflect  the  impact of  temporary  differences  between  amounts  of assets and
liabilities  for  financial  reporting  purposes  and basis of such  assets  and
liabilities as measured by tax laws and regulations.

         Earnings Per Share - Earnings per share of common stock is based on the
weighted  average  number of common  shares  outstanding  during  the year.  The
weighted average number of common shares  outstanding was 3,256,738,  2,160,233,
and 1,544,080 for fiscal years 1997, 1996 and 1995, respectively.  All per share
information has been restated to reflect the Company's  four-for-one stock split
in October 1994 and the Company's  two-for-one  stock split in October 1995. The
assumed exercise of stock options does not have a materially dilutive effect.

         New Accounting  Pronouncements - SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, was issued
in June 1996 and provides  accounting and reporting  standards for transfers and
servicing of financial assets and  extinguishments of liabilities.  SFAS No. 125
was  amended  by SFAS  No.  127,  Deferral  of the  Effective  Date  of  Certain
Provisions of SFAS No. 125. SFAS No. 127 defers  certain  provisions of SFAS No.
125 relating to repurchase  agreements,  dollar-roll,  securities  lending,  and
similar transactions and is effective for transactions  occurring after December
31, 1997.  Management  has not yet  quantified  the effect,  if any, of this new
standard on the consolidated financial statements.

         SFAS 128,  Earnings  Per Share,  applies to  financial  statements  for
public  companies for both interim and annual  periods ending after December 15,
1997. This statement establishes new accounting standards for the calculation of
basic earnings per share as well as diluted earnings per share.  Management does
not believe the adoption of this  statement  will have a material  effect on the
Company's calculation of earnings per share.

         In June  1997,  SFAS No.  130,  Comprehensive  Income,  was  issued and
becomes  effective  for fiscal  years  beginning  after  December  15,  1997 and
requires  reclassification  of  earlier  financial  statements  for  comparative
purposes.  SFAS No. 130 requires  that changes in the amounts of certain  items,
including  foreign  currency  translation  adjustments  and gains and  losses on
certain securities, be shown in the financial statements.  SFAS No. 130 does not
require a specific  format for the  financial  statement in which  comprehensive
income  is  reported,  but  does  require  that  an  amount  representing  total
comprehensive  income be  reported  in that  statement.  Management  has not yet
determined  the effect,  if any, of SFAS No. 130 on the  consolidated  financial
statements.

         Also in June 1997,  SFAS No.  131,  Disclosures  about  Segments  of an
Enterprise and Related  Information,  was issued. This Statement will change the
way public  companies  report  information  about  segments of their business in
their annual  financial  statements and requires them to report selected segment
information in their quarterly reports issued to shareholders.  It also requires
entity-wide  disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues,  and its major
customers.  SFAS No. 131 is effective for fiscal years  beginning after December
15, 1997.  Management has not yet determined the effect, if any, of SFAS No. 131
on the consolidated financial statements.

         The  Financial   Accounting  Standards  Board  issued  Exposure  Draft,
Accounting  for  Derivative and Similar  Financial  Instruments  and for Hedging
Activities,  in June 1996. Management has not yet quantified the effect, if any,
of this Exposure Draft on the consolidated financial statements.

         Reclassifications  of certain amounts in the 1996 and 1995 consolidated
financial statements have been made to conform to the 1997 presentation.
<PAGE>
2. SECURITIES
         The  amortized  cost and estimated  fair values of securities  held for
trading and securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
                                                                                        Gross             Gross
(Dollars in thousands)                                               Amortized        Unrealized        Unrealized          Fair
June 30, 1997                                                          Cost             Gains             Losses            Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>               <C>               <C>      
SECURITIES HELD FOR TRADING:
  GNMA certificates                                                 $ 165,894         $   2,291         $      83         $ 168,102
  FHLMC certificates                                                   41,194               401                79            41,516
  FNMA certificates                                                    68,800               628                73            69,355
  Non-agency participation certificates                                 2,545                42                85             2,502
  Collateralized mortgage obligations                                  25,789               295                52            26,032
  Residuals                                                               508               566                38             1,036
  Interest-only strips                                                  2,028                41               620             1,449
  Principal-only strips                                                   821                42                 3               860
  Interest rate swaps                                                    --                 626                45               581
  Interest rate collar                                                     50              --                  58                (8)
  Interest rate caps                                                    3,025              --               1,480             1,545
  Interest rate floors                                                  3,916               572               947             3,541
  Options                                                                  78              --                  54                24
  Futures                                                                --                 356              --                 356
  Equity securities                                                       305               159              --                 464
                                                                    ---------         ---------         ---------         ---------
Totals                                                              $ 314,953         $   6,019         $   3,617         $ 317,355
                                                                    =========         =========         =========         =========
SECURITIES AVAILABLE FOR SALE:
  Municipal bonds                                                   $     317         $      18              --           $     335
  Non-agency participation certificate                                    866              --           $      76               790
                                                                    ---------         ---------         ---------         ---------
Totals                                                              $   1,183         $      18         $      76         $   1,125
                                                                    =========         =========         =========         =========
</TABLE>

         The Bank's CMO  portfolio  at June 30,  1997  consisted  of four agency
investments with an estimated remaining weighted average life of 16.1 years.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1996                                                                          Gross             Gross
                                                                   Amortized         Unrealized        Unrealized          Fair
                                                                      Cost             Gains             Losses            Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>               <C>               <C>      
SECURITIES HELD FOR TRADING:
  GNMA certificates                                                 $ 148,674         $   1,515         $     323         $ 149,866
  FHLMC certificates                                                   83,329               211               156            83,384
  FNMA certificates                                                    66,182               304               489            65,997
  Non-agency participation certificates                                 3,209                55               110             3,154
  Collateralized mortgage obligations                                   6,131               248              --               6,379
  Residuals                                                               707               115                44               778
  Interest-only strips                                                  3,442               105               755             2,792
  Principal-only strips                                                 1,028                16                34             1,010
  Interest rate swaps                                                    --                 620              --                 620
  Interest rate collar                                                     83              --                  91                (8)
  Interest rate caps                                                    3,692               214               832             3,074
  Interest rate floors                                                  2,535             1,049               614             2,970
  Options                                                                  54                12                 1                65
  Futures                                                                --                --                 784              (784)
  Equity securities                                                       496                58                 4               550
                                                                    ---------         ---------         ---------         ---------
Totals                                                              $ 319,562         $   4,522         $   4,237         $ 319,847
                                                                    =========         =========         =========         =========
SECURITIES AVAILABLE FOR SALE:
  Municipal bonds                                                   $     921         $      41              --           $     962
  Non-agency participation certificate                                  1,141              --           $      53             1,088
                                                                    ---------         ---------         ---------         ---------
Totals                                                              $   2,062         $      41         $      53         $   2,050
                                                                    =========         =========         =========         =========
</TABLE>

         The Bank's CMO  portfolio  at June 30,  1996,  consisted  of two agency
investments with an estimated remaining weighted average life of 13.6 years.

         For a complete discussion of the Bank's Risk Management Activities, see
Note 13.
<PAGE>
         The  amortized   cost  and  estimated  fair  values  of  securities  by
contractual maturity are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1997
                                                                        Held for Trading                     Available for Sale
------------------------------------------------------------------------------------------------------------------------------------
                                                                   Amortized           Fair              Amortized           Fair
                                                                     Cost              Value                Cost             Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                <C>                <C>                <C>     
Debt securities:
  Due after 1 year through 5 years                                                                       $    317           $    335
Mortgage-backed securities                                         $275,888           $278,973
Non-agency participation certificates                                 2,545              2,502                866                790
Collateralized mortgage obligations                                  25,789             26,032
Mortgage-backed derivatives                                           3,357              3,345
Interest rate contracts                                               7,069              6,039
Equity securities                                                       305                464
                                                                   --------           --------           --------           --------
                                                                   $314,953           $317,355           $  1,183           $  1,125
                                                                   ========           ========           ========           ========
</TABLE>

         Securities with a total amortized cost of $255,387,000 and $230,558,000
and a total fair value of $257,826,000 and $229,680,000 were pledged at June 30,
1997 and 1996,  respectively,  to secure interest rate swaps and securities sold
under  agreements to  repurchase.  As of June 30, 1997 and 1996,  the Bank had a
blanket collateral  agreement for the Federal Home Loan Bank advances instead of
utilizing specific securities as collateral.

