SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                              ______________________

                                    FORM 10-K

          FOR ANNUAL AND TRANSITION  REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
          THE SECURITIES EXCHANGE ACT OF 1934


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

                     For the fiscal year ended June 30, 2001

                         Commission File Number: 0-22423

                              HCB BANCSHARES, INC.
             ------------------------------------------------------
             (Exact Name of Registrant 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 (b) of the Act: None

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

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

     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,  as of a
specified  date within the past 60 days:  $17,395,555  (1,386,100  shares at the
last sale  price on August  31,  2001  ($12.55  per  share);  for this  purpose,
directors,  executive  officers  and 5%  stockholders  have  been  deemed  to be
affiliates).

     State the number of shares  outstanding of each of the issuer's  classes of
common equity,  as of the latest  practicable  date:  2,118,223 shares of common
stock as of August 31, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE

     The following lists the documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:

1.   Portions of Annual  Report to  Stockholders  for the Fiscal Year Ended June
     30, 2001. (Parts II and IV)

2.   Portions of Proxy  Statement for the 2001 Annual  Meeting of  Stockholders.
     (Part III)


<PAGE>
                                     PART I
ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

GENERAL

     HCB BANCSHARES,  INC. HCB Bancshares,  Inc. ("Bancshares") was incorporated
under the laws of the State of Oklahoma in December 1996 at the direction of the
Board of Directors of HEARTLAND  Community  Bank (the "Bank") for the purpose of
serving  as a  savings  institution  holding  company  of  the  Bank,  upon  the
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").  The consolidated  financial  statements  include the accounts of
Bancshares and the Bank and are collectively  referred to as the "Company".  All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

     Prior  to the  Conversion,  Bancshares  did  not  engage  in  any  material
operations. Since the Conversion, Bancshares has had no significant assets other
than the outstanding capital stock of the Bank, a portion of the net proceeds of
the  Conversion  and notes  receivable,  one of which is from the Employee Stock
Ownership Plan ("ESOP").  Bancshares  principal  business is the business of the
Bank.  At June 30,  2001,  the Company had  consolidated  total assets of $287.6
million,  deposits of $161.3 million and stockholders'  equity of $31.9 million,
or 11.1% of total assets.

     The holding company  structure  permits  Bancshares to expand the financial
services  currently  offered through the Bank. As a holding company,  Bancshares
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. Bancshares is classified as a unitary savings
institution holding company and is subject to regulation by the Office of Thrift
Supervision ("OTS"). As long as Bancshares remains a unitary savings institution
holding  company,  under current law it can  diversify its  activities in such a
manner as to include any  activities  allowed by law or  regulation to a unitary
savings institution holding company. See "Regulation -- Regulation of Bancshares
-- 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 at that time were 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.

     On  February  23, 1998 the Bank sold all of the shares of stock of Heritage
Banc Holding,  Inc., parent of its subsidiary savings bank,  HEARTLAND Community
Bank, FSB ("FSB"), pursuant to an agreement between the Bank and the Bank of the
Ozarks,  Inc.  ("BOO").  Upon  completion of the transaction and pursuant to the
terms of the agreement, the Bank acquired the loans and certain other assets and
non-deposit  liabilities  of the  Little  Rock,  Arkansas  branch of FSB and all
assets and  liabilities  of the  Monticello,  Arkansas  branch  and the  Bryant,
Arkansas loan production office of FSB and BOO acquired the savings deposits and
premises and  equipment of the Little Rock,  Arkansas  branch of FSB, as well as
FSB's holding company charter and stock.  This  transaction was  substantively a
branch  sale.  Also at such  time,  Bancshares  became a unitary  rather  than a
multiple savings institution holding company.

     The Bank  currently  operates  through  six  full-service  banking  offices
located in Camden (2),  Fordyce,  Sheridan,  Monticello,  and Bryant,  Arkansas.
Historically,  the  principal  business  strategy  of the Bank,  like most

                                       1
<PAGE>
other savings institutions in Arkansas and elsewhere, has been to accept savings
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.

     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 a 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
installation of ATMs, and an 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)  complementing  the
Bank's internally generated growth, by 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 and Bryant areas,
management expects to find significant deposit growth and lending  opportunities
throughout central and southern Arkansas.

     As a  federally  chartered  savings  institution,  the Bank is  subject  to
extensive  regulation  by the OTS.  The  Bank's  lending  activities  and  other
investments must comply with various federal  regulatory  requirements,  and the
OTS  periodically  examines  the Bank for  compliance  with  various  regulatory
requirements.  The Federal Deposit Insurance  Corporation  ("FDIC") also has the
authority to conduct special  examinations.  The Bank must file reports with the
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").

MARKET AREA

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

     The year 2000 census data indicates  that the  population  has  experienced
growth in Bradley  (6.8%),  Cleveland  (10.2%),  Drew (7.8%),  Grant (18.0%) and
Saline  (30.1%)  Counties,  while  population  has declined  somewhat in Calhoun
(-1.4%),  Dallas (-4.2%) and Ouachita  (-5.8%) Counties over the past ten years.
Median  household  income  has been well above the  Arkansas  average in Saline,
Grant and  Cleveland  Counties,  slightly  below the  Arkansas  average in Drew,
Ouachita,  and Calhoun  Counties,  and well below the Arkansas average in Dallas
and Bradley Counties, though the Arkansas average is below the national average.
With respect to  unemployment  rates,  the  Arkansas  average has tended to rise
slightly above the national average, and while unemployment rates have been well
below the  Arkansas  average  in Saline  County,  unemployment  rates  have been
moderately above the Arkansas average in Grant and Cleveland Counties,  and well
above the  Arkansas  average in  Bradley,  Calhoun,  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 Georgia Pacific in the timber industry and Lockheed
Martin  and   Atlantic   Research  in  the  defense   industry,   SAU  Tech  and
UA-Monticello.  In addition, industries in the Bryant area include Bryant School
District as the largest employer, with Alcoa as the largest industrial business,
and United Auto Group as the second largest employer.

                                       2
<PAGE>

COMPETITION

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

     Direct   competition   for  savings   deposits  comes  from  other  savings
institutions,  credit  unions,  and both  regional and local  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 loan  products,  interest  rates  and the  quality  of
personal  service.  Competition  for  origination  of real estate loans normally
comes from other  savings  institutions,  commercial  banks,  credit  unions and
mortgage companies.

     The  Bank's  primary  competition  comes from  institutions  located in the
Bank's  primary  market  area.  Competing  financial  institutions  offer a wide
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
collateralized  by mortgages on existing and on  construction  of  single-family
residences in the Bank's primary  market area,  and  commercial  real estate and
multifamily  properties in the states of Arkansas and  Tennessee.  The Bank also
makes a variety of consumer  and  commercial  business  loans.  The Bank has for
several years, made commercial real estate loans in the Memphis,  Tennessee area
through a long-standing broker  relationship.  Management expects to continue to
expand 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   collateralized   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  of  each  single-family  dwelling  in the  development  does  not  exceed
$500,000;  (ii) the  institution is in compliance  with its  regulatory  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, 2001,  the maximum
aggregate amount that the Bank could have lent to any one borrower under the 15%
limit was $4.6 million. At such date, the largest aggregate amount of loans that
the Bank had  outstanding  to any one  borrower was $4.7  million.  Although the
aggregate  loan balance as of June 30, 2001 exceeded the Bank's lending limit at
that date,  the aggregate  balance was within the lending limit on the dates the
loans were approved by the board and booked. Bancshares may participate in loans
to one borrower thereby  permitting loans to one borrower to be made by the Bank
and Bancshares lending together that exceed the Bank's regulatory loan limit. At
June 30, 2001, the Bank and Bancshares'  loans to the borrower referred to above
totaled  approximately $5.4 million with Bancshares carrying $0.7 million of the
loans.

