HCB BANCSHARES, INC




                               2002 ANNUAL REPORT

<PAGE>


                              TO OUR SHAREHOLDERS:

What an exciting  year it's been!  Your Company has reached  several  milestones
this year, and the end is not in sight.  For example,  net interest income after
provision for loan and investment losses reached an all-time high of $6,733,412.
At the same time,  non-interest income also set a new record high of $1,606,460,
more than  double the  figure of only four  years ago.  Return on equity was the
highest in seven  years,  and earnings per share were the highest in the history
of the Company. But, there's more improvement to come.

Our ratio of  non-interest  expense to average  total  assets is higher  than we
like,  and we need to make  improvement  there.  Our  nonperforming  assets also
reached a new high,  primarily due to the faltering  economy,  but  fortunately,
unusually high losses have not occurred.  And  non-interest  income can still be
improved. In short, we aren't satisfied.

Satisfaction  - what a  variety  of ways  there  are to  achieve  it.  Sometimes
satisfaction comes from mere improvement, such as a marginal student raising his
grade from an F to a C.  That's  certainly  a  tremendous  achievement,  and yet
there's more to be done.  Earning that C is very, very satisfying,  but it isn't
over yet. Passing is far better than failing,  and absolutely deserves favorable
recognition,  but shouldn't that C become a B? And shouldn't that B become an A?
Isn't "excellence" more satisfying than "average"?  Don't we want to be the best
we can be? And how do we decide when our performance is satisfying enough?

In our  business,  as in many  others,  it's  never  enough.  We will  always be
disappointed at losing a customer,  no matter how many "satisfied"  customers we
may have. We will always be thrilled by reaching new levels of success, but then
we will set even  higher  goals in an  effort  to reach  even  higher  levels of
success.  No matter how many  objectives  we meet,  or how well we meet them, we
will still  strive for more.  In short,  as we review the  criteria  by which we
measure our achievement,  there is no such thing as "enough".  We must not . . .
ever! . . . be "satisfied".

During this past fiscal year, your Company has achieved some impressive results.
Net  interest   income  has  never  been  higher.   Income  from  other  sources
(non-interest income) has never been higher.  Earnings per share have never been
higher. But . . . it is not enough. We want continued improvement. Increased net
income.  Tighter control of  non-interest  expense.  New products  providing new
sources of  non-interest  income.  Reductions  in high-rate  borrowings,  partly
through  repayment  and partly  through  replacement  at lower rates.  Continued
repurchases of our stock.  Negotiated reductions of non-performing  assets. And,
or course, increased return on equity.

We  want,  and  expect,  to be your  best  investment.  We want to  exceed  your
expectations,  and we want to do that year after year  after  year.  We want the
satisfaction of being a high-performance company.

Even then, we won't be "satisfied"!



/s/ Cameron D. McKeel
President and Chief Executive Officer


                                       2
<PAGE>


                                TABLE OF CONTENTS

HCB Bancshares, Inc.........................................................  3
Market for Common Stock and Related Stockholder Matters.....................  4
Selected Consolidated Financial and Other Data..............................  5
Quarterly Financial Data....................................................  7
Management's Discussion and Analysis of Financial Condition and Results
  of Operations.............................................................  8
Consolidated Financial Statement.............................................18
  Consolidated Statements of Financial Condition............................ 20
  Consolidated Statements of Income and Comprehensive Income................ 21
  Consolidated Statements of Stockholders' Equity........................... 23
  Consolidated Statements of Cash Flows..................................... 24
  Notes to Consolidated Financial Statements................................ 26
Corporate Information....................................................... 44

                              HCB BANCSHARES, INC.


     HCB Bancshares,  Inc. ("Bancshares") was incorporated under the laws of the
State of Oklahoma in December 1996 at the direction of the Board of Directors of
HEARTLAND  Community  Bank (the  "Bank") for the purpose of serving as a savings
institution  holding  company of the Bank,  upon the conversion of the Bank from
mutual to stock form, which was completed on April 30, 1997 (the  "Conversion").
The  accompanying  consolidated  financial  statements  include the  accounts of
Bancshares and the Bank and are collectively  referred to as the "Company".  All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

     Prior  to the  Conversion,  Bancshares  did  not  engage  in  any  material
operations.  Bancshares  has no  significant  assets other than the  outstanding
capital stock of the Bank, a portion of the net proceeds of the  Conversion  and
notes  receivable,  one of which  is from  the  Employee  Stock  Ownership  Plan
("ESOP").  Bancshares'  principal  business is the business of the Bank. At June
30,  2002,  the Company had total assets of $276.4  million,  deposits of $165.0
million, and stockholders' equity of $26.7 million, or 9.7% of total assets.

     As of June 30, 2002,  the Bank  operated  through six full  service-banking
offices  located in Camden  (2),  Fordyce,  Bryant,  Sheridan,  and  Monticello,
Arkansas.  During  July 2002 the Bank sold its  Monticello  branch and  operated
through five full service-banking offices.

     As a  federally  chartered  savings  institution,  the Bank is  subject  to
extensive  regulation  by the OTS.  The  Bank's  lending  activities  and  other
investments must comply with various federal  regulatory  requirements,  and the
OTS  periodically  examines  the Bank for  compliance.  The Bank's  deposits are
insured up to the  maximum  limits by the  Savings  Association  Insurance  Fund
("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC"). The
FDIC also has the authority to conduct special examinations.  The Bank must file
reports with OTS describing  its activities and financial  condition and is also
subject to certain  reserve  requirements  promulgated  by the  Federal  Reserve
Board.

                                       3
<PAGE>

                            MARKET FOR COMMON STOCK
                        AND RELATED STOCKHOLDER MATTERS


     Bancshares  common stock began trading on the Nasdaq National Market on May
7, 1997,  under the symbol  "HCBB."  Effective  February 2, 1999, the Bancshares
common  stock was  delisted and ceased  trading on the Nasdaq  National  Market.
Bancshares  common  stock  began  trading on the OTC  Bulletin  Board  effective
September  16,  1999 and was listed on the  Nasdaq  Small-Cap  Market  effective
November 22, 1999. At June 30, 2002,  there were 1,503,436  shares of the common
stock outstanding. For the purpose of this disclosure,  shares held in the Stock
Option Trust are considered to be outstanding,  however, for financial reporting
purposes,  such shares are reported as treasury shares.  At June 30, 2002, there
were 557  stockholders  of record  according  to the  Company's  transfer  agent
listing.  Following  are the high and low bid  prices,  by  fiscal  quarter,  as
reported on the Nasdaq  Small-Cap  Market July 1, 2000 to June 30, 2002, as well
as the dividends paid during such quarters.
<TABLE>
<CAPTION>

                                                     High              Low             Dividends Per Share
                                                   -------            ------           -------------------
<S>                                                <C>                <C>                   <C>
              Fiscal 2002
                 First Quarter                     $ 13.00            $ 11.90               $ 0.06
                 Second Quarter                      12.95              12.00                 0.07
                 Third Quarter                       15.00              12.61                 0.07
                 Fourth Quarter                      16.70              14.27                 0.08

              Fiscal 2001
                 First Quarter                     $  7.38            $  6.00               $ 0.06
                 Second Quarter                       9.25               7.19                 0.06
                 Third Quarter                        8.88               8.31                 0.06
                 Fourth Quarter                      13.20               8.94                 0.06
</TABLE>

     The stated high and low bid prices  reflect  inter-dealer  prices,  without
retail  mark-up,   markdown  or  commission,   and  may  not  represent   actual
transactions.

     The payment of dividends on common  stock is subject to  determination  and
declaration  by the Board of  Directors  of  Bancshares.  The  payment of future
dividends  will  be  subject  to the  requirements  of  applicable  law  and the
determination  by the Board of  Directors  of  Bancshares  that the net  income,
capital and financial  condition of  Bancshares  and the Bank,  thrift  industry
trends and general  economic  conditions  justify the payment of dividends,  and
there can be no assurance that dividends will continue to be paid in the future.

     Since  Bancshares has no significant  source of income other than dividends
from the Bank,  the payment of dividends  by  Bancshares  can be dependent  upon
receipt of  dividends  from the Bank.  Payment of cash  dividends by the Bank is
limited by certain federal  regulations  under which the Bank may not declare or
pay a cash  dividend  on or  repurchase  any of its  common  stock if the effect
thereof  would cause its  regulatory  capital to be reduced below (1) the amount
required for the liquidation  account  established in connection with the Bank's
conversion to stock form or (2) the regulatory capital  requirements  imposed by
the OTS. In certain circumstances earnings appropriated to bad debt reserves and
deducted  for  federal  income tax  purposes  may not be  available  to pay cash
dividends  without the payment of federal income taxes by the Bank on the amount
of such earnings removed from the reserves for such purposes at the then current
income tax rate.

     Federal regulations impose certain additional limitations on the payment of
dividends and other capital distributions  (including stock repurchases and cash
mergers) by the Bank. Under OTS regulations,  savings  institutions  must submit
notice to the OTS prior to making a capital  distribution  if (a) they would not
be well capitalized after the distribution, (b) the distribution would result in
the  retirement of any of the  institution's  common or preferred  stock or debt
counted as its regulatory  capital,  or (c) the institution is a subsidiary of a
holding company. A savings institution must make application to the OTS to pay a
capital distribution if (x) the institution would not be adequately  capitalized
following the distribution,  (y) the institution's  total  distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution  would  otherwise  violate  applicable  law  or  regulation  or  an
agreement with or condition imposed by the OTS.


                                       4
<PAGE>

                  SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
                                                                           AT JUNE 30,
                                               ----------------------------------------------------------------------
                                                  2002           2001           2000          1999            1998
                                               ----------     ----------     ----------    ----------     -----------
<S>                                          <C>             <C>           <C>            <C>
Total assets..............................   $ 276,425,294   $287,598,650  $291,192,175    $285,396,885  $250,953,770
Loans receivable, net.....................     124,176,898    131,651,421   135,626,505     115,162,883   104,580,165
Allowance for loan losses.................       1,628,515      1,446,114     1,231,709       1,329,201     1,468,546
Cash and due from banks...................       3,492,257      3,302,540     3,211,802       3,560,884     1,531,363
Interest-earning savings deposits.........      14,404,572     15,107,481       236,846       1,693,330     5,073,035
Investment securities:
   Available for sale.....................      29,285,376     32,138,434    34,135,726      33,132,916    40,775,807
   Held to maturity.......................              --             --            --              --            --
Mortgage-backed securities:
    Available for sale....................      88,913,188     87,943,743    98,407,339     113,986,773    58,697,109
    Held to maturity......................              --             --            --              --    27,503,257
Deposits..................................     165,005,183    161,285,179   144,873,071     146,296,598   141,931,330
FHLB advances.............................      82,263,936     91,915,694   115,609,029     104,523,419    68,121,068
Note payable..............................              --         80,000       160,000         240,000       320,000
Stockholders' equity......................      26,736,288     31,934,334    28,240,550      32,117,560    37,678,924
Number of:
   Real estate loans outstanding..........           1,517          1,730         1,820           1,709         2,829
   Deposit accounts.......................          18,090         18,538        17,980          18,526        17,158
   Offices open...........................               6              6             6               6             6
</TABLE>
<TABLE>
<CAPTION>
                                                                      YEAR ENDED JUNE 30,
                                               -------------------------------------------------------------------
                                                  2002           2001         2000          1999          1998
                                               ----------     ----------   ----------    ----------    -----------
<S>                                          <C>             <C>           <C>           <C>           <C>
Interest income...........................   $  17,916,113   $ 20,078,400  $19,808,899   $18,274,647   $15,027,677
Interest expense..........................      10,823,701     14,079,466   13,099,656    12,093,603     8,942,149
                                             -------------   ------------  -----------   -----------   -----------
Net interest income.......................       7,092,412      5,998,934    6,709,243     6,181,044     6,085,528
Provision for loan and investment losses..         359,000        296,000           --            --        24,000
                                             -------------   ------------  -----------   -----------   -----------
Net interest income after provision
  for loan and investment losses..........       6,733,412      5,702,934    6,709,243     6,181,044     6,061,528
Noninterest income........................       1,606,460      1,378,612    1,039,622     1,018,654       710,856
Noninterest expense.......................       7,113,145      6,929,118    7,304,110     6,847,715     6,407,976
                                             -------------   ------------  -----------   -----------   -----------
Income before income taxes................       1,226,727        152,428      444,755       351,983       364,408
Income tax provision (benefit)............          61,027       (467,888)    (341,147)      (63,658)      (20,705)
                                             -------------   ------------- ------------  ------------  ------------

Net income................................   $   1,165,700   $    620,316  $   785,902   $   415,641   $   385,113
                                              ============    ===========   ==========    ==========    ==========

Earnings per share:
  Basic...................................   $       0.71    $       0.33  $      0.40   $      0.18   $      0.16
  Diluted.................................           0.68            0.33         0.40          0.18          0.16
Cash dividends declared...................           0.28            0.24         0.24          0.24          0.20
</TABLE>


                                       5
<PAGE>
<TABLE>
<CAPTION>
                                                                             YEAR ENDED JUNE 30,
                                                     ---------------------------------------------------------------
                                                       2002         2001           2000          1999         1998
                                                     --------     --------       --------      --------     --------
<S>                                                    <C>          <C>           <C>           <C>           <C>
PERFORMANCE RATIOS:
   Return on assets (net income divided
      by average total assets) ....................    0.41%        0.21%         0.27%         0.15%         0.18%
   Return on average equity (net income
      divided by average equity) ..................    3.82         2.02          2.76          1.14          1.02
   Interest rate spread (combined weighted
      average interest rate earned less combined
      weighted average interest rate cost).........    2.25         1.72          2.12          1.81          2.11
   Net interest margin (net interest income
      divided by average interest-earning assets)..    2.66         2.19          2.49          2.34          2.96
   Ratio of average interest-earning assets
      to average interest-bearing liabilities......  110.06       108.91        107.68        111.55        119.51
   Ratio of noninterest expense to average
      total assets.................................    2.52         2.38          2.55          2.48          3.00

ASSET QUALITY RATIOS:
   Nonperforming assets to total assets
      at end of period.............................    0.92         0.48          0.33          0.21          0.34
   Nonperforming loans to total loans
      at end of period.............................    1.44         0.81          0.64          0.46          0.75
   Allowance for loan losses to total
      loans at end of period.......................    1.22         0.99          0.85          1.08          1.33
   Allowance for loan losses to nonperforming
      loans at end of period.......................   84.91       121.48        133.95        234.84        177.25
   Provision for loan losses to total loans
      at end of period ............................    0.25         0.20            --            --          0.02
   Net charge-offs to average loans outstanding....    0.11         0.06          0.08          0.13          0.05

CAPITAL RATIOS:
   Equity to total assets at end of period.........    9.67        11.10          9.70         11.25         15.01
   Average equity to average assets................   10.81        10.55          9.95         13.19         17.71
   Dividend payout ratio (1).......................   40.52        76.46         64.50        142.58        137.36

<FN>
--------------
(1)  The  fiscal  year  ended  June 30,  1998,  was the  first  full  year  that
     Bancshares  was  publicly  traded.  Dividend  payout  ratio  is  the  total
     dividends declared divided by net income.
</FN>
</TABLE>

                                       6
<PAGE>

                            QUARTERLY FINANCIAL DATA

     The  following  tables  represent  summarized  data  for  each of the  four
quarters in the years ended June 30, 2002 and June 30, 2001.
<TABLE>
<CAPTION>
                                                                                2002
                                                                 (IN THOUSANDS, EXCEPT SHARE DATA)
                                                     -----------------------------------------------------------
                                                     FOURTH             THIRD           SECOND            FIRST
                                                     QUARTER           QUARTER          QUARTER          QUARTER
<S>                                                  <C>              <C>               <C>             <C>
      Interest income                                $ 4,248          $ 4,458           $ 4,509         $ 4,701
      Interest expense                                 2,430            2,559             2,796           3,039
                                                      ------            -----            ------           -----
      Net interest income                              1,818            1,899             1,713           1,662
      Provision for loan and investment losses           140               60                99              60
                                                      ------            -----            ------           -----
      Net interest income after provision
        for loan and investment losses                 1,678            1,839             1,614           1,602
      Noninterest income                                 401              402               429             375
      Noninterest expenses                             1,949            1,650             1,799           1,715
                                                      ------            -----            ------           -----
      Income before income taxes                         130              591               244             262
      Income tax provision (benefit)                     (16)             110                (9)            (24)
                                                      ------            -----            ------           -----
      Net income                                     $   146          $   481           $   253          $  286
                                                      ======            =====            ======           =====

      Basic earnings per common share                $  0.12          $  0.28          $   0.15         $  0.16

      Diluted earnings per common share                 0.12             0.27              0.14            0.15

      Cash dividends declared per common share          0.08             0.07              0.07            0.06
      Weighted average common shares outstanding
        Basic                                      1,391,685        1,689,348         1,691,522       1,768,494
        Diluted                                    1,489,017        1,774,003         1,762,565       1,843,429
<CAPTION>
                                                                                2002
                                                                 (IN THOUSANDS, EXCEPT SHARE DATA)
                                                     -----------------------------------------------------------
                                                     FOURTH             THIRD           SECOND            FIRST
                                                     QUARTER           QUARTER          QUARTER          QUARTER
<S>                                                  <C>              <C>               <C>             <C>
      Interest income                                $ 4,858          $ 4,990           $ 5,137         $ 5,093
      Interest expense                                 3,222            3,519             3,712           3,626
                                                      ------            -----            ------           -----

      Net interest income                              1,636            1,471             1,425           1,467
      Provision for loan losses                           60               60                60             116
                                                      ------            -----            ------           -----

      Net interest income after provision
        for loan losses                                1,576            1,411             1,365           1,351
      Noninterest income                                 460              264               331             323
      Noninterest expenses                             1,801            1,693             1,730           1,705
                                                      ------            -----            ------           -----

      Income (loss) before income taxes                  235              (18)              (34)            (31)
      Income tax provision (benefit)                    (103)            (124)             (134)           (107)
                                                      ------            -----            ------           -----

      Net income                                     $   338  $       $   106           $   100         $    76
                                                      ======            =====            ======           =====

      Basic earnings per common share                $  0.18          $  0.06          $   0.05         $  0.04

      Diluted earnings per common share                 0.18             0.06              0.05            0.04

      Cash dividends declared per common share          0.06             0.06              0.06            0.06
      Weighted average common shares outstanding
        Basic                                      1,842,259        1,840,580         1,863,269       1,918,473
        Diluted                                    1,842,259        1,840,580         1,863,269       1,918,473
</TABLE>


                                       7
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

     When used in this Annual Report, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated,"  "estimate,"  "project" or
similar expressions are intended to identify "forward-looking statements" within
the  meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  Such
statements are subject to certain risks and  uncertainties  including changes in
economic  conditions  in the  Company's  market  area,  changes in  policies  by
regulatory  agencies,  fluctuations in interest  rates,  demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially  from  historical   earnings  and  those  presently   anticipated  or
projected.  The Company wishes to caution readers not to place undue reliance on
any such forward-looking  statements,  which speak only as of the date made. The
Company  wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ  materially  from any opinions or statements  expressed
with respect to future periods in any current statements.