         Activities related to the sale of securities are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended June 30,                                                                    1997              1996               1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                <C>                <C>     
Proceeds from sales of securities held for trading                                    $888,429           $290,209           $419,340
Gross gains on sales of securities held for trading                                     44,324             30,492             12,761
Gross losses on sales of securities held for trading                                    45,947             28,658             12,695
</TABLE>

         A decline in the value of a non-agency participation  certificate which
is included in the  available  for sale  portfolio and which is considered to be
other than temporary  totaling  $414,000 was recorded in the statement of income
for the year ended June 30, 1995.
<PAGE>
3.  LOANS RECEIVABLE

         Approximately  88% of the Bank's  loans are to  customers  in Wayne and
Hamilton  counties in Indiana or surrounding  counties.  The portfolio  consists
primarily of owner occupied single family residential mortgages.

         Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 
June 30,                                                  1997           1996
--------------------------------------------------------------------------------
<S>                                                     <C>            <C>     
Loans secured by one to
  four family residences:
  Real estate mortgage                                  $ 90,871       $ 64,537
  Participation loans purchased                              226            305
Commercial                                                   258            441
Property improvement                                         690            315
Loans on savings accounts                                    252            267
Consumer and home equity lines of credit                   1,446            417
Real estate sold on contract                                  43             57
                                                        --------       --------
Subtotal                                                  93,786         66,339

Unamortized push-down
  accounting adjustment                                     (136)          (182)
Undisbursed loan proceeds                                     (9)          (420)

Net deferred loan fees,
  premiums and discounts                                     530            308
Allowance for loan losses                                   (213)          (120)
                                                        --------       --------
Loans receivable, net                                   $ 93,958       $ 65,925
                                                        ========       ========
</TABLE>

         The   principal   balance  of  loans  on  nonaccrual   status   totaled
approximately $336,000 and $261,000 at June 30, 1997 and 1996, respectively. For
the years ended June 30, 1997, 1996 and 1995,  gross interest income which would
have been  recorded  had the Bank's  non-accruing  loans been current with their
original terms amounted to $6,000, $6,000, and $13,000, respectively.

         The Bank had  commitments  to  originate or purchase  loans  consisting
primarily  of real estate  mortgages  secured by one to four  family  residences
approximating  $3,182,000 and $1,003,000 excluding undisbursed portions of loans
in-process at June 30, 1997 and 1996, respectively.

         The Bank has  transactions  in the  ordinary  course of  business  with
directors,  officers and employees.  Loans to such individuals  totaled $228,000
and $293,000 at June 30, 1997 and 1996, respectively.

         The amount of loans serviced for others totaled $4,657,000, $5,587,000,
and $6,820,000 at June 30, 1997,  1996 and 1995,  respectively.  Servicing loans
for others  generally  consists of  collecting  mortgage  payments,  maintaining
escrow amounts,  disbursing payments to investors and foreclosure processing. In
connection  with loans  serviced  for others,  the Bank held  borrowers'  escrow
balances of $31,000 and $44,000 at June 30, 1997 and 1996, respectively.

         Loan servicing fee income  included in other income for the years ended
June 30, 1997, 1996 and 1995 was $19,000, $23,000, and $27,000, respectively.
<PAGE>
         An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended June 30,                             1997        1996          1995
--------------------------------------------------------------------------------
<S>                                             <C>          <C>           <C>  
Beginning balance                               $ 120        $ 121         $ 106
Provision for loan losses                          92           (1)           15

Recoveries                                          1
                                                -----        -----         -----
Ending balance                                  $ 213        $ 120         $ 121
                                                =====        =====         =====
</TABLE>

         As a federally-chartered savings bank, aggregate commercial real estate
loans may not exceed 400% of capital as determined  under the capital  standards
provisions of FIRREA. This limitation was approximately $124 and $104 million at
June 30,  1997 and 1996,  respectively.  Also  under  FIRREA,  the  loans-to-one
borrower  limitation is generally 15% of unimpaired  capital and surplus  which,
for the Bank, was  approximately  $4 million at June 30, 1997 and 1996. The Bank
was in compliance with all of these requirements at June 30, 1997 and 1996.

4. INTEREST RECEIVABLE

         Interest receivable is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,                                                   1997           1996
--------------------------------------------------------------------------------
<S>                                                       <C>             <C>   
Loans (less allowance for
  uncollectibles - $6)                                    $  413          $  328
Interest-bearing deposits                                     34              26
Securities held for trading                                1,599           1,380
Securities available for sale                                 34              73
                                                          ------          ------
Interest receivable, net                                  $2,080          $1,807
                                                          ======          ======
</TABLE>
<PAGE>
5. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,                                                   1997           1996
--------------------------------------------------------------------------------
<S>                                                      <C>            <C>    
Land                                                     $ 1,003        $   395
Buildings and leasehold improvements                       3,357          2,631
Parking lot improvements                                     153            148
Furniture, fixtures and equipment                          1,059            844
                                                         -------        -------
Total                                                      5,572          4,018
Less accumulated depreciation                             (1,148)          (913)
                                                         -------        -------
Premises and equipment, net                              $ 4,424        $ 3,105
                                                         =======        =======
</TABLE>

         Depreciation expense included in operations during the years ended June
30, 1997, 1996 and 1995, totaled $235,000, $210,000, and $176,000, respectively.

6. DEPOSITS
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,                                                                     1997                                 1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Weighted                         Weighted
                                                                                         Average                          Average
                                                                 Amount                   Rate          Amount              Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                        <C>          <C>                     <C>  
NOW accounts                                                   $  4,778                   2.42%        $  4,529                3.04%
Savings accounts                                                 20,523                   4.18           17,342                3.96
Money market deposit accounts                                     1,930                   4.00            1,576                4.05
                                                               --------                                --------                   
                                                                 27,231                                  23,447
                                                               --------                                --------                   
Certificates of deposit:
1 year and less                                                  74,586                                  75,343     
1 to 2 years                                                     19,437                                  19,890
2 to 3 years                                                      7,486                                   8,093
3 to 4 years                                                      1,845                                   2,636
Over 4 years                                                      5,590                                   5,734
                                                               --------                   ----         --------                ----
                                                                108,944                   5.88          111,696                5.98
                                                               --------                   ----         --------                ----
Total deposits                                                 $136,175                                $135,143                   
                                                               ========                                ========                   
</TABLE>

         Certificates  of  deposit  in the amount of  $100,000  or more  totaled
approximately   $18  million  and  $20  million  at  June  30,  1997  and  1996,
respectively.
<PAGE>
         A summary of certificate  accounts by scheduled  fiscal year maturities
at June 30, 1997, is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)                    1998          1999          2000          2001          2002       Thereafter       Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>           <C>           <C>           <C>           <C>           <C>     
3.00% or less                                                                                                 $     10      $     10
3.01% - 5.00%                           $  4,894      $    464      $     65      $     17      $    909            99         6,448
5.01% - 7.00%                             68,462        16,298         6,359           962         2,005         2,167        96,253
7.01% - 9.00%                              1,135         2,446         1,055           127                         390         5,153
9.01% or greater                              95           229             7           739                          10         1,080
                                        --------      --------      --------      --------      --------      --------      --------
  Totals                                $ 74,586      $ 19,437      $  7,486      $  1,845      $  2,914      $  2,676      $108,944
                                        ========      ========      ========      ========      ========      ========      ========
</TABLE>

         Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended June 30,                                 1997       1996       1995
--------------------------------------------------------------------------------
<S>                                                 <C>        <C>        <C>   
NOW accounts                                        $  124     $  110     $   94
Savings accounts                                       844        613        568
Money market deposit accounts                           82         77         88
Certificates of deposit                              6,416      6,351      5,904
                                                    ------     ------     ------
                                                    $7,466     $7,151     $6,654
                                                    ======     ======     ======
</TABLE>

         Interest  expense on  certificates of deposit is net of interest income
on interest  rate  contracts of $130,000,  $129,000,  and $158,000 for the years
ended June 30, 1997, 1996 and 1995, respectively.

