<PAGE>
 
HFB FINANCIAL CORPORATION
 

[LOGO OF HFB FINANCIAL CORPORATION APPEARS HERE]





                                           1998 ANNUAL REPORT


<PAGE>
 
LETTER TO STOCKHOLDERS
--------------------------------------------------------------------------------


To Our Shareholders:

I am pleased to report that HFB Financial Corporation enjoyed a year of solid
growth.  In fiscal 1998, we achieved steady increases in loans, deposits and net
income, while undergoing a series of technological changes.  The Company earned
$1,503,000 for the year ended June 30, 1998, compared to $1,038,000, for the
year ended June 30, 1997 as basic earnings per share increased to $1.39 in 
1998 from $.98 in 1997. Total assets increased from $159.5 million to 
$176.4 million.

In consideration of the Company's performance during the past year, your Board
of Directors declared a semi-annual dividend of $.22 per share to all
stockholders of record as of September 15, 1998 and payable on September 30,
1998.

We are enthusiastic about the year ahead, and we review the challenges before us
as exciting ones.  We remain focused on growing Home Federal Bank and on
providing value to our shareholders.

We are grateful for your continued support.

Thank you,

/s/ David B. Cook

David B. Cook
President and CEO

                                      (1)
<PAGE>
 
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------


                             RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                CHANGE
                                                                                -----------------------------------
YEAR ENDED JUNE 30                                   1998             1997             AMOUNT           PERCENT
-------------------------------------------------------------------------------------------------------------------
                                                             (Dollars in Thousands)
<S>                                             <C>              <C>              <C>               <C>
Interest income                                      $12,979          $11,692           $1,287             11.01%
Interest expense                                       7,322            6,510              812             12.47
Net interest income                                    5,657            5,182              475              9.17
Provision for loan losses                                274              138              136             98.55
Net interest income after provision                
for loan losses                                        5,383            5,044              339              6.72
Other income                                             661              746              (85)           (11.39)
Other expenses                                         3,750            4,161             (411)            (9.88)
Income taxes                                             791              591              200             33.84
Net income                                             1,503            1,038              465             44.80
</TABLE>


                               FINANCIAL POSITION

<TABLE>
<CAPTION>
                                                                                                 CHANGE
                                                                                  ----------------------------------
JUNE 30                                               1998              1997            AMOUNT           PERCENT
--------------------------------------------------------------------------------------------------------------------
                                                              (Dollars in Thousands)
<S>                                             <C>               <C>               <C>              <C>
Total assets                                       $  176,437        $  159,457          $16,980            10.65%
Net loans                                             116,171           104,984           11,187            10.66
Investment securities                              
 Available for sale                                    26,905            25,113            1,792             7.14
 Held to maturity                                      20,547            20,207              340             1.68
Deposits                                              144,881           133,203           11,678             8.77
Stockholders' equity                                   17,987            16,567            1,420             8.57
                                                   
Number of Shares Outstanding                        1,089,648         1,083,627            6,021              .56
</TABLE>

                                      (2)
<PAGE>
 
SELECTED FINANCIAL AND OTHER DATA
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
JUNE 30                                                 1998       1997       1996       1995       1994
-----------------------------------------------------------------------------------------------------------
                                                     (Dollar amounts in thousands, except per share amount)
FINANCIAL POSITION
<S>                                                  <C>         <C>        <C>        <C>        <C>
 Assets                                                $176,437   $159,457   $146,248   $131,260   $128,521
 Loans, net                                             116,171    104,984     95,974     87,502     77,621
 Investments
  Available for sale                                     26,905     25,113     20,838      4,175     11,946
  Held to maturity                                       20,547     20,207     19,834     32,707     33,912
 Deposits                                               144,881    133,203    126,742    110,104    105,260
 Short-term borrowings and long-term debt                12,162      8,221      2,650      4,576      7,622
 Stockholders' equity                                    17,987     16,567     15,572     15,409     14,737
</TABLE>


<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                      1998         1997         1996        1995       1994
---------------------------------------------------------------------------------------------------------------
                                                       (Dollar amounts in thousands, except per share amount)
OPERATING RESULTS
<S>                                                  <C>          <C>          <C>          <C>        <C>
 Interest income                                        $12,979      $11,692      $10,479    $ 9,746    $ 8,862
 Interest expense                                        (7,322)      (6,510)      (6,024)    (5,024)    (4,215)
                                                   ------------------------------------------------------------
 Net interest income                                      5,657        5,182        4,455      4,722      4,647
 Provision for loan losses                                 (274)        (138)         (35)       (37)       (55)
                                                   ------------------------------------------------------------
 Net interest income after
  provision for loan losses                               5,383        5,044        4,420      4,685      4,592
 Other income
  Net realized gain (loss) on trading securities            159          307           (3)
  Other                                                     502          439          359        317        333
 Other expenses                                          (3,750)      (4,161)      (3,456)    (3,000)    (2,735)
                                                   ------------------------------------------------------------
 Income before income tax                                 2,294        1,629        1,320      2,002      2,190
 Income taxes                                              (791)        (591)        (473)      (711)      (779)
 Cumulative effect of change in
  accounting principle for income taxes                                                                      (5)
                                                   ------------------------------------------------------------
 
 Net income                                             $ 1,503      $ 1,038      $   847    $ 1,291    $ 1,406
                                                   ============================================================
 
 Basic earnings per share (1)                           $  1.39      $   .98      $   .79    $  1.19    $  1.23
 Diluted earnings per share                                1.35          .96          .76       1.14       1.19
 Book value per share                                     16.51        15.38        14.74      14.30      13.31
</TABLE>

(1) Years before 1997 adjusted to reflect a 5-for-3 stock split on June 30,
    1997.


<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                      1998         1997        1996        1995        1994
---------------------------------------------------------------------------------------------------------------
                                                       (Dollar amounts in thousands, except per share amount)
<S>                                                  <C>          <C>         <C>         <C>         <C>
OTHER DATA
 Average interest rate spread                              3.12%       3.06%       2.92%       3.34%       3.51%
 Net yield on average interest-earning assets              3.52        3.49        3.36        3.73        3.88
 Return on average assets                                   .90         .68         .61         .99        1.15
 Return on average stockholders' equity                    8.70        6.60        5.45        8.56        9.62
 Equity as a percent of year-end assets                   10.20       10.39       10.65       11.74       11.47
 Non-interest expense as a percent of                                                              
   average assets                                          2.22        2.71        2.33        2.18        2.23
 Non-performing assets to total assets                      .52         .27         .45         .26         .27
 Ratio of allowance for loan losses to                                                             
   gross loans                                              .83         .67         .68         .70         .74
 Dividend payout ratio                                    29.94       39.89       45.77       30.09       20.85
 Number of                                                                                         
  Real estate loans outstanding                           2,077       2,033       1,959       1,892       1,792
  Deposit accounts                                       14,945      14,161      13,465      12,732      13,475
  Full service offices                                        3           3           3           3           3
</TABLE>

                                      (3)
<PAGE>
 
BUSINESS OF THE COMPANY AND THE BANK
--------------------------------------------------------------------------------

THE CORPORATION.  HFB Financial Corporation (Company), a Tennessee corporation,
was organized by Home Federal Bank, Federal Savings Bank (Home Federal or Bank)
to be a savings institution holding company.  The Company was organized at the
direction of the Bank in September 1992 to acquire all of the capital stock
issued by the Bank upon the conversion of the Bank from mutual to stock form and
the simultaneous offering and sale of 722,704 shares of common stock of the
Company, completed on December 28, 1992 (Conversion).  The Company has no
significant assets other than capital stock of the Bank, a portfolio of trading
account equity securities and a loan to the Bank's employee stock ownership
plan.  The Company's principal business is the business of the Bank and its
subsidiary.  Therefore, most of the discussion in this Annual Report regards the
Bank and its operations.
 
The executive offices of the Company and the Bank are located at 1602 Cumberland
Avenue, Middlesboro, Kentucky 40965 and the telephone number is (606) 248-1095.

THE BANK.  Home Federal was incorporated in 1920 as a Kentucky-chartered
building and loan association known as Peoples Building and Loan.  The Bank
converted to a federal savings and loan association and obtained federal
insurance of accounts in 1961 and became a federally-chartered mutual savings
bank, Home Federal Savings Bank, in 1985.  The Bank changed to its current name,
Home Federal Bank, Federal Savings Bank, in 1990.  The Bank completed its
conversion from mutual to stock form on December 28, 1992.  The Bank operates
through two full service offices in the southeastern Kentucky communities of
Middlesboro and Harlan and one full service office in the East Tennessee
community of New Tazewell.

The Bank is engaged principally 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.  Home Federal's current business strategy embodies several
objectives:  (i) continued emphasis on originating interest rate sensitive or
shorter term loans for portfolio, primarily in the form of longer term
adjustable-rate mortgage loans and shorter term consumer loans, (ii) continued
maintenance of a substantial investment portfolio of short-term, low-risk
investments, primarily U. S. government and agency securities and investment
grade mortgage-backed securities and (iii) expanding the Bank's loan
originations in the counties adjacent to the Bank's market area.  In addition,
from time-to-time, the Bank has purchased whole loans and participation
interests in residential and commercial real estate and multi-family real estate
loans located primarily in Kentucky and East Tennessee areas contiguous to the
Bank's immediate market area.

As a federally-chartered savings bank, the Bank's deposits are insured by the
Federal Deposit Insurance Corporation (FDIC) up to applicable limits for each
depositor.  The Bank is a member of the Federal Home Loan Bank (FHLB) of
Cincinnati which is one of the twelve district banks comprising the FHLB system.
The Bank is subject to comprehensive examination, supervision and regulation by
the Office of Thrift Supervision (OTS) and the FDIC.  This regulation is
intended primarily for the protection of depositors.

                                      (4)
<PAGE>
 
MARKET INFORMATION
--------------------------------------------------------------------------------

TRADING IN THE COMMON STOCK.  The Company's common stock is listed over-the-
counter through the National Daily Quotation System "Pink Sheet" published by
the National Quotation Bureau, Inc.  There are currently 1,089,648 shares of the
common stock outstanding and approximately 400 holders of record of the common
stock (not including shares held in "street name").

The following table sets forth certain information as to the range of the high
and low bid prices for the Company's common stock for the calendar quarters
indicated:

<TABLE>
<CAPTION>
                               HIGH BID (1)     LOW BID (1)    DIVIDENDS PAID
                             --------------------------------------------------
FISCAL 1997                                                    
<S>                           <C>              <C>              <C>
 First quarter                     $14.55           $14.55     
 Second quarter                     15.00            14.55             $.19
 Third quarter                      15.30            15.00     
 Fourth quarter                     15.30            13.20              .20
                                                               
FISCAL 1998                                                    
 First quarter                     $16.00           $14.75             $.21
 Second quarter                     18.00            16.00     
 Third quarter                      18.00            18.00              .22
 Fourth quarter                     20.00            18.00
</TABLE>

(1) Quotations reflect inter-dealer prices, without retail mark-up, mark-down or
    commission and may not represent actual transactions.
(2) Transactions in the table above have been adjusted to reflect a 5-for-3
    stock split on June 30, 1997.

In fiscal 1999, the Company currently expects that it will pay a semi-annual
dividend.  The latest bid price as of October 5, 1998 was $17.25.

DIVIDEND RESTRICTIONS.  Under regulations of the OTS, the Bank is not permitted
to pay dividends on its capital stock if its regulatory capital would thereby be
reduced below regulatory capital requirements, or 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, savings institution
subsidiaries of savings and loan holding companies such as the Company are
required to give the OTS thirty days prior notice of any proposed declaration of
dividends to the holding company.

Additionally, an OTS regulation restricts the Bank's ability to make capital
distributions, including payment of dividends.  The regulation provides that an
institution meeting its capital requirements, both before and after its proposed
capital distribution, may generally distribute the greater of (1) 75% of its net
earnings for the prior four quarters or (2) 100% of its net earnings to date
during the year, plus the amount that would reduce by one-half its surplus
capital ratio (defined as the percentage by which the institution's capital-to-
assets ratio exceed the ratio of its capital requirements to its assets) at the
beginning of the year without prior supervisory approval.  The regulation
provides more significant restrictions on payment of dividends in the event that
the capital requirements are not met.

Although the Company is not subject to these restrictions, the Company's primary
source of funds for the payment of dividends is dividends from the Bank.

