<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-K

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

                     For the fiscal year ended June 30, 1997

                         Commission File Number: 0-22423

                              HCB BANCSHARES, INC.
        -----------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

                   Oklahoma                                       62-1670792
---------------------------------------------              --------------------
(State or other jurisdiction of incorporation                (I.R.S. Employer
               or organization)                             Identification No.)

     237 Jackson Street, Camden, Arkansas                        71701-3941
   ----------------------------------------                      ----------
   (Address of principal executive offices)                      (Zip Code)

       Registrant's telephone number, including area code: (870) 836-6841

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

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X] 

     State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $31,942,638.75 (2,323,101 shares at the last sale price on September 23,
1997 ($13.75 per share); for this purpose, directors, executive officers and the
employee stock ownership plan have not been deemed to be non-affiliates).

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 2,645,000 shares of common
stock as of September 23, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

     1. Portions of the registrant's Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1997 (the "Annual Report"). (Part II)

     2. Portions of the registrant's Proxy Statement for its 1997 Annual Meeting
of Stockholders (the "Proxy Statement"). (Part III)
<PAGE>
 
                                     PART I

Item 1.  Description of Business

General

         HCB Bancshares, Inc. HCB Bancshares, Inc. (the "Company") 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,
including its subsidiary savings bank, Heartland Community Bank, F.S.B., upon
the acquisition of all of the capital stock issued by the Bank upon its
conversion from mutual to stock form, which was completed on April 30, 1997 (the
"Conversion"). Prior to the Conversion, the Company did not engage in any
material operations. Since the Conversion, the Company has had no significant
assets other than the outstanding capital stock of the Bank, a portion of the
net proceeds of the Conversion and a note receivable from the Employee Stock
Ownership Plan ("ESOP"). The Company's principal business is the business of the
Bank.

         The holding company structure permits the Company to expand the
financial services currently offered through the Bank. As a holding company, the
Company has greater flexibility than the Bank to diversify its business
activities through existing or newly formed subsidiaries or through acquisition
or merger with other financial institutions. The Company is classified as a
multiple savings institution holding company and is subject to regulation by the
Office of Thrift Supervision ("OTS"). As long as the Company remains a multiple
savings institution holding company, the Company will be subject to regulatory
restrictions on the activities in which it and its non-savings institution
subsidiaries may engage. See "Regulation -- Regulation of the Company --
Activities Restrictions."

         The Company's executive offices are located at 237 Jackson Street,
Camden, Arkansas 71701-3941, and its telephone number is (870) 836-6841.

         HEARTLAND Community Bank. HEARTLAND Community Bank was organized as a
federally chartered mutual savings and loan association named "First Federal
Savings and Loan Association of Camden" ("First Federal") in 1933, and in 1934
it became a member of the FHLB system and obtained federal deposit insurance. In
May 1996, First Federal acquired the former Heritage Bank, FSB, which retained
its separate federal savings bank charter and deposit insurance as a wholly
owned subsidiary of First Federal (in order to facilitate possible future branch
expansion, in the event the Bank ever becomes subject to Arkansas branching
restrictions, which are based on the home office location of each separately
chartered banking institution), but whose business operations were fully
integrated with those of First Federal. In September 1996, First Federal and
Heritage changed their names to HEARTLAND Community Bank and HEARTLAND Community
Bank, F.S.B., respectively. The Bank itself currently operates through four full
service banking offices located in Camden (2), Fordyce and Sheridan, Arkansas,
and its subsidiary savings bank operates through two full service banking
offices located in Little Rock and Monticello, Arkansas and a loan production
office in Bryant, Arkansas. At June 30, 1997, the Bank had total assets of
$200.3 million, deposits of $151.2 million and equity of $37.7 million, or 18.8%
of total assets.

         Historically, the principal business strategy of the Bank, like most
other savings institutions in Arkansas and elsewhere, has been to accept
deposits from residents of the communities served by the Bank's branch offices
and to invest those funds in single-family mortgage loans to those and other
local residents. In this manner, the Bank and countless other independent
community-oriented savings institutions operated safely and soundly for
generations. In recent years, however, as the banking business nationwide and in
the Bank's primary market area in particular has become more competitive,
smaller savings institutions like the Bank have come under increasing market
pressure either to grow and increase their profitability or to be acquired by a
larger institution. Moreover, during this period the Bank's market area
experienced only limited economic growth.

                                       1
<PAGE>
 
         In September 1995, the Bank's Board of Directors carefully considered
the Bank's historical results of operations, current financial condition and
future business prospects and, in consultation with the Bank's executive
officers, determined to strengthen the Bank's competitiveness and profitability
by concentrating its business strategy as an independent community bank on
expanding the Bank's products and services and growing its customer and asset
base. Since then, the Bank has actively sought to implement this strategy by
adding two new executive officers -- Cameron McKeel as Executive Vice President
and William Lyon as Senior Vice President and Chief Lending Officer -and more
than doubling the Bank's total employees, by acquiring the former Heritage Bank,
FSB, which added to the Bank's branch network additional branches in the growing
and potentially lucrative Little Rock and Monticello banking markets, by
upgrading selected branch office facilities, by expanding the types of loans and
deposit accounts offered by the Bank, by updating the Bank's name and corporate
identity from First Federal Savings and Loan Association of Camden to HEARTLAND
Community Bank and by completing the Conversion. Throughout this period, the
Bank's executive officers have worked with the Bank's directors and with the
Bank's entire staff to formulate and effectuate the Bank's current strategic
plan.

         On a going forward basis, the Bank's current business strategy, as
developed and adopted by all of the Bank's directors, officers and employees,
incorporates the following key elements: (i) remaining an independent community-
oriented financial institution by continuing to provide the quality service that
only a locally based institution and its dedicated staff can deliver, including
the possible retention of additional executive officers in the future as the
Bank's growth and other needs may warrant; (ii) strengthening the Bank's core
deposit base and decreasing interest costs and increasing fee income by
expanding the Bank's deposit facilities and products, including the addition and
expansion of branch offices, the planned installation of ATMs, the introduction
of debit cards and a planned emphasis on attracting consumer demand deposits;
(iii) increasing loan yields and fee income while maintaining asset quality by
emphasizing the origination of higher yielding and shorter term loans,
especially commercial and multi-family real estate loans and consumer and
commercial business loans, for the Bank's portfolio while increasingly
originating lower yielding longer term single-family residential loans
principally for resale to investors; (iv) using the capital raised in the
Conversion to support the bank's future growth; and, (v) to complement the
Bank's internally generated growth, potentially acquiring one or more banking
institutions or other financial companies if attractive opportunities arise.
While it is expected that the Bank may experience especially high deposit and
loan growth in the relatively high income and growth segments of the Bank's
primary market area, particularly in the Sheridan, Monticello, Bryant and,
possibly, Little Rock areas, management expects to find significant deposit
growth and lending opportunities throughout central Arkansas.

         As federally chartered savings institutions, each of the Bank and its
subsidiary savings bank is subject to extensive regulation by the OTS. The
lending activities and other investments of each institution must comply with
various federal regulatory requirements, and the OTS periodically examines each
institution for compliance with various regulatory requirements. The Federal
Deposit Insurance Corporation ("FDIC") also has the authority to conduct special
examinations. Each institution must file reports with OTS describing its
activities and financial condition and is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). See "Proposed Legislative and Regulatory Changes"
below.

Proposed Legislative and Regulatory Changes

         Legislation proposed in the United States Congress could have a
profound impact on the banking and thrift industries and the operations of
commercial banks and thrift institutions, including the Bank. Such legislation
includes proposals to eliminate regulatory distinctions between institutions
chartered as banks and savings associations under federal law and would ease the
merger of the Savings Association Insurance Fund ("SAIF") and the Bank Insurance
Fund ("BIF"), the two deposit insurance funds. The legislation also could
require federally chartered savings associations to convert to federally
chartered commercial banks or to state chartered institutions, probably by a
specified date. The legislation under consideration is subject to continuing
review and major revision and might not be adopted soon or ever.

                                       2
<PAGE>
 
Market Area

         Management considers the Bank's primary market area to comprise the
following counties in Arkansas: Calhoun, Cleveland, Dallas, Drew, Grant,
Ouachita and Pulaski. To a lesser extent, the Bank accepts deposits and offers
loans throughout central and southern Arkansas.

         In recent years, population has experienced low to moderate growth in
Drew, Grant and Pulaski Counties, while population has declined somewhat in
Calhoun, Cleveland, Dallas and Ouachita Counties. Household income has increased
substantially throughout the Bank's primary market area in recent years, and
household income has been well above the Arkansas average in Grant and Pulaski
Counties and somewhat above the Arkansas average in Ouachita County but somewhat
below the Arkansas average in Calhoun, Cleveland and Drew Counties and well
below the Arkansas average in Dallas County, though the Arkansas average is
below the national average. With respect to unemployment rates, while the
Arkansas average has tended to fall somewhat below the national average, and
unemployment rates have been well below the Arkansas average in Grant and
Pulaski Counties, unemployment rates have been well above the Arkansas and
national averages in Calhoun, Cleveland, Dallas, Drew and Ouachita Counties.

         The economies in the Bank's primary market area include a variety of
industries, including manufacturing, government, services and retail trade.
Important employers include International Paper and Georgia Pacific in the
timber industry and Lockheed Martin and Atlantic Research in the defense
industry.

Competition

         The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.

         Direct competition for savings deposits comes from other savings
institutions, credit unions, regional bank holding companies and commercial
banks. Significant competition for the Bank's other deposit products and
services comes from money market mutual funds and brokerage firms. The primary
factors in competing for loans are interest rates and loan origination fees and
the quality and range of services offered by various financial institutions.
Competition for origination or real estate loans normally comes from other
savings institutions, commercial banks, credit unions, mortgage bankers and
mortgage brokers.

         The Bank's primary competition comes from institutions headquartered in
the Bank's primary market area and from various non-local commercial banks that
have branch offices located in the Bank's primary market area. Many competing
financial institutions have financial resources substantially greater than the
Bank and offer a wider variety of deposit and loan products. Management's
principal competitive strategy has been to emphasize quality customer service.

Lending Activities

         The Bank's principal lending activity consists of the origination of
loans secured by mortgages on existing single-family residences in the Bank's
primary market area. The Bank also makes commercial and multi-family real estate
loans and a variety of consumer and commercial business loans, and management
expects to continue and expand the Bank's increased emphasis on these types of
lending.

         With certain limited exceptions, the maximum amount that a savings
institution may lend to any borrower (including certain related entities of the
borrower) at one time may not exceed 15% of the unimpaired capital and surplus
of the institution, plus an additional 10% of unimpaired capital and surplus for
loans fully secured by readily marketable collateral. Savings institutions are
additionally authorized to make loans to one borrower, for any purpose, in an
amount not to exceed $500,000 or, by order of the Director of the OTS, in an
amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and
surplus to develop residential housing, provided: (i) the purchase price

                                       3
<PAGE>
 
of each single-family dwelling in the development does not exceed $500,000; (ii)
the institution is in compliance with its fully phased-in capital requirements;
(iii) the loans comply with applicable loan-to-value requirements, and; (iv) the
aggregate amount of loans made under this authority does not exceed 150% of
unimpaired capital and surplus. At June 30, 1997, the maximum aggregate amounts
that the Bank and its subsidiary savings bank could have lent to any one
borrower under the 15% limit were $4.4 million and $500,000, respectively. At
such date, the largest aggregate amounts of loans that the Bank and its
subsidiary savings bank had outstanding to any one borrower were $1,330,000 and
$491,000, respectively.

         Loan Portfolio Composition. The following table sets forth information
regarding the composition of the Bank's loan portfolio by type of loan at the
dates indicated. At June 30, 1997, the Bank had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below.

<TABLE> 
<CAPTION> 

                                                                            At June 30,
                                                       ---------------------------------------------------------
                                                                    1997                        1996
                                                       ---------------------------- ----------------------------
                                                           Amount          %             Amount            %
                                                       --------------   ------        -------------    ---------
<S>                                                     <C>             <C>            <C>              <C> 
Type of Loan Real estate loans:
  One- to four-family residential....................  $   62,340,601   62.27%        $  61,650,286     70.79%
  Multi-family loans.................................       8,873,156    8.86             6,819,212      7.83
  Non-residential....................................      18,814,701   18.79            13,746,549     15.78
  Loans to facilitate sale of
    foreclosed real estate...........................         616,660    0.62               720,749      0.83
  Land and other mortgage loans......................         483,236    0.48                36,944      0.04
Consumer loans:
  Loans secured by deposits..........................       2,434,621    2.43             1,832,180      2.10
  Home improvement...................................       1,665,244    1.66               204,776      0.24
  Auto...............................................       2,399,648    2.40               786,656      0.90
  Other consumer.....................................       2,629,442    2.63               418,027      0.48
Commercial...........................................       2,101,963    2.10               880,311      1.01
                                                       --------------  ------         -------------   -------
    Total............................................  $  102,359,272  100.00%        $  87,095,690    100.00%
                                                         ------------  ======         -------------    ======
Less:
  Loans in process...................................  $    2,057,095                 $   1,544,097
  Deferred loan fees and discounts...................         167,069                       137,335
  Allowance for loan losses..........................       1,492,473                     1,283,234
                                                       --------------                 -------------
    Total............................................  $   98,642,635                 $  84,131,024
                                                       ==============                 =============
</TABLE> 

                                       4
<PAGE>
 
         Loan Maturity Schedules. The following table sets forth information
regarding dollar amounts of loans maturing in the Bank's portfolio based on
their contractual terms to maturity, including scheduled repayments of
principal, at June 30, 1997. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less. The table does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause the
Bank's repayment experience to differ from that shown below.