                                       3
<PAGE>
     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,  2001,  the Bank had no  concentrations  of loans
exceeding 10% of gross loans other than as disclosed below.
<TABLE>
<CAPTION>
                                                                   At June 30,
                                        ----------------------------------------------------------------------
                                                2001                  2000                      1999
                                        -------------------       ---------------         -----------------
                                        Amount          %         Amount      %           Amount        %
                                        ------        -----       ------    -----         ------      -----
<S>                                 <C>              <C>      <C>            <C>       <C>            <C>
Type of Loan
------------
 Real estate loans:
  One-to-four family residential    $ 57,001,679     38.97%   $ 61,198,180   42.26%    $ 53,622,417   43.74%
  Multi-family loans                   6,810,198      4.66       9,220,931    6.37        9,226,426    7.53
  Non-residential                     49,736,511     34.01      48,756,744   33.67       41,907,368   34.18
  Loans to facilitate sale of
    foreclosed real estate                    --        --              --      --               --      --
  Land and other mortgage loans       10,080,790      6.89       5,644,050    3.90        3,547,514    2.89
Consumer loans:
  Loans secured by savings
    deposits                           2,488,948      1.70       2,320,915    1.60        2,021,141    1.65
  Home improvement                        23,611      0.02          40,851    0.03          125,990    0.10
  Auto                                 6,779,218      4.64       6,589,480    4.55        4,269,898    3.48
  Other consumer                       2,050,039      1.40       2,260,697    1.56        2,517,190    2.05
Commercial                            11,289,519      7.71       8,769,131    6.06        5,367,611    4.38
                                    ------------    ------    ------------  ------     ------------  ------
    Total                           $146,260,513    100.00%   $144,800,979  100.00%    $122,605,555  100.00%
                                    ------------    ------     -----------  ------     ------------  ------
Less:
  Loans in process                  $ 13,294,723              $  8,100,982             $  6,150,810
  Deferred loan costs (fees), net       (131,745)                 (158,217)                 (37,339)
  Allowance for loan losses            1,446,114                 1,231,709                1,329,201
                                    ------------              ------------             ------------
  Total                             $131,651,421              $135,626,505             $115,162,883
                                    ============              ============             ============
<CAPTION>
                                                        At June 30,
                                         -----------------------------------------
                                                1998                     1997
                                         ------------------      -----------------
                                         Amount         %        Amount        %
                                         ------       -----      ------      -----
<S>                                   <C>            <C>      <C>            <C>
Type of Loan
-------------
 Real estate loans:
  One-to-four family residential      $ 49,267,399   44.75%   $ 62,340,601   60.90%
  Multi-family loans                    12,577,034   11.43       8,873,156    8.67
  Non-residential                       35,321,040   32.08      18,814,701   18.38
  Loans to facilitate sale of
    foreclosed real estate                 473,476    0.43         616,660    0.60
  Land and other mortgage loans            598,860    0.54         483,236    0.47
Consumer loans:
  Loans secured by savings
    deposits                             2,215,441    2.01       2,434,621    2.38
  Home improvement                       1,291,174    1.17       1,665,244    1.63
  Auto                                   4,070,750    3.70       2,399,648    2.34
  Other consumer                         1,569,076    1.43       2,629,442    2.58
Commercial                               2,708,927    2.46       2,101,963    2.05
                                      ------------  ------    ------------  ------
    Total                             $110,093,177  100.00%   $102,359,272  100.00%
                                      ------------  ------    ------------  ------
Less:
  Loans in process                    $  3,921,787            $  2,057,095
  Deferred loan costs (fees), net          122,679                 167,069
  Allowance for loan losses              1,468,546               1,492,473
                                      ------------            ------------
  Total                               $104,580,165            $ 98,642,635
                                      ============            ============
</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,  at June 30, 2001.  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 After
                                     Due Within             One Through              Due After
                                      One Year              Five Years              Five Years            Total
                                      --------              ----------              ----------            -----
                                                           (In thousands)
<S>                                   <C>                    <C>                     <C>                 <C>
Real estate loans:
  One-to-four family mortgage
    loans.........................    $12,169                $ 20,697                $ 24,136            $ 57,002
  Other mortgage loans............     18,673                  18,996                  28,958              66,627
Commercial loans..................      5,826                   4,174                   1,290              11,290
Consumer loans:
  Loans secured by savings deposits     2,208                     274                       7               2,489
  Other..........................       3,189                   5,148                     516               8,853
                                      -------                --------                --------            --------
     Total........................    $42,065                $ 49,289                $ 54,907            $146,261
                                      =======                ========                ========            ========
</TABLE>

     The following table sets forth as of June 30, 2001, dollar amounts of loans
due one year or more after June 30, 2001 that had  predetermined  interest rates
and that had adjustable interest rates at that date.
<TABLE>
<CAPTION>
                                                 Predetermined           Floating or
                                                      Rates            Adjustable Rates            Total
                                                  -------------        ----------------          --------
                                                                       (In thousands)
<S>                                                 <C>                    <C>                  <C>
      Real estate loans:
        One-to-four family mortgage loans....       $  38,100              $   6,733            $  44,833
        Other mortgage loans.................          37,044                 10,910               47,954
      Commercial loans.......................           4,106                  1,358                5,464
      Consumer loans:
        Loans secured by savings deposits....             281                     --                  281
        Other consumer loans.................           5,664                     --                5,664
                                                    ---------              ---------            ---------
          Total..............................       $  85,195              $  19,001            $ 104,196
                                                    =========              =========            =========
</TABLE>
     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.


                                       5
<PAGE>
     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,
                                                                 --------------------------------------------------
                                                                    2001             2000              1999
                                                                 -----------      ------------     -------------
<S>                                                             <C>               <C>              <C>
Loans originated:
  Real estate loans:
    One-to-four family residential............................  $  28,443,919     $  46,925,450    $  24,486,365
    Other mortgage loans......................................     22,007,354        29,145,079       18,804,077
  Commercial loans............................................      4,465,227         7,973,954        7,350,903
  Consumer loans..............................................      9,659,572        13,515,847        5,380,714
                                                                -------------     -------------    -------------
     Total loans originated...................................  $  64,576,072     $  97,560,330    $  56,022,059
                                                                =============     =============    =============

Loans purchased:
  Real estate loans...........................................  $      40,000     $      82,547    $          --
                                                                =============     =============    =============

Loans sold....................................................  $  12,732,692     $ 10,160,826     $  13,140,464
                                                                =============     ============     =============
</TABLE>
     The Bank has increased both its scope of loan products offered and its loan
origination  efforts,  including  the addition of new  consumer  and  commercial
business loan  offerings with an increased  emphasis on the  origination of such
loans and  commercial  and  multi-family  real  estate  loans.  However,  higher
interest  rates in the first half of the fiscal  year ended June 30,  2001,  and
increased  competition  resulted in the  origination  of fewer numbers and total
amount of 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 one  large  homebuilder  with  which  the  Bank  has a  long-standing
relationship.   The  Bank's   experience  with  its  purchased  loans  has  been
successful.

     The Bank originates long term,  fixed-rate,  single-family  loans and sells
them to  investors  in the  secondary  market.  Management  expects  the Bank to
increase its  origination of selected types of loans that do not meet the Bank's
loan portfolio needs, such as long-term  fixed-rate  residential  mortgage loans
for sale to investors.

     ONE-TO-FOUR FAMILY RESIDENTIAL LENDING.  Historically, the Bank's principal
lending  activity has been the  origination  of  fifteen-year  fixed-rate  first
mortgage  loans  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 $75,000. At
June 30,  2001,  $57.0  million,  or  39.0%,  of the  Bank's  total  loans  were
collateralized 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 30-year  one-to-four family portfolio loans, due to the interest
rate risks  associated  with such  longer term loans,  management  has  approved
shifting  the Bank's  one-to-four  family  residential  lending  emphasis in the
future  away from the  origination  of such loans for the Bank's  portfolio  and
toward  the  origination  of such  loans for sale.  Currently,  it is the Bank's
policy to originate all 30-year term  one-to-four  family  residential  loans in
accordance  with the  investor's  underwriting  guidelines  and to sell all such
originations promptly to investors,  servicing released.  Such loan originations
and  sales  have  become  significant.   One-to-four-family   residential  loans
originated  during the year totaled $29.1 million with $12.7 million or 43.7% of
originations sold or to be sold in the secondary market.  The Bank will continue
to make  non-conforming  loans to be held in the  Bank's  portfolio.  Management
expects to continue these policies in the future.