     The Company does not undertake,  and specifically disclaims any obligation,
to  publicly  release  the  result  of any  revisions  which  may be made to any
forward-looking  statements to reflect events or circumstances after the date of
such  statements or to reflect the occurrence of  anticipated  or  unanticipated
events.

GENERAL

     The Bank's principal  business consists of attracting savings deposits from
the general public and investing those funds in loans secured by first mortgages
on existing owner-occupied single-family residences in the Bank's primary market
area, commercial and multi-family real estate loans, and consumer and commercial
business loans.  The Bank also maintains a substantial  investment  portfolio of
mortgage-related   securities,   nontaxable  municipal   securities,   and  U.S.
government and agency securities.

     The Bank's net income is dependent  primarily  on its net interest  income,
which  is  the  difference   between   interest  income  earned  on  its  loans,
mortgage-backed  securities  and  securities  portfolio  and  interest  paid  on
customers' deposits and other borrowings. The Bank's net income is also affected
by the level of  noninterest  income,  such as  service  charges  on  customers'
deposit  accounts,  net gains or losses on the sale of loans and  securities and
other fees.  In  addition,  net income is  affected by the level of  noninterest
expense, which primarily consists of employee compensation  expenses,  occupancy
expenses, and other expenses.

     The  financial  condition  and  results of  operations  of the Bank and the
thrift  and  banking  industries  as  a  whole  are  significantly  affected  by
prevailing economic conditions, competition and the monetary and fiscal policies
of governmental  agencies.  Lending  activities are influenced by demand for and
supply of credit,  competition  among lenders and the level of interest rates in
the  Bank's  market  area.  The  Bank's  deposit  flows  and  costs of funds are
influenced  by  prevailing  market  rates of  interest,  primarily  on competing
investments, as well as account maturities and the levels of personal income and
savings in the Bank's market area.

ASSET/LIABILITY MANAGEMENT

     Net interest  income,  the primary  component of the Bank's net income,  is
determined by the difference or "spread"  between the yield earned on the Bank's
interest-earning  assets and the rates paid on its interest-bearing  liabilities
and the relative  amounts of such assets and  liabilities.  Key  components of a
successful  asset/liability strategy are the monitoring and managing of interest
rate  sensitivity  on both  the  interest-earning  assets  and  interest-bearing
liabilities.  It has been the Bank's  historical policy to mitigate the interest
rate risk inherent in the historical savings institution business of originating
long-term  single-family mortgage loans funded by short-term savings deposits by
maintaining  substantial  liquidity and capital levels to withstand  unfavorable
movements in market  interest rates,  by purchasing  investment  securities with
adjustable-rates  and/or short terms to maturity and by  originating  relatively
shorter term consumer loans. In the future,  however, it is anticipated that the
Bank will sell more of its long term loan  originations  and  originate  for its
portfolio more  commercial and  multi-family  real estate loans and consumer and
commercial   business  loans  with  relatively  shorter  terms  to  maturity  or
repricing,  the Bank's  interest  rate risk exposure may decline  somewhat.  The
matching of the Bank's assets and  liabilities  may be analyzed

                                       8
<PAGE>

by examining  the extent to which its assets and  liabilities  are interest rate
sensitive and by monitoring  both its interest  rate  sensitivity  "gap" and the
expected effects of interest rate changes on its net portfolio value.

     For the fiscal  year  ending  June 30,  2002,  the Bank's  strategy  was to
continue to use cash flows from investment securities and deposit growth to fund
loans and reduce Federal Home Loan Bank borrowings.

     Interest  Rate  Sensitivity  Gap. An asset or  liability  is interest  rate
sensitive within a specific time period if it will mature or reprice within that
time period.  The interest  rate  sensitivity  gap is defined as the  difference
between the amount of  interest-earning  assets  maturing or repricing  within a
specific time period and the amount of interest-bearing  liabilities maturing or
repricing within that time period. A gap is considered  positive when the amount
of interest rate sensitive  assets exceeds the amount of interest rate sensitive
liabilities.  A gap is  considered  negative  when the amount of  interest  rate
sensitive  liabilities  exceeds the amount of interest  rate  sensitive  assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to positively  affect
net interest  income.  Similarly,  during a period of falling  interest rates, a
negative  gap would  tend to  positively  affect  net  interest  income  while a
positive gap would tend to adversely affect net interest income.

     At June 30, 2002, the Bank's total interest-bearing liabilities maturing or
repricing within one year exceeded its total interest-earning assets maturing or
repricing  in the same  period,  and the Bank's  cumulative  one-year  gap ratio
totaled a negative 26.0%. In addition, the Bank's total interest-earning  assets
maturing  or  repricing  within  five  years were  slightly  less than its total
interest-bearing  liabilities  maturing or repricing in the same period, and the
Bank's  cumulative  five-year gap ratio totaled a negative 12.7%. The Bank's gap
measures  indicate  that net  interest  income  would be exposed to increases in
interest rates in the short term, but would be much less exposed to increases in
interest rates over the longer term.

MARKET RISK

     Market risk  reflects  the risk of economic  loss  resulting  from  adverse
changes in market prices and interest  rates.  The risk of loss can be reflected
in diminished current market values and/or reduced potential net interest income
in future periods. The Company's market risk arises primarily from interest rate
risk  inherent in lending and  deposit-taking  activities.  The Company does not
maintain a trading  account for any class of  financial  instrument  nor does it
engage in hedging activities or purchase  derivative  instruments.  Furthermore,
the Company is not subject to foreign  currency  exchange rate risk or commodity
price risk.

     The OTS currently  requires  savings  institutions  to measure and evaluate
interest rate risk on a quarterly basis. A savings  institution's  interest rate
risk is measured in terms of the sensitivity of its net portfolio value (NPV) to
changes in interest  rates.  Net portfolio value is defined,  generally,  as the
present  value of expected  cash inflows from  existing  assets and  off-balance
sheet  contracts  less the present value of expected cash outflows from existing
liabilities and off-balance  sheet  contracts.  The Bank presently  monitors and
evaluates the potential impact of interest rate changes upon the market value of
the Bank's NPV on a quarterly basis. These  computations  estimate the effect on
the Bank's NPV of sudden and sustained 100 Basis Points (BP) to 300 BP increases
and  decreases in market  interest  rates.  The Bank's  Board of  Directors  has
adopted an interest rate risk policy which in the event of an assumed  immediate
and sustained 100 BP, 200 BP, or 300 BP, increase or decrease in market interest
rates,  the board has set as minimum post shock NPV ratio of 4.66%,  4.33%,  and
4.00% respectively.

     The following  tables present the Bank's projected change in NPV as of June
30, 2002 and June 30, 2001, as calculated by OTS, based on information  provided
to the OTS by the Bank.  Based on such  information,  from June 30, 2001 to June
30, 2002,  the Bank's  interest  rate risk has become  slightly  more  liability
sensitive over the period.

                                       9
<PAGE>
<TABLE>
<CAPTION>
                                                   June 30, 2002
         -----------------------------------------------------------------------------------------------
          CHANGE IN                                               NPV
         INTEREST RATES           NET PORTFOLIO VALUE           RATIO (1)       BP  CHANGE  IN NPV RATIO
             IN BP        -----------------------------------   ---------       ------------------------
         (RATE SHOCK)     AMOUNT      $ CHANGE      % CHANGE
         ------------     ------      --------      --------
             <S>         <C>         <C>              <C>          <C>                 <C>
            +300         $16,344     $(9,884)         (38)%        6.33 %              (298)
            +200          19,671      (6,556)         (25)         7.40                (191)
            +100          22,968      (3,260)         (12)         8.39                 (92)
              +0          26,228                                   9.31
            -100          28,115       1,888            7          9.73                  43
<CAPTION>
                                                   June 30, 2002
         -----------------------------------------------------------------------------------------------
          CHANGE IN                                               NPV
         INTEREST RATES           NET PORTFOLIO VALUE           RATIO (1)       BP  CHANGE  IN NPV RATIO
             IN BP        -----------------------------------   ---------       ------------------------
         (RATE SHOCK)     AMOUNT      $ CHANGE      % CHANGE
         ------------     ------      --------      --------
             <S>         <C>         <C>              <C>        <C>                 <C>
            +300         $24,498      $(10,785)       (31)%        9.17 %              (292)
            +200          28,096        (7,187)       (20)        10.21                (188)
            +100          31,525        (3,758)       (11)        11.13                 (96)
              +0          35,283                                  12.09
            -100          38,158         2,875          8         12.72                  64
            -200          39,912         4,629         13         12.98                  89
            -300          41,855         6,572         19         13.27                 118
<FN>
___________
(1)  NPV Ratio is defined as the NPV divided by the portfolio value of assets.
</FN>
</TABLE>

     At June 30, 2002, it was estimated  that the Bank's NPV could decrease 12%,
25%, and 38% in the event of 100 BP, 200 BP, and 300 BP respective  increases in
market interest rates, and could increase 7%, if market interest rates decreased
by 100 BP. These  calculations  indicate  that the Bank's NPV could be adversely
affected by significant  increases in interest rates.  The Bank's  interest-rate
risk has increased  moderately  compared to June 30, 2001,  primarily due to the
Bank paying Bancshares $9.0 million in dividends during the period.

     Changes in interest  rates also may affect the Bank's net interest  income.
In a declining rate  environment,  more borrowers would be expected to refinance
fixed rate  loans at lower  rates.  This  would  have the effect of cutting  the
Bank's  yield on fixed  rate  assets at a time when its  liability  costs  would
decline more  slowly.  In a rising rate  environment  fewer  borrowers  would be
expected to refinance while more depositors would be expected to liquidate their
certificates  of  deposit  and  reinvest  them in higher  rate  certificates  of
deposit. Depositors would tend to exhibit this behavior once rates had increased
sufficiently to offset early withdrawal penalties. This would have the effect of
maintaining the asset yield at a time when liability costs would tend to rise.

     The Bank's Board of Directors is responsible for reviewing the Bank's asset
and  liability  policies.  On at least a  quarterly  basis,  the  Board  reviews
interest rate risk, as well as liquidity  and capital  ratios and  requirements.
The  Bank's  management  is  responsible  for  administering  the  policies  and
determinations  of the Board of  Directors  with respect to the Bank's asset and
liability goals and strategies.  At June 30, 2002, the Bank's estimated  changes
in net interest income and NPV were within the targets  established by the Board
of Directors.

     Computations of prospective effects of hypothetical  interest rate changes,
such as the above  computations,  are based on numerous  assumptions,  including
relative levels of market interest  rates,  loan  prepayments and deposit decay,
and should not be relied upon as  indicative  of actual  results.  Further,  the
computations  do not  contemplate any actions the Bank may undertake in response
to changes in interest rates.

                                       10
<PAGE>

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES

     The following table sets forth information  regarding the Company's average
interest-earning  assets  and  interest-bearing  liabilities  and  reflects  the
average   yield   of   interest-earning   assets   and  the   average   cost  of
interest-bearing  liabilities for the periods  indicated.  Average  balances are
derived from daily balances. The table also presents information for the periods
indicated  with respect to the  difference  between the weighted  average  yield
earned  on  interest-earning  assets  and  the  weighted  average  rate  paid on
interest-bearing   liabilities,   or  "interest   rate  spread,"  which  savings
institutions have traditionally  used as an indicator of profitability.  Another
indicator  of an  institution's  net  interest  income  is  its  "net  yield  on
interest-earning  assets,"  which  is its net  interest  income  divided  by the
average balance of  interest-earning  assets. Net interest income is affected by
the interest rate spread and by the relative amounts of interest-earning  assets
and interest-bearing  liabilities.  The yield on non-taxable  securities has not
been adjusted to a tax equivalent basis.  Yield on available for sale securities
is based on  market  value.  Loans on a  nonaccrual  basis are  included  in the
computation of the average balance of loans  receivable.  Loan fees deferred and
accreted into income are included in interest earned. Whenever  interest-earning
assets equal or exceed interest-bearing  liabilities, any positive interest rate
spread will generate net interest income.
<TABLE>
<CAPTION>
                                                                          Year Ended June 30,
                                                 -----------------------------------------------------------------------------
                                                                2002                                      2001
                                                 ----------------------------------      ------------------------------------
                                                                            Average                                   Average
                                                 Average       Interest      Yield/       Average        Interest      Yield/
                                                 Balance      Earned/Paid    Rate         Balance       Earned/Paid    Rate
                                                 -------      -----------   -------      --------       -----------   ------
<S>                                           <C>             <C>            <C>        <C>            <C>             <C>
Interest-earning assets:
  Loans receivable.........................   $131,434,245    $10,735,729    8.17%      $136,107,616   $11,622,492     8.54%
  Investment and mortgage-backed securities
    Taxable................................     91,762,885      5,418,567    5.90         99,455,695     6,401,378     6.44
    Nontaxable.............................     26,709,166      1,344,478    5.03         29,246,420     1,529,550     5.23
  FHLB stock...............................      4,680,945        148,101    3.16          6,138,292       355,715     5.80
  FHLB DDA.................................     12,254,561        264,337    2.16          3,466,854       161,693     4.66
Other interest-earning assets..............        153,854          4,901    3.19            115,486         7,572     6.56
                                              ------------    -----------    ----       ------------   -----------     ----
    Total interest-earning assets .........    266,995,656     17,916,113    6.71        274,530,363    20,078,400     7.31
Noninterest-earning assets.................     15,411,663                                16,144,665
                                              ------------                              ------------
    Total assets...........................   $282,407,319                              $290,675,028
                                              ============                              ============
Interest-bearing liabilities:
  NOW, MMDA, statement savings.............   $ 43,566,756        792,670    1.82       $ 39,540,714     1,543,181     3.90
  Time deposits............................    112,568,794      4,913,494    4.36        106,806,416     6,156,303     5.76
  FHLB advances............................     86,442,890      5,116,537    5.92        105,619,861     6,372,982     6.03
  Note payable.............................         14,685          1,000    6.81             94,685         7,000     7.39
                                              ------------    -----------    ----       ------------   -----------     ----
    Total interest-bearing liabilities.....    242,593,125     10,823,701    4.46        252,061,676    14,079,466     5.59
Noninterest-bearing liabilities............      9,290,121                                 7,948,247
                                              ------------                              ------------
    Total liabilities......................    251,883,246                               260,009,923
Equity.....................................     30,524,073                                30,665,105
                                              ------------                              ------------
    Total liabilities and equity...........   $282,407,319                              $290,675,028
                                              ============                              ============
Net interest income........................                   $ 7,092,412                            $ 5,998,934
                                                               ==========                            ===========

Net interest rate spread...................                                  2.25%                                     1.72%
                                                                             ====                                      ====
Net yield on interest-earning assets                                         2.66%                                     2.19%
                                                                             ====                                      ====
Ratio of average interest-earning assets
  to average interest-bearing liabilities                                  110.06%                                   108.91%
                                                                           ======                                    ======

<CAPTION>
                                                         Year Ended June 30,
                                                 -------------------------------------
                                                                  2000
                                                 -------------------------------------
                                                                              Average
                                                   Average        Interest     Yield/
                                                   Balance      Earned/Paid     Rate
                                                  --------      -----------   --------
<S>                                             <C>              <C>             <C>
Interest-earning assets:
  Loans receivable.........................      $123,535,536    $10,491,741     8.49%
  Investment and mortgage-backed securities
    Taxable................................       112,065,588      7,352,290     6.56
    Nontaxable.............................        27,102,813      1,479,536     5.46
  FHLB stock...............................         5,784,385        441,291     7.63
  FHLB DDA.................................           543,475         28,729     5.29
Other interest-earning assets..............           208,296         15,312     7.35
                                                 ------------    -----------     ----
    Total interest-earning assets .........       269,240,093     19,808,899     7.36
Noninterest-earning assets.................        16,659,326
                                                 ------------
    Total assets...........................      $285,899,419
                                                 ============
Interest-bearing liabilities:
  NOW, MMDA, statement savings.............      $ 32,873,541      1,067,350     3.25
  Time deposits............................       104,443,704      5,439,824     5.21
  FHLB advances............................       112,554,831      6,579,482     5.85
  Note payable.............................           175,082         13,000     7.43
                                                 ------------    -----------     ----
    Total interest-bearing liabilities.....       250,047,158     13,099,656     5.24
Noninterest-bearing liabilities............         7,392,828
                                                 ------------
    Total liabilities......................       257,439,986
Equity.....................................        28,459,433
                                                 ------------
    Total liabilities and equity...........      $285,899,419
                                                 ============
Net interest income........................                    $ 6,709,243
                                                               ===========

Net interest rate spread...................                                      2.12%
                                                                                 ====
Net yield on interest-earning assets                                             2.49%
                                                                                 ====
Ratio of average interest-earning assets
  to average interest-bearing liabilities                                      107.68%
                                                                               ======
</TABLE>

                                       11
<PAGE>
RATE/VOLUME ANALYSIS

     The following  table analyzes  dollar amounts of changes in interest income
and expense for major components of interest-earning assets and interest-bearing
liabilities.  The table distinguishes between (i) changes attributable to volume
(changes  in  volume  multiplied  by the  prior  period's  rate),  (ii)  changes
attributable to rate (changes in rate  multiplied by the prior period's  volume)
and (iii)  changes in  rate/volume  (changes  in rate  multiplied  by changes in
volume).