         For a complete discussion of the Bank's Risk Management Activities, see
Note 13.
<PAGE>
7. SECURITIES SOLD UNDER AGREEMENTS
    TO REPURCHASE
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,                                                 1997             1996
--------------------------------------------------------------------------------
<S>                                                    <C>              <C>     
Securities sold under
  agreements to repurchase:
  Same securities                                      $191,664         $ 98,724
  Substantially identical securities                     53,907          120,343
                                                       --------         --------
                                                       $245,571         $219,067
                                                       --------         --------
Accrued interest on securities sold
  under agreements to repurchase                       $    300         $    115
                                                       ========         ========
</TABLE>

         At June 30, 1997, securities sold under agreements to repurchase mature
within one month.

         An  analysis  of  securities  sold  under   agreements  to  repurchase,
excluding related accrued interest, is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended June 30,                         1997          1996          1995
--------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>     
Maximum amount outstanding at
   any month-end                           $343,427      $219,067      $130,217

Daily average amount outstanding            306,034       148,524        68,277
Weighted average interest rate at
   end of year                                 5.47%         5.21%         6.01%
                                               ====          ====          ==== 
</TABLE>

         Assets pledged to secure securities sold under agreements to repurchase
are  concentrated  among  seven and six  dealers  as of June 30,  1997 and 1996,
respectively.  The Bank exercises  control over the securities  pledged when the
same security is repurchased. Assets pledged are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,                                    1997     1996
--------------------------------------------------------------------------------
<S>                                                  <C>                <C>     
Mortgage-backed securities:
  At amortized cost                                  $249,018           $226,091
  At fair value                                      $251,317           $225,161
</TABLE>
<PAGE>
         An  analysis  of the amount at risk under  repurchase  agreements  with
counterparties  exceeding  10% of  stockholders'  equity at June 30,  1997 is as
follows:
<TABLE>
<CAPTION>
                                                                           Weighted
                                         Amount           Accrued           Average
                                       Outstanding       Interest          Maturity
(Dollars in thousands)                                                     (in days)
------------------------------------------------------------------------------------
<S>                                     <C>             <C>                   <C>
Federal Home Loan
   Mortgage Corporation                 $115,431        $    165              12

Federal National Mortgage
   Association                            86,683             132              14

Merrill Lynch                             17,224                              21

Morgan Stanley Market
   Products, Inc.                          4,336                              14

Nomura Securities
   International, Inc.                     9,484                              14

Smith Barney                              11,216               3              17
                                        --------        --------              --

                                        $244,374        $    300  
                                        ========        ========  
</TABLE>

<PAGE>

8. FEDERAL HOME LOAN BANK ADVANCES

         Advances  from  the  Federal  Home  Loan  Bank of  Indianapolis  are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,                       1997                             1996
--------------------------------------------------------------------------------
                                      Variable                         Variable
                                      Weighted                         Weighted
                                      Average                          Average
Fiscal Year Maturity     Amount        Rate           Amount            Rate
--------------------------------------------------------------------------------
<C>                     <C>            <C>           <C>                <C>  
1998                    $26,000        5.78%         $ 26,000           5.41%
</TABLE>

As of June 30, 1997 and 1996,  the Bank had a blanket  collateral  agreement for
the Federal Home Loan Bank advances instead of utilizing specific  securities as
collateral.

9. NOTE PAYABLE

         At June 30, 1997,  the Company  maintained a $15,000,000  loan facility
from Mercantile Bancorporation,  Inc. (formerly Mark Twain Bank) consisting of a
revolving  line of credit of  $5,000,000  and a  $10,000,000  term loan of which
$5,000  had  been  repaid  under  the  term  loan at June  30,  1997.  Quarterly
interest-only  payments,  based on the prime rate  published  in the Wall Street
Journal (8.50% at June 30, 1997), are payable through maturity of June 2000. The
unpaid principal balance outstanding is payable in full in June 2000.

         As of June 30, 1997, the loan was secured by the  Harrington  Bank, FSB
stock held by HFG, a blanket  security  interest in all of the Company's  assets
and the  assignment of certain life  insurance  policies owned by HFG. Under the
terms  of the  agreement,  the  Company  is bound by  certain  restrictive  debt
covenants.  As of June 30,  1997,  HFG was in  compliance  with  all  such  debt
covenants.
<PAGE>
10. INCOME TAXES

         An analysis of the income tax provision is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended June 30,                        1997          1996            1995
--------------------------------------------------------------------------------
<S>                                       <C>            <C>             <C>    
Current:
  Federal                                 $   451        $ 1,203         $   372
  State                                       205            358             126
Deferred:
  Federal                                     484           (776)            572
  State                                       121           (137)            101
                                          -------        -------         -------
Total income tax provision                $ 1,261        $   648         $ 1,171
                                          =======        =======         =======
</TABLE>

         The  difference  between the financial  statement  provision and amount
computed by using the statutory rate of 34% is reconciled as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended June 30,                            1997         1996         1995
--------------------------------------------------------------------------------
<S>                                           <C>          <C>            <C>  
Federal statutory income
  tax at 34%                                  $ 1,109      $   636      $ 1,028
Tax exempt interest and dividends                 (14)         (29)         (32)
State income taxes,
  net of federal tax benefit                      185          129           83
Amortization of fair value adjustments            (12)         (53)         (19)
Other, net                                         (7)         (35)         111
                                              -------      -------        -----
Total income tax provision                    $ 1,261      $   648        1,171
                                              =======      =======        =====

</TABLE>
<PAGE>
         The  Company's  deferred  income  tax  assets  and  liabilities  are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,                                       1997                1996
--------------------------------------------------------------------------------
<S>                                                        <C>            <C>   
Deferred tax assets:
   Deferred compensation                                   $   35         $   48
   Deferred loan fees/costs, net                                9              6
Differences in depreciation methods                             2             16
Unrealized loss on securities
     available for sale                                        23              4
   Other                                                       27             31
                                                           ------         ------
                                                               96            105
                                                           ------         ------
Deferred tax liabilities:
   Bad debt reserves, net                                      43             79
   Unrealized gain on securities
     held for trading                                         951            114
   Differences in income recognition
     on investments                                           351            575
                                                           ------         ------
                                                            1,345            768
                                                           ------         ------
Deferred income taxes, net                                 $1,249         $  663
                                                           ======         ======
</TABLE>

         Retained  earnings at June 30, 1997 and 1996 includes  approximately $3
million of income that has not been subject to tax because of deductions for bad
debts allowed for federal  income tax purposes.  Deferred  income taxes have not
been provided on such bad debt  deductions  since the Company does not intend to
use the  accumulated  bad debt deductions for purposes other than to absorb loan
losses.  If, in the future,  this  portion of retained  earnings is used for any
purpose  other  than to absorb  bad debt  losses,  federal  income  taxes may be
imposed on such amounts at the then current corporation income tax rate.

         In August 1996,  the "Small  Business Job  Protection  Act of 1996" was
passed into law.  One  provision of the act repeals the special bad debt reserve
method for thrift institutions currently provided for in Section 593 of the IRC.
The provision  requires thrifts to recapture any reserve  accumulated after 1987
but  forgives  taxes  owed  on  reserves   accumulated  prior  to  1988.  Thrift
institutions  will be given  six  years to  account  for the  recaptured  excess
reserves,  beginning  with  the  first  taxable  year  after  1995,  and will be
permitted to delay the timing of this recapture for one or two years, subject to
whether they meet certain  residential loan test  requirements.  The adoption of
the act did not have a material  adverse  effect on the  Company's  consolidated
financial position.

