<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                             --------------------
                                  FORM 10-KSB
(Mark One)

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

For the fiscal year ended June 30, 1997

[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from                   to
                              ------------------   ---------------------------
 
                          Commission File No. 0-20956
                                              ------- 
                           HFB FINANCIAL CORPORATION
                           -------------------------
            (Exact name of registrant as specified in its charter)
 
 Tennessee                                                        61-1228266
----------------------------------------------------------  ----------------
(State or other jurisdiction                                (I.R.S. employer
of incorporation or organization)                          identification no.)

1602 Cumberland Avenue, Middlesboro, Kentucky                         40965
---------------------------------------------               --------------------
(Address of principal executive offices)                            (Zip Code)

         Registrant's telephone number, including area (606) 248-1095

  Securities registered pursuant to Section 12(b) of the Act:  Not Applicable

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

                   Common Stock (par value $1.00 per share)
                   ----------------------------------------
                                Title of Class

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

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

Registrant's revenues for the fiscal year ended June 30, 1997:  $12,438,114

The registrant's voting stock is listed on the National Daily Quotation System
"Pink Sheets" published by the National Quotation Bureau, Inc. The aggregate
market value of the voting stock held by nonaffiliates of the registrant, based
on the $14.38 per share closing sales price of the registrant's common stock as
quoted on the "Pink Sheets" on September 5, 1997, was $15,582,542. For purposes
of this calculation, it is assumed that directors and officers of the registrant
are affiliates. As of September 5, 1997, the registrant had 1,083,626 shares of
common stock outstanding, of which 236,626 were held by affiliates.

Transitional Small Business Disclosure Format   Yes             No    X
                                                   --------        -------

                      DOCUMENTS INCORPORATED BY REFERENCE

1.  Portions of Annual Report to Stockholders for the Fiscal Year Ended June
    30, 1997.  (Parts I and II)
2.  Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders.
    (Part III)


<PAGE>
 
                                 PART I

ITEM 1.  BUSINESS
-----------------

GENERAL

     THE COMPANY. HFB Financial Corporation (the "Company"), a Tennessee
corporation, was organized by Home Federal Bank, Federal Savings Bank ("Home
Federal" or the "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 to be 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, par value $1.00 per share (the "Common Stock"), of the Company,
which was completed on December 28, 1992 (the "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. Since the Conversion, the Company has repurchased 202,047 shares of its
outstanding Common Stock at a cost of $2.0 million, and paid cash dividends of
$1.5 million. The Company is a unitary savings and loan holding company subject
to regulation by the Office of Thrift Supervision ("OTS"). The Company's
principal business is the business of the Bank and its subsidiary. Therefore,
substantially all of the discussion in this Form 10-KSB relates to the Bank and
its operations. At June 30, 1997, the Corporation (on a consolidated basis with
the Bank) had total assets of $159.5 million, deposits of $133.2 million, net
loans receivable of $105.0 million and stockholders' equity of $16.6 million.

     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. Also, 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.

MARKET AREA

     Home Federal's offices are located in Bell and Harlan Counties in
southeastern Kentucky and Claiborne County in northeastern Tennessee. The Bell
County office, which is located in Middlesboro, Kentucky, primarily serves a
deposit market in within a twenty mile radius of Middlesboro and a lending
market comprised of Hamblin and Campbell Counties in northeastern Tennessee,
Bell, Harlan, Knox, Whitley and Laurel Counties in southeastern Kentucky and 

                                       2
<PAGE>
 
Lee County in southwestern Virginia. The Harlan County office serves a deposit
market primarily consisting of Harlan County and the city of Harlan and the
Claiborne County office, which is located in New Tazewell, Tennessee, serves a
deposit and loan market in Claiborne, Grainger, Union and Knox Counties in
northeastern Tennessee. Management plans to significantly increase its loan and
deposit markets in northeastern Tennessee through its New Tazewell office, which
opened in October 1995 and deposits in this branch totaled $19.3 million at June
30, 1997, while loans originated on Northeastern Tennessee properties during
fiscal 1997 approximated $4.9 million.

     The Bank serves the northeastern Tennessee and southeastern Kentucky loan
markets from its Middlesboro and New Tazewell offices. Employment in these
counties is primarily reliant on local manufacturing industries with significant
employment also coming from services, retail sales, the transportation, utility
and construction industries, agriculture and mining.

     The Bell and Harlan county markets are the Bank's primary source of
deposits with a smaller percentage of loans coming from this area. The economy
in Bell and Harlan Counties has suffered from the loss of jobs in the coal
industry since the 1980s. Both counties are gradually recovering by means of
diversification into other industries. In the last few years, Bell County has
experienced substantial growth in the retail sector with the development and
expansion of several shopping centers. Other sources of employment in Bell and
Harlan Counties include manufacturing, utilities, transportation and services.

LENDING ACTIVITIES

     General. Home Federal originates loans primarily through its main office
located in Middlesboro, Kentucky. The principal lending activity of the Bank is
the origination of conventional mortgage loans for the purpose of purchasing or
refinancing owner-occupied, one- to four-family residential properties in its
primary market areas. Conventional mortgage loans are primarily adjustable-rate
mortgage loans with a small amount of fixed-rate mortgage loans which are not
insured or guaranteed by federal agencies. The Bank does not originate Federal
Housing Administration-insured or Veterans Administration-insured loans. The
Bank does originate consumer loans on a direct basis. In addition, the Bank also
makes conventional mortgage loans for the purpose of constructing one- to four-
family residences and loans to construct commercial and multi-family real
estate.

     The Bank emphasizes the origination of adjustable-rate loans and short-term
loans in order to increase the interest rate sensitivity of its loan portfolio.
However, the Bank also continues to offer long-term, fixed-rate conventional
mortgage loans (15 year terms or less), originated for its portfolio. For the
fiscal year ended June 30, 1997, fixed-rate mortgages comprised 14.9% of total
mortgage loans originated for the period (all of which had terms of 15 years or
less), while adjustable rate and short term (5 years or less) balloon loans
comprised 85.1% of total mortgage loans originated for the period.

                                       3
<PAGE>
 
Analysis of Loan Portfolio

     Set forth below is selected data relating to the composition of the Bank's
loan portfolio at the dates indicated.  As of June 30, 1997, the Bank had no
concentrations of loans exceeding 10% of total loans other than as disclosed
below.
<TABLE>
<CAPTION>
 
                                                                       At June 30,
                                                        -------------------------------------
                                                                1997              1996
                                                       -------------------  ----------------
                                                        Amount        %     Amount      %
                                                      -----------  -------  -------  -------
                                                              (Dollars in thousands)
<S>                                                   <C>          <C>      <C>      <C>
Real estate loans:
  Single and multi-family
    mortgage loans..................................     $ 86,095   79.92%  $79,022   80.26%
  Commercial real estate loans......................       10,096    9.37    10,237   10.40
  Real estate construction loans....................        5,091    4.73     3,397    3.45
                                                         --------  ------   -------  ------
    Total real estate loans.........................      101,282   94.02    92,656   94.11
                                                         --------  ------   -------  ------
Consumer loans:
  Loans on deposits.................................        1,964    1.82     2,001    2.03
  Home improvement loans............................        1,306    1.21       836     .85
  Automobile loans..................................          959     .89       666     .68
  Other (1).........................................        1,493    1.39     2,130    2.16
                                                         --------  ------   -------  ------
    Total consumer loans............................        5,722    5.31     5,633    5.72
                                                         --------  ------   -------  ------
Commercial loans....................................          723     .67       171     .17
                                                         --------  ------   -------  ------
 
Total gross loans...................................      107,727  100.00%  $98,460  100.00%
                                                         --------  ======   -------  ======
Less:
  Undisbursed portion of
    mortgage loans..................................        2,019             1,797
  Allowances for loan losses........................          710               671
  Unamortized discount and deferred loan fees, net..           14                18
                                                         --------           -------
Total...............................................     $104,984           $95,974
                                                         ========           =======
</TABLE> 
--------------------
(1)   Includes home equity lines of credit.

                                       4
<PAGE>
 
     The following table sets forth certain information as of June 30, 1997
regarding the dollar amount of principal repayments becoming due during the
periods indicated for loans.  Demand loans, loans having no schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less.  The table below does not include any estimate of prepayments
which significantly shorten the average life of all mortgage loans and may cause
the Bank's actual repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
 
                                  0-1 Year  1-5 Years  5-10 Years  Over 10 Years   Total
                                  --------  ---------  ----------  -------------  --------
                                                       (In thousands)
<S>                               <C>       <C>        <C>         <C>            <C>
 
Real estate mortgage loans......    $3,406    $16,900     $28,998        $46,887  $ 96,191
Real estate construction loans..       104        512         932          3,543     5,091
Consumer loans (1)..............     1,376      3,396         475            475     5,722
Commercial loans................        --        723          --             --       723
                                    ------    -------     -------        -------  --------
  Total gross loans.............    $4,886    $21,531     $30,405        $50,905  $107,727
                                    ======    =======     =======        =======  ========
</TABLE> 
--------------------
(1)  Includes second mortgages and home equity lines of credit.


     The following table sets forth as of June 30, 1997 the dollar amount of all
the loans due after the year ending June 30, 1998 and distinguishes between
those with fixed interest rates and those with adjustable interest rates.
<TABLE>
<CAPTION>
 
                                  Predetermined    Floating or
                                      Rate       Adjustable Rates     Total
                                  -------------  ----------------    --------
                                               (In thousands)
<S>                               <C>            <C>                 <C>
Real estate mortgage loans......        $19,701      $73,084         $ 92,785
Real estate construction loans..             --        4,987            4,987
Consumer loans..................          4,346           --            4,346
Commercial loans................             --          723              723
                                        -------      -------         --------
  Total gross loans.............        $24,047      $78,794         $102,841
                                        =======      =======         ========
</TABLE>

     One- to Four-Family Real Estate Lending. The primary emphasis of the Bank's
lending activity is the origination of conventional loans secured by owner
occupied, one- to four-family residential properties. The purchase price for
properties securing loans originated by the Bank in the Bank's lending area has
been between $7,000 and $295,000 and averaged $64,000 in fiscal year 1997.
Management believes that price range includes the majority of the single family
properties in the Bank's market area. At June 30, 1997, $86.1 million or 79.9%
of the Bank's gross loan portfolio consisted of loans secured by single and
multi-family residential real properties which were primarily owner-occupied,
single-family residences located in the Bank's market area.

     The Bank's conventional mortgage loan originations are generally for terms
of 10 to 30 years, amortized on a monthly basis, with principal and interest due
each month. Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option without penalty. Conventional
residential mortgage loans granted by the Bank customarily contain "due-on-sale"
clauses which permit the Bank to accelerate the indebtedness of the loan upon
transfer of ownership of the mortgaged property. Due-on-sale clauses are an
important means of imposing assumption fees and increasing the rate on existing
mortgage loans during periods of rising interest rates and increasing the
turnover of mortgage loans in the Bank's portfolio.

     The Bank's lending policies generally limit the maximum loan-to-value ratio
on mortgage loans secured by owner-occupied properties to 80% of the lesser of
the appraised value or purchase price. The maximum loan-to-value ratio on
mortgage loans secured by non-owner-occupied properties and/or used for
refinancing purposes is also 80%. 

                                       5
<PAGE>
 
The Bank does originate some 90% loan-to-value ratio loans. Although the Bank
does not require private mortgage insurance on these loans, it charges a higher
effective interest rate on such loans to account for the additional risk which
90% loan-to-value ratio loans carry.

     Home Federal began originating conventional adjustable-rate residential
mortgage loans in the early 1980's and principally offers a variety of
adjustable-rate mortgage loans with rate adjustments indexed either to the
weekly average rate of U.S. Treasury securities adjusted to the relevant
maturity for the adjustment term, or the National Median Cost of Funds. Home
Federal originated $25.1 million in adjustable-rate one-to-four family mortgage
loans during the year ended June 30, 1997 or 85.1% of the mortgage loans
originated during the year, and such loans amounted to $75.7 million or 70.3% of
the Bank's gross loan portfolio at June 30, 1997.