                                      (5)
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------


HFB Financial Corporation, a Tennessee corporation, was organized by Home
Federal to be a savings institution holding company.  The Company was organized
at the direction of the Bank in September 1992 to acquire all of the capital
stock issued by the Bank upon the conversion of the Bank from mutual to stock
form.  The Company has no significant assets other than capital stock of the
Bank.  The Company's principal business is the business of the Bank and its
subsidiary.  Therefore, the discussion in this Management's Discussion and
Analysis relates to the Bank and its operations.

Home Federal's results of operations in recent years have reflected the
fundamental changes which have occurred in the regulatory, economic and
competitive environment in which savings institutions operate.  The Bank's
results of operations are primarily dependent on its net interest income, which
is the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities.  Interest income is a function
of the balances of interest-earning assets outstanding during the period and the
yields earned on such assets.  Interest expense is a function of the amount of
interest-bearing liabilities outstanding during the period and the rates paid on
such liabilities.  The Bank also generates non-interest income, such as service
charges on transaction accounts and other fees.  Net earnings is further
affected by the level of non-interest expenses, such as personnel expenses,
occupancy and equipment expenses, federal deposit insurance premiums and other
expenses.

The operations of Home Federal, and savings institutions generally, are
significantly influenced by general economic conditions and the monetary and
fiscal policies of governmental 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 is affected by the
interest rates at which such financing may be offered and other factors
affecting 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.

                                      (6)
<PAGE>
 
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 effect of interest rate risk on
future operations by providing a better match between the interest rate
sensitivity between 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 for portfolio 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.  At June 30, 1998, approximately
85% of the loans in the Bank's mortgage loan portfolio were adjustable-rate
mortgages.  The Bank has used excess funds to invest in various short-term
investments, including mortgage-backed securities, with terms of 7 years or
less, U. S. Government Treasury and agency securities with terms of 10 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.


INTEREST RATE SENSITIVITY
--------------------------------------------------------------------------------


Net portfolio value (NPV) analysis provides a quantification of interest rate
risk.  In essence, this approach calculates the difference between the present
value of liabilities, expected cash flows from assets and cash flow from off-
balance-sheet contracts.  Under OTS regulations, an institution's "normal" level
of interest rate risk in the event of an immediate and sustained 200 basis point
change in interest rates is a decrease in the institution's NPV in an amount not
exceeding 2% of the present value of its assets.  Pursuant to this regulation,
thrift institutions with greater than "normal" interest rate exposure must take
a deduction from their total capital available to meet their risk-based capital
requirement.  The amount of that deduction is one-half of the difference between
(a) the institution's actual calculated exposure to the 200 basis point interest
rate increase or decrease (whichever results in the greater pro forma decrease
in NPV) and (b) its "normal" level of exposure which is 2% of the present value
of its assets.

At June 30, 1998, 2% of the present value of the Bank's assets was approximately
$3.5 million, which was less than $4.3 million, the decrease in NPV resulting
from a 200 basis point change in interest rates.  As a result, if the rule were
in effect and were applicable to the Bank, it would have been required to make a
$800,000 deduction from total capital in calculating its risk-based capital
requirement, although the Bank's capital would have remained far in excess of
regulatory minimums.

                                      (7)
<PAGE>
 
The following table sets forth, as of June 30, 1998, the estimated changes in
the Bank's NPV (i.e., the present value of expected cash flows from assets,
liabilities and off-balance-sheet contracts).

                              NET PORTFOLIO EQUITY
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
   CHANGE IN INTEREST
  RATES (BASIS POINTS)     ESTIMATED NPV     AMOUNT OF CHANGE     PERCENT OF CHANGE
----------------------------------------------------------------------------------------
<S>                       <C>               <C>                  <C>
           +400                $10,607            $(9,914)               (48)%
           +300                 13,542             (6,979)               (34)
           +200                 16,264             (4,257)               (21)
           +100                 18,676             (1,845)                (9)
              0                 20,521                                
           -100                 21,920              1,399                  7
           -200                 23,300              2,779                 14
           -300                 24,813              4,292                 21
           -400                 26,567              6,046                 29
</TABLE>

As noted above, the market value of the Bank's net assets would be anticipated
to decline significantly in the event of certain designated increases in
interest rates.  For instance, in the event of a 200 basis point increase in
interest rates, NPV is anticipated to fall by $4.3 million, or 21%.  Conversely,
a 200 basis point decrease in interest rates is anticipated to cause a $2.8
million, or 14%, increase in NPV.  Subject to market conditions, management
intends to continue to restructure the Bank's assets and liabilities over time
to attempt to better manage the Bank's NPV volatility.

Certain assumptions utilized by the OTS in assessing the interest rate risk of
thrift institutions were employed in preparing the previous table.  These
assumptions relate to interest rates, loan prepayment rates, deposit decay rates
and the market values of certain assets under the various interest rate
scenarios.  It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case.  In the event that interest rates do not change in the
designated amounts, there can be no assurance that the Bank's assets and
liabilities would perform as set forth above.  In addition, a change in Treasury
rates in the designated amounts accompanied by a change in the shape of the
Treasury yield curve would cause significantly different changes to the NPV than
indicated above.

                                      (8)
<PAGE>
 
FINANCIAL CONDITION
--------------------------------------------------------------------------------


The Corporation's assets increased by 10.65% to $176.4 million at June 30, 1998
compared to $159.5 million at June 30, 1997.  The majority of this increase is
reflected in cash and due from banks, investment securities and loans
receivable, which was primarily funded by an increase in deposits and long-term
debt.

Cash and due from banks increased by $3.1 million to $6.9 million at June 30,
1998 from $3.8 million at June 30, 1997, primarily as a means to provide
liquidity for increased lending activities.

The Company maintains a portfolio of trading account securities which is
comprised of common stocks of other financial institutions.  The portfolio was
$835,000 at June 30, 1998 compared to $796,000 at June 30, 1997.  The portfolio
was profitable during the fiscal year ended June 30, 1998, but not as profitable
as in 1997 because of the effect of recent declines in the stock market that
have affected the market value of the portfolio.

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 was adjustable-rate residential
mortgages.  During the year ended June 30, 1998, the Bank originated
approximately $38.8 million in mortgages.  Total loans receivable, net increased
10.66% to $116.2 million at June 30, 1998 compared to $105.0 million at June 30,
1997.

At June 30, 1998, allowance for loan losses was $973,000 or .83% of loans
receivable compared to $710,000 or .67% of loans receivable at June 30, 1997.
During fiscal 1998, the Bank had net charge-offs of $11,000.  Management
continues to monitor, as previously reported, several problem commercial real
estate loans to one borrower.  The carrying amount of the loans is approximately
$1.3 million.  The properties securing these credits are not generating
sufficient cash flow to fund debt service payments and the borrower has made the
most recent payments from other sources.  During July 1998, the loans went 90
days past due and were subsequently transferred to nonaccrual status.  The
borrower is seeking refinancing which would provide sufficient cash flow to him
as well as payoff the loans.  Management is closely monitoring these credits as
to their collectability and any possible losses the Bank could incur.

The Bank augments its lending activities and increases its asset yields by
investing in investment securities such as mortgage-backed securities "MBSs" and
U. S. Government securities.  During the year ended June 30, 1998, management
purchased $18.5 million in investment securities.  These purchases were funded
primarily by proceeds from maturities and sales of other investment securities.
A portion of these purchases includes a $5 million growth strategy funded by
long-term debt used to purchase MBSs.  At June 30, 1998,  the balance of
investment securities available for sale, "AFS" was $26.9 million with a net
unrealized gain, net of tax, of $131,000 and the balance of investment
securities held to maturity, "HTM" was $20.5 million.

Interest receivable increased $334,000 to $1.408 million at June 30, 1998 from
$1.074 million at June 30, 1997 due to increased loan and investment balances.

Total deposits increased by $11.7 million to $144.9 million at June 30, 1998
from $133.2 million at June 30, 1997.  During the year ended June 30, 1998, CDs
increased $11 million and NOW accounts increased $1.5 million, while passbook
savings and money market deposit accounts decreased by $822,000.

Short-term borrowings increased by $1 million during the year ended June 30,
1998.  Proceeds from securities called prior to maturity were the source of
repayment.

                                      (9)
<PAGE>
 
Long-term debt increased $4.9 million to $5.7 million at June 30, 1998 from
$721,000 at June 30, 1997 as the result of a $5 million growth strategy, which
was implemented during fiscal 1998.  A total of $5 million was borrowed to
purchase $2.5 million in investment securities "AFS" and $2.5 million in
investment securities "HTM".  The projected margin on this strategy is estimated
at 110 basis points.

Certain components of stockholders' equity increased during the year ended 
June 30, 1998 primarily as the result of net income, employee stock options
exercised, reduction of the Employee Stock Ownership Plan debt, stock issued
under the Management Recognition Plan "MRP" and Supplemental Executive
Retirement Plan "SERP" and an increase in the net unrealized gain on securities.

The Bank's regulatory liquidity ratio was 26.19% at June 30, 1998 as compared to
21.50% at June 30, 1997.  At June 30, 1998 the Bank met all the fully phased-in
regulatory capital requirements under FIRREA.  Tangible, core and risk-based
capital ratios were 9.1%, 9.1% and 22.5%, respectively, at June 30, 1998 as
compared to 9.7%, 9.7% and 20.7% at June 30, 1997.

                                      (10)
<PAGE>
 
COMPARISON OF YEAR ENDED JUNE 30, 1998 TO YEAR ENDED JUNE 30, 1997
--------------------------------------------------------------------------------


General.  Net earnings increased by $465,000 to $1.503 million for the fiscal
year ended June 30, 1998 from $1.038 million for the fiscal year ended June 30,
1997.  The primary reasons for the increase were a $475,000 increase in net
interest income, and a $411,000 decrease in noninterest expense.  Offsetting
these increases were a $136,000 increase in provision for loan losses, a $85,000
decrease in noninterest income and a $200,000 increase in income tax expense.

Net Interest Income.  Net interest income increased from $5.2 million for fiscal
1997 to $5.7 million for fiscal 1998.

Interest Income.  Interest income for the fiscal years ended June 30, 1998 and
June 30, 1997, was $13 million and $11.7 million, respectively.  The increase in
fiscal 1998 over fiscal 1996 was due primarily to an increase in the average
balance of interest earning assets.  Yields on such assets were 8.07% in fiscal
1998 compared to 7.88% in fiscal 1997.

Average interest-earning assets were $160.8 million and $148.4 million for the
fiscal years ended June 30, 1998 and June 30, 1997, respectively.  The increase
in the average balance of interest-earning assets was primarily due to an
increase in loan originations and an increase in investment securities.

Interest Expense.  Interest expense for fiscal 1998 and 1997, was $7.3 million
and $6.5 million, respectively.  The increase in interest expense of $812,000 in
fiscal 1998 over fiscal 1997 was due primarily to an increase in the average
balance of interest-bearing liabilities from $135.2 million in fiscal 1997 to
$147.9 million in fiscal 1998.  The Company's cost of funds on deposits
increased to 4.95% in fiscal 1998 from 4.82% in fiscal 1997.  The cost of
borrowed funds increased to 5.91% in fiscal 1998 from 5.13% in fiscal 1997.  The
average balance of interest-bearing liabilities increased due to increased
deposits and increased borrowings used to fund loan demand and increases in the
investment portfolio.

Provision for Loan Losses.  The provision for loan losses for the fiscal years
ended June 30, 1998 and 1997 was $274,000 and $138,000, respectively.  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.

Other Income.  Other income for fiscal 1998 was $661,000 compared to $746,000
for fiscal 1997, a decrease of $85,000.  The decrease is primarily the result of
a $148,000 decrease in gains on trading account securities held by the Company
and a $68,000 increase in service charges for deposits and other customer fees.
A decrease in other income of $24,000 offsets increases in gains on the sale of
investment securities of $3,000 and other customer fees of $16,000.

                                      (11)
<PAGE>
 
Other Expenses.  Other expenses decreased $411,000 from $4.161 million for
fiscal 1997 to $3.750 million for  fiscal 1998.  Salaries and employee benefits
increased by $160,000 primarily as the result of salary increases and overtime
incurred during the Bank's recent conversion to a new data processor.  Occupancy
expense decreased $14,000 due to lower depreciation expense.  Equipment expense
increased $12,000 due to increased depreciation and repairs and maintenance.
Data processing expense increased $91,000 primarily due to one-time costs
associated with the Bank's conversion to a new data processor.  Deposit
insurance expense decreased by $85,000 as the result of lower premium rates.
This was precipitated by the recapitalization of the Savings Association
Insurance Fund "SAIF".  Legislation enacted on September 30, 1996 to
recapitalize the underfunded SAIF resulted in a one time assessment to savings
associations insured by the SAIF.  The Banks one time assessment of $706,000 was
expensed in fiscal 1997.  Legal and professional expense decreased $19,000 due
to lower consulting fees and advertising expense increased $13,000.  Other
expense increased $138,000 primarily as the result of a $53,000 penalty for
breaking a contract for ATM processing, a $33,000 increase in printing and
stationary expense and an increase of $28,000 in postage expense.