                                       6
<PAGE>
     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% 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, 2001, the Bank's loan portfolio included
$4.2 million of loans  collateralized  by one-to-four  family  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  collateralized  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 interest  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, and by requiring the involvement of
qualified builders.

     COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. The Bank offers commercial
and multi-family  real estate loans in order to benefit from the higher interest
rates than could be obtained from  investment  securities.  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 this method 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.

     Most of the  Bank's  commercial  and  multi-family  real  estate  loans are
collateralized  by properties  located in communities  within Arkansas that have
experienced   significant  growth  in  recent  years.  The  Bank's  emphasis  on
increasing  this  portfolio  resulted  in the  addition  to the Bank's  staff of
commercial and  multi-family  real estate loan originators who work closely with
borrowers and various members of the commercial real estate industry  throughout
Arkansas.  As opportunities  for originations of such loans have increased,  the
Bank  has  been  expanding  its  loan  underwriting  and  servicing  staff.  All
commercial  and  multi-family   loans  above  loan  officers'  approved  lending
authorities  are reviewed and approved by the Bank's  lending  committees at the
headquarters  in Camden  prior to any  funding or the  issuance  of any  binding
commitment by the Bank.

     The Bank's  commercial real estate loans may be  collateralized by offices,
warehouses,  shopping centers,  land, nursing homes,  single-family  subdivision
developments and other income-producing and commercial properties.  Multi-family
real  estate  loans  are  collateralized  by  greater  than  one-to-four  family
residential  properties.  At June 30,  2001,  the Bank had 273  commercial  real
estate,  construction commercial real estate, land, and multi-family loans, with
an average loan balance of  approximately  $211,000.  At that date,  50 of these
loans  totaling  approximately  $8.7 million were  collateralized  by properties
outside  Arkansas,  and none of these  out-of-market  loans were  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 Bank's  commercial  and  multi-family  real estate loans  generally are
limited  to loans not  exceeding  $3,500,000  on  properties  located  either in
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

                                       7
<PAGE>
for up to 20 years. Under certain circumstances,  these longer-term loans may be
match funded with similar term FHLB advances to reduce interest rate risk.

     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  collateralized 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.  The Bank's  consumer loans  primarily  consist of loans
collateralized  by savings  deposits at the Bank, and  automobiles.  These loans
totaled  $2.5  million  and  $6.8  million,  respectively,  at  June  30,  2001.
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 while increasing the Bank's portfolio yields and improving
its asset/liability management.

     The Bank makes  certificate  of deposit loans for up to 100% of the balance
of the  account.  The interest  rate on these loans  typically is fixed at least
three  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  collateralized  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.  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.

     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.

     COMMERCIAL  BUSINESS  LENDING.  The Bank currently  offers working  capital
loans, floor plan loans to dealers of automobiles and recreational vehicles, and
business equipment loans. At June 30, 2001, the Bank's commercial business loans
totaled $11.3 million and primarily consisted of recreational vehicle floor plan
loans,

                                       8
<PAGE>
inventory  loans, and equipment loans. At that date, the Bank had two commercial
business loans with  outstanding  commitments  exceeding  $500,000.  One loan is
collateralized  by a floor  plan of  recreational  vehicles,  and the  other  is
collateralized by inventory and accounts receivable of a furniture store.

     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 presidents
and  other  responsible  employees  to  local  realtors,  builders,   commercial
businesses,  and  advertisements  in local  newspapers  and billboards and radio
broadcasts. The Bank's loan officers, including corporate lending staff, as well
as branch presidents  originate loans. 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 that insures 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.

     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 committees
approve  loans up to  specified  limits above which the approval of the Board is
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
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 excess,  if any,
of loan  origination  fees over direct loan  origination  costs is deferred  and
accreted into income over the contractual life of the loan using the level yield
method.  If costs exceed fees,  the excess is deferred and  amortized to expense
over the loan's  contractual  life using the level  yield  method.  If a loan is
prepaid,  refinanced, or sold, all remaining deferred fees/costs with respect to
such loan are taken into income or recognized in expense 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

                                       9
<PAGE>
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, repossession, 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 re-classification,  and the Board of Directors reviews
and  approves  all  classifications.  The  Bank  contracts  with  a  third-party
professional to perform loan reviews generally on a semi-annual basis, including
classification  of assets and an  assessment  of the  adequacy  of the loan loss
reserve. The most recent third party loan reviews were as of April 30, 2001, and
June 30, 2000.  As of June 30, 2001,  the Bank had $50,573 of assets  classified
doubtful,  $2,435,120  of assets  classified  substandard,  and $1.4  million of
assets  designated as special  mention.  The Bank's total  adversely  classified
assets represented approximately 0.9% of the Bank's total assets and 8.1% of the
Bank's  tangible  regulatory  capital plus  allowance  for loan loss at June 30,
2001. At that date, a majority of the Bank's  adversely  classified  assets were
one-to-four  family  residences in the Bank's  primary  market area. At June 30,
2001,  management  did not  expect  the Bank to  incur  any  loss in  excess  of
attributable  existing  allowances on any of the Bank's adversely  classified or
designated assets.

     Management  also  reviews the loss  factors to  determine  whether they are
current and relevant.  Differences between estimated and actual losses have been
insignificant  for several  years.  However,  if the losses  experienced  change
significantly,  a determination  is made as to which factors  utilized should be
adjusted prospectively.

     Homogeneous   loans  are  those  that  are   considered   to  have   common
characteristics  that provide for evaluation on an aggregate or pool basis.  The
Company  considers the  characteristics  of (1) one-to-four  family  residential
first  mortgage  loans;  (2)  automobile   loans;  and  (3)  consumer  and  home
improvement  loans  to  permit  consideration  of  the  appropriateness  of  the
allowance  for  losses  of each  group  of loans on a pool  basis.  The  primary
methodology  used to determine the  appropriateness  of the allowance for losses
includes  segregating  certain specific,  poorly performing loans based on their
performance characteristics from the pools of loans as to type and then applying
a loss factor to the remaining pool balance based on several  factors  including
classification of the loans as to grade,  past loss experience,  inherent risks,
economic  conditions in the primary market areas and other factors which usually
are beyond the control of the Company.

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

                                       10
<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 collateralized 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 and may require adjustment.

     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.

     At the date of  foreclosure  or other  repossession,  the Bank  records the
property at fair value,  less estimated  costs to sell. 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,  2001,  the Bank held no
properties  acquired in  settlement of loans for which  estimated  market values
were  unavailable.  Any amount of cost in excess of fair value at foreclosure is
charged-off  against the allowance for loan losses.  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  differ from the net carrying value of the property,  a gain or loss 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.

     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
determinations as to the appropriateness of the allowance.

     During the year ended June 30, 2001, in light of the Bank's loan  portfolio
review  and  changes  in the  mix of loan  types,  the  Bank  made  $296,000  in
provisions  for loan losses  bringing  the total  reserve  for losses  after net
charged-off loans to $1.4 million,  or 0.99% of gross loans. The following table
sets forth an analysis of the Bank's  allowance  for loan losses for the periods
indicated.

