HCB BANCSHARES, INC.



                                  ANNUAL REPORT

                                      2001

<PAGE>
TO OUR SHAREHOLDERS:


Our mission has been to ensure that Arkansas towns continue to have a local bank
to help them meet their  financial  needs,  and experience  continues to tell us
that our mission is sound, wanted, and well-received.

During the fiscal  year ending  June 30,  2001,  total  customer  deposits  with
HEARTLAND Community Bank grew by $16,412,108,  or 11.3%, our largest growth ever
in a single year. Our customer  satisfaction surveys have included such comments
as "Best  bank I've ever  had!",  "You make  banking  a  pleasure  instead  of a
chore.", "The entire staff has provided wonderful service for our family.", "HCB
is my inspiration and model for customer service!", and "I do not believe I have
encountered  this quality of banking  experience."  These  comments,  along with
record growth in customer deposits (while interest rates were falling!), confirm
that our mission is valid,  that people still want to do their banking  business
with folks they know, folks who are involved in the community, local bankers who
have the authority to make decisions . . . and who make those decisions based on
local needs,  rather than on the instructions  issued from bank  headquarters in
some other state.

Every HEARTLAND  employee who has daily contact with customers  receives special
training in providing  Excellent  Customer Service.  Our tellers receive special
recognition for increasing their expertise as proven through professional tests,
resulting in their earning  designations as Teller II, Teller III, or Teller IV.
Customer  satisfaction  is our goal,  and the response  from our  customers  and
communities indicates that we're meeting that goal.

With that infrastructure in place, we recognize that stockholder satisfaction is
also  crucial to the  long-term  success of our  Company.  During 2001 we joined
forces with our largest outside stockholder to develop aggressive strategies for
both  short-term  and long-term  growth in the value of our common  stock.  That
stockholder's  designee  has been  added  to our  Board  of  Directors.  Several
strategies have been discussed,  and we are currently  researching the long-term
and short-term  pros and cons of those  strategies.  Our goal is to identify and
execute those strategies that provide both short-term and long-term benefits for
our  shareholders  and our Company,  as we continue to provide  sound  community
banking in South Arkansas.  We expect steady  improvement in our  profitability,
growth in both the book  value and the  market  value of our  common  stock,  an
increase in the number of our banking offices,  and a growing customer base. Our
Board believes that this new relationship  with our stockholder will be mutually
beneficial, and we look forward to a long and prosperous association.

                              FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>

                                       2001        2000        1999       1998        1997
<S>                                 <C>          <C>        <C>        <C>         <C>
Total Assets (millions)             $   287.6    $ 291.2    $ 285.4    $ 251.0     $ 200.5

Net Interest Income (millions)      $     6.0    $   6.7    $   6.2    $   6.1     $   4.8

Ratio of Interest Earning Assets
  To Interest-Bearing Liabilities      106.44%    105.42%    111.55%    119.51%     108.76%
</TABLE>

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


<PAGE>

                              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,  2001,  the Company had total assets of $287.6  million,  deposits of $161.3
million, and stockholders' equity of $31.9 million, or 11.1% of total assets.


     The  Bank  currently  operates  through  six full  service-banking  offices
located in Camden (2), Fordyce, Bryant, Sheridan, and Monticello, Arkansas.

     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, 2001,  there were 2,158,989  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, 2001, there
were 689  stockholders  of record  according  to the  Company's  transfer  agent
listings.  Following  are the high and low bid  prices,  by fiscal  quarter,  as
reported on the Nasdaq National Market from July 1, 1997 to February 2, 1999 and
on the Nasdaq  Small-Cap  Market November 22, 1999 to June 30, 2001, and through
the  initial  underwriting   brokerage  firm  of  Trident  Securities  (McDonald
Investments)  from  February  3,  1999  to  November  21,  1999,  as well as the
dividends paid during such quarters.

                                High            Low         Dividends Per Share
                                ----            ---         -------------------
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

Fiscal 2000:
      First Quarter           $ 9.63          $ 8.00            $ 0.06
      Second Quarter            9.63            7.00              0.06
      Third Quarter             8.00            5.75              0.06
      Fourth Quarter            7.25            5.63              0.06

     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

                                       4
<PAGE>

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.




                                       5
<PAGE>

                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

<TABLE>
<CAPTION>
                                                                                   AT JUNE 30,
                                               --------------------------------------------------------------------------
                                                 2001            2000           1999          1998             1997
                                               ----------      ----------     ----------    ----------      -------------
<S>                                           <C>            <C>           <C>            <C>            <C>
Total assets..............................    $287,598,650   $291,192,175  $285,396,885   $ 250,953,770  $200,498,516
Loans receivable, net.....................     131,651,421    135,626,505   115,162,883     104,580,165    98,642,635
Allowance for loan losses.................       1,446,114      1,231,709     1,329,201       1,468,546     1,492,473
Cash and due from banks...................       3,302,540      3,211,802     3,560,884       1,531,363     1,057,943
Interest-earning savings deposits.........      15,107,481        236,846     1,693,330       5,073,035    18,273,882
Investment securities:
   Available for sale.....................      32,138,434     34,135,726    33,132,916      40,775,807            --
   Held to maturity.......................              --             --            --              --    17,260,383
Mortgage-backed securities:
    Available for sale....................      87,943,743     98,407,339   113,986,773      58,697,109    18,361,987
    Held to maturity......................              --             --            --      27,503,257    36,493,086
Deposits..................................     161,285,179    144,873,071   146,296,598     141,931,330   151,192,591
FHLB advances.............................      91,915,694    115,609,029   104,523,419      68,121,068    10,000,000
Note payable..............................          80,000        160,000       240,000         320,000       400,000
Stockholders' equity......................      31,934,334     28,240,550    32,117,560      37,678,924    37,430,852
Number of:
   Real estate loans outstanding..........           1,710          1,820         1,709           2,829         2,093
   Deposit accounts.......................          18,538         17,980        18,526          17,158        15,380
   Offices open...........................               6              6             6               6             7

</TABLE>
<TABLE>
<CAPTION>
                                                                                      YEAR ENDED JUNE 30,
                                               ----------------------------------------------------------------------------

                                                 2001            2000         1999          1998               1997
                                             -------------   ------------  -----------   -----------      -----------
<S>                                           <C>            <C>           <C>           <C>              <C>
Interest income...........................    $ 20,078,400   $ 19,808,899  $18,274,647   $15,027,677      $12,987,848
Interest expense..........................      14,079,466     13,099,656   12,093,603     8,942,149        8,195,782
                                             -------------   ------------  -----------   -----------      -----------
Net interest income.......................       5,998,934      6,709,243    6,181,044     6,085,528        4,792,066
Provision for loan losses.................         296,000             --           --        24,000          221,671
                                             -------------   ------------  -----------   -----------      -----------
Net interest income after provision
  for loan losses.........................       5,702,934      6,709,243    6,181,044     6,061,528        4,570,395
Noninterest income........................       1,378,612      1,039,622    1,018,654       710,856          305,067
Noninterest expense.......................       6,929,118      7,304,110    6,847,715     6,407,976        5,765,870
                                             -------------   ------------  -----------   -----------      -----------
Income (loss) before income taxes.........         152,428        444,755      351,983       364,408         (890,408)
Income tax benefit........................        (467,888)      (341,147)     (63,658)      (20,705)        (280,935)
                                             -------------   ------------  -----------   -----------      -----------

Net income (loss).........................   $     620,316   $    785,902  $   415,641   $   385,113      $  (609,473)(1)
                                             =============   ============  ===========   ===========      ===========

Earnings per share:
  Basic...................................   $      0.33     $       0.40  $      0.18   $      0.16      $      (.25)
  Diluted.................................          0.33             0.40         0.18          0.16             (.25)
Cash dividends declared...................          0.24             0.24         0.24          0.20               --
</TABLE>

---------------
     (1)  Noninterest expense and, therefore,  net loss, for the year ended June
          30,  1997  were  adversely  affected  by the  imposition  of a special
          deposit  insurance  assessment in the second quarter of fiscal 1997 in
          connection  with  the   recapitalization  of  the  SAIF.  Absent  such
          assessment,  management  estimates that noninterest expense would have
          been  approximately  $4,876,859  and  that net loss  would  have  been
          approximately $58,286.