Income Tax Expense.  Income taxes increased by $200,000 to $791,000 for fiscal
1998 compared to $591,000 for fiscal 1997 due to higher earnings.

                                      (12)
<PAGE>
 
COMPARISON OF YEAR ENDED JUNE 30, 1997 TO YEAR ENDED JUNE 30, 1996
--------------------------------------------------------------------------------


General.  Net earnings increased by $191,000 to $1.038 million for the fiscal
year ended June 30, 1997 from $847,000 for the fiscal year ended June 30, 1996.
The primary reasons for the increase were a $727,000 increase in net interest
income, and a $390,000 increase in noninterest income and offset by a $103,000
increase in provision for loan losses, a $705,000 increase in noninterest
expense and a $118,000 increase in income tax expense.

Net Interest Income.  Net interest income increased from $4.4 million for fiscal
1996 to $5.2 million for fiscal 1997.

Interest Income.  Interest income for the fiscal years ended June 30, 1997 and
June 30, 1996, was $11.7 million and $10.5 million, respectively.  The increase
in fiscal 1997 over fiscal 1996 was due primarily to an increase in the average
balance of interest earning assets.  Yields on such assets were 7.88% in fiscal
1997 compared to 7.89% in fiscal 1996.

Average interest-earning assets were $148.4 million and $132.7 million for the
fiscal years ended June 30, 1997 and June 30, 1996, respectively.  The increase
in the average balance of interest-earning assets was primarily due to an
increase in loan originations and an increase in investment securities.

Interest Expense.  Interest expense for fiscal 1997 and 1996, was $6.5 million
and $6.0 million, respectively.  The increase in interest expense of $487,000 in
fiscal 1997 over fiscal 1996 was due primarily to an increase in the average
balance of interest-bearing liabilities from $121.1 million in fiscal 1996 to
$135.2 million in fiscal 1997.  Although interest expense increased, the
Company's cost of funds on deposits decreased to 4.81% in fiscal 1997 from 4.96%
in fiscal 1996.  The cost of funds on borrowed funds decreased from 5.34% in
fiscal 1996 to 5.13% in fiscal 1997.  The average balance of interest-bearing
liabilities increased due to increased deposits and increased borrowings used to
fund loan demand and increases in the investment portfolio.

Provision for Loan Losses.  The provision for loan losses for the fiscal years
ended June 30, 1997 and 1996 was $138,000 and $35,000, respectively.  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.

Other Income.  Other income for fiscal 1997 was $746,000 compared to $356,000
for fiscal 1996, an increase of $390,000.  The increase is primarily the result
of a $310,000 increase in gains on trading account securities held by the
Company and a $85,000 increase in service charges for deposits and other
customer fees.  An increase in gains on the sale of investment securities of
$11,000 were offset by a decrease in other income of $16,000.

Other Expenses.  Other expenses increased $705,000 from $3.5 million for fiscal
1996 to $4.2 million for  fiscal 1997.  Salaries and employee benefits decreased
by $16,000 as the result of a $122,000  increase in salaries and  certain
benefits offset by a decrease of $138,000 in the funding of the employee
retirement plan, the MRP and The Supplemental Executive Retirement Plan "SERP".
Increases such as occupancy expenses of $18,000, equipment expenses of $36,000
and data processing expenses of $21,000 were largely the result of the addition
of the Bank's New Tazewell branch.  Deposit insurance expense decreased by
$87,000 as the result of lower premium rates.  This was precipitated by the
recapitalization of the Savings Association Insurance Fund "SAIF".  Legislation
enacted on September 30, 1996 to recapitalize the underfunded SAIF resulted in a
one time assessment to savings associations insured by the SAIF.  The Banks one
time assessment was $706,000.  A decrease in legal and professional fees  of
$13,000 was partially offset by a $10,000 increase in advertising expense, a
$11,000 increase in state franchise and deposit taxes and a $17,000 increase in
other expenses.

Income Tax Expense.  Income taxes increased by $118,000 to $591,000 for fiscal
1997 compared to $473,000 for fiscal 1996 due to higher earnings.

                                      (13)
<PAGE>
 
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
--------------------------------------------------------------------------------


The following table sets forth certain information relating to the Company's
average interest-earning assets and interest-bearing liabilities and reflects
the average yield on assets and the average cost of liabilities for the periods
and dates indicated.  Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented.  Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of
average daily balances has caused any material difference in the information
presented.

<TABLE>
<CAPTION>
                                                           1998                          1997              
                                             --------------------------------------------------------------
                                                                   AVERAGE                       AVERAGE   
                                               AVERAGE              YIELD/   AVERAGE              YIELD/   
YEAR ENDED JUNE 30                             BALANCE   INTEREST    COST    BALANCE   INTEREST    COST    
-----------------------------------------------------------------------------------------------------------
                                                                  (Dollars in Thousands)
<S>                                            <C>       <C>       <C>       <C>       <C>       <C>       
Interest-earning assets
 Loans, net (1)                                $110,906   $ 9,768     8.81%  $100,098   $ 8,692     8.68%  
 Investment securities                           44,829     2,911     6.49     44,234     2,768     6.26   
 FHLB stock and deposits
   with financial institutions                    5,098       300     5.88      4,106       232     5.65   
                                             --------------------           -------------------            
 
   Total interest-earning assets               $160,833   $12,979     8.07%  $148,438   $11,692     7.88%  
                                             ====================           ===================         
 
Interest-bearing liabilities
 Deposits                                      $137,533   $ 6,708     4.88%  $131,202   $ 6,305     4.81%  
 Short-term borrowings and long-
   term debt                                     10,397       614     5.91      3,998       205     5.13   
                                             --------------------           -------------------         
 
   Total interest-bearing liabilities          $147,930   $ 7,322     4.95%  $135,200   $ 6,510     4.82%
                                             ====================           ===================         
 
Net interest income                                       $ 5,657                       $ 5,182         
                                                       ==========                    ==========         
 
Interest rate spread                                                  3.12%                         3.06%
                                                                 =========                     ========= 
 
Net yield on interest-earning assets                                  3.52%                         3.49%
                                                                 =========                     ========= 
 
Ratio of average interest-earning assets to
 average interest-bearing liabilities                               108.72%                       109.79%
                                                                 =========                     =========

<CAPTION>
                                                        1996
                                            ---------------------------
                                                                AVERAGE
                                            AVERAGE              YIELD/
YEAR ENDED JUNE 30                          BALANCE   INTEREST    COST
-----------------------------------------------------------------------
                                                (Dollars in Thousands)
<S>                                         <C>       <C>       <C>
                                            
Interest-earning assets                     
 Loans, net (1)                             $ 91,494   $ 7,904     8.64%
 Investment securities                        36,675     2,301     6.27
 FHLB stock and deposits                    
   with financial institutions                 4,578       274     5.99
                                            ------------------
                                            
   Total interest-earning assets            $132,747   $10,479     7.89%
                                            ==================
                                            
Interest-bearing liabilities                
 Deposits                                   $117,955   $ 5,855     4.96%
 Short-term borrowings and long-            
   term debt                                   3,163       169     5.34
                                            ------------------
                                            
   Total interest-bearing liabilities       $121,118   $ 6,024     4.97%
                                            ==================
                                            
Net interest income                                    $ 4,455
                                                    ==========
                                            
Interest rate spread                                               2.92%
                                                              =========
                                            
Net yield on interest-earning assets                               3.36%
                                                              =========
                                            
Ratio of average interest-earning assets to                    
 average interest-bearing liabilities                            109.60%
                                                              ========= 
</TABLE>
(1) Includes nonaccrual loans.

                                      (14)
<PAGE>
 
RATE/VOLUME ANALYSIS
--------------------------------------------------------------------------------


The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated.  For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rate (change in rate
multiplied by old volume); and (iii) changes in rate/volume (changes in rate
multiplied by changes in volume).  Average balances are derived from month-end
balances.  Management does not believe that the use of month-end balances
instead of average daily balances has caused any material differences in the
information presented.


<TABLE>
<CAPTION>
                                                         1998 vs. 1997                     1997 VS. 1996
                                               --------------------------------------------------------------------
                                                  INCREASE (DECREASE) DUE TO         INCREASE (DECREASE) DUE TO
                                               --------------------------------------------------------------------
                                                                  RATE/                              RATE/
YEAR ENDED JUNE 30                               VOLUME   RATE   VOLUME   TOTAL    VOLUME    RATE   VOLUME   TOTAL
-------------------------------------------------------------------------------------------------------------------
                                                                        (Dollars in Thousands)
<S>                                              <C>      <C>    <C>      <C>      <C>      <C>     <C>      <C>
Interest income                                                                 
 Loans receivable (1)                            $  938   $124     $ 14   $1,076   $  743   $  41     $  4   $  788
 Investment securities                               37    103        3      143      474      (6)      (1)     467
 Other dividend income and deposits                                             
   with financial institutions                       56     10        2       68      (28)    (15)       2      (41) 
                                               --------------------------------------------------------------------
   Total interest-earning assets                  1,031    237       19    1,287    1,189      20        5    1,214
                                               --------------------------------------------------------------------
                                                                                
Interest expense                                                                
 Deposits                                           304     94        5      403      658    (187)     (21)     450
 Short-term borrowings and long-                                                
   term debt                                        328     31       50      409       45      (7)      (2)      36
                                               --------------------------------------------------------------------
   Total interest-bearing liabilities               632    125       55      812      703    (194)     (23)     486
                                               --------------------------------------------------------------------
                                                                                
Change in net interest income                    $  343   $170     $(38)  $  475   $  486   $ 214     $ 28   $  728
                                               ====================================================================
</TABLE>

(1)  For purposes of calculating volume, rate and rate/volume variances,
     nonaccrual loans were included in the weighted-average balance outstanding.

                                      (15)
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------


The Company's primary source of liquidity is dividends paid by the Bank.  The
Bank, as a stock savings institution, is subject to certain regulatory
limitations with respect to the payment of dividends to the Company.  See
"Market Information-Dividend Restrictions".  Prior to 1998, the Company
repurchased shares of its common stock in order to improve earnings per share
and return on stockholders' equity.  To date, the Company has repurchased
202,047 of its shares (as restated for a 5-for-3 stock split on June 30, 1997)
of common stock at a cost of $2 million.

Home Federal's capital ratios are substantially in excess of regulatory capital
requirements.  At June 30, 1998, the Bank's tangible and core capital amounted
to 9.1% of total adjusted assets, or 7.6% and 6.1%, respectively, in excess of
the Bank's current 1.5% tangible and 3.0% core capital requirements.
Additionally, the Bank's risk-weighted capital to risk-weighted assets ratio was
23.5% at June 30, 1998, or 14.5% in excess of the Banks 8.0% risk-based capital
requirement.

Home Federal's principal sources of funds for operations are deposits from its
primary market area, principal and interest payments on loans and mortgage-
backed securities and proceeds from maturing investment securities.  In
addition, as a member of the FHLB of Cincinnati, the Bank is eligible to borrow
funds from the FHLB of Cincinnati in the form of advances.

Home Federal is required by OTS regulations to maintain minimum levels of
specified liquid assets which are currently equal to 5% of deposits and short-
term borrowings.  Such investments serve as a source of liquid funds which the
Bank may use to meet deposit withdrawals and other short-term needs.  The Bank's
most liquid assets are cash and cash equivalents, which are short-term, highly
liquid investments with original maturities of three months or less that are
readily convertible to known amounts of cash.  The levels of such assets are
dependent upon the Bank's operating, financing and investment activities at any
given time.  In recent years, the Bank has maintained higher levels of liquid
assets than required by regulation.  Management believes that the liquidity
levels maintained are fully adequate to meet potential deposit outflows, loan
demand and normal operations.  Home Federal's liquidity ratio at June 30, 1998
was approximately 26.2%.

The primary source of cash from operating activities is net earnings.  The
primary uses of funds are lending activities and investments in mortgage-backed
and investment securities.  Cash received from net loan repayments and other
sources is used to purchase investment and mortgage-backed securities.
Financing sources consist principally of net increases in deposits.  Other
financing sources include short and long-term borrowings.

