LETTER TO STOCKHOLDERS
--------------------------------------------------------------------------------








To Our Shareholders:

Fiscal  year  2001 has been a  challenging  one for us.  As we have  focused  on
becoming a relationship  bank, we have made many changes in our organization and
systems.  With these changes now in place and the  enthusiasm of our  management
and staff,  we feel that we are better  poised to increase  our market share and
earnings  in the coming  year.  For the year ended June 30,  2001,  the  Company
earned $1,489,000 compared to $1,442,000 for the year ended June 30, 2000. Basic
earnings per share were $1.20 and diluted  earnings per share were $1.18 for the
twelve  month  period  ended  June  30,  2001,  compared  to  $1.09  and  $1.08,
respectively,  for the twelve months ended June 30, 2000. Total assets increased
by $12.2 million to $217.4 million at June 30, 2001.

Looking  forward,  we are  committed to improving  our earnings with our primary
focus on creating  shareholder  value. As a means to operate more  competitively
and   efficiently,   we  have   initiated   the   process  to  convert   from  a
federally-chartered thrift to a Kentucky-chartered  commercial bank. The charter
conversion  will permit us to offer a wider range of  products  and  services to
better serve our market as a whole. We are excited about the opportunities as we
embark on a new stage in the growth Home Federal Bank. In addition, I am pleased
to announce  that your Board of  Directors  declared a  semi-annual  dividend of
$0.19 per share to all shareholders of record as of September 14, 2001.

We are grateful for your continued support.




David B. Cook
President and CEO


                                      (1)
<PAGE>

FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------


                              RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                     CHANGE
                                                                       ------------------------------------
YEAR ENDED JUNE 30                         2001             2000             AMOUNT           PERCENT
-----------------------------------------------------------------------------------------------------------
                                                   (Dollars in Thousands)
<S>                                         <C>               <C>               <C>               <C>
Interest income                             $15,713           $14,396           $1,317            9.15%
Interest expense                              9,495             8,265            1,230           14.88
Net interest income                           6,218             6,131               87            1.42
Provision for loan losses                       105              (437)             542          124.03
Net interest income after provision
   for loan losses                            6,113             6,568             (455)          (6.93)
Other income                                    998               361              638          176.73
Other expenses                                4,855             4,699              156            3.32
Income taxes                                    767               788              (21)          (2.66)
Net income                                    1,489             1,442               47            3.26
</TABLE>
<TABLE>
<CAPTION>
                               FINANCIAL POSITION

                                                                                     CHANGE
                                                                       ------------------------------------
JUNE 30                                    2001             2000             AMOUNT           PERCENT
-----------------------------------------------------------------------------------------------------------
                                                   (Dollars in Thousands)

<S>                                     <C>               <C>                  <C>               <C>
Total assets                            $   217,405       $   205,211          $12,194           5.94%
Net loans                                   136,863           131,394            5,469           4.16
Investment securities
   Available for sale                        57,110            36,672           20,438          55.73
   Held to maturity                                            24,697          (24,697)       (100.00)
Deposits                                    181,948           172,537            9,411           5.45
Stockholders' equity                         20,469            17,986            2,483          13.81

Number of Shares Outstanding              1,294,561         1,295,347             (786)          (.06)
</TABLE>

                                      (2)

<PAGE>

SELECTED FINANCIAL AND OTHER DATA
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30                                           2001            2000            1999            1998           1997
----------------------------------------------------------------------------------------------------------------------------
                                                        (Dollar amounts in thousands, except per share amount)
<S>                                               <C>             <C>             <C>             <C>             <C>
FINANCIAL POSITION
   Assets                                         $217,405        $205,211        $190,730        $176,437        $159,457
   Loans, net                                      136,863         131,394         120,742         116,171         104,984
   Investments
     Available for sale                             57,110          36,672          37,299          26,905          25,113
     Held to maturity                                               24,697          21,998          20,547          20,207
   Deposits                                        181,948         172,537         153,988         144,881         133,203
   Short-term borrowings and
     long-term debt                                 12,453          12,928          17,098          12,162           8,221
   Stockholders' equity                             20,469          17,986          17,751          17,987          16,567


YEAR ENDED JUNE 30                                2001            2000            1999            1998           1997
----------------------------------------------------------------------------------------------------------------------------
                                                        (Dollar amounts in thousands, except per share amount)
OPERATING RESULTS
   Interest income                               $  15,713       $  14,396       $  13,558       $  12,979       $  11,692
   Interest expense                                 (9,495)         (8,265)         (8,018)         (7,322)         (6,510)
                                            --------------------------------------------------------------------------------
   Net interest income                               6,218           6,131           5,540           5,657           5,182
   Provision for loan losses                          (105)            437            (253)           (274)           (138)
                                            --------------------------------------------------------------------------------
   Net interest income after
     provision for loan losses                       6,113           6,568           5,287           5,383           5,044
   Other income
     Net realized gain (loss) on
       trading securities                              260            (163)           (141)            159             307
     Other                                             738             524             465             502             439
   Other expenses                                   (4,855)         (4,699)         (3,715)         (3,750)         (4,161)
                                            --------------------------------------------------------------------------------
   Income before income tax                          2,256           2,230           1,896           2,294           1,629
   Income taxes                                       (767)           (788)           (656)           (791)           (591)
                                            --------------------------------------------------------------------------------

   Net income                                   $    1,489       $   1,442       $   1,240       $   1,503        $  1,038
                                            ================================================================================

   Basic earnings per share (1)(2)             $      1.20      $     1.09      $      .94       $    1.16       $     .82
   Diluted earnings per share                         1.18            1.08             .93            1.13             .80
   Book value per share                              15.81           13.89           13.43           13.76           12.82
</TABLE>
(1) Years  before  1997  adjusted  to reflect a 5-for-3  stock split on June 30,
1997.
(2) Years before 2000 adjusted for a 20% stock dividend on June 14, 2000.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                2001            2000            1999            1998           1997
----------------------------------------------------------------------------------------------------------------------------
                                                        (Dollar amounts in thousands, except per share amount)
OTHER DATA
<S>                                                 <C>             <C>             <C>             <C>             <C>
   Average interest rate spread                     2.69%           2.92%           2.69%           3.12%           3.06%
   Net yield on average interest-earning assets     3.08            3.24            3.09            3.52            3.49
   Return on average assets                          .70             .73             .67             .90             .68
   Return on average stockholders' equity           7.74            8.07            6.85            8.70            6.60
   Equity as a percent of year-end assets           9.42            8.76            9.32           10.20           10.39
   Non-interest expense as a percent of
     average assets                                 2.30            2.38            2.02            2.22            2.71
   Non-performing assets to total assets            1.09            1.69            1.02             .52             .27
   Ratio of allowance for loan losses to
     gross loans                                     .52             .49             .99             .83             .67
   Dividend payout ratio                           33.12           32.98           39.74           29.94           39.89
   Number of
     Real estate loans outstanding                  1,933           1,996           2,249           2,077           2,033
     Deposit accounts                              16,669          16,609          14,802          14,945          14,161
     Full service offices                               4               4               3               3               3
</TABLE>
                                      (3)

<PAGE>

BUSINESS OF THE COMPANY AND THE BANK
--------------------------------------------------------------------------------

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

The executive offices of the Company and the Bank are located at 1602 Cumberland
Avenue, Middlesboro, Kentucky 40965 and the telephone number is (606) 248-1095.