                                       6
<PAGE>
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED JUNE 30,
                                                     ----------------------------------------------------------------
                                                       2001        2000            1999        1998          1997
                                                     --------    --------        --------    --------      ----------
<S>                                                   <C>          <C>           <C>           <C>          <C>
PERFORMANCE RATIOS:
   Return on assets (net income (loss) divided
      by average total assets) (1).................    0.21%        0.27%         0.15%         0.18%        (0.34)%
   Return on average equity (net income (loss)
      divided by average equity) (1)...............    2.02         2.76          1.14          1.02         (3.38)
   Interest rate spread (combined weighted
      average interest rate earned less combined
      weighted average interest rate cost).........    1.85         2.23          1.81          2.11          2.35
   Net interest margin (net interest income
      divided by average interest-earning assets)..    2.19         2.49          2.34          2.96          2.76
   Ratio of average interest-earning assets
      to average interest-bearing liabilities......  106.44       105.42        111.55        119.51        108.76
   Ratio of noninterest expense to average
      total assets.................................    2.38         2.55          2.48          3.00          3.18

ASSET QUALITY RATIOS:
   Nonperforming assets to total assets
      at end of period.............................    0.48          0.33         0.21          0.34          0.29
   Nonperforming loans to total loans
      at end of period.............................    0.81          0.64         0.46          0.75          0.50
   Allowance for loan losses to total
      loans at end of period.......................    0.99          0.85         1.08          1.33          1.46
   Allowance for loan losses to nonperforming
      loans at end of period.......................  121.48        133.95       234.84        177.25        290.50
   Provision for loan losses to total loans
      at end of period ............................    0.20           --            --          0.02          0.22
   Net charge-offs to average loans outstanding....    0.06          0.08         0.13          0.05          0.01

CAPITAL RATIOS:
   Equity to total assets at end of period.........   11.10          9.70        11.25         15.01         18.92
   Average equity to average assets................   10.55          9.95        13.19         17.71          9.95
   Dividend payout ratio (2).......................   76.46         64.50       142.58        137.36            --

</TABLE>
--------------
(1)  Before cumulative effect  adjustment.  Returns on assets and equity for the
     year ended June 30, 1997 were  adversely  affected by the  imposition  of a
     special deposit  insurance  assessment in the second quarter of fiscal 1997
     in  connection  with  the   recapitalization   of  the  SAIF.  Absent  such
     assessment,  management  estimates  that  return on assets  would have been
     approximately  .07% and that  return  on  average  equity  would  have been
     approximately .70%. See "Management's  Discussion and Analysis of Financial
     Condition and Results of Operations" under Item 7.
(2)  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.

                                       7
<PAGE>

                            QUARTERLY FINANCIAL DATA

     The  following  tables  represent  summarized  data  for  each of the  four
quarters in the years ended June 30, 2001 and June 30, 2000.

<TABLE>
<CAPTION>
                                                                                2001
                                                                   (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
      Average common shares and common stock
        equivalents outstanding                    1,842,259        1,840,580         1,863,269       1,918,473

</TABLE>

<TABLE>
<CAPTION>
                                                                          2000
                                                               (IN THOUSANDS, EXCEPT SHARE DATA)
                                                     ----------------------------------------------------------

                                                     FOURTH             THIRD           SECOND            FIRST
                                                     QUARTER           QUARTER          QUARTER          QUARTER

  <S>                                            <C>              <C>               <C>             <C>
      Interest income                          $       5,046    $       4,953     $       4,912   $       4,898
      Interest expense                                 3,419            3,325             3,228           3,128
                                                    --------         --------          --------        --------

      Net interest income                              1,627            1,628             1,684           1,770
      Provision for loan losses                           --               --                --              --
                                                    --------         --------          --------        --------

      Net interest income after provision
        for loan losses                                1,627            1,628             1,684           1,770
      Noninterest income                                 316              240               257             227
      Noninterest expenses                             1,716            1,784             1,850           1,954
                                                    --------         --------          --------        --------

      Income (loss) before income taxes                  227               84                91              43
      Income tax provision (benefit)                    (205)            (152)               15               1
                                                    --------         --------          --------        --------

      Net income                                         432              236                76              42

      Basic earnings per common share                   0.22             0.12              0.04            0.02

      Diluted earnings per common share                 0.22             0.12              0.04            0.02

      Cash dividends declared per common share          0.06             0.06              0.06            0.06
      Average common shares and common stock
        equivalents outstanding                    1,922,356        1,918,618         1,953,898       2,161,695

</TABLE>

                                       8
<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' savings 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 as
the Bank sells more of its long term loan  originations  and  originates 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

                                       9
<PAGE>

interest  rate risk  exposure may decline  somewhat.  The matching of the Bank's
assets and  liabilities  may be  analyzed 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,  2001,  the Bank's  strategy was to use
cash flows  from  investment  securities  and  deposit  growth to fund loans and
reduce short term 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
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, 2001, 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 21.9%. 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 11.3%. 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.

                                       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  monthly  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  amortized  cost.  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,
                                            --------------------------------------------------------------------------------
                                                            2001                                      2000
                                            -------------------------------------    -------------------------------------
                                                                            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 ...........................$136,107,616   $ 11,622,492      8.54%  $123,535,536   $ 10,491,741      8.49%
Investment and mortgage-backed securities
  Taxable ..................................  99,455,695      6,401,378      6.44    112,065,588      7,352,290      6.56
  Nontaxable ...............................  29,246,420      1,529,550      5.23     27,102,813      1,479,536      5.46
Other interest-earning assets ..............   9,720,632        524,980      5.40      6,536,156        485,332      7.43
                                            ------------   ------------      ----    -----------   ------------      ----
  Total interest-earning assets ............$274,530,363     20,078,400      7.31   $269,240,093     19,808,899      7.36
Non-interest-earning assets ................  16,144,665                              16,659,326
                                            ------------                            ------------
    Total assets........................... $290,675,028                            $285,899,419
                                            ============                            ============

Interest-bearing liabilities:
  Deposits................................. $152,209,948      7,699,484      5.06   $142,663,307      6,507,174      4.56
  FHLB advances............................  105,619,861      6,372,982      6.03    112,554,831      6,579,482      5.85
  Notes payable............................       94,685          7,000      7.39        175,082         13,000      7.43
                                            ------------   ------------      ----    -----------   ------------      ----
    Total interest-bearing liabilities.....  257,924,494     14,079,466      5.46    255,393,220     13,099,656      5.13
Non-interest-bearing liabilities...........    2,085,429                               2,046,766
                                            ------------                            ------------
    Total liabilities......................  260,009,923                             257,439,986
Equity.....................................   30,665,105                              28,459,433
                                            ------------                            ------------
    Total liabilities and equity........... $290,675,028                            $285,899,419
                                            ============                            ============
Net interest income........................                 $ 5,998,934                            $ 6,709,243
                                                           ============                            ===========
Net interest rate spread...................                                1.85%                                     2.23%
                                                                         ======                                    ======
Net yield on interest-earning assets                                       2.19%                                     2.49%
                                                                         ======                                    ======
Ratio of average interest-earning assets
  to average interest-bearing liabilities                                106.44%                                   105.42%
                                                                         ======                                    ======


<CAPTION>


                                           --------------------------------------
                                                               1999
                                            -------------------------------------

                                               Average      Interest      Yield/
                                              Balance     Earned/Paid     Rate
                                              -------     -----------    ------
<S>                                        <C>            <C>               <C>
Interest-earning assets:
Loans receivable ..........................$108,211,367   $  8,984,708      8.30%
Investment and mortgage-backed securities
  Taxable ................................. 127,823,503      7,879,802      6.16
  Nontaxable ..............................  18,542,595        906,755      4.89
Other interest-earning assets .............   9,895,390        503,382      5.09
                                           ------------   ------------      ----
  Total interest-earning assets            $264,472,855     18,274,647      6.91
Non-interest-earning assets............. ..  11,984,411
                                           ------------
    Total assets...........................$276,457,266
                                           ============