11. REGULATORY CAPITAL REQUIREMENTS

         The  Bank  is  subject  to  various  regulatory  capital   requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate  certain   mandatory  -  and  possibly   additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material  effect on the Bank's  financial  statements.  Under  capital  adequacy
guidelines and the regulatory  framework for prompt corrective  action, the Bank
must meet specific capital guidelines that involve quantitative  measures of the
Bank's assets,  liabilities,  and certain  off-balance-sheet items as calculated
under  regulatory   accounting   practices.   The  Bank's  capital  amounts  and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

         Quantitative  measures  that have been  established  by  regulation  to
ensure capital adequacy require the Bank to maintain minimum capital amounts and
ratios (set forth in the table below). The Bank's primary regulatory agency, the
OTS,  requires that the Bank  maintain  minimum  ratios of tangible  capital (as
defined in the  regulations) of 1.5%, core capital (as defined) of 3%, and total
risk-based  capital  (as  defined)  of 8%.  The Bank is also  subject  to prompt
corrective  action  capital  requirement  regulations  set forth by the  Federal
Deposit Insurance Corporation  ("FDIC").  The FDIC requires the Bank to maintain
minimum  capital  amounts  and ratios of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average  assets (as defined).  Management  believes,  as of June 30,
1997,  that the Bank  meets all  capital  adequacy  requirements  to which it is
subject.

         As of June 30, 1997 and 1996, the most recent notification from the OTS
categorized the Bank as "well  capitalized"  under the regulatory  framework for
prompt corrective  action. To be categorized as "well capitalized" the Bank must
maintain minimum total risk-based,  Tier I risk-based and Tier I leverage ratios
as set  forth in the  table.  There  are no  conditions  or  events  since  that
notification that management believes have changed the institution's category.
<PAGE>
<TABLE>
<CAPTION>
                                                                                                           To Be Categorized as
                                                                                                            "Well Capitalized"
                                                                                                               Under Prompt
                                                                                     For Capital             Corrective Action
(Dollars in thousands)                                         Actual             Adequacy Purposes             Provisions
                                                      Amount         Ratio       Amount        Ratio        Amount       Ratio
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>            <C>         <C>            <C>        <C>            <C>
AS OF JUNE 30, 1997:
Tangible capital (to total assets)                   $ 31,031        6.96%      $  6,687       1.50%           N/A         N/A
Core capital (to total assets)                         31,031        6.96%        13,375       3.00%           N/A         N/A
Total risk-based capital (to risk weighted assets)     31,239       31.14%         8,025       8.00%      $ 10,032       10.00%
Tier I risk-based capital (to risk weighted assets)    31,031       30.93%           N/A        N/A          6,020        6.00%
Tier I leverage capital (to average assets)            31,031        6.96%           N/A        N/A          22,292       5.00%
                                                     ===============================================================================
                                      
Tangible capital (to total assets)                   $ 26,046        6.27%      $  6,228       1.50%           N/A         N/A
Core capital (to total assets)                         26,046        6.27%        12,456       3.00%            N/A        N/A
Total risk-based capital (to risk weighted assets)     26,161       30.10%         6,953       8.00%      $  8,691       10.00%
Tier I risk-based capital (to risk weighted assets)    26,046       29.97%           N/A        N/A          5,214        6.00%
Tier I leverage capital (to average assets)            26,046        6.27%           N/A        N/A         20,770        5.00%
                                                     ===============================================================================
</TABLE>

12. EMPLOYEE BENEFIT PLANS

         Profit-sharing  plan  -  The  Bank  has  a  qualified   noncontributory
profit-sharing  plan  for  all  eligible   employees.   The  plan  provides  for
contributions by the Bank in such amounts as its Board of Directors may annually
determine.  Contributions  charged to expense for the years ended June 30, 1997,
1996 and 1995 were $85,000, $39,000, and $79,000, respectively.

         Deferred  compensation  plan - On  September  30,  1988,  three  senior
officers of the Bank entered into  consulting  agreements  with the Bank to take
effect at their  retirement.  The  agreements  obligate the Bank to make monthly
payments to these individuals for the remainder of their lives. At September 30,
1988, the Bank recorded a liability for this deferred compensation calculated as
the present value of the estimated  future cash payments.  The amount of benefit
expense for fiscal years 1997, 1996 and 1995 was $32,000,  $29,000, and $26,000,
respectively.

         Stock  options - The  Company  has  granted  stock  options to existing
stockholders,  officers,  directors and other affiliated individuals to purchase
shares of the Company's  stock at prices at least equal to the fair market value
of the stock on the date of the grant. The options are  nontransferable  and are
forfeited upon termination of employment,  as applicable.  At June 30, 1997, all
outstanding stock options were exercisable through May 2007. The following is an
analysis  of stock  option  activity  for each of the three  years in the period
ended  June  30,  1997  and  the  stock  options  outstanding  at the end of the
respective years:
<PAGE>
<TABLE>
<CAPTION>
                                                               1997                       1996                      1995
                                                                   Weighted                   Weighted                  Weighted
                                                                   Average                    Average                   Average
                                                        Shares      Price          Shares      Price         Shares      Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>        <C>              <C>       <C>             <C>       <C>      
Outstanding, beginning of fiscal year                  155,700   $     7.70       163,200   $    7.32       155,200   $    7.50
Granted                                                 21,000        10.89        26,612        7.51        41,000        5.04
Exercised                                                                         (30,112)       5.48       (21,600)       4.66
Forfeited or expired                                      (250)       10.00        (4,000)       7.50       (11,400)       6.66
                                                       -------    ---------       -------   ---------       -------   ---------
Outstanding, end of fiscal year                        176,450    $    8.08       155,700   $    7.70       163,200   $    7.32
                                                       -------    ---------       -------   ---------       -------   ---------
Options exercisable at end of fiscal year                2,500    $   10.00
                                                       =======    =========
</TABLE>

         As of June 30, 1997,  options  outstanding have exercise prices between
$7.50 and $11.50 and a weighted average remaining contractual life of 2.2 years.
Of the stock options  outstanding at June 30, 1997, 143,200 have exercise prices
of $7.50 with a weighted average remaining contractual life of 6.5 months.

         The Company applies APB Opinion No. 25,  Accounting for Stock Issued to
Employees, and related interpretations in accounting for the plans; accordingly,
since the grant price of the stock options is at least 100% of the fair value at
the date of the grant no compensation expense has been recognized by the Company
in connection with the option grants.  Had compensation  cost for the plans been
determined  based on the fair value at the grant dates for awards under the plan
consistent  with  the  fair  value  method  of  SFAS  No.  123,  Accounting  for
Stock-Based  Compensation,  the  Company's  net  income and net income per share
would have decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
Years Ended June 30,                                  1997               1996
--------------------------------------------------------------------------------
<S>                                                <C>                 <C>      
Net income:
  As reported                                      $   2,002           $   1,223
  Pro forma                                        $   1,995           $   1,221

Net income per share:
  As reported                                      $    0.61           $    0.57
  Pro forma                                        $    0.61           $    0.57
</TABLE>
<PAGE>
         The weighted  average fair value of options granted was $3.42 in fiscal
year 1997 and $1.51 in fiscal year 1996. The fair value of the option grants are
estimated on the date of grant using the Black-Scholes option pricing model with
the following  assumptions:  no dividend  yield (except for the May 1997 grant),
risk-free  interest  rates  ranging  from 5.42% - 6.62%,  expected  volatilities
ranging from 0% - 22.49% and expected  lives ranging from 23 days to five years.
The pro forma  amounts are not  representative  of the  effects on reported  net
income for future years.