                                      (16)
<PAGE>
 
YEAR 2000
--------------------------------------------------------------------------------


The Company has completed an assessment of its computer systems, including its
information and non-information systems, and identified those systems that it
believes could be affected by the Year 2000 issue.  It has also developed an
implementation plan to address the issue and is in the process of testing its
internal mission critical hardware and software systems to determine if they are
Year 2000 compliant.  While the Company has exposure to several risks related to
Year 2000, the primary risk to the Company of not complying with Year 2000 is
the potential inability to correctly process and record customer loan and
deposit transactions.

The Company believes that it has met the majority of the requirements that have
been established for the banking industry by the Federal Financial Institution
Examination Council.  These standards require that a series of procedures be
performed by financial institutions within established timeframes to reduce the
risk of noncompliance with the Year 2000 issue.  While the Company believes that
it will meet all of the FFIEC requirements and that its mission critical systems
will be in compliance with Year 2000, it can give no assurance that this will
occur.

The Company is in the early stages of developing a business resumption
contingency plan that would take effect if its internal systems, or the systems
of those material vendors on which it is reliant on, would not be compliant with
Year 2000 requirements.

The Company outsources a significant portion of its data processing to an
outside provider.  A worst case scenario for the Company would likely involve
non-compliance with Year 2000 by its primary data processor in such a manner
that would leave the Company in a position where it could not correctly process
and record customer loan and deposit transactions.   While the Company plans to
test its data processing system for compliance with Year 2000, it cannot
guarantee that the systems of this and other companies on which the Company's
systems rely will be timely converted and not have a material effect on the
Company.

The Company has, through June 30, 1998, has incurred certain costs related to
Year 2000.  A portion of these costs were incurred in connection with the recent
conversion of the Company's primary data processing system.  Costs incurred
through June 30, 1998 total approximately $326,000 and include $205,000 for
equipment, $65,000 for software, $12,000 for de-conversion fees that were paid
to the previous data processing provider, $38,000 for training and $6,000 for
the initial assessment.   At June 30, 1998, the Company expects to incur
additional costs associated with testing but does not expect these costs to be
material to the Company's financial condition or results of operations.

The Company does not have, at September 30, 1998 any material commitments to
purchase new equipment, software or to incur material costs to modify its
existing system and does not believe that any material amounts of its existing
computer hardware or software is impaired.  The Company has assessed the impact
of Year 2000 on its commercial lending customers, and believes that the impact,
in terms of potential credit exposure, is not material.  The majority of the
Company's commercial lending portfolio consists of commercial real estate loans
that are made to companies that are not highly technology intensive.

                                      (17)
<PAGE>
 
IMPACT OF INFLATION AND CHANGING PRICES
--------------------------------------------------------------------------------


The consolidated financial statements, and notes thereto, presented herein have
been prepared in accordance with generally accepted accounting principles, which
generally require the measurement of financial position and operating results in
terms of historical (dollars in thousands) without consideration of the changes
in the relative purchasing power of money over time due to inflation.  The
impact of inflation is reflected in the increased cost of the Bank's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Bank are monetary.  As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation.  Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.

         







        







    

                                      (18)
<PAGE>
 
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEET


<TABLE>
<CAPTION>
JUNE 30                                                                   1998                 1997
---------------------------------------------------------------------------------------------------------
                                                                                        
<S>                                                                <C>                  <C>
ASSETS                                                                                  
 Cash and due from banks                                                $  6,947,148         $  3,794,637
 Trading account securities                                                  835,307              795,555
 Investment securities                                                                  
  Available for sale                                                      26,904,517           25,112,540
  Held to maturity                                                        20,546,634           20,206,502
                                                                  ---------------------------------------
     Total investment securities                                          47,451,151           45,319,042
 Loans                                                                   117,143,613          105,694,555
  Allowance for loan losses                                                 (972,859)            (710,168)
                                                                  ---------------------------------------
     Net loans                                                           116,170,754          104,984,387
 Premises and equipment                                                    2,220,548            2,167,393
 Federal Home Loan Bank stock                                              1,255,900            1,169,100
 Interest receivable                                                       1,407,901            1,074,282
 Other assets                                                                148,077              152,571
                                                                  ---------------------------------------
                                                                                        
     Total assets                                                       $176,436,786         $159,456,967
                                                                  =======================================
                                                                                        
LIABILITIES                                                                             
 Deposits                                                                               
  Interest bearing                                                      $144,622,466         $131,130,405
  Non-interest bearing                                                       258,952            2,072,137
                                                                  ---------------------------------------
     Totals                                                              144,881,418          133,202,542
 Short-term borrowings                                                     6,500,000            7,500,000
 Long-term debt                                                            5,661,598              720,753
 Interest payable                                                            580,621              548,233
 Other liabilities                                                           825,950              918,412
                                                                  ---------------------------------------
     Total liabilities                                                   158,449,587          142,889,940
                                                                  ---------------------------------------
                                                                                        
STOCKHOLDERS' EQUITY                                                                    
 Preferred stock, $1 par value                                                          
  Authorized and unissued--1,000,000 shares                                             
 Common stock, $1 par value                                                             
  Authorized--5,000,000 shares                                                          
  Issued and outstanding-- 1,291,694 and 1,285,673 shares                  1,291,694            1,285,673
 Additional paid-in capital                                                6,195,948            6,094,551
 Less:  Common stock acquired by ESOP                                        (41,545)            (125,422)
        Common stock acquired by Management Recognition                                   
          Plan and Supplemental Executive Retirement Plan                                        (100,950)
        Common stock acquired by Rabbi trusts for deferred                                 
          compensation plans                                                (313,059)            (283,259)
 Treasury stock, at cost-- 202,046 and 202,046 shares                     (2,030,955)          (2,030,955)
 Retained earnings                                                        12,754,183           11,717,514
 Net unrealized gain on securities available for sale                        130,933                9,875
                                                                  ---------------------------------------
     Total stockholders' equity                                           17,987,199           16,567,027
                                                                  ---------------------------------------
                                                                                        
     Total liabilities and stockholders' equity                         $176,436,786         $159,456,967
                                                                  =======================================
</TABLE>


See notes to consolidated financial statements.

                                      (19)
<PAGE>
 
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

                        CONSOLIDATED STATEMENT OF INCOME


<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                               1998         1997          1996
---------------------------------------------------------------------------------------------------
                                                            
<S>                                                           <C>          <C>          <C>
INTEREST INCOME                                             
 Loans receivable                                             $ 9,767,979  $ 8,692,178  $ 7,904,025
 Investment securities                                          2,911,288    2,768,076    2,301,301
 Other dividend income                                             87,085       78,953       73,207
 Deposits with financial institutions                             212,868      152,989      200,922
                                                            ---------------------------------------
     Total interest income                                     12,979,220   11,692,196   10,479,455
                                                            ---------------------------------------
                                                            
INTEREST EXPENSE                                            
 Deposits                                                       6,708,163    6,305,373    5,855,179
 Short-term borrowings                                            469,668      160,393       14,328
 Long-term debt                                                   144,100       44,140      154,741
                                                            ---------------------------------------
     Total interest expense                                     7,321,931    6,509,906    6,024,248
                                                            ---------------------------------------
                                                            
NET INTEREST INCOME                                             5,657,289    5,182,290    4,455,207
 Provision for loan losses                                        273,721      138,156       35,012
                                                            ---------------------------------------
                                                            
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES             5,383,568    5,044,134    4,420,195
                                                            ---------------------------------------
                                                            
OTHER INCOME                                                
 Service charges for deposit accounts                             387,845      319,555      260,458
 Other customer fees                                               72,738       56,260       30,578
 Net gain (loss) on trading securities                            158,642      307,461       (2,665)
 Net realized gain (loss) on sales of available             
   for sale securities                                             13,614       10,653         (625)
 Other income                                                      28,383       51,989       67,835
                                                            ---------------------------------------
     Total other income                                           661,222      745,918      355,581
                                                            ---------------------------------------
                                                            
OTHER EXPENSES                                              
 Salaries and employee benefits                                 1,818,476    1,658,323    1,673,827
 Net occupancy expenses                                           191,988      205,675      187,845
 Equipment expenses                                               229,994      217,608      182,444
 Data processing fees                                             311,847      221,250      199,537
 Deposit insurance expense                                         84,129      169,261      256,321
 SAIF special assessment                                                       705,859
 Legal and professional fees                                      162,686      181,584      194,624
 Advertising                                                      133,453      120,579      110,427
 State franchise and deposit taxes                                121,915      123,033      111,903
 Other expenses                                                   695,868      558,108      538,887
                                                            ---------------------------------------
     Total other expenses                                       3,750,356    4,161,280    3,455,815
                                                            ---------------------------------------
                                                            
INCOME BEFORE INCOME TAX                                        2,294,434    1,628,772    1,319,961
 Income tax expense                                               791,360      591,180      473,450
                                                            ---------------------------------------
                                                            
NET INCOME                                                    $ 1,503,074  $ 1,037,592  $   846,511
                                                            =======================================
                                                            
BASIC EARNINGS PER SHARE                                            $1.39         $.98         $.79
                                                            =======================================
                                                            
DILUTED EARNINGS PER SHARE                                          $1.35         $.96         $.76
                                                            =======================================
                                                            
WEIGHTED AVERAGE SHARES OUTSTANDING                             1,084,598    1,077,065    1,110,222
                                                            =======================================
</TABLE>


See notes to consolidated financial statements.

                                      (20)
<PAGE>
 
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                                          
                                                                                                          
                                     COMMON STOCK                                                             
                                 ----------------------   ADDITIONAL                                        
                                    SHARES                 PAID-IN        ESOP        MRP AND       RABBI    
                                 OUTSTANDING    AMOUNT     CAPITAL        DEBT*       SERP**       TRUSTS   
                                 --------------------------------------------------------------------------
                                                                                                        
<S>                              <C>          <C>       <C>            <C>          <C>          <C>       
BALANCES, JULY 1, 1995             742,064    $742,064   $6,232,552    $(293,200)   $(166,850)   $(247,608)
                                                                                                        
 Net earnings for 1996                                                                                     
 Stock issued upon exercise                                                                            
   of stock options                  4,000       4,000       41,747                                     
 Dividends declared excluding                                                                          
   MRP, SERP and Rabbi trusts                                                                           
   ($.38 per share)                                                                                        
 Treasury stock purchased--                                                                            
   16,860 shares                                                                                        
 Reduction of ESOP debt                                       5,394       83,772                           
 Stock issued under MRP                                      16,046                    45,600              
 Stock purchased by Rabbi                                                                               
   trusts                                                                                          (15,861)
 Distribution of Rabbi                                                                                  
   trust assets                                               1,391                                  5,179 
 Net change in unrealized                                                                              
   gain (loss) on securities                                                                           
   available for sale                                                                                  
                                 --------------------------------------------------------------------------
                                                                                                        
BALANCES, JUNE 30, 1996            746,064     746,064    6,297,130     (209,428)    (121,250)    (258,290)
                                                                                                        
 Net earnings for 1997                                                                                     
 Stock issued upon exercise                                                                            
   of stock options                 25,439      25,439      256,421                                     
 Dividends declared excluding                                                                          
   MRP, SERP and Rabbi trusts                                                                          
   ($.39 per share)                                                                                    
 Treasury stock purchased--                                                                            
   8,850 shares                                                                                         
 Reduction of ESOP debt                                                   84,006                           
 Stock issued under MRP                                                                20,300              
 Stock purchased by Rabbi                                                                               
   trusts                                                                                          (24,969) 
 Net change in unrealized                                                                              
   gain (loss) on securities                                                                            
   available for sale                                                                                      
 5-for-3 stock split                                                                                   
   ($4,490 paid in lieu of                                                                             
   fractional shares)              514,170     514,170    (518,660)                                    
 Tax benefit of employee                                                                               
   benefit plans                                             59,660                                     
                                 --------------------------------------------------------------------------

<CAPTION> 
                                                                      NET        
                                                                  UNREALIZED     
                                                                  GAIN (LOSS)    
                                                                 ON SECURITIES         TOTAL
                                   TREASURY        RETAINED      AVAILABLE FOR     STOCKHOLDERS'
                                    STOCK          EARNINGS           SALE             EQUITY
                                 --------------------------------------------------------------
                                                                               
<S>                              <C>             <C>              <C>               <C>
BALANCES, JULY 1, 1995           $(1,496,242)    $10,634,729        $   3,178       $15,408,623
                                                                               
