<PAGE>
 
                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

                                   FORM 10-Q

                [X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934



                 For the quarterly period ended March 31, 1997

                                      OR

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

                          Commission File No. 0-20956

                           HFB FINANCIAL CORPORATION
 
A Tennessee Corporation                                 I.R.S. Employer 
                                                        Identification 
                                                        No. 61-1228266


Address                                                 Telephone Number
-------                                                 ----------------
 
1602 Cumberland Avenue                                   (606) 248-1095
Middlesboro, Kentucky  40965
 

Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the
preceding twelve 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     .
                                        ---    ---


The number of shares of the registrant's $1 par value common stock outstanding
at March 31, 1997 was 644,284.



There are a total of 18 pages filed in this document.

                                       1
<PAGE>
 
                           HFB FINANCIAL CORPORATION

                                   I N D E X
                                   ---------


                                                                    PAGE NO.
                                                                    --------

PART I - FINANCIAL INFORMATION

ITEM  1.  FINANCIAL STATEMENTS
 
          Consolidated Balance Sheets                                    3
 
          Consolidated Statements of Earnings                            4
 
          Consolidated Statement of Stockholders' Equity                 5

          Consolidated Statements of Cash Flows                        6-7

          Notes to Consolidated Financial Statements                  8-10

ITEM  2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS             11-16

PART II - OTHER INFORMATION                                             17


SIGNATURES                                                              18

                                       2
<PAGE>
                           HFB FINANCIAL CORPORATION
                          Consolidated Balance Sheets
                                  (Unaudited)
<TABLE> 
<CAPTION> 
                                                                                            March 31,            June 30,
                                                                                              1997                 1996     
                                                                                          ------------         ------------
       <S>                                                                                <C>                  <C> 
          Assets                                                                                                             
                                                                                                                            
                                                                                                                            
       Cash and equivalents                                                                 $3,648,457           $4,744,672 
       Trading securities, at fair value                                                       783,240              246,500 
       Investment securities, available for sale, at market value                                                           
         (amortized cost of $17,724,705 and $13,245,033 at March 31, 1997                                                   
         and June 30, 1996, respectively)                                                   17,441,242           13,160,481 
       Investment securities, held to maturity, at amortized cost                                                           
         (market value of $9,876,880 and $9,405,221                                                                         
         at March 31, 1997 and June 30, 1996, respectively)                                 10,164,467            9,611,689 
       Loans receivable, net                                                               101,329,214           95,973,650 
       Mortgage-backed securities, available for sale, at market value                                                      
         (amortized cost of $7,294,777 and $7,857,319 at March 31, 1997                                                     
         and June 30, 1996, respectively)                                                    7,174,072            7,677,022 
       Mortgage-backed securities, held to maturity, at amortized cost                                                      
         (market value of $11,000,960 and $10,979,790 at March 31, 1997                                                     
         and June 30, 1996, respectively)                                                   11,222,919           11,312,956 
       Accrued interest receivable                                                           1,149,870              954,626 
       Real estate owned                                                                       215,971                    -  
       Premises and equipment, net                                                           2,223,059            2,370,438 
       Other assets (including prepaid income taxes of $12,135 and $13,893                                                  
         at March 31, 1997 and June 30, 1996, respectively)                                    126,308              195,763 
                                                                                          ------------         ------------
            Total assets                                                                  $155,478,819         $146,247,797 
                                                                                          ============         ============ 
            Liabilities and Stockholders' Equity                                                                            
                                                                                                                            
       Deposits                                                                           $134,053,266         $126,742,237 
       Accrued interest on deposits                                                          1,083,030              534,298 
       Advances from Federal Home Loan Bank                                                  3,734,815            2,650,348 
       Advances from borrowers for taxes and insurance                                         111,556              137,152 
       Accrued expenses and other liabilities                                                  659,914              570,077 
       Income taxes payable                                                                     12,267               41,418 
                                                                                          ------------         ------------
            Total liabilities                                                              139,654,848          130,675,530 
                                                                                          ------------         ------------
                                                                                                                            
       Commitments and contingencies                                                                 -                    - 
                                                                                                                            
            Stockholders' Equity                                                                                            
       Preferred stock, $1 par value, authorized: 1,000,000 shares; none issued                      -                    - 
       Common stock, $1 par value; authorized: 5,000,000 shares; issued:                                                    
          765,512 and 746,064 shares at March 31, 1997 and                                                                  
          June 30, 1996, respectively                                                          765,512              746,064 
       Additional paid-in capital                                                            6,559,238            6,297,130 
       Less:   Common stock acquired by ESOP with borrowed funds                              (138,000)            (209,428)
               Common stock acquired by Management Recognition Plan and                                                     
                  Supplemental Executive Retirement Plan                                      (100,950)            (121,250)
               Common stock acquired by Rabbi trusts for deferred compensation plans          (258,290)            (258,290) 
       Treasury stock, at cost, 121,228 and 112,378 shares at March 31, 1997 and                                           
          June 30, 1996, respectively                                                       (2,030,955)          (1,826,405)
       Net unrealized gain (loss) on securities available for sale                            (242,679)            (149,320)
       Retained earnings - substantially restricted                                         11,270,095           11,093,766 
                                                                                          ------------         ------------
            Total stockholders' equity                                                      15,823,971           15,572,267 
                                                                                          ------------         ------------
            Total liabilities and stockholders' equity                                    $155,478,819         $146,247,797 
                                                                                          ============         ============
</TABLE> 
       See accompanying notes to consolidated financial statements.