                                       11
<PAGE>
<TABLE>
<CAPTION>
                                                                         Year Ended June 30,
                                                ---------------------------------------------------------------------------
                                                     2001          2000            1999           1998            1997
                                                  ---------      --------        --------       --------        --------

<S>                                              <C>            <C>             <C>            <C>            <C>
Balance at beginning of period.................  $ 1,231,709    $1,329,201      $1,468,546     $ 1,492,473    $ 1,283,234
                                                  ----------    -----------     ----------     -----------    -----------

Loans charged-off:
  Real estate mortgage:
    One-to-four family residential.............       19,982          4,960         26,883           5,466         11,317
    Other mortgage loans.......................           --             --             --              --             --
Commercial.....................................       25,811         50,047         37,742              --             --
Consumer.......................................       55,968         44,791         79,632          43,100         11,668
                                                 -----------    -----------     ----------     -----------    -----------
Total charge-offs..............................      101,761         99,798        144,257          48,566         22,985
                                                 -----------    -----------     ----------     -----------    -----------

Recoveries:
  Real estate mortgage:
    One-to-four family residential.............        1,617             --            865              --          6,333
    Other mortgage loans.......................           --             --             --              --             --
  Commercial...................................           --             --             --              --             --
  Consumer.....................................       18,549          2,306          4,047             639          4,220
                                                 -----------    -----------     ----------     -----------    -----------
Total recoveries...............................       20,166          2,306          4,912             639         10,553
                                                 -----------    -----------     ----------     -----------    -----------

Net loans charged-off..........................       81,595         97,492        139,345          47,927         12,432
                                                 -----------    -----------     ----------     -----------    -----------

Acquisition of subsidiary......................           --             --             --              --             --
Provision for loan losses......................      296,000             --             --          24,000        221,671
                                                 -----------    -----------     ----------     -----------    -----------

Balance at end of period.......................  $ 1,446,114    $ 1,231,709     $1,329,201     $ 1,468,546    $ 1,492,473
                                                 ===========    ===========     ==========     ===========    ===========

Ratio of net charge-offs to average
  loans outstanding during the period..........     0.06 %          0.08 %         0.13 %         0.05 %          0.01 %
                                                    ======          ======         ======         ======          ======
</TABLE>

                                       12
<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>
                                                                         At June 30,
                                          -------------------------------------------------------------------------
                                                  2001                       2000                     1999
                                          ----------------------    -----------------------   ----------------------
                                                     Percent of                 Percent of              Percent of
                                                      Loans in                   Loans in                Loans in
                                                    Category to                Category to              Category to
                                          Amount    Total Loans     Amount     Total Loans    Amount    Total Loans
                                          ------    ------------    ------     -----------    ------    -----------
<S>                                      <C>             <C>      <C>              <C>      <C>           <C>
Allocated to:
  Real estate loans:
    One-to-four family residential...... $  480,460      39.0%    $  440,709       42.3%    $ 422,000     43.7%
    Multi-family, non-residential, and
      land..............................    570,261      45.6        551,000       43.9       603,000     44.6
  Consumer loans........................     89,360       7.7         91,000        7.7       101,000      7.3
  Commercial loans......................    255,662       7.7        149,000        6.1        82,000      4.4
  Unallocated...........................     50,371       --           --           --        121,201       --
                                         ----------     ------    ----------      -----     ---------    -----

         Total.......................... $1,446,114     100.0%    $1,231,709      100.0%    $1,329,201   100.0%
                                         ==========     =====     ==========      =====     ==========   =====
<CAPTION>
                                                            At June 30,
                                          -------------------------------------------------
                                                  1998                    1997
                                           ---------------------   ------------------------
                                                      Percent of                Percent of
                                                       Loans in                 Loans in
                                                     Category to               Category to
                                            Amount   Total Loans     Amount    Total  Loans
                                            ------   -----------     ------    ------------
<S>                                      <C>           <C>       <C>            <C>
Allocated to:
  Real estate loans:
    One-to-four family residential...... $  504,000    45.18%    $  954,093     61.50%
    Multi-family, non-residential, and
      land..............................    557,000    44.05        296,018     27.52
  Consumer loans........................    123,000     8.31         67,700      8.93
  Commercial loans......................     72,000     2.46         81,250      2.05
  Unallocated...........................    212,546       --         93,412       --
                                         ----------   ------     ----------    -----

         Total.......................... $1,468,546   100.00%    $1,492,473   100.00%
                                         ==========   ======     ==========   ======
</TABLE>


                                       13
<PAGE>
     The  Bank's  increasing  emphasis  on the  origination  of  commercial  and
multi-family  real estate loans and consumer and  commercial  business loans may
increase the Bank's risk of corresponding  increases in loan loss provisions and
charge-offs.  While  management  believes the Bank has  established its existing
loss allowances in accordance  with generally  accepted  accounting  principles,
there can be no  guarantee  or  assurance  that such  allowances  are, or in the
future  will be,  adequate  to absorb  all loan  losses or that  regulators,  in
reviewing  the Bank's  assets,  will not require  the Bank to increase  its loss
allowance,  thereby negatively affecting the Bank's reported financial condition
and results of operations.

     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 set forth in Item 8 herein.
<TABLE>
<CAPTION>
                                                                          At June 30
                                                ------------------------------------------------------------
                                                    2001         2000         1999        1998        1997
                                                  --------     --------     -------     --------    --------
<S>                                             <C>          <C>         <C>           <C>         <C>
Loans accounted for on a nonaccrual basis:(1)
  Real estate:
    One-to-four family residential...........   $  838,271   $ 655,988   $  462,205    $ 648,012   $ 133,386
    Other mortgage loans.....................           --          --       22,139           --          --
  Consumer...................................      137,987     102,003       81,648      138,747          --
                                                ----------   ---------   ----------    ---------   ---------
    Total....................................   $  976,258   $ 757,991   $  565,992    $ 786,759   $ 133,386
                                                ==========   =========   ==========    =========   =========

Accruing loans which are contractually past
  due 90 days or more:
  Real estate:
    One-to-four family residential...........   $   38,816   $ 140,000   $       --    $  41,770   $ 323,478
  Commercial loans...........................      161,926          --           --           --          --
  Consumer loans.............................       13,400      21,524           --           --      56,904
                                                ----------   ---------   ----------    ---------   ---------
    Total....................................   $  214,142   $ 161,524   $       --    $  41,770   $ 380,382
                                                ==========   =========   ==========    =========   =========

    Total nonperforming loans................   $1,190,400   $ 919,515   $  565,992    $ 828,529   $ 513,768
                                                ==========   =========   ==========    =========   =========

Percentage of total loans....................       0.81%       0.64%        0.46%         0.75%       0.50%
                                                    ====        ====         ====          ====        ====
Other nonperforming assets (2)...............   $  175,783   $  52,919   $   20,289    $  17,001   $  65,005
                                                ==========   =========   ==========    =========   =========
Loans modified in troubled debt restructurings  $       --   $      --   $       --    $ 392,000   $ 281,441
                                                ==========   =========   ==========    =========   =========
<FN>
______________
(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.
</FN>
</TABLE>

     During the years ended June 30,  2001 and 2000,  gross  interest  income of
$80,541 and $70,933,  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 $33,365 and $20,045, respectively.

     At June 30, 2001,  management had identified  approximately $1.4 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
provide for increased  monitoring of the ability of the borrowers to comply with
present loan repayment  terms, all of which was included in the Bank's adversely
classified asset amounts at that date. Of this aggregate  amount,  approximately
$859,000 was attributable to 21 one-to-four family  residential loans,  $389,000
was  attributable  to 8  commercial  loans,  $74,000  was  attributable  to  two
nonresidential  real estate loans,  and $107,000

                                       14
<PAGE>
was  attributable  to 17 consumer  loans.  At June 30, 2001,  management did not
expect the Bank to incur any loss in excess of attributable  existing allowances
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,  savings  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 to
maintain  a  sufficient  level of  liquidity.  The Bank has  chosen to fulfill a
portion of this requirement by investing in securities which provide liquidity.

     The Bank  makes  investments  in order to  maintain a  sufficient  level of
liquid  assets 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 and state and  municipal  securities.  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
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 stockholders' 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  collateralized  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. They 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
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 media and by  communication  with the
issuer when  necessary.  At June 30, 2001, no privately  issued  securities were
rated below AA except as follows:

                A Citicorp Mortgage, Inc. REMIC Pass-Through Class A Certificate
          was rated "CAA1" by Moody.  The grade  reflects  deterioration  in the
          performance of the mortgage pools underlying the security. At June 30,
          2001,  the Bank  estimated the value of the security at  approximately
          $54,000 less than its face value.  The Bank's  carrying value for this
          security at that date was approximately  $192,709 after recognition of
          impairment loss.

                                       15
<PAGE>
                A  DLJ  Mortgage   Acceptance  Corp.   Pass-Through   Class  A-3
          Certificate   was  rated   "CAA2"  by   Moody.   The  grade   reflects
          deterioration  in the performance of the mortgage pools underlying the
          security.  As of June 30, 2001, the deterioration  affected the credit
          support and not the  principal  or interest  of the  security  itself.
          Management  had not  identified  any  expected  losses on principal or
          interest on the security as of that date.  The Bank's  carrying  value
          for this security at that date was $352,158.