 Net earnings for 1996                               846,511                            846,511
 Stock issued upon exercise                                                    
   of stock options                                                                      45,747
 Dividends declared excluding                                                  
   MRP, SERP and Rabbi trusts                                                  
   ($.38 per share)                                 (387,474)                          (387,474) 
 Treasury stock purchased--                                                    
   16,860 shares                    (330,163)                                          (330,163)
 Reduction of ESOP debt                                                                  89,166
 Stock issued under MRP                                                                  61,646
 Stock purchased by Rabbi                                                      
   trusts                                                                               (15,861)
 Distribution of Rabbi                                                         
   trust assets                                                                           6,570
 Net change in unrealized                                                      
   gain (loss) on securities                                                   
   available for sale                                                (152,498)         (152,498)
                                 --------------------------------------------------------------
                                                                               
BALANCES, JUNE 30, 1996           (1,826,405)     11,093,766         (149,320)       15,572,267
                                                                               
 Net earnings for 1997                             1,037,592                          1,037,592
 Stock issued upon exercise                                                    
   of stock options                                                                     281,860 
 Dividends declared excluding                                                  
   MRP, SERP and Rabbi trusts                                                  
   ($.39 per share)                                 (413,844)                          (413,844)
 Treasury stock purchased--                                                    
   8,850 shares                     (204,550)                                          (204,550)
 Reduction of ESOP debt                                                                  84,006
 Stock issued under MRP                                                                  20,300
 Stock purchased by Rabbi                                                      
   trusts                                                                               (24,969)
 Net change in unrealized                                                      
   gain (loss) on securities                                                   
   available for sale                                                 159,195           159,195
 5-for-3 stock split                                                           
   ($4,490 paid in lieu of                                                     
   fractional shares)                                                                    (4,490)
 Tax benefit of employee                                                       
   benefit plans                                                                         59,660
                                 --------------------------------------------------------------
</TABLE>

                                      (21)
<PAGE>
 
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                  (Continued)

<TABLE>
<CAPTION>
                                                                                                         
                                                                                                         
                                       COMMON STOCK                                                              
                                 ------------------------   ADDITIONAL                             
                                    SHARES                   PAID-IN        ESOP       MRP AND       RABBI   
                                 OUTSTANDING     AMOUNT      CAPITAL       DEBT*        SERP**       TRUSTS  
                                 ----------------------------------------------------------------------------
                                                                                                             
<S>                              <C>           <C>          <C>          <C>          <C>          <C>       
BALANCES, JUNE 30, 1997           1,285,673    $1,285,673   $6,094,551   $(125,422)   $(100,950)   $(283,259)
                                                                                                             
 Net earnings for 1998                                                                                       
 Stock issued upon exercise of                                                                               
   stock options                      6,021         6,021       30,105                                       
 Dividends declared excluding                                                                                
   MRP, SERP and Rabbi trusts                                                                                
   ($.43 per share)                                                                                          
 Reduction of ESOP debt                                                     83,877                           
 Stock issued under MRP                                                                                      
   and SERP                                                                             100,950              
 Stock purchased by                                                                                          
   Rabbi trusts                                                                                      (29,800)
 Net change in unrealized                                                                                    
   gain (loss) on securities                                                                                 
   available for sale                                                                                        
 Tax benefit of employee                                                                                     
   benefit plans                                                71,292                                       
                                 ----------------------------------------------------------------------------
                                                                                                             
BALANCES, JUNE 30, 1998           1,291,694    $1,291,694   $6,195,948   $ (41,545)   $       0    $(313,059)
                                 ============================================================================

<CAPTION> 
                                                                      NET         
                                                                  UNREALIZED      
                                                                  GAIN (LOSS)     
                                                                 ON SECURITIES        TOTAL
                                   TREASURY        RETAINED      AVAILABLE FOR    STOCKHOLDERS'
                                    STOCK          EARNINGS          SALE             EQUITY
                                 --------------------------------------------------------------
                                                                                
<S>                              <C>             <C>              <C>              <C>
BALANCES, JUNE 30, 1997          $(2,030,955)     $11,717,514         $  9,875      $16,567,027
                                                                                
 Net earnings for 1998                              1,503,074                         1,503,074
 Stock issued upon exercise                                                     
   of  options                                                                           36,126
 Dividends declared excluding                                                   
   MRP, SERP and Rabbi trusts                                                   
   ($.43 per share)                                  (466,405)                         (466,405)
 Reduction of ESOP debt                                                                  83,877
 Stock issued under MRP                                                         
   and SERP                                                                             100,950
 Stock purchased by                                                             
   Rabbi trusts                                                                         (29,800)
 Net change in unrealized                                                       
   gain (loss) on securities                                                    
   available for sale                                                  121,058          121,058         
 Tax benefit of employee                                                        
   benefit plans                                                                         71,292
                                 --------------------------------------------------------------
                                                                                
BALANCES, JUNE 30, 1998          $(2,030,955)     $12,754,183         $130,933      $17,987,199
                                 ==============================================================
</TABLE>

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

See notes to consolidated financial statements.

                                      (22)
<PAGE>
 
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                                 1998              1997              1996
-----------------------------------------------------------------------------------------------------------------
                                                                                                    
<S>                                                             <C>               <C>               <C>
OPERATING ACTIVITIES                                                                                
 Net income                                                      $  1,503,074      $  1,037,592      $    846,511
 Adjustments to reconcile net income to net cash                                                    
   provided by operating activities                                                                  
   Provision for loan losses                                          273,721           138,156            35,012
   Depreciation and amortization                                                                    
     Property and equipment                                           217,587           233,684           191,550
     Cost of ESOP and MRP                                             184,827           104,306           129,372
     Investment securities                                             32,336            60,686            44,809
   FHLB stock dividend                                                (86,800)          (78,700)          (73,000)
   Investment security (gains) losses                                 (13,614)          (10,653)              625
   Deferred income tax                                                (27,000)           29,000            48,150
   Net change in                                                                                    
     Trading account securities                                       (39,752)         (549,055)         (246,500)
     Interest receivable                                             (333,619)         (119,656)         (154,683)
     Interest payable                                                  32,388            13,935           174,114
     Other assets                                                       4,494            43,192           (65,474)
     Other liabilities                                                (62,977)           83,620             4,486
   Other                                                                                 29,718             7,070
                                                                -------------------------------------------------
   Net cash provided by operating activities                        1,684,665         1,015,825           942,042
                                                                -------------------------------------------------
                                                                                                    
INVESTING ACTIVITIES                                                                                
 Purchases of securities available for sale                        (9,722,516)       (8,881,777)       (8,939,113)
 Proceeds from maturities of securities available for sale          6,342,531         2,849,946         1,891,724
 Purchases of securities held to maturity                          (8,763,360)       (4,005,000)       (7,498,125)
 Proceeds from sales of securities available for sale               1,783,144         2,000,000         3,999,375
 Proceeds from maturities of securities held to maturity            8,399,235         3,615,504         5,453,475
 Net change in loans                                              (11,460,088)       (9,364,864)       (8,583,425)
 Purchases of premises and equipment                                 (270,742)          (31,314)         (717,192)
 Proceeds from sale of real estate owned                                                185,527           161,420
 Other                                                                                    1,401             5,150
                                                                -------------------------------------------------
   Net cash used by investing activities                          (13,691,796)      (13,630,577)      (14,226,711)
                                                                -------------------------------------------------
</TABLE>

                                      (23)
<PAGE>
 
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (Continued)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                                    1998             1997             1996
-----------------------------------------------------------------------------------------------------------------
                                                                                                  
<S>                                                             <C>              <C>              <C>
FINANCING ACTIVITIES                                                                              
 Net change in                                                                                     
   Noninterest-bearing, interest-bearing and                                                       
     savings deposits                                            $   654,002      $  (483,555)     $(2,632,892)
   Certificates of deposit                                        11,024,874        6,943,860       19,270,911
   Short-term borrowings                                          (1,000,000)       5,625,000       (1,875,000)
 Proceeds of long-term debt                                        5,000,000                      
 Repayment of long-term debt                                         (59,155)         (54,595)         (50,385)
 Cash dividends                                                     (466,405)        (413,844)        (387,474)
 Purchase of stock                                                                   (204,550)        (330,163)
 Sale of common stock                                                 36,126          281,860           40,000
 Cash paid in lieu of fractional shares                                                (4,490)    
 Common stock acquired by Rabbi trusts                               (29,800)         (24,969)         (15,861)
                                                                ----------------------------------------------
   Net cash provided by financing activities                      15,159,642       11,664,717       14,019,136
                                                                ----------------------------------------------
                                                                                                  
NET CHANGE IN CASH AND CASH EQUIVALENTS                            3,152,511         (950,035)         734,467
                                                                                                  
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                       3,794,637        4,744,672        4,010,205
                                                                ----------------------------------------------
                                                                                                  
CASH AND CASH EQUIVALENTS, END OF YEAR                           $ 6,947,148      $ 3,794,637      $ 4,744,672
                                                                ==============================================
                                                                                                  
ADDITIONAL CASH FLOWS INFORMATION                                                                 
 Interest paid                                                   $ 7,289,543      $ 6,492,945      $ 5,856,889
 Income tax paid                                                     914,762          426,896          403,553
</TABLE>


See notes to consolidated financial statements.

                                      (24)
<PAGE>
 
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (Table Dollar Amounts in Thousands)


NOTE 1 --  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of HFB Financial Corporation (Company) and
its wholly-owned subsidiary, Home Federal Bank (Bank), and the Bank's wholly-
owned subsidiary, Home Service Corporation, conform to generally accepted
accounting principles and reporting practices followed by the banking industry.
The more significant of the policies are described below.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.

The Company is a bank holding company whose principal activity is the ownership
and management of the Bank.  The Bank operates under a federal thrift charter
and provides full banking services in a single significant business segment.  As
a federally-chartered thrift, the Bank is subject to regulation by the Office of
Thrift Supervision and the Federal Deposit Insurance Corporation.

The Bank generates commercial, mortgage and consumer loans and receives deposits
from customers located primarily in Bell County, Kentucky, surrounding counties
and the surrounding States of Tennessee and Virginia.  The Bank's loans are
generally secured by specific items of collateral including real property,
consumer assets and business assets.

CONSOLIDATION--The consolidated financial statements include the accounts of the
Company, the Bank and the Bank's subsidiary after elimination of all material
intercompany transactions and accounts.

INVESTMENT SECURITIES--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity.  Securities held to maturity are carried at amortized cost.  Debt
securities not classified as held to maturity or included in the trading account
and marketable equity securities not classified as trading are classified as
available for sale.  Securities available for sale are carried at fair value
with unrealized gains and losses reported separately in stockholders' equity,
net of tax.  Trading account securities are primarily thrift equity securities
held for resale in anticipation of short-term market movements and are valued at
fair value.  Gains and losses, both realized and unrealized, are included in
other income.

Amortization of premiums and accretion of discounts are recorded as interest
income from securities.  Realized gains and losses are recorded as net security
gains (losses).  Gains and losses on sales of securities are determined on the
specific-identification method.

                                      (25)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


LOANS are carried at the principal amount outstanding.  Interest income is
accrued on the principal balances of loans.  The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due.  When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible.  Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans.

ALLOWANCE FOR LOAN LOSSES is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio.  The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio,  the current condition and amount of loans
outstanding, and the probability of collecting all amounts due.  Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.

The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions.  Management believes that as of 
June 30, 1998 the allowance for loan losses is adequate based on information
currently available.  A worsening or protracted economic decline in the area
within which the Bank operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.

PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the declining balance method principally on the
estimated useful lives of the assets.  Maintenance and repairs are expensed as
incurred while major additions and improvements are capitalized.  Gains and
losses on dispositions are included in current operations.

FEDERAL HOME LOAN BANK (FHLB) STOCK is a required investment for institutions
that are members of the Federal Home Loan Bank system.  The required investment
in the common stock is based on a predetermined formula.

FORECLOSED REAL ESTATE is carried at the lower of cost or fair value less
estimated selling costs.   When foreclosed real estate is acquired, any required
adjustment is charged to the allowance for loan losses.  All subsequent activity
is included in current operations.

TREASURY STOCK is stated at cost.  Cost is determined by the first-in, first-out
method.

INCOME TAX in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes.  The
Company files consolidated income tax returns with its subsidiary.

EARNINGS PER SHARE have been computed based upon the weighted average common
shares (including ESOP shares) outstanding during each year.  All share data
included in the notes to consolidated financial statements has been adjusted for
stock splits.

                                      (26)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


STOCK OPTIONS are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant.  The
Company accounts for and will continue to account for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants.