<TABLE>
<CAPTION>
                                                                       Year Ended June 30
                              --------------------------------------------------------------------------------------
                                     2002        vs.        2001                 2001       vs          2000
                              ---------------------------------------      -----------------------------------------
                                         Increase (Decrease)                          Increase (Decrease)
                                               Due to                                      Due to
                              ---------------------------------------      -----------------------------------------
                                                  Rate/                                           Rate/
                              Volume    Rate     Volume         Total       Volume       Rate     Volume       Total
                              ------    ----     ------         -----       ------       ----     ------       -----
                                                                (In thousands)
<S>                          <C>      <C>         <C>         <C>            <C>        <C>        <C>       <C>
Interest income:
  Loans receivable           $  (399) $  (505)    $   17      $  (887)       $  1,068   $    57    $    6    $ 1,131
  Investment and mortgage-
    backed securities
      Taxable                   (495)    (529)        42         (982)           (827)     (139)       15       (951)
      Nontaxable                (133)     (57)         4         (186)            117       (62)       (5)        50
  FHLB stock                     (84)    (162)        38         (208)             27      (106)       (7)       (86)
  FHLB DDA                       410      (87)      (220)         103             155        (3)      (19)       133
  Other interest-earning
     assets                        3       (4)        (1)          (2)            (7)        (2)        2         (7)
                             -------  -------     ------      -------         -------   -------    ------    -------
     Total interest-earning
        assets                  (698)  (1,344)      (120)      (2,162)            533      (255)       (8)       270
                             -------  -------     ------      -------         -------   -------    ------    -------

Interest expense:
  NOW, MMDA,
    statement savings            157     (824)       (84)        (751)            216       216        44        476
  Time deposits                  332   (1,494)       (81)      (1,243)            123       580        13        716
  FHLB advances               (1,157)    (121)        23       (1,255)           (406)      212       (12)      (206)
  Note payable                    (6)      (1)         1           (6)             (6)       --        --         (6)
                             -------  -------     ------      -------         -------   -------    ------    -------
     Total interest-bearing
        liabilities             (674)  (2,440)      (141)      (3,255)            (73)    1,008        45        980
                             -------  -------     ------      -------         -------   -------    ------    -------
Change in net interest
  income                     $   (24) $ 1,096     $   21      $ 1,093         $   606   $(1,263)   $  (53)   $  (710)
                             =======  =======     ======      =======         =======   =======    ======    =======
</TABLE>

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND 2001

     The  Company had  consolidated  total  assets of $276.4  million and $287.6
million at June 30, 2002, and 2001, respectively. During the twelve-month period
ended June 30, 2002 the Company  experienced a decrease in its net  consolidated
loan  portfolio  from $131.7 million at June 30, 2001, to $124.2 million at June
30, 2002. During this same period,  investments and  mortgage-backed  securities
and other  short-term  interest-earning  assets  decreased  slightly from $135.2
million at June 30, 2001 to $132.6 million at June 30, 2002.

     Deposits  increased from $161.3 million at June 30, 2001, to $165.0 million
at June 30, 2002. The outstanding balances of FHLB borrowings were $91.9 million
and $82.3 million at June 30, 2001 and June 30, 2002, respectively. The decrease
in FHLB  borrowings  was  primarily  due to slower  loan  demand  combined  with
increases in deposits and investment securities paydowns.

     Stockholders'  equity amounted to $26.7 million at June 30, 2002, and $31.9
million at June 30, 2001.  The decreases in equity were  primarily due to the to
the purchase of treasury stock,  offset by a reduction of the unrealized

                                       12
<PAGE>

loss on  investment  securities  available for sale and the Company's net income
earned for the fiscal year ended June 30,  2002.  During the year ended June 30,
2002, the Company  purchased  510,389  shares (net of options  exercised) of its
common stock at a cost of  approximately  $7.6 million,  or $14.82 per share. At
June 30, 2002, the Bank's regulatory capital exceeded all applicable  regulatory
capital  requirements and meets the definition of "well"  capitalized  under the
Prompt Corrective Action provisions.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2002 AND 2001

     Net Income.  Net income for the year ended June 30, 2002, was approximately
$1,166,000  compared to net income of $620,000 for the year ended June 30, 2001.
The  changes  resulted  primarily  from an increase  in net  interest  income of
$1,093,000, an increase in noninterest income of $228,000, offset by an increase
in the  provision  for loan and  investment  loss of $63,000,  a decrease in the
income  tax  benefit  of  $529,000,  and a increase  in  noninterest  expense of
$184,000.

     Interest  Income.  Interest  income for the year ended June 30,  2002,  was
$17.9 million, or $2.2 million less than interest income for the year ended June
30, 2001.  The total average  interest-earning  assets  decreased  $7.5 million,
while the yield decreased from 7.31% to 6.71%,  due to rate and volume decreases
on loans and investment securities.

     The average balance of loans receivable decreased $4.7 million,  total loan
interest income decreased $0.9 million, and the average yield on loans decreased
37  basis  points.  The  average  balance  of  investments  and  mortgage-backed
securities  receivable  decreased $10.2 million,  interest income decreased $1.2
million, and the average yield decreased 45 basis points. The average balance of
other  interest-earning  assets  (primarily FHLB DDA's and FHLB stock) increased
$7.4  million,  interest  income  decreased  $108,000,  and  the  average  yield
decreased 296 basis points.

     Interest Expense. Total average interest-bearing liabilities decreased $9.5
million,  while the interest rate on such  liabilities  decreased  from 5.59% to
4.46%. The average balance of interest-bearing  deposits increased $9.8 million,
deposit interest expense decreased $2.0 million,  and the average cost decreased
161 basis points.  The average balance of FHLB advances decreased $19.2 million,
FHLB interest expense decreased $1.3 million,  and the average cost decreased 11
basis points.

     Net Interest Income.  Net interest income for the year ended June 30, 2002,
was $7.1  million,  or $1.1 million  more than net interest  income for the year
ended June 30, 2001.  The increase in net interest  income from June 30, 2001 to
2002,  was the result of an  increase  in our  interest  rate spread of 53 basis
points.  During  the year ended  June 30,  2002,  the  Federal  Reserve  dropped
interest  rates 5 times  totaling 200 basis points,  and the prime interest rate
decreased  225 basis  points  from  7.00% on June 30,  2001 to 4.75% on June 30,
2002.  These interest rate decreases  caused a greater  reduction in the average
rates we paid on deposits  and  borrowed  money than the average  yield which we
earned on loans, investments, and interest-bearing deposits. This trend reflects
the liability  sensitive  nature of the Company  which would,  keeping all other
things  equal,  typically  show  improved  net  interest  income in a decreasing
interest rate environment.

     Provision for Loan and  Investment  Losses.  During the year ended June 30,
2002, the Bank's management  continued its review of the  appropriateness of the
amount of the allowance for loan and investment losses.  Based on these reviews,
management made a $330,000 provision for loan losses and a $29,000 provision for
investment  losses for the year  ended June 30,  2002.  The  allowance  for loan
losses of $1.6 million at June 30, 2002,  represented 1.22% of gross outstanding
loans which  compares to 0.99% as of June 30, 2001.  The  provision  was made in
consideration  of reviews of  individual  loans and the fact that  nonperforming
loans as of June 30,  2002 as a percent of total loans  increased  to 1.44% from
0.81% as of June 30, 2001. In addition,  total classified assets as a percent of
the Bank's  tangible  capital plus  allowance for loan loss was 31.0% as of June
30, 2002,  which compares to 8.1% as of June 30, 2001.  Part of this increase is
due to an  increase  in  classified  assets  and part is due to the Bank  paying
Bancshares $9.0 million in dividends,  thus reducing  capital at the Bank. As of
June 30, 2002,  the Bank had $7.1 million in assets  classified  substandard  or
doubtful as compared to $2.5 million as of June 30, 2001.

     Management evaluates the carrying value of the loan portfolio  periodically
and  provisions  are  made,  if  necessary.   While  management  uses  the  best
information  available to make  evaluations,  future provisions to the

                                       13
<PAGE>

allowance  may  be  necessary  if  conditions  differ   substantially  from  the
assumptions  used in making the  evaluations.  In addition,  various  regulatory
agencies, as an integral part of their examination process,  periodically review
the Bank's  allowance  for loan  losses.  Such  agencies may require the Bank to
recognize   changes  to  the  allowance  based  upon  their  judgments  and  the
information available to them at the time of their examination.

     There were no  significant  changes in loan terms during the year, nor were
there  significant   changes  in  the  estimation   methodologies   employed  or
assumptions utilized. Nonperforming loan and loss trends did not indicate a need
to substantially modify loss experience factors during the year.

     Noninterest  Income.  Noninterest income is comprised primarily of gains on
the sales of loans and service charges on deposit accounts.  Noninterest  income
for the year ended June 30,  2002,  was  approximately  $1,606,000  compared  to
approximately  $1,378,000  for the year ended June 30,  2001.  This  increase of
approximately  $228,000 is the result of loan fee  income,  growth of the Bank's
checking  and savings  accounts  resulting  in increased  service  charges,  and
increases in the deposit account fee structure.

     Noninterest  Expense.  The major  components  of  noninterest  expense  are
salaries and employee  benefits paid to or on behalf of the Company's  employees
and  directors,   professional   fees  paid  to  consultants,   attorneys,   and
accountants,  occupancy  expense for ownership and  maintenance of the Company's
buildings,  furniture,  and  equipment,  and  data  processing  expenses.  Total
noninterest  expense for the year ended June 30, 2002, was $7.1 million compared
to $6.9 million for the year ended June 30, 2001.  Significant components of the
increase in noninterest expense are an $86,000 increase in salaries and employee
benefits,  a $52,000  increase in net occupancy  expense,  a $56,000 increase in
data processing  expense,  a $146,000 increase in other expenses,  offset with a
$136,000  decrease in  professional  fees as a result of improved  internal  and
accounting controls.

     In light of the substantial  costs associated with the recent,  pending and
planned  expansions of the Bank's  activities,  facilities and staff,  including
additional costs associated with adding staff,  building or renovating branches,
and introducing new deposit and loan products and services,  it is expected that
the Bank's noninterest expense levels may remain high relative to the historical
levels for the Bank, as well as the prevailing  levels for institutions that are
not undertaking such expansions, for an indefinite period of time, as management
implements the Bank's business strategy.

     Income Taxes. The effective income tax rates for the Company for the fiscal
years ended June 30,  2002 and 2001 were 5.0% and  (307.0)%,  respectively.  The
variance in the effective rate from the expected statutory rate is due primarily
to tax exempt interest.

     The  negative  rate for  fiscal  year  ended  June 30,  2001,  is a net tax
benefit,  and increases net income.  The net tax benefit is primarily due to tax
exempt income.  The corresponding  deferred tax asset totals  approximately $1.7
million  as of June  30,  2002,  and  $1.5  million  as of June  30,  2001.  The
recoverability  of this asset is  entirely  contingent  upon the  production  of
taxable income for income tax reporting  purposes.  Management  anticipates that
the Company will  produce  such income in the near future based on  management's
current  forecasts  of earnings  and  management's  tax and  interest-rate  risk
planning  strategy  of  selling  available  for sale tax exempt  securities  and
reinvesting the proceeds into taxable income producing securities.  The strategy
does not  anticipate  significant  taxable  gains on the sale of the  tax-exempt
securities, but rather a shift of nontaxable interest income to taxable interest
income. See Note 10 to the Consolidated Financial Statements.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2001 AND 2000

     The  Company had  consolidated  total  assets of $287.6  million and $291.2
million at June 30, 2001 and 2000, respectively.  During the twelve-month period
ended June 30, 2001, the Company  experienced a decrease in its net consolidated
loan  portfolio  from $135.6 million at June 30, 2000, to $131.7 million at June
30, 2001. During this same period,  investments and  mortgage-backed  securities
and other  short-term  interest-earning  assets increased from $132.8 million at
June 30,  2000,  to $135.2  million at June 30,  2001,  due to  increases in the
bank's  FHLB DDA  account  and  increases  in the  market  value  of  investment
securities.

     Deposits  increased from $144.9 million at June 30, 2000, to $161.3 million
at June 30, 2001.  This  represents  an 11.3

                                       14
<PAGE>

percent increase in deposits.  The outstanding  balances of FHLB borrowings were
$91.9  million  and  $115.6  million  at  June  30,  2001  and  June  30,  2000,
respectively.  The decrease in FHLB  borrowings was primarily due to slower loan
demand combined with increases in deposits and investment securities paydowns.

     Stockholders'  equity amounted to $31.9 million at June 30, 2001, and $28.2
million at June 30,  2000.  The  changes  in equity  were  primarily  due to the
reduction of the unrealized loss on investment securities available for sale and
the Company's net income earned for the fiscal year ended June 30, 2001,  net of
the decrease due to the purchase of treasury stock. At June 30, 2001, the Bank's
regulatory capital exceeded all applicable  regulatory capital  requirements and
meets the definition of "well"  capitalized  under the Prompt  Corrective Action
provisions.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000

     Net Income.  Net income for the year ended June 30, 2001, was approximately
$620,000  compared to net income of $786,000  for the year ended June 30,  2000.
The  changes  resulted  primarily  from a  decrease  in net  interest  income of
$710,000,  an increase in the provision for loan loss of $296,000,  offset by an
increase in the income tax  benefit of  $127,000,  an  increase  in  noninterest
income of $339,000, and a decrease in noninterest expense of $375,000.

     Interest  Income.  Interest  income for the year ended June 30,  2001,  was
$20.1 million, or $0.3 million more than interest income for the year ended June
30, 2000.  The total average  interest-earning  assets  increased  $5.3 million,
while the yield  decreased  from 7.36% to 7.31%,  primarily due to average yield
decreases on investment securities and other interest-earning assets.

     The average balance of loans receivable increased $12.6 million, total loan
interest income increased $1.1 million, and the average yield on loans increased
5  basis  points.  The  average  balance  of  investments  and   mortgage-backed
securities  receivable  decreased $10.5 million,  interest income decreased $0.9
million, and the average yield decreased 19 basis points. The average balance of
other  interest-earning  assets  (primarily FHLB DDA's and FHLB stock) increased
$3.2 million, interest income increased $40,000, and the average yield decreased
203 basis points.

     Interest Expense. Total average interest-bearing liabilities increased $2.0
million,  while the interest rate on such  liabilities  increased  from 5.24% to
5.59%. The average balance of interest-bearing  deposits increased $9.0 million,
deposit interest expense increased $1.2 million,  and the average cost increased
35 basis points.  The average  balance of FHLB advances  decreased $6.9 million,
FHLB interest expense decreased $0.2 million,  and the average cost increased 18
basis points.