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

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

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

                                      (4)

<PAGE>

MARKET INFORMATION
--------------------------------------------------------------------------------

TRADING IN THE COMMON STOCK.  The Company's common stock is listed on the NASDAQ
small cap market under the symbol "HFBA".  There are currently  1,294,347 shares
of the common stock  outstanding and  approximately 400 holders of record of the
common stock (not including shares held in "street name").

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

                             HIGH BID (1)     LOW BID (1)      DIVIDENDS PAID
                         -------------------------------------------------------
FISCAL 2000
   First quarter                 $11.667         $11.458              $.21
   Second quarter                 12.550          11.667
   Third quarter                  11.667           8.750               .22
   Fourth quarter                 13.875          11.042

FISCAL 2001
   First quarter                 $13.000         $11.375              $.19
   Second quarter                 13.000          10.125
   Third quarter                  12.000          11.000               .19
   Fourth quarter                 12.880          11.000

(1)  Quotations reflect inter-dealer prices,  without retail mark-up,  mark-down
     or commission and may not represent actual transactions.

The latest bid price as of August 29, 2001 was $12.50.

DIVIDEND  RESTRICTIONS.  Under regulations of the OTS, the Bank is not permitted
to pay dividends on its capital stock if its regulatory capital would thereby be
reduced below regulatory capital requirements.

Additionally,  an OTS  regulation  restricts the Bank's  ability to make capital
distributions,  including payment of dividends.  The regulation provides that an
institution meeting its capital requirements, both before and after its proposed
capital  distribution,  may generally  distribute  net income to date during the
year, plus retained income for the preceding two years. The regulation  provides
more  significant  restrictions  on payment of  dividends  in the event that the
capital requirements are not met.

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

                                      (5)

<PAGE>

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

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

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

The  operations  of  Home  Federal,  and  savings  institutions  generally,  are
significantly  influenced by general  economic  conditions  and the monetary and
fiscal policies of governmental regulatory agencies.  Deposit flows and costs of
funds are influenced by interest rates on competing  investments  and prevailing
market  rates of  interest.  Lending  activities  are affected by the demand for
financing real estate and other types of loans, which in turn is affected by the
interest  rates at  which  such  financing  may be  offered  and  other  factors
affecting  loan  demand  and the  availability  of  funds.  Just  as the  Bank's
operations are influenced by regulatory authorities, so are its liquidity levels
and capital resources.


                                      (6)
<PAGE>

ASSET/LIABILITY MANAGEMENT
--------------------------------------------------------------------------------

Key components of a successful  asset/liability  strategy are the monitoring and
managing of interest rate  sensitivity  of both the  interest-earning  asset and
interest-bearing  liability  portfolios.   Home  Federal  has  employed  various
strategies  intended to minimize  the  adverse  effect of interest  rate risk on
future  operations  by  providing  a better  match  between  the  interest  rate
sensitivity  between  its  assets and  liabilities.  In  particular,  the Bank's
strategies  are intended to stabilize  net interest  income for the long term by
protecting its interest rate spread against  increases in interest  rates.  Such
strategies  include the  origination for portfolio of  adjustable-rate  mortgage
loans secured by one-to-four  family residential real estate and the origination
of consumer  and other  loans with  greater  interest  rate  sensitivities  than
long-term,   fixed-rate   residential   mortgage   loans.   At  June  30,  2001,
approximately  15% of the  loans in the  Bank's  mortgage  loan  portfolio  were
adjustable-rate  mortgages.  The Bank has used excess funds to invest in various
short-term investments,  including mortgage-backed  securities,  with terms of 7
years or less, U. S. Government  Treasury and agency securities with terms of 15
years or less and other short-term investments.

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


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

Net portfolio value (NPV) analysis  provides a  quantification  of interest rate
risk. In essence,  this approach  calculates the difference  between the present
value of  liabilities,  expected  cash  flows  from  assets  and cash  flow from
off-balance-sheet  contracts.  Under OTS regulations,  an institution's "normal"
level of interest rate risk in the event of an immediate and sustained 200 basis
point  change in  interest  rates is a decrease in the  institution's  NPV in an
amount not exceeding 2% of the present value of its assets. Savings associations
with over $300 million in assets or less than a 12% risk-based capital ratio are
required to file OTS Schedule CMR, which is used by the OTS to calculate changes
in NPV and the related level of interest rate risk.  Institutions,  which do not
meet either of the filing  requirements,  such as the Bank,  are not required to
file a CMR. Pursuant to this regulation,  thrift  institutions with greater than
"normal"  interest rate exposure must take a deduction  from their total capital
available  to meet  their  risk-based  capital  requirement.  The amount of that
deduction is one-half of the  difference  between (a) the  institution's  actual
calculated  exposure to the 200 basis point  interest  rate increase or decrease
(whichever  results  in the  greater  pro  forma  decrease  in NPV)  and (b) its
"normal" level of exposure which is 2% of the present value of its assets.

At June 30, 2001, 2% of the present value of the Bank's assets was approximately
$4.5 million,  which was less than $7.0  million,  the decrease in NPV resulting
from a 200 basis point change in interest rates.  As a result,  if the rule were
in effect and were applicable to the Bank, it would have been required to make a
$2.5 million deduction from total capital in calculating its risk-based  capital
requirement,  although  the  Bank's  capital  would have  remained  in excess of
regulatory minimums.

                                      (7)

<PAGE>

The following  table sets forth,  as of June 30, 2001, the estimated  changes in
the Bank's NPV (i.e.,  the  present  value of expected  cash flows from  assets,
liabilities and off-balance-sheet contracts).