         Employee  Stock  Ownership  Plan - The Company  established an Employee
Stock Ownership Plan (ESOP) on February 5, 1996 for employees of the Company and
the Bank. Full-time employees of the Company and the Bank who have been credited
with at least 1,000 hours of service  during a twelve  month period are eligible
to  participate  in the ESOP.  During the 1997 fiscal year,  the ESOP  purchased
5,000 shares at $10.25 per share which have not been allocated as of fiscal year
end. During the 1996 fiscal year, the ESOP purchased 7,000 shares in the initial
public  offering  at $10.00 per share  which  have been  allocated  to  eligible
employees.  Contributions  are  allocated to eligible  employees  based on their
eligible  compensation  as defined  in the ESOP  Agreement.  Gross  compensation
expense (i.e.  the value of shares  contributed  to the ESOP by the Company) for
fiscal years 1997 and 1996 was $51,000 and $70,000, respectively.

13. RISK MANAGEMENT ACTIVITIES

         The Bank closely  monitors  the  sensitivity  of its balance  sheet and
income  statement  to  potential  changes  in  the  interest  rate  environment.
Derivative  financial  instruments  such as interest rate swaps,  caps,  floors,
collars,  futures,  and  options are used on an  aggregate  basis to protect the
trading  portfolio  and certain  liabilities  from adverse rate  movements.  The
Bank's objective,  with regard to managing interest rate risk, is to maintain at
an acceptably low level the sensitivity to rising or falling rates of its market
value of portfolio equity.

         Interest  rate  swaps  are  contracts  in which  the  parties  agree to
exchange  fixed and floating rate  payments for a specified  period of time on a
specified  (notional)  amount. The notional amount is only used to calculate the
amount of the periodic interest payments to be exchanged, and does not represent
the  amount at risk.  The Bank uses swaps to modify the  effective  duration  of
various assets and liabilities.  The floating rates are generally indexed to the
three-month London Interbank Offered Rates (LIBOR).

         Interest  rate caps and  floors  are  instruments  in which the  writer
(seller)  agrees to pay the holder  (purchaser)  the amount that an  agreed-upon
index is above or below the specified cap or floor rate, respectively, times the
notional amount.  In return for this promise of future  payments,  the purchaser
pays a premium to the seller. The notional amount is never exchanged between the
two  parties  and does not  represent  the  amount at risk.  The Bank  purchases
interest rate caps and floors to reduce the impact of rising or falling interest
rates on the market value of its trading  portfolio.  The interest rate caps and
floors generally have indexes equal to one or three month LIBOR,  except for one
interest rate cap which is tied to the five year Constant Maturity Treasury.

         The Bank is a party to an interest  rate  collar  which also is used to
manage  interest  rate risk in the trading  portfolio.  The interest rate collar
consists of an interest rate cap held by
the Bank and an interest rate floor written by the Bank. The notional  amount of
the interest rate collar is based on the balance in the  collection  accounts of
certain Merrill Lynch collateralized mortgage obligation trusts.

         Interest rate futures  contracts are  commitments to either purchase or
sell  designated  instruments  at a future date for a specified  price.  Initial
margin  requirements  are met in cash or other  instruments,  and changes in the
contract  values  are  settled  in cash  daily.  The Bank  enters  into  futures
contracts when these instruments are economically  advantageous to interest rate
swaps, caps and floors. The Bank uses primarily  Eurodollar  contracts which are
structured in calendar quarter  increments and therefore result in a much larger
notional  amount  than  longer  maturity  swap,  cap or  floor  contracts  which
represent a series of quarterly repricings.

         Financial  options  are  contracts  which  grant the  purchaser,  for a
premium  payment,  the right to  either  purchase  from or sell to the  writer a
specified financial instrument under agreed-upon terms. Financial options to buy
or sell securities are typically  traded in standardized  contracts on organized
exchanges.  The Bank  purchases  financial  options  to  reduce  the risk of the
written financial options embedded in mortgage related assets.

         Cash  restrictions - The Bank  maintained  $1,300,000 and $1,548,000 at
June 30, 1997 and 1996,  respectively,  in U.S. Treasury  Securities,  which are
considered  cash  equivalents,  as a  deposit  with a  broker  for  its  futures
activities.

         Credit risk - The Bank is dedicated to managing credit risks associated
with hedging activities.  The Bank maintains trading positions with a variety of
counterparties  or obligors  (counterparties).  To limit credit exposure arising
from  such   transactions,   the  Bank   evaluates   the  credit   standing   of
counterparties,   establishes   limits  for  the  total   exposure  to  any  one
counterparty,  monitors  exposure  against the  established  limits and monitors
trading portfolio composition to manage  concentrations.  In addition,  the Bank
maintains  qualifying  netting  agreements with its  counterparties  and records
gains  and  losses  on  derivative  financial  instruments  net in  the  trading
portfolio.