     Provision for Loan Losses.  During the year ended June 30, 2001, the Bank's
management  continued  its  review of the  appropriateness  of the amount of the
allowance for loan losses.  Based on these reviews,  management  made a $296,000
provision  for loan losses for the year ended June 30, 2001.  The  allowance for
loan  losses  of $1.4  million  at June  30,  2001,  represented  0.99% of gross
outstanding  loans.  The  provision  was made in  consideration  of  reviews  of
individual loans and the fact that nonperforming loans as of June 30, 2001, as a
percent of total loans increased to 0.81% from 0.64% as of June 30, 2000.

     Management evaluates the carrying value of the loan portfolio  periodically
and  provisions  are  made,  if  necessary.   While  management  uses  the  best
information  available to make  evaluations,  future provisions to the allowance
may be necessary if conditions differ substantially from the assumptions used in
making the evaluations. In addition, various regulatory agencies, as an integral
part of their examination process,  periodically review the Bank's allowance for
loan losses.  Such  agencies  may require the Bank to  recognize  changes to the
allowance based upon their  judgments and the  information  available to them at
the time of their examination.

     There were no  significant  changes in loan terms during the year, nor were
there  significant   changes  in  the  estimation   methodologies   employed  or
assumptions utilized. Nonperforming loan and loss trends did not indicate a need
to substantially modify loss experience factors during the year.

     Noninterest  Income.  Noninterest income is comprised primarily of gains on
the sales of loans and service charges on deposit accounts.  Noninterest  income
for the year ended June 30,  2001,  was  approximately  $1,379,000

                                       15
<PAGE>

compared to  approximately  $1,040,000  for the year ended June 30,  2000.  This
increase of approximately  $339,000 is the result of loan fee income,  growth of
the Bank's checking and savings accounts resulting in increased service charges,
and increases in the deposit account fee structure.

     Noninterest  Expense.  The major  components  of  noninterest  expense  are
salaries and employee  benefits paid to or on behalf of the Company's  employees
and  directors,   professional   fees  paid  to  consultants,   attorneys,   and
accountants,  occupancy  expense for ownership and  maintenance of the Company's
buildings,  furniture,  and  equipment,  and  data  processing  expenses.  Total
noninterest  expense for the year ended June 30, 2001, was $6.9 million compared
to $7.3 million for the year ended June 30, 2000.  Significant components of the
decrease in  noninterest  expense are a $133,000  increase in occupancy  expense
primarily  resulting from a new full service branch in Bryant,  Arkansas,  and a
$426,000  decrease in  professional  fees as a result of improved  internal  and
accounting controls.

     In light of the substantial  costs associated with the recent,  pending and
planned  expansions of the Bank's  activities,  facilities and staff,  including
additional costs associated with adding staff,  building or renovating branches,
and introducing new deposit and loan products and services,  it is expected that
the Bank's noninterest expense levels may remain high relative to the historical
levels for the Bank, as well as the prevailing  levels for institutions that are
not undertaking such expansions, for an indefinite period of time, as management
implements the Bank's business strategy.

     Income Taxes. The effective income tax rates for the Company for the fiscal
years ended June 30, 2001 and 2000, were (307.0)% and (76.7)%, respectively. The
variance in the effective rate from the expected statutory rate is due primarily
to tax exempt interest.

     These negative rates are a result of net tax benefits,  which increases net
income.  These  benefits are due  primarily to increases in net  operating  loss
carryforwards for income tax reporting purposes.  The corresponding deferred tax
asset totals approximately $1.5 million and $1.1 million as of June 30, 2001 and
June 30,  2000,  respectively.  The  recoverability  of this  asset is  entirely
contingent  upon the  production  of taxable  income  for  income tax  reporting
purposes.  Management  anticipates  that the Company will produce such income in
the  near  future  based on  management's  current  forecasts  of  earnings  and
management's  tax planning  strategy of selling  certain  available for sale tax
exempt securities to generate taxable income.

SUBSEQUENT EVENTS - BRANCH SALE

     On July 19, 2002, the bank sold its Monticello branch to Simmons First Bank
of South Arkansas.  The sale included  approximately $8.3 million in loans, $1.5
million in fixed  assets,  $0.2 million in other  assets,  and $13.2  million in
deposits.  The Bank recognized a premium on the deposits of  approximately  $0.9
million and the  difference was paid in cash to the buyer.  The resulting  after
tax  gain  on the  sale  of the  Monticello  branch  of  approximately  $440,000
translates into $0.29 in earnings per share.

SOURCES OF CAPITAL AND LIQUIDITY

     The  Company  has no  business  other  than that of the  Bank.  Bancshares'
primary  sources of liquidity are cash,  dividends paid by the Bank and earnings
on  investments  and loans.  In  addition,  the Bank is  subject  to  regulatory
limitations with respect to the payment of dividends to Bancshares.

     The Bank has historically  maintained  substantial  levels of capital.  The
assessment of capital  adequacy is dependent on several factors  including asset
quality,  earnings  trends,  liquidity and economic  conditions.  Maintenance of
adequate  capital levels is integral to provide  stability to the Bank. The Bank
seeks to maintain  substantial  levels of regulatory  capital to give it maximum
flexibility in the changing regulatory  environment and to respond to changes in
the market and economic conditions.

     The Bank's primary  sources of funds are customer  deposits,  proceeds from
principal  and  interest  payments  on  loans  and  mortgage-backed  securities,
interest payments and maturities of investment securities,  and earnings.  While
scheduled  principal  repayments  on loans and  mortgage-backed  securities  and
interest payments on investment  securities are a relatively  predictable source
of funds,  deposit flows and loan and  mortgage-backed  prepayments  are greatly

                                       16
<PAGE>

influenced by general interest rates, economic conditions, competition and other
factors.  The Bank does not solicit customer deposits outside of its market area
through brokers or other financial institutions.

     At June 30, 2002, the Bank had designated  securities  with a fair value of
approximately  $118.2  million as  available  for sale.  In addition to internal
sources of funding,  the Bank as a member of the FHLB has substantial  borrowing
authority with the FHLB. The Bank's use of a particular source of funds is based
on need, comparative total costs and availability.

     At June 30, 2002, the Bank had  outstanding  approximately  $6.1 million in
commitments to originate  loans  (including  unfunded  portions of  construction
loans) and $1.6 million in unused lines of credit.  At the same date,  the total
amount of  certificates of deposit which were scheduled to mature in one year or
less was $86.8 million.  Management anticipates that the Bank will have adequate
resources  to meet its current  commitments  through  internal  funding  sources
described  above.  Historically,  the Bank has been able to retain a significant
amount of its savings deposits as they mature.

     Management is not aware of any current  recommendations  by its  regulatory
authorities,  legislation, competition, trends in interest rate sensitivity, new
accounting guidance or other material events and uncertainties that would have a
material effect on the Bank's ability to meet its liquidity demands.


                                       17
<PAGE>
INDEPENDENT AUDITORS' REPORT


To the Board of Directors of
HCB Bancshares, Inc.
Camden, Arkansas

We have audited the accompanying  consolidated  statement of financial condition
of HCB Bancshares,  Inc. and its subsidiary (the "Company") as of June 30, 2001,
and the related  consolidated  statements  of income and  comprehensive  income,
stockholders' equity, and cash flows for the years ended June 30, 2001 and 2000.
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 auditing standards generally accepted
in the  United  States of  America.  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 HCB  Bancshares,  Inc.  and its
subsidiary as of June 30, 2001,  and the results of their  operations  and their
cash  flows for the years  ended  June 30,  2001 and 2000,  in  conformity  with
accounting principles generally accepted in the United States of America.


/s/ Deloitte & Touche LLP


September 21, 2001

                                       18
<PAGE>

INDEPENDENT AUDITORS' REPORT




The Board of Directors
HCB Bancshares, Inc.
Camden, Arkansas

We have audited the accompanying  consolidated  statement of financial condition
of HCB  Bancshares,  Inc.  as of June 30,  2002,  and the  related  consolidated
statements of income and comprehensive  income,  stockholders'  equity, and cash
flows for the year then ended. 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 audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the 2002 consolidated  financial  statements  referred to above
present  fairly,  in  all  material  respects,  the  financial  position  of HCB
Bancshares,  Inc. as of June 30, 2002, and the results of its operations and its
cash  flows for the year then ended in  conformity  with  accounting  principles
generally accepted in the United States of America.




/s/ BKD, LLP

Little Rock, Arkansas
August 1, 2002

                                       19
<PAGE>

HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2002 AND 2001
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

ASSETS                                                                                  2002                2001
<S>                                                                                <C>                 <C>
Cash and due from banks                                                            $    3,492,257      $    3,302,540
Interest-bearing deposits with banks                                                   14,404,572          15,107,481
                                                                                     ------------        ------------

  Cash and cash equivalents                                                            17,896,829          18,410,021
Investment securities:
  Available for sale, at fair value (amortized cost at June 30, 2002
    and 2001, of $115,796,195 and $120,222,942, respectively)                         118,198,564         120,082,177
Loans receivable, net of allowance at June 30, 2002 and 2001,
    of $1,628,515 and $1,446,114, respectively                                        124,176,898         131,651,421
Accrued interest receivable                                                             1,721,612           2,017,188
Federal Home Loan Bank stock                                                            4,709,900           4,735,800
Premises and equipment, net                                                             7,112,211           7,564,681
Goodwill, net                                                                             131,250             206,250
Real estate held for sale                                                                 910,587             398,132
Other assets                                                                            1,567,443           2,532,980
                                                                                     ------------        ------------
TOTAL                                                                              $  276,425,294      $  287,598,650
                                                                                     ============         ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
  Deposits                                                                         $  165,005,183      $  161,285,179
  Federal Home Loan Bank advances                                                      82,263,936          91,915,694
  Advance payments by borrowers for
      taxes and insurance                                                                 110,446             199,470
  Accrued interest payable                                                                740,008             972,900
  Note payable                                                                                 --              80,000
  Other liabilities                                                                     1,569,433           1,211,073
                                                                                     ------------        ------------

                                    Total liabilities                                 249,689,006        255,664,316
                                                                                     ------------        -----------

COMMITMENTS AND CONTINGENCIES (Notes 12 and 14)
STOCKHOLDERS' EQUITY:
  Common stock, $.01 par value, 10,000,000 shares authorized, 2,645,000 shares
     issued, 1,425,056 and 1,935,445 shares
     outstanding at June 30, 2002 and 2001, respectively                                   26,450              26,450
  Additional paid-in capital                                                           25,832,641          25,914,132
  Unearned ESOP shares                                                                   (846,400)         (1,058,000)
  Unearned MRP shares                                                                    (116,169)           (155,601)
  Accumulated other comprehensive income (loss)                                         1,441,942             (59,600)
  Retained earnings                                                                    14,950,088          14,256,684
                                                                                     ------------        ------------

                                                                                       41,288,552          38,924,065
                                                                                     ------------        ------------

Treasury stock, at cost, 1,219,944 and 709,555
  shares at June 30, 2002 and 2001, respectively                                      (14,552,264)         (6,989,731)
                                                                                     -------------       -------------

                                    Total stockholders' equity                         26,736,288          31,934,334
                                                                                     ------------        ------------

TOTAL                                                                              $  276,425,294      $  287,598,650
                                                                                     ============         ===========
</TABLE>

See notes to consolidated financial statements.


                                       20
<PAGE>

HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
<TABLE>
<CAPTION>

                                                                 2002              2001              2000
<S>                                                          <C>              <C>                <C>
INTEREST INCOME:
   Interest and fees on loans                                 $ 10,735,729      $ 11,622,492      $ 10,491,741
   Investment securities:
     Taxable                                                     5,418,567         6,401,378         7,352,290
     Nontaxable                                                  1,344,478         1,529,550         1,479,536
   Other                                                           417,339           524,980           485,332
                                                               -----------       -----------       -----------

        Total interest income                                   17,916,113        20,078,400        19,808,899

INTEREST EXPENSE:
   Deposits                                                      5,706,164         7,699,484         6,507,174
   Federal Home Loan Bank advances                               5,116,537         6,372,982         6,579,482
   Note payable                                                      1,000             7,000            13,000
                                                               -----------       -----------       -----------

        Total interest expense                                  10,823,701        14,079,466        13,099,656
                                                               -----------       -----------        ----------

NET INTEREST INCOME                                              7,092,412         5,998,934         6,709,243

PROVISION FOR LOAN AND INVESTMENT LOSSES                           359,000           296,000                --
                                                               -----------       -----------       -----------

NET INTEREST INCOME AFTER PROVISION
   FOR LOAN AND INVESTMENT LOSSES                                6,733,412         5,702,934         6,709,243
                                                               -----------       -----------       -----------

NONINTEREST INCOME:
   Service charges on deposit accounts                             984,089           765,532           555,292
   Gain on sales of investment securities
     available for sale                                              1,518                --                --
   Gain on sales of loans available for sale, net                  381,733           223,906           276,841
   Other                                                           239,120           389,174           207,489
                                                               -----------       -----------       -----------

        Net noninterest income                                   1,606,460         1,378,612         1,039,622
                                                               -----------       -----------       -----------

NONINTEREST EXPENSE:
   Salaries and employee benefits                                3,961,413         3,875,094         3,904,807
   Net occupancy expense                                         1,085,602         1,033,684           900,948
   Federal insurance premiums                                       29,439            50,330            79,692
   Data processing                                                 368,176           312,551           326,528
   Professional fees                                               489,360           624,622         1,050,873
   Amortization of goodwill                                         75,000            75,000            75,000
   Other                                                         1,104,155           957,837           966,262
                                                               -----------       -----------       -----------

        Total noninterest expenses                               7,113,145         6,929,118         7,304,110
                                                               -----------       -----------       -----------

INCOME BEFORE INCOME TAXES                                       1,226,727           152,428           444,755

INCOME TAX PROVISION (BENEFIT)                                      61,027          (467,888)         (341,147)
                                                               -----------       ------------      ------------

NET INCOME                                                    $  1,165,700      $    620,316      $    785,902
                                                               -----------       -----------       -----------

                                                                                                       (Continued)
</TABLE>

                                       21
<PAGE>

HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
<TABLE>
<CAPTION>
                                                                 2002              2001              2000
<S>                                                          <C>              <C>                <C>

OTHER COMPREHENSIVE INCOME (LOSS),
   NET OF TAX
     Unrealized holding gain (loss) on securities
       arising during period                                  $  1,503,060      $  4,342,068      $ (1,780,995)
     Reclassification adjustment for
       gains included in net income                                 (1,518)               --                --
                                                               ------------      -----------       -----------

                  Other comprehensive income (loss)              1,501,542         4,342,068        (1,780,995)
                                                               -----------       -----------       -----------

COMPREHENSIVE INCOME (LOSS)                                   $  2,667,242      $  4,962,384      $   (995,093)
                                                               ===========       ===========       ===========

WEIGHTED AVERAGE COMMON SHARES
   OUTSTANDING
     BASIC                                                       1,635,669         1,866,387         1,988,984
                                                               ===========       ===========       ===========
     DILUTED                                                     1,719,903         1,866,387         1,988,984
                                                               ===========       ===========       ===========

EARNINGS PER SHARE:
   Basic                                                         $  0.71            $ 0.33             $ 0.40
                                                                    ====              ====               ====

   Diluted                                                       $  0.68            $ 0.33             $ 0.40
                                                                    ====              ====               ====

DIVIDENDS PER SHARE                                              $  0.28            $ 0.24             $ 0.24
                                                                    ====              ====               ====

                                                                                                      (Concluded)
</TABLE>

See notes to consolidated financial statements.