     The Bank's privately issued securities  consist of collateralized  mortgage
obligations (CMOs) and mortgage pass-through  securities.  At June 30, 2001, all
of the privately issued securities had adjustable interest rates with a weighted
average  yield of 6.88% and a weighted  average  term to maturity of 19.3 years.
The carrying value of the privately issued  securities was $3,058,540 or 3.5% of
the  mortgage-backed  securities  and CMOs at that date.  None of the  privately
issued securities are 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 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 accreted  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
Company's investment securities at the dates indicated.  All securities are held
as available for sale.
<TABLE>
<CAPTION>
                                                                                 At June 30,
                                                                ---------------------------------------------------
                                                                    2001                2000             1999
                                                                 -----------        ------------    -------------
<S>                                                             <C>               <C>              <C>
Securities available for sale:
   U.S. government and agencies...............................  $    1,900,448    $     5,880,903  $     6,368,125
   Municipal securities.......................................      30,197,186         28,201,198       26,704,416
   Collateralized mortgage obligations........................      12,159,483         11,805,058       12,346,191
   Other mortgage-backed securities...........................      75,784,260         86,602,281      101,640,582
   Equity securities..........................................          40,800             53,625           60,375
                                                                --------------    ---------------  ---------------
                                                                $  120,082,177    $   132,543,065  $   147,119,689
                                                                ==============    ===============  ===============
</TABLE>

                                       16
<PAGE>
     The following table sets forth information  regarding scheduled  maturities
of the  Company's  investment  portfolio at June 30,  2001.  Yields on municipal
securities are not tax-effected.
<TABLE>
<CAPTION>
                                       One Year or Less    One to Five Years    Five to Ten Years
                                    --------------------  ------------------   -------------------
                                    Carrying    Average   Carrying   Average   Carrying    Average
                                     Value      Yield      Value      Yield      Value      Yield
                                    -------    -------    -------    -------   --------    -------
<S>                                 <C>        <C>       <C>          <C>      <C>           <C>
   U.S. government and agencies     $    --     -- %     $1,900,448    6.28%   $       --      --%
   Municipal securities                  --     --               --      --     1,161,263    5.16
   Collateralized mortgage
      obligations                        --     --               --      --       515,835    7.11
   Other mortgage-backed securities   8,742    9.36       2,260,401    6.66     6,198,695    6.51
                                    ------               ----------            ----------
      Total                         $ 8,742    9.36%     $4,160,849    6.49%   $7,875,793    6.35%
                                    =======    ====      ==========    ====    ==========    ====
   Equity securities

<CAPTION>
                                     More than Ten Years        Total Investment Portfolio
                                     -------------------    --------------------------------
                                      Carrying   Average    Carrying      Market     Average
                                       Value     Yield       Value        Value       Yield
                                      --------   -------    -------       -----      -------
<S>                                 <C>           <C>     <C>           <C>            <C>
   U.S. government and agencies     $         --    --%   $  1,900,448  $  1,900,448   6.28%
   Municipal securities               29,035,923  4.98      30,197,186    30,197,186   4.99
   Collateralized mortgage
      obligations                     11,643,648  6.47      12,159,483    12,159,483   6.50
   Other mortgage-backed securities   67,316,422  6.40      75,784,260    75,784,260   6.42
                                    ------------           -----------
      Total                         $107,995,993  6.03%    $120,041,377  $120,041,377  6.07%
                                    ============  ====     ============  ============  ====
   Equity securities                                             40,800        40,800
                                                           ------------  ------------
                                                           $120,082,177  $120,082,177
                                                           ============  ============
</TABLE>

                                       17
<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  deposit  base,  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 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 to  compensate  for  reductions in the  availability  of
funds, or for general operational purposes. The Bank has access to advances from
the FHLB of Dallas.

     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.  The Bank on a periodic
basis establishes  maturities,  terms, service fees and withdrawal penalties for
its  deposit  accounts.  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 typically  accept  brokered  deposits or pay negotiated  rates for
jumbo certificates of 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.

     The  following  table sets  forth  information  regarding  interest-bearing
average deposit balances and rates during the periods presented.
<TABLE>
<CAPTION>

                                                                   Year Ended June 30,
                                          -----------------------------------------------------------------------
                                                  2001                     2000                        1999
                                          -------------------       ------------------        -------------------

                                          Average    Average        Average    Average        Average    Average
                                          Balance      Rate         Balance      Rate         Balance      Rate
                                          -------    --------       -------    --------       -------    --------
<S>                                     <C>           <C>       <C>              <C>         <C>           <C>
NOW accounts..........................  $ 31,662,439  3.54%     $ 14,170,075     1.73%      $ 10,505,515   1.46%
Money market savings deposits.........     6,967,070  3.72        16,093,630     3.84         20,474,110   3.57
Savings deposits - statement..........     6,774,023  2.43         7,955,898     2.58          7,325,746   2.81
Certificates of deposit...............   106,806,416  5.76       104,443,704     5.21        103,414,235   5.35
                                        ------------  ----      ------------     ----       -------------  ----
    Total.............................  $152,209,948  5.06%     $142,663,307     4.56%      $141,719,606   4.67%
                                        ============  ====      ============     ====       ============   ====
</TABLE>

                                       18

<PAGE>
     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>
                                   Balance at                                Balance at
                                    June 30,       % of       Increase        June 30,        % of     Increase
                                     2001        Deposits    (Decrease)        2000         Deposits   (Decrease)
                                  -----------    --------    ----------     -----------     --------   ----------
<S>                             <C>               <C>      <C>              <C>               <C>      <C>
NOW accounts ................   $  38,055,320     23.60%   $  14,501,854    $  23,553,466     16.26%   $11,141,534
Money market savings deposits       5,733,865      3.56       (3,626,326)       9,360,191      6.46     (8,259,150)
Savings deposits - statement        6,903,036      4.28         (627,396)       7,530,432      5.20       (441,015)
Certificates of deposit .....     110,592,958     68.56        6,163,976      104,428,982     72.08     (3,864,896)
                                -------------    ------    -------------    -------------    ------    -----------
                                $ 161,285,179    100.00%   $  16,412,108    $ 144,873,071    100.00%   $(1,423,527)
                                =============    ======    =============    =============    ======    ===========
<CAPTION>
                                  Balance at
                                    June 30,      % of
                                     1999       Deposits
                                  -----------   --------
<S>                              <C>              <C>
NOW accounts ................    $ 12,411,932     8.49%
Money market savings deposits      17,619,341    12.04
Savings deposits - statement        7,971,447     5.45
Certificates of deposit .....     108,293,878    74.02
                                 ------------   ------
                                 $146,296,598   100.00%
                                 ============   ======
</TABLE>
                                       19
<PAGE>
     The  following  table  sets forth  information  regarding  certificates  of
deposits classified by rates at the dates indicated.
<TABLE>
<CAPTION>
                                                                               At June 30,
                                                                 ------------------------------------------
                                                                   2001           2000             1999
                                                                 --------        -------         ----------
<S>                                                             <C>             <C>             <C>
 3.25 -5.99%.................................................   $ 77,451,889    $ 68,258,761    $107,158,894
 6.00 -7.99%.................................................     33,141,069      36,170,221       1,134,984
                                                                ------------    ------------    ------------
                                                                $110,592,958    $104,428,982    $108,293,878
                                                                ============    ============    ============
</TABLE>
     The following table sets forth information regarding amounts and maturities
of certificates of deposits at June 30, 2001.
<TABLE>
<CAPTION>
                                                         Amount Due
                                  -------------------------------------------------------
                                  Less Than
Rate                              One Year        1-2 Years      2-3 Years       Total
----                              ----------      ---------      ---------       -----
<S>                              <C>             <C>            <C>          <C>
 3.25 - 5.99%..................  $62,900,440     $11,780,163    $2,771,286   $ 77,451,889
 6.00 - 7.99%..................   23,641,338       7,187,915     2,311,816     33,141,069
                                 -----------     -----------    ----------   ------------
                                 $86,541,778     $18,968,078    $5,083,102   $110,592,958
                                 ===========     ===========    ==========   ============
</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, 2001.
                                                            Certificates
               Maturity Period                               of Deposit
               ---------------                              ------------