         The  Bank's   exposure  to  credit  risk  from   derivative   financial
instruments is represented by the fair value of instruments. Credit risk amounts
represent the replacement cost the Bank could incur should  counterparties  with
contracts in a gain position completely fail to perform under the terms of those
contracts and any collateral  underlying the contracts  proves to be of no value
to the Bank.  Counterparties  are  subject  to the  credit  approval  and credit
monitoring  policies and procedures of the Bank. Certain instruments require the
Bank or the counterparty to maintain collateral for all or part of the exposure.
Limits  for  exposure  to  any  particular   counterparty  are  established  and
monitored.   Notional  or  contract   amounts   indicate  the  total  volume  of
transactions and significantly  exceed the amount of the Bank's credit or market
risk associated with these instruments.
<PAGE>
         The following  off balance  sheet  positions are included in the Bank's
trading  portfolio and are thus reported in the financial  statements at current
fair value.
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1997
------------------------------------------------------------------------------------------------------------------------------------
                                                                   Estimated
                                          Contract or              Fair Value                  Weighted Average Interest Rate
                                           Notional      ---------------------------------------------------------------------------
                                            Amount          Asset           Liability   Payable  Receivable     Cap        Floor
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>                   <C>       <C>       <C>         <C>          <C>
Interest rate swaps:
   Pay fixed rate                         $  267,500      $      581                      5.92%     5.80%       N/A          N/A
Interest rate caps                           133,000           1,545                      N/A       N/A         7.92%        N/A
Interest rate floors                         275,000           3,541                      N/A       N/A         N/A          6.38%
Interest rate collar                           4,268                            $  8      N/A       N/A         10.25%       5.25%
Futures                                    1,546,400             356                      N/A       N/A         N/A          N/A
Options                                       77,900              24
                                          ----------          ------            ----
                                          $2,304,068          $6,047            $  8
                                          ==========          ======            ====
<CAPTION>
(Dollars in thousands)
June 30, 1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                   Estimated
                                          Contract or              Fair Value                  Weighted Average Interest Rate
                                           Notional      ---------------------------------------------------------------------------
                                            Amount          Asset           Liability   Payable  Receivable     Cap        Floor
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                <C>                <C>       <C>       <C>         <C>          <C>
Interest rate swaps:
   Pay fixed rate                      $    63,500           $  620                       5.56%     5.52%       N/A          N/A
Interest rate caps                         158,000            3,074                       N/A       N/A          7.46%       N/A
Interest rate floors                       165,000            2,970                       N/A       N/A         N/A          6.41%
Interest rate collar                         6,484                              $  8      N/A       N/A         10.25%       5.25%
Futures                                  1,361,900                               784      N/A       N/A         N/A          N/A
Options                                     13,000               65                       N/A       N/A         N/A          N/A
                                      ------------           ------             ----
                                      $  1,767,884           $6,729             $792
                                      ============           ======             ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
YEAR ENDED JUNE 30,                                                       1997                                   1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                        Monthly                                 Monthly
                                                                        Average                                 Average
                                                                       Fair Value                              Fair Value
------------------------------------------------------------------------------------------------------------------------------------
                                                                Asset             Liability              Asset            Liability
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                  <C>                  <C>                <C>   
Interest rate swaps:
  Pay fixed rate                                               $  952               $   45               $  534             $1,469
Interest rate caps                                              2,389                                     3,228                   
Interest rate floors                                            4,945                                     4,370                   
Interest rate collar                                                                    13                                      48
Futures                                                                                 95                                     134
Options                                                           154                                       136                   
                                                               ------               ------               ------             ------
                                                               $8,440               $  153               $8,268             $1,651
                                                               ======               ======               ======             ======
</TABLE>
<PAGE>
         The  following  table shows the  various  components  of the  Company's
recorded net gain on its trading  portfolio.  All realized and unrealized  gains
and losses are reported as other income in the statement of income. The periodic
exchanges  of  interest  payments  and the  amortization  of  premiums  paid for
contracts are accounted for as  adjustments  to the yields,  and are reported on
the statements of income as interest income.
<TABLE>
<CAPTION>
(Dollars in thousands)
Year Ended June 30, 1997
------------------------------------------------------------------------------------------------------------------------------------
                                                                    Realized              Unrealized             Net Trading
                                                                     Gains/                 Gains/                 Gains/
                                                                    (Losses)               (Losses)               (Losses)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                    <C>                    <C>    
Interest rate contracts:
  Swaps                                                                                    $   (39)               $   (39)
  Caps                                                                                        (862)                  (862)
  Floors                                                                                      (810)                  (810)
  Collar                                                                                        32                     32
  Futures                                                           $(5,045)                 1,140                 (3,905)
  Options                                                               114                    (65)                    49
                                                                    -------                -------                -------
Total                                                                (4,931)                  (604)                (5,535)
MBS and other trading assets                                          3,308                  2,721                  6,029
                                                                    -------                -------                -------
Total trading portfolio                                             $(1,623)               $ 2,117                $   494
                                                                    =======                =======                =======
<CAPTION>
(Dollars in thousands)
Year Ended June 30, 1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                    Realized              Unrealized             Net Trading
                                                                     Gains/                 Gains/                 Gains/
                                                                    (Losses)               (Losses)               (Losses)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                    <C>                    <C>    
Interest rate contracts:
  Swaps                                                             $(1,116)               $   839                $  (277)
  Caps                                                                 --                     (316)                  (316)
  Floors                                                               --                   (1,430)                (1,430)
  Collar                                                               --                      135                    135
  Futures                                                             2,522                   (650)                 1,872
  Options                                                               256                     76                    332
                                                                    -------                -------                -------
Total                                                                 1,662                 (1,346)                   316
MBS and other trading assets                                            172                   (614)                  (442)
                                                                    -------                -------                -------
Total trading portfolio                                             $ 1,834                $(1,960)               $  (126)
                                                                    =======                =======                ======= 
<PAGE>
<CAPTION>
(Dollars in thousands)
Year Ended June 30, 1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                    Realized              Unrealized             Net Trading
                                                                     Gains/                 Gains/                 Gains/
                                                                    (Losses)               (Losses)               (Losses)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                    <C>                    <C>    
Interest rate contracts:
  Swaps                                                             $  (651)               $(3,577)               $(4,228)
  Caps                                                                 (110)                (1,783)                (1,893)
  Floors                                                                 42                  2,737                  2,779
  Collar                                                               --                      (14)                   (14)
  Futures                                                            (1,854)                  (134)                (1,988)
  Options                                                               135                    (65)                    70
                                                                    -------                -------                -------
Total                                                                (2,438)                (2,836)                (5,274)
MBS and other trading assets                                          2,504                  4,371                  6,875
                                                                    -------                -------                -------
Total trading portfolio                                             $    66                $ 1,535                $ 1,601
                                                                    =======                =======                =======
</TABLE>
<PAGE>
         The following table sets forth the maturity  distribution  and weighted
average  interest rates of financial  instruments  used on an aggregate basis to
protect the trading portfolio from adverse rate movements at June 30, 1997.
<TABLE>
<CAPTION>
(Dollars in thousands)
Maturities During Fiscal
Years Ending June 30,                          1998          1999           2000          2001          2002       Thereafter
------------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>               <C>            <C>              <C>         <C>
Interest rate swaps-Pay fixed rate
  Notional amount                           $ 146,500     $ 100,000         $ 16,000       $  5,000
  Weighted average payable rate                  5.72%         6.12%            6.27%          6.58%
  Weighted average receivable rate               5.79%         5.82%            5.79%          5.82%
Interest rate caps
  Notional amount                                                             37,000         10,000                      $  86,000
  Weighted average cap rate                                                     8.09%          6.50%                          8.01%
Interest rate floors
  Notional amount                              35,000        60,000           30,000         70,000         $ 20,000        60,000
  Weighted average floor rate                    7.50%         6.42%            6.50%          6.50%            6.00%         5.63%
Interest rate collar
  Notional amount                                                                                                            4,268
  Weighted average cap rate                                                                                                  10.25%
  Weighted average floor rate                                                                                                 5.25%
Futures
  Notional amount                             152,400       145,000          182,000        348,000          278,000       441,000
Options  
  Notional amount                              77,900
</TABLE>

         The  following  interest  rate  hedges are not  included  in the Bank's
trading  portfolio.  Interest  rate swaps are used to modify the  interest  rate
sensitivity  of  certain  certificates  of  deposit  issued by the  Bank.  These
certificates of deposit, called inverse variable rate CDs, adjust according to a
formula in such a way as to pay a higher rate of interest  when the index falls,
and a lower rate of interest when the index rises. As of June 30, 1997 and 1996,
the Bank held  approximately  $6.2 million and $8.4 million of inverse  variable
rate CDs, with original terms to maturity  ranging from three to ten years.  The
Bank utilizes  interest rate swaps with the same notional  amount as the inverse
variable rate CDs to convert such  certificates of deposit  effectively to fixed
rate  deposits.  An additional  notional  amount of interest rate swaps are then
utilized to convert a portion of such  certificates  from fixed rate to variable
rate deposits. During fiscal year 1996, the notional amount of the interest rate
swaps  was  approximately  twice  that of the  inverse  variable  rate CDs which
effectively  converted  all such  certificates  from fixed rate to variable rate
deposits.  The  interest  rate swaps  protect the Bank  against the  exposure to
falling interest rates inherent in these CDs.

         The Bank also has a 7% interest  rate cap which is used to  effectively
cap the  interest  rate on the  Company's  floating  rate Federal Home Loan Bank
advances.  As of June 30, 1997, the Bank held two advances  totaling $26 million
that reprice based on the three month LIBOR quarterly. The interest rate cap has
a notional  amount of $30  million and  reprices  based on the three month LIBOR
quarterly  within a few days of the advances.  The interest rate cap matures May
2001 and the advances  mature  October and  November  1997,  however,  it is the
Bank's intent to replace the advances when they mature with additional  floating
rate liabilities, which will be designated against the interest rate cap.

         The market  values of the  following  interest  rate swaps and interest
rate cap are not reflected in the Company's financial  statements.  The periodic
exchanges of interest  payments and the net expense of the interest rate cap are
included in interest expense in the statements of income.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, 1997
                                          Contract or            Estimated Fair Value          Weighted Average Interest Rate
                                            Notional         -----------------------------------------------------------------------
                                             Amount            Asset          Liability          Payable           Receivable
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>              <C>                 <C>                 <C>  
Interest rate swaps:
    Pay floating rate                      $   7,500         $     91                             6.00%               6.96%
Interest rate cap                          $  30,000         $    351                             N/A                 N/A

<CAPTION>
(Dollars in thousands)
June 30, 1996
                                          Contract or            Estimated Fair Value          Weighted Average Interest Rate
                                            Notional         -----------------------------------------------------------------------
                                             Amount            Asset          Liability          Payable           Receivable
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>              <C>                 <C>                 <C>  
Interest rate swaps:
    Pay floating rate                      $  17,500         $   110                              5.57%               6.48%
Interest rate cap                          $  30,000         $   747                              N/A                 N/A
</TABLE>
<PAGE>
         The following table sets forth the maturity  distribution  and weighted
average  interest  rates of the interest  rate swaps used to protect the inverse
variable rate CDs from adverse rate  movements and the interest rate cap used to
cap the Federal Home Loan Bank advances at 7% as of June 30, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
Maturities During Fiscal
Years Ending June 30,                           1998          1999           2000          2001          2002       Thereafter
------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>          <C>           <C>             <C>        <C>
Interest rate swaps-Pay floating rate
    Notional amount                                                        $7,500
    Weighted average payable rate                                             6.00%
    Weighted average receivable rate                                          6.96%
Interest rate cap
    Notional amount                                                                      $30,000
    Weighted average cap rate                                                               7.00%
</TABLE>
<PAGE>
14. CREDIT COMMITMENTS

         The Bank is a party to  commitments  to  extend  credit  as part of its
normal business  operations to meet the financing needs of its customers.  These
commitments  involve,  to varying degrees,  elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. Exposure to credit
loss  in the  event  of  nonperformance  by the  other  party  to the  financial
instrument  for  commitments  to extend  credit is  represented  by the contract
amount of those  instruments.  The Bank uses the same credit  policies in making
commitments as it does for on-balance-sheet instruments. Unless noted otherwise,
the Bank does not require  collateral  or other  security  to support  financial
instruments with credit risk.