     The retention of adjustable-rate mortgage loans in the Bank's portfolio
helps reduce the Bank's exposure to changes in interest rates. However, there
are unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of adjustable-rate mortgage loans. It is
possible that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest cost to the borrower. Further, the adjustable-rate mortgages originated
by the Bank generally provide for initial rates of interest less than the fully
indexed rates which would prevail were the index used for pricing applied
initially. These loans are subject to increased risk of delinquency or default
as the higher, fully-indexed rate of interest subsequently comes into effect,
replacing the lower initial rate. Further, although adjustable-rate mortgage
loans allow the Bank to increase the sensitivity of its asset base to change in
interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limitations. Accordingly, there
can be no assurance that yields on the Bank's adjustable-rate mortgages will
adjust sufficiently to compensate for increases in the Bank's cost of funds.

     Home Federal also originates conventional fixed-rate mortgage loans on one-
to-four family residential properties, all of which have a maximum term to
maturity of 15 years. The Bank originates and holds its fixed-rate mortgage
loans in its portfolio as long-term investments. Home Federal originated $4.4
million in fixed-rate one- to-four family mortgage loans with a maximum maturity
of 15 years during the year ended June 30, 1997, and such loans amounted to
$12.7 million or 14.4% of the Bank's gross loan portfolio at June 30, 1997. Such
loans amounted to 14.9% of all mortgage loans originated during fiscal 1997. All
such loans were held as long-term investments, and none were held for sale.

     Home Federal engages in a limited, but increasing amount of construction
lending, involving loans to qualified borrowers for construction of one- to-four
family residential properties. These properties are primarily located in the
Bank's market area. At June 30, 1997 the Bank's loan portfolio included $3.6
million of loans secured by properties under construction, all of which were
construction/permanent loans structured to become permanent loans upon the
completion of construction and none of which were interim construction loans
structured to be repaid in full upon completion of construction and receipt of
permanent financing. All construction loans are secured by a first lien on the
property under construction. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. Construction/permanent loans
generally have adjustable interest rates and are underwritten in accordance with
the same terms and requirements as the Bank's permanent mortgages, except the
loans generally provide for disbursement in stages during a construction period
of up to six months, during which period the borrower is required to make
monthly payments of accrued interest on the outstanding loan balance. Interim
construction loans generally have fixed interest rates, terms of up to six
months and a maximum loan-to-value ratio of 80%. Borrowers must satisfy all
credit requirements which would apply to the Bank's permanent mortgage loan
financing for the subject property.

     Loans involving construction financing present a greater level of risk than
loans for the purchase of existing homes since collateral values and
construction costs can only be estimated at the time the loan is approved. The
Bank has historically had a small amount of construction loans, thus limiting
risk in this area, however, as the level of construction lending increases, the
risk will correspondingly increase.

                                       6
<PAGE>
 
     Consumer Lending. Consumer lending is a small but important part of Home
Federal's business. Consumer loans generally have shorter terms to maturity or
repricing and higher interest rates than the long-term, adjustable-rate mortgage
loans that constitute a substantial part of the Bank's loan portfolio. The
Bank's consumer loans primarily consist of savings account loans, automobile
loans, home equity loans and lines of credit, second mortgage loans and other
consumer loans secured by mortgages on residences. The Bank also makes a limited
amount of unsecured loans. At June 30, 1997, the Bank's consumer loans totaled
$5.7 million, or 5.3% of the Bank's gross loan portfolio. Approximately $1.9
million of these loans are secured by savings accounts. Management expects to
continue to aggressively promote consumer loans as part of its strategy to
provide a wide range of personal financial services to its customers and as a
means to enhance the interest rate sensitivity of the Bank's interest-earning
assets and the spread between its average loan yield and its costs of funds.

     Home Federal makes automobile loans directly to the borrower. Direct
automobile loans secured by new cars generally are limited to 80% of the
purchase price and have terms of up to 60 months. Automobile loans secured by
used cars generally are limited to their loan value as published by the National
Automobile Dealers Association and terms of 24-60 months, depending on the age
of the automobile. The Bank does not make loans secured by automobiles more than
five years old. Collision insurance policies are required on all automobile
loans. At June 30, 1997, the Bank had $959,000 in automobile loans.

     Home Federal offers home equity lines of credit which are generally made on
the security of residences on which the Bank has a first mortgage. Consumer
mortgage loans may not exceed 80% of the appraised value of the residence (less
the outstanding principal of the first mortgage). The draw period is limited to
the first 10 years and the loans have monthly adjustable interest rates indexed
to the One Year Treasury Index (the maximum interest rate is 18%). At June 30,
1997, the Bank had $1.9 million disbursed under home equity lines of credit and
an additional $1.7 million of authorized but undrawn home equity lines of
credit.

     Home Federal makes savings account loans up to 90% of a depositor's savings
account balance. The interest rate is 2.5% above the rate on the savings
account, and the account must be pledged as collateral to secure the loan.
Savings account loans are payable on demand. Interest is billed on a quarterly
basis. Accrued but unpaid interest is added to the loan balance. If the loan
balance rises to 98% of the savings account balance, the Bank sends a letter to
the customer requesting payment of the accrued interest, and if payment is not
made the Bank may demand payment of the full loan amount.

     Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loans such as the Bank, and a borrower may be able to assert
against such assignee claims and defenses which it has against the seller of the
underlying collateral. Despite these risks, the Bank's level of consumer loan
delinquencies generally has been low. No assurance can be given, however, that
the Bank's delinquency rate on consumer loans will continue to remain low in the
future.

     Commercial Lending. As a federally chartered savings institution, the Bank
is authorized to invest up to 10% of its assets in commercial loans not secured
by real property. Home Federal has only a limited amount of commercial loans and
does not actively pursue loans of this type. At June 30, 1997, the Bank had
$723,000, or .67% of its assets, outstanding in commercial loans not secured by
real property.

                                       7
<PAGE>
 
     Commercial and Multi-Family Real Estate Lending. Home Federal has
historically engaged in a limited amount of commercial and multi-family real
estate lending. These types of lending can involve substantial risk. The Bank
generally makes commercial and multi-family real estate loans available on
properties in its market area, with terms of 20 years or less, loan-to-value
ratios of 80% or less and adjustable rates of interest indexed to the One Year
Treasury Index. In addition, the Bank, from time to time, purchases whole loans
or participation interests in loans on commercial and multi-family real estate
located in Kentucky and Eastern Tennessee. See "Participation Interests in
Loans." Management does not actively seek commercial or multi-family real estate
lending opportunities and applies conservative underwriting criteria to those
applications which it does consider.

     Home Federal's largest commercial real estate loans at June 30, 1997
consisted of: (i) a loan with an outstanding balance of $1.5 million secured by
a hotel and restaurant development; (ii) a loan with an outstanding balance of
$905,000 secured by a residential real estate development in Campbell County
Tennessee; (iii) a loan with an outstanding balance of $903,000 secured by two
apartment complexes in Louisville, Kentucky, which is a 19.61% participation
interest in a loan originated by Great Financial Federal of Louisville,
Kentucky; (iv) a loan with an outstanding balance of $481,000 secured by 46
townhouse apartments located in central Kentucky; which is a 35.2% participation
interest in a loan originated by the Blair Financial Federal of Louisville,
Kentucky; and (v) a loan with an outstanding balance of $472,000 secured by an
apartment complex in Winchester, Kentucky, which is a 33 1/3% participation
interest in a loan originated by the Blair Corporation of Lexington, Kentucky.
All of these loans were being repaid on an amortized basis and the borrowers
have performed as agreed with the exception of the borrower with a $1.5 million
loan secured by a hotel and restaurant development. (See Non-Performing Loans
and Other Problem Assets).

     Loans secured by commercial real estate generally are larger and involve
greater risks than one- to-four family residential mortgage loans. Because
payments on loans secured by such properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Bank seeks to minimize these risks in a variety of ways,
including obtaining personal guarantees from the principals of the borrower and
reviewing the principal's financial condition, limiting the size of such loans
and strictly scrutinizing the financial condition of the borrower through the
review of financial statements, and establishing the quality of the collateral
and the effectiveness of the management of the property securing the loan.
Substantially all of the properties securing the Bank's commercial and multi-
family real estate loans are inspected by the Bank's lending personnel before
the loan is made. The Bank also obtains appraisals on each property in
accordance with applicable regulations. If such loans later become delinquent,
the Bank contacts and works with the borrower to resolve the delinquency or
initiates foreclosure proceedings.

     The Bank's self-imposed loan to one borrower limit is approximately $2.3
million at June 30, 1997. One customer, a real estate developer in Campbell
County, Tennessee, has come close to this limit with total lines of credit
outstanding of $1.9 million. OTS loans to one borrower limitations provide that
the aggregate amount of loans which a federally chartered savings institution
may make on the security of liens on non-residential real property may not
exceed 400% of the institution's capital as determined under the capital
standards mandated by the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA"). FIRREA, however, provides that the new limits on 
non-residential real property lending do not require divestiture of any loan or
investment that was lawful when made. In addition, FIRREA authorizes the
Director of OTS to permit federally chartered savings institutions to exceed the
400% of capital limit in certain circumstances. This restriction has not had a
material impact on Home Federal's business. For more information, see
"Regulation -- Regulation of the Bank -- Limits on Loans to One Borrower."

     Participation Interests in Loans. Due to limited lending opportunities in
the Bank's immediate market area, the Bank, from time to time, has purchased
participation interests in loans on residential, commercial and multi-family
real estate located in Kentucky and Eastern Tennessee. At June 30, 1997,
participation interests in loans totaled $4.4 million or 4.1% of the Bank's
gross loan portfolio. Of this amount $2.0 million were secured by residential
properties and $2.4 million were secured by commercial or multi-family
properties.

                                       8
<PAGE>
 
     It is the Bank's policy to purchase participation interests in loans that
meet the Bank's underwriting standards on loans it originates directly. The Bank
requires income and deposit verification to be provided on each borrower. All
loans must be documented, including an appraisal that substantiates the value of
the subject property at the time of origination of the loan. The Bank may,
however, rely on the appraisal obtained by the financial institution originating
the loan. Appraisals generally are substantiated with an inspection of the
properties by an officer of the Bank. The Bank makes every effort to purchase
loans only from financially secure institutions. There can be no assurance that
a servicing financial institution will not experience financial difficulty which
may affect the Bank's ability to timely collect any principal and interest
payments, although the Bank, to date, has not experienced these types of
problems on the participation interests it has purchased.

     Loan Solicitation and Processing. Loan originations are derived from a
number of sources. Residential mortgage loan originations primarily come from
walk-in customers and referrals by realtors, depositors and borrowers. The
Bank's loan solicitation program includes two loan officers on the road in the
Bank's market area. These officers have regular realtor and builder routes.
Consumer and other loan originations emanate from many of the same sources as
for residential real estate loan originations as well as from consumer goods
dealers. Real estate loans are originated by Home Federal's staff of salaried
loan officers working in one of the Bank's offices. Loan applications are taken
in each of the Bank's offices and then submitted to the Bank's main office for
processing and approval. Applications for fixed-rate one-to-four family real
estate loans are underwritten and closed based on FHLMC and FNMA standards, and
other loan applications are underwritten and closed on the Bank's own loan
guidelines.

     Upon receipt of a loan application from a prospective borrower, a credit
report and verifications are ordered to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of the
real estate intended to secure the proposed loan is undertaken by either the
Bank's staff appraiser (for the vast majority of appraisals) or a fee appraiser
approved by the Bank.

     The Board of Directors of the Bank has the responsibility and authority for
general supervision over the loan policies of the Bank. The Board has
established written lending policies for the Bank and has delegated to its Loan
Committee, which consists of the President, the Senior Lending Officer, the
Chairman of the Board, and two designated Directors, the authority to approve
all mortgage loans up to $500,000. With respect to consumer loans, The
President, Chairman of the Board, Senior Lending Officer and the Branch Manager
of the New Tazewell office are authorized to approve unsecured loans up to
$15,000 and other lending officers are authorized to approve unsecured loans
from $5,000 to $10,000.