Interest-bearing liabilities:
  Deposits.................................$141,719,606      6,620,808      4.67
  FHLB advances............................  95,124,165      5,453,795      5.73
  Notes payable............................     253,333         19,000      7.50
                                           ------------   ------------      ----
    Total interest-bearing liabilities..... 237,097,104     12,093,603      5.10
Non-interest-bearing liabilities...........   2,903,969
                                           ------------
    Total liabilities...................... 240,001,073
Equity.....................................  36,456,193
                                           ------------
    Total liabilities and equity...........$276,457,266
                                           ============
Net interest income........................               $  6,181,044
                                                          ============
Net interest rate spread...................                                 1.81%
                                                                           ======
Net yield on interest-earning assets                                        2.34%
                                                                           ======
Ratio of average interest-earning assets
  to average interest-bearing liabilities                                  111.55%
                                                                           ======
</TABLE>

                                       11
<PAGE>

RATE/VOLUME ANALYSIS

     The following  table analyzes  dollar amounts of changes in interest income
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,
                             -------------------------------------------------------------------------------------------
                                            2001      vs.       2000                 2000       vs.       1999
                             -----------------------------------------------    ----------------------------------------
                                           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            $ 1,068    $    57      $     6    $ 1,131    $ 1,272    $   206    $    29    $ 1,507
  Investment securities and
    mortgage- backed
    securities                   (710)      (201)          10       (901)      (553)       612        (14)        45
  Other interest-earning
     assets                       236       (132)         (64)        40       (171)       231        (78)       (18)
                              --------------------------------------------------------------------------------------
     Total interest-earning
        assets                    594       (276)         (48)       270        548      1,049        (63)     1,534
                              -------    -------      -------    -------    -------    -------    -------    -------

Interest expense:
  Deposits                        435        709           48      1,192         44       (157)        (1)      (114)
  FHLB advances                  (406)       212          (12)      (206)       999        107         20      1,126
  Note payable                     (6)        --           --         (6)        (6)        --         --         (6)
                              --------------------------------------------------------------------------------------
     Total interest-bearing
        liabilities                23        921           36        980      1,037        (50)        19      1,006
                              -------    -------      -------    -------    -------    -------    -------    -------
Change in net interest
  income                      $   571    $(1,197)     $   (84)   $  (710)   $  (489)   $ 1,099    $   (82)   $   528
                              =======    =======      =======    =======    =======    =======    =======    =======
</TABLE>


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 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

                                       12
<PAGE>

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.


                                       13
<PAGE>

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 non-interest 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 13 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 on
decreased 2.03 percent.

     Interest Expense. Total average interest bearing liabilities increased $2.5
million,  while the interest rate on such  liabilities  increased  from 5.13% to
5.46%. The average balance of deposits increased $9.5 million,  deposit interest
expense increased $1.2 million,  and the average cost increased 50 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  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,

                                       14

<PAGE>

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  non-interest  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 benefit,  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.


COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2000 AND 1999

     Net Income.  Net income for the year ended June 30, 2000 was  approximately
$786,000  compared to net income of $416,000  for the year ended June 30,  1999.
The  changes  resulted  primarily  from an increase  in net  interest  income of
$528,000,  an  increase  in the tax  benefit of  $277,000,  less an  increase in
non-interest expense of $457,000.

     Net Interest  Income.  Net interest income for the year ended June 30, 2000
was $6.7 million,  or $528,000 more than net interest  income for the year ended
June 30, 1999.  This  improvement is primarily due to rate increases on interest
earning assets, offset by volume increases on interest bearing liabilities.  The
total average  interest  earning assets  increased  $4.8 million,  and the yield
increased from 6.91% to 7.36%  primarily due to a 19 basis point increase in the
average yield on loans while total average loans increased $15.3 million.  Total
average  interest  bearing  liabilities  increased  $18.3 million,  and the cost
increased slightly from 5.10% to 5.13%.

     Provision for Loan Losses.  During the year ended June 30, 2000, the Bank's
management  continued  its  review  of  loan  files.  Based  on  these  reviews,
management  did not make any  provisions  for loan losses in the year ended June
30,  2000.  The  allowance  for loan  losses of $1.2  million  at June 30,  2000
represented 0.85% of gross outstanding loans. Nonperforming loans as of June 30,
2000 as a percent of total  loans  increased  to 0.64% from 0.46% as of June 30,
1999.

     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 modify loss experience factors during the year.

                                       15
<PAGE>

     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,  2000 was  approximately  $1,040,000  compared  to
approximately  $1,019,000  for the year ended June 30,  1999.  This  increase of
approximately $21,000 is the result of gains on sales of loans and the growth of
the Bank's  checking  and  savings  accounts,  resulting  in  increased  service
charges,  less a decrease in gains on sales of investment  securities  available
for sale of $262,000.

     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, 2000 was $7.3 million  compared
to $6.8 million for the year ended June 30, 1999.  Significant components of the
increase  in  non-interest  expense  are a $330,000  increase  in  salaries  and
benefits primarily resulting from increased staff, an increase of $93,000 in net
occupancy expense, a $152,000 increase in other expenses, and a $30,000 decrease
in professional  fees. It is anticipated by management that future  professional
fees will continue to decline.

     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.  Among the  activities  planned or in
process  are a full  service  branch in  Bryant,  Arkansas  in place of the loan
production  office,  and continued  increased loan  originations in the areas of
multi-family residential, commercial business, and consumer loans.

     Income Taxes. The effective income tax rates for the Company for the fiscal
years ended June 30, 2000 and 1999 were (76.7)% and (18.1)%,  respectively.  The
variance in the effective rate from the expected statutory rate is due primarily
to tax exempt interest.

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

     At June 30, 2001, the Bank had designated  securities  with a fair value of
approximately  $120.1  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.

                                       16
<PAGE>

     At June 30, 2001, the Bank had outstanding  approximately  $12.0 million in
commitments to originate  loans  (including  unfunded  portions of  construction
loans) and $1.3 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 $86.9 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.


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 establishes  maximum decreases in the
Bank's estimated NPV of 20%, 35%, and 55% in the event of assumed  immediate and
sustained  100 BP to 300 BP,  increases or decreases in market  interest  rates,
respectively.  In addition,  in the event of the 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  6.00%,  6.50%,  and 7.00%
respectively.

                                       17
<PAGE>

     The following  tables present the Bank's projected change in NPV as of June
30, 2001 and 2000, as calculated by OTS,  based on  information  provided to the
OTS by the Bank. Based on such information, from June 30, 2000 to June 30, 2001,
the Bank's interest rate risk has become less liability sensitive throughout the
period.

<TABLE>
<CAPTION>
                                                      2001
        --------------------------------------------------------------------------------------------------
          CHANGE IN                                                    NPV
         INTEREST RATES                NET PORTFOLIO VALUE            RATIO        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
</TABLE>


<TABLE>
<CAPTION>

                                                      2000
        --------------------------------------------------------------------------------------------------
          CHANGE IN                                                    NPV
         INTEREST RATES                NET PORTFOLIO VALUE            RATIO        BP CHANGE IN NPV RATIO
             IN BP         --------------------------------------     -----        ----------------------
         (RATE SHOCK)        AMOUNT       $ CHANGE     % CHANGE
         ------------        ------       --------      --------
         <S>                <C>           <C>             <C>          <C>                    <C>
            +300            $19,349       $(14,482)       (43)%        7.31 %                 (428)
            +200             23,842         (9,989)       (30)         8.73                   (286)
            +100             28,693         (5,138)       (15)        10.17                   (142)
              +0             33,831                                   11.59
            -100             38,838          5,007         15         12.87                    128
            -200             42,604          8,773         26         13.71                    212
            -300             45,416         11,585         34         14.23                    264

</TABLE>


     At June 30, 2001, it was estimated  that the Bank's NPV could decrease 11%,
20%, and 31% in the event of 100 BP, 200 BP, and 300 BP respective  increases in
market  interest  rates,  and could  increase  8%, 13%,  and 19% in the event of
equivalent decreases in market interest rates. These calculations  indicate that
the Bank's NPV could be adversely affected by significant  increases in interest
rates. The decrease in interest-rate risk compared to June 30, 2000 is primarily
due to replacing  maturing  shorter-term  FHLB  advances with  longer-term  core
deposits.  This  strategy  is coupled  with  replacing  shorter-term  investment
securities with longer-term loans.

     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 and trends,  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, 2001, 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.