                                       3


<PAGE>
                           HFB FINANCIAL CORPORATION
                      Consolidated Statements of Earnings
                                  (unaudited)
<TABLE> 
<CAPTION> 
                                                               Three months ended          Nine months ended                
                                                                    March 31,                   March 31,                       
                                                               1997          1996          1997          1996            
                                                            ----------    ----------    ----------    ----------        
   <S>                                                       <C>          <C> 
   Interest income:                                                                                                      
     Loans receivable                                       $2,104,906    $1,948,064    $6,245,875    $5,704,338         
     Mortgage-backed securities                                292,545       313,100       887,541       934,614         
     Trading account securities                                  2,830             -         5,806             -         
     Investment securities                                     421,679       277,776     1,197,270       809,366         
     Other interest-earning assets                              34,668        56,613       114,161       138,631         
                                                            ----------    ----------    ----------    ----------        
       Total interest income                                 2,856,628     2,595,553     8,450,653     7,586,949         
                                                            ----------    ----------    ----------    ----------        
   Interest expense:                                                                                                     
     Deposits                                                1,567,070     1,497,229     4,712,261     4,314,339         
     Borrowed funds                                             53,827        36,696       135,254       132,096         
                                                            ----------    ----------    ----------    ----------        
       Total interest expense                                1,620,897     1,533,925     4,847,515     4,446,435         
                                                            ----------    ----------    ----------    ----------        
       Net interest income                                   1,235,731     1,061,628     3,603,138     3,140,514         
   Provision for loan losses                                     5,073         5,583        91,632        24,991         
                                                            ----------    ----------    ----------    ----------        
       Net interest income after provision for                                                                           
         loan losses                                         1,230,658     1,056,045     3,511,506     3,115,523         
                                                            ----------    ----------    ----------    ----------        
   Noninterest income:                                                                                                   
     Loan service charges                                        9,566         7,711        34,490        22,871         
     Service charges on NOW accounts                            84,036        61,920       232,264       192,585         
     Gain (loss) on trading account securities                 109,107             -       229,740             -         
     Gain (loss) on sale of investment securities                                                                        
       available for sale                                        1,963             -        10,628          (625)        
     Gain (loss) on sale of premises and equipment                   -           950           338        (1,640)        
     Other                                                      20,742        18,717        51,313        46,420         
                                                            ----------    ----------    ----------    ----------        
       Total noninterest income                                225,414        89,298       558,773       259,611         
                                                            ----------    ----------    ----------    ----------        
   Noninterest expense:                                                                                                  
     Compensation and benefits                                 391,959       407,734     1,129,907     1,199,379         
     Occupancy expense                                          46,597        40,971       150,348       123,345         
     Equipment and data processing expense                     117,825       104,464       332,424       273,580         
     SAIF deposit insurance premium                             20,519        65,613       147,900       189,055         
     SAIF special assessment                                         -             -       705,859             -         
     Professional services                                      43,755        53,162       154,660       142,076         
     Kentucky savings and loan tax                              23,676        29,185        88,676        81,685         
     Other                                                     132,352       125,281       422,816       418,637         
                                                            ----------    ----------    ----------    ----------        
       Total noninterest expense                               776,683       826,410     3,132,590     2,427,757         
                                                            ----------    ----------    ----------    ----------        
       Earnings before income taxes                            679,389       318,933       937,689       947,377         
                                                            ----------    ----------    ----------    ----------        
   Income taxes:                                                                                                         
       Current                                                 262,816       105,450       323,066       286,309         
       Deferred                                                (10,500)        3,800        24,450        43,800         
                                                            ----------    ----------    ----------    ----------        
        Total income taxes                                     252,316       109,250       347,516       330,109         
                                                            ----------    ----------    ----------    ----------        
       Net earnings                                         $  427,073    $  209,683    $  590,173    $  617,268         
                                                            ==========    ==========    ==========    ==========        
                                                                                                                         
   Earnings per share                                       $     0.65    $     0.31    $     0.90    $     0.92         
                                                            ==========    ==========    ==========    ==========        
                                                                                                                         
   Dividends per share                                      $     0.33    $     0.32    $     0.65    $     0.64         
                                                            ==========    ==========    ==========    ==========        
</TABLE> 



   See accompanying notes to consolidated financial statements.

                                       4

<PAGE>
                           HFB FINANCIAL CORPORATION

                Consolidated Statement of Stockholders' Equity

                       Nine months ended March 31, 1997

                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                                    Additional                  MRP                           
                                          Common     Paid-in        ESOP*       and        Rabbi      Treasury   
                                          Stock      Capital        Debt       SERP**     Trusts        Stock    
                                         --------   ----------   ---------   ---------   ---------   -----------
<S>                                      <C>        <C>          <C>         <C>         <C>         <C> 
Balance at June 30, 1996                 $746,064   $6,297,130   ($209,428)  ($121,250)  ($258,290)  ($1,826,405)
                                                                                                         
Net earnings                                    -            -           -           -           -             - 
                                                                                                         
Stock issued upon exercise                                                                               
  of stock options                         19,448      243,688           -           -           -             - 
                                                                                                         
Dividends declared                              -            -           -           -           -             - 
                                                                                                         