<TABLE> 
<CAPTION> 
                                     Due During the Year Ending            Due After             Due After             Due After    
                                               June 30,                    3 Through             5 Through            10 Through    
                                   ------------------------------        5 Years After         10 Years After        15 Years After 
                                    1998        1999       2000          June 30, 1997         June 30, 1997         June 30, 1997
                                   ------      ------     -------        -------------         -------------         -------------
<S>                               <C>          <C>          <C>           <C>                  <C>                    <C> 
Real estate loans:              
  One- to four-family mortgage                        
    loans...................    $ 2,765,998   $  349,077   $ 3,246,769    $ 5,386,160          $  9,452,683          $ 24,875,919 
  Other mortgage loans......      1,590,551      530,544     4,046,463      3,402,878             3,627,432             2,984,246 
                                
Consumer loans:                 
  Loans secured by deposits       1,789,446      645,175            --             --                    --                    -- 
  Home improvement and          
     other.................       2,758,539    1,077,751     1,756,931      2,087,111             1,015,965                    -- 
                                -----------   ----------   -----------    -----------          ------------          ------------ 
     Total..................    $ 8,904,534   $2,602,547   $ 9,050,163    $10,876,149          $ 14,096,080          $ 27,860,165 
                                ===========   ==========   ===========    ===========          ============          ============ 
                              

                                    Due After 15
                                     Years After
                                    June 30, 1997          Total
                                    -------------        -------

Real estate loans:
  One- to four-family mortgage
    loans...................        $ 16,880,655     $ 62,957,261
  Other mortgage loans......          11,988,979       28,171,043

Consumer loans:
  Loans secured by deposits                   --        2,434,621
  Home improvement and
     other.................                   --        8,696,297
                                    ------------     ------------
     Total..................        $ 28,869,634     $102,359,272
                                    ============     ============
</TABLE> 


         The following table sets forth dollar amounts of loans due one year or
more after June 30, 1997 that had predetermined interest rates and that had
adjustable interest rates at that date.

<TABLE> 
<CAPTION> 
                                                     Predetermined                                             
                                                           Rate             Adjustable Rate                    
                                                     -------------          ---------------
<S>                                                   <C>                    <C>                               
Real estate loans:                                                                                             
  One- to four-family residential..................  $ 40,266,100            $15,821,994                       
  Multi-family residential.........................     2,693,632             11,144,039                       
                                                                                                               
Consumer loans:                                                                                                
  Loans secured by deposits........................       579,604                     --                       
  Home improvement and other.......................     7,740,680                     --                       
                                                     ------------            -----------                       
    Total..........................................  $ 51,280,016            $26,966,033                       
                                                     ============            ===========                       
</TABLE> 

                                       5
<PAGE>
 
         Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Bank the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.

         Loan Originations, Purchases and Sales. The following table sets forth
information regarding the Bank's loan originations, purchases and sales during
the periods indicated.

<TABLE> 
<CAPTION> 
                                                          Year Ended June 30,
                                                      -------------------------
                                                       1997               1996
                                                      ------             ------
<S>                                                    <C>               <C> 
Loans originated:                           
  Real estate loans:                        
    One- to four-family residential...............  $   9,175,000      $  6,766,000
    Other mortgage loans..........................     11,579,200         3,928,000
  Consumer loans..................................      4,276,008         1,867,292
                                                    -------------      ------------
     Total loans originated.......................  $  25,030,208      $ 12,561,292
                                                    =============      ============
                                            
Loans purchased:                            
  Real estate loans...............................  $   1,305,000      $  4,555,000
                                                    =============      ============
                                            
Loans sold........................................  $   1,804,100      $    244,230
                                                    =============      ============
</TABLE> 

         The Bank has increased both its range of loan products offered and its
loan origination efforts, including the addition of new consumer and commercial
business loan offerings and an increased emphasis on the origination of such
loans and commercial and multi-family real estate loans.

         The Bank has purchased loans from established and reputable loan
originators from time to time to supplement the Bank's internally generated
originations. Historically, substantially all of the Bank's loan purchases have
been from large home builders, and a commercial and multi-family mortgage
banker, with which the Bank has a long-standing relationship, and the Bank's
experience with its purchased loans has been successful. In light of the
expected continuation and expansion of the Bank's increased loan originations,
management expects to reduce the Bank's loan purchasing activities in the
future.

         The Bank has not sold substantial amounts of loans in the past.
However, management expects the Bank to increase its origination of selected
types of loans which do not meet the Bank's loan portfolio needs, such as
long-term fixed-rate residential mortgage loans, for sale to investors, and it
is expected that increases in such originations will result in increases in the
Bank's loan sales.

         One- to Four-Family Residential Lending. Historically, the Bank's
principal lending activity has been the origination of fifteen-year fixed-rate
loans secured by first mortgages on existing single-family residences in the
Bank's primary market area. The purchase price or appraised value of most of
such residences generally has been between $50,000 and $200,000, with the Bank's
loan amounts averaging approximately $52,300. At June 30, 1997, $62.3 million,
or 60.9%, of the Bank's total loans were secured by one- to four-family
residences, substantially all of which were existing, owner-occupied,
single-family residences in the Bank's primary market area.

         While the Bank offers a variety of one- to four-family residential
mortgage loans with fixed or adjustable interest rates and terms of up to 30
years, substantially all of the fixed rate loans retained in the Bank's
portfolio have terms of 15 years or less. Despite the relatively low credit
risks associated with the Bank's one- to four-family portfolio loans, due to the
unfavorable yield and interest rate risks associated with such loans, management
has shifted the Bank's

                                       6
<PAGE>
 
one- to four-family residential lending emphasis away from the origination of
such loans for the Bank's portfolio and toward the origination of such loans for
sale, and management has revised the Bank's underwriting guidelines specifically
to facilitate the sale of such loans without undue delay or expense. Currently,
it is the Bank's policy to originate all one- to four-family residential loans
in accordance with the Bank's underwriting guidelines and to sell all such
originations promptly to investors, servicing released, though it is recognized
that the Bank will continue to occasionally make nonconforming loans to be held
in the Bank's portfolio. It is expected that management will continue these
policies in the future, though, in order to increase the Bank's fee income,
management may determine to retain the servicing on loans sold in the future as
the Bank's loan servicing capacity grows.

         With respect to one- to four-family residential loans originated for
retention in the Bank's portfolio, the Bank's lending policies generally limit
the maximum loan-to-value ratio to 90% (with private mortgage insurance or other
collateral for the amount over 80%) for owner-occupied properties and 80% for
non-owner-occupied properties. Loans originated expressly for sale are
originated in accordance with the lending policies and underwriting guidelines
of the investor.

         From time to time, the Bank makes loans to individuals for construction
of one- to four-family owner-occupied residences located in the Bank's primary
market area, with such loans usually converting to permanent financing upon
completion of construction. At June 30, 1997, the Bank's loan portfolio included
$2,102,595 of loans secured by properties under construction, some of which were
construction/permanent loans structured to become permanent loans upon the
completion of construction and some of which were interim construction loans
structured to be repaid in full upon completion of construction and receipt of
permanent financing. The Bank also offers loans to qualified builders for the
construction of one- to four-family residences located in the Bank's primary
market area. Because such homes are intended for resale, such loans are
generally not covered by permanent financing commitments by the Bank. All
construction loans are secured by a first lien on the property under
construction. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant. Construction/permanent loans are
underwritten in accordance with the same requirements as the Bank's permanent
mortgages, except the loans generally provide for disbursement in stages during
a construction period of up to nine months, during which period the borrower may
be required to make monthly payments. Borrowers must satisfy all credit
requirements that would apply to the Bank's permanent mortgage loan financing
prior to receiving construction financing for the subject property. Construction
financing generally is considered to involve a higher degree of risk of loss
than financing on existing properties. The Bank has sought to minimize this risk
by limiting construction lending to qualified borrowers in the Bank's primary
market area, by requiring the involvement of qualified builders, and by limiting
the aggregate amount of outstanding construction loans.

         Commercial and Multi-Family Real Estate Lending. The Bank offers
commercial and multi-family real estate loans in order to benefit from the
higher origination fees and interest rates, as well as shorter terms to
maturity, than could be obtained from single-family mortgage loans. The Bank has
offered commercial and multi-family loans for years with many of such loans
having been indirectly originated and underwritten by the Bank through a broker
in the Memphis, Tennessee area with whom the Bank has had a long and successful
relationship. It is anticipated that the Bank will continue to make loans
through the broker in Memphis as opportunities arise, but management also has
increased the Bank's emphasis on the direct origination of commercial and
multi-family real estate loans, particularly in Central Arkansas, and has
continued to expand these activities.

         Most of the Bank's commercial and multi-family real estate loans are
secured by properties located in communities within Central Arkansas that have
experienced significant growth in recent years, particularly communities in or
near the greater Little Rock area. The Bank's acquisition of the former Heritage
Bank, FSB, which was headquartered in Little Rock, resulted in the addition to
the Bank's staff of a commercial and multi-family real estate loan origination
specialist who works closely with borrowers and various members of the
commercial real estate industry throughout central Arkansas. As opportunities
for increased originations of such loans have increased, the Bank has been
expanding its loan underwriting and servicing staff. All commercial and
multi-family loans are reviewed and approved by the Bank's staff at the
headquarters office in Camden prior to any funding or the issuance of any
binding commitment by the Bank.

                                       7
<PAGE>
 
         The Bank's commercial and multi-family real estate loans may be secured
by apartments, offices, warehouses, shopping centers and other income-producing
multi-family and commercial properties. At June 30, 1997, the Bank had 163 of
these loans, with an average loan balance of approximately $185,150. At that
date, 65 of these loans totaling approximately $11.7 million were secured by
properties outside central Arkansas, and none of these out-of-market loans was
classified by management as substandard, doubtful or loss or designated by
management as special mention. Management expects the Bank to continue making
these out-of-market loans from time to time as opportunities arise.

         The following paragraphs set forth information regarding the Bank's
commercial and multi-family real estate loans with outstanding balances
exceeding $500,000 at June 30, 1997. None of these loans was classified by
management as substandard, doubtful or loss or designated by management as
special mention at that date. For information regarding the Bank's asset
classification policies, see "Asset Classification, Allowances for Losses and
Nonperforming Assets."

                  Outpatient Surgery Center in Conway, Arkansas. In November
         1996, the Bank made a $1,662,300 loan secured by a 6,375 square foot
         medical office building and outpatient surgery center. At that time, an
         appraisal indicated a loan-to-value ratio of approximately 79%. The
         loan is being amortized over 20 years for the purpose of monthly
         payments of principal and interest, maturing in November 2016. The
         interest rate is adjustable each five years. At June 30, 1997, the
         outstanding balance was $1,637,670, and the loan was fully performing
         in accordance with its terms.

                  Shopping Center - Kiehl Plaza in Sherwood, Arkansas;
         Convenience Store - 1700 Airport Road in Hot Springs, Arkansas; BP
         Convenience Store in Conway, Arkansas. In November 1996, the Bank made
         a $1,300,000 loan secured by a shopping center and two convenience
         stores. At that time, the appraisals indicated a loan-to-value ratio of
         approximately 80%. The loan is being amortized over 20 years for the
         purpose of monthly payments of principal and interest, but the full
         balance of the loan will be due in November 2001. Shortly after
         origination, the Bank sold a 40% interest in this loan. At June 30,
         1997, the outstanding balance of the Bank's 60% interest in this loan
         was $770,415, and the loan was fully performing in accordance with its
         terms.

                  Apartments in El Dorado, Arkansas. In August 1994, the Bank
         made a $720,000 loan secured by a 44 unit apartment building. At that
         time, an appraisal indicated a loan-to-value ratio of approximately
         80%. The loan is being amortized over 15 years for the purpose of
         monthly payments of principal and interest, but the full balance of the
         loan will be due in August 1997. At June 30, 1997, the outstanding
         balance was $638,834, and the loan was fully performing in accordance
         with its terms.

                  Apartments in San Marcos, Texas. In February 1992, the Bank
         made a $750,000 loan secured by a 69 unit apartment building. This loan
         was made to facilitate the sale of the property, which had been
         acquired by the Bank following a default on a prior loan. At that time,
         an appraisal indicated a loan-to-value ratio of approximately 64%. The
         loan currently is being amortized over 15 years for the purpose of
         monthly payments of principal and interest, with the full balance of
         the loan due in March 2010. At June 30, 1997, the outstanding balance
         was $614,968, and the loan was fully performing in accordance with its
         terms.

                  Retail Center in Memphis, Tennessee. In July 1996, the Bank
         made a $560,000 loan secured by a 118,000 square foot retail center. At
         that time, an appraisal indicated a loan-to-value ratio of
         approximately 26%. The loan is being amortized over 15 years for the
         purpose of monthly payments of principal and interest, and the full
         balance of the loan will be due in August 2011. At June 30, 1997, the
         outstanding balance was $541,949, and the loan was fully performing in
         accordance with its terms.

                                       8
<PAGE>
 
                  Office Building in Memphis, Tennessee. In September 1996, the
         Bank made a $625,000 loan secured by a 30,000 square foot office
         building. At that time, an appraisal indicated a loan-to-value ratio of
         approximately 69%. The loan is being amortized over 20 years for the
         purpose of monthly payments of principal and interest, and the full
         balance of the loan will be due in September 2016. At June 30, 1997,
         the outstanding balance was $614,276, and the loan was fully performing
         in accordance with its terms.