                                       18
<PAGE>
                        [Letterhead of Deloitte & Touche]




INDEPENDENT AUDITOR'S REPORT


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


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



/s/ Deloitte & Touche LLP

September 21, 2001


                                       19
<PAGE>
HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2001 AND 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

ASSETS                                                                                  2001                2000
<S>                                                                              <C>              <C>
Cash and due from banks                                                          $   3,302,540    $   3,211,802
Interest bearing deposits with banks                                                15,107,481          137,846
                                                                                 -------------    -------------

  Cash and cash equivalents                                                         18,410,021        3,349,648
Other interest bearing deposits with banks                                                  --           99,000
Investment securities:
  Available for sale, at fair value (amortized cost at June 30, 2001
    and 2000, of $120,222,942 and $139,920,654, respectively)                      120,082,177      132,543,065
Loans receivable, net of allowance at June 30, 2001 and 2000,
    of $1,446,114 and $1,231,709, respectively                                     131,651,421      135,626,505
Accrued interest receivable                                                          2,017,188        1,852,887
Federal Home Loan Bank stock                                                         4,735,800        6,223,500
Premises and equipment, net                                                          7,564,681        6,552,484
Goodwill, net                                                                          206,250          281,250
Real estate held for sale                                                              398,132          359,608
Other assets                                                                         2,532,980        4,304,228
                                                                                 -------------    -------------
TOTAL                                                                            $ 287,598,650    $ 291,192,175
                                                                                 =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
  Deposits                                                                       $ 161,285,179    $ 144,873,071
  Federal Home Loan Bank advances                                                   91,915,694      115,609,029
  Advance payments by borrowers for
      taxes and insurance                                                              199,470          139,554
  Accrued interest payable                                                             972,900          917,415
  Note payable                                                                          80,000          160,000
  Other liabilities                                                                  1,211,073        1,252,556
                                                                                 -------------    -------------

                                    Total liabilities                              255,664,316      262,951,625
                                                                                 -------------    -------------

COMMITMENTS AND CONTINGENCIES (Notes 12 and 14)
STOCKHOLDERS' EQUITY:
  Common stock, $.01 par value, 10,000,000 shares authorized, 2,645,000 shares
     issued, 1,935,445 and 2,046,580 shares
     outstanding at June 30, 2001 and 2000, respectively                                26,450           26,450
  Additional paid-in capital                                                        25,914,132       25,945,850
  Unearned ESOP shares                                                              (1,058,000)      (1,269,600)
  Unearned MRP shares                                                                 (155,601)        (220,104)
  Accumulated other comprehensive loss                                                 (59,600)      (4,401,668)
  Retained earnings                                                                 14,256,684       14,110,667
                                                                                 -------------    -------------

                                                                                    38,924,065       34,191,595
                                                                                 -------------    -------------

Treasury stock, at cost, 709,555 and 598,420
  shares June 30, 2001 and 2000 respectively                                        (6,989,731)      (5,951,045)
                                                                                 -------------    -------------

                                    Total stockholders' equity                      31,934,334       28,240,550
                                                                                 -------------    -------------

TOTAL                                                                            $ 287,598,650    $ 291,192,175
                                                                                 =============    =============
</TABLE>

See notes to consolidated financial statements.

                                       20

<PAGE>
HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 2001, 2000 AND 1999


<TABLE>
<CAPTION>

                                                 2001            2000            1999
INTEREST INCOME:
<S>                                         <C>             <C>             <C>
   Interest and fees on loans               $ 11,622,492    $ 10,491,741    $  8,984,708
   Investment securities:
     Taxable                                   6,401,378       7,352,290       7,879,802
     Nontaxable                                1,529,550       1,479,536         906,755
   Other                                         524,980         485,332         503,382
                                            ------------    ------------    ------------

        Total interest income                 20,078,400      19,808,899      18,274,647

INTEREST EXPENSE:
   Deposits                                    7,699,484       6,507,174       6,620,808
   Federal Home Loan Bank advances             6,372,982       6,579,482       5,453,795
   Note payable                                    7,000          13,000          19,000
                                            ------------    ------------    ------------

        Total interest expense                14,079,466      13,099,656      12,093,603
                                            ------------    ------------    ------------

NET INTEREST INCOME                            5,998,934       6,709,243       6,181,044

PROVISION FOR LOAN LOSSES                        296,000              --              --
                                            ------------    ------------    ------------

NET INTEREST INCOME AFTER PROVISION
   FOR LOAN LOSSES                             5,702,934       6,709,243       6,181,044

NONINTEREST INCOME:
   Service charges on deposit accounts           765,532         555,292         328,958
   Gain on sales of investment securities
     available for sale                               --              --         261,996
   Other                                         613,080         484,330         427,700
                                            ------------    ------------    ------------

        Net noninterest income                 1,378,612       1,039,622       1,018,654
                                            ------------    ------------    ------------

NONINTEREST EXPENSES:
   Salaries and employee benefits              3,875,094       3,904,807       3,574,562
   Net occupancy expense                       1,033,684         900,948         808,255
   Federal insurance premiums                     50,330          79,692          88,035
   Data processing                               312,551         326,528         397,585
   Professional fees                             624,622       1,050,873       1,080,916
   Loss on impaired investment security               --              --           9,000
   Amortization of goodwill                       75,000          75,000          75,000
   Other                                         957,837         966,262         814,362
                                            ------------    ------------    ------------

        Total noninterest expenses             6,929,118       7,304,110       6,847,715
                                            ------------    ------------    ------------

INCOME BEFORE INCOME TAXES                       152,428         444,755         351,983

INCOME TAX BENEFIT                              (467,888)       (341,147)        (63,658)
                                            ------------    ------------    ------------

NET INCOME                                  $    620,316    $    785,902    $    415,641
                                            ------------    ------------    ------------
</TABLE>

                                                                     (Continued)
                                       21
<PAGE>

HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
<TABLE>
<CAPTION>

                                                          2001          2000          1999
<S>                                                   <C>           <C>            <C>
OTHER COMPREHENSIVE INCOME (LOSS),
   NET OF TAX
     Unrealized holding gain (loss) on securities
       arising during period                          $ 4,342,068   $ (1,780,995)  $(2,501,663)
     Reclassification adjustment for
       gains included in net income                            --             --      (172,917)
                                                      -----------   ------------   -----------

                  Other comprehensive income (loss)     4,342,068     (1,780,995)   (2,674,580)
                                                      -----------   ------------   -----------

COMPREHENSIVE INCOME (LOSS)                           $ 4,962,384   $   (995,093)  $(2,258,939)
                                                      ===========   ============   ===========

WEIGHTED AVERAGE COMMON SHARES
   OUTSTANDING                                          1,866,387      1,988,984     2,344,083
                                                      ===========   ============   ===========

EARNINGS PER SHARE:
   Basic                                              $      0.33   $       0.40   $      0.18
                                                      ===========   ============   ===========

   Diluted                                            $      0.33   $       0.40   $      0.18
                                                      ===========   ============   ===========

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

</TABLE>

                                                                    (Concluded)

See notes to consolidated financial statements.

                                       22
<PAGE>

HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------

                                    ISSUED          ADDITIONAL                                 ACCUMULATED
                                COMMON STOCK         PAID-IN       UNEARNED       UNEARNED       OTHER
                              SHARES     AMOUNT      CAPITAL         ESOP           MRP       COMPREHENSIVE     RETAINED
                                                                    SHARES         SHARES        INCOME         EARNINGS
                             ---------  --------   ------------  ------------   -----------   ----------      -------------
<S>                          <C>        <C>        <C>           <C>            <C>              <C>          <C>
BALANCE, JULY 1, 1998        2,645,000  $ 26,450   $ 25,861,230  $ (1,692,800)  $  (578,528)     $53,907      $  14,008,665

Net income                                                                                                          415,641
Common stock committed
  to be released for ESOP                                 8,570       211,600
MRP shares earned                                       124,072                     188,472
Net change in unrealized
  gain (loss) on securities
  available for sale, net of tax                                                              (2,674,580)
Treasury stock purchased
Dividends paid                                                                                                     (592,612)
                             ---------  --------   ------------  ------------   -----------   ----------      -------------
BALANCE, JUNE 30, 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
                             =========  ========   ============  ============   ===========   ==========      =============

<CAPTION>


                              TREASURY      TREASURY       TOTAL
                               STOCK         STOCK      STOCKHOLDERS'
                               SHARES        AMOUNT        EQUITY
                              --------    -------------   ------------
<S>                             <C>       <C>              <C>
BALANCE, JULY 1, 1998               --             --     $ 37,678,924

Net income                                                     415,641
Common stock committed
  to be released for ESOP                                      220,170
MRP shares earned                                              312,544
Net change in unrealized
  gain (loss) on securities
  available for sale, net of tax                            (2,674,580)
Treasury stock purchased       315,456      $(3,242,527)    (3,242,527)
Dividends paid                                                (592,612)
                              --------    -------------   ------------
BALANCE, JUNE 30, 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
                              =======     =============   ============

</TABLE>


See notes to consolidated financial statements.