Treasury stock-                                                                                          
  8,850 shares purchased                        -            -           -           -           -      (204,550)
                                                                                                         
Reduction of ESOP debt                          -        7,482      71,428           -           -             - 
                                                                                                         
Stock issued under MRP                          -       10,938           -      20,300           -             - 
                                                                                                         
Net change in unrealized gain (loss)                                                                     
  on securities available for sale              -            -           -           -           -             - 
                                         --------   ----------   ---------   ---------   ---------   -----------

Balance at March 31, 1997                $765,512   $6,559,238   ($138,000)  ($100,950)  ($258,290)  ($2,030,955)
                                         ========   ==========   =========   =========   =========   ===========
</TABLE> 
                                    
<TABLE> 
<CAPTION>                                     
                                                       Net Unrealized                    
                                                       Gain (Loss) on   
                                                         Securities         Total        
                                          Retained        Available     Stockholders'   
                                          Earnings        for Sale          Equity        
                                         -----------   --------------   ------------                              
<S>                                      <C>           <C>              <C> 
Balance at June 30, 1996                 $11,093,766        ($149,320)   $15,572,267     
                                                                                                            
Net earnings                                 590,173                -        590,173  
                                                                                
Stock issued upon exercise                                                      
  of stock options                                 -                -        263,136      
                                                                                
Dividends declared                          (413,844)               -       (413,844)     
                                                                                
Treasury stock-                                                                 
  8,850 shares purchased                           -                -       (204,550)     
                                                                                
Reduction of ESOP debt                             -                -         78,910      
                                                                                
Stock issued under MRP                             -                -         31,238      
                                                                                
Net change in unrealized gain (loss)                                            
  on securities available for sale                 -          (93,359)       (93,359)     
                                         -----------   --------------   ------------                              
                                                                                
Balance at March 31, 1997                $11,270,095        ($242,679)   $15,823,971     
                                         ===========   ==============   ============
</TABLE> 


*   Employees Stock Ownership Plan (ESOP)
**  Management Recognition Plan (MRP) and Supplemental Executive Retirement 
    Plan (SERP)

See accompanying notes to consolidated financial statements.


                                       5


<PAGE>
                           HFB FINANCIAL CORPORATION

                     Consolidated Statements of Cash Flows
                                  (Unaudited)
<TABLE> 
<CAPTION> 
                                                                                                   Nine months ended
                                                                                                       March 31,
                                                                                                  1997           1996
                                                                                              ------------   -----------
       <S>                                                                                    <C>            <C> 
       Cash flows from operating activities:                                       
         Net earnings                                                                          $   590,173    $  617,268
         Adjustments to reconcile net earnings to net cash                         
           provided by operating activities:                                       
             Depreciation and amortization of premises and equipment                               174,094       125,871
             Amortization of cost of ESOP                                                           71,428        70,923
             Amortization of cost of Management Recognition Plan                                    20,300        45,600
             Distribution of Rabbi trusts assets                                                         -         5,179
             Amortization of premiums and discounts on investment                  
               securities and mortgage-backed securities                                            15,092        36,538
             FHLB stock dividend                                                                   (58,100)      (54,400)
             Deferred income taxes                                                                  24,450        43,800
             Provision for loan losses                                                              91,632        24,991
             Loss (gain) on trading account securities                                            (229,740)            -
             Sales of trading account securities                                                 2,340,823             -
             Purchases of trading account securities                                            (2,647,823)            -
             Loss (gain) on sale of premises & equipment                                              (338)        1,640
             Loss (gain) on sale of investment securities available for sale                       (10,628)          625          
             Decrease (increase) in accrued interest receivable                                   (195,244)     (188,395)
             Decrease (increase) in other assets                                                    67,697          (142)
             Increase (decrease) in accrued interest on deposits                                   548,732       655,580
             Increase (decrease) in accrued expenses and other liabilities                          89,837        36,081          
             Increase (decrease) in income taxes payable                                            60,149        40,700
                                                                                              ------------   -----------
                                                                                   
                 Net cash provided by (used in) operating activities                               952,534     1,461,859
                                                                                              ------------   -----------
                                                                                   
       Cash flows from investing activities:                                       
         Principal collected on investment securities available for sale                           515,604       505,727
         Proceeds from sales of investment securities                              
           available for sale                                                                    3,505,000     3,999,375
         Purchase of investment securities, available for sale                                  (8,485,469)   (3,973,546)
         Proceeds from investment securities matured                                             1,002,776     3,153,352
         Purchase of investment securities                                                      (1,500,000)   (5,000,000)
         Principal collected on mortgage-backed securities                         
           available for sale                                                                      547,175       643,523
         Purchases of mortgage-backed securities                                   
           available for sale                                                                            -    (1,984,005)
         Principal collected on mortgage-backed securities                                       1,076,949     1,670,972
         Purchases of mortgage-backed securities                                                  (996,012)            -
         Mortgage loans originated, net of principal collected                                  (5,560,892)   (6,401,234)
         Principal collected, net of purchases of, mortgage loans                  
           serviced by other institutions                                                          976,345       762,393
         (Increase) decrease in consumer loans                                                  (1,077,250)   (1,085,268)
         Proceeds from sales of real estate owned                                                        -       138,596
         Proceeds from sales of premises and equipment                                                 901         5,150
         Acquisition of premises and equipment used in                             
           Bank's business                                                                         (27,278)     (616,338)
                                                                                              ------------   -----------
                                                                                   
                 Net cash provided by (used in) investing activities                          ($10,022,151)  ($8,181,303)
                                                                                              ------------   -----------
</TABLE>

         See accompanying notes to consolidated financial statements.