     Loan applicants are promptly notified of the decision of the Bank. Interest
rates on approved loans are subject to change if the loan is not funded within
30 days after approval. If an approved loan is not funded within 45 days,
management contacts the applicant to determine the loan's status. It has been
management's experience that substantially all approved loans are funded.

                                       9
<PAGE>
 
     Loan Originations, Purchases and Sales. The following table sets forth
certain information with respect to the loan origination and purchase activity
of the Bank during the periods indicated.
<TABLE>
<CAPTION>
 
                                        For the Year Ended June 30,
                                        ---------------------------
                                               1997       1996
                                                (In thousands)
<S>                                         <C>        <C>
Loans originated:
 Conventional real estate loans:
   Construction loans:
    1-4 family residences.................    $ 3,411  $ 3,120
    Non-residential.......................      1,202    1,255
   Permanent loans:                       
    Newly built 1-4 family................         --      800
    Previously occupied 1-4 family........     20,095   21,699
    Newly built 5 or more family..........         --       --
    Previously occupied 5 or more family..         --       --
    Non-residential.......................      2,118    3,085
    Land..................................      2,160      820
  Consumer loans..........................      4,377    4,248
  Commercial loans........................        571      105
                                              -------  -------
    Total.................................    $33,934  $35,132
                                              =======  =======
Loans purchased...........................    $   750  $   185
                                              =======  =======
Loans sold................................    $ 1,500  $ 1,750
                                              =======  =======
 
</TABLE>

     Loans purchased by the Bank in the above periods were (i) during fiscal
1997, a $750,000 loan secured by a multi-family complex in Murfreesboro,
Tennessee; and (ii) a $185,000 loan secured by an apartment building in
Lexington, Kentucky; loans sold in fiscal 1997 include two commercial real
estate loans of $750,000 each, secured by a hotel, restaurant and other
properties, while during 1996 a $1.8 million interest in three loans totaling
$3.2 million was sold with no gains or losses recognized.

     Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan rates reflect factors such as general interest rate
levels, the supply of money available to the savings industry and the demand for
such loans. These factors are in turn affected by general economic conditions,
the monetary policies of the Federal government, including the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.

     In addition to interest earned on loans, Home Federal receives fees for
servicing loans for others. Loan servicing fees usually are charged as a
percentage (generally 1/4%) of the balance of the loans being serviced. At June
30, 1997 the Bank was servicing $2.7 million of loans for others, and loan
service fee income was considered immaterial for 1995, 1996 and 1997. In
addition to loan servicing fees, the Bank receives fees in connection with loan
commitments and originations, loan modifications, late payments, changes of
property ownership and for miscellaneous services related to its loans. Income
from these activities varies from period to period with the volume and type of
loans originated, sold and purchased, which in turn is dependent on prevailing
mortgage interest rates and their effect on the demand for loans in the markets
served by the Bank.

     To the extent that loans are originated or acquired for the portfolio,
Statement of Financial Accounting Standards ("SFAS") No. 91 limits immediate
recognition of loan origination or acquisition fees as revenues and requires
that such income (net of certain loan origination or acquisition costs) be
recognized over the estimated life of such loans. 

                                       10
<PAGE>
 
The statement reduces the amount of revenue recognized by Home Federal at the
time such loans are originated or acquired.

     Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specified allowances for
loan losses in the amount of 100% of the portion of the asset classified loss,
or charge off such amount. An asset which does not currently warrant
classification but which possesses weaknesses or deficiencies deserving close
attention is required to be designated as "special mention." Currently, general
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. See "Regulation -- Regulatory
Capital Requirements." The Bank has determined that at June 30, 1997 it had $1.1
million in assets classified as substandard, $586,000 in assets classified as
doubtful and $3,000 in assets classified as loss. In addition, the Bank had
$41,000 in assets designated as special mention. Depending on their future
performance, it is possible that these loans might be required to be classified
in future periods. For additional information, see "Non-Performing Loans and
Other Problem Assets."

     In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality. The
Bank increases its allowance for loan losses by charging provisions for possible
loan losses against the Bank's income.

     General allowances are made pursuant to management's assessment of risk in
the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
General allowances are included in calculating the Bank's risk-based capital,
while specific allowances are not so included. Management continues to actively
monitor the Bank's asset quality and to charge off loans against the allowance
for loan losses when appropriate or to provide specific loss reserves when
necessary. Although management believes it uses the best information available
to make determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions differ substantially from
the economic conditions in the assumptions used in making the initial
determinations.

     The Bank recorded a provision for loan loss of $138,000 in fiscal 1997 and
$35,000 in fiscal 1996, primarily due to the dollar amount of commercial real
estate loans in the Bank's loan portfolio. Management also reviews individual
loans for which full collectibility may not be reasonably assured and considers,
among other matters, the fair value of the underlying collateral. While the Bank
believes it has established its existing allowances for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that changes in the Bank's loan portfolio or in economic conditions
would not require the Bank to significantly increase its allowance for loan
losses, thereby negatively effecting the Bank's financial condition and
earnings.

                                       11
<PAGE>
 
     The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
 
                                        Year Ended June 30,
                                        ----------------------
                                             1997    1996
                                             ----    ----
                                        (Dollars in Thousands)
<S>                                         <C>     <C>
Balance at Beginning of Period...........   $ 671   $ 633
                                            -----   -----
                                            
Loan charged-offs:                          
 Real Estate:                               
  Residential............................      --      --
  Commercial.............................     (99)     --
 Consumer................................      (3)     (8)
 Commercial..............................      --      --
                                            -----   -----
Total charge-offs........................    (102)     (8)
                                            -----   -----
Recoveries:                                 
 Real Estate:                               
  Residential............................       3      11
  Commercial.............................      --      --
 Consumer................................      --      --
 Commercial..............................      --      --
                                            -----   -----
Total Recoveries.........................       3      11
                                            -----   -----
Net loan recoveries (chargeoffs).........     (99)      3
                                            -----   -----
Provision for Loan Losses................     138      35
                                            -----   -----
Balance at end of period.................   $ 710   $ 671
                                            =====   =====
Ratio of allowance for losses to            
 gross loans receivable..................     .67%    .68%
                                            =====   =====
 
Ratio of net loan chargeoffs to average
 loans outstanding during the period.....     .10%    .00%
                                            =====   =====
</TABLE>

                                       12
<PAGE>
 
     The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>

                                                     Year Ended June 30,
                              -------------------------------------------------------------------
                                                 1997             1996
                             --------------------------------------------------------------------
                                           % of Loans                        % of Loans
                                             in Each     % of                 in Each     % of
                                            Category   Allowance              Category    Allowance
                                            to Total   to Total              to Total     to Total
                                Amount    Gross Loans   Loans     Amount    Gross Loans   Loans
                              ----------  ------------  ------  ----------  ------------  ------
                                                      (Dollars in thousands)
<S>                           <C>         <C>           <C>     <C>         <C>           <C>
Residential and commercial   
 real estate loans..........     $ 707        94.02%    .69%        $669        94.11%    .72%
Consumer loans..............         3         5.31     .05            2         5.72     .04
Commercial loans............        --          .67      --           --          .17      --
                                 -----       ------              -------     --------
  Total allowance for        
   loan losses..............     $ 710       100.00%                $671       100.00%
                                 =====       ======              =======     ========
</TABLE>

     Non-Performing Loans and Other Problem Assets. Management reviews the
credit quality of the Bank's loans on a regular basis. After residential
mortgage loans become past due more than 90 days, the Bank generally establishes
an allowance for uncollectible interest for the amount by which the principal
balance and uncollected interest exceeds 90% of the appraised value of the
property. Commercial and multi-family real estate loans generally are placed on
non-accrual status if the borrower is placed in bankruptcy proceedings, or
management concludes that payment in full is not likely. The Bank has had a
favorable loan loss history, and has not charged off any residential real estate
loans during fiscal 1997 and 1996. During fiscal 1997, the Bank charged off
$99,000 of a participation loan secured by a food store in Nicholasville,
Kentucky. The property was sold at public auction as the result of an agreement
between the borrowers and the participating lenders. In accordance with the
agreement, the Bank has no further recourse to recover the deficiency. Consumer
and commercial loans generally are charged off, or any expected loss is reserved
for, after they become more than 90 days past due. The Bank accrues interest on
delinquent loans past due more than 90 days without establishing a reserve when
management concludes such action is warranted, such as in the event the loan is
exceptionally well collateralized or the borrower establishes the temporary
nature of the delinquency. Loans are charged off when management concludes that
they are uncollectible. See also "Nature of Operations and Summary of
Significant Accounting Policies" included in the Notes to Consolidated Financial
Statements.

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

                                       13
<PAGE>
 
     The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of Statement of Financial Accounting
Standards No. 15, at the dates indicated.

<TABLE>
<CAPTION>
                                                              At June 30,
                                                       ----------------------
                                                          1997         1996
                                                       (Dollars in thousands)
<S>                                                   <C>              <C>
Loans accounted for on a nonaccrual basis (1)..           $  --        $  --
                                                          -----        -----
Accruing loans which are contractually                            
  past due 90 days or more: (1)                                   
  Real estate..................................           $ 365        $ 657
  Consumer.....................................               3            3
  Commercial...................................              --           --
                                                          -----        -----
  Total of nonaccrual and 90 days                                 
    or more past due loans.....................           $ 368        $ 660
                                                          -----        -----
                                                                  
Real estate owned..............................              58           --
                                                          -----        -----
  Total nonperforming assets...................           $ 426        $ 660
                                                          =====        =====
Nonaccrual and 90 days or more past due                           
  loans as a percentage of total loans, net....             .41%         .69%
                                                          =====        =====
Nonaccrual and 90 days or more past due                           
  loans as a percentage of total assets........             .27%         .45%
                                                          =====        =====
Nonperforming assets as a percentage                              
  total assets.................................             .27%         .45%
                                                          =====        =====
 
--------------------
</TABLE>
(1) Interest on delinquent loans is accrued to income to the extent considered
    collectible. Nonaccrual loans did not have a material effect on the Bank's
    interest income for the years ended June 30, 1997 or 1996.

     As of June 30, 1997, Home Federal had a total of $325,000 in four single
family loans classified as "substandard." The balances of these loans ranged
from $18,000 to $133,000, and all were involved in bankruptcy. The risk of loss
in the remaining loans, in Management's opinion, at this time, is not
significant. As of June 30, 1997, Home Federal had no commercial loans
classified, $3,000 in consumer loans classified and one single family
residential loan totaling $41,000 classified as "special mention."

     In addition, the Bank had five related commercial real estate loans
totaling $1.4 million. Of these loans, $719,000 has been classified as
"substandard" and $586,000 has been classified as "doubtful." The largest
property, a hotel-restaurant operation, is not generating sufficient cash flow
to fund the debt service payments and the borrower has made the most recent
payments from other sources. Management believes that these loans have been
adequately classified and reserved for, but continues to monitor them as to
their collectibility and any possible losses the Bank could incur, or additional
reserves that may need to be established.

     As of June 30, 1997, Home Federal had $58,000 in real estate owned, which
consisted of one single family residence. No significant loss is expected.

     Finally, at June 30, 1997, had no other loans which were not classified as
non-accrual, past due 90 days or more or restructured but where known
information about possible credit problems of borrowers caused management to
have serious doubts as to the ability of the borrowers to comply with present
loan repayment terms and could result in future disclosure as non-accrual, 90
days past due or restructured.