NOTE 2 -- INVESTMENT SECURITIES

<TABLE>
<CAPTION>
                                                            GROSS         GROSS
                                           AMORTIZED     UNREALIZED     UNREALIZED      FAIR
                                             COST           GAINS         LOSSES        VALUE
                                        ------------------------------------------------------
<S>                                      <C>            <C>            <C>            <C>
JUNE 30, 1998                                                                         
  Available for sale                                                                  
    U. S. Treasury                          $ 5,479          $ 98                      $ 5,577
    Federal agencies                         12,603            64         $  (6)        12,661
    Mortgage-backed securities                8,633            50           (16)         8,667
                                        ------------------------------------------------------
       Total available for sale              26,715           212           (22)        26,905
                                        ------------------------------------------------------
                                                                                      
  Held to maturity                                                                    
    Federal agencies                          6,497            56           (20)         6,533
    Mortgage-backed securities               14,050            61           (19)        14,092
                                        ------------------------------------------------------
       Total held to maturity                20,547           117           (39)        20,625
                                        ------------------------------------------------------
                                                                                      
       Total investment securities          $47,262          $329         $ (61)       $47,530
                                        ======================================================
                                                                                      
JUNE 30, 1997                                                                         
  Available for sale                                                                  
    U. S. Treasury                          $ 5,470          $ 30         $ (14)       $ 5,486
    Federal agencies                         12,074            45           (72)        12,047
    Mortgage-backed securities                7,558            71           (49)         7,580
                                        ------------------------------------------------------
       Total available for sale              25,102           146          (135)        25,113
                                        ------------------------------------------------------
                                                                                      
  Held to maturity                                                                    
    Federal agencies                          9,515             7          (115)         9,407
    Mortgage-backed securities               10,692            15           (96)        10,611
                                        ------------------------------------------------------
       Total held to maturity                20,207            22          (211)        20,018
                                        ------------------------------------------------------
                                                                                      
       Total investment securities          $45,309          $168         $(346)       $45,131
                                        ======================================================
</TABLE>

                                      (27)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


The amortized cost and fair value of securities held to maturity and available
for sale at June 30, 1998, by contractual maturity, are shown below.  Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>
                                   HELD TO MATURITY         AVAILABLE FOR SALE
                                -----------------------------------------------
                                 AMORTIZED     FAIR        AMORTIZED     FAIR  
JUNE 30                             COST       VALUE          COST       VALUE 
-------------------------------------------------------------------------------
<S>                              <C>            <C>        <C>            <C>
                                                                        
Within one year                                              $   278    $   277
One to five years                  $ 1,500    $ 1,492         10,479     10,602
Five to ten years                    4,497      4,541          6,825      6,859
After ten years                        500        500            500        500
                                -----------------------------------------------
                                     6,497      6,533         18,082     18,238
Mortgage-backed securities          14,050     14,092          8,633      8,667
                                -----------------------------------------------
                                                                        
   Totals                          $20,547    $20,625        $26,715    $26,905
                                ===============================================
</TABLE>

Securities with a carrying value of $9,775,000 and $6,425,000 were pledged at
June 30, 1998 and 1997 to secure advances from the FHLB of Cincinnati.

Proceeds from sales of securities available for sale during 1998, 1997 and 1996
were $1,783,144, $2,000,000 and $3,999,375.  Gross gains on those sales of
$13,614 and $14,212 were realized in 1998 and 1997 and gross losses of $3,559
and $625 were realized in 1997 and 1996.

Unrealized holding gains (losses) on trading securities of $(35,915), $50,069
and $(2,665) were included in earnings in 1998, 1997 and 1996.

On December 29, 1995, the Company transferred certain securities from held to
maturity to available for sale in accordance with a transition reclassification
allowed by the Financial Accounting Standards Board.  Such securities had a
carrying value of $8,307,712 and a fair value of $8,385,412.  The Company also
transferred certain securities from available for sale to held to maturity.
Such securities had a carrying value of $1,475,985 and a fair value of
$1,512,980.

                                      (28)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)

 
NOTE 3 --  LOANS AND ALLOWANCE

<TABLE>
<CAPTION>
JUNE 30                                                       1998           1997
-----------------------------------------------------------------------------------
                                                                         
<S>                                                       <C>            <C>
Commercial real estate and industrial loans                 $ 10,764       $ 10,806
Real estate mortgage loans                                    94,028         86,095
Construction loans                                             8,636          5,091
Consumer loans                                                 6,473          5,722
                                                       ----------------------------
                                                             119,901        107,714
Loans in process                                              (2,757)        (2,019)
                                                       ----------------------------
                                                                         
   Total loans                                              $117,144       $105,695
                                                       ============================
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                1998         1997         1996
----------------------------------------------------------------------------------
                                                                          
<S>                                             <C>          <C>          <C>
Allowance for loan losses                                                 
  Balances, July 1                                 $ 710        $ 671        $ 633
  Provision for losses                               274          138           35
  Recoveries on loans                                               3           11
  Loans charged off                                  (11)        (102)          (8)
                                             -------------------------------------
                                                                          
  Balances, June 30                                $ 973        $ 710        $ 671
                                             =====================================
</TABLE>

Information on impaired loans is summarized below:

<TABLE>
<CAPTION>
JUNE 30                                                         1998         1997
------------------------------------------------------------------------------------
                                                                            
<S>                                                            <C>          <C>
Impaired loans with an allowance                                 $1,271       $1,305
                                                              ======================
                                                                            
Allowance for impaired loans (included in the Company's                     
 allowance for loan losses)                                      $  356       $  294
                                                              ======================
</TABLE>

<TABLE>
<CAPTION>   
YEAR ENDED JUNE 30                                              1998         1997
------------------------------------------------------------------------------------
                                                                           
<S>                                                            <C>          <C>
Average balance of impaired loans                                $1,285       $1,607
Interest income recognized on impaired loans                        156           88
Cash-basis interest received                                        128           88
</TABLE>

                                      (29)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates (related
parties).  Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features.

The aggregate amount of loans, as defined, to such related parties were as
follows:

<TABLE>
<S>                                                                <C>
Balances, July 1, 1997                                                 $206
  New loans, including renewals                                         173 
  Payments, etc., including renewals                                    (65)
                                                                   -------- 
                                                                            
Balances, June 30, 1998                                                $314 
                                                                   ======== 
</TABLE>


NOTE 4 -- PREMISES AND EQUIPMENT

<TABLE>
<CAPTION>
JUNE 30                                            1998             1997
---------------------------------------------------------------------------
                                                           
                                                           
<S>                                            <C>              <C>
Land and improvements                              $   611          $   611
Buildings                                            1,685            1,764
Furniture and equipment                              1,499            1,174
Automobiles                                            104              112
                                               ----------------------------
   Total cost                                        3,899            3,661
Accumulated depreciation                            (1,678)          (1,494)
                                               ----------------------------
                                                           
   Net                                             $ 2,221          $ 2,167
                                               ============================
</TABLE>

                                      (30)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)

 
NOTE 5 -- DEPOSITS

<TABLE>
<CAPTION>
JUNE 30                                                            1998           1997
-----------------------------------------------------------------------------------------
                                                                               
<S>                                                             <C>            <C>
Demand deposits                                                   $ 12,453       $ 11,193
Savings deposits                                                     8,836          9,443
Certificates and other time deposits of $100,000 or more            35,181         29,691
Other certificates and time deposits                                88,411         82,876
                                                              ---------------------------
                                                                               
   Total deposits                                                 $144,881       $133,203
                                                              ===========================
</TABLE>

Certificates and other time deposits maturing in years ending June 30

<TABLE>
  <S>                                                                          <C>
   1999                                                                          $ 82,669
   2000                                                                            34,625
   2001                                                                             1,583
   2002                                                                             1,088
   2003                                                                             2,401
   Thereafter                                                                       1,226
                                                                              -----------
                                                                                 
                                                                                 $123,592
                                                                              ===========
</TABLE>


NOTE 6 --  SHORT-TERM BORROWINGS AND LINE OF CREDIT

In 1998 and 1997, the Company had available a 90-day revolving line of credit up
to a maximum of $13,000,000 and $10,000,000.  The line of credit bears interest
at a daily variable rate which is set by the Federal Home Loan Bank.

At June 30, 1998 and 1997, the Company had drawn $6,500,000 and $7,500,000 on
the line of credit.

These advances are collateralized by FHLB stock and single-family first mortgage
loans with aggregate principal balances totaling 150% of the outstanding amount
of advances.


NOTE 7 --  LONG-TERM DEBT

At June 30, 1998, the Company had three long-term advances of $5,662,000; at
June 30, 1997, it had one long-term advance of $721,000.  The first advance with
a balance of $662,000 at June 30, 1998 and $721,000 at June 30, 1997 is payable
monthly in installments of $9,585, including interest, which is fixed at 8.05%,
with the final payment being due January 2006.  The second long-term advance
with a ten-year final maturity and a balance of $2,500,000 at June 30, 1998 has
a fixed rate of 5.78% for 60 months and an adjustable rate tied to LIBOR for the
remaining term.  This advance is not prepayable at any time during the fixed
rate term.  The third long-term advance with a seven-year final maturity and a
balance of $2,500,000 at June 30, 1998 has a fixed rate of 5.63% for 36 months
and an adjustable rate tied to LIBOR for the remaining term.  This advance is
not prepayable at any time during the fixed rate term.

                                      (31)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


These advances are collateralized by FHLB stock and single-family first mortgage
loans with aggregate principal balances totaling 150% of the outstanding amount
of advances.

<TABLE>
<CAPTION>
Maturities in years ending June 30
 
  <S>                                                            <C>
   1999                                                            $   64
   2000                                                                69
   2001                                                                75
   2002                                                                82
   2003                                                                88
   Thereafter                                                       5,284
                                                                ---------
                                                                         
                                                                   $5,662
                                                                ========= 
</TABLE>

 
NOTE 8 --  INCOME TAX

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                               1998        1997       1996
---------------------------------------------------------------------------------------------
                                                                                      
Income tax expense                                                                    
Currently payable                                                                     
<S>                                                            <C>         <C>        <C>
  Federal                                                        $ 765       $ 523      $ 403
  State                                                             53          39         22
 Deferred                                                                             
  Federal                                                          (35)         27         46
  State                                                              8           2          2
                                                              -------------------------------
                                                                                      
   Total income tax expense                                      $ 791       $ 591      $ 473
                                                              ===============================
                                                                                      
Reconciliation of federal statutory to actual tax expense                             
 Federal statutory income tax at 34%                             $ 780       $ 554      $ 449
 Effect of state income taxes                                       40          27         14
 Other                                                             (29)         10         10
                                                              -------------------------------
                                                                                      
   Actual tax expense                                            $ 791       $ 591      $ 473
                                                              ===============================
</TABLE>

                                      (32)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


A cumulative net deferred tax liability is included in other liabilities.  The
components of the liability are as follows:

<TABLE>
<CAPTION>
JUNE 30                                                              1998        1997
---------------------------------------------------------------------------------------
                                                                                
<S>                                                                 <C>         <C>
ASSETS                                                                          
 Deferred compensation                                                $ 127       $ 151
 Allowance for loan losses                                                4     
 Other                                                                                4
                                                                  ---------------------
     Total assets                                                       131         155
                                                                  ---------------------
                                                                                
LIABILITIES                                                                     
 Basis in FHLB stock                                                   (243)       (212)
 Allowance for loan losses                                                          (90)
 Unrealized loss on investment securities available for sale            (59)         (3)
 Other                                                                   (8)    
                                                                  ---------------------
     Total liabilities                                                 (310)       (305)
                                                                  ---------------------
                                                                                
                                                                      $(179)      $(150)
                                                                  =====================
</TABLE>

Retained earnings include approximately $2,096,000 for which no deferred income
tax liability has been recognized.  This amount represents an allocation of
income to bad debt deductions as of June 30, 1988 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses
including redemption of bank stock of excess dividends, or loss of "bank"
status, would create income for tax purposes only, which income would be subject
to the then-current corporate income tax rate.  At June 30, 1998, the unrecorded
deferred income tax liability on the above amount was approximately $800,000.


NOTE 9 -- COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements.  The
Banks' exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments.  The Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the consolidated balance sheet.

Financial instruments whose contract amount represents credit risk as of June 30
were as follows:

<TABLE>
<CAPTION>
                                                      1998             1997
                                                 -----------------------------
                                                 
<S>                                                 <C>              <C>
Commitments to extend credit                          $10,127           $6,980
Standby letters of credit                                 360              134 
</TABLE>

                                      (33)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.  The Bank evaluates each customer's credit
worthiness on a case-by-case basis.  The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation.

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.

The Company has entered into change in control agreements with two of it's
executive officers which provide for the continuation of salary and certain
benefits for a specified period of time under certain conditions.