                                       23

<PAGE>

HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
<TABLE>
<CAPTION>

                                                                   2001               2000            1999

<S>                                                             <C>             <C>             <C>
OPERATING ACTIVITIES:
  Net income                                                    $    620,316    $    785,902    $    415,641
  Adjustments to reconcile net income to net
    cash provided (used) by operating activities:
    Depreciation                                                     730,212         649,779         544,142
    Amortization (accretion) of:
      Deferred loan origination fees                                 116,232        (116,260)         (2,729)
      Goodwill                                                        75,000          75,000          75,000
      Premiums and discounts on loans, net                            (4,487)         (4,619)           (510)
      Premiums and discounts on investment securities, net            68,487         119,181         323,110
    Provision for loan loss                                          296,000              --              --
    Deferred income taxes                                           (403,424)       (477,356)       (311,921)
    Net gain on sale of investment securities
      available for sale                                                  --              --        (261,996)
    Loss on impaired investment security                                  --              --           9,000
    Loss on disposal of assets, net                                       --              --           5,464
    Origination of loans held for sale                           (13,502,308)     (9,239,668)    (14,751,445)
    Proceeds from sales of loans held for sale                    12,732,692      10,160,826      13,140,464
    Stock compensation expense                                       244,385         333,530         408,642
    Change in accrued interest receivable                           (164,301)       (135,064)        121,503
    Change in accrued interest payable                                55,485         102,218         171,310
    Change in other assets                                          (720,084)        826,402        (321,083)
    Change in other liabilities                                      (41,483)        (23,113)         72,750
                                                                ------------    ------------    ------------

        Net cash provided (used) by operating activities             102,722       3,056,758        (362,658)

INVESTING ACTIVITIES:
  Purchases of investment securities available for sale                   --      (3,302,892)    (94,991,103)
  Purchases of loans                                                      --         (82,547)             --
  Redemption (purchase) of Federal Home Loan Bank stock            1,487,700        (844,400)     (1,930,200)
  Proceeds from sales of investment securities - available
   for sale                                                               --              --      48,024,577
  Loan (originations), net of repayments                           4,336,955     (21,181,354)     (8,968,498)
  Principal payments on investment securities                     19,629,225      14,768,810      22,279,177
  Proceeds from maturities of other interest bearing deposits         99,000         619,000       2,064,000
  Net (increase) decrease in land held for resale                    (38,524)        103,870          (2,288)
  Proceeds from sales of premises and equipment                           --              --          14,426
  Purchases of premises and equipment                             (1,742,409)       (701,559)     (1,462,969)
                                                                ------------    ------------    ------------

        Net cash provided (used) by investing activities          23,771,947     (10,621,072)    (34,972,878)
</TABLE>

                                       24
                                                                (Continued)



<PAGE>

HCB BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
<TABLE>
<CAPTION>
                                                                 2001            2000             1999
<S>                                                       <C>              <C>              <C>
FINANCING ACTIVITIES:
  Net increase (decrease) in deposits                     $  16,412,108    $  (1,423,527)   $   4,365,268
  Advances from Federal Home Loan Bank                      213,740,000      281,234,000      124,128,000
  Repayment of Federal Home Loan Bank advances             (237,433,335)    (270,148,390)     (87,725,649)
  Net increase (decrease) in advance payments by
    borrowers for taxes and insurance                            59,916           11,112          (80,800)
  Purchase of treasury stock                                 (1,038,686)      (2,708,518)      (3,242,527)
  Purchase of shares for the management retention plan               --               --         (722,328)
  Repayment of note payable                                     (80,000)         (80,000)         (80,000)
  Dividends paid                                               (474,299)        (506,929)        (592,612)
                                                          -------------    -------------    -------------

              Net cash provided by financing activities      (8,814,296)       6,377,748       36,049,352
                                                          -------------    -------------    -------------

NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                           15,060,373       (1,186,566)         713,816

CASH AND CASH EQUIVALENTS:
  Beginning of year                                           3,349,648        4,536,214        3,822,398
                                                          -------------    -------------    -------------

  End of year                                             $  18,410,021    $   3,349,648    $   4,536,214
                                                          =============    =============    =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
  Cash paid for:
    Interest                                              $  14,023,981    $  12,997,438    $  11,922,293
                                                          =============    =============    =============

    Income taxes                                          $     150,000    $          --    $      95,000
                                                          =============    =============    =============
</TABLE>

                                                                     (Concluded)
See notes to consolidated financial statements.

                                       25
<PAGE>
HCB BANCSHARES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
--------------------------------------------------------------------------------


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  generally  accepted  accounting  principles  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.

     OTHER  INTEREST  BEARING  DEPOSITS  WITH  BANKS  - Other  interest  bearing
deposits with banks  represents  certificates  of deposit in other banks held by
the Company not meeting the definition of a cash equivalent.

     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.

     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,

                                       26
<PAGE>

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.

     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.

                                       27
<PAGE>

     GOODWILL AND LONG LIVED ASSETS - Goodwill is being amortized over six years
using the  straight-line  method.  Goodwill  and other  long  lived  assets  are
reviewed for recoverability whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.

     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,  1,988,984,
and 2,344,083  weighted-average  common shares  outstanding  for the years ended
June 30, 2001,  2000,  and 1999,  respectively.  Weighted-average  common shares
outstanding  was the same for  basic  and  diluted  in  those  years.  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,  2000,
and 1999.

     STOCK PURCHASED FOR OPTION BENEFIT TRUST - As of June 30, 2001, the Company
has  purchased  a total of 223,544  shares of stock and placed them in its stock
option  plan  trust.  These  shares  are  included  in  treasury  stock  on  the
accompanying  condensed  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 2000  and 1999  consolidated
financial  statements have been  reclassified to conform to the  classifications
adopted for reporting in 2001.

     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,  however,

                                       28
<PAGE>

early  adoption  is allowed for  companies  that have not issued  first  quarter
financial  statements  as of July 1,  2001.  The  Company  plans  to  adopt  the
provisions of this  statement on July 1, 2002,  and is currently  evaluating the
effect on the Company's consolidated financial statements.

                                       29
<PAGE>





2.    INVESTMENT SECURITIES

     Investment securities consisted of the following at June 30:

<TABLE>
<CAPTION>

                                                                                 2001
                                                ------------------------------------------------------------------
                                                                      GROSS            GROSS
                                                 AMORTIZED         UNREALIZED        UNREALIZED           FAIR
      AVAILABLE FOR SALE                           COST               GAINS            LOSSES            VALUE

   <S>                                          <C>                  <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>

<TABLE>
<CAPTION>

                                                                                 2000
                                                ------------------------------------------------------------------
                                                                      GROSS             GROSS
                                                 AMORTIZED         UNREALIZED        UNREALIZED           FAIR
      AVAILABLE FOR SALE                           COST               GAINS           LOSSES             VALUE

     <S>                                      <C>                  <C>            <C>             <C>
      U.S. Government and agencies           $      6,107,679                     $     226,776   $      5,880,903
      Municipal securities                         30,459,285     $    1,977          2,260,064         28,201,198
      Equity securities                                63,100                             9,475             53,625
      Mortgage-backed securities                   90,635,969         17,825          4,051,513         86,602,281
      Collateralized mortgage obligations          12,654,621          2,558            852,121         11,805,058
                                                   ----------         ------         ----------        -----------

            Total                              $  139,920,654      $  22,360       $  7,399,949     $  132,543,065
                                                  ===========         ======         ==========        ===========
</TABLE>


     There  were no  significant  gross  realized  gains or  losses  on sales of
available for sale  securities  for the years ended June 30, 2001,  and June 30,
2000 as compared to  approximately  $262,000  gross  realized gains for the year
ended June 30, 1999.