                                       14
<PAGE>
 
INVESTMENT ACTIVITIES

     Home Federal is required under federal regulations to maintain a minimum
amount of liquid assets, which can be invested in specified short-term
securities, and is also permitted to make certain other investments. See
"Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" in the Annual
Report. It has generally been Home Federal's policy to maintain a liquidity
portfolio in excess of the amount required to satisfy regulatory requirements,
and the Bank's liquidity ratio of 21.5% at June 30, 1997 exceeded the 5%
regulatory liquidity requirement. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, management's judgment as
to the attractiveness of the yields then available in relation to other
opportunities, its expectations of the level of yield that will be available in
the future and its projections as to the short-term demand for funds to be used
in the Bank's loan origination and other activities.

     The general objectives of Home Federal's investment policy are to (i)
protect Home Federal's depositor resources, (ii) maintain liquidity levels to
meet the operational needs of the Bank and applicable regulatory requirements,
(iii) reduce credit risk by investing in high quality, diverse investments, (iv)
serve as a hedge against significant interest rate shifts, (v) contribute to
earnings in a stable and dependable manner without compromising the goals of
liquidity and safety, and (vi) provide collateral for pledging needs. The Bank's
investment activities are conducted by the Investment Committee and supervised
by the Board of Directors. An investment policy has been adopted by the Board
which provides for maintenance of the investment portfolio for the purpose of
providing earnings and ensuring a minimum liquidity reserve. In accordance with
the investment policy, management has primarily invested in U.S. Treasury
securities backed by the full faith and credit of the United States and
government agency securities, mortgage-backed securities issued by FHLMC, FNMA,
or GNMA, federal funds sold, and federally insured interest-bearing deposits in
other financial institutions. General obligation and bank qualified bonds of
municipalities within the market areas served by the Bank and which are
considered to possess acceptable credit and limited default risk are also
considered for investment.

     The Board of Directors of the Bank has authorized the existence of a
trading account in an amount not to exceed 8% of total assets for the purpose of
taking advantage of favorable short-term market conditions. The Bank's
investment policy specifies that securities traded within this account must be
U.S. Treasury or agency obligations. Securities in the trading account are
marked to market on a monthly basis. During the year ended June 30, 1997, there
was no trading activity. At June 30, 1997, there were no securities held in the
Bank's trading account.

     The Board of Directors of the Company has authorized the existence of a
trading account in an amount not to exceed $1.0 million for purpose of investing
in common stocks of publicly traded thrifts which are considered to be
undervalued. The Company had $796,000 invested in common stock of publicly held
thrift institutions at June 30, 1997.

                                       15
<PAGE>
 
     The Bank, in accordance with generally accepted accounting principles,
reports its investment securities, available for sale, at current market value,
with unrealized gains or losses, net of tax effect, adjusted through equity and
realized gains or losses in income when securities are sold. Investment
securities, held to maturity, are reported at cost as adjusted for unaccreted
discounts and unamortized premiums. For more information, see Note 1 of Notes to
Consolidated Financial Statements.

     The following table sets forth the carrying value of the Bank's investment
securities and interest-bearing deposits at the dates indicated.
<TABLE>
<CAPTION>
                                                             At June 30,
                                                       ---------------------
                                                        1997          1996
                                                       ------        -------
                                                         (In thousands)
<S>                                                   <C>          <C> 
Investment securities, available for sale:
 U.S. Treasury and Federal Agency obligations....      $17,533       $13,160
                                                       -------       -------
                                                               
Total investment securities, available for sale..      $17,533       $13,160
                                                       -------       -------
Investment securities, held to maturity:                       
 U.S. Treasury and Federal Agency obligations....      $ 9,515       $ 8,509
 Municipal.......................................           10            13
 FHLB of Cincinnati capital stock................        1,169         1,090
                                                       -------       -------
Total investment securities, held to maturity....      $10,694       $ 9,612
                                                       -------       -------
Total investment securities, available for                     
 sale and held to maturity.......................      $28,227       $22,772
                                                               
Federal funds sold...............................          100           200
Interest-bearing deposits........................          988         1,653
                                                       -------       -------
                                                               
  Total..........................................      $29,315       $24,625
                                                       =======       =======
</TABLE>

                                       16
<PAGE>
 
     The following table sets forth the scheduled maturities, amortized cost,
average yields, carrying values and market values for the Bank's investment
securities, excluding FHLB of Cincinnati capital stock at June 30, 1997.
<TABLE>
<CAPTION>

                                                                        At June 30, 1997
                             ------------------------------------------------------------------------------------
                               One Year or Less    One to Five Years    Five to Ten Years     More than Ten Years
                             -------------------  -------------------   -------------------   -------------------
                             Amortized   Average  Amortized   Average   Amortized   Average   Amortized  Average
                                Cost      Yield      Cost      Yield       Cost      Yield       Cost     Yield
                             ---------   -------  ---------   -------   ---------   -------   ---------- --------
                                                              (Dollars in thousands)
Investment securities,
 available for sale:
   U.S. Treasury and
    Federal
    Agency obligations.....       $593     6.96%    $10,475     6.35%    $ 5,480     7.02%     $  996     7.80%      
                                 -----              -------              -------               ------ 
     Total investment                                                                                                
      securities,                                                                                                    
      available for sale...        593     6.96      10,475     6.35       5,480     7.02         996     7.80       
                                 -----              -------              -------               ------                  
Investment securities,                                                                                               
 held to maturity:                                                                                                   
   U.S. Treasury and                                                                                                 
    Federal                                                                                                          
    Agency obligations.....         --       --       3,502     6.37       5,503     6.83         500     7.91       
   Municipal (1)...........         --       --          10    13.64          --       --          --       --       
                                 -----              -------              -------               ------  
     Total investment                                                                                                
      securities,                                                                                                    
      held to maturity.....         --       --       3,512     6.37       5,503     6.83         500     7.91       
                                 -----              -------              -------               ------  
     Total investment                                                                                                
      securities,                                                                                                    
      available for sale                                                                                             
       and                                                                                                           
      held to maturity.....       $593     6.96%    $13,987     6.36%    $10,983     6.92%     $1,496     7.84%      
                                 =====              =======              =======               ======  

<CAPTION> 
                                  Total Investment Portfolio
                            ------------------------------------
                            Amortized Carrying  Market   Average
                              Cost     Value     Value    Yield
                            --------- --------  ------   -------
<S>                         <C>       <C>       <C>      <C> 
Investment securities,       
 available for sale:         
   U.S. Treasury and         
    Federal                  
    Agency obligations.....  $17,544   $17,533  $17,533     6.66%
                             -------   -------  ------- 
     Total investment        
      securities,            
      available for sale...   17,544    17,533   17,533     6.66
                             -------   -------  ------- 
                             
Investment securities,       
 held to maturity:           
   U.S. Treasury and         
    Federal                  
    Agency obligations.....    9,505     9,505    9,397     6.72
   Municipal (1)...........       10        10       10    13.64
                             -------   -------  ------- 
     Total investment        
      securities,            
      held to maturity.....    9,515     9,515    9,407     6.72
                             -------   -------  ------- 
     Total investment        
      securities,            
      available for sale     
       and                   
      held to maturity.....  $27,059   $27,048  $26,940     6.68%
                             =======   =======  ======= 
</TABLE> 
--------------------
(1)  The average yield on the municipal has been computed on a tax equivalent
basis using an effective tax rate of 34%.

                                       17
<PAGE>
 
MORTGAGE-BACKED SECURITIES ACTIVITIES

     In accordance with Home Federal's investment policy, management invests in
mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA") and the Government
National Mortgage Association ("GNMA"). Purchases of mortgage-backed securities
during the years ended June 30, 1997 and 1996 were $1.5 million and $2.0
million, respectively.

     The Bank, in accordance with generally accepted accounting principles,
reports its mortgage-backed securities, available for sale, at current market
value, with unrealized gains or losses, net of tax effect, adjusted through
equity and realized gains or losses in income when securities are sold. 
Mortgage-backed securities, held to maturity, are reported at cost as adjusted
for unaccreted discounts and unamortized premiums. For more information, see
Notes 1 of Notes to Consolidated Financial Statements.

     The following table sets forth the composition of the Bank's mortgage-
backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
 
                                                                  At June 30,
                                                   -------------------------------------
                                                            1997               1996
                                                   -------------------    ---------------
                                                     Amount        %      Amount      %
                                                   ---------      ---    --------    ---
                                                           (Dollars in thousands)
<S>                                                <C>          <C>        <C>      <C>
Mortgage-backed securities, available for sale:                         
  FHLMC..........................................     $   368     2.08%   $   435    2.29%
  FNMA...........................................       6,102    33.40      5,949   31.33
  GNMA...........................................       1,110     6.07      1,293    6.81
                                                      -------   ------    -------  ------
Total mortgage-backed securities                                        
  available for sale.............................     $ 7,580    41.48    $ 7,677   40.43
                                                      -------   ------    -------  ------
Mortgage-backed securities, held to maturity:                           
  FHLMC..........................................     $   247     1.35    $   424    2.23
  FNMA...........................................      10,442    57.15     10,885   57.32
  GNMA...........................................           3      .02          4     .02
                                                      -------   ------    -------  ------
Total mortgage-backed securities,                                       
  held to maturity...............................     $10,692    58.52    $11,313   59.57 
                                                      -------   ------    -------  ------
                                                                        
Total mortgage-backed securities, available                             
  for sale and held to maturity..................     $18,272   100.00%   $18,990  100.00%
                                                      =======   ======    =======  ======
</TABLE>

                                       18
<PAGE>
 
     The following table sets forth the scheduled maturities, amortized cost,
weighted average yields, carrying values and market values for the Bank's
mortgage-backed securities at June 30, 1997. Scheduled maturities will differ
from contractual maturities due to repayments and because borrowers may have the
right to call or prepay obligations with or without prepayment penalties. The
following table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.

<TABLE>
<CAPTION>
                                                                     AT JUNE 30, 1997
                            ------------------------------------------------------------------------------------------------------
                                                                                                             Total Mortgage
                            One Year of Less  One to Five Years Five to Ten Years More than Ten Years  Backed Securities Portfolio
                            ----------------  ----------------- ----------------- -------------------  ---------------------------
                            Amortized Average Amortized Average Amortized Average Amortized Average    Amortized Market Average
                               Cost    Yield     Cost    Yield     Cost    Yield     Cost    Yield        Cost    Value  Yield
                              -----    -----     ----    -----     ----    -----     ----    -----        ----    -----  -----
<S>                         <C>        <C>    <C>      <C>      <C>       <C>        <C>     <C>        <C>       <C>    <C> 
Mortgage-backed securities,        
 available for sale:
 FHLMC.....................  $    --    --%   $   --      --%   $  372     5.99%     $   --        --%  $   372  $   368  5.99%
 FNMA......................       --    --     2,175    5.85       491     5.98       3,422      6.68     6,088    6,102  6.33
 GNMA......................       --    --        --      --        --       --       1,097      6.79     1,097    1,110  6.79
                             -------          ------            ------                ------             -------  -------
  Total mortgage-backed                                                                       
   securities, available                                                                      
   for sale................       --    --     2,175    5.85       863     5.99       4,519      6.71     7,557    7,580  6.38
                                                                                              
Mortgage-backed securities,                                                                   
 held to maturity:                                                                            
 FHLMC.....................  $    --    --%   $   --      --%   $   --      -- %     $  247      6.41%  $   247  $   244  6.41%
 FNMA......................       --    --     5,564    6.08       430     6.87       4,448      6.26    10,442   10,364  6.17
 GNMA......................       --    --         3    7.39        --       --          --                   3        3  7.39
                             -------          ------            ------               ------             -------  -------
  Total mortgage-backed                                                                       
   securities, held to                                                                        
   maturity................  $    --    - %   $5,567    6.09%   $  430     6.87%     $4,695      6.23%  $10,692  $10,611  6.18%
                             -------          ------            ------               ------             -------  -------
                                                                                              
  Total mortgage-backed                                                                       
   securities, available                                                                      
    for                                                                                       
   sale and held to                                                                           
    maturity...............  $    --    --%   $7,742    6.02%   $1,293     6.28%     $9,214      6.47%  $18,249  $18,191  6.26%
                             =======          ======            ======               ======             =======  =======

</TABLE> 

                                       19
<PAGE>
 
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS

     GENERAL. Deposits are a significant source of the Bank's funds for lending
and other investment purposes. In addition to deposits, Home Federal derives
funds from loan principal repayments and interest payments and maturing
investment securities. Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources, or on a longer term basis for general business
purposes.