                  Apartments in Conway, Arkansas. In July 1996, the Bank made a
         $600,000 loan secured by a 20 unit apartment building. At that time, an
         appraisal indicated a loan-to-value ratio of approximately 65%. The
         loan is being amortized over 20 years for the purpose of monthly
         payments of principal and interest, and the full balance of the loan
         will be due in September 2002. At June 30, 1997, the loan was fully
         performing in accordance with its terms.

                  Apartments in Conway, Arkansas. In October 1996, the Bank made
         a $665,000 loan secured by another 20-unit apartment building in the
         above apartment project. At that time, an appraisal indicated a
         loan-to-value ratio of approximately 73%. The loan is being amortized
         over 20 years for the purpose of monthly payments of principal and
         interest, and the full balance of the loan will be due in September
         2002. At June 30, 1997, the loan was fully performing in accordance
         with its terms.

                  Retail Store in Fordyce, Arkansas. In January 1992, the Bank
         made a $650,000 loan secured by a 32,500 square foot retail store. At
         that time, an appraisal indicated a loan-to-value ratio of
         approximately 73%. The loan currently is being amortized over 5 years
         for the purpose of monthly payments of principal and interest, with the
         full balance of the loan due in February 2000. At June 30, 1997, the
         outstanding balance was $503,631, and the loan was fully performing in
         accordance with its terms.

                  Nursing Home in Little Rock, Arkansas. In January 1997, the
         Bank made a $1,000,000 loan secured by a 105-bed nursing home. At that
         time, an appraisal indicated a loan-to-value ratio of approximately
         50%. The loan is being amortized over 12 years for the purpose of
         monthly payments of principal and interest, and the full balance of the
         loan will be due in January 2000. Shortly after origination, the Bank
         sold a 50% interest in this loan. At June 30, 1997, the outstanding
         balance of the Bank's 50% interest in this loan was $489,856 and the
         loan was fully performing in accordance with its terms.

                  Nursing Homes in Pine Bluff, Arkansas. In May 1997, the Bank
         made a $1,900,000 loan secured by two nursing homes with 167 total
         beds. At that time, an appraisal indicated a loan-to-value ratio of
         approximately 75%. The loan is being amortized over 10 years for the
         purpose of monthly payments of principal and interest, and the full
         balance of the loan will be due in June 2000. Shortly after
         origination, the Bank sold a 45% interest in this loan. At June 30,
         1997, the outstanding balance of the Bank's 55% interest in this loan
         was $1,045,000, and the loan was fully performing in accordance with
         its terms.

         In addition, at June 30, 1997 the Bank had $21.7 million in 51
commercial and multi-family real estate loans with outstanding balances
exceeding $200,000, only one of which was adversely classified or designated by
management. For additional information, see "Asset Classification, Allowances
for Losses and Nonperforming Assets" below.

         The Bank's commercial and multi-family real estate loans generally are
limited to loans not exceeding $1,750,000 on properties located either in
Central Arkansas or other areas selected by management and approved by the Board
of Directors, with terms of up to 20 years and loan-to-value ratios of up to
80%. Interest rates may be fixed for up to five years, after which period the
rate may adjust or the loan may become due.

                                       9
<PAGE>
 
         Commercial and multi-family real estate lending entails significant
additional risks compared with one- to four-family residential lending. For
example, commercial and multi-family real estate loans typically involve large
loan balances to single borrowers or groups of related borrowers, the payment
experience on such loans typically is dependent on the successful operation of
the real estate project, and these risks can be significantly impacted by supply
and demand conditions in the market for multi-family residential units and
commercial office, retail and warehouse space. These risks may be higher with
respect to loans secured by properties outside the Bank's primary market area or
outside the Bank's most historically active lending areas. The Bank's recent and
planned increases in commercial and multi-family lending also introduce
additional risk as demands on the Bank's loan origination and administration
increase and as the Bank's aggregate exposure to these types of loans increases.

         The aggregate amount of loans which federally chartered savings
institutions may make on the security of liens on commercial real estate
generally may not exceed 400% of the institution's capital.

         Consumer Lending. Historically, the Bank's consumer loans have
primarily consisted of loans secured by deposits at the Bank and home
improvement loans secured by first or second mortgages on single-family
residences in the Bank's primary market area. These loans totaled approximately
$2.4 million and $4.1 million, respectively, at June 30, 1997. The Bank has
recently expanded its consumer loan offerings to include a full variety of such
loans, with a particular emphasis on loans secured by new and used automobiles
and other vehicles, including boats. These vehicle loans increased from
approximately $787,000 at June 30, 1996 to $2.4 million at June 30, 1997.
Management plans to continue the expansion of the Bank's consumer lending
activities in the future as part of management's plan to provide a wider range
of financial services to the Bank's customers while increasing the Bank's
portfolio yields and improving its asset/liability management.

         The Bank makes savings account loans for up to 100% of the balance of
the account. The interest rate on these loans typically is fixed at least two
percentage points above the rate paid on a deposit at the Bank or four
percentage points above the rate paid on a deposit at another institution, with
the maturity and payment frequency matched to the terms of the deposit. The
account must be pledged as collateral to secure the loan.

         The Bank makes home improvement loans secured by the borrower's
residence. These loans, combined with any higher priority mortgage loan, which
usually is from the Bank, generally are limited to 90% of the appraised value of
the residence. Home improvement loans generally have fixed interest rates and
terms of up to ten years.

         The Bank's new and used automobile loans generally are underwritten in
amounts up to 90% of the purchase price, dealer cost or the loan value as
published by the National Automobile Dealers Association or the "Black Book."
The terms of such loans generally do not exceed 60 months, with loans for older
used cars underwritten for shorter terms. The Bank requires that the vehicles be
insured and that the Bank be listed as loss payee on the insurance policy.
The Bank offers floor plan loans to selected dealers on a case by case basis.

         Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against the Bank, and a borrower may be able to assert against the
Bank claims and defenses which it has against the seller of the underlying
collateral. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income, expenses and ability to
repay the loan and the value of the collateral. The Bank's recent and planned
increases in consumer lending also introduce additional risk as demands on the
Bank's loan origination and administration increase and as the Bank's aggregate
exposure to these types of loans increases.

                                       10
<PAGE>
 
         Commercial Business Lending. Before the acquisition of the former
Heritage Bank, FSB, the Bank did not offer commercial business loans, except on
a limited basis in modest amounts as an accommodation to customers of the Bank.
Upon the acquisition, the Bank acquired approximately $768,000 of commercial
business loans, and since then the Bank has been expanding its commercial
business offerings and increasing its loan origination efforts. The Bank
currently offers, or plans to offer, working capital loans, accounts receivable
loans, floor plan loans to dealers of automobiles, and business equipment loans,
and the Bank has recently added to its staff an additional loan officer with
extensive experience originating and servicing indirect automobile loans. At
June 30, 1997, the Bank's commercial business loans totaled $2.1 million and
primarily consisted of automobile dealer floor plan loans and equipment loans.
At that date, the Bank had one commercial business loan with an outstanding
balance or loan commitment exceeding $300,000. The loan consisted of a floor
plan lending arrangement dating back to August 1996 and begun by the former
Heritage Bank, FSB. The loan is secured by used automobiles at a dealership in
Monticello, Arkansas. The loan requires regular payments of interest, and the
Bank requires principal paydowns as vehicles are sold and periodically in
accordance with specified repayment schedules. At June 30, 1997, the Bank had
committed to lend up to $500,000, the outstanding balance was $280,614, the loan
was fully performing in accordance with its terms, and the loan was not
adversely classified or designated by management.

         Commercial business loans generally involve more risk than single
family residential loans. In underwriting commercial business loans, The Bank
considers the obligor's credit history, an analysis of the obligor's income,
expenses and ability to repay the obligation and the value of the collateral.

         Loan Solicitation and Processing. The Bank's loan originations are
derived from a number of sources, including referrals by realtors, builders,
depositors, borrowers and mortgage brokers, as well as walk in customers. The
Bank's solicitation programs consist of calls by the Bank's officers, branch
managers and other responsible employees to local realtors and builders and
advertisements in local newspapers and billboards and radio broadcasts. Real
estate loans are originated by the Bank's staff loan officers as well as the
Bank's branch managers and executive officers, none of whom receives commissions
for loan originations. Loan applications are accepted at each of the Bank's
offices and, depending on the loan type and amount, may be processed and
underwritten at the originating office or forwarded to the main office.

         Upon receipt of a loan application from a prospective borrower, the
Bank's staff preliminarily reviews the information provided and makes an initial
determination regarding the qualification of the borrower. If not disapproved,
the application then is placed in processing, and a credit report and
verifications are ordered to verify specific information relating to the loan
applicant's employment, income and credit standing. It is the Bank's policy to
obtain an appraisal of the real estate intended to secure a proposed mortgage
loan from independent fee appraisers. It is the Bank's policy to obtain personal
guarantees from the principals on all loans. Except when the Bank becomes aware
of a particular risk of environmental contamination, the Bank generally does not
obtain a formal environmental report on the real estate at the time a loan is
made.

         It is the Bank's policy to record a lien on the real estate securing
the loan and to obtain a title insurance policy which insures that the property
is free of prior encumbrances. Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in a designated flood plain,
paid flood insurance policies. Most borrowers are also required to advance funds
on a monthly basis together with each payment of principal and interest to a
mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes.

         The Board of Directors has the overall responsibility and authority for
general supervision of the Bank's loan policies. The Board has established
written lending policies for the Bank. The Bank's officers and loan committee
approve loans up to specified limits above which the approval of the Board may
be required. Loan applicants are promptly notified of the decision of the Bank.
It has been management's experience that substantially all approved loans are
funded.

         Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
primary market area and the Bank's minimum yield requirements. Mortgage loan

                                       11
<PAGE>
rates reflect factors such as prevailing market interest rate levels, the supply
of money available to the savings industry and the demand for such loans. These
factors are in turn affected by general economic conditions, the monetary
policies of the federal government, including the Federal Reserve Board, the
general supply of money in the economy, tax policies and governmental budget
matters.

         The Bank receives fees in connection with loan commitments and
originations, loan modifications, late payments and changes of property
ownership and for miscellaneous services related to its loans. Loan origination
fees are calculated as a percentage of the loan principal. The Bank typically
receives fees of up to one point (one point being equivalent to 1% of the
principal amount of the loan) in connection with the origination of mortgage
loans. The excess, if any, of loan origination fees over direct loan origination
expenses is deferred and accreted into income over the contractual life of the
loan using the interest method. If a loan is prepaid, refinanced or sold, all
remaining deferred fees with respect to such loan are taken into income at such
time.

         Collection Policies. When a borrower fails to make a payment on a loan,
the Bank generally takes prompt steps to have the delinquency cured and the loan
restored to current status. Once the payment grace period has expired (in most
instances 15 days after the due date), a late notice is mailed to the borrower,
and a late charge is imposed, if applicable. If payment is not promptly
received, a second notice is sent 15 days after the expiration of the grace
period. If the loan becomes 30 days delinquent, the borrower is contacted, and
efforts are made to formulate an affirmative plan to cure the delinquency. If a
loan becomes 60 days delinquent, the loan is reviewed by the Bank's management,
and if payment is not made, management may pursue foreclosure or other
appropriate action. If a loan remains delinquent 90 days or more, the Bank
generally initiates foreclosure proceedings.

         Asset Classification, Allowances for Losses and Nonperforming Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. An asset is
classified as doubtful if full collection is highly questionable or improbable.
An asset is classified as loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. The regulations also provide
for a special mention designation, described as assets which do not currently
expose an institution to a sufficient degree of risk to warrant classification
but do possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as substandard or doubtful
require an institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, an institution must either
establish a specific allowance for loss in the amount of the portion of the
asset classified loss, or charge off such amount. Federal examiners may disagree
with an institution's classifications. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
OTS Regional Director.

         Management regularly reviews the Bank's assets to determine whether
assets require classification or reclassification, and the Board of Directors
reviews and approves all classifications. Following the Bank's acquisition of
the former Heritage Bank, FSB, and in light of management's intention of
increasing the Bank's emphasis on originating more commercial and multi-family
real estate loans and consumer and commercial business loans, in August 1996 the
Bank retained a consultant with extensive commercial banking experience in both
executive and advisory capacities, both to perform a detailed initial evaluation
of the Bank's loan portfolio and on an ongoing basis to assist management in
planning and implementing these changes in the Bank's lending activities. The
Bank also recently hired a staff loan analyst, whose responsibilities include
assisting with monitoring the Bank's loan portfolio quality. The Bank also
recently hired a staff loan analyst, whose responsibilities include assisting
with monitoring the Bank's loan portfolio quality. As of June 30, 1997, the Bank
had approximately $3,000 assets classified as loss, $41,000 of assets classified
as doubtful, $3.5 million of assets classified as substandard and $678,000 of
assets designated as special mention. The Bank's total adversely classified or
designated assets represented approximately 2.1% of the Bank's total assets and
14.6% of the Bank's tangible regulatory capital at June 30, 1997. At that date,
substantially all of the Bank's adversely classified or designated assets were
one- to four-family residences in the Bank's primary market area, and none of
such assets was in excess of $100,000, except for the following six loans 
totaling $1,263,830:

-     Two of these loans were secured by interests in a partnership that owns 
      and operates a strip shopping center in Little Rock, Arkansas, and were
      classified due to concerns about the borrowers' ability to repay the loan.
-     Loan secured by commercial real estate in Camden, Arkansas classified due
      to insufficient cash flow and concerns about borrower's ability to repay
      the debt.
-     Loan secured by a house built for speculative sale in Little Rock,
      Arkansas market: classified as a result of litigtion (Litigation has since
      been resolved and debt has been paid in full from sale proceeds of the 
      house).
-     Agriculture loan classified due to insufficient collateral and concerns
      about borrower's ability to repay the debt.
-     Loan secured by a single family residence located out of market having a
      extraordinarily slow payment history.