     At  June  30,  2001,   municipal   securities  with  a  carrying  value  of
approximately  $2.1 million were pledged to collateralize  public  deposits.  At
June 30,  2001 and 2000,  mortgage-backed  securities  with a carrying  value of
approximately  $20.7 million and $ 62.3 million,  respectively,  were pledged as
collateral for Federal Home Loan Bank advances.

     The scheduled  maturities of available for sale debt securities at June 30,
2001 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.

                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                        AMORTIZED           FAIR
                                                           COST             VALUE

       <S>                                           <C>               <C>
         Due in one year or less                    $           --    $           --
         Due from one year to five years                 1,854,215         1,900,448
         Due from five years to ten years                1,149,568         1,161,263
         Due after ten years                            29,339,206        29,035,923
                                                        ----------        ----------

                                                        32,342,989        32,097,634

         Equity securities                                  39,750            40,800
         Mortgage-backed securities                     75,714,645        75,784,260
         Collateralized mortgage obligations            12,125,558        12,159,483
                                                        ----------        ----------

               Total                                $  120,222,942    $  120,082,177
                                                       ===========       ===========
</TABLE>

3.    LOANS RECEIVABLE

     Loans receivable consisted of the following at June 30:

<TABLE>
<CAPTION>
                                               2001            2000
<S>                                      <C>              <C>
First mortgage loans:
  One- to four- family residences        $  50,579,375    $  53,789,291
  Multi-family and commercial               57,041,028       56,765,619
  Real estate construction loans            16,008,775       14,264,996
    Less undisbursed loan funds            (12,020,255)      (7,386,539)
                                         -------------    -------------
        Total first mortgage loans         111,608,923      117,433,367

Consumer and other loans:
  Commercial loans                          11,289,519        8,769,131
  Automobile                                 6,779,218        6,460,343
  Consumer and home improvement loans        2,073,650        2,430,684
  Loans collateralized by deposits           2,488,948        2,320,915
    Less undisbursed loan funds             (1,274,468)        (714,443)
                                         -------------    -------------

        Total consumer and other loans      21,356,867       19,266,630

Allowance for loan losses                   (1,446,114)      (1,231,709)
Net deferred loan costs and discounts          131,745          158,217
                                         -------------    -------------

          Loans receivable, net          $ 131,651,421    $ 135,626,505
                                         =============    =============
</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.

     The Company has made loans to its directors,  executive officers, and their
related business interests.  The aggregate dollar amount of loans outstanding to
directors,  officers and their related business interests totaled  approximately
$1.8 million and $0.8 million at June 30, 2001 and 2000, respectively.

     Loans  identified  by management as impaired at June 30, 2001 and 2000 were
not  significant.  The  Company is not  committed  to lend  additional  funds to
debtors whose loans have been modified.

     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.

                                       31
<PAGE>

4.    ACCRUED INTEREST RECEIVABLE

     Accrued interest receivable consisted of the following at June 30:

                                           2001         2000

                Investment securities   $  931,985   $1,109,074
                Loans                    1,085,203      743,813
                                        ----------   ----------

                    Total               $2,017,188   $1,852,887
                                        ==========   ==========

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:

                                         2001            2000            1999

    Balance, beginning of year       $ 1,231,709    $ 1,329,201    $ 1,468,546
    Provision                            296,000             --             --
    Charge-offs, net of recoveries       (81,595)       (97,492)      (139,345)
                                     -----------    -----------    -----------

    Balance, end of year             $ 1,446,114    $ 1,231,709    $ 1,329,201
                                     ===========    ===========    ===========

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 .3% of its total  assets.  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.

7.    PREMISES AND EQUIPMENT

     Premises and equipment consisted of the following at June 30:

                                         2001            2000
Land and buildings                 $  7,154,882    $  5,920,828
Furniture and equipment               3,404,811       2,896,456
                                   ------------    ------------

      Total                          10,559,693       8,817,284

Accumulated depreciation             (2,995,012)     (2,264,800)
                                   ------------    ------------

     Premises and equipment, net   $  7,564,681    $  6,552,484
                                   ============    ============

8.    DEPOSITS

          Deposits are summarized as follows at June 30:
<TABLE>
<CAPTION>

                                                              2001            2000
<S>                                                      <C>            <C>
Demand and NOW accounts, including noninterest-bearing
  deposits of $7,379,892 and $5,650,755 in 2001 and
  2000, respectively                                     $ 38,055,320   $ 23,553,466
Money market                                                5,733,865      9,360,191
Statement savings                                           6,903,036      7,530,432
Certificates of deposit                                   110,592,958    104,428,982
                                                         ------------   ------------

      Total                                              $161,285,179   $144,873,071
                                                         ============   ============
</TABLE>

     The aggregate  amount of short-term  jumbo  certificates  of deposit with a
minimum  denomination  of $100,000  was  approximately  $13.6  million and $11.6
million at June 30, 2001 and 2000, respectively.

                                       32
<PAGE>

     At June 30, 2001,  scheduled  maturities of  certificates of deposit are as
follows:

        Years ending June 30:
             2002                                    $   86,925,381
             2003                                        18,584,475
             2004                                         5,083,102
                                                        -----------
                   Total                             $  110,592,958
                                                        ===========

     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 AND NOTE PAYABLE

     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 $20.7
million at June 30, 2001,  as additional  collateral.  Advances at June 30, 2001
and 2000, have maturity dates as follows:

<TABLE>
<CAPTION>
                                                      2001                                         2000
                                         WEIGHTED                                       WEIGHTED
                                          AVERAGE                                      AVERAGE
                                            RATE           AMOUNT                        RATE              AMOUNT
     <S>                                  <C>            <C>                          <C>            <C>
      Years ending June 30:
         2001                                -- %        $          --                  6.46 %         $  35,045,000
         2002                              5.82              8,050,000                  5.50               7,550,000
         2003                              5.70             12,030,126                  5.70              12,047,991
         2004                              5.65              9,875,000                  5.66               4,875,000
         2005                              5.42              9,721,317                  5.73               7,000,000
         2006                              5.92              4,889,509                  5.89               4,500,000
         Thereafter                        6.07             47,349,742                  6.07              44,591,038
                                           ----             ----------                  ----              ----------

            Total                          5.88 %        $  91,915,694                  6.07 %         $ 115,609,029
                                           ====             ==========                  ====             ===========
</TABLE>

     The note payable of $80,000 at June 30, 2001, is due in annual installments
of $80,000 plus interest  through  September  2001.  The note bears  interest at
7.50% and is  collateralized  by real estate  held for sale and office  premises
with a combined carrying value at June 30, 2001, of approximately $1.5 million.

10.   INCOME TAXES

     Income tax provisions (benefits) are summarized as follows:

<TABLE>
<CAPTION>

                                           Years Ended June 30,
                                  ------------------------------------
                                      2001        2000         1999
<S>                               <C>          <C>          <C>
Income tax provision (benefit):
  Current                         $ (64,464)   $ 136,209    $ 248,263
  Deferred                         (403,424)    (477,356)    (311,921)
                                  ---------    ---------    ---------
       Total                      $(467,888)   $(341,147)   $ (63,658)
                                  =========    =========    =========
</TABLE>
                                       33
<PAGE>

     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,
                            -----------------------------------------------------------------------------------
                                          2001                       2000                          1999
<S>                               <C>              <C>      <C>              <C>    <C>             <C>
Taxes at statutory rate           $  51,826        34.0%    $ 151,217        34.0%  $ 119,674       34.0%
Increase (decrease)
  resulting from:
    Tax exempt income              (520,047)     (341.18)    (503,043)     (113.11)  (304,193)     (86.42)
    Disallowed interest expense      85,650        56.19       67,735        15.23     44,561       12.66
    Change in estimate              (67,000)      (43.95)           0         0.00     64,915       18.44
    Compensation                    (19,825)      (13.01)     (77,301)      (17.38)   (14,389)      (4.09)
    Other, net                        1,508         0.99       20,245         4.56     25,774        7.32
                                  ---------       ------    ---------       ------  ---------       -----

                Total             $(467,888)     (306.96)%  $(341,147)      (76.70)%$ (63,658)     (18.09)%
                                  =========       ======    =========       ======  =========       =====
</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:


                                           2001         2000
Deferred tax assets:
  Allowance for loan losses             $  326,016   $  275,866
  Unrealized loss on investments            81,165    2,975,921
  Deferred compensation                    312,942      306,236
  Net operating loss carryforward        1,147,149      661,092
  AMT credit carryforward                  278,496      278,496
  Investment premiums and discount              --       18,360
  Other                                     13,425       46,048
                                        ----------   ----------
            Total deferred tax assets    2,159,193    4,562,019
Deferred tax liabilities:
  Premises and equipment                   262,610      222,683
  Investment premiums and discount          10,432           --
  Loan fees                                  1,553           --
  FHLB dividends                           327,057      290,462
                                        ----------   ----------
       Total deferred tax liabilities      601,652      513,145
                                        ----------   ----------
       Net deferred tax asset           $1,557,541   $4,048,874
                                        ==========   ==========


     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, 2001, the amount of these reserves totaled approximately
$3,459,119  with an  unrecognized  deferred tax  liability of  $1,177,372.  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 $3,373,968, which will
begin expiring in 2019. The Company's AMT credit  carryforward  of $278,496 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  $1,425,645.  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

                                       34
<PAGE>

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. It is probable that without achievement of the
intended results of the strategy,  a valuation  allowance would be necessary for
the portion of the net deferred tax asset resulting from the carryforwards.