     DEPOSITS. Deposits are attracted principally from within the Bank's primary
market area through the offering of a variety of deposit instruments, including
passbook and statement accounts and certificates of deposit. Deposit account
terms vary, principally on the basis of the minimum balance required, the time
periods the funds must remain on deposit and the interest rate. The Bank also
offers individual retirement accounts ("IRAs") and Keogh Plans.

     The Bank's policies are designed primarily to attract deposits from local
residents through its branch network rather than to solicit deposits from areas
outside its primary market. The Bank does not accept deposits from brokers due
to the volatility and rate sensitivity of such deposits. Interest rates paid,
maturity terms, service fees and withdrawal penalties are established by the
Bank on a periodic basis. Determination of rates and terms are predicated upon
funds acquisition and liquidity requirements, rates paid by competitors, growth
goals and federal regulations.

     The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
 
                                         Balance at              Balance at
                               June 30,     % of      Increase    June 30,    % of
                                 1997     Deposits   (Decrease)     1996    Deposits
                              ----------  ---------  -----------  --------  ---------
                                              (Dollars in thousands)
<S>                           <C>         <C>        <C>          <C>       <C>
NOW checking accounts.......    $  9,938      7.46%     $   909   $  9,029      7.12%
Super NOW accounts..........         650       .49         (149)       799       .63
Passbook accounts...........       9,443      7.09       (1,239)    10,682      8.43
Money market plus accounts..         605       .46           (4)       609       .48
3-6 month certificates......       9,035      6.78         (526)     9,561      7.54
12 month certificates.......      18,092     13.58         (823)    18,915     14.92
18-48 months certificates...      77,073     57.86        8,463     68,610     54.14
60-96 month certificates....       8,367      6.28         (170)     8,537      6.74
                                --------    ------      -------   --------    ------
    Total...................    $133,203    100.00%     $ 6,461   $126,742    100.00%
                                ========    ======      =======   ========    ======
 
</TABLE>

                                       20
<PAGE>
 
     The following table sets forth the average balances and interest rates for
the Bank's deposit accounts by type of deposit for the periods indicated.
<TABLE>
<CAPTION>
 
                                      Year Ended June 30,
                             --------------------------------------
                                    1997                1996
                                  --------            --------
                             Average   Average   Average   Average
                             Balance     Rate    Balance     Rate
                             --------  --------  --------  --------
                                      (Dollars in thousands)
<S>                          <C>       <C>       <C>       <C>
NOW and money market
 deposit accounts..........  $ 11,666     2.14%  $ 10,437     2.20%
Passbook accounts..........     9,868     2.71     11,522     2.71
Certificates...............   110,440     5.33     96,632     5.57
                             --------            --------
  Total....................  $131,974     4.85   $118,591     4.99
                             ========            ========
 
</TABLE>
     The following table sets forth the time deposits in the Bank classified by
rates as of the dates indicated.

<TABLE>
<CAPTION>


                                  At June 30,
                             --------------------
                               1997       1996
                             ---------  ----------
                               (In thousands)
 
            <S>              <C>       <C>
            3.01 -  4.00%..  $  3,093  $  6,033
            4.01 -  5.00%..    38,099    28,073
            5.01 -  6.00%..    63,948    54,149
            6.01 -  7.00%..     6,962    17,101
            7.01 -  8.00%..       465       267
                             --------  --------
               Total.......  $112,567  $105,623
                             ========  ========
 
</TABLE>
     The following table sets forth the amount and maturities of certificates at
June 30, 1997.


<TABLE>
<CAPTION>
 
                                          Amount Due
                      -------------------------------------------------
                      One Year                         After
Rate                   or Less  1-2 Years  2-3 Years  3 Years   Total
--------------------  --------  ---------  ---------  -------  --------
<S>                   <C>       <C>        <C>        <C>      <C>
    (In thousands)
 
3.01 -  4.00%.......   $ 3,093    $    --     $   --   $   --  $  3,093
4.01 -  5.00%.......    26,660     11,439         --       --    38,099
5.01 -  6.00%.......    38,210     20,661      3,025    2,052    63,948
6.01 -  7.00%.......     4,251      1,133      1,055      523     6,962
7.01 -  8.00%.......       260         12        181       12       465
                       -------    -------     ------   ------  --------
 Total..............   $72,474    $33,245     $4,261   $2,587  $112,567
                       =======    =======     ======   ======  ========
</TABLE>

                                       21
<PAGE>
 
     The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1997.  Most of the Bank's deposits of over $100,000 come from individual
depositors in the Bank's market area.
<TABLE>
<CAPTION>
                                         Certificates
          Maturity Period                 of Deposit
          ---------------------------     ----------
                                       (In thousands)
          <S>                          <C> 
          Three months or less.......     $ 6,830
          Three through six months...       3,664
          Six through twelve months..       8,983
          Over twelve months.........      10,214
                                          -------
                   Total.............     $29,691
                                          =======
 
</TABLE>

     Management attributes the net increase in deposits for the year ended June
30, 1997 to general economic conditions and competition in the local market. The
Bank does not offer premiums for deposits, and in the past has not offered
interest rates on deposits which exceed the average rates paid by other
financial institutions in its market area. Due to aggressive competition, the
Bank has recently instituted promotions offering higher rates on deposits to
maintain its market share. Management anticipates that this trend will continue
over the next twelve months.

     BORROWINGS. Savings deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. In February 1991, the Bank borrowed $1,000,000
from the FHLB of Cincinnati. The advance, which bears interest at a fixed-rate
of 8.05%, is payable in monthly installments of principal and interest totaling
$9,585. The advance is for a term of 15 years, with the final payment due in
January 2006. From time to time, the Bank uses short-term advances as a source
of funding. In 1997 and 1996, the Company had available a 90-day revolving line
of credit up to a maximum of $10,000,000 and $7,500,000. The line of credit
bears interest at a daily variable rate which is set by the Federal Home Loan
Bank. At June 30, 1997, the Company had drawn $7,500,000 on the line of credit.
The highest amount drawn against the line during fiscal 1997 was $7,500,000
which occurred in June 1997. The weighted average balance outstanding during
fiscal 1997 was $2,821,000 at a weighted average rate of 5.71%. At June 30,
1996, the Company had short-term FHLB advances of $1,875,000, which matured on
October 5, 1996 and had a fixed rate of 4.45%. All of the advances are
collateralized by FHLB stock and single family first mortgage loans with
aggregate principal balances totaling 150% of the outstanding amount of
advances.

     The FHLB of Cincinnati functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions. As a
member, Home Federal is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met.

SUBSIDIARY ACTIVITIES

     As a federally chartered savings bank, Home Federal is permitted to invest
an amount equal to 2% of its assets in subsidiaries with an additional
investment of 1% of assets where such investment serves primarily community,
inner-city, and community development purposes. Under such limitations, as of
June 30, 1997 Home Federal was authorized to invest up to approximately $4.7
million in the stock of or loans to subsidiaries including the additional 1%
investment for community inner-city and community development purposes.
Institutions meeting regulatory capital requirements, which Home Federal
currently does, may invest up to 50% of their regulatory capital in conforming
first mortgage loans to subsidiaries in which they own 10% or more of the
capital stock.

                                       22
<PAGE>
 
     The Bank's only subsidiary is Home Service Corporation in which its
investment was $1.8 million at June 30, 1997. Home Service Corporation's
principal activity is that of ownership and rental of Home Federal's Main Office
Building in Middlesboro, Kentucky and a branch office in New Tazewell,
Tennessee. Home Service Corporation also owns and rents two other properties to
unrelated parties. These properties are contiguous to Home Federal's main office
and being held for future expansion. During 1995, Home Service Corporation
purchased land for the Bank's New Tazewell office at a cost of $167,000. The
branch office building was completed in October 1995 at a total cost of
$462,000. Also in 1995, property located in Lafollette, Tennessee was purchased
for future expansion. The purchase price was $196,000.

     FIRREA requires SAIF-insured savings institutions to give the FDIC and the
Director of the OTS 30 days' prior notice before establishing or acquiring a new
subsidiary, or commencing any new activity through an existing subsidiary. Both
the FDIC and the Director of the OTS have authority to order termination of
subsidiary activities determined to pose a risk to the safety or soundness of
the institution. In addition, capital requirements require savings institutions
to deduct the amount of their investments in and extensions of credit to
subsidiaries engaged in activities not permissible to national banks from
capital in determining regulatory capital compliance. The activities of Home
Service Corporation are permissible for national banks. See "Regulation --
Regulatory Capital Requirements."

COMPETITION

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

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

     Home Federal's primary competition comprises the commercial banks near each
of the Bank's branch offices. In Middlesboro, where the Bank's main office is
located, primary competition consists of two banks and one savings bank. In
Harlan, Kentucky where a branch office is located, the Bank's primary
competition is two banks. In New Tazewell, Tennessee, where a branch office is
located, the Bank's primary competition is three banks.

     Home Federal is able to compete effectively in its primary market area by
offering competitive interest rates and loan fees, and a wide variety of deposit
products, and by emphasizing personal customer service. Management believes
that, as a result of the Bank's commitment to competitive pricing, varied
products and personal service, the Bank has developed a solid base of core
deposits and the Bank's loan origination quality and volume are among the
leaders in the Bank's market area.

EMPLOYEES

     As of June 30, 1997, Home Federal and its subsidiary had 47 full-time
employees, none of whom was represented by a collective bargaining agreement.
Home Federal believes that it enjoys excellent relations with its personnel.

                                       23
<PAGE>
 
                                 REGULATION

REGULATION OF THE BANK

     GENERAL. As a savings association, Home Federal is subject to extensive
regulation by the OTS. The lending activities and other investments of the Bank
must comply with various federal regulatory requirements. The OTS will
periodically examine the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct examinations of SAIF
members. The Bank must file reports with OTS describing its activities and
financial condition. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these regulatory
requirements are referred to below or appear elsewhere herein.

     REGULATORY CAPITAL REQUIREMENTS. Under OTS regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and "total"
capital (a combination of core and "supplementary" capital) equal to 8.0% of
"risk-weighted" assets. In addition, the OTS has recently adopted regulations
which impose certain restrictions on savings institutions that have a total 
risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted
total assets of less than 4.0% (or 3.0% if the institution is rated composite 1
under the OTS examination rating system). For purposes of these regulations,
Tier 1 capital has the same definitions as core capital. See "-- Prompt
Corrective Regulatory Action." Core capital is defined as common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, minority interests in the equity accounts of fully
consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits
and "qualifying supervisory goodwill."

     Qualifying supervisory goodwill is defined generally as goodwill resulting
from the acquisition, merger, consolidation, purchase of assets or other
business combination (if such transaction occurred on or before April 12, 1989)
with or of: (i) a savings association the fair market value of the assets of
which were less than the fair market value of its liabilities at the date of
acquisition; (ii) a problem institution which includes savings associations that
failed to meet their regulatory capital requirements or otherwise posed
supervisory concerns; or (iii) a savings association which was subject to
regulatory controls. Qualifying supervisory goodwill must be amortized on a
straight-line basis over the shorter of 20 years or the amortization period
previously in effect. Only eligible savings associations are permitted to
include qualifying supervisory goodwill in their capital calculations. An
eligible savings association is an association determined by the Director of OTS
to have competent management, to be in substantial compliance, as certified by
its board of directors, with all applicable statutes, regulations, orders, and
written agreements and directives, and to have management that has not engaged
in insider dealing, speculative practices or other activities that have
jeopardized or may jeopardize the savings association's safety capital. Unless
otherwise determined or notified by the Director of OTS, savings associations
will be deemed to be eligible savings associations for purposes of including
qualifying supervisory goodwill in core capital.