                              NET PORTFOLIO EQUITY
                             (Dollars in Thousands)

 CHANGE IN INTEREST
RATES (BASIS POINTS)      ESTIMATED NPV   AMOUNT OF CHANGE    PERCENT OF CHANGE
--------------------------------------------------------------------------------

         +300                $14,645           $(10,878)             (43)%
         +200                 18,561             (6,962)             (27)
         +100                 22,217             (3,306)             (13)
            0                 25,523
         -100                 27,559              2,036                8
         -200                 38,730              3,207               13
         -300                 29,706              4,183               16

As noted above,  the market value of the Bank's net assets would be  anticipated
to  decline  significantly  in the  event of  certain  designated  increases  in
interest  rates.  For  instance,  in the event of a 200 basis point  increase in
interest rates, NPV is anticipated to fall by $7.0 million, or 27%.  Conversely,
a 200 basis  point  decrease in interest  rates is  anticipated  to cause a $3.2
million,  or 13%  increase  in NPV.  Subject  to market  conditions,  management
intends to continue to restructure the Bank's assets and  liabilities  over time
to attempt to better manage the Bank's NPV volatility.

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

                                      (8)

<PAGE>


FINANCIAL CONDITION
--------------------------------------------------------------------------------

The  Corporation's  assets  increased by 5.9% to $217.4 million at June 30, 2001
compared to $205.2  million at June 30, 2000.  The majority of this  increase is
reflected in cash and cash equivalents and loans,  which was primarily funded by
an increase in deposits.

Cash and cash  equivalents  increased by $10.7  million to $13.9 million at June
30, 2001 from $3.2 million at June 30, 2000,  primarily  due to  maturities  and
securities called in the investment portfolio and an increase in deposits.

Trading  account  securities  increased to $1.049  million at June 30, 2001 from
$759,000 at June 30, 2000.  The increase of $290,000 was primarily  attributable
to an increase in the market value of the underlying securities.

The Bank  augments its lending  activities  and  increases its asset yields to a
significant extent by investing in investment securities such as mortgage-backed
securities  "MBSs",  U.  S.  Government  securities,  municipal  securities  and
corporate securities.  During the year ended June 30, 2001, management purchased
$14.3 million in investment securities. Most of these purchases were funded from
the proceeds from called and maturing investment securities, principal collected
on MBSs and the sale of  investment  securities.  At June 30,  2001,  Management
reclassified  the balance of its' held to maturity  portfolio as  available  for
sale "AFS" as a means to better manage the Bank's  interest rate risk  position.
At June 30, 2001, the balance of investment  securities available for sale "AFS"
was $57.1 million with a net unrealized gain of $441,000.

During the year ended June 30, 2001, total loans receivable,  net increased 4.2%
to $136.9 million compared to $131.4 million at June 30, 2000.

At June 30,  2001,  allowance  for loan  losses was  $718,000  or 0.52% of loans
receivable compared to $645,000 or 0.49% of loans receivable at June 30, 2000.

Premises and equipment  increased by $772,000 to $4.643 million at June 30, 2001
from $3.871  million at June 30, 2000.  Most of this increase was related to the
completion  of the Bank's new annex  facility at its main office in  Middlesboro
Kentucky and the purchase of computer hardware and software.

Total  deposits  increased  $9.4 million to $181.9 million at June 30, 2001 from
$172.5  million at June 30,  2000.  During the year  ended  June 30,  2001,  CDs
increased $9.6 million while savings and NOW accounts decreased $100,000.

The Bank's regulatory  liquidity was 36.2% at June 30, 2001 as compared to 40.1%
at June 30,  2000.  At June  30,  2001  the  bank  met all the  fully  phased-in
regulatory capital  requirements under FIRREA.  Tangible,  core and risked-based
capital  ratios  were  8.7%,  8.7% and 15.7%  respectively  at June 30,  2001 as
compared to 8.6%, 8.6% and 18.3% at June 30, 2000.


                                      (9)

<PAGE>


COMPARISON OF YEAR ENDED JUNE 30, 2001 TO YEAR ENDED JUNE 30, 2000
--------------------------------------------------------------------------------

General.  Net income  increased by $48,000 to $1.489 million for the fiscal year
ended  June 30,  2001.  The  primary  reasons  for the  increase  were a $87,000
increase in net interest income, a $638,000 increase in non-interest  income and
a $21,000  decrease  in income  tax  expense  offset by a $542,000  increase  in
provision for loan losses and a $156,000 increase in non-interest expense.

Net Interest Income.  Net interest income increased to $6.218 million for fiscal
2001 from $6.131  million for fiscal 2000.  The increase was primarily due to an
increase in volume.  Even though net income  increased,  the net interest margin
decreased by 16 basis points to 3.08% for the year ended June 30, 2001  compared
to  3.24%  for  the  year  ended  June  30,  2000.  Most of  this  decrease  was
attributable to a higher weighted average cost of funds.

Interest  Income.  Interest  income for the fiscal years ended June 30, 2001 and
June 30,  2000 was  $15.713  million  and  $14.396  million,  respectively.  The
increase in fiscal 2001 over fiscal 2000 was due primarily to an increase in the
average balance of interest-earning  assets. Yields on such assets were 7.77% in
fiscal 2001 compared to 7.60% in fiscal 2000.

Average  interest-earning  assets were $202.2 million and $189.4 million for the
fiscal years ended June 30, 2001 and June 30, 2000,  respectively.  The increase
in the  average  balance  of  interest-earning  assets was  primarily  due to an
increase in loan originations.

Interest  Expense.  Interest expense for fiscal 2001 and 2000 was $9.495 million
and $8.265  million,  respectively.  The increase in interest  expense of $1.230
million in fiscal 2001 over fiscal 2000 was  primarily due to an increase in the
rate of interest  paid on  deposits.  The cost of  interest-bearing  liabilities
increased  to 5.08% for  fiscal  2001  compared  to 4.68% for  fiscal  2000.  In
addition, the average balance of interest-bearing liabilities increased by $10.5
million due to increased deposits, which was used to fund loan demand.

Provision  for Loan Losses.  The  provision for loan losses for the fiscal years
ended June 30, 2001 and June 30, 2000 was $105,000 and $(437,000), respectively.
The increase of $542,000 was primarily due to unanticipated collections on loans
that,  during the fiscal year ended June 30, 1999,  were  impaired with specific
allowances  included  in the  allowance  for  loan  losses.  The  provision  was
determined by Management's  evaluation of the adequacy of the allowance for loan
losses,  including  consideration of recoveries of loans previously charged off,
the  perceived  risk  exposure  among  loan  types,   actual  loss   experience,
delinquency rates and current economic conditions.

Other Income. Other income for fiscal 2001 was $998,000 compared to $361,000 for
fiscal 2000, an increase of $637,000.  The increase is primarily the result of a
$254,000  increase in service charges on deposits,  a $421,000 increase in gains
on trading  account  securities  and a $22,000  increase in other  fees.  During
fiscal 2001  Management  instituted a new  overdraft  privilege  product,  which
increased deposit service charge income significantly.