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 $179,882,  $163,578,  and $220,171 was recognized
during the years ended June 30, 2001, 2000, and 1999, 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, 2001 and 2000,  21,160 shares were committed to
be released by the ESOP to participant  accounts.  At June 30, 2001,  there were
105,800 shares allocated to participant accounts and 105,800 unallocated shares.
The fair value of the unallocated  shares amounted to  approximately  $1,343,660
(105,800 shares at $12.70 per share) at June 30, 2001.

     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 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 year ended 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.  During the year ended June 30,
1999,  put options were issued to two  employees  resulting in an expense to the
Company totaling approximately $20,000.

     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 on 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.  On October 29,
1998, the options  committee of the Board of Directors  lowered the option grant
price on the existing 304,140 options granted to current employees and directors
at that date to $9.125 per share,  which was  market  value on that day.  No new
options were granted during the years ended June 30, 2001 or 2000.

     A summary of the status of the  Company's  stock option plan as of June 30,
2001,  and changes  during the years ending June 30, 2000 and 1999, is presented
below:

                                       35


<PAGE>

                                                             WEIGHTED
                                                             AVERAGE
                                                             EXERCISE
OPTIONS                                         SHARES        PRICE

Outstanding at July 1, 1998                     304,300   $   16.00
Granted                                          20,100        9.35
Exercised                                            --          --
Forfeited                                         9,104        9.22
                                                -------      ------

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
                                                -------      ------

Options exercisable at June 30, 2001 (vested)   278,993   $    9.13
                                                =======      ======


     Exercise prices for options outstanding at June 30, 2001, range from $9.125
to $9.375 per share.  The weighted  average  remaining  contractual life of such
shares was 6.9 years at June 30, 2001.

     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:

                                       2001
                            AS REPORTED     PRO FORMA

Net income (in thousands)   $    620        $    529
Earnings per share:
    Basic                   $   0.33        $   0.28
    Diluted                 $   0.33        $   0.28


                                     2000
                          AS REPORTED       PRO FORMA

Net income (in thousands)   $    786        $    676
Earnings per share:
    Basic                   $   0.40        $   0.34
    Diluted                 $   0.40        $   0.34


                                       1999
                           AS REPORTED      PRO FORMA

Net income (in thousands)   $    416        $    311
Earnings per share:
    Basic                   $   0.18        $   0.13
    Diluted                 $   0.18        $   0.13


     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:

                                       36
<PAGE>

                                       1999              1998
                                      GRANTS            GRANTS

      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%

     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,  2001)  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,  2001)  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, 2001,  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   $65,000,   $170,000  and  $188,000  in
compensation  expense was recognized during the years ended June 30, 2001, 2000,
and 1999,  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.

     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.

                                       37
<PAGE>

     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.

                                              JUNE 30,
RECONCILIATION OF FUNDED STATUS:               1999
                                             --------
    Actuarial present value of accumulated
       benefit obligations:
        Vested portion                       $450,170
        Vested part of excess assets           98,310
        Non-vested portion                         --
                                             --------
    Accumulated benefit obligation            548,480
    Effect of estimated future pay growth          --
                                             --------

    Projected benefit obligation              548,480
    Plan assets at fair value                 548,480
                                             --------

    Funded status:

    Unrecognized net (gain) or loss                --
    Unrecognized prior service cost                --
    Unrecognized net transition obligation         --
                                             --------

        (Accrued) prepaid pension cost             --
                                             ========


                                             YEAR ENDED
                                            JUNE 30, 1999
                                            -------------
    Determination of pension cost:
        Service cost                               --
        Interest cost                        $ 33,564
        Actual return on assets                10,923
        Net amortization and deferral         (44,487)
                                             --------

             Net periodic pension cost             --
                                             =========

     The  weighted  average  interest  rate used in  determining  the  projected
benefit  obligation was 6.0% in 1999.  The expected  long-term rate of return on
assets was 6.0% for 1999.

     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,  2001,
2000  and  1999,  contributions  to the  plan  totaled  approximately  $181,000,
$184,000, and $162,000, 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, 2001, 2000 or 1999.

     EMPLOYMENT  AGREEMENTS  - Certain  executive  officers  of the Bank and the
Company  have  employment   agreements  with  one-year   renewable  terms.  Such
agreements  provide  for  termination  pay  and  other  benefits  under  certain
circumstances. Aggregate termination pay is approximately $0.70 million.

     CHANGE-IN-CONTROL AGREEMENTS - As of June 30, 2001, 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 299%
of the officers' compensation.  The aggregate benefits total approximately $0.50
million.  Subsequent  to June 30, 2001,  additional

                                       38
<PAGE>

officers  were  provided with  change-in-control  agreements  that provide for a
range of 25% to 299% of the officers' compensation. The aggregate benefits total
of these new agreements is approximately $0.48 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.

     The Company had the following outstanding commitments at June 30, 2001:

  Undisbursed construction loans                                 $   6,817,867
  Commitments to originate mortgage loans                            5,202,388
  Unused lines of credit                                             1,274,468
                                                                    ----------

       Total                                                     $  13,294,723
                                                                    ==========


     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, 2001, 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:

                                       39
<PAGE>
<TABLE>
<CAPTION>
                                                       JUNE 30, 2001                JUNE 30, 2000
                                                                 ESTIMATED                      ESTIMATED
                                                  CARRYING         FAIR          CARRYING         FAIR
                                                    VALUE          VALUE          VALUE           VALUE
<S>                                            <C>            <C>            <C>            <C>
      ASSETS:
  Cash and due from banks                      $  3,302,540   $  3,302,540   $  3,211,802   $  3,211,802
  Interest bearing deposits with banks           15,107,481     15,107,481        137,846        137,846
  Other interest bearing deposits with banks             --             --         99,000         99,000
  Investment securities:
    Available for sale                          120,082,177    120,082,177    132,543,065    132,543,065
  Loans receivable, net                         131,651,421    133,015,674    135,626,505    132,485,000
  Accrued interest receivable                     2,017,188      2,017,188      1,852,887      1,852,887
  Federal Home Loan Bank stock                    4,735,800      4,735,800      6,223,500      6,223,500

LIABILITIES
  Deposits:
    Demand, NOW, money
      market and regular savings                 50,692,221     50,692,221     40,444,089     40,444,089
    Certificates of deposit                     110,592,958    111,361,694    104,428,982    104,225,000
  Federal Home Loan Bank advances                91,915,694     92,800,235    115,609,029    111,141,000
  Advance payments by
    borrowers for taxes and insurance               199,470        199,470        139,554        139,554
  Accrued interest payable                          972,900        972,900        917,415        917,415
  Note payable                                       80,000         80,019        160,000        161,000
</TABLE>

     For cash and due from banks,  interest bearing  deposits with banks,  other
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.

     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,  2001 and 2000.  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.

                                       40
<PAGE>

     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.

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, 2001 and 2000, 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.

                                       41
<PAGE>

     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
                                                    ------      -----    ------     -----      ------        -----
      AS OF JUNE 30, 2001:
<S>                                                <C>         <C>        <C>        <C>        <C>          <C>
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

      AS OF JUNE 30, 2000:

Tier I (Core) Capital to Adjusted Total Assets     $ 29,437    10.02 %    $ 11,756   4.00 %     $ 14,695     5.00 %
Total Risk-Based Capital to Risk-weighted Assets     30,669    21.79 %      11,262   8.00 %       14,077    10.00 %
Tier I (Core) Capital to Risk-weighted Assets        29,437    20.91 %         N/A    N/A          8,446     6.00 %
Tangible Capital to Tangible Assets                  29,437    10.02 %       4,408   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.