                                  (continued)
                                       6


<PAGE>
 
                           HFB FINANCIAL CORPORATION

                     Consolidated Statements of Cash Flows
                                  (Unaudited)

<TABLE> 
<CAPTION> 

                                                                   Nine months ended
                                                                        March 31,
                                                                    1997          1996
                                                                -----------   -----------  
<S>                                                             <C>           <C> 
Cash flows from financing activities:                                     
  Proceeds from sale of common stock                            $   221,896   $    40,000
  Purchase of treasury stock                                       (204,550)     (253,103)
  Dividends paid to stockholders                                   (413,844)     (412,110)
  Proceeds from advances from Federal Home Loan Bank              6,800,000            --
  Repayment of advances from Federal Home Loan Bank              (5,715,533)   (1,912,408)
  Net increase (decrease) in deposits                             7,311,029    12,734,147
  Net increase (decrease) in advances from borrowers
    for taxes and insurance                                         (25,596)      (49,742)
                                                                -----------   ----------- 

      Net cash provided by (used in) financing
        activities                                                7,973,402    10,146,784
                                                                -----------   ----------- 
Net increase (decrease) in cash and cash
  equivalents                                                    (1,096,215)    3,427,340
Cash and cash equivalents at beginning of
  the period                                                      4,744,672     4,010,205
                                                                -----------   ----------- 

      Cash and cash equivalents at end of
        the period                                              $ 3,648,457   $ 7,437,545
                                                                ===========   =========== 
Supplemental cash flow disclosures:
  Cash paid during the period for:
    Interest                                                    $ 4,291,482   $ 3,797,292
                                                                ===========   =========== 

    Income taxes                                                $   262,918   $   245,609
                                                                ===========   =========== 

Noncash activity:
  Acquisition of real estate in settlement of
    loans                                                       $   215,971   $    44,736
                                                                ===========   =========== 

  Transfer of investment securities, available for sale
    to held to maturity                                         $        --   $ 1,475,985
                                                                ===========   =========== 

  Transfer of investment securities, held to maturity
    to available for sale                                       $        --   $ 8,307,712
                                                                ===========   =========== 

  Transfer of mortgage-backed securities, held to maturity
    to available for sale                                       $        --   $ 7,082,419
                                                                ===========   =========== 

</TABLE> 

See accompanying notes to consolidated financial statements.

                                       7
<PAGE>
 
                           HFB FINANCIAL CORPORATION

            Notes to Consolidated Financial Statements (Unaudited)

1.   BASIS OF PRESENTATION:

        The unaudited consolidated financial information for the three and nine
        month periods ended March 31, 1997 and 1996 includes the results of
        operations of HFB Financial Corporation (the "Corporation") and its
        wholly owned subsidiary Home Federal Bank, Federal Savings Bank ("Home
        Federal" or the "Bank"). HFB Financial Corporation acquired 100 percent
        of the Bank's stock during the completion of the Bank's conversion from
        mutual to stock form on December 28, 1992. The accompanying unaudited
        financial statements have been prepared in accordance with generally
        accepted accounting principles for interim financial statements and with
        the instructions to Form 10-Q. It is suggested that these statements and
        notes be read in conjunction with the financial statements and notes
        thereto included in the Bank's annual report for the year ended June 30,
        1996 on Form 10-K filed with the Securities and Exchange Commission.

        In the opinion of management, the financial information reflects all
        adjustments (consisting only of normal recurring adjustments) which are
        necessary for a fair presentation of the results of operations for such
        periods but should not be considered as indicative of results for a full
        year.

2.   NONPERFORMING LOANS AND PROBLEM ASSETS
 
        Management reviews the Bank's loans on a regular basis. After
        residential mortgage loans become past due more that 90 days, the Bank
        generally establishes an allowance for uncollectible interest for the
        amount by which the principal balance and uncollected interest exceeds
        90% of the appraised value of the property. Commercial and multi-family
        real estate loans generally are placed on non-accrual status if the
        borrower is placed in bankruptcy proceedings, or management concludes
        that payment in full is not likely. Consumer and commercial loans
        generally are charged off, or an allowance is established for any
        expected loss after they become more than 90 days past due. The Bank
        accrues interest on delinquent loans past due more than 90 days without
        establishing a reserve when management concludes such action is
        warranted, such as in the event the loan is exceptionally well
        collateralized or the borrower establishes the temporary nature of the
        delinquency. Loans are charged off when management concludes that they
        are uncollectible.

        The Bank's collection procedures provide that when a loan becomes past
        due 30 days, the borrower is contacted in person or by telephone or
        mail, and payment is requested. If payment is not promptly received, the
        borrower is contacted again, and efforts are made to formulate an
        affirmative plan to cure the delinquency. After a loan becomes past due
        90 days the Bank generally initiates legal proceedings. Loans delinquent
        90 days or greater and still accruing are managed based on a work out
        plan developed by the Bank. Interest accrues based on the work out plan
        and the value of the collateral when collateral value is more than
        sufficient to fully cover the loan balance. Interest is not accrued on
        loans in the process of foreclosure.