                                       22
<PAGE>

HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, 2001 AND 2000

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------
                                                                                               ACCUMULATED
                                    ISSUED          ADDITIONAL     UNEARNED       UNEARNED       OTHER
                                COMMON STOCK         PAID-IN         ESOP           MRP       COMPREHENSIVE     RETAINED
                              SHARES     AMOUNT      CAPITAL        SHARES         SHARES        INCOME         EARNINGS
                             ---------  --------   ------------  ------------   -----------   ----------      -------------
<S>                          <C>        <C>        <C>           <C>            <C>              <C>          <C>
BALANCE, JULY 1, 1999       2,645,000     26,450     25,993,872    (1,481,200)     (390,056)  (2,620,673)        13,831,694

Net income                                                                                                          785,902
Common stock committed
  to be released for ESOP                               (48,022)      211,600
MRP shares earned                                                                   169,952
Net change in unrealized
  gain (loss) on securities
  available for sale,
  net of tax                                                                                  (1,780,995)
Treasury stock purchased
Dividends paid                                                                                                     (506,929)
                             ---------  --------   ------------  ------------   -----------   ----------      -------------

BALANCE, JUNE 30, 2000       2,645,000    26,450     25,945,850    (1,269,600)     (220,104)  (4,401,668)        14,110,667

Net income                                                                                                          620,316
Common stock committed
  to be released for ESOP                               (31,718)      211,600
MRP shares earned                                                                    64,503
Net change in unrealized
  gain (loss) on securities
  available for sale,
  net of tax                                                                                   4,342,068
Treasury stock purchased

Dividends paid                                                                                                     (474,299)
                             ---------  --------   ------------  ------------   -----------   ----------      -------------

BALANCE, JUNE 30, 2001       2,645,000  $ 26,450   $ 25,914,132  $ (1,058,000)  $  (155,601)  $  (59,600)     $  14,256,684

Net income                                                                                                        1,165,700
Common stock committed
  to be released for ESOP                                77,065       211,600
MRP shares earned                                                                    39,432
Net change in unrealized
  gain (loss) on securities
  available for sale, net of tax                                                               1,501,542
Stock options exercised                                (158,556)
Treasury stock purchased
Dividends paid                                                                                                     (472,296)
                             ---------  --------   ------------  ------------   -----------   ----------      -------------

BALANCE, JUNE 30, 2002       2,645,000  $ 26,450   $ 25,832,641  $   (846,400)  $  (116,169)  $1,441,942      $  14,950,088
                             =========  ========   ============  ============   ===========   ==========      =============

<CAPTION>

                              TREASURY       TREASURY        TOTAL
                               STOCK          STOCK       STOCKHOLDERS'
                               SHARES         AMOUNT         EQUITY
                              --------    -------------   ------------
<S>                             <C>       <C>              <C>
BALANCE, JULY 1, 1999          315,456       (3,242,527)    32,117,560

Net income                                                     785,902
Common stock committed
  to be released for ESOP                                      163,578
MRP shares earned                                              169,952
Net change in unrealized
  gain (loss) on securities
  available for sale,
  net of tax                                                (1,780,995)
Treasury stock purchased       282,964       (2,708,518)    (2,708,518)
Dividends paid                                                (506,929)
                              --------    -------------   ------------

BALANCE, JUNE 30, 2000         598,420       (5,951,045)    28,240,550

Net income                                                     620,316
Common stock committed
  to be released for ESOP                                      179,882
MRP shares earned                                               64,503
Net change in unrealized
  gain (loss) on securities
  available for sale,
  net of tax                                                 4,342,068
Treasury stock purchased       111,135       (1,038,686)    (1,038,686)
Dividends paid                                                (474,299)
                              --------    -------------   ------------

BALANCE, JUNE 30, 2001        709,555     $  (6,989,731)  $ 31,934,334

Net income                                                   1,165,700
Common stock committed
  to be released for ESOP                                      288,665
MRP shares earned                                               39,432
Net change in unrealized
  gain (loss) on securities
  available for sale,
   net of tax                                                1,501,542
Stock options exercised        (50,473)         619,821        461,265
Treasury stock purchased       560,862       (8,182,354)    (8,182,354)
Dividends paid                                                (472,296)
                             ---------    -------------   ------------
BALANCE, JUNE 30, 2002       1,219,944    $ (14,552,264)  $ 26,736,288
                             =========    =============   ============
</TABLE>

See notes to consolidated financial statements.


                                       23
<PAGE>
HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
<TABLE>
<CAPTION>
                                                                   2002               2001                 2000
<S>                                                           <C>                  <C>                 <C>
OPERATING ACTIVITIES:
  Net income                                                  $  1,165,700         $   620,316         $   785,902
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Depreciation                                                   743,412             730,212             649,779
    Amortization (accretion) of:
      Deferred loan origination fees                               117,153             116,232            (116,260)
      Goodwill                                                      75,000              75,000              75,000
      Premiums and discounts on loans, net                         (14,412)             (4,487)             (4,619)
      Premiums and discounts on investment securities, net          49,942              68,487             119,181
    Provision for loan and investment loss                         359,000             296,000                  --
    Deferred income taxes                                         (269,037)           (403,424)           (477,356)
    Net gain on sale of investment securities
      available for sale                                            (1,518)                 --                  --
    Origination of loans held for sale                         (26,675,718)        (13,502,308)         (9,239,668)
    Proceeds from sales of loans held for sale                  27,117,741          12,732,692          10,160,826
    Stock compensation expense                                     169,541             244,385             333,530
    Change in accrued interest receivable                          295,576            (164,301)           (135,064)
    Change in accrued interest payable                            (232,892)             55,485             102,218
    Change in other assets                                         192,983            (720,084)            826,402
    Change in other liabilities                                    358,360             (41,483)            (23,113)
                                                              ------------        ------------        ------------
       Net cash provided by operating activities                 3,450,831             102,722           3,056,758
                                                              ------------        ------------        ------------
INVESTING ACTIVITIES:
  Purchases of investment securities available for sale        (23,053,591)                 --          (3,302,892)
  Purchases of loans                                                    --                  --             (82,547)
  Redemption (purchase) of Federal Home Loan Bank stock             25,900           1,487,700            (844,400)
  Proceeds from sales of investment securities - available
   for sale                                                      4,995,347                  --                  --
  Loan (originations), net of repayments                         6,599,759           4,336,955         (21,181,354)
  Principal payments on investment securities                   22,407,566          19,629,225          14,768,810
  Proceeds from maturities of other interest-bearing deposits           --              99,000             619,000
  Net (increase) decrease in real estate held for resale          (512,455)            (38,524)            103,870
  Purchases of premises and equipment                             (290,942)         (1,742,409)           (701,559)
                                                              ------------        ------------        ------------
       Net cash provided (used) by investing activities         10,171,584          23,771,947         (10,621,072)
                                                              ------------        ------------        ------------

                                                                                                        (Continued)
</TABLE>

                                       24
<PAGE>
HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
<TABLE>
<CAPTION>
                                                                   2002               2001               2000
<S>                                                            <C>                 <C>                 <C>
 FINANCING ACTIVITIES:
   Net increase (decrease) in deposits                         $  3,720,004        $  16,412,108       $  (1,423,527)
   Advances from Federal Home Loan Bank                           6,464,838          213,740,000         281,234,000
   Repayment of Federal Home Loan Bank advances                 (16,116,596)        (237,433,335)       (270,148,390)
   Net increase (decrease) in advance payments by
     borrowers for taxes and insurance                              (89,024)              59,916              11,112
   Purchase of treasury stock, net                               (7,562,533)          (1,038,686)         (2,708,518)
   Repayment of note payable                                        (80,000)             (80,000)            (80,000)
   Dividends paid                                                  (472,296)            (474,299)           (506,929)
                                                               ------------        -------------       -------------
         Net cash provided (used) by financing activities       (14,135,607)          (8,814,296)          6,377,748
                                                               ------------        -------------       -------------
NET INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS                                                (513,192)          15,060,373          (1,186,566)

CASH AND CASH EQUIVALENTS:
   Beginning of year                                             18,410,021            3,349,648           4,536,214
                                                               ------------        -------------       -------------
   End of year                                                 $ 17,896,829        $  18,410,021       $   3,349,648
                                                               ============        =============       =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION:
 Cash paid for:
   Interest                                                    $ 11,056,593        $  14,023,981       $  12,997,438
                                                               ============        =============       =============

   Income taxes paid (received)                                $    (94,698)       $     150,000       $          --
                                                               ============        =============       =============

                                                                                                          (Concluded)
</TABLE>
See notes to consolidated financial statements.


                                       25
<PAGE>
HCB BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION - HCB Bancshares, Inc.
("Bancshares"),  a bank holding company, owns 100 percent of Heartland Community
Bank and its  subsidiary  (collectively  the  "Bank").  Bancshares'  business is
primarily that of owning the Bank and  participating  in the Bank's  activities.
The Bank provides a broad line of financial products to individuals and small to
medium-sized  businesses  through banking  offices  located in Camden,  Fordyce,
Sheridan, Bryant, and Monticello, Arkansas

     The accompanying  consolidated financial statements include the accounts of
Bancshares and the Bank and are collectively  referred to as the "Company".  All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

     USE OF ESTIMATES - The  preparation  of financial  statements in conformity
with accounting  principles  generally  accepted in the United States of America
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities  at the  date  of the  consolidated  financial  statements  and  the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results  could  differ  from  those  estimates.   Material  estimates  that  are
particularly  susceptible to  significant  change in the near term relate to the
determination of the allowance for loan losses and the valuation of the deferred
tax asset.

     CASH  AND  CASH   EQUIVALENTS  -  For  purposes  of   presentation  in  the
consolidated statements of cash flows, "cash and cash equivalents" includes cash
on  hand  and  amounts  due  from   depository   institutions,   which  includes
interest-bearing amounts available upon demand.

     INVESTMENT  SECURITIES - The Company classifies  investment securities into
one of two categories:  held to maturity or available for sale. The Company does
not engage in trading  activities.  Debt  securities  that the  Company  has the
positive  intent  and  ability to hold to  maturity  are  classified  as held to
maturity and recorded at cost, adjusted for the amortization of premiums and the
accretion of discounts.

     Investment  securities  that the  Company  intends  to hold for  indefinite
periods of time are  classified  as available  for sale and are recorded at fair
value.  Unrealized  holding  gains and losses are  excluded  from  earnings  and
reported  net of tax as a  separate  component  of  stockholders'  equity  until
realized.  Investment securities in the available for sale portfolio may be used
as part of the  Company's  asset and liability  management  practices and may be
sold in  response  to changes in interest  rate risk,  prepayment  risk or other
economic factors.

     Premiums are amortized  into interest  income using the interest  method to
the earlier of maturity  or call date.  Discounts  are  accreted  into  interest
income  using the  interest  method over the period to  maturity.  The  specific
identification  method of  accounting  is used to compute gains or losses on the
sales of investment securities.

     If the fair value of an investment security declines for reasons other than
temporary  market  conditions,  the carrying value of such a security is written
down to fair value by a charge to operations.

     LOANS  RECEIVABLE - Loans  receivable  that  management  has the intent and
ability to hold for the  foreseeable  future or until  maturity  or pay-off  are
stated at unpaid principal balances adjusted for any charge-offs,  the allowance
for loan  losses,  deferred  loan fees or costs,  and  unamortized  premiums  or
discounts.  Deferred  loan fees or costs and premiums and discounts on loans are
amortized or accreted to income using the level-yield  method over the remaining
period to contractual maturity.

                                       26
<PAGE>

     The accrual of interest on impaired loans is generally  discontinued  when,
in  management's  opinion,  the borrower may be unable to meet  payments as they
become  due or when the loan  becomes  ninety  days past due,  whichever  occurs
first.  When interest  accrual is  discontinued,  all unpaid accrued interest is
reversed.  Interest  income is  subsequently  recognized only to the extent cash
payments  in excess  of  principal  due are  received,  until  such time that in
management's  opinion, the borrower will be able to meet payments as they become
due.

     ALLOWANCE  FOR LOAN LOSSES - The  allowance  for loan losses is a valuation
allowance to provide for incurred but not yet realized losses.  The Bank reviews
its loans for  impairment  on a quarterly  basis.  Impairment  is  determined by
assessing  the  probability  that the  borrower  will not be able to fulfill the
contractual terms of the agreement.  If a loan is determined to be impaired, the
amount of the  impairment  is measured  based on the  present  value of expected
future cash flows discounted at the loan's effective  interest rate or by use of
the observable  market price of the loan or fair value of collateral if the loan
is collateral  dependent.  Throughout the year management estimates the level of
probable  losses  to  determine   whether  the  allowance  for  loan  losses  is
appropriate considering the estimated losses existing in the portfolio. Based on
these  estimates,  an amount is charged  to the  provision  for loan  losses and
credited to the  allowance for loan losses in order to adjust the allowance to a
level  determined  by  management  to be  appropriate  relative  to losses.  The
allowance  for loan losses is  increased by charges to income  (provisions)  and
decreased by charge-offs, net of recoveries.

     Management's periodic evaluation of the appropriateness of the allowance is
based on the Company's  past loan loss  experience,  known and inherent risks in
the portfolio,  adverse  situations  that may affect the  borrower's  ability to
repay,  the estimated  value of any underlying  collateral and current  economic
conditions.

     Homogeneous   loans  are  those  that  are   considered   to  have   common
characteristics  that provide for evaluation on an aggregate or pool basis.  The
Company  considers the  characteristics  of (1) one-to-four  family  residential
first  mortgage  loans;   (2)  automobile  loans  and;  (3)  consumer  and  home
improvement  loans  to  permit  consideration  of  the  appropriateness  of  the
allowance  for  losses  of each  group  of loans on a pool  basis.  The  primary
methodology  used to determine the  appropriateness  of the allowance for losses
includes  segregating  certain specific,  poorly performing loans based on their
performance characteristics from the pools of loans as to type and then applying
a loss factor to the remaining pool balance based on several  factors  including
classification of the loans as to grade,  past loss experience,  inherent risks,
economic  conditions in the primary market areas and other factors which usually
are beyond the  control of the  Company.  Those  segregated  specific  loans are
evaluated  using the present value of future cash flows,  usually  determined by
estimating  the  fair  value of the  loan's  collateral  reduced  by any cost of
selling and  discounted at the loan's  effective  interest rate if the estimated
time to receipt of monies is more than three months.

     Non-homogeneous  loans are those loans that can be included in a particular
loan type,  such as  commercial  loans and  multi-family  and  commercial  first
mortgage  loans,  but which differ in other  characteristics  to the extent that
valuation  on a pool  basis is not valid.  After  segregating  specific,  poorly
performing  loans  and  applying  the  methodology  as  noted  in the  preceding
paragraph for such specific  loans,  the remaining  loans are evaluated based on
payment  experience,  known difficulties in the borrowers business or geographic
area,  loss  experience,  inherent  risks and other factors  usually  beyond the
control of the  Company.  These  loans are then  graded  and a factor,  based on
experience, is applied to estimate the probable loss.

     Estimates  of the  probability  of  loan  losses  involve  an  exercise  of
judgment.  While it is  possible  that in the near term the  Company may sustain
losses which are substantial in relation to the allowance for loan losses, it is
the judgment of management  that the allowance for loan losses  reflected in the
consolidated  statements of financial  condition is appropriate  considering the
estimated probable losses in the portfolio.

     REAL ESTATE HELD FOR SALE - Real estate  acquired in settlement of loans is
initially  recorded at estimated fair value less estimated  costs to sell and is
subsequently  carried  at the  lower  of  carrying  amount  or fair  value  less
estimated disposal costs.  Management  periodically performs valuations,  and an
allowance for losses is established by a charge to operations to the extent that
the  carrying  value of a property  exceeds  its  estimated  fair  value.  Costs
relating to the  development  and  improvement of the property are  capitalized,
whereas  those  relating  to holding  the  property  are  expensed.  Real estate
acquired  for sale is  carried  of the lower of cost or fair value less costs to
sell.

                                       27
<PAGE>
     PREMISES AND  EQUIPMENT - Office  premises and equipment are stated at cost
less   accumulated   depreciation   and   amortization.   The  Company  computes
depreciation of premises and equipment using the  straight-line  method over the
estimated  useful lives of the individual  assets which range from 5 to 50 years
for  buildings  and  improvements  and  from 3 to 10  years  for  furniture  and
equipment.

     GOODWILL AND INTANGIBLE  ASSETS - Goodwill and other long-lived  assets are
tested  periodically  for  impairment  and  written  down to their fair value as
necessary.

     LOAN  ORIGINATION  FEES - Loan  origination  fees and  certain  direct loan
origination  costs  are  deferred  and the net fee or cost is  recognized  as an
adjustment to interest income using the level-yield  method over the contractual
life  of the  loans.  When a loan  is  fully  repaid  or  sold,  the  amount  of
unamortized fee or cost is recorded in income.

     INCOME TAXES - The Company  recognizes  deferred tax assets and liabilities
for the expected future tax  consequences of temporary  differences  between the
carrying  amounts  and the tax bases of assets  and  liabilities.  Deferred  tax
assets and  liabilities  are  reflected  at currently  enacted  income tax rates
applicable  to the period in which the  deferred tax assets or  liabilities  are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and  liabilities  are  adjusted  through the  provision  for
income taxes. The Company considers the need for a valuation allowance if, based
on available evidence, deferred tax assets are not expected to be realized.

     INTEREST RATE RISK - The Bank's asset base is exposed to risk including the
risk  resulting from changes in interest rates and changes in the timing of cash
flows. The Bank monitors the effect of such risks by considering the mismatch of
the  maturities  of its assets and  liabilities  in the  current  interest  rate
environment and the sensitivity of assets and liabilities to changes in interest
rates. The Bank's management has considered the effect of significant  increases
and decreases in interest  rates and believes such  changes,  if they  occurred,
would be  manageable  and would not affect  the  ability of the Bank to hold its
assets as planned.  However,  the Bank is exposed to significant  market risk in
the event of significant and prolonged interest rate changes.

     EMPLOYEE STOCK OWNERSHIP PLAN - Compensation expense for the Employee Stock
Ownership Plan ("ESOP") is determined  based on the average fair value of shares
committed to be released  during the period and is  recognized as the shares are
committed  to be released.  For the purposes of earnings per share,  ESOP shares
are included in  weighted-average  common shares  outstanding  as the shares are
committed to be released.