         The following table sets forth the Bank's real estate loan  commitments
whose  contract  amounts  represent  credit  risk  and the  applicable  range of
interest rates for such loan commitments.
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,                                                       1997                                    1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                      Interest                                Interest
                                                       Amount          Rates                  Amount            Rates
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>                       <C>              <C>        
Fixed rate                                           $   573       7.625-8.375%              $   703          7.75-8.875%
Adjustable rate                                        2,609         6.50-7.50%                  300           5.75-7.25%
                                                     -------                                 -------
                                                     $ 3,182                                 $ 1,003
                                                     =======                                 =======
</TABLE>
<PAGE>
15.   RELATED PARTY TRANSACTIONS

         The Company has contracted with Smith Breeden Associates,  Inc. ("SBA")
to provide investment advisory services and interest rate risk analysis. Certain
stockholders of HFG are also principals of SBA. The amount of consulting expense
relating  to SBA for  fiscal  years  ending  June  30,  1997,  1996 and 1995 was
$281,000, $232,000 and $195,000, respectively.

16. STOCKHOLDERS' EQUITY AND
     REGULATORY MATTERS

         Equity  offering  - Under  the  terms of an  offering  memorandum,  the
Company offered up to 555,556 shares of stock to certain stockholders, directors
and  officers  of the Company and the Bank  during  fiscal  1995.  The shares of
common  stock were  offered at $4.50 per share  beginning  on  November 1, 1994;
however,  the purchase  price  increased  each day thereafter at a rate of prime
plus 2% until the closing of the equity offering on January 31, 1995.

         Liquidation  account  - On July 10,  1985,  the Bank  converted  from a
federally   chartered  mutual   association  to  a  federally   chartered  stock
association  through  the  issuance  of 463,173  shares of common  stock ($1 par
value) at a price of $8 per share. From the proceeds,  $463,000 was allocated to
capital  stock at the par value of $1 per share and  $2,919,000  which is net of
conversion costs of $324,000 was allocated to additional paid-in-capital.

         The Bank established a special liquidation account (in memorandum form)
in an amount  equal to its total  retained  earnings  as of June 1, 1984 for the
purpose of granting to eligible  savings account holders a priority in the event
of  future  liquidation.  In the event of future  liquidation  of the  converted
institution  (and only in such event),  an eligible account holder who continues
to maintain his savings account shall be entitled to receive a distribution from
the liquidation  account.  The total amount of the  liquidation  account will be
decreased in an amount proportionately corresponding to decreases in the savings
accounts of eligible  account  holders on each subsequent  annual  determination
date.

         Dividend  restrictions  -  Regulations  provide  that  the Bank may not
declare or pay a cash dividend on or  repurchase  any of its stock if the result
thereof  would be to reduce the  consolidated  stockholders'  equity of the Bank
below  the  amount  required  for  the   liquidation   account  (as  defined  by
regulations).  Under the capital distribution  regulations of the OTS, the Bank,
as a "Tier 1" institution,  is permitted to make capital  distributions during a
calendar  year up to one  hundred  percent of its net income to date  during the
calendar year plus the amount that would reduce by one-half its surplus  capital
ratio, as defined, at the beginning of the calendar year. Under this limitation,
$6,440,000 was available for dividends at June 30, 1997.

         Reserve  Requirements  - As of June 30, 1997, the Bank was not required
to maintain reserve balances with the Federal Reserve Bank.

         SAIF Assessment - On September 30, 1996, the President  signed into law
an omnibus  appropriations  act for fiscal year 1997 that included,  among other
things, the recapitalization of the Savings Association Insurance Fund (SAIF) in
a section entitled "The Deposit  Insurance Funds Act of 1996" (the Act). The Act
included a provision where all insured depository  institutions would be charged
a one-time special assessment on their SAIF assessable  deposits as of March 31,
1995. The Company  recorded a pre-tax  charge of $830,000  during the year ended
June 30, 1997.
<PAGE>
17. FAIR VALUES OF FINANCIAL INSTRUMENTS

         The  following  disclosures  of the  estimated  fair value of financial
instruments  are made in  accordance  with  the  requirements  of SFAS No.  107,
Disclosures about Fair Value of Financial Instruments:
<TABLE>
<CAPTION>
(Dollars in thousands)
JUNE 30,                                                        1997                                     1996
------------------------------------------------------------------------------------------------------------------------------------
                                                     Carrying            Fair                    Carrying           Fair
                                                       Value            Value                      Value            Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>                       <C>               <C>    
ASSETS:
    Cash                                             $  1,207          $ 1,207                   $  1,036          $ 1,036
    Interest-bearing deposits                           8,309            8,309                     16,107           16,107
    Securities held for trading                       317,355          317,355                    319,847          319,847
    Securities available for sale                       1,125            1,125                      2,050            2,050
    Loans receivable, net                              93,958           94,800                     65,925           65,900
    Interest receivable                                 2,080            2,080                      1,807            1,807
    Federal Home Loan Bank stock                        4,852            4,852                      2,645            2,645
    Due fr0m brokers                                   11,308           11,308                      4,374            4,374
LIABILITIES:
    Deposits                                          136,175          136,200                    135,143          134,951
    Securities sold under agreements
     to repurchase                                    245,571          245,600                    219,067          218,967
    Federal Home Loan Bank advances                    26,000           26,000                     26,000           26,000
    Interest payable on securities sold
     under agreements to repurchase                       300              300                        115              115
    Other interests payable                               787              787                      1,855            1,855
    Note payable                                        9,995            9,995                      8,998            8,998
    Advance payments by borrowers for
      taxes and insurance                                 585              585                        392              392
OFF BALANCE SHEET HEDGING
    INSTRUMENTS:
    Interest rate swaps                                                     91                                         110
    Interest rate cap                                     685              351                        863              747
</TABLE>
<PAGE>
         The estimated fair value amounts are  determined by the Company,  using
available market information and appropriate valuation  methodologies.  However,
considerable  judgment is required  in  interpreting  market data to develop the
estimates of fair value.  Accordingly,  the estimates  presented  herein are not
necessarily  indicative  of the amounts the Company  could  realize in a current
market  exchange.  The use of different  market  assumptions  and/or  estimation
methodologies  may have a material  effect on the estimated  fair value amounts.
Cash,  interest-bearing  deposits,  interest  receivable  and  payable,  advance
payments by borrowers  for taxes and  insurance  and note payable - The carrying
amounts of these items are a reasonable estimate of their fair value.

         Loans  receivable - The fair value of loans  receivable is estimated by
discounting  future  cash  flows at market  interest  rates for loans of similar
terms and maturities,  taking into consideration  repricing  characteristics and
prepayment risk.

         Securities  held for  trading  consist of  mortgage-backed  securities,
collateralized   mortgage   obligations,    residuals,   interest-only   strips,
principal-only  strips,  interest rate swaps, an interest rate collar,  interest
rate caps, interest rate floors,  options,  futures and equity securities.  Fair
values are based on quoted market prices or dealer quotes. Where such quotes are
not available, fair value is estimated by using quoted market prices for similar
securities  or by  discounting  future cash flows at a risk  adjusted  spread to
Treasury.