        Real estate acquired by the Bank as a result of foreclosure is
        classified as real estate owned until such time as it is sold. When such
        property is acquired, it is recorded at the lower of the unpaid
        principal balance or its fair value less estimated selling cost. Any
        required write-down of the loan to its fair market value upon
        foreclosure is charged against the allowance for loan losses.

                                       8
<PAGE>
 
The following sets forth information with respect to the Bank's non-performing
assets at March 31, 1997 and June 30, 1996:

                            (Dollars in thousands)
<TABLE>
<CAPTION>
 
                                                              March 31,   June 30,
                                                                 1997       1996
                                                              ----------  ---------
<S>                                                           <C>         <C>
 
     Loans accounted for on a nonaccrual basis (1)                $   -      $   -
                                                                  -----      -----
 
     Accruing loans which are contractually past due
        90 days or more: (1)
          Real estate                                             $ 434      $ 657
          Consumer                                                   25          3
          Commercial                                                  -          -
                                                                  -----      -----
                                                                  $ 459      $ 660
                                                                  -----      -----
        Total of nonaccrual and 90 days or more
          past due loans                                          $ 459      $ 660
 
     Real estate owned                                              216          -
                                                                  -----      -----
        Total non-performing assets                               $ 675      $ 660
                                                                  =====      =====
 
     Nonaccrual and 90 days or more past due loans
        as a percentage of total loans, net                         .45%       .69%
                                                                  =====      =====
 
     Nonaccrual and 90 days or more past due loans
        as a percentage of total assets                             .30%       .45%
                                                                  =====      =====
 
     Non-performing assets as a percentage of total assets          .43%       .45%
                                                                  =====      =====
 
</TABLE>



     (1) Interest on delinquent loans is accrued to income to the extent
     considered collectible. Nonaccrual loans did not have a material effect on
     the Bank's interest income for the periods ended March 31, 1997 and June
     30, 1996.


The Bank has a potential problem commercial real estate loan at March 31, 1997.
The carrying amount of the loan is approximately $1.4 million, including a
$131,000 working capital loan funded in January 1997.  The property is not
generating sufficient cash flow to fund debt service payments.  The borrower has
obtained funds from another source to make the most recent payments on this
indebtedness.  Management is currently evaluating the collectability of this
loan and assessing the possibility of any losses the Bank could incur.

                                       9
<PAGE>
 
The following sets forth the activity in the Bank's allowance for  loan losses
for the nine months ended March 31,  1997:

                            (Dollars in thousands)
<TABLE>
<CAPTION>
 
<S>                                                               <C>   
     Balance at June 30, 1996                                     $671
     Charge offs:                                           
       Domestic:                                            
       Commercial, financial and agricultural                       68
       Real estate-construction                                      0
       Real estate-mortgage                                          0
       Installment loans to individuals                              2
                                                                  ----
                                                                    70
                                                                  ----
     Recoveries:                                            
       Domestic:                                            
        Commercial, financial and agricultural                       -
        Real estate-construction                                     -
        Real estate-mortgage                                         2  
     Installment loans to individuals                                -
                                                                  ----
                                                                     2
                                                                  ----
     Net charge offs (Recoveries):                                  68  
      Additions charged to operations                               92  
                                                                  ----
      Balance March 31, 1997                                      $695
                                                                  ====

      Ratio of net charge offs during the period to average
       loans outstanding during the period                         .07%
                                                                  ====
</TABLE> 

                                       10
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

GENERAL:

     HFB Financial Corporation, a Tennessee Corporation, was formed in September
1992 at the direction of Home Federal Bank, Federal Savings Bank for the purpose
of becoming a holding company for the Bank as part of its conversion from mutual
to stock form ("the "Conversion").  Prior to the Conversion, the Corporation did
not engage in any material operations and at March 31, 1997, its primary
operation was its investment in the common stock of the Bank.

     The Bank is principally engaged in the business of accepting deposits from
the general public and originating permanent loans which are secured by one-to-
four family residential properties located in its market area.  The Bank also
originates consumer loans and commercial real estate loans, and maintains a
substantial investment portfolio of mortgage-backed and other investment
securities.

     The operations of Home Federal, and savings institutions generally, are
significantly influenced by general economic conditions and the monetary and
fiscal policies of government regulatory agencies.  Deposit flows and costs of
funds are influenced by interest rates on competing investments and prevailing
market rates of interest.  Lending activities are affected by the demand for
financing real estate and other types of loans, which in turn are influenced by
the interest rates at which such financing may be offered and other factors
related to loan demand and the availability of funds.  Just as the Bank's
operations are influenced by regulatory authorities, so are its liquidity levels
and capital resources.  As of March 31, 1997, management is not aware of any
current recommendations by the regulatory authorities, which if implemented,
would have a material effect on the Bank's operations, liquidity or resources.

ASSET/LIABILITY MANAGEMENT

     Key components of a successful asset/liability strategy are the monitoring
and managing of interest rate sensitivity of both the interest-earning asset and
interest-bearing liability portfolios.  Home Federal has employed various
strategies intended to minimize the adverse affect of interest rate risk on
future operations by providing a better match between the interest rate
sensitivity of its assets and liabilities.  In particular, the Bank's strategies
are intended to stabilize net interest income for the long-term by protecting
its interest rate spread against increases in interest rates.  Such strategies
include the origination of adjustable-rate mortgage loans secured by one-to-four
family residential real estate and the origination of consumer and other loans
with greater interest rate sensitivities than long-term, fixed-rate residential
mortgage loans.  Although customers typically prefer fixed-rate mortgage loans
in a low interest rate environment, Home Federal has been successful in
originating adjustable-rate loans in recent years.  In addition, the Bank has
used excess funds to invest in various short-term investments including
mortgage-backed securities with terms of seven years or less, U.S. Government
Treasury and Agency securities with terms of ten years or less and other short-
term investments.