     MANAGEMENT  RECOGNITION PLAN - Compensation for Management Recognition Plan
shares granted is based on the fair value of the shares at the date of grant and
is recognized ratably over the vesting period.

     EARNINGS  PER SHARE - Earnings  per share  ("EPS") of common stock has been
computed on the basis of the  weighted-average  number of shares of common stock
outstanding, assuming the Company was a public company since July 1, 1996. Basic
and  diluted  earnings  per  share  were both  calculated  with  1,866,387,  and
1,988,984  weighted-average  common shares  outstanding for the years ended June
30, 2001, and 2000, respectively. Weighted-average common shares outstanding was
the same for basic and diluted in those years. For the year ended June 30, 2002,
basic  earnings per share was  calculated  using  1,635,669  shares and dilutive
earnings per share was calculated  using 1,719,903  shares.  Potential  dilutive
common  shares   include  the  Stock  Option  Plan  shares  and  the  Management
Recognition Plan shares,  all of which were granted May 1, 1998. These potential
common  shares had no  dilutive  effect for the years ended June 30,  2001,  and
2000. However, for the year ended June 30, 2002, the Management Recognition Plan
was antidilutive, but the Stock Option Plan was dilutive by 84,234 shares.

     STOCK PURCHASED FOR OPTION BENEFIT TRUST - As of June 30, 2002, the Company
has a total of 78,380 shares of its common stock in its stock option plan trust.
These shares are  included in treasury  stock on the  accompanying  consolidated
statement of financial condition, are available for sale, and are managed by the
trustees  specifically  for  funding  stock  option  benefits  provided  to  key
employees.

     RECLASSIFICATIONS  -  Certain  amounts  in the 2001  and 2000  consolidated
financial  statements have been  reclassified to conform to the  classifications
adopted for  reporting  in 2002.  These  reclassifications  had no effect on net
earnings.

                                       28
<PAGE>

     RECENTLY  ISSUED  ACCOUNTING  PRONOUNCEMENTS  - In July 2001, the Financial
Accounting  Standards Board issued Statement of Financial  Accounting  Standards
("SFAS") No. 141, "Business Combinations". The statement discontinues the use of
the pooling of interest  method of accounting for business  combinations  and is
effective  for  all  business  combinations   initiated  after  June  30,  2001.
Management has completed an evaluation of the effects of this statement and does
not believe that it will have a material  effect on the  Company's  consolidated
financial statements.

     In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets". The statement will require discontinuing
the amortization of goodwill and other intangible  assets with indefinite useful
lives.  Instead,  these assets will be tested  periodically  for  impairment and
written down to their fair value as necessary.  This  statement is effective for
fiscal years  beginning  after December 15, 2001. The Company plans to adopt the
provisions of this statement on July 1, 2002, and has determined that the effect
on the Company's consolidated financial statements will not be material.

2.   INVESTMENT SECURITIES

     Investment securities consisted of the following at June 30:
<TABLE>
<CAPTION>
                                                                                2002
                                              --------------------------------------------------------------------
                                                                      GROSS            GROSS
                                                 AMORTIZED         UNREALIZED        UNREALIZED           FAIR
      AVAILABLE FOR SALE                           COST               GAINS            LOSSES            VALUE
<S>                                             <C>              <C>                 <C>             <C>
      U.S. Government and agencies               $  1,500,000     $   30,945                          $  1,530,945
      Municipal securities                         25,520,671        323,090        $   154,570         25,689,191
      Equity securities                                39,750         30,490                                70,240
      Other securities                              2,000,000                             5,000          1,995,000
      Mortgage-backed securities                   75,820,993      1,820,096             38,053         77,603,036
      Collateralized mortgage obligations          10,914,781        395,371                            11,310,152
                                                 ------------     ----------           --------       ------------
            Total                                $115,796,195     $2,599,992           $197,623       $118,198,564
                                                 ============     ==========           ========       ============
<CAPTION>

                                                                                2001
                                              --------------------------------------------------------------------
                                                                      GROSS            GROSS
                                                 AMORTIZED         UNREALIZED        UNREALIZED           FAIR
      AVAILABLE FOR SALE                           COST               GAINS            LOSSES            VALUE
<S>                                              <C>                <C>                               <C>
      U.S. Government and agencies               $  1,854,215       $ 46,233                          $  1,900,448
      Municipal securities                         30,488,774        159,481           $451,069         30,197,186
      Equity securities                                39,750          1,050                                40,800
      Mortgage-backed securities                   75,714,645        424,709            355,094         75,784,260
      Collateralized mortgage obligations          12,125,558         54,622             20,697         12,159,483
                                                 ------------       --------           --------       ------------
            Total                                $120,222,942       $686,095           $826,860       $120,082,177
                                                 ============       ========           ========       ============
</TABLE>

     For the year ended June 30, 2002, the Company realized $11,659 in gains and
$10,141 in losses on sales of investment  securities  available for sale.  There
were no realized  gains or losses on sales of available for sale  securities for
the years ended June 30, 2001 and 2000.

     While at June 30, 2002, no securities were pledged to collateralize  public
deposits,  as of June 30, 2001,  municipal  securities  with a carrying value of
approximately  $2.1 million were pledged as collateral for public  deposits.  At
June 30,  2002 and 2001,  mortgage-backed  securities  with a carrying  value of
approximately  $16.7 million and $20.7  million,  respectively,  were pledged as
collateral for Federal Home Loan Bank advances.

                                       29
<PAGE>

     The scheduled maturities of available for sale securities at June 30, 2002,
by  contractual  maturity are shown below.  Expected  maturities may differ from
contractual  maturities  because  borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
                                                AMORTIZED        FAIR
                                                  COST           VALUE
<S>                                          <C>            <C>
       Due in one year or less               $  1,500,000   $  1,530,945
       Due from one year to five years                 --             --
       Due from five years to ten years                --             --
       Due after ten years                     27,520,671     27,684,191
                                             ------------   ------------
                                               29,020,671     29,215,136

       Equity securities                           39,750         70,240
       Mortgage-backed securities              75,820,993     77,603,036
       Collateralized mortgage obligations     10,914,781     11,310,152
                                             ------------   ------------
             Total                           $115,796,195   $118,198,564
                                             ============   ============
</TABLE>

3.   LOANS RECEIVABLE

     Loans receivable consisted of the following at June 30:
<TABLE>
<CAPTION>
                                                                2002                2001
<S>                                                       <C>                    <C>
      First mortgage loans:
        One- to four- family residences                   $ 41,724,098           $ 50,579,375
        Multi-family and commercial                         50,626,236             57,041,028
        Real estate construction loans                      12,449,965             16,008,775
          Less undisbursed loan funds                       (5,945,029)           (12,020,255)
                                                          ------------           ------------
              Total first mortgage loans                    98,855,270            111,608,923

      Consumer and other loans:
        Commercial loans                                    14,406,499             11,289,519
        Automobile                                           6,836,399              6,779,218
        Consumer and home improvement loans                  4,807,218              2,073,650
        Loans collateralized by deposits                     2,469,033              2,488,948
          Less undisbursed loan funds                       (1,718,669)            (1,274,468)
                                                          ------------           ------------
              Total consumer and other loans                26,800,480             21,356,867

      Allowance for loan losses                             (1,628,515)            (1,446,114)
      Net deferred loan costs and discounts                    149,663                131,745
                                                          ------------           ------------
                Loans receivable, net                     $124,176,898           $131,651,421
                                                          ============           ============
</TABLE>

     The  Company   originates  and  maintains   loans   receivable   which  are
substantially   concentrated  in  its  lending  territory   (primarily  Southern
Arkansas)  but also  originates  commercial  real estate loans in other areas of
Arkansas and in contiguous  states. The Company's policy calls for collateral or
other forms of repayment  assurance to be received from the borrower at the time
of loan  origination.  Such  collateral or other form of repayment  assurance is
subject to changes in economic  value due to various  factors beyond the control
of the Company.

     At June 30, 2002,  impaired  loans totaled  approximately  $4,900,000.  All
impaired  loans had  designated  reserves  for possible  loan  losses.  Reserves
relative  to  impaired  loans  at June 30,  2002,  was  approximately  $426,000.
Approximately  $173,000 in interest  income was  recognized on average  impaired
loans of approximately  $2,200,000 for the year ended June 30, 2002. At June 30,
2001, loans identified by management as impaired were


                                       30
<PAGE>

not  significant.  Interest  recognized on impaired loans on a cash basis during
2002 and 2001 was  immaterial.  The Company is not committed to lend  additional
funds to debtors whose loans have been modified.

     The  subsidiary  Bank had  extensions  of  credit  to  executive  officers,
directors and to companies in which the Banks' directors were principal  owners,
in the amount of approximately $1.8 million as of June 30, 2002 and 2001.

Balance, June 30, 2001                 $1,833,111
New extensions of credit                  119,100
Repayments                               (192,382)
                                       ----------
Balance, June 30, 2002                 $1,759,829
                                       ==========

     In  management's  opinion,  such loans were made in the ordinary  course of
business and were made on substantially the same terms (including interest rates
and collateral) as those prevailing at the time for comparable transactions with
other persons.  Further, in management's opinion, these extensions of credit did
not  involve  more than the  normal  risk of  collectability  or  present  other
unfavorable features.

     Certain loans are originated  for sale.  These loans are typically held for
sale only a short time, and do not represent a material  amount in the aggregate
prior to their sale.  Normally the short time between  origination and sale does
not provide for significant differences between cost and market values.

4.   ACCRUED INTEREST RECEIVABLE

     Accrued interest receivable consisted of the following at June 30:
<TABLE>
<CAPTION>
                                            2002           2001
                <S>                     <C>            <C>
                Investment securities   $  839,287     $  931,985
                Loans                      882,325      1,085,203
                                        ----------     ----------
                    Total               $1,721,612     $2,017,188
                                        ==========     ==========
</TABLE>

5.   ALLOWANCE FOR LOAN LOSSES

     A summary of the  activity in the  allowance  for loan losses is as follows
for the years ended June 30:
<TABLE>
<CAPTION>
                                           2002                2001                2000
<S>                                    <C>                 <C>                <C>
      Balance, beginning of year       $  1,446,114        $  1,231,709       $  1,329,201
      Provision                             330,000             296,000                 --
      Charge-offs                          (234,382)           (101,761)           (99,798)
      Recoveries                             86,783              20,166              2,306
                                       ------------        ------------       ------------
      Balance, end of year             $  1,628,515        $  1,446,114       $  1,231,709
                                       ============        ============       ============
</TABLE>

6.   FEDERAL HOME LOAN BANK STOCK

     The Bank is a member of the Federal Home Loan Bank  System.  As a member of
this system,  it is required to maintain an  investment  in capital stock of the
Federal  Home Loan Bank  ("FHLB") in an amount equal to the greater of 1% of its
outstanding  home loans or 1/20 of its advances  (borrowings)  from the FHLB. No
ready market  exists for such stock and it has no quoted market value but may be
redeemed at par. The carrying value of the stock is its cost.

                                       31
<PAGE>

7.   PREMISES AND EQUIPMENT

     Premises and equipment consisted of the following at June 30:
<TABLE>
<CAPTION>
                                                                       2002                    2001
<S>                                                                 <C>                    <C>
      Land and buildings                                            $  7,153,233           $  7,154,882
      Furniture and equipment                                          3,667,962              3,404,811
                                                                    ------------           ------------
            Total                                                     10,821,195             10,559,693
      Accumulated depreciation                                        (3,708,984)            (2,995,012)
                                                                    ------------           ------------
           Premises and equipment, net                              $  7,112,211           $  7,564,681
                                                                    ============           ============
</TABLE>

8.   DEPOSITS

     Deposits are summarized as follows at June 30:
<TABLE>
<CAPTION>
                                                                       2002                       2001
<S>                                                                 <C>                     <C>
      Demand and NOW accounts, including noninterest-bearing
        deposits of $8,889,867 and $7,379,892 in 2002 and
        2001, respectively                                          $ 39,092,410            $ 38,055,320
      Money market                                                     5,911,715               5,733,865
      Statement savings                                                8,010,973               6,903,036
      Certificates of deposit                                        111,990,085             110,592,958
                                                                    ------------            ------------
            Total                                                   $165,005,183            $161,285,179
                                                                    ============            ============
</TABLE>

     The aggregate  amount of short-term  jumbo  certificates  of deposit with a
minimum  denomination  of $100,000  was  approximately  $19.3  million and $13.6
million at June 30, 2002 and 2001, respectively.

     At June 30, 2002,  scheduled  maturities of  certificates of deposit are as
follows:

        Years ending June 30:
             2003                                      $ 86,819,911
             2004                                        19,993,891
             2005                                         5,092,669
             Thereafter                                      83,614
                                                       ------------
                   Total                               $111,990,085
                                                       ============

     Eligible  deposits  of the Bank are  insured up to  $100,000 by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC").

9.   FEDERAL HOME LOAN BANK ADVANCES

     The Bank  pledges as  collateral  for FHLB  advances its FHLB stock and has
entered into blanket collateral agreements with the FHLB whereby the Bank agrees
to maintain, free of other encumbrances, qualifying single family first mortgage
loans with unpaid principal  balances,  when discounted to 75% of such balances,
of at  least  100% of  total  outstanding  advances.  Additionally  the Bank has
pledged mortgage-backed  securities with a carrying value of approximately $16.7
million at June 30, 2002,  as additional  collateral.  Advances at June 30, 2002
and 2001, have maturity dates as follows:

                                       32
<PAGE>
<TABLE>
<CAPTION>
                                                      2002                                         2001
                                         WEIGHTED                                       WEIGHTED
                                          AVERAGE                                      AVERAGE
                                            RATE           AMOUNT                        RATE              AMOUNT
      <S>                                  <C>             <C>                          <C>            <C>
      Years ending June 30:
         2002                               -- %           $        --                  5.82%          $ 8,050,000
         2003                              5.70             12,007,051                  5.70            12,030,126
         2004                              5.65              9,875,000                  5.65             9,875,000
         2005                              5.95              7,141,929                  5.42             9,721,318
         2006                              5.92              4,859,326                  5.92             4,889,509
         2007                              5.91              6,477,709                  6.14             8,400,629
         Thereafter                        6.06             41,902,921                  6.05            38,949,112
                                           ----            -----------                  ----           -----------
            Total                          5.93%           $82,263,936                  5.88%          $91,915,694
                                           ====            ===========                  ====           ===========
</TABLE>

10.  INCOME TAXES

     Income tax provisions (benefits) are summarized as follows:
<TABLE>
<CAPTION>
                                                                     YEARS ENDED JUNE 30,
                                                       -----------------------------------------------
                                                            2002              2001             2000
<S>                                                       <C>               <C>             <C>
      Income tax provision (benefit):
               Current                                    $ 330,065         $ (64,464)      $ 136,209
               Deferred                                    (269,038)         (403,424)       (477,356)
                                                          ---------         ---------       ---------
             Total                                        $  61,027         $(467,888)      $(341,147)
                                                          =========         =========       =========
</TABLE>

     The reasons for the  differences  between the statutory  federal income tax
rates and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
                                                                       YEARS ENDED JUNE 30,
                                         -----------------------------------------------------------------------------
                                                   2002                       2001                          2000
         <S>                             <C>            <C>         <C>           <C>             <C>            <C>
         Taxes at statutory rate         $ 417,087      34.0%       $  51,826     34.0%           $ 151,217      34.0%
         Increase (decrease)
           resulting from:
             Tax exempt income            (457,123)    (37.26)       (520,047)  (341.18)           (503,043)   (113.11)
             Disallowed interest expense    66,972       5.46          85,650     56.19              67,735      15.23
             Change in estimate                  0       0.00         (67,000)   (43.95)                  0       0.00
             Compensation                  (38,289)     (3.12)        (19,825)   (13.01)            (77,301)    (17.38)
             Other, net                     72,380       5.89           1,508      0.99              20,245       4.56
                                         ---------       ----       ---------   -------           ---------     ------
                         Total           $  61,027       4.97%      $(467,888)  (306.96)%         $(341,147)    (76.70)%
                                         =========       ====       =========   =======           =========     ======

</TABLE>

     During the year ended December 31, 1996, new  legislation was enacted which
provides for the recapture  into taxable  income of certain  amounts  previously
deducted as additions to the bad debt reserves for income tax purposes. The Bank
changed its method of determining  bad debt reserves for tax purposes  following
the year ended  June 30,  1997.  The  amounts  to be  recaptured  for income tax
reporting  purposes are considered by the Bank in the  determination  of the net
deferred tax liability.