At June 30, 1997, management did not expect the Bank to incur any loss in excess
of attributable existing reserves on any of the Bank's adversely classified or
designated assets.

                                      12
<PAGE>
 
         In extending credit, the Bank recognizes that losses will occur and
that the risk of loss will vary with, among other things, the type of credit
being extended, the creditworthiness of the obligor over the term of the
obligation, general economic conditions and, in the case of a secured
obligation, the quality of the security. It is management's policy to maintain
adequate allowances for losses based on management's assessment of the Bank's
loan portfolio. The Bank increases its allowance for losses by charging
provisions for losses against the Bank's income. Federal examiners may disagree
with an institution's allowance for losses.

         The Bank's methodology for establishing the allowance for losses takes
into consideration probable losses that have been identified in connection with
specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of the Bank's assets and
evaluates the need to establish allowances on the basis of this review.
Allowances are established by the Board of Directors on a regular basis based on
an assessment of risk in the Bank's assets taking into consideration the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience, the state of the real estate market, regulatory reviews
conducted in the regulatory examination process and economic conditions
generally. Allowances are provided for individual assets, or portions of assets,
when ultimate collection is considered improbable by management based on the
current payment status of the assets and the fair value or net realizable value
of the security. At the date of foreclosure or other repossession or at the date
the Bank determines a property is an "in-substance foreclosed" property, the
Bank transfers the property to real estate acquired in settlement of loans at
the lower of cost or fair value. Fair value is defined as the amount in cash or
cash-equivalent value of other consideration that a property would yield in a
current sale between a willing buyer and a willing seller. Fair value is
measured by market transactions. If a market does not exist, fair value of the
property is estimated based on selling prices of similar properties in active
markets or, if there are no active markets for similar properties, by
discounting a forecast of expected cash flows at a rate commensurate with the
risk involved. Fair value generally is determined through an appraisal at the
time of foreclosure. At June 30, 1997, the Bank held no properties acquired in
settlement of loans for which market values were unavailable. Any amount of cost
in excess of fair value is charged-off against the allowance for loan losses.
The Bank records an allowance for estimated selling costs of the property
immediately after foreclosure. Subsequent to acquisition, the property is
periodically evaluated by management and an allowance is established if the
estimated fair value of the property, less estimated costs to sell, declines.
If, upon ultimate disposition of the property, net sales proceeds exceed the net
carrying value of the property, a gain on sale of real estate is recorded.

         The banking regulatory agencies, including the OTS, have adopted a
policy statement regarding maintenance of an adequate allowance for loan and
lease losses and an effective loan review system. This policy includes an
arithmetic formula for checking the reasonableness of an institution's allowance
for loan loss estimate compared to the average loss experience of the industry
as a whole. Examiners will review an institution's allowance for loan losses and
compare it against the sum of (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii)
for the portions of the portfolio that have not been classified (including those
loans designated as special mention), estimated credit losses over the upcoming
twelve months given the facts and circumstances as of the evaluation date. This
amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.

         Management actively monitors the Bank's asset quality and charges off
loans and properties acquired in settlement of loans against the allowances for
losses on such loans and such properties when appropriate and provides specific
loss allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.

                                       13
<PAGE>
 
         During the year ended June 30, 1997, in light of the Bank's
comprehensive loan portfolio review and reevaluation, the Bank made additional
provisions for loan losses totalling $221,671, bringing the total reserve for
losses on loans to $1.5 million, or 1.5% of gross loans. The following table
sets forth an analysis of the Bank's allowance for loan losses for the periods
indicated.

<TABLE> 
<CAPTION> 
                                                           Year Ended June 30,
                                                       -------------------------
                                                        1997               1996
                                                       -------            ------
<S>                                                   <C>               <C> 
Balance at beginning of period.....................  $   1,283,234      $    728,491
                                                     -------------      ------------
                                             
Loans charged-off:                           
  Real estate mortgage:                      
    One- to four-family residential................         11,317            12,130
    Other mortgage loans...........................             --                --
  Consumer.........................................         11,668                --
                                                     -------------      ------------
Total charge-offs..................................         22,985            12,130
                                                     -------------      ------------
                                             
Recoveries:                                  
  Real estate mortgage:                      
    One- to four-family residential................          6,333               250
    Other mortgage loans...........................             --                --
  Consumer.........................................          4,220                --
                                                     -------------      ------------
Total recoveries...................................         10,553               250
                                                     -------------      ------------
                                             
Net loans charged-off..............................         12,432            11,880
                                                     -------------      ------------
                                             
Acquisition of subsidiary..........................             --           524,140
Provision for loan losses..........................        221,671            42,483
                                                     -------------      ------------
                                             
Balance at end of period...........................  $   1,492,473      $  1,283,234
                                                     =============      ============
                                             
Ratio of net charge-offs to average          
  loans outstanding during the period..............           .024%            0.018%
                                                     =============      ============

</TABLE> 

                                       14
<PAGE>
 
         The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.

<TABLE> 
<CAPTION> 
                                                                             June 30,
                                                     ------------------------------------------------------
                                                                    1997                     1996
                                                     --------------------------  --------------------------
                                                                     Percent                      Percent
                                                                     of Loans                     of Loans
                                                                    in Category                 in Category
                                                                     to Total                     to Total
                                                     Amount           Loans       Amount           Loans
                                                    --------       ------------   -------      -------------
<S>                                                 <C>            <C>            <C>            <C> 
Allocated to:
  Real estate loans:
    One- to four-family residential................  $   954,093    60.90%        $   935,354      71.66%
    Multi-family and non-residential
      loans........................................      296,018    27.05             278,650      23.61
  Consumer loans:..................................       67,700    10.00              17,635       3.72
    Commercial.....................................       81,250     2.05                  --       1.01
    Unallocated....................................       93,412       --              51,595         --
                                                     -----------   ------         -----------    -------
         Total.....................................  $ 1,492,473   100.00%        $ 1,283,234     100.00%
                                                     ===========   ======         ===========     ======
</TABLE> 

         In addition to its allowance for loan losses, the Bank maintains an
allowance for losses on real estate acquired in settlement of loans, including
in-substance foreclosures. This allowance is established to cover losses on such
properties. At June 30, 1997, the Bank had such an allowance in the amount of
approximately $28,287.

         Numerous financial institutions throughout the United States have
incurred losses due to significant increases in loss provisions and charge-offs
resulting largely from higher levels of loan delinquencies and foreclosures.
Depressed real estate market conditions have adversely affected the economies of
various regions and have had a severe impact on the financial condition and
businesses of many of the financial institutions doing business in these areas.
Moreover, the Bank's increasing emphasis on the origination of commercial and
multi-family loans and consumer and commercial business loans may increase the
Bank's risk of corresponding increases in loan loss provisions and charge-offs.
Finally, as a result of declines in real estate market values and significant
losses experienced by many financial institutions, there has been a greater
level of scrutiny by regulatory authorities of the loan portfolios of financial
institutions undertaken as part of examinations of such institutions by the
FDIC, OTS or other federal or state regulators. Results of examinations indicate
that these regulators may be applying more conservative criteria in evaluating
real estate market values, requiring significantly increased provisions for
losses on loans and real estate acquired in settlement of such loans. While
management believes the Bank has established its existing loss allowances in
accordance with generally accepted accounting principles, there can be no
guaranty or assurance that such reserves are, or in the future will be, adequate
to absorb all loan losses or that regulators, in reviewing the Bank's assets,
will not make the Bank increase its loss allowance, thereby negatively affecting
the Bank's reported financial condition and results of operations.

                                       15
<PAGE>
 
         The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. For information regarding the
Bank's interest accrual practices, see the Notes to Consolidated Financial
Statements.


<TABLE>
<CAPTION>
                                                                          At June 30,
                                                                ------------------------------
                                                                   1997               1996
                                                                -----------        -----------
<S>                                                             <C>                <C>
Loans accounted for on a nonaccrual basis: /1/
  Real estate:
    One- to four-family residential...........................  $   133,386        $   166,228
    Other mortgage loans......................................           --                 --
  Consumer....................................................           --                 --
                                                                -----------        -----------
    Total.....................................................  $   133,386        $   166,228
                                                                ===========        ===========

Accruing loans which are contractually past due 90 days or more:
  Real estate:
    One- to four-family residential...........................  $   323,478        $   725,487
    Other mortgage loans......................................           --                 --
  Consumer loans..............................................       56,904            127,142
                                                                -----------        -----------
    Total.....................................................  $   380,382        $   852,629
                                                                ===========        ===========

    Total nonperforming loans.................................  $   513,768        $ 1,018,857
                                                                ===========        ===========

Percentage of total loans.....................................          .50%              1.21%
                                                                ===========        ===========
Other nonperforming assets /2/................................  $    65,005        $   168,206
                                                                ===========        ===========
Loans modified in troubled debt restructurings................  $   281,441        $   298,195
                                                                ===========        ===========

</TABLE>

/1/    Designated nonaccrual loan payments received applied first to
       contractual principal; interest income recognized when contractually
       current.

/2/    Other nonperforming assets includes foreclosed real estate.

         During the years ended June 30, 1997 and 1996, gross interest income of
$12,177 and $7,718, respectively, would have been recorded on loans accounted
for on a nonaccrual basis if the loans had been current throughout the
respective periods. Interest on such loans included in income during such
respective periods amounted to $17,689 and $2,604, respectively.

         At June 30, 1997, management had identified approximately $4.22 million
of loans which amount is not reflected in the preceding table but as to which
known information about possible credit problems of borrowers caused management
to have doubts as to the ability of the borrowers to comply with present loan
repayment terms, all of which was included in the Bank's adversely classified or
designated asset amounts at that date. Of this aggregate amount, $2.9 million
was attributable to 126 one- to four-family residential loans, and $1.3 million
was attributable to 11 commercial or multi-family real estate loans. At June 30,
1997, management did not expect the Bank to incur any loss in excess of
attributable existing reserves on any of the Bank's assets.

Investment Activities

         General. The Bank is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of Dallas,
certificates of deposit in federally insured institutions, certain bankers'
acceptances and federal funds. It may also invest, subject to certain
limitations, in commercial paper rated in one of the two highest investment
rating categories of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Bank to maintain an investment in FHLB stock and a minimum amount of
liquid assets which may be invested in cash and specified securities. From time
to time, the OTS adjusts the percentage of liquid assets

                                      16
<PAGE>
 
which savings banks are required to maintain. See "Regulation -- Regulation of
the Banks -- Liquidity Requirements" below.

         The Bank makes investments in order to maintain the levels of liquid
assets required by regulatory authorities and manage cash flow, diversify its
assets, obtain yield and, under prior federal income tax law, satisfy certain
requirements for favorable tax treatment. The investment activities of the Bank
consist primarily of investments in mortgage-backed securities and other
investment securities, consisting primarily of securities issued or guaranteed
by the U.S. government or agencies thereof. Typical investments include
federally sponsored agency mortgage pass-through and federally sponsored agency
and mortgage-related securities. Investment and aggregate investment limitations
and credit quality parameters of each class of investment are prescribed in the
Bank's investment policy. The Bank performs analyses on mortgage-related
securities prior to purchase and on an ongoing basis to determine the impact on
earnings and market value under various interest rate and prepayment conditions.
Securities purchases are approved by the Bank's Investment Committee, and the
Board of Directors reviews all securities transactions on a monthly basis.

         Securities designated as "held to maturity" are those assets which the
Bank has the ability and intent to hold to maturity. The held to maturity
investment portfolio is carried at amortized cost. Securities designated as
"available for sale" are those assets which the Bank might not hold to maturity
and thus are carried at market value with unrealized gains or losses, net of tax
effect, recognized in equity.

         Mortgage-backed securities typically represent an interest in a pool of
fixed-rate or adjustable-rate mortgage loans, the principal and interest
payments on which are passed from the mortgage borrowers to investors such as
the Bank. Mortgage-backed security sponsors may be private companies or
quasi-governmental agencies such as FHLMC, FNMA and GNMA, which guarantee the
payment of principal and interest to investors. Mortgage-backed securities can
represent a proportionate participation interest in a pool of loans or,
alternatively, an obligation to repay a specified amount secured by a pool of
loans (commonly referred to as a "collateralized mortgage obligation," or
"CMO"). Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the credit enhancements that back them, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Bank. The Bank's mortgage-backed securities portfolio
primarily consists of seasoned securities either issued by a one of the
quasi-governmental agencies or rated in one of the top two categories by a
recognized rating organization.