         Due  from  brokers  consists  of  amounts   receivable  from  sales  of
securities  in which the  transactions  have not settled as of the balance sheet
date.  The fair value is  determined by the carrying  amounts of the  securities
sold.

         Federal  Home Loan Bank stock - The fair value is  estimated  to be the
carrying  value  which is par.  All  transactions  in the  capital  stock of the
Federal Home Loan Bank of Indianapolis are executed at par.

         Deposits  - The fair value of NOW,  savings  and money  market  deposit
accounts is the amount  payable on demand at the reporting  date. The fair value
of fixed maturity  certificates is estimated  using rates currently  offered for
deposits of similar remaining maturities.

         Securities sold under  agreements to repurchase - Fair values are based
on the discounted  value of contractual cash flows using dealer quoted rates for
agreements of similar terms and maturities.

         Federal  Home Loan  Bank  advances  - The fair  value is  estimated  by
discounting  future cash flows using rates  currently  available to the bank for
advances of similar maturities.

         Off balance  sheet hedging  instruments  consist of interest rate swaps
and an interest rate cap used to modify the interest rate sensitivity of certain
certificates of deposits and Federal Home Loan Bank advances, respectively. Fair
values are based on quoted market prices or dealer quotes. Where such quotes are
not available, fair value is estimated by using quoted market prices for similar
securities  or by  discounting  future cash flows at a risk  adjusted  spread to
Treasury.

         Commitments  - The  estimated  fair value of  commitments  to originate
fixed-rate loans is determined based on the fees currently charged to enter into
similar  agreements and the difference  between current levels of interest rates
and the committed  rates.  Based on that  analysis,  the estimated fair value of
such commitments is a reasonable estimate of the loan commitments at par.

         The fair value  estimates  presented  herein  are based on  information
available to management as of June 30, 1997 and 1996. Although management is not
aware of any factors that would  significantly  affect the estimated  fair value
amounts,  such  amounts have not been  comprehensively  revalued for purposes of
these consolidated financial statements since such dates, and therefore, current
estimates  of fair value may differ  significantly  from the  amounts  presented
herein.

18. HARRINGTON FINANCIAL GROUP, INC. FINANCIAL INFORMATION
(PARENT COMPANY ONLY)

The  following  condensed  balance  sheets  as of June 30,  1997 and  1996,  and
condensed  statements of income and cash flows for the three years in the period
ended June 30,  1997 for  Harrington  Financial  Group,  Inc.  should be read in
conjunction with the consolidated financial statements and notes thereto.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
(Dollars in thousands)
June 30,                                                 1997            1996
--------------------------------------------------------------------------------
<S>                                                    <C>             <C>     
Cash and cash equivalents                              $  3,500        $  5,271
Securities held for trading                                 464             550
Income taxes receivable                                     124
Other assets                                                 55              82
Intercompany receivable (payable)                            (1)             70
Investment in subsidiary                                 30,997          26,039
                                                       --------        --------
Total assets                                           $ 35,139        $ 32,012
                                                       ========        ========

Note payable                                           $  9,995        $  8,998
Deferred income taxes, net                                   63              10
Accrued income taxes                                       (210)
Accrued expenses payable
    and other liabilities                                    87              97
                                                       --------        --------
    Total liabilities                                    10,145           8,895
                                                       --------        --------

Common stock                                                407             407
Additional paid-in capital                               15,623          15,623
Unrealized loss
    on securities available
    for sale                                                (35)             (8)
Retained earnings                                         8,999           7,095
                                                       --------        --------
    Total stockholders' equity                           24,994          23,117
                                                       --------        --------
Total liabilities and
    stockholders' equity                               $ 35,139        $ 32,012
                                                       ========        ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
Years Ended
June 30,                         1997         1996        1995
--------------------------------------------------------------------------------
<S>                                           <C>          <C>          <C>    
Dividends from subsidiary                     $ 4,000      $   855         --   
Interest income from securities
  held for trading                                 76            8      $    18
Interest on deposits                                8           12           12
Gain on sale of securities
  held for trading                                 12           42           24
Unrealized gain on securities
  held for trading                                105           28           26
                                              -------      -------      -------
  Total income                                  4,201          945           80
                                              -------      -------      -------
Interest expense on
  long-term borrowings                            907          905          749
Salaries and employee benefits                    231          105           31
Other expenses                                    315           12           46
                                              -------      -------      -------
  Total expenses                                1,453        1,022          826
                                              -------      -------      -------
Income (loss) before equity in
  undistributed earnings                        2,748          (77)        (746)
Income tax provision (benefit)                   (509)        (359)        (296)
Equity in undistributed earnings
  of subsidiary                                (1,255)         941        2,303
                                              -------      -------      -------

Net income                                    $ 2,002      $ 1,223      $ 1,853
                                              =======      =======      =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended June 30,                                                                     1997              1996              1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>               <C>               <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                             $  2,002          $  1,223          $  1,853
Adjustments to reconcile  net income to
    net cash provided by (used in) operating activities:
    Decrease in other assets                                                                 27                 8                23
    Increase in income taxes receivable                                                    (124)
    Decrease (increase) in intercompany receivable                                           71               (70)
    Increase (decrease) in accrued expenses
    and other liabilities                                                                   (10)               83                14
    Gain on sale of securities held for trading                                             (12)              (42)              (24)
    Unrealized gain on securities held for trading                                         (105)              (28)              (26)
    Purchases of securities held for trading                                               (545)             (880)
    Proceeds from sales of securities held for trading                                      203               314             1,081
    Deferred income tax provision                                                            53                16                (4)
    Increase (decrease) in accrued income taxes                                             210               211              (189)
    Decrease (increase) in undistributed earnings of subsidary                            1,255              (941)           (2,303)
                                                                                       --------          --------          --------
    Net cash provided by (used in)
      operating activities                                                                3,570               229              (455)
                                                                                       --------          --------          --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributions to subsidiary                                                      (6,240)           (6,792)           (3,250)
                                                                                       --------          --------          --------
    Net cash used in investing activities                                                (6,240)           (6,792)           (3,250)
                                                                                       --------          --------          --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under
    equity offering                                                                        --                --               2,421
Proceeds from issuance of common stock
    under initial public offering                                                          --              11,437              --
Proceeds from stock options exercised                                                      --                 165               101
Proceeds from note payable                                                                2,300               800             1,900
Principal repayments on note payable                                                     (1,303)           (1,002)             (600)
Dividends paid on common stock                                                              (98)             --                --
                                                                                       --------          --------          --------
    Net cash provided by financing activities                                               899            11,400             3,822
                                                                                       --------          --------          --------
Net increase (decrease) in cash and cash equivalents                                     (1,771)            4,837               117

Cash and cash equivalents,
    Beginning of year                                                                     5,271               434               317
                                                                                       --------          --------          --------
Cash and cash equivalents,
    End of year                                                                        $  3,500          $  5,271          $    434
                                                                                       ========          ========          ========
</TABLE>

19. SUBSEQUENT EVENT

         On August 7, 1997,  the Board of Directors of the Company  approved the
repurchase of up to 5% of the Company's outstanding common stock.
<PAGE>
INDEPENDENT AUDITORS' REPORT





Board of Directors and Stockholders
Harrington Financial Group, Inc.
Richmond, Indiana

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Harrington  Financial Group,  Inc. and its subsidiary (the "Company") as of June
30, 1997 and 1996, and the related consolidated statements of income, changes in
stockholders'  equity and cash  flows for each of the three  years in the period
ended June 30, 1997. These financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

      In our opinion, such consolidated  financial statements present fairly, in
all material  respects,  the financial  position of Harrington  Financial Group,
Inc. and its  subsidiary as of June 30, 1997 and 1996,  and the results of their
operations  and their cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.



/s/DELOITTE & TOUCHE LLP


DELOITTE & TOUCHE LLP
Indianapolis, Indiana
July 23, 1997
(August 7, 1997 as to Note 19)