                                      (10)

<PAGE>

Other Expenses.  Other expenses  increased $156,000 to $4.855 million for fiscal
2001 from $4.699 million for fiscal 2000. Compensation and benefits increased by
$86,000,  primarily  the  result of a  $77,000  decrease  in the  amount of loan
origination  fees  deferred  related to  compensation  expense net of the amount
amortized in the current period.

Occupancy  expense  increased  $29,000 to $325,000  for fiscal 2001  compared to
$296,000  for  fiscal  2000.  This  increase  was  primarily  due  to  increased
depreciation,  taxes and utilities resulting from the addition of the Bank's new
annex  building  in  Middlesboro  Kentucky  and the  purchase  of the new branch
building in Harlan Kentucky.

Equipment  expense  increased  $152,000 to $432,000 for fiscal 2001  compared to
$280,000  for  fiscal  2000,  primarily  the result of higher  depreciation  and
maintenance fees associated with the purchase of new computer and communications
equipment.

Data processing  expense  decreased $17,000 to $260,000 for fiscal 2001 compared
to $277,000 for 2000  primarily  due to one-time  expenses  associated  with the
conversion and addition of the new Harlan branch in fiscal 2000.

Deposit insurance expense decreased $28,000 due to a reduction in premium rates.
Professional services decreased $163,000 due to the fees paid to consultants for
assistance in developing a sales culture for the Bank in fiscal 2000.

State deposit and franchise taxes increased  $11,000  primarily due to a benefit
received with the Bank's  purchase of the new Harlan branch,  which was realized
in fiscal 2000 that was not available to the Bank in 2001.

Other  expense  increased  $86,000,  primarily  due  to a  $36,000  increase  in
telephone expense.  All other categories of other expense increased $50,000 with
no substantial increase or decrease in any one category.

Income Tax Expense.  Income tax expense decreased $21,000 to $767,000 for fiscal
2001 compared to $788,000 for fiscal 2000 due to a greater  amount of tax-exempt
income in fiscal 2001.

                                      (11)

<PAGE>

COMPARISON OF YEAR ENDED JUNE 30, 2000 TO YEAR ENDED JUNE 30, 1999
--------------------------------------------------------------------------------

General.  Net income increased by $202,000 to $1.442 million for the fiscal year
ended June 30, 2000 from $1.240 million for the fiscal year ended June 30, 1999.
The primary  reasons for the increase  were a $591,000  increase in net interest
income,  $690,000  decrease  in the  provision  for loan  losses  and a  $37,000
increase in  non-interest  income offset by a $984,000  increase in  noninterest
expense and a $132,000 increase in income tax expense.

Net Interest Income.  Net interest income increased to $6.131 million for fiscal
2000 from $5.540  million for fiscal 1999.  The increase was primarily due to an
increase  in  the  interest  rate  spread,  as  the  cost  of   interest-bearing
liabilities declined by 20 basis points during fiscal 2000.

Interest  Income.  Interest  income for the fiscal years ended June 30, 2000 and
June 30,  1999,  was  $14.396  million and $13.558  million,  respectively.  The
increase in fiscal 2000 over fiscal 1999 was due primarily to an increase in the
average balance of interest earning assets.  Yields on such assets were 7.60% in
fiscal 2000 compared to 7.57% in fiscal 1999.

Average  interest-earning  assets were $189.4 million and $179.0 million for the
fiscal years ended June 30, 2000 and June 30, 1999,  respectively.  The increase
in the  average  balance  of  interest-earning  assets was  primarily  due to an
increase in investment securities and an increase in loan originations.

Interest  Expense.  Interest expense for fiscal 2000 and 1999, was $8.3 and $8.0
million,  respectively.  The increase in interest  expense of $247,000 in fiscal
2000 over fiscal 1999 was due primarily to an increase in the average balance of
interest-bearing  liabilities  from  $164.2  million  in  fiscal  1999 to $176.5
million in fiscal 2000.  Although  interest  expense  increased due to increased
volume, the cost of interest-bearing  liabilities  decreased to 4.68% for fiscal
2000  from  4.88% in  fiscal  1999.  The  average  balance  of  interest-bearing
liabilities increased due to increased deposits and was used to fund loan demand
and increases in the investment portfolio.

Provision  for Loan Losses.  The  provision for loan losses for the fiscal years
ended June 30, 2000 and 1999 was  $(437,000)  and  $253,000,  respectively.  The
decrease of $690,000 was primarily due to  unanticipated  collections  on loans,
that, at June 30, 1999 were impaired  with specific  allowances  included in the
allowance  for  loan  losses.  The  provision  was  determined  by  Management's
evaluation  of  the  adequacy  of  the  allowance  for  loan  losses   including
consideration of recoveries of loans previously  charged off, the perceived risk
exposure  among loan  types,  actual loss  experience,  delinquency  rates,  and
current economic conditions.

Other Income. Other income for fiscal 2000 was $361,000 compared to $324,000 for
fiscal 1999,  an increase of $37,000.  The increase is primarily the result of a
$10,000 increase in service charges for deposit accounts,  a $31,000 decrease in
other  customer  fees and an  increase of $87,000 in other  income,  offset by a
$22,000  increase in losses on trading account  securities and a $7,000 decrease
in net realized gain on sales of available-for-sale securities.

Other Expenses. Other expenses increased $984,000 from $3.715 million for fiscal
1999 to $4.699 million for fiscal 2000. Salaries and employee benefits increased
by  $362,000,  primarily  the  result of an  increase  of  $242,000  in  general
compensation  expense and a $25,000 increase in benefit expense.  These expenses
increased  due  to  the  addition  of  new  employees  from  the  Harlan  branch
acquisition, the employment of an executive officer and normal annual increases.
In addition, there was a $95,000 decrease in the amount of loan origination fees
deferred  related to  compensation  expense net of the amount  amortized  in the
current period.

                                      (12)

<PAGE>

Occupancy expense increased  $100,000 due to an increase of $41,000 in leasehold
expense,  an  increase  of $41,000 in repairs  and  maintenance,  an increase of
$13,000  in taxes and  insurance  and an  increase  of  $5,000  in  depreciation
expense.  Increases in leasehold  expense included $27,000 for the rental of the
Harlan  facility from  National City Bank and an annual  increase of $14,000 for
the  other  Harlan  office  due  to  increase  floor  space  and   improvements.
Maintenance  and repairs,  taxes and insurance  increased due to the addition of
more facilities.

Equipment  expenses  increased  $49,000,  primarily  as  the  result  of  higher
depreciation. The Bank purchased new equipment for its new annex building during
the fiscal year ended June 30, 2000.

Data  processing  expenses  increased  $42,000  during  fiscal  2000  due to the
conversion and addition of the new Harlan branch.