         All of the Bank's privately issued securities were rated "AA" or higher
by a nationally recognized credit rating agency at the time of purchase.
Management regularly monitors the ratings of the Bank's privately issued
holdings by reference to nationally published rating medium and by communication
with the issuer where necessary. At June 30, 1997, no privately issued
securities had been downgraded from their original rating, except during fiscal
1997 the Bank was notified of a downgrade in the rating of one of its private
issue obligations. The security is a Citicorp Mortgage, Inc. REMIC pass-thru
certificate. The downgrade reflected deterioration in the performance of the
mortgage pools underlying the security. At June 30, 1997, the Class A
Certificate holders had suffered no interest losses but had suffered $625,223 in
principle losses. The Bank's balance of this security at that date was $871,312,
which represented 1.36% of the total outstanding pool of $64,244,942. The credit
enhancement available to Class A certificate holders was $2,901,490 at June 30,
1997. As long as this amount is positive, no significant loss to the Bank, if
any, is anticipated. The Bank's privately issued securities have been primarily
collateralized mortgage obligations (CMOs). At June 30, 1997, all of these
securities had adjustable interest rates with a weighted average yield of 6.66%
and a weighted average term to maturity of 24 years. The carrying value of the
privately issued securities was $32.1 million, or 60.1% of mortgage-backed
securities at that date. None of the privately issued securities is insured or
guaranteed by FHLMC or FNMA.

         The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based

                                      17
<PAGE>
 
upon the interest income and the amortization of the premium or accretion of the
discount related to the mortgage-backed security. Premiums and discounts on
mortgage-backed securities are amortized or accredited over the estimated term
of the securities using a level yield method. The prepayment assumptions used to
determine the amortization period for premiums and discounts can significantly
affect the yield of the mortgage-backed security, and these assumptions are
reviewed periodically to reflect the actual prepayment. The actual prepayments
of the underlying mortgages depend on many factors, including the type of
mortgage, the coupon rate, the age of the mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.

         The following table sets forth information regarding carrying values of
the Bank's investment securities at the dates indicated.

<TABLE>
<CAPTION>
                                                                         At June 30,
                                                                ------------------------------
                                                                   1997               1996
                                                                ------------      ------------
<S>                                                             <C>               <C>
Securities available for sale:
   U.S. government and agencies...............................  $ 16,155,955      $  5,279,625
   Collateralized mortgage obligations........................     6,171,341         9,034,604
   Other mortgage-backed securities...........................    13,919,065         3,120,595
                                                                ------------      ------------
                                                                $ 36,246,161      $ 17,434,824
                                                                ============      ============

Securities held to maturity:
   U.S. government and agencies...............................  $         --      $         --
   Collateralized mortgage obligations........................            --                --
   Other mortgage-backed securities...........................    35,869,295        45,212,891
                                                                ------------      ------------

      Total...................................................  $ 72,115,456      $ 62,647,715
                                                                ============      ============

</TABLE>
                                      18
<PAGE>
 
     The following table sets forth information in the scheduled maturities,
amortized cost, market values and average yields for the Bank's investment
portfolio at June 30, 1997. 

<TABLE>
<CAPTION>
                                     One Year or Less      One to Five Years       Five to Ten Years        More than Ten Years  
                                    ------------------    -------------------     -------------------     ---------------------  
                                    Carrying   Average    Carrying     Average    Carrying     Average    Carrying    Average    
                                     Value      Yield       Value      Yield        Value      Yield        Value      Yield     
                                    -------    -------     -------    -------      -------    -------      ------     ------     
<S>                                <C>         <C>        <C>         <C>        <C>          <C>       <C>          <C>
Securities available for sale:
   U.S. government and agencies...  $ 1,503,866  6.09%     $12,647,279   6.78%    $2,004,610    7.05%    $        --      --%    
   Collateralized mortgage
      obligations.................           --    --               --     --             --      --       6,270,999    6.43     
   Other mortgage-backed securities          --    --        2,197,535   7.54      5,483,501    7.07       6,238,029    7.30     
                                    -----------            -----------            ----------             -----------             
                                      1,503,866  6.09       14,844,814   6.90      7,488,111    7.06      12,509,028    6.86
Securities held to maturity:

  U.S. government agencies........           --     --              --     --             --      --              --      --     
  Collateralized mortgage                                                                                                  
    obligations...................           --     --              --     --             --      --              --      --     
  Mortgage-backed securities......           --     --         703,741   9.08      1,456,595    9.29      33,708,959    6.73     
                                    -----------            -----------            ----------             -----------             
      Total.......................  $ 1,503,866   6.09     $15,548,555   7.00     $8,944,706    7.42     $46,217,987    6.77      
                                    ===========            ===========            ==========             ===========              

<CAPTION>
                                        Total Investment Portfolio
                                      ---------------------------------
                                      Carrying       Market     Average
                                        Value        Value      Yield
                                       -------       -----      ------
<S>                                 <C>          <C>            <C>  
Securities available for sale:
   U.S. government and agencies...  $16,155,755  $ 16,155,755    6.45%
   Collateralized mortgage
      obligations.................    6,270,999     6,270,999    6.43
   Other mortgage-backed securities  13,919,065    13,919,065    7.20
                                    -----------    ----------  
                                     36,345,819    36,345,819    6.86
                                                                 
Securities held to maturity:

  U.S. government agencies........           --            --      --
  Collateralized mortgage
    obligations...................           --            --      --
   Mortgage-backed securities.....   35,869,295    36,194,350    6.81
                                    -----------    ----------
      Total.......................  $72,215,114   $72,540,169    6.84
                                    ===========   ===========    
</TABLE>



                                      19
<PAGE>
 
Deposit Activity and Other Sources of Funds

         General. Deposits are the primary source of the Bank's funds for
lending, investment activities and general operational purposes. While the Bank,
like most independent savings institutions, historically has relied on
certificates of deposit for a substantial portion of its deposits, management
has recently shifted the Bank's deposit gathering emphasis away from
certificates of deposit and toward transaction accounts with more favorable
interest costs, interest rate risk characteristics and opportunities for the
Bank to perform valued customer services that generate additional fee income,
and it is expected that management will continue this trend in the future. In
addition to deposits, the Bank derives funds from loan principal and interest
repayments, maturities of investment securities and mortgage-backed securities
and interest payments thereon. Although loan repayments are a relatively stable
source of funds, deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds, or
on a longer term basis for general operational purposes. The Bank has access to
borrow advances from the FHLB of Dallas, which the Bank uses from time to time.

         Deposits. The Bank attracts deposits principally from within its
primary market area by offering competitive rates on its deposit instruments,
including money market accounts, passbook savings accounts, Individual
Retirement Accounts and certificates of deposit which range in maturity from 90
days to three years. Deposit terms vary according to the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. Maturities, terms, service fees and withdrawal penalties for its deposit
accounts are established by the Bank on a periodic basis. In determining the
characteristics of its deposit accounts, the Bank considers the rates offered by
competing institutions, lending and liquidity requirements, growth goals and
federal regulations. The Bank does not accept brokered deposits or pay
negotiated rates for jumbo deposits.

         The Bank attempts to compete for deposits with other institutions in
its market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Bank seeks to meet
customers' needs by providing convenient customer service to the community,
efficient staff and convenient hours of service. Substantially all of the Bank's
depositors are Arkansas residents who reside in the Bank's primary market area.

     Savings deposits in the Bank at June 30, 1997 were represented by the
various types of savings programs listed below.

<TABLE>
<CAPTION>

Interest       Minimum                                                    Minimum                     Percentage of
 Rate /1/        Term                     Category                         Amount         Balances    Total Deposits
--------       --------                   --------                        --------     -------------- --------------
<S>           <C>                   <C>                                  <C>           <C>            <C>
                                    Demand Deposits

 2.76%         None                 NOW accounts                          $    500     $  9,406,397        6.22%
 4.09          None                 Money market deposits                    2,500       17,807,493       11.78
                                                                                       ------------     -------
                                      Total Demand Deposits                            $ 27,213,890       18.00

 3.04          None                 Savings deposits-passbook                             8,441,845        5.50

                                    Certificates of Deposit

 4.13          3 months or less     Fixed-term, fixed-rate                   1,000        1,558,705        1.03
 5.27          6 months             Fixed-term, fixed-rate                   1,000       33,602,568       22.22
 5.39          12 months            Fixed-term, fixed-rate                   1,000       42,381,305       28.04
 5.77          15-72 months         Fixed-term, fixed-rate                   1,000       38,010,450       25.13
                                                                                       ------------     -------
 5.63                                 Total certificates of deposit                     115,553,028       76.42
                                                                                       ------------     -------
 5.12                                    Total deposits                                $151,208,763      100.00%
                                                                                       ============      ======
</TABLE>
-------------
/1/       Represents weighted average interest rate.

                                      20
<PAGE>
 
         The following table sets forth information regarding average deposit
balances and rates during the periods presented.

<TABLE>
<CAPTION>
                                                                            June 30,
                                                     ----------------------------------------------------
                                                              1997                        1996
                                                     ------------------------    ------------------------
                                                     Average        Average         Average      Average
                                                     Balance         Rate           Balance        Rate
                                                    ------------    ---------     -------------  ---------
<S>                                                 <C>            <C>           <C>            <C>
NOW accounts......................................  $  5,858,963      3.07%       $   4,387,731      2.92%
Money market deposits.............................    18,333,058      4.23           13,777,197      3.94
Savings deposits - passbook.......................     7,792,066      3.02            6,632,913      3.71
Certificates of deposit...........................   116,980,504      5.42           95,231,454      5.66
                                                    ------------                  -------------
    Total.........................................  $148,964,591      5.05        $ 120,029,295      5.26
                                                    ============                  =============

</TABLE>

         The following table sets forth information regarding changes in dollar
amounts of deposits in various types of accounts offered by the Bank between the
dates indicated.

<TABLE>
<CAPTION>
                                                                     Increase
                                       Balance at                   (Decrease)        Balance at
                                        June 30,        % of       from June 30,       June 30,        % of
                                          1997        Deposits         1996              1996        Deposits
                                       ----------     --------    --------------      ----------     --------
<S>                                   <C>             <C>         <C>               <C>               <C>
NOW accounts........................  $  9,406,397      6.22%     $ 2,737,862       $   6,668,535      4.57%
Money market deposits...............    17,807,493     11.78        2,315,902          15,491,591     10.62
Savings deposits - passbook              8,441,845      5.58          413,690           8,028,155      5.50
Certificates of deposits............   115,553,028     76.42         (177,942)        115,730,970     79.31
                                      ------------    ------      -----------       -------------    ------
                                      $151,208,763    100.00%     $ 5,289,512       $ 145,919,251    100.00%
                                      ============    ======      ===========       =============    ======
</TABLE>

         The following table sets forth information regarding time deposits
classified by rates at the dates indicated.

<TABLE>
<CAPTION>

                                                                         At June 30,
                                                               -------------------------------
                                                                   1997               1996
                                                               -------------     -------------
<S>                                                            <C>               <C>
 2.00 -  3.99%...............................................  $          --     $          --
 4.00 -  5.99%...............................................     99,606,159        75,847,271
 6.00 -  7.99%...............................................     15,946,869        39,883,699
 8.00 -  9.99%...............................................             --                --
                                                               -------------     -------------
                                                               $ 115,553,028     $ 115,730,970
                                                               =============     =============
</TABLE>


                                      21
<PAGE>
 
         The following table sets forth information regarding amounts and
maturities of time deposits at June 30, 1997.

<TABLE>
<CAPTION>
                                                         Amount Due
                                  --------------------------------------------------------
                                  Less Than                                        After
Rate                              One Year        1-2 Years        2-3 Years       3 Years         Total
----                              --------        ---------        ---------       -------         -----
<S>                               <C>             <C>            <C>             <C>           <C>
 4.00 -  5.99%.................   $ 4,923,824     $48,797,581    $ 1,570,754     $       --    $  99,606,519
 6.00 -  7.99%.................     4,419,330      11,521,177          6,632             --       15,947,139
                                  -----------     -----------    -----------     ----------    -------------
                                  $53,657,154     $60,318,758    $ 1,577,116     $       --    $ 115,553,658
                                  ===========     ===========    ===========     ==========    =============
</TABLE>

         The following table sets forth information regarding amounts of
certificates of deposit of $100,000 or more by time remaining until maturity at
June 30, 1997.

<TABLE>
<CAPTION>

                                                                         Certificates
                            Maturity Period                               of Deposit
                            ---------------                              ------------
                            <S>                                          <C>
                            Three months or less.......................  $         --
                            Over three through six months..............     2,957,579
                            Over six through 12 months.................     3,929,943
                            Over 12 months.............................     2,486,229
                                                                         ------------
                                Total..................................  $  9,373,751
                                                                         ============
</TABLE>

         The following table sets forth information regarding savings activities
of the Bank for the periods indicated.

<TABLE>
<CAPTION>

                                                                      Year Ended June 30,
                                                               ---------------------------------
                                                                   1997               1996
                                                               --------------      -------------
<S>                                                            <C>                 <C>
Deposits....................................................   $  142,004,936      $  93,529,413
Withdrawals.................................................     (144,249,869)       (91,037,454)
Net increase (decrease) before
  interest credited.........................................               --          2,491,959
Subsidiary acquisition......................................               --         25,101,788
Interest credited...........................................        7,534,445          6,314,641
                                                               --------------      -------------
    Net increase (decrease) in savings
      deposits..............................................   $    5,289,512      $  33,908,388
                                                               ==============      =============
</TABLE>

         Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending, investments and general operating activities.
The Bank is authorized, however, to use advances from the FHLB of Dallas to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Dallas functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB System, the Bank is required to own stock in the FHLB of
Dallas and is authorized to apply for advances. Advances are pursuant to several
different programs, each of which has its own interest rate and range of
maturities. Advances from the FHLB of Dallas are secured by the Bank's stock in
the FHLB of Dallas and first mortgage loans.