               Three months or less.......................  $  4,852,596
               Over three through six months..............     3,037,539
               Over six through 12 months.................     5,715,876
               Over 12 months.............................     3,027,079
                                                            ------------
                   Total..................................  $ 16,633,090
                                                             ===========

     The following table sets forth information  regarding savings activities of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
                                                                              Year Ended June 30,
                                                                 -------------------------------------------------
                                                                   2001              2000                  1999
                                                                 --------           --------              ------
<S>                                                            <C>                <C>                <C>
Net increase (decrease) before
  interest credited.........................................   $    8,676,800     $   (8,032,919)    $   (2,521,766)
Interest credited...........................................        7,735,308          6,609,392          6,887,034
                                                               --------------     --------------     --------------
    Net increase (decrease) in
      savings deposits......................................   $   16,412,108     $   (1,423,527)    $    4,365,268
                                                                =============     ==============     ==============
</TABLE>
     BORROWINGS. 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

                                       20
<PAGE>
authorized  to apply for  advances.  Advances are pursuant to several  different
programs, each with its own interest rate and range of maturities. Advances from
the FHLB of Dallas are collateralized by the Bank's stock in the FHLB of Dallas,
qualifying first mortgage loans and mortgage-backed investment securities.

     The following table sets forth certain information  regarding borrowings by
the Bank for the periods indicated. Averages are based on monthly balances.
<TABLE>
<CAPTION>
                                                                               Year Ended June 30,
                                                                 --------------------------------------------------
                                                                   2001               2000               1999
                                                                 --------           --------           --------
<S>                                                             <C>             <C>                <C>
Amounts outstanding at end of period:
  FHLB advances...............................................  $  91,915,694   $ 115,609,029      $104,523,419
  Weighted average rate.......................................          5.88%            6.07%             5.63%

Maximum amount of borrowings outstanding at any month end:
  FHLB advances...............................................  $ 114,694,903   $ 117,040,406      $104,523,419

Approximate average borrowings during the year
 outstanding with respect to:
  FHLB advances...............................................  $ 105,619,861   $ 112,554,831      $ 95,124,165
  Weighted average rate.......................................          6.03%          5.85%              5.73%
</TABLE>

SUBSIDIARY ACTIVITIES

     As a federally  chartered  savings bank, the Bank is 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, 2001 on a consolidated  basis
the Bank was authorized to invest up to approximately  $5.7 million 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, 2001,  the Bank's  aggregate  investment in, and loans
to, the subsidiary service corporation totaled $580,928.

REGULATION OF THE BANK

     GENERAL.  As a federally  chartered savings institution the Bank 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  Bank  for  compliance   with  various   regulatory
requirements. The FDIC also has the authority to conduct special examinations of
the Bank  because its savings  deposits  are insured by the SAIF.  The Bank must
file reports with the OTS describing its activities and financial  condition and
also is subject to  certain  reserve  requirements  promulgated  by the  Federal
Reserve Board.  This  supervision  and regulation is intended  primarily for the
protection of depositors.

     FEDERAL  HOME LOAN BANK  SYSTEM.  The Bank is a member of the FHLB  System,
which consists of 12 district  FHLB's  subject to supervision  and regulation by
the Federal Housing Finance Board ("FHFB").  The FHLB's provide a central credit
facility primarily for member  institutions.  As a member of the FHLB of Dallas,
the Bank is 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
its home mortgage loans, home purchase contracts and similar  obligations at the
beginning of each year,  or 1/20 of its advances  (borrowings)  from the FHLB of
Dallas, whichever is greater.

                                       21
<PAGE>
     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 of the FHLB of Dallas.  Long-term  advances
may only be made for the  purpose of  providing  funds for  residential  housing
finance and small businesses, small farms and small agri-businesses. At June 30,
2001,  the Bank had  $91.9  million  in  advances  outstanding  with the FHLB of
Dallas. See " -- Deposit Activity and Other Sources of Funds -- Borrowings."

     QUALIFIED  THRIFT LENDER TEST. The Bank is subject to OTS regulations  that
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,  value of
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.  Upon failure to qualify as a Qualified Thrift Lender
for two years, a savings institution must convert to a commercial bank.

     REGULATORY  CAPITAL  REQUIREMENTS.  Under OTS  capital  standards,  savings
institutions must maintain "tangible" capital equal to at least 1.5% of tangible
assets,  "core"  capital equal to at least 4.0% (or 3.0% if the  institution  is
rated CAMELS 1 under the OTS examination rating system) 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 regulations 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 savings  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.

                                       22
<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, 2001,
the Bank had $580,928 investments in, or extensions of credit to, non-includable
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
includable  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
includable  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 savings  deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other  capital  instruments,  a portion of the  institution's  general loan loss
allowances and up to 45% of unrealized  gains on equity  securities.  Total core
and supplementary  capital are reduced by the amount of capital instruments held
by other depository  institutions pursuant to reciprocal arrangements and equity
investments  other than those deducted from core and tangible  capital.  At June
30, 2001, the Bank $580,928 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 the Bank relative to its
various regulatory capital requirements at June 30, 2001.
<TABLE>
<CAPTION>
                                                                                    Percent of
                                                                Amount              Assets(1)
                                                                ------              ---------
                                                                  (Dollars in thousands)

             <S>                                                <C>                     <C>
             Tangible capital...............................    $  29,132               10.20%
             Tangible capital requirement...................        4,282                1.50
                                                                  -------              ------
                Excess......................................    $  24,850                8.70%
                                                                  =======              ======

             Core capital...................................    $  29,132               10.20%
             Core capital requirement.......................       11,420                4.00
                                                                  -------              ------
                Excess......................................    $  17,712                6.20%
                                                                  =======              ======

             Total capital..................................    $  30,578               22.17%
             Risk-based capital requirement.................       11,032                8.00
                                                                  -------              ------
                Excess.....................................     $  19,546               14.17%
                                                                  =======               =====
          <FN>
         (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.
         </FN>
         </TABLE>

                                       23
<PAGE>

     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,  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 Bank is  required  to pay  assessments  based on a
percentage  of its insured  savings  deposits to the FDIC for  insurance  of its
savings 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  savings  deposits  or at a higher  percentage  of  estimated
insured savings  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.

     The SAIF deposit insurance assessment rates set by the FDIC range from zero
for "well  capitalized"  institutions  with the highest  supervisory  ratings to
0.27% of insured savings  deposits for  institutions  in the highest  risk-based
premium  category.  Until  December 31,  1999,  SAIF-insured  institutions  were
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,  Bank Insurance Fund ("BIF") members
were  assessed  for these  obligations  at the rate of 1.3 basis  points.  After
December 31,  1999,  both BIF and SAIF members are assessed at the same rate for
FICO payments.

     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.

                                       24
<PAGE>
     FEDERAL  RESERVE  SYSTEM.  Pursuant to regulations  of the Federal  Reserve
Board,  all  FDIC-insured  depository  institutions  must maintain average daily
reserves equal to 3% on transaction  accounts of up to $42.8 million plus 10% on
the remainder.  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 Bank is required by OTS  regulations  to give the OTS 30 days'
prior notice of any proposed declaration of dividends.

     OTS regulations require that savings  institutions submit notice to the OTS
prior to making a capital distribution if (a) they would not be well-capitalized
after the distribution,  (b) the distribution  would result in the retirement of
any of the  institution's  common  or  preferred  stock or debt  counted  as its
regulatory capital, or (c) the institution is a subsidiary of a holding company.
A  savings  institution  must  make  application  to the  OTS  to pay a  capital
distribution  if  (x)  the  institution  would  not  be  adequately  capitalized
following the distribution,  (y) the institution's  total  distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution  would  otherwise  violate  applicable  law  or  regulation  or  an
agreement  with  or  condition  imposed  by the  OTS.  If  neither  the  savings
institution  nor the proposed  capital  distribution  meet any of the  foregoing
criteria,  then no notice or  application  is  required to be filed with the OTS
before making a capital  distribution.  The OTS may disapprove or deny a capital
distribution  if in  the  view  of  the  OTS,  the  capital  distribution  would
constitute an unsafe or unsound practice.