     Asset/liability management in the form of structuring cash instruments
provides greater flexibility to adjust exposure to interest rates.  During
periods of high interest rates, management believes it is prudent to offer
competitive rates on short-term deposits and less competitive rates for long-
term liabilities.  This posture allows the Bank to benefit quickly from declines
in interest rates.  Likewise, offering more competitive rates on long-term
deposits during the low interest rate periods allows the Bank to extend the
repricing and/or maturity of its liabilities thus reducing its exposure to
rising interest rates.

FINANCIAL CONDITION

     The Corporation's assets increased by 6.31% to $155.4 million at March 31,
1997 compared to $146.2 million at June 30, 1996.  The majority of this increase
is reflected in investment securities and loans receivable, which was primarily
funded by an increase in deposits.

                                       11
<PAGE>
 
     Cash and cash equivalents decreased by $1.1 million to $3.6 million at
March 31, 1997 from $4.7 million at  June 30, 1996.  This decrease was primarily
the result of increased levels of loans and investments net of short borrowing
during the quarter ended March 31, 1997.

     The Bank's asset composition continues to change due to volatility in
interest rates and a strong loan demand.  In the current interest rate
environment, a substantial portion of loans originated were adjustable-rate
residential mortgages.  During the nine months ended March 31, 1997, the Bank
originated $24.0 million in mortgages.  Total loans receivable, net increased
5.58% to $101.3 million at March 31, 1997 compared to $96.0 million at June 30,
1996.

     The Bank augments its lending activities and increases its asset yields by
investing in mortgage-backed securities "MBSs " and U.S. Government securities.
During the nine months ended March 31, 1997, management purchased $11.0 million
in investment securities and MBSs.   These purchases were funded by $6.6  in
proceeds from called and maturing investment securities, principal collected on
MBSs and investments, and the sale of investment securities.  The balance was
primarily funded by increased deposits and borrowings.  At March 31, 1997,
investment securities, AFS and MBSs, AFS were $24.6 million with a net
unrealized loss of $243,000.

     At March 31, 1997, the balance in real estate owned was $216,000, compared
to $0 at June 30, 1996.  The $216,000 balance represents an interest in a
commercial building in Nicholasville, Kentucky, which was obtained through
foreclosure during the quarter ended December 31, 1996.  Management sold the
Bank's interest in the property in April 1997, incurring no significant loss.

     Accrued interest receivable increased by $195,000 from $955,000 at June 30,
1996 to $1.150 million at March 31, 1997 due to a higher volume of interest-
earning assets and the timing of interest payments.

     Premises and equipment decreased by $150,000 to  $2.22 million at March 31,
1997 from $2.37 million at June 30, 1996 primarily due to depreciation.

     Total deposits increased by $7.3 million to $134.0 million at March 31,
1997 from $126.7 million at June 30, 1996.  During the nine months ended March
31, 1997, CDs increased $6.8 million and NOW accounts increased $1.5 million,
while passbook savings and money market deposit accounts decreased by $960,000.

     Accrued interest on deposits increased by $549,000 to $1.083 million at
March 31, 1997 from $534,000 at June 30, 1996.  The increase was due to
increased volume and the timing of interest payments.

     Advances  from Federal Home Loan Bank increased by $1.1 million during the
nine months ended March 31, 1997 due to net increases in borrowings, which was
used to fund increases in lending and investment activities.

     Advances from borrowers for taxes and insurance decreased by $25,000 for
the nine months ended March 31, 1997 due to the timing of tax and insurance
payments.

     Accrued expenses and other liabilities increased by $90,000 during the nine
months ended March 31, 1997 primarily as the result of the timing of payments of
Kentucky saving and loan taxes and other expenses.

     Income taxes payable decreased by $29,000 for the nine months ended March
31, 1997, due to the timing of tax payments.
 
     Certain components of stockholders' equity increased during the nine months
ended March 31, 1997 as the result of employee stock options exercised,
reduction of the Employee Stock Ownership Plan debt and stock issued under the
Management Recognition Plan.  Also, 8,850 shares of treasury stock were
purchased at a cost of $205,000 during the nine month period end March 31, 1997.

                                       12
<PAGE>
 
     The Bank's regulatory liquidity ratio was 21.27% at March 31, 1997 as
compared to 21.29% at June 30, 1996.  At March 31, 1997 the Bank met all the
fully phased-in regulatory capital requirements under FIRREA.  Tangible, core
and risk-based capital ratios were 9.5%, 9.5% and 21.9% respectively at March
31, 1997 as compared to 10.2%, 10.2% and 23.3% at June 30, 1996.
 
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996

     Net earnings increased by $217,000 to $427,000 for the three month period
ended March 31, 1997 from $210,000 for the three month period ended March 31,
1996.  The primary reasons for the increase were a $174,000 increase in net
interest income, an $136,000 increase noninterest income and a $50,000 decrease
in noninterest expense offset by a $143,000 increase in income tax expense.