                                      22
<PAGE>
 
         The following tables set forth certain information regarding short-term
borrowings by the Bank for the periods indicated. Averages are based on monthly
balances.

<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                                                -------------------------------
                                                                   1997               1996
                                                                -------------      ------------
<S>                                                            <C>                 <C>
Amounts outstanding at end of period:
  FHLB advances...............................................  $  10,000,000      $ 10,000,000

Maximum amount of borrowings outstanding at any month end:
  FHLB advances...............................................  $  12,500,000      $ 10,000,000

Approximate average short-term borrowings outstanding with respect to:
  FHLB advances...............................................  $  10,208,333      $  7,500,000

</TABLE>

Subsidiary Activities

         As federally chartered savings banks, the Bank and its separate
subsidiary savings bank, are each permitted to invest an amount equal to 2% of
its assets in non-savings institution service corporation subsidiaries, with an
additional investment of 1% of assets where such investment serves primarily
community, inner-city and community development purposes. Under such
limitations, as of June 30, 1997 on a consolidated basis the Bank was authorized
to invest up to approximately $6,010,973 in the stock of or loans to such
subsidiaries, including the additional 1% investment for community inner-city
and community development purposes. The Bank has one subsidiary service
corporation, HCB Properties, Inc., which was formed in August 1996 to hold
certain properties acquired by the Bank for possible future expansion, because
the properties are larger than the Bank's anticipated expansion needs, and it is
expected that portions of the properties eventually will be sold. At June 30,
1997, the Bank's aggregate investment in, and loans to, the subsidiary service
corporation totalled $1,307,000, all of which was subject to exclusion from the
Bank's regulatory capital under applicable legal requirements (see "Regulation
of the Banks -- Regulatory Capital Requirements").

Regulation of the Banks

         General. As federally chartered savings institutions, each of the Bank
and its savings bank subsidiary (collectively, the "Banks") is subject to
extensive regulation by the OTS and the FDIC and to OTS regulations governing
such matters as capital standards, mergers, establishment of branch offices,
subsidiary investments and activities and general investment authority. The OTS
periodically examines the Banks for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations of
the Banks because their deposits are insured by the SAIF. The Banks must file
reports with the OTS describing their activities and financial condition and
also are subject to certain reserve requirements promulgated by the Federal
Reserve Board. This supervision and regulation is intended primarily for the
protection of depositors. See also "Proposed Legislative and Regulatory
Changes."

         Federal Home Loan Bank System. The Banks are members of the FHLB
System, which consists of 12 district FHLBs subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a
central credit facility primarily for member institutions. As members of the
FHLB of Dallas, the Banks are required to acquire and hold shares of capital
stock in the FHLB of Dallas in an amount at least equal to 1% of the aggregate
unpaid principal of their home mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or 1/20 of their advances
(borrowings) from the FHLB of Dallas, whichever is greater.

         The FHLB of Dallas serves as a reserve or central bank for its member
institutions within its assigned district. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHLB and the Board of Directors

                                      23
<PAGE>
 
of the FHLB of Dallas. Long-term advances may only be made for the purpose of
providing funds for residential housing finance. At June 30, 1997, the Banks had
$10 million in advances outstanding with the FHLB of Dallas. See " -- Deposit
Activity and Other Sources of Funds -- Borrowings."

         Liquidity Requirements. The Banks are required to maintain average
daily balances of liquid assets (cash, deposits maintained pursuant to Federal
Reserve Board requirements, time and savings deposits in certain institutions,
obligations of the United States and states and political subdivisions thereof,
shares in mutual funds with certain restricted investment policies, highly rated
corporate debt and mortgage loans and mortgage-related securities with less that
one year to maturity or subject to pre-arranged sale within one year) equal to
the monthly average of not less than a specified percentage (currently 5%) of
their net withdrawable savings deposits plus short-term borrowings. The Banks
are also required to maintain average daily balances of short-term liquid assets
at a specified percentage (currently 1%) of the total of their net withdrawable
savings accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet liquidity requirements. The average ratios of
liquid assets and short-term liquid assets of the Banks for June 1997 were
68.11% and 26.23%, respectively.

         Qualified Thrift Lender Test. The Banks are subject to OTS regulations
which use the concept of a Qualified Thrift Lender to determine eligibility for
Federal Home Loan Bank advances and for certain other purposes. To qualify as a
Qualified Thrift Lender, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined to include total assets less intangibles, property
used by a savings institution in its business and liquidity investments in an
amount not exceeding 20% of assets. Qualified Thrift Investments consist of (i)
loans, equity positions or securities related to domestic, residential real
estate or manufactured housing, and educational, small business and credit card
loans, (ii) 50% of the dollar amount of residential mortgage loans subject to
sale under certain conditions, and (iii) stock issued by a Federal Home Loan
Bank. Subject to a 20% of portfolio assets limit, savings institutions are able
to treat as Qualified Thrift Investments 200% of their investments in loans to
finance "starter homes" and loans for construction, development or improvement
of housing and community service facilities or for financing small businesses in
"credit-needy" areas. To be qualified as a Qualified Thrift Lender, a savings
institution must maintain its status as a Qualified Thrift Lender for nine out
of every 12 months. Failure to qualify as a Qualified Thrift Lender results in a
number of sanctions, including the imposition of certain operating restrictions
imposed on national banks and a restriction on obtaining additional advances
from the Federal Home Loan Bank System. Upon failure to qualify as a Qualified
Thrift Lender for two years, a savings institution must convert to a commercial
bank in excess of the required percentage.

         At June 30, 1997, approximately 68.11% and 83.18% of the Banks'
respective portfolio assets were invested in Qualified Thrift Investments.

         Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8% of "risk-weighted" assets. In addition, the OTS has adopted regulations
which impose certain restrictions on institutions that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated CAMELS 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital. See " -- Prompt Corrective Regulatory
Action." Core capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits and "qualifying
supervisory goodwill." Core capital is generally reduced by the amount of an
institution's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill. Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets with only a limited exception for purchased
mortgage servicing rights.


                                      24
<PAGE>
 
         Both core and tangible capital are further reduced by an amount equal
to a savings institution's debt and equity investments in subsidiaries engaged
in activities not permissible to national banks (other than subsidiaries engaged
in activities undertaken as agent for customers or in mortgage banking
activities and depository institutions or their holding companies). As of June
30, 1997, the Banks had approximately $1,307,000 and zero, respectively, of
investments in, or extensions of credit to, non-includible subsidiaries.

         Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles, increased by certain
goodwill amounts and by a pro rated portion of the assets of unconsolidated
includible subsidiaries in which the institution holds a minority interest.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the savings institution's investments in unconsolidated
includible subsidiaries, and, for purposes of the core capital requirement,
qualifying supervisory goodwill.

         In determining compliance with the risk-based capital requirement, a
savings institution is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
institution's core capital. Supplementary capital is defined to include certain
preferred stock issues, nonwithdrawable accounts and pledged deposits that do
not qualify as core capital, certain approved subordinated debt, certain other
capital instruments and a portion of the institution's general loan loss
allowances. Total core and supplementary capital are reduced by the amount of
capital instruments held by other depository institutions pursuant to reciprocal
arrangements and, by the amount of the savings institution's high loan-to-value
ratio land loans, non-residential construction loans and equity investments
other than those deducted from core and tangible capital. At June 30, 1997, the
Banks had no high ratio land or non-residential construction loans and no equity
investments for which OTS regulations require a deduction from total capital.

         The risk-based capital requirement is measured against risk-weighted
assets which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, one- to four-family first mortgages not
more than 90 days past due with loan-to-value ratios under 80% and average
annual occupancy rates of at least 80% and certain qualifying loans for the
construction of one- to four-family residences pre-sold to home purchasers are
assigned a risk weight of 50%. Consumer and residential construction loans are
assigned a risk weight of 100%. Mortgage-backed securities issued, or fully
guaranteed as to principal and interest, by the FNMA or FHLMC are assigned a 20%
risk weight. Cash and U.S. Government securities backed by the full faith and
credit of the U.S. Government (such as mortgage-backed securities issued by
GNMA) are given a 0% risk weight.

         The table below presents the capital position of HEARTLAND Community
Bank relative to its various regulatory capital requirements at June 30, 1997.

<TABLE>
<CAPTION>

                                                                                   Percent of
                                                                  Amount           Assets(1)
                                                                ---------           ------
                                                                  (Dollars in thousands)
             <S>                                                <C>                  <C>
             Tangible capital...............................    $  29,058            16.92%
             Tangible capital requirement...................        2,576             1.50
                                                                ---------           ------
                Excess......................................    $  26,482            15.42%
                                                                =========            =====

             Core capital...................................    $  29,058            16.92%
             Core capital requirement.......................        5,152             3.00
                                                                ---------           ------
                Excess......................................    $  23,906            13.92%
                                                                =========            =====

             Total capital..................................    $  29,819            41.31%
             Risk-based capital requirement.................        5,274             8.00
                                                                ---------          -------
                Excess.....................................     $  24,045            33.31%
                                                                =========            =====
</TABLE>
-----------------
         (1)      Based on adjusted total assets for purposes of the tangible
                  capital and core capital requirements and risk-weighted assets
                  for purpose of the risk-based capital requirement.




                                      25
<PAGE>
 
         The table below presents the capital position of HEARTLAND Community
Bank, F.S.B., relative to its various regulatory capital requirements at June
30, 1997.

<TABLE>
<CAPTION>
                                                                                  Percent of
                                                                  Amount           Assets(1)
                                                                ---------           ------
                                                                  (Dollars in thousands)
             <S>                                                <C>               <C>
             Tangible capital...............................    $   1,822             6.03%
             Tangible capital requirement...................          454             1.50
                                                                ---------           ------
                Excess......................................    $   1,368             4.53%
                                                                =========           ======

             Core capital...................................    $   1,822             6.03%
             Core capital requirement.......................          907             3.00
                                                                ---------           ------
                Excess......................................    $     915             3.03%
                                                                =========           ======

             Total capital..................................    $   2,071            10.85%
             Risk-based capital requirement.................        1,526             8.00
                                                                ---------          -------
                Excess.....................................     $     545             2.85%
                                                                =========          =======
</TABLE>
---------------------
         (1)      Based on adjusted total assets for purposes of the tangible
                  capital and core capital requirements and risk-weighted assets
                  for purpose of the risk-based capital requirement.


         The OTS' risk-based capital requirements require savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital. An institution's interest rate risk will be measured in terms of
the sensitivity of its "net portfolio value" 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. A savings institution
is considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk will be
required to deduct from total capital, for purposes of calculating its
risk-based capital requirement, an amount (the "interest rate risk component")
equal to one-half the difference between the institution's measured interest
rate risk and the normal level of interest rate risk, multiplied by the economic
value of its total assets. Management does not believe the implementation of the
interest rate risk requirement will have a material effect on the Banks.

         The OTS calculates the sensitivity of an institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from an institution's total capital will be based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers. Due to their size and capital level, the Banks are exempt
from the interest rate risk component.

         In addition to requiring generally applicable capital standards for
savings institutions, the Director of the OTS is authorized to establish the
minimum level of capital for a savings institution at such amount or at such
ratio of capital-to-assets as the Director determines to be necessary or
appropriate for such institution in light of the particular circumstances of the
institution. Such circumstances would include a high degree of exposure of
interest rate risk,

                                      26
<PAGE>
 
prepayment risk, credit risk and concentration of credit risk and certain risks
arising from non-traditional activities. The Director may treat the failure of
any savings institution to maintain capital at or above such level as an unsafe
or unsound practice and may issue a directive requiring any savings institution
which fails to maintain capital at or above the minimum level required by the
Director to submit and adhere to a plan for increasing capital. Such an order
may be enforced in the same manner as an order issued by the FDIC.

         Deposit Insurance. The Banks are required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions at a level necessary to
maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured
deposits or at a higher percentage of estimated insured deposits that the FDIC
determines to be justified for that year by circumstances indicating a
significant risk of substantial future losses to the SAIF. Under the FDIC's
risk-based deposit insurance assessment system, the assessment rate for an
insured depository institution depends on the assessment risk classification
assigned to the institution by the FDIC, which is determined by the
institution's capital level and supervisory evaluations. Based on the data
reported to regulators for the date closest to the last day of the seventh month
preceding the semi-annual assessment period, institutions are assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.

         In recent years, institutions with SAIF-assessable deposits, like the
Banks, were required to pay higher deposit insurance premiums than institutions
with deposits insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. In order to recapitalize the SAIF and address the premium disparity, in
November 1996 the FDIC imposed a one-time special assessment on institutions
with SAIF-assessable deposits based on the amount determined by the FDIC to be
necessary to increase the reserve levels of the SAIF to the designated reserve
ratio of 1.25% of insured deposits. Institutions were assessed at the rate of
65.7 basis points based on the amount of their SAIF-assessable deposits as of
March 31, 1995. As a result of the special assessment the Banks incurred a
pre-tax expense totalling approximately $889,011 during the quarter ended
September 30, 1996.