     The Company's  deferred tax asset account was comprised of the following at
June 30:
<TABLE>
<CAPTION>

                                                                             2002                 2001
<S>                                                                     <C>                   <C>
      Deferred tax assets:
        Allowance for loan losses                                         $   543,084           $  326,016
        Unrealized loss on available for sale investments                          --               81,165
        Deferred compensation                                                 388,868              312,942
        Net operating loss carryforward                                       801,281            1,147,149
        AMT credit carryforward                                               445,313              278,496
        Other                                                                 140,367               13,425
                                                                          -----------           ----------
                                       33
<PAGE>

                  Total deferred tax assets                                 2,318,913            2,159,193
                                                                          -----------           ----------
      Deferred tax liabilities:
        Premises and equipment                                                106,624              262,610
        Unrealized gains on available for sale investments                    960,427                   --
        Investment premiums and discount                                           --               10,432
        Loan fees                                                               1,200                1,553
        FHLB dividends                                                        465,675              327,057
                                                                          -----------           ----------
             Total deferred tax liabilities                                 1,533,926              601,652
                                                                          -----------           ----------
             Net deferred tax asset                                       $   784,987           $1,557,541
                                                                          ===========           ==========
</TABLE>

     A deferred tax liability has not been  recognized for the bad debt reserves
of the Bank created in the tax years which began prior to December 31, 1987 (the
base year). At June 30, 2002, the amount of these reserves totaled approximately
$3,462,590  with an  unrecognized  deferred tax  liability of  $1,177,281.  Such
unrecognized  deferred tax liability could be recognized in the future, in whole
or in part,  if (i) there is a change in federal tax law, (ii) the Bank fails to
meet certain  definitional  tests and other  conditions  in the federal tax law,
(iii) certain  distributions  are made with respect to the stock of the Bank, or
(iv) the bad debt  reserves are used for any purpose  other than  absorbing  bad
debt losses.

     The Company has a net operating loss  carryforward of $2,300,832,  of which
$625,146, $1,120,698, and $554,988 expire in 2019, 2020, and 2021, respectively.
The  Company's AMT credit  carryforward  of $445,313 does not have an expiration
date.

     The portion of the net deferred tax asset resulting from net operating loss
carryforward and AMT credit  carryforward totals $1,246,594 as of June 30, 2002.
The Company has  approved a  tax-planning  strategy  intended to provide for the
realization of these  carryforwards.  The success of this strategy is contingent
on several factors  including (1) the sale of a sufficient  amount of tax-exempt
investment  securities  and  corresponding  reduction in  tax-exempt  income and
increase in taxable income and (2) sufficient  taxable  earnings from operations
or other sources to provide aggregate net taxable income and permit  utilization
of the carryforwards prior to their expirations. Should this strategy not result
in a sufficient  amount of net taxable  income,  the Company will  determine the
need for a valuation  allowance  for the portion of the net  deferred  tax asset
resulting  from  the  carryforwards.  This  tax  strategy  does  not  anticipate
significant taxable gains on the sale of the tax exempt securities, but rather a
shift of nontaxable interest income to taxable interest income.

11.   BENEFIT PLANS

     EMPLOYEE  STOCK  OWNERSHIP  PLAN - The Company has  established an employee
stock ownership plan ("ESOP") to benefit  substantially all employees.  The ESOP
has a note payable to Bancshares,  the proceeds from which were used to purchase
shares of common stock of Bancshares.

     The note receivable, presented in the statements of stockholders' equity as
unearned ESOP shares,  is to be repaid in  installments of $211,600 on June 30th
each year through  2006.  Interest is based upon the prime rate,  which is to be
adjusted and paid annually. The note may be prepaid without penalty. The ESOP is
funded by  contributions  made by the Bank in amounts  sufficient  to retire the
debt.  Compensation expense of $288,665,  $179,882,  and $163,578 was recognized
during the years ended June 30, 2002, 2001 and 2000, respectively.

     Shares no longer required to be held to collateralize the debt and earnings
from the common stock held by the ESOP are allocated  among  participants on the
basis of  compensation  in the year of allocation.  Benefits  become 100% vested
after three years of credited service. Forfeitures of nonvested benefits will be
reallocated  among remaining  participating  employees in the same proportion as
contributions.  At both June 30, 2002 and 2001,  21,160 shares were committed to
be released by the ESOP to participant  accounts.  At June 30, 2002,  there were
126,960 shares allocated to participant  accounts and 84,640 unallocated shares.
The fair value of the unallocated  shares amounted to  approximately  $1,265,368
(84,640 shares at $14.95 per share) at June 30, 2002.

     Participants  with vested account balances leaving  employment,  generally,
may  elect  to  have  their  allocated  shares  distributed.  In the  case  of a
distribution  of  shares,  which at the  time of  distribution  are not  readily
tradable on an established securities market, the Company is required to issue a
put option to the  participant.  The put option is priced  using the fair market
value as determined as of the most recent  valuation date (prior to the exercise
of such

                                       34
<PAGE>

right) by an  independent  appraiser.  Any excess of the total  purchase
price at which the  participant  may put the shares to the Company over the fair
value of the shares at the date of the issuance of the option is  recognized  as
expense to the  Company  with the fair value of the shares  recorded as treasury
stock.  During the years ended June 30, 2002,  and June 30, 2001, no put options
were issued. During the year ended June 30, 2000, put options were issued to two
employees but without any material expense to the Company.

     STOCK  OPTION  PLAN  - The  Stock  Option  Plan  ("SOP"),  approved  by the
Company's  stockholders  during  the year ended June 30,  1998,  provides  for a
committee  of  the   Company's   Board  of  Directors  to  award   incentive  or
non-incentive stock options, representing up to 317,400 shares of Company stock.
Options granted to executive officers and directors vest 25% immediately and 25%
on each of the three subsequent  anniversary dates of the grant. Options granted
to employee's vest 20% immediately upon grant, with the balance vesting in equal
amounts on the four subsequent  anniversary dates of the grant.  Options granted
vest immediately in the event of disability or death.  Outstanding stock options
can be exercised over a ten-year  period from the date of grant.  Vested options
of terminated  participants expire one year after the participant's  termination
date.

     Under the SOP,  options have been granted to directors and key employees to
purchase common stock of the Company. The exercise price in each case equals the
fair market value of the  Company's  stock at the date of grant.  No new options
were granted during the years ended June 30, 2002, 2001, or 2000.

     A summary of the status of the  Company's  stock option plan as of June 30,
2002,  and changes  during the years ending June 30, 2001 and 2000, is presented
below:
<TABLE>
<CAPTION>
                                                                                             WEIGHTED
                                                                                              AVERAGE
                                                                                              EXERCISE
      OPTIONS                                                                 SHARES           PRICE
<S>                                                                           <C>             <C>
      Outstanding at June 30, 1999                                            315,296         $ 9.14
      Granted                                                                      --             --
      Exercised                                                                    --             --
      Forfeited                                                                 2,316           9.22
                                                                              -------           ----
      Outstanding at June 30, 2000                                            312,980           9.14
      Granted                                                                      --            --
      Exercised                                                                    --            --
      Forfeited                                                                18,513           9.18
                                                                              -------           ----
      Outstanding at June 30, 2001                                            294,467           9.14
                                                                              -------           ----
      Granted                                                                      --            --
      Exercised                                                                50,473           9.14
      Forfeited                                                                25,444           9.13
                                                                              -------           ----
      Outstanding at June 30, 2002                                            218,550           9.14
                                                                              -------           ----
      Options exercisable at June 30, 2002 (vested)                           216,330         $ 9.13
                                                                              =======           ====
</TABLE>

     Exercise prices for options outstanding at June 30, 2002, range from $9.125
to $9.375 per share.  The weighted  average  remaining  contractual life of such
shares was 5.9 years at June 30, 2002.

     The Company applies the provisions of Accounting  Principles  Board Opinion
No. 25 in  accounting  for its stock option plan, as allowed under SFAS No. 123,
Accounting for Stock-Based Compensation.  Accordingly,  no compensation cost has
been  recognized for options  granted to employees.  Had  compensation  cost for
these  plans  been  determined  based on the fair  value at the  grant  dates or
repricing date for awards under those plans  consistent with the methods of SFAS
No. 123,  the  Company's  pro forma net income and pro forma  earnings per share
would have been as follows:

                                      35
<PAGE>

<TABLE>
<CAPTION>
                                                                    2002
                                                   AS REPORTED                PRO FORMA
<S>                                                 <C>                       <C>
             Net income (in thousands)              $ 1,166                    $1,146
             Earnings per share:
                Basic                               $ 0.71                     $ 0.70
                Diluted                             $ 0.68                     $ 0.67
<CAPTION>

                                                                    2001
                                                   AS REPORTED                PRO FORMA
<S>                                                   <C>                       <C>
             Net income (in thousands)              $ 620                      $ 529
             Earnings per share:
                Basic                               $ 0.33                     $ 0.28
                Diluted                             $ 0.33                     $ 0.28
<CAPTION>

                                                                    2000
                                                   AS REPORTED                PRO FORMA
<S>                                                   <C>                       <C>
             Net income (in thousands)              $  786                     $  676
             Earnings per share:
                Basic                               $ 0.40                     $ 0.34
                Diluted                             $ 0.40                     $ 0.34
</TABLE>

     In determining  the above pro forma  disclosure,  the fair value of options
granted was  estimated  on the date of grant using the  binomial  option-pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
                                                        1999              1998
                                                       GRANTS            GRANTS
<S>                                                      <C>              <C>
      Volatility                                         54%              15%
      Life of options                                 7.5 years        7.5 years
      Risk-free interest rate                           5.3%              5.7%
      Dividend rate                                     2.56%            2.63%
</TABLE>

     The weighted  average fair value of options  granted during the fiscal year
ended June 30, 1999, was $2.25 per share.

     MANAGEMENT  RECOGNITION  PLAN - The  Management  Recognition  Plan ("MRP"),
approved  by the  Company's  stockholders  during the year ended June 30,  1998,
provides for a committee of the Company's Board of Directors to award restricted
stock to key officers as well as non-employee directors.  The MRP authorizes the
Company to grant up to 52,900 shares of Company stock, all of which were granted
during 1998.  Compensation  expense is recognized based on the fair market value
of the shares on the grant date of $16.00  over the  vesting  period.  Under the
original  plan,  shares  granted  to  directors  (37,024,  of which  1,322  were
forfeited  as of June 30,  2002)  vest 25% at the grant  date and 25% each May 1
afterward.  Shares  granted  to  non-directors  (15,876,  of  which  1,908  were
forfeited  as of June 30,  2002)  vest 20% at the grant  date and 20% each May 1
afterward.  Shares granted will be deemed vested in the event of disability,  or
death.  At June 30, 2002,  all shares have been  acquired  that are necessary to
meet the Plan's award requirements. The difference between the price at the date
of grant  and the  actual  purchase  price  was  recorded  as an  adjustment  to
stockholders'   equity.   Approximately   $40,000,   $65,000  and   $170,000  in
compensation  expense was recognized during the years ended June 30, 2002, 2001,
and 2000,  respectively.  On May 17, 2000, all directors  voluntarily elected to
extend their vesting period three  additional years to May 1, 2004. In addition,
certain officers also voluntarily  elected to adopt the three-year  extension of
their vesting period.

                                       36
<PAGE>

     DEFINED  BENEFIT PLAN - The Bank had a qualified,  noncontributory  defined
benefit  retirement  plan (the "Plan")  covering all of its eligible  employees.
Employees were eligible when they had attained at least  twenty-one years of age
and six  months of  service  with the Bank.  The  Board of  Directors  initially
adopted a resolution  on July 1, 1996, to terminate the Plan as of September 16,
1996,  and  to  freeze  benefit  accruals  as of  July  31,  1996.  The  Company
experienced  delays in  terminating  the Plan and on June 18, 1998, a resolution
was adopted to terminate the Plan as of September 1, 1998, with benefit accruals
remaining  frozen  as of  July  31,  1996.  Settlement  of the  related  pension
obligation occurred on August 30, 1999.

     All active participants became fully vested for their accrued benefits. The
Plan provides that any excess assets will be allocated to participants. As such,
based  on the  funded  status  of the  Plan,  no  gain  or  loss  occurred  upon
settlement.

     OFFICERS'  AND DIRECTORS  RETIREMENT  PLAN - During the year ended June 30,
1996, the Bank adopted a  "non-qualified"  retirement  plan for its officers and
directors in  recognition  of their years of service to the Bank. The plan is an
annuity  contract plan whereby  funds are to be set aside  annually in a grantor
trust, with the Bank acting as trustee of the Trust. Distributions are scheduled
to be paid upon  completion  of six to ten years of service to the Bank.  No tax
deduction  for the Plan is claimed  until  funds are paid to the  beneficiaries.
Future  funding is dependent on continued  service to the Bank and  therefore is
expensed  as the plan is funded each year.  For the years  ended June 30,  2002,
2001  and  2000,  contributions  to the  plan  totaled  approximately  $124,000,
$181,000, and $184,000, respectively.

     401(k) PLAN - Effective July 1, 1993, employees of the Bank may participate
in a 401(k) savings plan,  whereby the employees may elect to make contributions
pursuant to a salary reduction agreement upon reaching age 21 and completing one
year of service. At its discretion,  the Bank may make matching contributions to
the plan. Employer  contributions vest 20% each year beginning in the third year
of service  and become  100%  vested in seven  years.  The Bank made no matching
contribution during the years ended June 30, 2002, 2001 or 2000.

     EMPLOYMENT  AGREEMENTS  - Certain  executive  officers  of the Bank and the
Company have employment  agreements with one to three year renewable terms. Such
agreements  provide  for  termination  pay  and  other  benefits  under  certain
circumstances.  As of June 30, 2002, aggregate  termination pay is approximately
$0.90 million.

     CHANGE-IN-CONTROL AGREEMENTS - As of June 30, 2002, certain officers of the
Bank and the Company had change-in-control  agreements with three-year renewable
terms.   Such   agreements   provide  for  benefits   under   circumstances   of
changes-in-control  as defined in the  agreements.  The  benefits  provide for a
range of 25% to 299% of the  officers'  compensation.  As of June 30, 2002,  the
aggregate benefits total approximately $0.70 million.

12.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

     The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing  needs of its  customers.
These  financial  instruments  include  commitments to extend credit and standby
letters of credit.  Those instruments  involve, to varying degrees,  elements of
credit risk in excess of the amount recognized in the consolidated statements of
financial  condition.  The  Company  does  not use  financial  instruments  with
off-balance sheet risk as part of its asset/liability  management program or for
trading  purposes.  The  Company's  exposure  to  credit  loss in the  event  of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby  letters of credit is represented  by the  contractual
amounts of those  instruments.  The  Company  uses the same  credit  policies in
making  commitments and conditional  obligations as it does for on-balance sheet
instruments.

     Commitments  to extend credit are  agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally have fixed expiration dates or other termination clauses.
The Company evaluates each customer's  creditworthiness on a case-by-case basis.
The amount of  collateral  obtained,  if deemed  necessary  by the Company  upon
extension of credit,  is based on management's  credit  evaluation of the credit
applicant. Such collateral consists primarily of residential properties. Standby
letters of credit are conditional commitments issued by the Company to guarantee
the  performance  of a customer to a third  party.  The credit risk  involved in
issuing  letters of credit is essentially the same as that involved in extending
loan facilities to customers.

                                       37
<PAGE>

     The Company had the following outstanding commitments at June 30, 2002:

             Undisbursed construction loans              $4,614,879
             Commitments to originate mortgage loans      1,330,150
             Commitments to originate commercial loans      149,500
             Unused lines of credit                       1,569,169
                                                         ----------
                  Total                                  $7,663,698
                                                         ==========

     The  funding  period for  construction  loans is  generally  less than nine
months and commitments to originate mortgage loans are generally outstanding for
60 days or less. At June 30, 2002, interest rates on commitments are believed by
management to approximate market rates.

13.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair value amounts have been  determined by the Company using
available market information and appropriate valuation  methodologies.  However,
considerable  judgment  is  required  to  interpret  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.
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
                                                           JUNE 30, 2002                    JUNE 30, 2001
                                                                     ESTIMATED                       ESTIMATED
                                                      CARRYING         FAIR          CARRYING           FAIR
                                                       VALUE          VALUE            VALUE           VALUE
<S>                                                <C>            <C>                <C>           <C>
      ASSETS:
        Cash and due from banks                    $   3,492,257  $  3,492,257       $  3,302,540  $   3,302,540
        Interest bearing deposits with banks          14,404,572    14,404,572         15,107,481     15,107,481
        Investment securities:
          Available for sale                         118,198,564   118,198,564        120,082,177    120,082,177
        Loans receivable, net                        124,176,898   127,424,573        131,651,421    133,015,674
        Accrued interest receivable                    1,721,612     1,721,612          2,017,188      2,017,188
        Federal Home Loan Bank stock                   4,709,900     4,709,900          4,735,800      4,735,800

      LIABILITIES:
        Deposits:
          Demand, NOW, money
            market and statement savings              53,015,098    53,015,098         50,692,221     50,692,221
          Certificates of deposit                    111,990,085   112,396,949        110,592,958    111,361,694
        Federal Home Loan Bank advances               82,263,936    86,780,344         91,915,694     92,800,235
        Advance payments by
          borrowers for taxes and insurance              110,446       110,446            199,470        199,470
        Accrued interest payable                         740,008       740,008            972,900        972,900
        Note payable                                          --            --             80,000         80,019
</TABLE>

     For cash and due from banks,  interest bearing deposits with banks, Federal
Home Loan Bank stock and accrued  interest  receivable,  the carrying value is a
reasonable  estimate of fair value primarily because of the short-term nature of
instruments  or, as to Federal  Home Loan Bank  stock,  the  ability to sell the
stock back to the Federal Home Loan Bank at cost.  The fair value of  investment
securities is based on quoted market prices,  dealer quotes and prices  obtained
from  independent  pricing  services.  The fair  value of  loans  receivable  is
estimated based on present values using the rates currently offered for loans of
similar remaining maturities at the reporting date.