     Net interest income increased by $174,000 for the three month period ended
March 31, 1997 as compared to the three month period ended March 31, 1996.
Interest income increased during the quarter, primarily as the result of a
higher level of interest-earning assets.

     Interest on loans increased by $156,000 to $2.104 million for the three
month period ended March 31, 1997 as compared to $1.948 million for the three
month period ended March 31, 1996.  This increase is mainly attributable to a
higher weighted average balance of loans receivable outstanding.

     Interest on MBSs decreased by $20,000 to $293,000 during the three month
period ended March 31, 1997 from $313,000 for the three month period ended March
31, 1996,  primarily due to a lower weighted average balance.

     Interest on trading account securities was $3,000 for the three month
period ended March 31, 1997 compared to $0 for the three months ended March 31,
1996.

     Interest on investment securities increased by $144,000 to $422,000 for the
three month period ended March 31, 1997 from $278,000 for the three month period
ended March 31, 1996.  This increase was primarily due to increased volume and
higher rates on new purchases.

     Interest on other interest-earning bearing assets decreased by $22,000 to
$35,000 for the three month period ended March 31, 1997 from $57,000 for the
three month period ended March 31, 1996 due to a lower level of interest-bearing
cash balances.

     Interest on deposits increased by $70,000 to $1.57 million for the three
month period ended March 31, 1997 from $1.50 million for the three month period
ended March 31, 1996 as a result of  higher volume and a change in the overall
deposit mix.  Lower rate savings accounts declined, while CDs increased.

     Interest on borrowed funds increased by $17,000 to $54,000 for the three
month period ended March 31, 1997 from $37,000 for the three month period ended
March 31, 1996 due to higher levels of borrowing.

     Provision for loan losses was $5,000 for the three month period ended March
31, 1997 as compared to $6,000 for the three month period ended March 31, 1996.
The provision was the result of Management's evaluation of the adequacy of the
allowance for loan losses including consideration of recoveries of loans
previously charged off, the perceived risk exposure among loan types,  actual
loss experience, delinquency rates, and current economic conditions.  The Bank's
allowance for loan losses as a percent of total loans at March 31, 1997 was
 .69%.

                                       13
<PAGE>
 
     The Banks non-interest income increased by $136,000 to $225,000 for the
three month period ended March 31, 1997 as compared to $89,000 for the same
period in 1996.  The increase was attributable to realized and unrealized gains
on trading account securities and realized gains on investment securities AFS of
$111,000, an increase of $2,000 in loan late charge income, an increase of
$22,000 in deposit service charge income and other noninterest income increased
by $1,000.  Trading account securities are equity securities, which are subject
to market fluctuations.

     Non-interest expense decreased by $50,000 to $776,000 for the three month
period ended March 31, 1997 as compared to $826,000 for the same period in 1996.
Compensation and benefits decreased by $16,000 to $392,000 for the three month
period ended March 31, 1997 as compared to $408,000 for the same period in 1996.
This decrease is primarily attributable to the Bank not having to fund the
employees retirement plan during the quarter ended March 31, 1997.

     Occupancy expense increased by $5,000 to $46,000 for the three month period
ended March 31, 1997 compared to $41,000 for the same period in 1996. This
increase was mainly the result of increased property taxes and depreciation
expense.

     Equipment and data processing expense increased by $13,000 to $117,000 for
the three month period ended March 31, 1997 from $104,000 for the three month
period ended March 31, 1996 primarily due to increased data processing fees and
repair and maintenance of equipment.
 
     SAIF deposit insurance premiums decreased by $45,000 to $21,000 for the
three month period ended March 31, 1997 as compared to $66,000 for the three
month period ended March 31, 1996 due to lower SAIF premiums.

     Professional services decreased by $9,000 for the three month period ended
March 31, 1997 primarily due to lower accounting and consulting fees.

     Kentucky saving and loan tax decreased by $5,000 to $24,000 for the three
month period ended March 31, 1997 compared to $29,000 for the three month period
ended March 31, 1996 due to a change in the Bank's estimated liability.

     Other expense increased by $7,000 to $132,000 for three the month period
ended March 31, 1997 from $125,000 for the three month period ended March 31,
1996 as the result of small increases in several expense categories.

     Income taxes increased by $143,000 to $252,000 for the three month period
ended March 31, 1997 compared to $109,000 for the three months ended March 31,
1996 due to higher earnings.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996

     Net earnings decreased by $27,000 to $590,000 for the nine month period
ended March 31, 1997 from $617,000  for the nine month period ended March 31,
1996.  The primary reasons for the decrease were a $463,000 increase in net
interest income, an increase of $299,000 in noninterest income offset by an
increase of $67,000 in provision for loan loss, an increase of $705,000 in
noninterest expense and an increase of $17,000 in income tax expense.

     Net interest income increased by $463,000 for the nine month period ended
March 31, 1997 as compared to the nine month period ended March 31, 1996.
During the nine months ended March 31, 1997, the Bank's net interest income
increased primarily as the result of a higher volume of net interest-earning
assets.

     Interest on loans increased by $542,000 to $6.246 million for the nine
month period ended March 31, 1997 as compared to $5.704 million for the nine
month period ended March 31, 1996.  This increase is mainly attributable 
to a higher volume of loans receivable outstanding.