     Tangible capital is given the same definition as core capital but does not
include qualifying supervisory goodwill and is reduced by the amount of all the
savings association's intangible assets with only a limited exception for
purchased mortgage servicing rights and purchased credit card relationships.
Both core and tangible capital are further reduced by an amount equal to savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible to national banks other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities and
subsidiary depository institutions or their holding companies. As of June 30,
1997, the Bank had no investments in or extensions of credit to subsidiaries
engaged in activities not permitted to national banks.

     "Adjusted total assets" are a savings association's total assets as
determined under generally accepted accounting principles, increased by certain
goodwill amounts and by a pro-rated portion of the assets of subsidiaries in
which the savings association holds a minority interest and which are not
engaged in activities for which the capital rules 

                                       24
<PAGE>
 
require the savings association to net its debt and equity investments in such
subsidiaries against capital, as well as a pro-rated portion of the assets of
other subsidiaries for which deduction is not fully required under phase-in
rules. Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the portion of savings association's investments in
subsidiaries that must be deducted from capital under the capital rules and, for
purposes of the core capital requirement, qualifying supervisory goodwill.

     In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and, after July 1, 1990, by an increasing percentage of
the savings association's high loan-to-value ratio land loans and nonresidential
construction loans, and certain equity investments not permitted to national
banks and not otherwise deducted from core and tangible capital.

     The risk-based capital requirement is measured against risk-weighted
assets, which equals the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, one- to four-family first mortgages not
more than 90 days past due with loan-to-value ratios under 80% are assigned a
risk weight of 50%. Consumer and residential construction loans are assigned a
risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as
to principal and interest, by the FHLMC are assigned a 20% risk weight. Cash and
U.S. Government securities backed by the full faith and credit of the U.S.
Government are given a 0% risk weight.

                                       25
<PAGE>
 
     The following table reconciles the Bank's retained earnings as reported in
its consolidated Balance Sheet at June 30, 1997, to its tangible, core and total
regulatory capital at that date.
<TABLE>
<CAPTION>
 
                                                Regulatory  Regulatory
                                                  Amount    Requirement  Capital Excess
                                                ----------  -----------  --------------
                                                             (In thousands)
<S>                                             <C>         <C>          <C>
Stockholders' equity as reported in
  financial statements (Bank only)............  $15,455
                                               
Less:                                          
 Deductible intangible assets.................       --
 Investment in and advances to nonincludable   
   subsidiaries required to be deducted.......       --
                                               --------
Tangible capital..............................  $15,455       $2,377     $13,078
                                                                         
Add:                                                                     
  Qualifying supervisory goodwill.............       --                  
                                               --------                  
Core capital..................................  $15,455       $4,754     $10,701
 
Add:
  General valuation allowances................      414
 
Less:
  Assets required to be deducted..............       --
                                               --------
 
Total risk-based capital......................  $15,869       $6,148     $ 9,721
                                                =======       ======     =======
</TABLE>

     As the preceding table demonstrates, at June 30, 1997 Home Federal exceeded
its tangible, core and risk-based regulatory capital requirements. For more
information, see "Selected Consolidated Financial and Other Data -- Regulatory
Capital Ratios" in the Annual Report attached as Exhibit 13 hereto.

     The Director of OTS must restrict the asset growth of savings associations
not in regulatory capital compliance, subject to a limited exception for growth
not exceeding interest credited. In addition, savings associations not in full
compliance with capital standards then applicable would be subject to a capital
directive which may include such restrictions, including restrictions on the
payment of dividends and on compensation, as deemed appropriate by the Director
of OTS. Institutions not in capital compliance must, within 60 days thereafter,
submit a capital plan to the OTS District Director for approval explaining in
detail its proposed strategies for raising capital and for accomplishing its
overall objective, and the institution may concurrently apply for an exemption
from a capital directive. The Director of OTS is directed to treat as an unsafe
and unsound practice any material failure by a savings association to comply
with a capital plan or capital directive. The sanctions and penalties that could
be imposed range from restrictions on branching or on the activities of the
institution, to restrictions on the ability to obtain FHLB advances, to
termination of insurance of accounts following appropriate proceedings, to the
appointment of a conservator or receiver. A savings association not in full
compliance with the capital standards may apply for a limited exemption from
sanctions. If the exemption is granted, the savings association would still
remain subject to restrictions on growth.

     OTS staff policies specify that savings associations failing any one of
their minimum regulatory capital requirements may not increase their total
assets during any quarter in excess of an amount equal to net interest credited
during the quarter. Under these policies, associations that have submitted
capital plans that are rejected by the District Director or that have had
capital plans approved but do not meet the targets or requirements of the
capital plan may not make any new loans or investments except with the prior
written approval of the District Director. Such approval will 

                                       26
<PAGE>
 
only be granted when the proposed loan or investment is reasonable in the
context of the association's operations and does not significantly increase the
risk profile of the savings association.

     In addition to requiring generally applicable capital standards for savings
associations, FIRREA authorizes the Director of OTS to establish the minimum
level of capital for a savings association at such amount or at such ratio of
capital-to-assets as the Director determines to be necessary or appropriate for
such association in light of the particular circumstances of the association.
The Director of OTS may treat the failure of any savings association to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any savings association which fails to maintain capital at
or above the minimum level required by the Director to submit and adhere to a
plan for increasing capital. Such an order may be enforced in the same manner as
an order issued by the FDIC.

     The capital standards for savings associations must be no less stringent
than the capital standards applicable to national banks. Regulations of the
Office of the Comptroller of the Currency ("OCC") require a core capital ratio
of 3% for the most highly rated national banks, with an additional 100 to 200
basis point "cushion" amount of additional capital required on a case-by-case
basis, considering the quality of risk management systems and the overall risk
in individual banks. The OTS has proposed an amendment to its capital
regulations establishing a minimum core capital ratio of 3% for savings
associations rated composite 1 under the OTS CAMEL rating system. For all other
savings associations, the minimum core capital ratio will be 3% plus at least an
additional 100 to 200 points. In determining the amount of additional core
capital, the OTS will assess both the quality of risk management systems and the
level of overall risk in each individual savings association through the
supervisory process on a case-by-case basis.

     The OTS requires savings institutions with more than a "normal" level of
interest rate risk to maintain additional total capital. A savings institution's
interest rate risk is measured in terms of the sensitivity of its "net portfolio
value" to changes in interest rates. Net portfolio value is defined, generally,
as the present value of expected cash inflows from existing assets and off-
balance sheet contracts less the present value of expected cash outflows from
existing liabilities. A savings institution is considered to have a "normal"
level of interest rate risk exposure if the decline in its net portfolio value
after an immediate 200 basis point increase or decrease in market interest rates
(whichever results in the greater decline) is less than two percent of the
current estimated economic value of its assets. A savings institution with a
greater than normal interest rate risk is required to deduct from total capital,
for purposes of calculating its risk-based capital requirement, an amount (the
"interest rate risk component") equal to one-half the difference between the
institution's measured interest rate risk and the normal level of interest rate
risk, multiplied by the economic value of its total assets.

     The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. The Bank has
determined that, on the basis of current financial data, it would not be deemed
to have more than normal level of interest rate risk under the new rule and
believes that it will not be required to increase its total capital as a result
of the rule.

     PROMPT CORRECTIVE REGULATORY ACTION. FDICIA requires the federal banking
regulators to take prompt corrective action if an institution fails to satisfy
certain minimum capital requirements. Under FDICIA, capital requirements include
a leverage limit, a risk-based capital requirement, and any other measure deemed
appropriate by the federal banking regulators for measuring the capital adequacy
of an insured depository institution. All institutions, regardless of their
capital levels, are restricted from making any capital distribution or paying
any management fees that would cause the institution to become undercapitalized.
An institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") generally is: (i) subject to
increased monitoring by the appropriate federal banking regulator; (ii) required
to submit an acceptable capital restoration plan within 45 days; (iii) subject
to asset growth limits; and (iv) required to obtain prior regulatory approval
for acquisitions, branching and new lines of business. A significantly
undercapitalized institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader 

                                       27
<PAGE>
 
application of restrictions on transactions with affiliates, limitations on
interest rates paid on deposits, asset growth and other activities and possible
replacement of directors and officers. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt, with certain
exceptions. If an institution's ratio of tangible capital to total assets falls
below a level established by the appropriate federal banking regulator, which
may not be less than 2.0% of total assets nor more than 65% of the minimum
tangible capital level otherwise required (the "critical capital level"), the
institution will be subject to conservatorship or receivership within 90 days
unless periodic determinations are made that forbearance from such action would
better protect the deposit insurance fund. Unless appropriate findings and
certifications are made by the appropriate federal bank regulatory agencies, a
critically undercapitalized institution must be placed in receivership if it
remains critically undercapitalized on average during the calendar quarter
beginning 270 days after the date it became critically undercapitalized.

     The OTS measures a savings institution's capital adequacy on the basis of
its total risk-based capital ratio (the ratio of its total capital to risk-
weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital
to risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). A savings institution that is not subject to an order or
written directive to meet or maintain a specific capital level will be deemed
"well-capitalized" if it also has: (i) a total risk-based capital ratio of 10%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a leverage ratio of 5.0% or greater. An "adequately capitalized" savings
institution is a savings institution that does not meet the definition of well-
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a
composite 1 CAMEL rating). An "undercapitalized institution" is a savings
institution that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMEL
rating). A "significantly undercapitalized" institution is defined as a savings
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of core capital to total
assets of less than 2.0%. The OTS may reclassify a well capitalized savings
institution as adequately capitalized and may require an adequately capitalized
or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category if the OTS
determines, after notice and an opportunity for a hearing, that the savings
institution is in an unsafe or unsound condition or that the institution has
received and not corrected a less-than-satisfactory rating for any CAMEL rating
category. The Bank is classified as "well-capitalized" under these regulations.

     QUALIFIED THRIFT LENDER TEST. A savings association that does not meet the
Qualified Thrift Lender test ("QTL Test") must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the institution ceases to be a
Qualified Thrift Lender, it must cease any activity, and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).

     To meet the QTL test, an institution's "Qualified Thrift Investments" must
total at least 65% of "portfolio assets." Portfolio assets are defined as total
assets less intangibles, property used by a savings institution in its business
and liquidity investments in an amount not exceeding 20% of assets. OTS
regulations define Qualified Thrift Investments to include, among other things,
loans that were made to purchase, refinance, construct, improve or repair
domestic residential housing, home equity loans, mortgage-backed securities,
FHLB, FHLMC or FNMA stock and, subject to a 5% of assets limitation, loans for
personal, family, household or education purposes. Qualified Thrift Investments
do not include any intangible asset. Subject to a 20% of portfolio assets limit,
savings associations are able to treat as Qualified Thrift Investments 200% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses 

                                       28
<PAGE>
 
in "credit-needy" areas. In order to maintain QTL status, the savings
institution must maintain a weekly average percentage of Qualified Thrift
Investments to portfolio assets equal to 65% on a monthly average basis in nine
out of 12 months. A savings institution that fails to maintain QTL status is
permitted to requalify once, and if it fails the QTL test a second time, it will
become immediately subject to all penalties as if all time limits on such
penalties had expired.

     At June 30, 1997, Home Federal had in excess of 81.04% of assets invested
in Qualified Thrift Investments as then defined which were substantially in
excess of the percentage required to qualify the Bank as a Qualified Thrift
Lender. It is expected that the Bank will continue to qualify as a Qualified
Thrift Lender, although there can be no assurance that it will do so.

     DIVIDEND LIMITATIONS. Under OTS regulations, the Bank may not pay dividends
on its capital stock if its regulatory capital would thereby be reduced below
the amount then required for the liquidation account established for the benefit
of certain depositors of the Bank at the time of its conversion to stock form.
In addition, savings association subsidiaries of savings and loan holding
companies are required to give the OTS 30 days prior notice of any proposed
declaration of dividends to the holding company.

     Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Bank. Under these regulations, a savings institution that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Association") is generally permitted without OTS
approval to make capital distributions during a calendar year in an amount equal
to the greater of (i) 75% of net income for the previous four quarters or (ii)
up to 100% of its net income to date during the calendar year plus an amount
that would reduce by one-half the amount by which its total capital to assets
ratio exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings association with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted to make capital
distributions without OTS approval of up to 75% of its net income for the
previous four quarters, less dividends already paid for such period depending on
the savings association's level of risk-based capital. A savings association
that fails to meet current minimum capital requirements (a "Tier 3 Association")
is prohibited from making any capital distributions without the prior approval
of the OTS. Tier 1 Associations that have been notified by the OTS that they are
in need of more than normal supervision will be treated as either a Tier 2 or
Tier 3 Association. At June 30, 1997, the Bank was a Tier 1 Association.

     The Bank is prohibited from making any capital distributions if after
making the distribution, it would be undercapitalized as defined in the OTS'
prompt corrective action regulations. After consultation with the FDIC, the OTS
may permit a savings association to repurchase, redeem, retire or otherwise
acquire shares or ownership interests if the repurchase, redemption, retirement
or other acquisition: (i) is made in connection with the issuance of additional
shares or other obligations of the institution in at least an equivalent amount;
and (ii) will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.

     In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation."

     LIMITS ON LOANS TO ONE BORROWER. The Home Owners' Loan Act ("HOLA"), as
amended by FIRREA, provides that the loans-to-one-borrower limits applicable to
national banks apply to savings associations in the same manner and to the same
extent. Previously, the Bank was generally authorized to make loans to one
borrower, including related entities, in an amount equal to the lesser of 10.0%
of deposits or 100% of regulatory capital. Under the new limits, with certain
limited exceptions, loans and extensions of credit to a person outstanding at
one time generally shall not exceed 15.0% of the unimpaired capital and surplus
of the savings association. Loans and extensions of credit fully 

                                       29
<PAGE>
 
secured by readily marketable collateral may comprise an additional 10.0% of
unimpaired capital and surplus. HOLA additionally authorizes savings
associations to make loans to one borrower, for any purpose, in an amount not to
exceed $500,000 or, by order of the Director of OTS, in an amount not to exceed
the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided: (i) the purchase price of each single-family
dwelling in the development does not exceed $500,000; (ii) the savings
association is in compliance with its fully phased-in capital requirements;
(iii) the loans comply with applicable loan-to-value requirements; and (iv) the
aggregate amount of loans made under this authority does not exceed 150% of
unimpaired capital and surplus.

     The OTS has taken the position that the new loans-to-one-borrower limits do
not apply to loans and legally binding commitments outstanding as of the date of
enactment of FIRREA. However, the aggregate principal balance of loans which
exceeded the permissible limits on the effective date cannot be increased and
the institution must use its best efforts to reduce its interest therein in
order to bring such loans into compliance with the new standard. The loans-to-
one-borrower limits generally do not apply to purchase money mortgage notes
taken from the purchaser of real property acquired by the association in
satisfaction of debts previously contracted if no new funds are advanced to the
borrower and the savings institution is not placed in a more detrimental
position as a result of the sale. Management believes that the loans-to-one-
borrower limits imposed by FIRREA have not had a significant impact on the
operations of the Bank. As of June 30, 1997, loans-to-one borrower limit was
$2.3 million. As of that date, Home Federal's five largest loans outstanding to
one borrower ranged from $571,000 to $1.5 million.

     DEPOSIT INSURANCE. The Bank is required to pay assessments, based on a
percentage of its insured deposits, to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits, or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.

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

     For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the recently-enacted
Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on institutions with SAIF-assessable deposits, based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995. As a result of the
special assessment the Bank incurred a pre-tax expense of $706,000, during the
fiscal year ended June 30, 1997.

     The FDIC has proposed a rule that would lower the regular semi-annual SAIF
assessment rates by establishing a base assessment rate schedule ranging from 4
to 31 basis points effective October 1, 1996. The rule widens the range

                                       30
<PAGE>
 
between the lowest and highest assessment rates among healthy and troubled
institutions with the intent of creating an incentive for savings institutions
to control risk-taking behavior. The rule also prevents the FDIC from collecting
more funds than needed to maintain the SAIF's capitalization at 1.25% of insured
deposits. Until December 31, 1999, however, SAIF-insured institutions will be
required to pay assessments to the FDIC at the rate of 6.44 basis points to help
fund interest payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to finance takeovers
of insolvent thrifts. During this period, BIF members will be assessed for these
obligations at the rate of 1.3 basis points. After December 31, 1999, both BIF
and SAIF members will be assessed at the same rate for FICO payments.

     The Bank is prohibited under current federal law from converting from SAIF
to BIF insurance. Under federal statute, the prohibition on conversion from SAIF
to BIF insurance will continue until such time as the SAIF's ratio of reserves
to insured deposits (the "reserve ratio") equals 1.25%. Based on projections
published by the FDIC, absent a special assessment, the SAIF reserve ratio is
not expected to reach 1.25% for a number of years. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to SAIF equal to 0.90% of the deposits transferred and an entrance fee to
BIF based on the current reserve ratio of the BIF. A savings institution is not
prohibited from adopting a commercial bank or savings bank charter if the
resulting bank remains a SAIF member.

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

     TRANSACTIONS WITH AFFILIATES. Transactions between savings associations and
any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act.
An affiliate of a savings association is any company or entity which controls,
is controlled by or is under common control with the savings association. In a
holding company context, the parent holding company of a savings association
(such as the Company) and any companies which are controlled by such parent
holding company are affiliates of the savings association. Generally, Sections
23A and 23B (i) limit the extent to which the savings institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a nonaffiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings association may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings association.

     Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders.  Under Section 22(h), loans to a director,
executive 

                                       31
<PAGE>
 
officer or greater than 10% stockholder of a savings association and certain
affiliated interests of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the association's
loans-to-one-borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus) and all loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus. Section 22(h) also
prohibits loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and greater than 10% stockholders of a
savings association, and their respective affiliates, unless such loan is
approved in advance by a majority of the board of directors of the association
with any "interested" director not participating in the voting. The Federal
Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval if required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, the Federal Reserve Board pursuant to Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also prohibits a depository
institution from paying the overdrafts of any of its executive officers or
directors.

     Savings associations are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act on loans to executive officers and
the restrictions of 12 U.S.C. (S) 1972 on certain tying arrangements and
extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.

     LIQUIDITY REQUIREMENTS. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus short-
term borrowings. The Bank is also required to maintain average daily balances of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable savings accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity ratio and short-term liquidity ratio
of the Bank for the month ended June 30, 1997 were 21.5% and 18.2%,
respectively.

     FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System,
which consists of twelve district Federal Home Loan Banks subject to supervision
and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home
Loan Banks provide a central credit facility primarily for member institutions.
As a member of the FHLB of Cincinnati, the Bank is required to acquire and hold
shares of capital stock in the FHLB of Cincinnati in an amount at least equal to
1% of the aggregate unpaid principal of its home mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB of Cincinnati, whichever is greater. As of
June 30, 1997, the Bank had an investment in FHLB Cincinnati stock of $1.2
million.

     The FHLB of Cincinnati serves as a reserve or central bank for its member
institutions within its assigned district. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Cincinnati. Long-term
advances may only be made for the purpose of providing funds for residential
housing finance. See "Deposit Activities and Other Sources of Funds --
Borrowings."

                                       32
<PAGE>
 
     FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves in a manner
sufficient to satisfy its reserve requirements on reservable liabilities. No
reserves are required to be maintained on the first $4.3 million of transaction
accounts, reserves equal to 3% must be maintained on the next $49.3 million of
transaction accounts, and a reserve of 10% must be maintained against all
remaining transaction accounts. These reserve requirements are subject to
adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a non-interest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of June 30, 1997, the
Bank met its reserve requirements.

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

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

REGULATION OF THE COMPANY

     General. The Company is a unitary savings and loan holding company within
the meaning of the Home Owners' Loan Act. As such, the Company is registered
with the OTS and subject to OTS regulations, examinations, supervision and
reporting requirements.

     ACTIVITIES RESTRICTIONS. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company. However, if the director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk and
limiting (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the QTL Test,
then such unitary holding company shall 

                                       33
<PAGE>
 
also be subject to the activities restrictions applicable to multiple holding
companies and unless the savings association requalifies as a Qualified Thrift
Lender within one year thereafter, register as, and become subject to, the
restrictions applicable to a bank holding company.

     If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. The Home Owners' Loan Act provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not a savings association shall commence or continue for a limited period of
time after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity, upon prior notice to, and no objection by the
OTS, other than (i) furnishing or performing management services for a
subsidiary savings association, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by the
Federal Savings and Loan Insurance Corporation by regulation as of March 5, 1987
to be engaged in by multiple holding companies or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the Director of OTS by regulation prohibits or limits such
activities for savings and loan holding companies. Those activities described in
(vii) above must also be approved by the Director of OTS prior to being engaged
in by a multiple holding company.

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

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

     The OTS has recently amended its regulations to permit federal associations
to branch in any state or states of the United States and its territories.
Except in supervisory cases or when interstate branching is otherwise permitted
by state law or other statutory provision, a federal association may not
establish an out-of-state branch unless (i) the federal association qualifies as
a "domestic building and loan association" under (S)7701(a)(19) of the Internal
Revenue 

                                       34
<PAGE>
 
Code and the total assets attributable to all branches of the association in the
state would qualify such branches taken as a whole for treatment as a domestic
building and loan association and (ii) such branch would not result in (a)
formation of a prohibited multi-state multiple savings and loan holding company
or (b) a violation of certain statutory restrictions on branching by savings
association subsidiaries of banking holding companies. Federal associations
generally may not establish new branches unless the association meets or exceeds
minimum regulatory capital requirements. The OTS will also consider the
association's record of compliance with the Community Reinvestment Act of 1977
in connection with any branch application.

     The Bank Holding Company Act of 1956 authorizes the Federal Reserve Board
to approve an application by a bank holding company to acquire control of any
savings association. Pursuant to rules promulgated by the Federal Reserve Board,
owning, controlling or operating a savings association is a permissible activity
for bank holding companies, if the savings association engages only in deposit-
taking activities and lending and other activities that are permissible for bank
holding companies. In approving such an application, the Federal Reserve Board
may not impose any restriction on transactions between the savings association
and its holding company affiliates except as required by Sections 23A and 23B of
the Federal Reserve Act.

     A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual deposit growth
increment. In addition, the transaction must comply with the restrictions on
interstate acquisitions of commercial banks under the Bank Holding Company Act.

                                 TAXATION

     GENERAL. The Company and its subsidiaries file a consolidated federal
income tax return on a June 30 fiscal year basis. Consolidated returns have the
effect of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.

     FEDERAL AND STATE INCOME TAXATION. Savings institutions are subject to the
provisions of the Internal Revenue Code of 1986, as amended (the "Code") in the
same general manner as other corporations. Prior to recent legislation,
institutions such as the Bank which met certain definitional tests and other
conditions prescribed by the Code benefitted from certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. For purposes of the bad debt reserve deduction, loans are
separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans, which
are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans must be based on actual loss experience. The amount of the
bad debt reserve deduction with respect to qualifying real property loans may be
based upon actual loss experience (the "experience method") or a percentage of
taxable income determined without regard to such deduction (the "percentage of
taxable income method"). Legislation recently signed by the President repealed
the percentage of taxable income method of calculating the bad debt reserve. The
Bank has generally elected to use the method which has resulted in the greatest
deductions for federal income tax purposes.