Deposit insurance expense decreased $25,000 due to a reduction in premium rates.
Professional services increased $186,000 primarily as the result of fees paid to
consultants  for  assistance  in  developing a sales  culture for the Bank.  The
process has been  extensive  and has resulted a complete  reorganization  of the
Bank's staff.

Advertising  expense  increased  $109,000  as the  result  of a new  advertising
campaign launched during fiscal 2000.

Other  expense  increased  $150,000,   primarily  due  to  $93,000  of  goodwill
amortization  for the  purchase  of  intangibles  related to the  Harlan  branch
purchase. Printing expense increased $17,000, directors' fees increased $19,000,
telephone  expense  increased $23,000 and all other categories of other expenses
net decreased by $2,000.

Income Tax Expense.  Income  taxes  increased by $132,000 to $788,000 for fiscal
2000 compared to $656,000 for fiscal 1999 due to higher earnings

                                      (13)
<PAGE>

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
--------------------------------------------------------------------------------

The  following  table sets forth certain  information  relating to the Company's
average  interest-earning  assets and interest-bearing  liabilities and reflects
the average yield on assets and the average cost of liabilities  for the periods
and dates  indicated.  Such yields and costs are  derived by dividing  income or
expense by the average balance of assets or liabilities,  respectively,  for the
periods  presented.  Average  balances  are  derived  from  month-end  balances.
Management  does not  believe  that the use of  month-end  balances  instead  of
average daily  balances has caused any material  difference  in the  information
presented.
<TABLE>
<CAPTION>
                                                            2001                                      2000
                                         ------------------------------------------------------------------------------------
                                                                        AVERAGE                                   AVERAGE
                                            AVERAGE                      YIELD/       AVERAGE                      YIELD/
YEAR ENDED JUNE 30                          BALANCE       INTEREST        COST        BALANCE       INTEREST        COST
-----------------------------------------------------------------------------------------------------------------------------
                                                                         (Dollars in Thousands)
Interest-earning assets
<S>                                         <C>             <C>          <C>          <C>             <C>          <C>
   Loans, net (1)                           $137,874        $11,655        8.45%      $124,003        $10,218        8.24%
   Investment securities                      61,243          3,885        6.34         62,882          4,062        6.46
   FHLB stock and deposits
     with financial institutions               3,038            173        5.69          2,538            116        4.57
                                         -----------------------------             -----------------------------

       Total interest-earning assets        $202,155        $15,713        7.77%      $189,423        $14,396        7.60%
                                         =============================             =============================
Interest-bearing liabilities
   Deposits                                 $174,532       $  8,807        5.05%      $163,325        $ 7,549        4.62%
   Short-term borrowings and long-
     term debt                                12,559            688        5.48         13,196            716        5.43
                                         -----------------------------             -----------------------------

       Total interest-bearing liabilities   $187,091       $  9,495        5.08%      $176,521        $ 8,265        4.68%
                                         =============================             =============================
Net interest income                                        $  6,218                                   $ 6,131
                                                       ===============                           ===============
Interest rate spread                                                       2.69%                                     2.92%
                                                                     ===============                           ===============
Net yield on interest-earning assets                                       3.08%                                     3.24%
                                                                     ===============                           ===============
Ratio of average interest-earning assets
   to average interest-bearing                                           108.05%                                   107.31%
   liabilities                                                       ===============                           ===============
</TABLE>
[TABLE CONTINUED FROM ABOVE]

                                                           1999
                                         ---------------------------------------
                                                                        AVERAGE
                                              AVERAGE                    YIELD/
YEAR ENDED JUNE 30                            BALANCE       INTEREST      COST
--------------------------------------------------------------------------------

Interest-earning assets
   Loans, net (1)                             $121,817        $10,030      8.23%
   Investment securities                        51,493          3,229      6.27
   FHLB stock and deposits
     with financial institutions                 5,716            299      5.23
                                           ---------------------------

       Total interest-earning assets          $179,026        $13,558      7.57%
                                           ===========================
Interest-bearing liabilities
   Deposits                                   $149,288        $ 7,207      4.83%
   Short-term borrowings and long-
     term debt                                  14,918            811      5.44
                                           ---------------------------

       Total interest-bearing liabilities     $164,206        $ 8,018      4.88%
                                           ===========================
Net interest income                                           $ 5,540
                                                         =============
Interest rate spread                                                       2.69%
                                                                      ==========
Net yield on interest-earning assets                                       3.09%
                                                                      ==========
Ratio of average interest-earning assets
   to average interest-bearing                                           109.03%
   liabilities                                                        ==========

(1) Includes nonaccrual loans.

                                      (14)

<PAGE>

RATE/VOLUME ANALYSIS
--------------------------------------------------------------------------------

The table below sets forth  certain  information  regarding  changes in interest
income and interest expense of the Company for the periods  indicated.  For each
category   of   interest-earning   assets  and   interest-bearing   liabilities,
information  is  provided  on  changes  attributable  to (i)  changes  in volume
(changes in volume multiplied by old rate); (ii) changes in rate (change in rate
multiplied  by old volume);  and (iii) changes in  rate/volume  (changes in rate
multiplied by changes in volume).  Average  balances are derived from  month-end
balances. Management does not believe that the use of month-end balances instead
of average daily balances has caused any material differences in the information
presented.
<TABLE>
<CAPTION>
                                                                 2001 VS. 2000                            2000 VS. 1999
                                                 --------------------------------------------------------------------------------
                                                           INCREASE (DECREASE) DUE TO              INCREASE (DECREASE) DUE TO
                                                 --------------------------------------------------------------------------------
                                                                          RATE/                                    RATE/
YEAR ENDED JUNE 30                                   VOLUME    RATE      VOLUME      TOTAL      VOLUME    RATE    VOLUME    TOTAL
----------------------------------------------------------------------------------------------------------------------------------
                                                                                    (Dollars in Thousands)
Interest income
<S>                                                   <C>        <C>         <C>     <C>         <C>     <C>        <C>     <C>
   Loans receivable (1)                               $1,143     $264        $30     $1,437      $180    $   8              $188
   Investment securities                                (106)     (73)         2       (177)      714       97      $22      833
   Other dividend income and deposits
     with financial institutions                          23       29          6         58      (166)     (38)      21     (183)
                                                 ---------------------------------------------------------------------------------
       Total interest-earning assets                   1,060      220         38      1,318       728       67       43      838
                                                 ---------------------------------------------------------------------------------

Interest expense
   Deposits                                              518      693         48      1,259       678     (306)     (29)     343
   Short-term borrowings and long-
     term debt                                           (35)       7                   (28)      (94)      (2)              (96)
                                                 ---------------------------------------------------------------------------------
       Total interest-bearing liabilities                483      700         48      1,231       584     (308)     (29)     247
                                                 ---------------------------------------------------------------------------------

Change in net interest income                         $  577    $(480)      $(10)   $    87      $144     $375      $72     $591
                                                 =================================================================================
</TABLE>
(1)  For  purposes  of  calculating  volume,  rate  and  rate/volume  variances,
     nonaccrual loans were included in the weighted-average balance outstanding.