         The special assessment recapitalized the SAIF, and as a result the FDIC
lowered the SAIF deposit insurance assessment rates through the end of 1997 to
zero for well capitalized institutions with the highest supervisory ratings and
0.31% of insured deposits for institutions in the highest risk-based premium
category. Since the BIF is above its designated reserve ratio of 1.25% of
insured deposits, "well-capitalized" institutions in Subgroup A, numbering 95%
of BIF-insured institutions, pay no federal deposit insurance premiums, with the
remaining 5% of institutions paying a graduated range of rates up to 0.27% of
insured deposits for the highest risk-based premium category. Until December 31,
1999, SAIF-insured institutions will be required to pay assessments to the FDIC
at the rate of 6.5 basis points to help fund interest payments on certain bonds
issued by the Financing Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts. During this period, BIF
members will be assessed for these obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments, or sooner if the two funds are merged.

         Since the SAIF now meets its designated reserve ratio as a result of
the special assessment, SAIF members are now permitted to convert to the status
of members of the BIF and may merge with or transfer assets to a BIF member.
Although the Banks would qualify for insurance of deposits of the BIF,
substantial entrance and exit fees apply to conversions from SAIF to BIF
insurance and such fees may make a SAIF to BIF conversion prohibitively
expensive. In the past, the substantial disparity existing between deposit
insurance premiums paid by BIF and SAIF members gave

                                      27
<PAGE>
 
BIF-insured institutions a competitive advantage over SAIF-insured institutions
like the Banks. The reduction of the SAIF deposit insurance premiums effectively
eliminated this disparity and could have the effect of increasing the net income
of the Banks and restoring the competitive equality between BIF-insured and
SAIF-insured institutions. See also "Proposed Legislation and Regulatory
Changes."

         The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that in
considering applications that must be submitted to it by savings institutions,
the FDIC will take into account whether the institution is meeting with the Tier
1 capital requirement for state non-member banks of 4% of total assets for all
but the most highly rated state non-member banks.

         Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves equal to 3% must be maintained on the first $49.3 million of
transaction accounts, and a reserve of 10% must be maintained against all
remaining transaction accounts. This percentage is subject to adjustment by the
Federal Reserve Board. Because required reserves must be maintained in the form
of vault cash or in a noninterest-bearing account at a Federal Reserve Bank, the
effect of the reserve requirement is to reduce the amount of the institution's
interest-earning assets.

         Dividend Restrictions. Under OTS regulations, the Bank is not permitted
to pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of the Conversion.
In addition, the Banks are required by OTS regulations to give the OTS 30 days'
prior notice of any proposed declaration of dividends.

         OTS regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Banks. Under these regulations, an institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulations) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the greater of: (i)
75% of its net income for the previous four quarters; or (ii) 100% of its net
income to date during the calendar year plus an amount that would reduce by
one-half the amount by which its ratio of total capital to assets exceeded
regulatory requirements at the beginning of the calendar year. An institution
with total capital in excess of current minimum capital ratio requirements but
not in excess of the fully phased-in requirements (a "Tier 2 Association") is
permitted, after notice, to make capital distributions without OTS approval of
up to 75% of its net income for the previous four quarters, less dividends
already paid for such period. An institution that fails to meet current minimum
capital requirements (a "Tier 3 Association") is prohibited from making any
capital distributions without the prior approval of the OTS. A Tier 1
Association that has been notified by the OTS that it is in need of more than
normal supervision will be treated as either a Tier 2 or Tier 3 Association. The
Banks are Tier 1 Associations. Despite the above authority, the OTS may prohibit
any institution from making a capital distribution that would otherwise be
permitted by the regulation, if the OTS were to determine that the distribution
constituted an unsafe or unsound practice.


                                      28
<PAGE>
 
         Under the OTS prompt corrective action regulations, the Banks would be
prohibited from making any capital distributions if, after making the
distribution, it would have: (i) a total risk-based capital ratio of less than
8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. See " -- Prompt Corrective Regulatory Action."
Furthermore, during the first year following completion of the Conversion, the
Bank will not pay dividends to the Company if, as a result of any such dividend,
the Bank's tangible capital would be reduced below 10% of its adjusted total
assets.

         In addition to the foregoing, earnings of the Banks appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate on the amount of earnings removed from the
reserves for such distributions. See "Taxation." The Company intends to make
full use of this favorable tax treatment afforded to the Banks, and the Company
and does not contemplate use of any post-Conversion earnings of the Banks in a
manner which would limit either Bank's bad debt deduction or create federal tax
liabilities.

         Transactions with Related Parties. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of an institution is any company or entity
which controls, is controlled by or is under common control with the savings
institution. In a holding company context, the parent holding company of an
institution (such as the Company) and any companies which are controlled by such
parent holding company are affiliates of the savings institution. Generally,
Sections 23A and 23B (i) limit the extent to which the savings institution or
its subsidiaries may engage in "covered transactions" with any one affiliate to
an amount equal to 10% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable,
to the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution. Section 106 of the Bank Holding Company Act which
applies to the Banks, prohibits the Banks from extending credit to or offering
any other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions.

         Loans to Directors, Executive Officers and Principal Stockholders.
Depository institutions like the Banks are also subject to the restrictions
contained in Section 22(h) and Section 22(g) of the Federal Reserve Act on loans
to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, executive officer and to a greater than 10%
stockholder of a depository institution and certain affiliated interests of such
persons, may not exceed, together with all other outstanding loans to such
person and affiliated interests, the institution's loans-to-one- borrower limit
(generally equal to 15% of the institution's unimpaired capital and surplus plus
an additional 10% of such capital and surplus for loans fully secured by certain
readily marketable capital). Section 22(h) also prohibits the making of loans
above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% stockholders of an
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person) as to which such prior board of director approval is required as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, Section 22(h) requires that loans to directors, executive officers and
principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons. Section 22(h) also generally prohibits
a depository institution from paying the overdrafts of any of its executive
officers or directors.

         Section 22(g) of the Federal Reserve Act requires that loans to
executive officers of depository institutions not be made on terms more
favorable than those afforded to other borrowers, requires approval for such
extensions of credit

                                      29
<PAGE>
 
by the board of directors of a the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. In addition, Section 106 of the Bank Holding Company
Act prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.

         Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an institution fails
to satisfy certain minimum capital requirements. All institutions, regardless of
their capital levels, are restricted from making any capital distribution or
paying any management fees that would cause the institution to become
undercapitalized. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") generally is: (i)
subject to increased monitoring by the appropriate federal banking regulator;
(ii) required to submit an acceptable capital restoration plan within 45 days;
(iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of businesses. The
capital restoration plan must include a guarantee by the institution's holding
company that the institution will comply with the plan until it has been
adequately capitalized on average for four consecutive quarters, under which the
holding company would be liable up to the lesser of 5% of the institution's
total assets or the amount necessary to bring the institution into capital
compliance as of the date it failed to comply with its capital restoration plan.
A "significantly undercapitalized" institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution may also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below the "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.

         Under the OTS regulation implementing the prompt corrective action
provisions of FDICIA, the OTS measures an institution's capital adequacy for
purposes of the prompt corrective action rules on the basis of its total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). An institution that is not subject to an order or
written directive to meet or maintain a specific capital level is deemed "well
capitalized" if it also has: (i) a total risk-based capital ratio of 10% or
greater; (ii) a Tier 1 risk-based capital ratio of 6% or greater; and (iii) a
leverage ratio of 5% or greater. An "adequately capitalized" savings institution
is an institution that does not meet the definition of well capitalized and has:
(i) a total risk-based capital ratio of 8% or greater; (ii) a Tier 1 capital
risk-based ratio of 4% or greater; and (iii) a leverage ratio of 4% or greater
(or 3% or greater if the savings institution has a composite 1 CAMELS rating).
An "undercapitalized institution" is an institution that has (i) a total
risk-based capital ratio less than 8%; or (ii) a Tier 1 risk-based capital ratio
of less than 4%; or (iii) a leverage ratio of less than 4% (or 3% if the
institution has a composite 1 CAMELS rating). A "significantly undercapitalized"
institution is defined as an institution that has: (i) a total risk-based
capital ratio of less than 6%; or (ii) a Tier 1 risk-based capital ratio of less
than 3%; or (iii) a leverage ratio of less than 3%. A "critically
undercapitalized" savings institution is defined as an institution that has
"tangible equity" of less than 2%. Tangible equity is defined as core capital
plus cumulative perpetual preferred stock (and related surplus) less all
intangibles other than qualifying supervisory goodwill and certain purchased

                                      30
<PAGE>
 
mortgage servicing rights. The OTS may reclassify a well capitalized savings
institution as adequately capitalized and may require an adequately capitalized
or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category (but may not
reclassify a significantly undercapitalized institution as
critically-undercapitalized) if the OTS determines, after notice and an
opportunity for a hearing, that the savings institution is in an unsafe or
unsound condition or that the institution has received and not corrected a
less-than- satisfactory rating for any CAMELS rating category. As of June 30,
1997, the Banks were classified as "well capitalized" under the prompt
corrective action regulations.

         Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the federal
banking agencies, including the OTS and Federal Reserve Board, released
Interagency Guidelines Establishing Standards for Safety and Soundness and
published a final rule establishing deadlines for submission and review of
safety and soundness compliance plans. The final rule and the guidelines went
into effect on August 9, 1995. The guidelines require depository institutions to
maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution's
business. The guidelines also establish certain basic standards for loan
documentation, credit underwriting, interest rate risk exposure, and asset
growth. The guidelines further provide that depository institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the appropriate federal banking agency determines
that a depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A depository institution must submit an
acceptable compliance plan to its primary federal regulator within 30 days of
receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
believes that the Banks already meet substantially all the standards adopted in
the interagency guidelines, and therefore does not believe that implementation
of these regulatory standards will materially affect the Banks' operations.

         Additionally under FDICIA, as amended by the CDRI Act, the federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On July 10,
1995, the federal banking agencies, including the OTS and Federal Reserve Board,
issued proposed guidelines relating to asset quality and earnings. Under the
proposed guidelines, an FDIC insured depository institution should maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by the banking agencies,
would not have a material effect on the Banks' operations.

Regulation of the Company

         General. The Company is a savings institution holding company as
defined by the Home Owners' Loan Act. As such, the Company is registered with
the OTS and is subject to OTS regulation, examination, supervision and reporting
requirements. As subsidiaries of a savings institution holding company, the
Banks are subject to certain restrictions in their dealings with the Company and
affiliates thereof. The Company also is required to file certain reports with,
and otherwise comply with the rules and regulations of, the SEC under the
federal securities laws.

         Activities Restrictions. The Board of Directors of the Company
presently intends to continue operating the Company as a multiple savings
institution holding company, in order to facilitate possible future branch
expansion, in the event the Bank ever becomes subject to Arkansas branching
restrictions, which are based on the home office location of each separately
chartered banking institution. As a result, the activities of the Company and
any of its subsidiaries (other than the Banks or other subsidiary savings
institutions) will be subject to various restrictions. Among other things, no
multiple savings institution holding company or subsidiary thereof which is not
an institution shall commence or continue for a limited period of time after
becoming a multiple savings institution holding company or subsidiary

                                      31
<PAGE>
 
thereof, any business activity, upon prior notice to, and no objection by, the
OTS, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution; (iv) holding or managing properties used
or occupied by a subsidiary savings institution; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies; or (vii) unless the
Director of the OTS by regulation prohibits or limits such activities for
savings institution holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. A multiple
savings institution holding company must obtain the approval of the OTS prior to
engaging in the activities described in (vii) above. In addition, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by an institution holding company of an activity constitutes a
serious risk to the financial safety, soundness or stability of its subsidiary
savings institution, the Director of the OTS may impose such restrictions as
deemed necessary to address such risk including limiting: (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.

         Restrictions on Acquisitions. Savings institution holding companies may
not acquire, without prior approval of the Director of the OTS, (i) control of
any other savings institution or savings institution holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of an institution or holding company thereof which is not a subsidiary. Under
certain circumstances, a registered savings institution holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the voting shares of an under-capitalized savings institution pursuant to a
"qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings institution holding company's other subsidiaries must have tangible
capital of at least 6 1/2% of total assets, there must not be more than one
common director or officer between the savings institution holding company and
the issuing savings institution, and transactions between the savings
institution and the savings institution holding company and any of its
affiliates must conform to Sections 23A and 23B of the Federal Reserve Act.
Except with the prior approval of the Director of the OTS, no director or
officer of an institution holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings institution holding company.

         The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings institution holding company which controls
savings institutions in more than one state if: (i) the multiple savings
institution holding company involved controls an institution which operated a
home or branch office in the state of the institution to be acquired as of March
5, 1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the FDIC Act; or
(iii) the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings institution holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).

         OTS regulations permit federal savings institutions to branch in any
state or states of the United States and its territories. Except in supervisory
cases or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal institution may not establish an out-of-state
branch unless (i) the federal institution qualifies as a QTL or as a "domestic
building and loan association" under ss.7701(a)(19) of the Internal Revenue Code
and the total assets attributable to all branches of the institution in the
state would qualify such branches taken as a whole for treatment as a QTL or as
a domestic building and loan association and (ii) such branch would not result
in (a) formation of a prohibited multi-state multiple savings holding company or
(b) a violation of certain statutory restrictions on branching by savings
institution subsidiaries of banking holding companies. Federal savings
institutions generally may not establish new branches unless the institution
meets or exceeds minimum regulatory capital requirements. The OTS

                                      32
<PAGE>
 
will also consider the institution's record of compliance with the Community
Reinvestment Act of 1977 in connection with any branch application.

         Federal Securities Law. The Common Stock is registered with the SEC
under the Securities Exchange Act of 1934, as amended ("Securities Exchange
Act"), and, under OTS regulations, generally may not be deregistered for at
least three years after the Conversion. The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the Securities Exchange Act.