The Company and subsidiary are also subject to claims and lawsuits which arise
primarily in the ordinary course of business.  It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.


NOTE 10 -- DIVIDENDS AND CAPITAL RESTRICTIONS

The Office of Thrift Supervision (OTS) regulations provide that a savings
association which meets fully phased-in capital requirements and is subject only
to "normal supervision" may pay out, as a dividend, 100% of net income to date
over the calendar year and 50% of surplus capital existing at the beginning of
the calendar year without supervisory approval, but with 30 days prior notice to
the OTS.  Any additional amount of capital distributions would require prior
regulatory approval.  A savings association meeting current minimum capital
requirements but not fully phased-in standards, such as the Bank, may, with 30
days prior notice but without prior approval, distribute up to 75% of net income
if it meets the risk-based requirement on January 1, 1993.  A savings
association failing to meet current capital standards may only pay dividends
with supervisory approval.


NOTE 11 -- REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category.  The
assigned capital category is largely determined by three ratios that are
calculated according to the regulations: total risk adjusted capital, Tier 1
capital, and Tier 1 leverage ratios.  The ratios are intended to measure capital
relative to assets and credit risk associated with those assets and off-balance
sheet exposures of the entity.  The capital category assigned to an entity can
also be affected by qualitative judgments made by regulatory agencies about the
risk inherent in the entity's activities that are not part of the calculated
ratios.

There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized.  Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations.  At June 30, 1998 and 1997, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements.  There are no conditions or events since June 30, 1998 that
management believes have changed the Bank's classification.

                                      (34)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


The Bank's actual and required capital amounts and ratios are as follows:

<TABLE>
<CAPTION>
                                                                 REQUIRED FOR            TO BE WELL
                                              ACTUAL           ADEQUATE CAPITAL*         CAPITALIZED*
                                        -----------------------------------------------------------------
                                          AMOUNT      RATIO    AMOUNT      RATIO      AMOUNT       RATIO
                                        -----------------------------------------------------------------
<S>                                      <C>         <C>       <C>        <C>        <C>          <C>
AS OF JUNE 30, 1998                                                                               
 Total risk-based capital* (to risk-                                                              
  weighted assets)                        $16,727      23%      $5,943      8.00%      $ 7,429     10.00%
 Core capital* (to adjusted tangible                                                              
  assets)                                  16,040       9        7,023      4.00        10,534      6.00
 Core capital* (to adjusted total                                                                 
  assets)                                  16,040       9        7,023      4.00         8,778      5.00
                                                                                                  
                                                                                                  
AS OF JUNE 30, 1997                                                                               
 Total risk-based capital* (to risk-                                                              
  weighted assets)                        $15,750      21%      $6,144      8.00%      $ 7,681     10.00%
 Core capital* (to adjusted tangible                                                              
  assets)                                  15,334      10        6,354      4.00         9,531      6.00
 Core capital* (to adjusted total                                                                 
  assets)                                  15,334      10        6,354      4.00         7,943      5.00
                                  
</TABLE>

*As defined by regulatory agencies

The Bank's tangible capital at June 30, 1998 was $16,040,000, which amount was
13.6% of tangible assets and exceeded the required ratio of 1.5%.


NOTE 12 -- STOCKHOLDERS' EQUITY

On June 15, 1997, the Board of Directors declared a 5-for-3 stock split, which
was paid on June 30, 1997.  All share data has been adjusted to reflect the
stock split.


NOTE 13 -- EMPLOYEE BENEFIT PLANS

PENSION PLAN

The Company is a participant in a pension fund known as The Pentegra Group
(formerly the Financial Institutions Retirement Fund).  This plan is a multi-
employer plan; separate actuarial valuations are not made with respect to each
participating employer.  According to The Pentegra Group, the market value of
the fund's assets exceed the value of vested benefits in the aggregate as of
June 30, 1997, the most recent valuation date.  There is no unfunded liability
for past service.  Plan benefits are fully vested after five years of service
and are based on an employee's years of service and a percentage of the
employee's average salary, using the five highest consecutive years preceding
retirement.  The Bank's funding policy is to make contributions to the plan
equal to the amount accrued as pension expense.  The Bank's required
contributions, which represent yearly expense, were $109,554 for fiscal year
1996.  The Bank incurred no expense for the years ended June 30, 1998 or 1997.

                                      (35)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


EMPLOYEE STOCK OWNERSHIP PLAN

The Bank has an Employee Stock Ownership Plan (ESOP) for the benefit of
participating employees.  Generally, all employees age 21 or older are eligible
to participate upon completion of one year of service.  The Bank accounts for
its ESOP in accordance with Emerging Issues Task Force (EITF) Issue No. 89-8.
ESOP cash contributions and ESOP expense accrued during the year are determined
by several factors including the number of shares allocated to participants,
ESOP debt service and dividends on unallocated shares.  Dividends on allocated
and unallocated shares are used to retire ESOP debt.

The ESOP borrowed $505,890 from the Company to purchase 84,314 shares of HFB
Financial Corporation common stock.  The loan, secured by the stock, bears
interest at a rate of prime plus 1% and matures in the year 2002.  Principal and
interest payments are made monthly.  The Bank's contributions for 1998, 1997,
and 1996 were $83,877, $82,955, and $83,200, of which $61,715, $67,030 and
$59,122 was charged to operations.  For 1998, 1997, and 1996, the portions
eliminated in consolidation were $7,914, $15,925, and $24,078.  ESOP expense is
determined by the shares allocated method.  The number of shares released is
determined by taking the number of shares before the allocation for the current
plan year and multiplying by a fraction.  The numerator of the fraction is the
amount of principal and interest paid on the loan for that plan year.  The
denominator of the fraction is the sum of the numerator plus the total payments
of principal and interest on that loan projected to be paid for all future plan
years.  For this purpose, the interest to be paid in future years is to be
computed by using the interest rate in effect as of the current allocation date.
Both allocated and unallocated shares are considered outstanding when computing
earnings per share.

At June 30, 1998, 67,877 shares were released, 6,310 shares were committed to be
released and 5,249 shares were not released.

MANAGEMENT RECOGNITION PLAN

The objective of the Bank's Management Recognition Plan (MRP) is to enable the
Bank to retain executive personnel of experience and ability in key positions of
responsibility.  Under the plan, 20,475 shares of HFB Financial Corporation
common stock were issued to the MRP Trust and were payable over a three-year
period, at the rate of 33 1/3% of such shares per year, following the date of
the grant or award.  Compensation expense in the amount of the fair market value
at the award date of the common stock was recognized pro rata over the three
years (1995, 1996 and 1997) during which the shares vest.  All shares in the MRP
Trust have been awarded to the President of the Bank.  The MRP expense was
$11,360 and $20,475 for 1997 and 1996.  There was no expense recognized in 1998.
In 1998, 1997 and 1996, 1,166, 3,383 and 7,600 shares were paid to the President
of the Bank.

                                      (36)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

The objective of the Bank's Supplemental Retirement Plan (SERP) is to provide
selected senior officers with postretirement benefits which will (i) enable a
targeted level of retirement income to be met, (ii) provide certain
preretirement death benefits should the covered executive die prior to
retirement age and (iii) compensate for the inability to earn full ESOP benefits
due to the senior officer's anticipated retirement before the Bank's ESOP loan
is repaid.  Under the plan, 15,658 shares of HFB Financial Corporation common
stock were issued to the SERP Trust and were payable upon completion of the
earlier of five years of service or when the recipient's employment terminates
due to retirement at or after age 65.  Compensation expense in the amount of the
fair market value at the award date of the common stock was being recognized pro
rata over four years to the projected retirement date of the recipient.  All
shares in the SERP Trust have been awarded to the former Chairman of the Board
of the Bank.  The SERP expense was $14,364 and $22,728 for 1997 and 1996.  There
was no expense recognized in 1998.  The shares awarded under this plan were
fully paid in 1998.

DEFERRED COMPENSATION AGREEMENTS (RABBI TRUSTS)

Prior to its conversion, the Bank maintained an unfunded deferred compensation
plan for members of the Board of Directors who elected to participate in any one
year.  Benefits were payable upon a participating director's retirement,
resignation, disability or death unless the plan committee permitted earlier
distributions in the event of a participant's emergency or necessity.  The Bank
established individual grantor trusts (Rabbi trusts) for each director who had
deferred compensation, contributed funds sufficient to equal the deferred fees
for each director and purchased a total of 37,061 shares of HFB Financial
Corporation common stock at its conversion date.  The assets of the individual
Rabbi trusts are available to the general creditors of the Bank in the event of
the Bank's insolvency.  In 1998, the Rabbi trusts purchased an additional 1,600
shares at a total cost of $29,800.  In 1997, the Rabbi trusts purchased an
additional 1,666 shares at a total cost of $24,969. In 1996, the Rabbi trusts
purchased an additional 1,201 shares at a total cost of $15,862 and distributed
838 shares to a trust beneficiary.  In 1994, the Bank adopted a new Deferred
Compensation Agreement for the directors similar to the old agreement.  All
deferred payments are paid to these same Rabbi trusts.  The Bank's liability at
June 30, 1998 and 1997 for both plans was $328,887 and $295,840.  Deferred
amounts are included in accrued expenses and other liabilities.  The stock in
the grantor trusts is shown as a contra-capital account until distributed to the
directors over a five-year period beginning at their retirement, resignation or
death.  The amount charged to expense was $33,047, $21,509 and $21,100 for 1998,
1997 and 1996.

The EITF has recently issued EITF No. 97-14, Accounting for Deferred
Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and
Invested, which is effective September 30, 1998.  This new accounting guidance
is not expected to have a material impact on the Company's financial position or
results of operations.

                                      (37)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


NOTE 14 --  STOCK OPTION PLAN

The Company has an incentive stock option plan in which 120,450 shares have been
reserved for future issuance by the Company to directors and employees of the
Company and its subsidiary.  The plan provides for a term of ten years, after
which no awards may be made, unless earlier terminated by the Board of
Directors.  At June 30, 1994, options to purchase 108,148 shares had been
granted, with 102,127 shares at $10 per share and 6,021 shares at $14 per share.

Under the Company's incentive stock option plan, which is accounted for in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and related interpretations, the Company grants
selected executives and other key employees stock option awards which vest and
become fully exercisable immediately.  During 1997, the Company authorized the
grant of options for up to 9,995 shares of the Company's common stock.  The
exercise price of each option, which has a ten-year life, was equal to the
market price of the Company's stock on the date of grant; therefore, no
compensation expense was recognized.

Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement.  The fair value
of each option grant was estimated using an option-pricing model with the
following assumptions:  risk-free interest rate, 6%; dividend yield, 2.5%;
volatility factor of expected market price of common stock, 11%; and weighted
average expected life of the options, 8 years.

Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period.  The pro forma effect on net income and earnings per share of
this statement were not materially different from those presented on the
consolidated statement of income.

The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the years ended June 30, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                      1998                   1997                   1996
------------------------------------------------------------------------------------------------------------------
                                                            WEIGHTED-              Weighted-              Weighted
                                                             AVERAGE                Average                Average
                                                            EXERCISE               Exercise               Exercise
                    OPTIONS                       SHARES      PRICE      Shares      Price      Shares      Price
------------------------------------------------------------------------------------------------------------------
                                                                                               
<S>                                              <C>        <C>         <C>        <C>         <C>        <C>
Outstanding, beginning of year                                                                 
                                                  44,872     $ 6.93      81,258     $ 6.00      87,924      $6.00
Granted                                                                   9,995      12.90                 
Exercised                                                                                                  
                                                  (6,021)     (6.00)    (42,408)      6.65      (6,666)      6.00
Forfeited/expired                                                                                          
                                                                         (3,973)      6.00                 
Outstanding, end of year                                                                                   
                                                  38,851       7.07      44,872       6.93      81,258       6.00
Options exercisable at year end                   38,851       7.07      44,872       6.93      81,258       6.00
Weighted-average fair value of options granted                          
 during the year                                                          $2.86
</TABLE>

As of June 30, 1998, the 38,851 options outstanding have exercise prices ranging
from $6.00 to $12.90 and a weighted-average remaining contractual life of five
years.