     Legislation that is effective for tax years beginning after December 31,
1995 requires institutions to recapture into taxable income over a six taxable
year period the portion of the tax loan loss reserve that exceeds the pre-1988
tax loan loss reserve. The Bank will no longer be allowed to use the percentage
of taxable income method for tax loan loss provisions, but would be allowed to
use the experience method of accounting for bad debts. There will be no future
effect on net income of the Bank from the recapture because the taxes on these
bad debts reserves have been accrued as a deferred tax liability. Beginning with
the first taxable year beginning after December 31, 1995, savings institutions,
such as the Bank, will be treated the same as commercial banks. Institutions
with $500 million or more in assets will only be able to take a tax deduction
when a loan is actually charged off. Institutions with less than $500 million in
assets will still be permitted to make deductible bad debt additions to
reserves, but only using the experience method.

                                       35
<PAGE>
 
     The legislation provides for a suspension of this recapture if the
institution meets the "residential loan requirement." This requirement is met if
the principal amount of residential loans that the institution originates during
its first taxable year after December 31, 1995, exceeds the average of the
principal amounts of residential loans made by the institution during the six
most recent taxable years beginning before January 1, 1996. If the requirement
is met, the recapture is suspended until a taxable year beginning December 31,
1997, or until the residential loan requirement is not met in a subsequent year.
The Bank met this requirement for the taxable year ended June 30, 1997.

     Under the experience method, the bad debt deduction for an addition to the
reserve for qualifying real property loans is an amount determined under a
formula based generally on the bad debts actually sustained by a savings
institution over a period of years. Under the percentage of taxable income
method, the bad debt reserve deduction for qualifying real property loans is
computed as a percentage, which Congress has reduced from as much as 60% in
prior years to 8% of taxable income, with certain adjustments, effective for
taxable years beginning after 1986. The allowable deduction under the percentage
of taxable income method (the "percentage bad debt deduction") for taxable years
beginning before 1987 was scaled downward in the event that less than 82% of the
total dollar amount of the assets of an institution were within certain
designated categories. When the percentage method bad debt deduction was lowered
to 8%, the 82% qualifying assets requirement was lowered to 60%. For all taxable
years, there is no deduction in the event that less than 60% of the total dollar
amount of the assets of an institution falls within such categories. Moreover,
in such case, the Bank could be required to recapture, generally over a period
of up to four years, its existing bad debt reserve.

     Earnings appropriated to the Bank's bad debt reserve and claimed as a tax
deduction are not available for the payment of cash dividends or for
distribution to stockholders (including distributions made on dissolution or
liquidation), unless the Bank includes the amount in taxable income, along with
the amount deemed necessary to pay the resulting federal income tax.

     The Bank's federal income tax return for the period ended June 30, 1993,
was audited by the Internal Revenue Service in 1995. The examination did not
significantly effect the Bank's tax liability. For further information regarding
federal income taxes see "Income Tax" included in the Notes to Consolidated
Financial Statements.

     The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. However, the Company (on an unconsolidated basis) and the
Bank's wholly-owned subsidiary must pay a Kentucky state income tax, as well as
a tax on capital. The tax on income is 4.0% for the first $25,000 of taxable
income, 5.0% for the next $25,000, 6.0% for the next $50,000, 7.0% for the next
$150,000 and 8.25% for all income over $250,000. The tax on capital is .0021
times the capital employed.

     The Bank is subject to a Kentucky ad valorem tax. Assessed at the beginning
of each calendar year, this tax is 0.1% of the Bank's savings accounts, common
stock, capital, and retained income with certain deductions for amounts borrowed
by depositors and for securities guaranteed by the U.S. Government or certain of
its agencies. For the fiscal year ended June 30, 1997, the amount of such
expense was approximately $112,000 and is included in noninterest expense in the
Consolidated Statements of Earnings.

     In addition to the Bank's federal income tax liability, the State of
Tennessee imposes an excise tax on savings institutions at the rate of 6% of net
taxable income, which is computed based on federal taxable income allocable to
Tennessee, subject to certain adjustments. The State of Tennessee also imposes
franchise and privilege taxes on savings institutions based on assets, which, in
the case of the Bank, have not constituted significant expense items.

                                       36
<PAGE>
 
ITEM 2.  PROPERTIES
-------------------

     The following table sets forth the location and certain additional
information regarding the Bank's offices at June 30, 1997. The Bank owns its
main office and New Tazewell Branch, and leases its Harlan Branch.
<TABLE>
<CAPTION>
 
                                    Year   Square
                                   Opened  Footage  Net Book Value
                                   ------  -------  --------------
    <S>                            <C>     <C>      <C>
     MAIN OFFICE:
     1602 Cumberland Avenue (1)
     Middlesboro, Kentucky           1980    9,500      $1,009,439
 
     BRANCH OFFICES:
     Village Center (2)              1975    3,300          93,677
     Harlan, Kentucky
 
     600 Fifth Avenue (1)
     New Tazewell, Tennessee         1995    5,000         798,027
 
       Total                                            $1,901,143
                                                        ==========
</TABLE>
--------------------

(1)  Owned by Home Service Corporation, the Bank's wholly-owned subsidiary, and
     leased to the Bank.
(2)  In November 1990, the lease on this property was renegotiated for a seven-
     year term with three five-year options. The annual rent is $39,803. The
     Bank is liable to reimburse the lessor for its proportionate share of any
     increase in real estate taxes and insurance paid by lessor. The rent
     expense for years 1997 and 1996 was $39,803 and $39,803, respectively.

     Intrieve Corporation, Cincinnati, Ohio, performs data processing and record
keeping for Home Federal. The Bank's fixtures and equipment include a network of
teller terminals, several computers, satellite communications equipment, ATMs
and a check processing machine.

     At June 30, 1997, the net book value of the Bank's premises, furniture,
fixtures, equipment and land for future development was $2.2 million. It is
Management's opinion that all of the Bank's properties are adequately covered by
insurance. See "Premises and Equipment" included in the Notes to Consolidated
Financial Statements included elsewhere herein.

ITEM 3. LEGAL PROCEEDINGS.
------------------------- 

     From time to time, the Bank is a party to various routine legal proceedings
incident to its business, including loan foreclosure actions. The Bank has one
lawsuit outstanding in the U.S. District Court for the Eastern District of
Tennessee involving a loan which was made in 1990 and paid off in 1991. The
lawsuit, which was filed in federal court by the plaintiff on his own behalf,
charges the Bank and certain of its officers with fraud in the loan transaction,
and requests damages of approximately $3.0 million. The suit has been reviewed
by counsel from the Bank's insurance company. Counsel has determined that the
lawsuit is without merit and has filed a motion with the court to dismiss the
lawsuit. There are currently no other material legal proceedings to which the
Company, the Bank or its subsidiary is a party or to which any of their property
is subject.

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

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1997.

                                       37
<PAGE>
 
                                 PART II

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

     The information contained under the section captioned "Market Information"
in the Bank's Annual Report to Stockholders for the Fiscal Year Ended June 30,
1997 (the "Annual Report") is incorporated herein by reference. For information
regarding restrictions on the payment of dividends see Item 1. "Business --
Regulation -- Regulation of the Bank -- Dividend Limitations."

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------

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

ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

     The consolidated financial statements contained in the Annual Report,
listed under Item 13 herein, are incorporated herein by reference.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

     Not applicable.

                                 PART III

Item 9.  Directors and Executive Officers, Promoters and Control Persons;
-------------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------

     For information regarding delinquent filers and the disclosure required
pursuant to Item 405 of Regulation S-KSB, reference is made to "Voting
Securities and Principal Holders Thereof" in the Proxy Statement which
information is incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

     The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

(a) and (b) The information required by this item is incorporated herein by
            reference to the sections captioned "Proposal I - Election of
            Directors" and "Voting Securities and Principal Holders Thereof" of
            the Proxy Statement.

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

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

     The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" of the Proxy
Statement.

                                       38
<PAGE>
 
ITEM 13.  EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
------------------------------------------------- 

     (A)  LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
          ----------------------------------------------

          The following exhibits are either attached to or incorporated by
     reference in this Annual Report on Form 10-KSB.
<TABLE>
<CAPTION>
  Page No.
Sequentially
     No.      Description                                                 Numbered Copy
------------  ------------                                                -------------
<S>            <C>                                                        <C> 
  (3a)         Articles of Incorporation of HFB Financial Corporation            *
              
  (3b)         Bylaws of HFB Financial Corporation                               *
              
  (4)          Common Stock Certificate of HFB Financial Corporation             *
              
  (10a)        HFB Financial Corporation Stock Option Plan                       *
              
  (10b)        Home Federal Bank, Federal Savings Bank Management                *
               Recognition Plan
              
  (10c)        Home Federal Bank, Federal Savings Bank Supplemental              *
               Executive Retirement Plan
              
  (10d)        Employment Agreement between the Bank and David B. Cook           *
              
  (10e)        Employment Agreement between the Bank and J. D. Cook              *
              
  (10f)        Employment Agreement between the Bank and Stanley Alexander, Jr.  *
              
  (13)         Annual Report to Stockholders for the Fiscal Year Ended June 30, 1997
              
  (21)         Subsidiaries of the Registrant

  (27)         Financial Data Schedule
</TABLE>
----------------
*    Incorporated by reference to the Corporation's Registration Statement on
     Form S-1 (33-52308) filed with the Securities and Exchange Commission on
     September 23, 1992.


     (B)  REPORTS ON FORM 8-K.  On May 20, 1997, the Corporation filed a Current
          -------------------                                                   
Report on Form 8-K, disclosing under "Item 4. Change in Registrant's Certifying
Accountant," the change in accountants by the Registrant from Grover Greweling &
Co. PSC, to George S. Oliver & Co.

                                       39
<PAGE>
 
                                 SIGNATURES

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

                                     HFB FINANCIAL CORPORATION


September 26, 1997                   By: /s/ David B. Cook
                                         ---------------------------
                                         David B. Cook
                                         President and Chief Executive Officer
  
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


/s/ David B. Cook                               September 26, 1997
------------------------------------
David B. Cook
President and Chief Executive Officer
and Director
(Principal Executive Officer)


/s/ Stanley Alexander, Jr.                      September 26, 1997
------------------------------------
Stanley Alexander, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)


/s/ J. D. Cook                                  September 26, 1997
------------------------------------
J. D. Cook
Chairman of the Board


/s/ E. W. Nagle                                 September 26, 1997
------------------------------------
E. W. Nagle
Vice Chairman of the Board


/s/ Frank W. Lee                                September 26, 1997
------------------------------------
Frank W. Lee
Secretary-Treasurer and a Director


/s/ Frances C. Rasnic                           September 26, 1997
------------------------------------
Frances C. Rasnic
Director


/s/ Charles Harris                              September 26, 1997
------------------------------------
Charles Harris
Director


/s/ Earl Burchfield                             September 26, 1997
------------------------------------
Earl Burchfield
Director


/s/ Robert V. Costanzo                          September 26, 1997
------------------------------------
Robert V. Costanzo
Director

                                      40


<PAGE>
 
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>

Exhibit No.   Description                                             Page
-----------   -----------                                             ----
<S>           <C>                                                     <C>
(3a)          Articles of Incorporation of HFB Financial Corporation    *
              
(3b)          Bylaws of HFB Financial                                   *
              
(4)           Common Stock Certificate of HFB Financial Corporation     *
              
(10a)         HFB Financial Corporation Stock Option Plan               *
              
(10b)         Home Federal Bank, Federal Savings Bank Management        *
              Recognition Plan
              
(10c)         Home Federal Bank, Federal Savings Bank Supplemental      *
              Executive Retirement Plan
              
(10d)         Employment Agreement between the Bank and David B. Cook   *
              
(10e)         Employment Agreement between the Bank and J. D. Cook      *
              
(10f)         Employment Agreement between the Bank and Stanley         *
              Alexander, Jr.
              
(13)          Annual Report to Stockholders for the Fiscal Year Ended
              June 30, 1997
              
(21)          Subsidiaries of the Registrant
              
(27)          Financial Data Schedule
</TABLE>        
----------------
*    Incorporated by reference to the Corporation's Registration Statement on
     Form S-1 (33-52308) filed with the Securities and Exchange Commission on
     September 23, 1992.