                                      (15)
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------

The Company's  primary  source of liquidity is dividends  paid by the Bank.  The
Bank,  as  a  stock  savings  institution,  is  subject  to  certain  regulatory
limitations with respect to the payment of dividends to the Company. See "Market
Information-Dividend  Restrictions".  Prior to  1998,  the  Company  repurchased
shares of its common stock in order to improve  earnings per share and return on
stockholders' equity. To date, the Company has repurchased 278,935 of its shares
(as restated for a 20% stock dividend on June 14, 2000 and a 5-for-3 stock split
on June 30, 1997) of common stock at a cost of $2.4 million.

Home Federal's capital ratios are substantially in excess of regulatory  capital
requirements. At June 30, 2001, the Bank's tangible and core capital amounted to
8.7% of total adjusted assets, or 6.7% and 4.7%, respectively,  in excess of the
Bank's current 2.0% tangible and 4.0% core capital  requirements.  Additionally,
the Bank's risk-weighted capital to risk-weighted assets ratio was 15.7% at June
30, 2001, or 7.7% in excess of the Banks 8.0% risk-based capital requirement.

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

Home  Federal is  required by OTS  regulations  to  maintain  minimum  levels of
specified  liquid  assets  which  are  currently  equal  to 5% of  deposits  and
short-term borrowings.  Such investments serve as a source of liquid funds which
the Bank may use to meet deposit  withdrawals and other  short-term  needs.  The
Bank's most liquid assets are cash and cash  equivalents,  which are short-term,
highly liquid investments with original  maturities of three months or less that
are readily  convertible to known amounts of cash. The levels of such assets are
dependent upon the Bank's operating,  financing and investment activities at any
given time. In recent  years,  the Bank has  maintained  higher levels of liquid
assets than  required by  regulation.  Management  believes  that the  liquidity
levels maintained are fully adequate to meet potential  deposit  outflows,  loan
demand and normal  operations.  Home Federal's  liquidity ratio at June 30, 2001
was approximately 36.2%.

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

                                      (16)
<PAGE>

IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
--------------------------------------------------------------------------------

ACCOUNTING  FOR  DERIVATIVE  INSTRUMENTS  AND HEDGING  ACTIVITIES.  Statement of
Financial  Accounting  Standards No. 133, Accounting for Derivative  Instruments
and  Hedging  Activities,  issued in June  1998 (as  amended  by SFAS No.  137),
standardizes  the  accounting  for  derivative  instruments,  including  certain
derivative  instruments  embedded in other  contracts.  The  statement  requires
entities to carry all  derivative  instruments  in the  statement  of  financial
position at fair value. The accounting for changes in the fair value,  gains and
losses, of a derivative instrument depends on whether it has been designated and
qualifies  as part of a hedging  relationship  and,  if so, on the  reasons  for
holding it. If certain  conditions  are met,  entities  may elect to designate a
derivative  instrument  as a hedge of exposures  to changes in fair value,  cash
flows or foreign  currencies.  The  statement  is  effective  for  fiscal  years
beginning  after June 15,  2001.  The  statement  is not  expected to affect the
Company because the Company does not currently purchase  derivative  instruments
or enter into hedging activities.

RECENT ACCOUNTING  PRONOUNCEMENTS.  In September 2000, the FASB issued Statement
No.  140,  Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
Extinguishments  of Liabilities--a  replacement of FASB Statement No. 125, which
revises the standards for accounting for  securitizations and other transfers of
financial  assets and collateral and requires certain  disclosures,  although it
continues most of the  provisions of Statement No. 125 without  reconsideration.
The provisions of Statement No. 140 are effective for periods after December 15,
2000. We currently are evaluating the impact, if any, of adopting the provisions
of  Statement  No.  140.  We do not expect the  adoption  of the  provisions  of
Statement No. 140 to have a material impact on our financial position or results
of operations.

In July 2001,  the FASB issued  Statement No. 141,  Business  Combinations,  and
Statement  No. 142,  Goodwill and Other  Intangible  Assets.  Statement  No. 141
requires  the  use of  the  purchase  method  of  accounting  for  all  business
combinations   initiated   after  June  30,  2001,   thereby   eliminating   the
pooling-of-interests  method.  Statement No. 141 also provides new criteria that
determine whether an acquired  intangible asset should be recognized  separately
from  goodwill.  Statement  No. 142  provides  guidance  on how to  account  for
goodwill and intangible assets after a business  combination has been completed.
Under Statement No. 142,  goodwill and certain other  intangible  assets will no
longer  be  amortized  and will be  tested  for  impairment  at least  annually.
Intangible  assets  with a definite  life will  continue  to be  amortized.  The
nonamortization  and  impairment  rules  will  apply to  existing  goodwill  and
intangible  assets beginning with fiscal years starting after December 15, 2001.
While the Company has  recorded  intangible  assets  related to the  purchase of
certain deposits,  it does not have any goodwill  recorded.  Accordingly,  these
statements are not expected to have an impact on the Company.

IMPACT OF INFLATION AND CHANGING PRICES
--------------------------------------------------------------------------------

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

                                      (17)
<PAGE>
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>

JUNE 30                                                                     2001                 2000
--------------------------------------------------------------------------------------------------------------
ASSETS
<S>                                                                      <C>                  <C>
   Cash and due from banks                                               $   5,112,788        $   3,171,389
   Interest-bearing demand deposits                                          8,775,000
                                                                    ------------------------------------------
     Cash and cash equivalents                                              13,887,788            3,171,389
   Trading assets, at fair value                                             1,049,327              758,570
   Investment securities
     Available for sale                                                     57,109,780           36,672,364
     Held to maturity (fair value of $0 and $23,505,716)                                         24,697,115
                                                                    ------------------------------------------
         Total investment securities                                        57,109,780           61,369,479
   Loans, net of allowance for loan losses of $718,267
         and $645,107                                                      136,863,425          131,393,748
   Premises and equipment                                                    4,642,655            3,871,340
   Federal Home Loan Bank stock                                              1,527,400            1,419,700
   Interest receivable                                                       1,790,607            1,908,022
   Other assets                                                                533,607            1,318,620
                                                                    ------------------------------------------

         Total assets                                                     $217,404,589         $205,210,868
                                                                    ==========================================