                                       38
<PAGE>

     The fair value of demand deposit accounts,  NOW accounts,  savings accounts
and money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit, Federal Home Loan Bank
advances,  and note payable is estimated using the rates  currently  offered for
deposits and borrowings of similar  remaining  maturities at the reporting date.
For advance  payments by borrowers for taxes and insurance and accrued  interest
payable the  carrying  value is a reasonable  estimate of fair value,  primarily
because of the short-term nature of instruments.  Commitments are generally made
at prevailing  interest  rates at the time of funding and are  relatively  short
term.  Therefore,  there is no difference  between the contract  amount and fair
value.

     The  fair  value  estimates   presented   herein  are  based  on  pertinent
information  available  to  management  as of June 30,  2002 and 2001.  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  financial  statements  since the reporting  date
and,  therefore,  current estimates of fair value may differ  significantly from
the amounts presented herein.

14.  COMMITMENTS AND CONTINGENCIES

     In the  ordinary  course of business,  the Company has various  outstanding
commitments   and  contingent   liabilities   that  are  not  reflected  in  the
accompanying  consolidated  financial statements.  In addition, the Company is a
defendant in certain claims and legal actions  arising in the ordinary course of
business.  In the opinion of management,  after consultation with legal counsel,
the  ultimate  disposition  of these  matters is not expected to have a material
adverse effect on the consolidated financial statements of the Company.

     In May, 1999, a shareholder filed a putative class action complaint against
the Company and several current and former officers alleging that the defendants
defrauded the  plaintiff and other  shareholder  class members  through  various
public  statements  and reports  that had the  supposed  effect of  artificially
inflating  the price the  plaintiff  and other  putative  class  members paid to
purchase the Company's common stock.

     The Company and the other  defendants  moved to dismiss the complaint.  The
federal  district  court  granted  the  motion on March 31,  2001,  but  allowed
plaintiffs  30 days from the date of the order to file an amended  class  action
complaint.  On August 28, 2001, the Company was informed by the federal district
court that the case was dismissed with prejudice on August 27, 2001.

15.  RETAINED EARNINGS

     Upon the Conversion,  the Company established a special liquidation account
for the  benefit of  eligible  account  holders  and the  supplemental  eligible
account  holders in an amount  equal to the net worth of the Bank as of the date
of its latest statement of financial  condition  contained in the final offering
circular used in connection with the Conversion. The liquidation account will be
maintained for the benefit of eligible account holders and supplemental eligible
account  holders  who  continue  to  maintain  their  accounts in the Bank after
Conversion.  In the event of a complete  liquidation  (and only in such  event),
each  eligible  and  supplemental  eligible  account  holder will be entitled to
receive a liquidation  distribution  from the  liquidation  account in an amount
proportionate  to the current  adjusted  qualifying  balances for accounts  then
held.

     The Bank may not  declare  or pay cash  dividends  on its  shares of common
stock if the effect  thereof would cause the Bank's  stockholders'  equity to be
reduced below applicable regulatory capital maintenance requirements for insured
institutions or below the amount of the special  liquidation account referred to
above.  This requirement  effectively  limits the dividend paying ability of the
Company in that the Company must  maintain an  investment  in equity of the Bank
sufficient to enable the Bank to meet its requirements as noted above.  Required
capital amounts are shown in Note 16 to the consolidated  financial  statements.
Liquidation  account  balances  are  not  maintained  because  of  the  cost  of
maintenance and the remote likelihood of complete liquidation. Additionally, the
Bank is limited to distributions it may make to Bancshares  without OTS approval
if the distribution would cause the total distributions to exceed the Bank's net
income for the year to date plus the Bank's net income (less  distributions) for
the preceding two years.  Bancshares may use assets other than its investment in
the Bank as a source of dividends.

                                       39
<PAGE>

16.  REGULATORY MATTERS

     The Bank is subject to various regulatory capital requirements administered
by federal banking  agencies.  Failure to meet minimum capital  requirements can
initiate certain mandatory--and  possible 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 established by regulation to ensure capital adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below) of tangible  capital (as defined in the  regulations)  to tangible assets
(as  defined)  and core  capital  (as  defined)  to  adjusted  total  assets (as
defined),  and of total risk-based capital (as defined) to risk-weighted  assets
(as defined).

     As of June 30, 2002 and 2001, the most recent  notification from the Office
of  Thrift  Supervision  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  core  (Tier  I  core),  Tier  I
risk-based,  and total risk-based ratios as set forth in the table. There are no
conditions  or events since that  notification  that  management  believes  have
changed the Bank's category.

     The  Bank's  actual  capital  amounts  (in  thousands)  and ratios are also
presented in the tables:
<TABLE>
<CAPTION>
                                                                                              TO BE CATEGORIZED
                                                                                              AS WELL CAPITALIZED
                                                                                                UNDER PROMPT
                                                                              FOR CAPITAL         CORRECTIVE
                                                          ACTUAL        ADEQUACY PURPOSES       ACTION PROVISIONS
                                                    AMOUNT      RATIO    AMOUNT     RATIO      AMOUNT        RATIO
                                                    -----------------    ----------------      ------        -----
<S>                                                <C>          <C>       <C>        <C>        <C>          <C>
      AS OF JUNE 30, 2002:

Tier I (Core) Capital to Adjusted Total Assets     $ 21,396     7.88 %    $ 10,861   4.00 %     $ 13,576     5.00 %
Total Risk-Based Capital to Risk-weighted Assets     23,025    17.06 %      10,798   8.00 %       13,497    10.00 %
Tier I (Core) Capital to Risk-weighted Assets        21,396    15.85 %         N/A    N/A          8,098     6.00 %
Tangible Capital to Tangible Assets                  21,396     7.88 %       4,073   1.50 %          N/A      N/A

      AS OF JUNE 30, 2001:

Tier I (Core) Capital to Adjusted Total Assets     $ 29,132    10.20 %    $ 11,420   4.00 %     $ 14,274     5.00 %
Total Risk-Based Capital to Risk-weighted Assets     30,578    22.17 %      11,032   8.00 %       13,790    10.00 %
Tier I (Core) Capital to Risk-weighted Assets        29,132    21.12 %         N/A    N/A          8,274     6.00 %
Tangible Capital to Tangible Assets                  29,132    10.20 %       4,282   1.50 %          N/A      N/A
</TABLE>


     Regulations  require the Bank to maintain an amount equal to 4% of deposits
(net of loans collateralized by deposits) plus short-term borrowings in cash and
U.S. Government and other approved securities.

                                       40
<PAGE>

17.  PARENT COMPANY ONLY FINANCIAL INFORMATION

     The following  condensed  statements of financial  condition as of June 30,
2002 and 2001,  and condensed  statements of income and cash flows for the years
ended June 30, 2002, 2001 and 2000, for HCB  Bancshares,  Inc. should be read in
conjunction with the consolidated financial statements and the notes herein.

HCB BANCSHARES, INC.
(PARENT COMPANY ONLY)

CONDENSED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2002 AND 2001
<TABLE>
<CAPTION>
ASSETS                                                   2002             2001
<S>                                                  <C>             <C>
Deposit in Bank                                      $ 1,221,185     $   515,975
Cash equivalents                                         175,817         134,522
                                                     -----------     -----------
Cash and cash equivalents                              1,397,002         650,497
Investment in Bank                                    21,927,797      29,861,612
Loans receivable                                       1,060,298         700,000
Investment securities                                     70,240          40,800
Other assets                                             821,076         909,850
                                                     -----------     -----------
TOTAL ASSETS                                         $25,276,413     $32,162,759
                                                     ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities               $   143,058     $   228,425
Stockholders' equity                                  25,133,354      31,934,334
                                                     -----------     -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY           $25,276,413     $32,162,759
                                                     ===========     ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
<TABLE>
<CAPTION>

INCOME:                                               2002          2001           2000
<S>                                               <C>           <C>            <C>
  Dividend from Bank                              $ 9,000,000   $ 1,000,000    $        --
  Interest and dividend income                        205,248       230,421        346,007
                                                  -----------   -----------    -----------
   Total income                                     9,205,248     1,230,421        346,007
EXPENSES:
  Operating expenses                                   48,944       191,509        301,181
                                                  -----------   -----------    -----------
INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS IN
  (EXCESS) LESS THAN BANK SUBSIDIARY INCOME         9,156,304     1,038,912         44,826

INCOME TAX PROVISION                                   59,849        13,000         15,242
                                                  -----------   -----------    -----------
INCOME BEFORE DISTRIBUTIONS IN (EXCESS) LESS
  THAN BANK SUBSIDIARY INCOME                       9,096,455     1,025,912         29,584

DISTRIBUTIONS IN (EXCESS) LESS THAN  BANK
SUBSIDIARY INC                                     (7,930,755)     (405,596)       756,318
                                                  -----------   -----------    -----------
NET INCOME                                        $ 1,165,700   $   620,316    $   785,902
                                                  ===========   ===========    ===========
</TABLE>

                                       41
<PAGE>

HCB BANCSHARES, INC.
         (PARENT COMPANY ONLY)

CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
<TABLE>
<CAPTION>

OPERATING ACTIVITIES:                                                      2002             2001            2000
<S>                                                                   <C>              <C>             <C>
    Net income                                                        $   1,165,700    $     620,316   $     785,902
    Adjustments to reconcile net income to net cash provided
       (used) by operating activities:
      Distributions in excess (less) than bank subsidiary income          7,930,755          405,596        (756,318)
      Changes in operating assets and liabilities:
        Other assets                                                        239,824         (259,752)        954,507
        Accrued expenses and other liabilities                             (194,647)         228,425      (1,179,190)
                                                                      -------------     ------------    ------------
           Net cash provided (used) by operating activities               9,141,632          994,585        (195,099)
                                                                      -------------     ------------    ------------
INVESTING ACTIVITIES:
    Purchase loan, net of repayments                                      (360,298)               --       1,713,019
                                                                      -------------     ------------    ------------
           Net cash provided (used) by investing activities               (360,298)               --       1,713,019
                                                                      -------------     ------------    ------------
FINANCING ACTIVITIES:
    Dividends paid                                                         (472,296)        (474,299)       (506,929)
    Purchase of treasury stock, net                                      (7,562,533)      (1,038,686)     (2,708,518)
                                                                      -------------     ------------    ------------
           Net cash used by financing activities                         (8,034,829)      (1,512,985)     (3,215,447)
                                                                      -------------     ------------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH    EQUIVALENTS                     746,505         (518,400)     (1,697,527)
CASH AND CASH EQUIVALENTS:
    Beginning of period                                                     650,497        1,168,897       2,866,424
                                                                      -------------     ------------    ------------
    End of period                                                     $   1,397,002     $    650,497    $  1,168,897
                                                                      =============     ============    ============
</TABLE>

                                       42
<PAGE>

18.  OTHER COMPREHENSIVE INCOME

     The amount of income tax expense or benefit  allocated to each component of
comprehensive income, including reclassification adjustments, are shown below:
<TABLE>
<CAPTION>
                                                                                   YEAR ENDED JUNE 30, 2002
                                                                     -----------------------------------------------------
                                                                        BEFORE TAX        TAX EXPENSE       NET-OF-TAX
                                                                          AMOUNT           (BENEFIT)          AMOUNT
                                                                                            AMOUNT
<S>                                                                    <C>               <C>                  <C>
         UNREALIZED GAINS ON SECURITIES:
           Unrealized holding gain on securities
             arising during period                                     $   2,544,652     $ (1,041,592)        $ 1,503,060
           Less reclassification adjustment for
             (gains) losses included in net income                            (1,518)              --              (1,518)
                                                                       -------------     ------------         -----------
                     Other comprehensive income                        $   2,543,134     $ (1,041,592)        $ 1,501,542
                                                                       =============     ============         ===========
<CAPTION>
                                                                                   YEAR ENDED JUNE 30, 2001
                                                                     -----------------------------------------------------
                                                                        BEFORE TAX        TAX EXPENSE       NET-OF-TAX
                                                                          AMOUNT           (BENEFIT)          AMOUNT
                                                                                            AMOUNT
<S>                                                                    <C>               <C>                  <C>
         UNREALIZED GAINS ON SECURITIES:
           Unrealized holding gain on securities
             arising during period                                       $ 7,236,824      $ 2,894,756         $ 4,342,068
           Less reclassification adjustment for
             (gains) losses included in net income                                --               --                  --
                                                                       -------------      -----------         -----------
                     Other comprehensive income                        $   7,236,824      $ 2,894,756         $ 4,342,068
                                                                       =============      ===========         ===========

<CAPTION>
                                                                                   YEAR ENDED JUNE 30, 2000
                                                                     -----------------------------------------------------
                                                                        BEFORE TAX        TAX EXPENSE       NET-OF-TAX
                                                                          AMOUNT           (BENEFIT)          AMOUNT
                                                                                            AMOUNT
<S>                                                                    <C>               <C>                  <C>
         UNREALIZED LOSSES ON SECURITIES:
           Unrealized holding loss on securities
             arising during period                                      $ (2,991,525)    $ (1,210,530)       $ (1,780,995)
           Less reclassification adjustment for
             (gains) losses included in net income                                --               --                  --
                                                                        ------------     ------------        ------------
                     Other comprehensive loss                           $ (2,991,525)    $ (1,210,530)       $ (1,780,995)
                                                                        ============     ============        ============
</TABLE>

19.  SUBSEQUENT EVENTS

     On July 19, 2002, the bank sold its Monticello branch to Simmons First Bank
of South Arkansas.  The sale included  approximately $8.3 million in loans, $1.5
million in fixed  assets,  $0.2 million in other  assets,  and $13.2  million in
deposits.  The bank recognized a premium on the deposits of  approximately  $0.9
million and the  difference was paid in cash to the buyer.  The resulting  after
tax  gain  on the  sale  of the  Monticello  branch  of  approximately  $440,000
translates into $0.29 in earnings per share.

                                       43
<PAGE>

                              CORPORATE INFORMATION

DIRECTORS                                  MAIN OFFICE:

Vida H. Lampkin                              237 Jackson Street, S.W.
 Chairman of the Board                       Camden, Arkansas

Cameron D. McKeel                          BRANCH OFFICES:
 President and Chief
    Executive Officer                        4937 Highway 5 North
                                             Bryant, Arkansas
Bruce D. Murry
   Retired Owner, Bruce's                    1125 Fairview Road SW
   Camden, Arkansas                          Camden, Arkansas

Carl E. Parker, Jr.                          610 West 4th Street
   General Manager, Camden Monument Co.      Fordyce, Arkansas
   Camden, Arkansas
                                             473 Highway 425 North
Clifford Steelman                            Monticello, Arkansas
   Retired Human Resource Administrator,
   Camden, Arkansas                          108 South Main Street
                                             Sheridan, Arkansas
F. Michael Akin
  President, CEO - Akin Industries         INDEPENDENT AUDITOR:
  Monticello, Arkansas
                                             BKD, LLP
John G. Rich                                 400 West Capital
  Of Counsel, Eppenstein & Eppenstein        Suite 2500, P.O. Box 3667
  New York, New York                         Little Rock, AR  72203-3667

EXECUTIVE OFFICERS:                        GENERAL COUNSEL:

Charles T. Black                             Robert S. Laney
  Senior Vice President and Chief            P.O. Box 777
  Lending Officer                            Camden, Arkansas  71711-0777
Paula J. Bergstrom
  Senior Vice President Administration     SECURITIES AND REGULATORY
   and Secretary                             COUNSEL:
Scott A. Swain
  Senior Vice President and Chief            Stradley Ronon Stevens & Young, LLP
  Financial Officer                          1220 19th Street, N.W., Suite 700
ANNUAL STOCKHOLDERS MEETING:                 Washington, D.C.  20036

November 21, 2002 - 10:00 a.m.             STOCK REGISTRAR & TRANSFER
Camden Country Club                          AGENT:
1915 Washington Street SW
Camden, Arkansas 71701                       Registrar and Transfer Company
Record Date - October 7, 2002                Cranford, New Jersey  07016-3572

ANNUAL REPORT ON FORM 10-K:

A copy of the  Company's  Annual  Report on Form 10-K for the fiscal  year ended
June 30, 2002, as filed with the  Securities  and Exchange  Commission,  will be
furnished  without  charge to  stockholders  as of the record  date for the 2002
Annual Meeting upon written  request to:  Corporate  Secretary,  HCB Bancshares,
Inc., 237 Jackson Street, S.W, Camden, Arkansas 71701-3941.

                                       44