                                       14
<PAGE>
 
     Interest on MBSs decreased by $47,000 to $888,000 during the nine month
period ended March 31, 1997 from $935,000 for the nine month period ended March
31, 1996 primarily due to a lower weighted average balance.

     Interest on trading account securities was $6,000 for the nine month period
ended March 31, 1997 compared to $0 for the nine months ended March 31, 1996.

     Interest on investment securities increased by $388,000 to $1.197 million
for the nine month period ended March 31, 1997 from $809,000 for the nine month
period ended March 31, 1996.  This increase was primarily due to increased
volume and higher yields on new purchases.

     Interest on other interest-earning assets decreased by $25,000 to $114,000
for the nine month period ended March 31, 1997 from $139,000 for the nine month
period ended March 31, 1996 due to a lower level of interest-bearing cash
balances.

     Interest on deposits increased by $398,000 to $4.712 million for the nine
month period ended March 31,  1997 from $4.314 million for the nine month period
ended March 31, 1996 as a result of higher interest rates, higher volume and a
change in the overall deposit mix.  Lower rate NOW accounts and savings accounts
declined, while CDs increased.

     Interest on borrowed funds increased by $3,000 to $135,000 for the nine
month period ended March 31, 1997 from $132,000 for the nine month period ended
March 31, 1996 due to higher levels of borrowing.

     Provision for loan losses increased by $67,000 for the nine month period
ended March 31, 1997  compared to the nine month period ended March 31, 1996.
This level of provision was a result of Management's evaluation of the adequacy
of the allowance for loan losses including consideration of recoveries of loans
previously charged off, the perceived risk exposure among loan types,  actual
loss experience, delinquency rates, and current economic conditions.  The Bank's
allowance for loan losses as a percent of total loans at March 31, 1997 was
 .69%.

     The Banks non-interest income increased by $299,000 to $559,000 for the
nine month period ended March 31, 1997 as compared to $260,000 for the same
period in 1996.  Gains from the sale of trading account securities and
investments AFS increased by $241,000 for the nine months ended March 31, 1997
as compared to the nine month period ended March 31, 1996.  Service charges on
deposit accounts increased by $40,000 and late charges on loans increased by
$12,000.  Other noninterest income increased by $6,000 for the nine months ended
March 31, 1997 with no significant change in any other single category.

     Non-interest expense increased by $705,000 to $3.133 million for the nine
month period ended March 31, 1997 as compared to $2.428 million for the same
period in 1996.  Compensation and benefits decreased by $69,000 to $1.130
million for the nine month period ended March 31, 1997 as compared to $1.199
million for the same period in 1996.  This decrease is primarily due to a
reduction in the cost of funding the Bank's retirement plan.

     Occupancy expense increased by $27,000 to $150,000 for the nine month
period ended March 31, 1997 compared to $123,000 for the same period in 1996.
This increase was mainly the result of expenses associated with the new branch
office in New Tazewell, Tennessee.

     Equipment and data processing expense increased by $59,000 to $332,000 for
the nine month period ended March 31, 1997 from $273,000 for the nine month
period ended March 31, 1996 primarily due to increased data processing fees and
depreciation expense identifiable with the New Tazewell branch.
 
     The Bank's Federal deposit insurance premium decreased by $41,000 to
$148,000 for the nine month period ended March 31, 1997 from $189,000 for the
nine month period ended March 31, 1996 due to lower premium rates.  

                                       15
<PAGE>
 
This was this was the result of the legislation enacted to recapitalize the
SAIF, which required the Bank to pay an additional one time special assessment
of $706,000 during the quarter ended December 31, 1996.
 
     Professional services increased by $13,000 to $155,000 for the nine month
period ended March 31, 1997 compared to $142,000 for the same period in 1996.
Most of this increase was attributable to fees paid to consultants  for
recommendations to improve the Banks operational procedures.  The project was
completed in November 1996 and the associated expense ended at that point.

     Kentucky saving and loan tax increased by $7,000 to $89,000 for the nine
month period ended March 31, 1997 from $82,000 for the nine month period ended
March 31, 1996 due to a higher level of deposits.

     Other expense increased by $4,000 to $423,000 for nine the month period
ended March 31, 1997 from $419,000 for the nine month period ended March 31,
1996.  The principal components of this increase were attributable to
advertising  expense, printing supplies and expenses associated with automated
teller machines brought into service during the period.

     Income taxes increased by $17,000 to $347,000 for the nine month period
ended March 31, 1997 compared to $330,000 for the nine month period ended March
31, 1996 due to a higher percentage of income being subject to state income
taxes.

                                       16
<PAGE>
 
                           HFB FINANCIAL CORPORATION

                                    PART II

                               OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

         None

ITEM 2.  CHANGES IN SECURITIES

         None

ITEM 3.  DEFAULTS IN SENIOR SECURITIES

         None

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

         None

ITEM 5.  OTHER INFORMATION

         None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         a. Exhibits
 
            None
 

                                       17
<PAGE>
 
                           HFB FINANCIAL CORPORATION

                                  Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned, thereunto duly authorized.



                             HFB FINANCIAL CORPORATION
 
                             By: /s/ David B. Cook
                                --------------------------------
                                David B. Cook
                                President and
                                Chief Executive Officer


                             By: /s/ Stanley Alexander, Jr.
                                --------------------------------
                                Stanley Alexander, Jr.
                                Chief Financial Officer



Dated: May 8, 1997

                                       18