     Under the OTS  prompt  corrective  action  regulations,  the Bank  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 Tier
1 (core) capital ratio of less than 4.0%. See " -- Prompt Corrective  Regulatory
Action."  The OTS,  after  consultation  with the FDIC,  however,  may permit an
otherwise prohibited stock repurchase if made in connection with the issuance of
additional  shares in an equivalent  amount and the  repurchase  will reduce the
institution's  financial  obligations  or  otherwise  improve the  institution's
financial condition.

     In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves  and deducted for federal  income tax  purposes are not  available  for
payment of cash dividends or other  distributions to Bancshares  without payment
of taxes at the then current tax rate on the amount of earnings removed from the
reserves for such  distributions.  See  "Federal  Income  Taxation."  Bancshares
intends to make full use of this  favorable tax treatment  afforded to the Bank,
and does not  contemplate use of any  post-Conversion  earnings of the Bank in a
manner  which would limit the 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 a savings  institution  is any company or
entity which  controls,  is  controlled  by or is under common  control with the
institution.  In a holding  company  context,  the parent holding  company of an
institution  (such as Bancshares) 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

                                       25
<PAGE>

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 Bank,  prohibits the Bank 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 Bank 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  collateralized 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 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 savings
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

                                       26
<PAGE>
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
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,
2001, the Bank was 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 Bank already meets  substantially all the standards adopted in
the interagency  guidelines,  and therefore does not believe that implementation
of these regulatory standards will materially affect the Bank's operations.

                                       27
<PAGE>

     Additionally,  the federal banking agencies,  including the OTS and Federal
Reserve Board,  have issued  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 would not have a material effect on the
Bank's operations.

     FINANCIAL  MODERNIZATION  LEGISLATION.  ON  November  12,  1999,  President
Clinton  signed  legislation  which  could  have a  far-reaching  impact  on the
financial services  industry.  The  Gramm-Leach-Bliley  ("G-L-B") Act authorizes
affiliations between banking, securities and insurance firms and authorizes bank
holding  companies  and national  banks to engage in a variety of new  financial
activities.  Among the new  activities  that will be  permitted  to bank holding
companies are  securities  and  insurance  brokerage,  securities  underwriting,
insurance  underwriting  and merchant  banking.  The Federal  Reserve Board,  in
consultation  with  the  Secretary  of  the  Treasury,  may  approve  additional
financial activities.  The G-L-B Act, however,  prohibits future acquisitions of
existing unitary savings and loan holding companies,  like the Company, by firms
which are engaged in commercial activities and limits the permissible activities
of unitary holding companies formed after May 4, 1999.

     The G-L-B Act imposes  new  requirements  on  financial  institutions  with
respect to customer  privacy.  The G-L-B Act generally  prohibits  disclosure of
customer  information  to  non-affiliated  third parties unless the customer has
been given the  opportunity  to object and has not objected to such  disclosure.
Financial  institutions  are further required to disclose their privacy policies
to customers  annually.  Financial  institutions,  however,  will be required to
comply  with state law if it is more  protective  of customer  privacy  than the
G-L-B Act.  The G-L-B Act directs the federal  banking  agencies,  the  National
Credit Union Administration,  the Secretary of the Treasury,  the Securities and
Exchange  Commission and the Federal Trade Commission,  after  consultation with
the National Association of Insurance Commissioners,  to promulgate implementing
regulations  within six  months of  enactment.  The  privacy  provisions  became
effective in July 2001.

     The G-L-B Act contains significant  revisions to the FHLB System. The G-L-B
Act imposes new capital  requirements  on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption  requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net  earnings  formula.  The G-L-B Act expands the  permissible  uses of FHLB
advances by community  financial  institutions (under $500 million in assets) to
include   funding   loans  to  small   businesses,   small   farms   and   small
agri-businesses.  The G-L-B  Act  makes  membership  in the FHLB  voluntary  for
federal savings associations.

     The  G-L-B  Act  contains  a  variety  of  other  provisions   including  a
prohibition  against ATM surcharges  unless the customer has first been provided
notice of the  imposition  and  amount of the fee.  The  G-L-B Act  reduces  the
frequency of Community  Reinvestment Act  examinations for smaller  institutions
and imposes certain reporting requirements on depository  institutions that make
payments  to   non-governmental   entities  in  connection  with  the  Community
Reinvestment  Act.  The  G-L-B  Act  eliminates  the SAIF  special  reserve  and
authorizes a federal  savings  association  that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.

     The  Company  is  unable  to  predict  the  impact  of the G-L-B Act on its
operations  at this time.  Although the G-L-B Act reduces the range of companies
with which may acquire  control of the Company,  it may facilitate  affiliations
with companies in the financial services industry.

                                       28
<PAGE>
REGULATION OF BANCSHARES

     GENERAL. Bancshares is a savings and loan holding company as defined by the
Home Owners' Loan Act. As such, it is registered  with the OTS and is subject to
OTS  regulation,  examination,  supervision  and  reporting  requirements.  As a
subsidiary  of a savings  institution  holding  company,  the Bank is subject to
certain  restrictions  in its dealings with  Bancshares and affiliates  thereof.
Bancshares also is required to file certain  reports with, and otherwise  comply
with the rules and  regulations  of,  the  Securities  and  Exchange  Commission
("SEC") under the federal securities laws.

     ACTIVITIES  RESTRICTIONS.  The Board of Directors of  Bancshares  presently
intends to continue  operating as a unitary  savings and loan  holding  company.
There are generally no  restrictions  on the activities of a unitary savings and
loan holding company if the savings and loan holding company was formed prior to
May 4,  1999.  However,  if the  Director  of the OTS  determines  that there is
reasonable  cause to believe  that the  continuation  by such  savings  and loan
holding  company of an  activity  constitutes  a serious  risk to the  financial
safety,  soundness or  stability  of its  subsidiary  savings  institution,  the
Director 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. If the savings institution
subsidiary  of such a  holding  company  fails to meet the QTL  test,  then such
unitary  holding  company shall also presently  become subject to the activities
restrictions  applicable to multiple  holding  companies and, unless the savings
institution  requalifies as a QTL within one year  thereafter,  register as, and
become subject to, the restrictions  applicable to a bank holding  company.  See
"Regulation of the Bank -- Qualified Thrift Lender Test."

     If Bancshares were to acquire control of another savings institution, other
than through  merger or other  business  combination  with the Bank,  Bancshares
would thereupon become a multiple savings and loan holding company. Except where
such  acquisition  is  pursuant to the  authority  to approve  emergency  thrift
acquisitions and where each subsidiary  savings  institution meets the QTL test,
the activities of Bancshares and any of its subsidiaries (other than the Bank or
other subsidiary  savings  institutions)  would thereafter be subject to further
restrictions.  Among other things,  no multiple savings and loan 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 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 and loan holding companies,  those activities  authorized by the Federal
Reserve Board as permissible for bank holding companies.  A multiple savings and
loan  holding  company  must obtain the approval of the OTS prior to engaging in
the activities described in (vii) above.

     RESTRICTIONS ON  ACQUISITIONS.  Savings and loan holding  companies may not
acquire,  without prior  approval of the Director of the OTS, (i) control of any
other savings  institution or savings and loan 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 and loan  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 and loan
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  and  loan  holding   company  and  the  issuing   savings
institution,  and transactions  between the savings  institution and the savings
and loan holding  company and any of its affiliates must conform to Sections 23A
and 23B of the  Federal  Reserve  Act.  Except  with the prior

                                       29
<PAGE>
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 and loan holding company.

     The  Director of the OTS may only  approve  acquisitions  resulting  in the
formation of a multiple  savings and loan holding company which controls savings
institutions  in more than one  state  if:  (i) the  multiple  savings  and loan
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 and loan holding  companies  located in the state where the acquiring
entity is located (or by a holding  company that controls  such  state-chartered
savings institutions).

     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 Section 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 and loan 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 will also
consider the institution's record of compliance with the Community  Reinvestment
Act in connection with any branch application.