                                      (38)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)
 
 
NOTE 15 -- EARNINGS PER SHARE

Earnings per share (EPS) were computed as follows:

<TABLE>
<CAPTION>
                                                             WEIGHTED  
                                                             AVERAGE       PER SHARE
                                                  INCOME      SHARES        AMOUNT
                                               ----------------------------------------
<S>                                              <C>        <C>           <C>
YEAR ENDED JUNE 30, 1998                                                  
 NET INCOME                                       $1,503                  
                                               ==========                 
 BASIC EARNINGS PER SHARE                                                 
  Income available to common stockholders         $1,503     1,083,866       $1.39
 EFFECT OF DILUTIVE SECURITIES                                            
  Stock options                                                 28,882    
                                               -----------------------------------
 DILUTED EARNINGS PER SHARE                                               
  Income available to common stockholders                                 
    and assumed conversions                       $1,503     1,112,748       $1.35
                                               ===================================
                                                                          
YEAR ENDED JUNE 30, 1997                                                  
 NET INCOME                                       $1,038                  
                                               ==========                 
 BASIC EARNINGS PER SHARE                                                 
  Income available to common stockholders         $1,038     1,057,642       $ .98
 EFFECT OF DILUTIVE SECURITIES                                            
  Stock options                                                 19,423    
                                               -----------------------------------
 DILUTED EARNINGS PER SHARE                                               
  Income available to common stockholders                                 
    and assumed converstion                       $1,038     1,077,065       $ .96
                                               ===================================
                                                                          
YEAR ENDED JUNE 30, 1996                                                  
 NET INCOME                                       $  847                  
                                               ==========                 
 BASIC EARNINGS PER SHARE                                                 
  Income available to common stockholders         $  847     1,067,023       $ .79
 EFFECT OF DILUTIVE SECURITIES                                            
  Stock options                                                 43,199    
                                               -----------------------------------
 DILUTED EARNINGS PER SHARE                                               
  Income available to common stockholders                                 
    and assumed converstion                       $  847     1,110,222       $ .76
                                               ===================================
</TABLE>

                                      (39)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


NOTE 16 -- FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:

CASH AND CASH EQUIVALENTS--The fair value of cash and cash equivalents
approximates carrying value.

TRADING ACCOUNT AND INVESTMENT SECURITIES--Fair values are based on quoted
market prices.

LOANS--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values.  The fair values for certain mortgage loans, including one-to-four
family residential, are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics.  The fair value for other loans is estimated using discounted
cash flow analyses using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.

INTEREST RECEIVABLE/PAYABLE--The fair values of interest receivable/payable
approximate carrying values.

FHLB STOCK--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.

DEPOSITS--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance sheet
date.  The carrying amounts for variable rate, fixed-term certificates of
deposit approximate their fair values at the balance sheet date.  Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.

SHORT-TERM BORROWINGS AND LONG-TERM DEBT--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt.

OFF-BALANCE-SHEET COMMITMENTS--Commitments include commitments to purchase and
originate mortgage loans, commitments to sell mortgage loans, and standby
letters of credit and are generally of a short-term nature.  The fair value of
such commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.  The carrying amounts of these commitments,
which are immaterial, are reasonable estimates of the fair values of these
financial statements.

                                      (40)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


The estimated fair values of the Company's financial instruments are as follows:

<TABLE>
<CAPTION>
                                                         1998                        1997
                                               ---------------------------------------------------
                                                CARRYING        FAIR        Carrying        Fair
JUNE 30                                          AMOUNT        VALUE         Amount        Value
--------------------------------------------------------------------------------------------------

<S>                                             <C>          <C>           <C>          <C>
ASSETS                                                                                  
 Cash and cash equivalents                       $  6,947     $  6,947      $  3,795      $  3,795
 Trading account securities                           835          835           796           796
 Investment securities available for sale          26,905       26,905        25,113        25,113
 Investment securities held to maturity            20,547       20,625        20,207        20,018
 FHLB stock                                         1,256        1,256         1,169         1,169
 Loans, net                                       116,171      118,665       104,984       105,135
 Interest receivable                                1,408        1,408         1,074         1,074
                                                                                        
LIABILITIES                                                                             
 Deposits                                         144,881      146,517       133,203       133,307
 Short-term borrowings                              6,500        6,496         7,500         7,507
 Long-term debt                                     5,662        5,667           721           721
 Interest payable                                     581          581           548           548
</TABLE>

    



    

                                      (41)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


NOTE 17 -- CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

Presented below is condensed financial information as to financial position,
results of operations and cash flows for the Company:

                            CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
JUNE 30                                                      1998           1997
----------------------------------------------------------------------------------
                                                                        
<S>                                                      <C>            <C>
ASSETS                                                                  
 Cash                                                       $   414        $   284
 Account receivable--subsidiary                                 500             48
 Trading account securities                                     835            796
 Loan to ESOP                                                    42            125
 Investment in subsidiary                                    16,171         15,339
 Other assets                                                    25     
                                                       ---------------------------
                                                                        
     Total assets                                           $17,987        $16,592
                                                       ===========================
                                                                        
LIABILITIES                                                             
 Accrued expenses                                                          $    25
                                                                      ------------
                                                                        
STOCKHOLDERS' EQUITY                                                    
 Common stock                                               $ 1,292          1,286
 Additional paid-in capital                                   6,196          6,094
 Less:  Common stock acquired by ESOP                           (42)          (125)
        Common stock acquired by MRP and SERP                                 (101)
        Common stock acquired by Rabbi trusts                  (313)          (283)
 Treasury stock                                              (2,031)        (2,031)
 Retained earnings                                           12,754         11,717
 Unrealized gain on securities available for sale               131             10
     Total stockholders' equity                              17,987         16,567
                                                       ---------------------------
                                                                        
     Total liabilities and stockholders' equity             $17,987        $16,592
                                                       ===========================
</TABLE>

                                      (42)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


                         CONDENSED STATEMENT OF INCOME


<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                     1998        1997        1996
------------------------------------------------------------------------------------
                                                                              
INCOME                                                                        
<S>                                                  <C>         <C>         <C>
  Dividends from subsidiary                            $  950      $  620      $ 350
  Net gain (loss) on trading securities                   159         307         (3)
  Other income                                             28          27         36
                                                  ----------------------------------
     Total income                                       1,137         954        383
                                                                              
EXPENSES                                                                      
  Other expenses                                           64          30         46
                                                  ----------------------------------
INCOME BEFORE INCOME TAX AND EQUITY IN                                        
  UNDISTRIBUTED INCOME OF SUBSIDIARY                    1,073         924        337
                                                                              
INCOME TAX EXPENSE (BENEFIT)                               54         108         (2)
                                                  ----------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED                                         
  INCOME OF SUBSIDIARY                                  1,019         816        339
                                                                              
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY              484         222        508
                                                  ----------------------------------
                                                                              
NET INCOME                                             $1,503      $1,038      $ 847
                                                  ==================================
</TABLE>

                                      (43)
<PAGE>
 
HFB FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands)


                       CONDENSED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                           1998         1997         1996
---------------------------------------------------------------------------------------------
                                                                                     
OPERATING ACTIVITIES                                                                 
<S>                                                        <C>          <C>          <C>
 Net earnings                                                $1,503       $1,038        $ 847
 Adjustments to reconcile net income to net                                          
   cash provided by operating activities                                             
   Equity in undistributed earnings of subsidiary              (484)        (222)        (508)
   Amortization of cost of ESOP and MRP                         185          104          130
   Increase in account receivable--subsidiary                  (452)         (36)          (3)
   Net change in  trading account securities                    (39)        (549)        (247)
   Net change in other assets and other liabilities             (50)         (51)        (151)
   Other                                                       (156)                 
                                                         ------------------------------------
   Net cash provided by operating activities                    507          284           68
                                                         ------------------------------------
                                                                                     
INVESTING ACTIVITIES                                                                 
 Principal collected on loans to subsidiary                                          
   under repurchase agreement                                                             589
 Principal collected on loan to ESOP                             83           84           84
                                                         ------------------------------------
   Net cash provided by investing activities                     83           84          673
                                                         ------------------------------------
                                                                                     
FINANCING ACTIVITIES                                                                 
 Sale of common stock                                            36          282           40
 Cash paid in lieu of fractional shares                                       (5)    
 Purchase of stock                                                          (205)        (330)
 Other                                                          (30)         (25)         (10)
 Cash dividends                                                (466)        (414)        (387)
                                                         ------------------------------------
   Net cash used by financing activities                       (460)        (367)        (687)
                                                         ------------------------------------
                                                                                     
NET INCREASE IN CASH                                            130            1           54
                                                                                     
CASH, BEGINNING OF YEAR                                         284          283          229
                                                         ------------------------------------
                                                                                     
CASH, END OF YEAR                                            $  414       $  284        $ 283
                                                         ====================================
                                                                                     
SUPPLEMENTAL CASH FLOWS INFORMATION                                                  
 Cash paid for interest                                                                 $   1
 Cash paid for income taxes                                  $  104                         4
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<PAGE>
 
[LOGO OF OLIVE LLP APPEARS HERE]



                          INDEPENDENT AUDITOR'S REPORT



          To the Stockholders and
          Board of Directors
          HFB Financial Corporation
          Middlesboro, Kentucky


          We have audited the consolidated balance sheet of HFB Financial
          Corporation and subsidiary as of June 30, 1998 and 1997, and the
          related consolidated statements of income, changes in stockholders'
          equity, and cash flows for the years then ended.  These consolidated
          financial statements are the responsibility of the Company's
          management.  Our responsibility is to express an opinion on these
          consolidated financial statements based on our audit.  The
          consolidated financial statements of HFB Financial Corporation as of
          June 30, 1996 and for the year then ended were audited by other
          auditors whose report dated August 2, 1996 expressed an unqualified
          opinion on those statements.

          We conducted our audits in accordance with generally accepted auditing
          standards.  Those standards require that we plan and perform the audit
          to obtain reasonable assurance about whether the financial statements
          are free of material misstatement.  An audit includes examining, on a
          test basis, evidence supporting the amounts and disclosures in the
          financial statements.  An audit also includes assessing the accounting
          principles used and significant estimates made by management, as well
          as evaluating the overall financial statement presentation.  We
          believe that our audits provide a reasonable basis for our opinion.

          In our opinion, the consolidated financial statements described above
          present fairly, in all material respects, the consolidated financial
          position of HFB Financial Corporation and subsidiary as of June 30,
          1998 and 1997, and the results of their operations and their cash
          flows for the years then ended, in conformity with generally accepted
          accounting principles.

          
          /s/ Olive LLP  

          Evansville, Indiana
          July 24, 1998

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<PAGE>
 
                               BOARD OF DIRECTORS

<TABLE>
<S>                                   <C>                                   <C>
ROBERT V. COSTANZO                    FRANK W. LEE                          FRANCES COFFEY RASNIC
Chairman of the Board of              Retired Pharmacist                    Vice-President
the Bank and the Company              Lee's Drug Store                      Coffey Funeral Home
 
E. W. NAGLE                           CHARLES A. HARRIS                     EARL BURCHFIELD
Vice Chairman of the Bank             Independent Insurance Agent           Retired Publisher of
and a Director of the Company         Harris Insurance Agency               Middlesboro Daily News
 
DAVID B. COOK
President, Chief Executive
Officer and Director of the
Bank and the Company
 
                              EXECUTIVE OFFICERS
 
DAVID B. COOK                         STANLEY ALEXANDER, JR.
President and Chief Executive         Chief Financial Officer
Officer
 
                               OFFICE LOCATIONS
 
MAIN OFFICE                           BRANCH OFFICE                         BRANCH OFFICE
1602 Cumberland Avenue                Village Center                        500 Fifth Avenue
Middlesboro, Kentucky                 Harlan, Kentucky                      New Tazewell, Tennessee
 
                              GENERAL INFORMATION
 
INDEPENDENT CERTIFIED ACCOUNTANTS     ANNUAL MEETING                        ANNUAL REPORT ON FORM
Olive LLP                             The 1998 Annual Meeting of            A copy of the Company's Annual
20 N. W. Third Street                 Stockholders will be held on          Report on Form 10-K for the fiscal
Evansville, Indiana  47708            November 24, 1998 at 2:00 p.m.        year ended June 30, 1998, as filed
                                      at the Pine Mountain State Resort     with the Securities and Exchange
                                      Park, Pineville, Kentucky.            Commission, will be furnished
                                                                            without charge to stockholders as of
GENERAL COUNSEL                       TRANSFER AGENT AND REGISTRAR          the record date for the 1998 Annual
Joseph Coker                          Reliance Trust Company                Meeting upon written request to the
P. O. Box 134                         950 East Paces Ferry Road             Chief Financial Officer, HFB
Jacksboro, Tennessee  37757           Suite 2840                            Financial Corporation, 1602
                                      Atlanta, Georgia  30326               Cumberland Avenue, Middlesboro,
                                                                            Kentucky.
                                   
SPECIAL COUNSEL                    
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N. W.            
Suite 700                         
Washington, D.C.  20036            

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