LIABILITIES
   Deposits
     Interest bearing                                                     $177,316,986         $167,221,697
     Noninterest bearing                                                     4,631,492            5,315,314
                                                                    ------------------------------------------
         Totals                                                            181,948,478          172,537,011
   Short-term borrowings                                                                            400,000
   Long-term debt                                                           12,452,796           12,528,050
   Interest payable                                                            962,143              850,771
   Other liabilities                                                         1,572,344              908,629
                                                                    ------------------------------------------
         Total liabilities                                                 196,935,761          187,224,461
                                                                    ------------------------------------------

STOCKHOLDERS' EQUITY
   Preferred stock, $1 par value
     Authorized and unissued--1,000,000 shares
   Common stock, $1 par value
     Authorized--5,000,000 shares
     Issued and outstanding--1,579,582 and 1,574,282 shares                  1,579,582            1,574,282
   Additional paid-in capital                                                8,729,990            8,708,790
   Common stock acquired by Rabbi trusts for deferred
     compensation plans                                                       (488,102)            (515,623)
   Treasury stock, at cost--282,728 and 278,935 shares                      (2,484,267)          (2,438,366)
   Retained earnings                                                        12,839,997           11,843,918
   Accumulated other comprehensive income (loss)                               291,628           (1,186,594)
                                                                    ------------------------------------------
         Total stockholders' equity                                         20,468,828           17,986,407
                                                                    ------------------------------------------

         Total liabilities and stockholders' equity                       $217,404,589         $205,210,868
                                                                    ==========================================
</TABLE>
See notes to consolidated financial statements.

                                      (18)
<PAGE>
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

                        CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                                        2001             2000
-------------------------------------------------------------------------------------------------------

INTEREST INCOME
<S>                                                                     <C>               <C>
   Loans receivable                                                     $11,654,613       $10,217,744
   Investment securities                                                  3,885,382         4,062,065
   Other dividend income                                                     26,011            33,560
   Deposits with financial institutions                                     146,521            82,436
                                                                      ---------------------------------
         Total interest income                                           15,712,527        14,395,805
                                                                      ---------------------------------

INTEREST EXPENSE
   Deposits                                                               8,806,524         7,549,213
   Short-term borrowings                                                      4,746           113,635
   Long-term debt                                                           683,328           602,176
                                                                      ---------------------------------
         Total interest expense                                           9,494,598         8,265,024
                                                                      ---------------------------------

NET INTEREST INCOME                                                       6,217,929         6,130,781
   Provision (adjustment) for loan losses                                   104,980          (436,988)
                                                                      ---------------------------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                       6,112,949         6,567,769
                                                                      ---------------------------------

OTHER INCOME
   Service charges for deposit accounts                                     630,588           376,887
   Other customer fees                                                       80,125            58,072
   Net gain (loss) on trading securities                                    259,697          (163,026)
   Net realized loss on sales of available-for-sale securities                 (670)
   Other income                                                              29,133            88,765
                                                                      ------------------------------------
         Total other income                                                 998,873           360,698
                                                                      ------------------------------------

OTHER EXPENSES
   Salaries and employee benefits                                         2,192,803         2,106,928
   Net occupancy expenses                                                   325,243           296,233
   Equipment expenses                                                       431,970           279,904
   Data processing fees                                                     260,021           276,622
   Deposit insurance expense                                                 34,202            61,900
   Legal and professional fees                                              218,505           381,220
   Advertising                                                              221,741           222,281
   State franchise and deposit taxes                                        167,515           156,743
   Other expenses                                                         1,003,140           916,976
                                                                   ------------------------------------
         Total other expenses                                             4,855,140         4,698,807
                                                                   ------------------------------------

INCOME BEFORE INCOME TAX                                                  2,256,682         2,229,660
   Income tax expense                                                       767,364           787,949
                                                                   ------------------------------------
NET INCOME                                                             $  1,489,318      $  1,441,711
                                                                   ====================================
BASIC EARNINGS PER SHARE                                                      $1.20             $1.09
                                                                   ====================================
DILUTED EARNINGS PER SHARE                                                    $1.18             $1.08
                                                                   ====================================
</TABLE>
See notes to consolidated financial statements.

                                      (19)
<PAGE>

                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                        COMMON STOCK
                                                  ----------------------   ADDITIONAL
                                                     SHARES                  PAID-IN      RABBI     COMPREHENSIVE
                                                  OUTSTANDING    AMOUNT      CAPITAL      TRUSTS       INCOME
                                                  -----------------------------------------------------------------

<S>                                                <C>         <C>         <C>          <C>         <C>
BALANCES, JULY 1, 1999                             1,303,031   $1,303,031  $6,303,419   $(639,767)
   Comprehensive income
     Net income                                                                                      $1,441,711
     Other comprehensive income, net of tax
       Unrealized losses on securities                                                                 (500,198)
                                                                                                   ----------------
   Comprehensive income                                                                              $  941,513
                                                                                                   ================
   Cash dividends ($.43 per share)
   20% stock dividend with $1,216 paid in lieu of
     fractional shares                               262,279      262,279   2,360,511
   Stock issued upon exercise of stock options         8,972        8,972      44,860
   Purchase of treasury stock (30,400 shares)
   Stock withdrawn from Rabbi Trusts                                                        8,352
   Net change in fair value of Rabbi Trust
     shares, net of tax                                                                   115,792
                                                  --------------------------------------------------

BALANCES, JUNE 30, 2000                            1,574,282    1,574,282   8,708,790    (515,623)
   Comprehensive income
     Net income                                                                                      $1,489,318
     Other comprehensive income, net of tax
       Unrealized gains on securities                                                                 1,478,222
                                                                                                   ----------------
   Comprehensive income                                                                              $2,967,540
                                                                                                   ================
   Cash dividends ($.38 per share)
   Stock issued upon exercise of stock options         5,300        5,300      21,200
   Purchase of treasury stock (3,793 shares)
   Stock withdrawn from Rabbi Trusts                                                        8,355
   Net change in fair value of Rabbi Trust
     shares, net of tax                                                                    19,166
                                                  --------------------------------------------------
BALANCES, JUNE 30, 2001                            1,579,582   $1,579,582  $8,729,990   $(488,102)
                                                  ==================================================
</TABLE>
[TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
                                                                ACCUMULATED
                                                                  OTHER
                                                    RETAINED   COMPREHENSIVE    TREASURY  STOCKHOLDERS'
                                                    EARNINGS   INCOME (LOSS)     STOCK       EQUITY
                                                  ------------------------------------------------------

<S>                                                <C>            <C>         <C>          <C>
BALANCES, JULY 1, 1999                             $13,501,715    $(686,396)  $(2,030,955) $17,751,047
   Comprehensive income
     Net income                                      1,441,711                               1,441,711
     Other comprehensive income, net of tax
       Unrealized losses on securities                             (500,198)                  (500,198)
   Comprehensive income
   Cash dividends ($.43 per share)                    (475,502)                               (475,502)
   20% stock dividend with $1,216 paid in lieu of
     fractional shares                              (2,624,006)                                 (1,216)
   Stock issued upon exercise of stock options                                                  53,832
   Purchase of treasury stock (30,400 shares)                                    (407,411)    (407,411)
   Stock withdrawn from Rabbi Trusts                                                             8,352
   Net change in fair value of Rabbi Trust
     shares, net of tax                                                                        115,792
                                                  ------------------------------------------------------