     FEDERAL SECURITIES LAW. Bancshares' Common Stock is registered with the SEC
under the  Securities  Exchange Act of 1934,  as amended  ("Securities  Exchange
Act").  Bancshares 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 Bank 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 Bank which met certain definitional
tests and other  conditions  prescribed by the Internal  Revenue Code  benefited
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  collateralized 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 was 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  Bank
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 Bank 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 debt  reserves  have already been
accrued  as a

                                       30
<PAGE>

deferred tax liability.  The regulatory authorities have not examined the Bank's
federal income tax returns in the past five years.

     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 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,
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 Bank is 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 Bank is subject to Arkansas corporation income tax which is 6.5% of all
taxable earnings when income exceeds $100,000.  Bancshares is incorporated under
Oklahoma law and qualified to do business in Arkansas as a foreign  corporation,
and accordingly it incurs certain  franchise and other taxes,  which  management
believes are not material.

EMPLOYEES

     As of June 30, 2001, the Bank had 99 full-time equivalent  employees,  none
of  whom  was  represented  by a  collective  bargaining  agreement.  Management
considers the Bank's relationships with its employees to be good.

                                       31
<PAGE>
ITEM 2.  PROPERTIES

     The following table sets forth information  regarding the Bank's offices at
June 30, 2001.
<TABLE>
<CAPTION>
                                  YEAR           OWNED OR                     APPROXIMATE
                                 OPENED           LEASED     BOOK VALUE      SQUARE FOOTAGE
                                 ------          --------    ----------      --------------
<S>                               <C>            <C>         <C>                <C>
Main Office:

237 Jackson Street, SW            1933            Owned      $   259,695        12,000
Camden, Arkansas

Corporate Office:

313 Jefferson Street SW           2000            Leased              --         1,000
Camden, Arkansas

Branch Offices:

4937 Highway 5 North              2000            Owned      $ 1,748,463         6,500
Bryant, Arkansas

1125 Fairview Road, SW
Suite 208                         1981            Owned      $   148,184         1,200
Camden, Arkansas

610 West 4th Street               1969            Owned      $   781,673         3,500
Fordyce, Arkansas

473 Highway 425 North             1996            Owned      $ 1,222,805         7,400
Monticello, Arkansas

108 South Main                    1996            Owned      $ 1,054,932         5,500
Sheridan, Arkansas
</TABLE>

     In addition to the offices  described above, at June 30, 2001 the Bank held
four 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.  If certain of the  properties  are
beyond the Bank's  foreseeable  needs for  facilities  usage,  portions of those
properties may be sold by the Bank, though such a sale is not currently planned.
At June 30,  2001,  the  aggregate  net book value of these  properties  totaled
$1,258,077  of  which  $314,189  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 $7.6 million at June 30, 2001. See Note 7 of
the  Notes  to  Consolidated  Financial  Statements  in  the  Annual  Report  to
Stockholders for June 30, 2001.

                                       32
<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, 2001,  except as set forth below,  there
were no legal  proceedings to which the Company was a party,  or to which any of
its property  was  subject,  which were  expected by  management  to result in a
material  loss to the  Company.  In addition,  there were no pending  regulatory
proceedings  to which the Company or any of its  properties  was a party,  which
were expected to result in a material loss.

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

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     There were no matters  submitted to a vote of the security  holders  during
the fourth quarter of the fiscal year ended June 30, 2001.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------------------

     The  information  contained  under the section "Market for Common Stock and
Related  Stockholder  Matters" in the Annual  Report is  incorporated  herein by
reference.

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

     The  information  contained in the table captioned  "Selected  Consolidated
Financial  and  Other  Data" in the  Annual  Report  is  incorporated  herein by
reference.

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
--------------------------------------------------------------------------------

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial  Condition  and Results of  Operations"  in the Annual
Report is incorporated herein by reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
-------------------------------------------------------------------

     The  information  contained in the section  captioned  "Market Risk" in the
Annual Report is incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------

     The financial  statements  contained in the Annual Report, which are listed
under Item 14 herein, are incorporated herein by reference.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------

     None.

                                       33
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

     For information concerning the Board of Directors and executive officers of
the Company,  the information  contained under the section captioned "Proposal I
-- Election of Directors" in the Company's  definitive  proxy  statement for the
Company's 2001 Annual Meeting of Stockholders (the "Proxy Statement") which will
be filed within 120 days of the  Company's  fiscal year end and is  incorporated
herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

     The   information   contained  under  the  sections   captioned   "Director
Compensation"   and  "Executive   Compensation"   in  the  Proxy   Statement  is
incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

     (a)  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

          Information  required by this item is incorporated herein by reference
          to the section captioned "Voting Securities and Beneficial  Ownership"
          in the Proxy Statement.

     (b)  SECURITY OWNERSHIP OF MANAGEMENT

          Information  required by this item is incorporated herein by reference
          to the sections captioned  "Securities Ownership of Management" in the
          Proxy Statement.

     (c)  CHANGES IN CONTROL

          Management  of the Company  knows of no  arrangements,  including  any
          pledge by any person of  securities  of the Company,  the operation of
          which may at a  subsequent  date  result in a change in control of the
          registrant.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

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


                                       34
<PAGE>
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' Report

               Consolidated  Statements  of  Financial  Condition as of June 30,
               2001 and 2000

               Consolidated  Statements of Income and  Comprehensive  Income for
               the years ended June 30, 2001, 2000 and 1999

               Consolidated  Statements  of  Stockholders'  Equity for the years
               ended June 30, 2001, 2000 and 1999

               Consolidated  Statements  of Cash Flows for the years  ended June
               30, 2001, 2000 and 1999

               Notes to  Consolidated  Financial  Statements for the years ended
               June 30, 2001, 2000 and 1999


     (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.

     (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.

      NO.                DESCRIPTION
      ---                -----------

      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 *+

                                       35
<PAGE>
      10.5         Heartland Community Bank Directors' Retirement Plan,
                   as amended*+

      10.6(a)      Change-in-Control  Protective  Agreement between  Heartland
                   Community Bank and Scott A. Swain *+

      10.6(b)      Change-in-Control  Protective  Agreement  between HCB
                   Bancshares,  Inc. and Scott A. Swain *+

      10.7***      Standstill Agreement, dated August 29, 2001, by and among HCB
                   Bancshares, Inc. and Stilwell Value Partners IV, L.P.,
                   Stilwell Associates, L.P., Stilwell Value LLC and Joseph
                   Stilwell

      13           Annual Report to Security Holders

      21           Subsidiaries

      23           Consent of Deloitte & Touche LLP
___________
*    Incorporated by reference to the Company's  Registration  Statement on Form
     SB-2 (File No. 333-19093).
**   Incorporated by reference to the Company's Annual Report on Form 10-K for
     the year ended June 30, 2000 (File No. 0-22423)
***  Incorporated by reference to the Company's Current Report on Form 8-K filed
     on September 5, 2001 (File No. 0-22423)
+    Management contract or compensatory plan or arrangement.


     (b) REPORTS ON FORM 8-K.  During the last quarter of the period  covered by
         -------------------
this report, the Registrant did not file any Current Reports on Form 8-K

     (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.

                                       36
<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 28, 2001              By: /s/ Cameron D. McKeel
                                           -------------------------------------
                                           Cameron D. McKeel
                                           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/ Cameron D. McKeel                                     September 28, 2001
    --------------------------------------------------------
       Cameron D. McKeel
       Director, President and Chief Executive Officer
       (Principal Executive Officer)

By: /s/ Scott A. Swain                                        September 28, 2001
    ----------------------------------------------------
       Scott A. Swain
       Senior Vice President and Chief Financial Officer
       (Principal Financial and Accounting Officer)

By: /s/ Vida H. Lampkin                                       September 28, 2001
    ---------------------------------------------------
       Vida H. Lampkin
       Chairman of the Board


By:
    ---------------------------------------------------
      Ned Ray Purtle
      Director


By: /s/ Bruce D. Murry                                        September 28, 2001
    ---------------------------------------------------
       Bruce D. Murry
       Director


By: /s/ Carl E. Parker, Jr.                                   September 28, 2001
    ----------------------------------------------------
       Carl E. Parker, Jr.
       Director


By:
    ---------------------------------------------------
       F. Michael Akin
       Director


By: /s/ Clifford Steelman                                     September 28, 2001
    ----------------------------------------------------
       Clifford Steelman
       Director