Federal Income Taxation

         Savings institutions such as the Banks are subject to the provisions of
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") in
the same general manner as other corporations. Through tax years beginning
before December 31, 1995, institutions such as the Banks which met certain
definitional tests and other conditions prescribed by the Internal Revenue Code
benefitted from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans are separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and "nonqualifying loans," which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans may be based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the "percentage of taxable income method"). Under the
experience method, the bad debt deduction for an addition to the reserve for
qualifying real property loans was an amount determined under a formula based
generally on the bad debts actually sustained by a savings institution over a
period of years. Under the percentage of taxable income method, the bad debt
reserve deduction for qualifying real property loans was computed as 8% of a
savings institution's taxable income, with certain adjustments. The Banks
generally elected to use the method which has resulted in the greatest
deductions for federal income tax purposes in any given year.

         Legislation that is effective for tax years beginning after December
31, 1995 requires institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan reserve that exceeds the
pre-1988 tax loan loss reserve. The Banks will no longer be allowed to use the
reserve method for tax loan loss provisions, but would be allowed to use the
experience method of accounting for bad debts. There will be no future effect on
net income from the recapture because the taxes on these bad debts reserves has
already been accrued as a deferred tax liability.

         The Banks' federal income tax returns have not been examined by the
regulatory authorities in the past five years. For additional information, see
Note 12 of the Notes to Consolidated Financial Statements contained elsewhere
herein.

         For taxable years beginning after June 30, 1986, the Internal Revenue
Code imposes an alternative minimum tax at a rate of 20%. The alternative
minimum tax generally applies to a base of regular taxable income plus certain
tax preferences ("alternative minimum taxable income" or "AMTI") and is payable
to the extent such AMTI exceeds an exemption amount. The Internal Revenue Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax-exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) for taxable years including 1987 through 1989,
50% of the excess of (i) the taxpayer's pre-tax adjusted net book income over
(ii) AMTI (determined without regard to this latter preference and prior to
reduction by net operating losses). For taxable years beginning after 1989, this
latter preference has been replaced by 75% of the excess (if any) of (i)
adjusted current earnings as defined in the Internal Revenue Code, over (ii)
AMTI (determined without regard to this preference and prior to reduction by net
operating losses). For any taxable year beginning after 1986, net operating
losses can offset no more than 90% of AMTI. Certain payments of alternative
minimum taxes may be used as credits against regular tax liabilities in future
years. In addition, for taxable years after 1986 and before 1992, corporations,

                                      33
<PAGE>
 
including savings institutions, are also subject to an environmental tax equal
to 0.12% of the excess of AMTI for the taxable year (determined without regard
to net operating losses and the deduction for the environmental tax) over $2.0
million. The Banks are not currently paying any amount of alternative minimum
tax but may, depending on future results of operations, become subject to this
tax.

State Income Taxation

         The Banks are subject to Arkansas corporation income tax which is 6.5%
of all taxable earnings when income exceeds $100,000. The Company is
incorporated under Oklahoma law and qualified to do business in Arkansas as a
foreign corporation, and accordingly the Company incurs certain franchise and
other taxes, which management does not expect to be material to the Company as a
whole.

Employees

         As of June 30, 1997, the Bank had 63 full-time and 4 part-time
employees, none of whom was represented by a collective bargaining agreement.
Management considers the Bank's relationships with its employees to be good.

Executive Officers Who Are Not Directors

         The following table sets forth information regarding the executive
officer of the Company who does not serve on the Board of Directors.

<TABLE>
<CAPTION>
                                                   Age at
                                                  June 30,
         Name                                       1997                       Title
         ----                                     -------                      -----
         <S>                                      <C>                          <C>
         William C. Lyon                             56                        Vice President of the Company; Senior Vice
                                                                               President and Chief Lending Officer of the
                                                                               Bank
</TABLE>
         The following paragraph sets forth information regarding the principal
occupation of the executive officer designated above.

         William C. Lyon  has served as Vice President of the Company since 
December 1996 and has been Senior Vice President and Chief Lending Officer of
the Bank since May 1996. Mr. Lyon also serves as a director and the Chief
Lending Officer of the Bank's subsidiary savings bank. From January 1994 to May
1996, Mr. Lyon was a self-employed banking consultant and from 1991 to 1994 he
served as Senior Vice President of American National Bank and Trust Co. in
Shawnee, Oklahoma. Mr. Lyon is a member of the Lions Club and serves on various
Chamber of Commerce committees.


                                      34
<PAGE>
 
Item 2.  Properties

         The following table sets forth information regarding the Bank's offices
at June 30, 1997.
<TABLE> 
<CAPTION> 

                                  Year           Owned or                             Approximate
                                 Opened           Leased             Book Value      Square Footage
                                 ------          --------            ----------      --------------
<S>                              <C>             <C>                 <C>             <C> 
Main Office:

237 Jackson Street, S.W           1933             Owned              $720,900             12,000
Camden, Arkansas

Branch Offices:

23233 Interstate 30, No. 201      1996             Leased               18,300              1,000
Bryant, Arkansas

208 Cardinal Shopping Center      1981             Owned               156,000              1,200
Camden, Arkansas

610 West 4th Street               1969             Owned               724,000              3,500
Fordyce, Arkansas

109 North Chester                 1993             Owned               610,000              1,800
Little Rock, Arkansas

207 North Church2                 1993             Leased               26,000              2,200
Monticello, Arkansas

108 East Pine3                    1996             Leased              120,900                900
Sheridan, Arkansas
</TABLE> 
-------------- 

     1    Limited service loan production office opened in November 1996.
     2    The Bank built a 7,400 square foot replacement branch at 473 Highway
          425 North in Monticello, which opened in July 1997 at an aggregate
          building cost of approximately $1,250,000.
     3    The Bank built a 5,500 square foot replacement branch at 108 South
          Main Street in Sheridan, which opened in August 1997 at an aggregate
          building cost of approximately $975,000.


         In addition to the offices described above, at June 30, 1997 the Bank
held five other properties located in various communities within the Bank's
primary market area. These properties were acquired for possible future
construction of additional offices and related facilities, though certain of the
properties are larger than the Bank's foreseeable needs, and therefore portions
of those properties may be sold by the Bank. At that date, the aggregate net
book value of these properties totaled $1.1 million, of which $480,000 was
classified as held for resale. It is anticipated that in the future management
may determine to expand the Bank's network of banking facilities by installing
ATMs in existing or new banking facilities, by building branches or other
facilities on the properties held by the Bank, by acquiring other facilities or
sites and/or by acquiring banks or other financial companies with their own
facilities.

         The book value of the Bank's aggregate investment in properties,
premises and equipment totaled approximately $4.6 million at June 30, 1997. See
Note 7 of the Notes to Consolidated Financial Statements.

                                       35
<PAGE>
 
Item 3.  Legal Proceedings

         From time to time, the Bank is a party to various legal proceedings
incident to its business. At June 30, 1997, there were no legal proceedings to
which the Company or the Bank was a party, or to which any of their property was
subject, which were expected by management to result in a material loss to the
Company or the Bank, and there were no pending regulatory proceedings to which
the Company, the Bank or its subsidiaries was a party, or to which any of their
properties was subject, which were expected to result in a material loss.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.


                                    PART II

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

         The information required by this item is incorporated by reference to
"Item 1. Business -- Regulation of the Banks -- Dividend Restrictions" herein
and "Market Information," "Market Price of Common Stock and Dividend
Information" and Note 21 of the Notes to Consolidated Financial Statements in
the portions of the Annual Report filed as Exhibit 13 to this report.

Item 6.  Selected Financial Data

         The information required by this item is incorporated by reference to
"Selected Consolidated Financial and Other Data" in the portions of the Annual
Report filed as Exhibit 13 to this report.

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

         The information required by this item is incorporated by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the portions of the Annual Report filed as Exhibit 13 to this
report.

Item 8.  Financial Statements and Supplementary Data

         The financial statements required by this item are incorporated by
reference to the Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Independent Auditors' Reports in the portions of the
Annual Report filed as Exhibit 13 to this report.

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

         Effective June 25, 1997, the Company dismissed Gaunt & Co., Little
Rock, Arkansas, and engaged Miller, England & Company, Little Rock, Arkansas, as
the Company's independent certified public accountants. For additional
information, see the Company's Current Report on Form 8-K dated June 25, 1997,
which is incorporated herein by reference (File No. 0-22423).

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant

         The information required by this item is incorporated by reference to
"Election of Directors" in the Proxy Statement and "Item 1. Description of
Business -- Executive Officers Who Are Not Directors" herein.

                                       36
<PAGE>
 
Item 11.  Executive Compensation

         The information required by this item is incorporated by reference to
"Executive Compensation" in the Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         The information required by this item is incorporated by reference to
"Voting Securities and Security Ownership" and "Election of Directors" in the
Proxy Statement.

Item 13.  Certain Relationships and Related Transactions

         The information required by this item is incorporated by reference to
"Transactions with Management" in the Proxy Statement.

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

         (a)  List of Documents Filed as Part of this Report

         (1) Financial Statements. The following consolidated financial
statements are incorporated by reference from Item 8 hereof:

                  Independent Auditors' Reports

                  Consolidated Statements of Financial Condition as of 
                  June 30, 1997 and 1996

                  Consolidated Statements of Income for the years ended 
                  June 30, 1997, 1996, and 1995

                  Consolidated Statements of Stockholders' Equity for 
                  the years ended June 30, 1997, 1996 and 1995

                  Consolidated Statements of Cash Flows for the years 
                  ended June 30, 1997, 1996 and 1995

                  Notes to Consolidated Financial Statements for the 
                  years ended June 30, 1997, 1996 and 1995

                  Consolidated Statements of Income of subsidiary for 
                  the period from July 1, 1994 to May 3, 1996 (uanudited)

                  Consolidated Statements of Stockholders' Equity of subsidiary
                  for the period from July 1, 1994 to May 3, 1996 (unaudited)

                  Consolidated Statements of Cash Flows of subsidiary for the
                  period from July 1, 1994 to May 3, 1996 (unaudited)

                  Notes to Financial Statements of subsidiary (unaudited)

         (2) Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.

                                       37
<PAGE>
 
         (3) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-K and is also the Exhibit Index.

<TABLE> 
<CAPTION> 
      No.                           Description
      ---                           -----------
      <S>                     <C> 
      3.1                     Articles of Incorporation of HCB Bancshares, Inc. *

      3.2                     Bylaws of HCB Bancshares, Inc. *

      4                       Form of Common Stock Certificate of HCB Bancshares, Inc. *

      10.1                    Form of HCB Bancshares, Inc. 1997 Stock Option and Incentive Plan *+

      10.2                    Form of HCB Bancshares, Inc. Management Recognition Plan and Trust Agreement *+

      10.3(a)                 Employment Agreements by and between Heartland Community Bank and Vida H.
                              Lampkin and Cameron D. McKeel *+

      10.3(b)                 Employment Agreements by and between HCB Bancshares, Inc. and Vida H. Lampkin
                              and Cameron D. McKeel *+

      10.4(a)                 Change-in-Control Protective Agreement between Heartland Community Bank and
                              William C. Lyon *+

      10.4(b)                 Change-in-Control Protective Agreement between HCB Bancshares, Inc. and William C.
                              Lyon *+

      10.5                    Heartland Community Bank Directors' Retirement Plan, as amended*+

      13                      Portions of Annual Report to Stockholders for the Fiscal Year Ended June 30, 1997

      21                      Subsidiaries**

      27                      Financial Data Schedule
</TABLE> 

*        Incorporated by reference to the Company's Registration Statement on 
         Form SB-2 (File No. 333-19093).
**       Incorporated by reference to Item 1 herein.
+        Management contract or compensatory plan or arrangement.

         (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K
dated June 25, 1997 reporting under Item 4 thereof a change of the Company's
independent certified public accountants. See Item 9 herein.

         (c) Exhibits. The exhibits required by Item 601 of Regulation S-K are
either filed as part of this Annual Report on Form 10-K or incorporated by
reference herein.

         (d) Financial Statements and Schedules Excluded from Annual Report.
There are no other financial statements and financial statement schedules which
were excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b)
which are required to be included herein.

                                       38
<PAGE>
 
                                  SIGNATURES


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

                                      HCB BANCSHARES, INC.


Date: September 29, 1997              By: /s/ Vida H. Lampkin
                                          -------------------
                                          Vida H. Lampkin
                                          Chairman of the Board, President and
                                          Chief Executive Officer
                                          (Duly Authorized Representative)

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


By: /s/ Vida H. Lampkin
   -----------------------------------------------
        Vida H. Lampkin
        Chairman of the Board, President and Chief
        Executive Officer
        (Principal Executive, Financial and
        Accounting Officer)


By: /s/ Cameron D. McKeel
   -----------------------------------------------
        Cameron D. McKeel
        Director and Vice President


By: /s/ Roy Wayne Moseley
   -----------------------------------------------
        Roy Wayne Moseley
        Director


By: /s/ Bruce D. Murry
   -----------------------------------------------
        Bruce D. Murry
        Director


By: /s/ Carl E. Parker, Jr.
   -----------------------------------------------
        Carl E. Parker, Jr.
        Director


By: /s/ Lula Sue Silliman
   -----------------------------------------------
        Lula Sue Silliman
        Director


By: /s/ Clifford Steelman
   -----------------------------------------------
        Clifford Steelman
        Director

                                       39