                                       42
<PAGE>



17.   PARENT COMPANY ONLY FINANCIAL INFORMATION

     The following  condensed  statements of financial  condition as of June 30,
2001 and 2000,  and condensed  statements of income and cash flows for the years
ended  June 30,  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, 2001 AND 2000
ASSETS                                           2001           2000
Deposit in Bank                              $   515,975   $ 1,089,752
Cash equivalents                                 134,522        79,145
                                             -----------   -----------
  Cash and cash equivalents                      650,497     1,168,897
Investment in Bank                            29,861,612    25,898,664
Loans receivable                                 700,000       700,000
Investment securities                             40,800        53,625
Other assets                                     909,850       419,364
                                             -----------   -----------
TOTAL ASSETS                                 $32,162,759   $28,240,550
                                             ===========   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities       $   228,425   $        --
Stockholders' equity                          31,934,334    28,240,550
                                             -----------   -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $32,162,759   $28,240,550
                                             ===========   ===========
CONDENSED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2001 AND 2000

INCOME:                                           2001           2000
 Dividend from Bank                          $ 1,000,000   $        --
  Interest and dividend income                   230,421       346,007
                                             -----------   -----------
   Total income                                1,230,421       346,007
EXPENSES:
  Operating expenses                             191,509       301,181
                                             -----------   -----------
INCOME BEFORE INCOME TAXES AND EQUITY IN
  UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY    1,038,912        44,826
INCOME TAX PROVISION (BENEFIT)                    13,000        15,242
                                             -----------   -----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
  EARNINGS OF BANK SUBSIDARY                   1,025,912        29,584
EQUITY IN UNDISTRIBUTED EARNINGS (LOSS) OF
   BANK SUBSIDIARY                              (405,596)      756,318
                                             -----------   -----------
NET INCOME                                   $   620,316   $   785,902
                                             ===========   ===========

                                       43

<PAGE>

HCB BANCSHARES, INC.
(PARENT COMPANY ONLY)

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

OPERATING ACTIVITIES:                                                  2001           2000
<S>                                                               <C>            <C>
   Net income                                                     $   620,316    $   785,902
   Adjustments to reconcile net income to net cash provided
      (used) by operating activities:
     Equity in undistributed (earnings) loss of Bank subsidiary       405,596       (756,318)
     Changes in operating assets and liabilities:
       Other assets                                                  (259,752)       954,507
       Accrued expenses and other liabilities                         228,425     (1,179,190)
                                                                  -----------    -----------
            Net cash provided (used) by operating activities          994,585       (195,099)
                                                                  -----------    -----------
INVESTING ACTIVITIES:
   Purchase of investments                                                 --             --
   Purchase loan, net of repayments                                        --      1,713,019
                                                                  -----------    -----------
            Net cash provided by investing activities                      --      1,713,019
                                                                  -----------    -----------
FINANCING ACTIVITIES:
   Dividends paid                                                    (474,299)      (506,929)
   Purchase of treasury stock                                      (1,038,686)    (2,708,518)
                                                                  -----------    -----------
            Net cash used by financing activities                  (1,512,985)    (3,215,447)
                                                                  -----------    -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS                            (518,400)    (1,697,527)
CASH AND CASH EQUIVALENTS:
   Beginning of period                                              1,168,897      2,866,424
                                                                  -----------    -----------
   End of period                                                  $   650,497    $ 1,168,897
                                                                  ===========    ===========
</TABLE>
                                       44
<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:

                                                  YEAR ENDED JUNE 30, 2001
                                      ------------------------------------------
                                       BEFORE TAX     TAX EXPENSE    NET-OF-TAX
                                         AMOUNT        (BENEFIT)      AMOUNT
                                                        AMOUNT

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
                                        ==========   ==========   ==========


                                                  YEAR ENDED JUNE 30, 2000
                                      ------------------------------------------
                                       BEFORE TAX     TAX EXPENSE    NET-OF-TAX
                                         AMOUNT         AMOUNT         AMOUNT


UNREALIZED GAINS ON SECURITIES:
 Unrealized holding gain 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 income   $(2,991,525)  $(1,210,530)  $(1,780,995)
                                        ===========   ===========   ===========


                                                  YEAR ENDED JUNE 30, 1999
                                      ------------------------------------------
                                       BEFORE TAX     TAX EXPENSE    NET-OF-TAX
                                         AMOUNT        (BENEFIT)       AMOUNT

UNREALIZED GAINS ON SECURITIES:
 Unrealized holding gain on securities
   arising during period                $(3,790,398)  $(1,288,735)  $(2,501,663)
 Less reclassification adjustment for
   (gains) losses included in net income   (261,996)      (89,079)     (172,917)
                                        -----------   -----------   -----------
           Other comprehensive income   $(4,052,394)  $(1,377,814)  $(2,674,580)
                                        ===========   ===========   ===========


19.   SUBSEQUENT EVENTS

     Subsequent to June 30, 2001,  the Company  purchased  77,803 shares for the
stock option plan trust at a cost of approximately  $985,000. In addition,  from
July 1, 2001 through  September 17, 2001, 16,053 option shares were exercised at
an average  price of $9.125 per share.  From July 1, 2001 through  September 17,
2001, the Company also  purchased  69,866 shares in treasury stock at an average
cost of $12.58 per share for a total of approximately $879,000.

     In addition,  subsequent to June 30, 2001,  certain  officers were provided
with  change-in-control  agreements  ranging from 25% to 299% of annual  salary.
Aggregate  change-in-control pay for these new agreements is $0.48 million as of
August 31, 2001.

     On September 5, 2001 the Company  filed a Form 8-K Current  Report with the
SEC regarding a standstill  agreement  entered into with a major  stockholder on
August 29,  2001.  Please  refer to the Form 8-K  Current  Report for  specifics
regarding this agreement.

                                       45
<PAGE>

                              CORPORATE INFORMATION

DIRECTORS

Vida H. Lampkin
  Chairman of the Board

Cameron D. McKeel
 President and Chief
    Executive Officer

Bruce D. Murry
   Self-employed
   Camden, Arkansas

Carl E. Parker, Jr.
   General Manager, Camden Monument Co.
   Camden, Arkansas

Clifford Steelman
   Senior Human Resource Administrator,
   Atlantic Research Corporation
   Camden, Arkansas

Ned Ray Purtle
   Self-employed
   Hope, Arkansas

F. Michael Akin
   President, CEO - Akin Industries
   Monticello, Arkansas

EXECUTIVE OFFICERS

William C. Lyon
   Senior Vice President and Chief Lending Officer

Paula J. Bergstrom
   Senior Vice President Administration and Secretary

Scott A. Swain
   Senior Vice President and Chief Financial Officer

ANNUAL STOCKHOLDERS
   MEETING:

November 15, 2001 - 10:00 a.m.
   Charles O. Ross Center
   746 California Avenue
    Camden, Arkansas
    Record Date - October 4, 2001

MAIN OFFICE:

   237 Jackson Street, S.W.
   Camden, Arkansas

                                       46
<PAGE>

BRANCH OFFICES:

   22461 Interstate 30, Suite 1100A
   Bryant, Arkansas

   1125 Fairview Road SW
   Camden, Arkansas

   610 West 4th Street
   Fordyce, Arkansas

   473 Highway 425 North
   Monticello, Arkansas

   108 South Main Street
   Sheridan, Arkansas

INDEPENDENT AUDITORS:

  Deloitte & Touche, LLP
  111 Center Street, Suite 1800
  Little Rock, Arkansas 72201

GENERAL COUNSEL:

  Robert S. Laney, Esquire
  P.O. Box 777
  Camden, Arkansas  71711-0777

SECURITIES AND REGULATORY
   COUNSEL:

  Stradley Ronon Housley Kantarian  & Bronstein, LLP.
  1220 19th Street, N.W., Suite 700
  Washington, D.C.  20036

STOCK REGISTRAR & TRANSFER
   AGENT

   Registrar and Transfer Company
   Cranford, New Jersey  07016-3572

                                       47