BALANCES, JUNE 30, 2000                             11,843,918   (1,186,594)   (2,438,366)  17,986,407
   Comprehensive income
     Net income                                      1,489,318                               1,489,318
     Other comprehensive income, net of tax
       Unrealized gains on securities                             1,478,222                  1,478,222
   Comprehensive income
   Cash dividends ($.38 per share)                    (493,239)                               (493,239)
   Stock issued upon exercise of stock options                                                  26,500
   Purchase of treasury stock (3,793 shares)                                      (45,901)     (45,901)
   Stock withdrawn from Rabbi Trusts                                                             8,355
   Net change in fair value of Rabbi Trust
     shares, net of tax                                                                         19,166
                                                  ------------------------------------------------------
BALANCES, JUNE 30, 2001                            $12,839,997     $291,628   $(2,484,267) $20,468,828
                                                  ======================================================
</TABLE>
See notes to consolidated financial statements.
                                      (20)
<PAGE>

                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                                  2001            2000
--------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
<S>                                                            <C>             <C>
   Net income                                                  $  1,489,318    $  1,441,711
   Adjustments to reconcile net income to net cash
     provided by operating activities
     Provision (adjustment) for loan losses                         104,980        (436,988)
     Depreciation and amortization
       Goodwill                                                     107,525          92,655
       Premises and equipment                                       378,780         292,876
       Investment securities                                       (138,780)        (85,388)
       Premises and equipment gains                                  (9,976)
     FHLB stock dividend                                           (107,700)        (72,900)
     Investment security loss                                           670
     Deferred income tax                                            (54,620)        198,000
     Net change in
       Trading assets, at fair value                               (290,757)        256,238
       Interest receivable                                          117,415         (86,052)
       Interest payable                                             111,372         117,730
       Other assets                                                 677,488        (362,552)
       Other liabilities                                           (103,055)       (136,634)
                                                               ----------------------------
         Net cash provided by operating activities                2,282,660       1,218,696
                                                               ----------------------------

INVESTING ACTIVITIES
   Purchases of securities available for sale                   (14,300,249)     (8,346,396)
   Proceeds from maturities of securities available for sale     11,572,457       8,237,202
   Proceeds from sales of securities available for sale           3,649,998
   Purchases of securities held to maturity                                      (7,874,038)
   Proceeds from maturities of securities held to maturity        5,794,382       5,211,053
   Net change in loans                                           (5,574,657)    (10,214,962)
   Purchases of premises and equipment                           (1,277,442)     (1,731,741)
   Proceeds from sales of premises and equipment                    137,323
   Acquisition of deposits (net of cash acquired)                                  (459,423)
                                                               ----------------------------
         Net cash provided (used) by investing activities             1,812     (15,178,305)
                                                               ----------------------------
</TABLE>

                                      (21)

<PAGE>
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (continued)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                       2001             2000
----------------------------------------------------------------------------------
<S>                                                  <C>             <C>
FINANCING ACTIVITIES
   Net change in
     Noninterest-bearing, interest-bearing and
       savings deposits                              $   (180,009)   $  4,020,255
     Certificates of deposit                            9,591,476      14,529,000
     Short-term borrowings                               (400,000)     (6,100,000)
   Proceeds of long-term debt                                           2,000,000
   Repayment of long-term debt                            (75,254)        (69,451)
   Cash dividends                                        (493,240)       (475,502)
   Purchase of stock                                      (45,901)       (407,411)
   Cash paid in lieu of fractional shares                                  (1,216)
   Proceeds from exercise of stock options                 26,500          53,832
   Common stock withdrawn from Rabbi trusts                 8,355           8,352
                                                     ----------------------------
         Net cash provided by financing activities      8,431,927      13,557,859
                                                     ----------------------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                10,716,399        (401,750)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR            3,171,389       3,573,139
                                                     ----------------------------

CASH AND CASH EQUIVALENTS, END OF YEAR               $ 13,887,788    $  3,171,389
                                                     ============================

ADDITIONAL CASH FLOWS INFORMATION
   Interest paid                                     $  9,383,226    $  8,147,294
   Income tax paid                                        630,014         690,254
</TABLE>
See notes to consolidated financial statements.

                                      (22)
<PAGE>
                    HFB FINANCIAL CORPORATION AND SUBSIDIARY

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


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

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

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

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

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

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

TRADING ACTIVITIES are engaged in by the Company for its own account. Securities
that are held  principally  for  resale  in the near  term are  recorded  in the
trading  assets  account at fair value with  changes in fair value  recorded  in
earnings.   Trading  account  securities  consist  primarily  of  thrift  equity
securities. Interest and dividends are included in net interest income.

Quoted   market  prices  are  used  to  determine  the  fair  value  of  trading
instruments.

INVESTMENT  SECURITIES--Debt  securities are classified as held to maturity when
the  Company  has the  positive  intent and  ability to hold the  securities  to
maturity.  Securities  held to maturity  are  carried at  amortized  cost.  Debt
securities not classified as held to maturity or included in the trading account
and  marketable  equity  securities  not classified as trading are classified as
available for sale. Securities available for sale are carried at fair value with
unrealized   gains  and  losses   reported   separately  in  accumulated   other
comprehensive income, net of tax.

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

                                      (23)
<PAGE>

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


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

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

The  determination  of the adequacy of the allowance for loan losses is based on
estimates  that are  particularly  susceptible  to  significant  changes  in the
economic environment and market conditions.  Management believes that as of June
30,  2001 the  allowance  for  loan  losses  is  adequate  based on  information
currently  available.  A worsening or  protracted  economic  decline in the area
within which the Bank  operates  would  increase the  likelihood  of  additional
losses due to credit and market risks and could  create the need for  additional
loss reserves.

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

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

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

EMPLOYEE  STOCK  OWNERSHIP  PLAN--The  Company  accounts for its employee  stock
ownership plan (ESOP) in accordance with American  Institute of Certified Public
Accountants  (AICPA)  Statement  of Position  93-6,  Employer's  Accounting  for
Employee Stock  Ownership  Plans.  The cost of shares issued to the ESOP but not
yet allocated to participants are presented in the consolidated balance sheet as
a reduction of stockholders'  equity.  Compensation expense is recorded based on
the  market  price  of the  shares  as they are  committed  to be  released  for
allocation to participant accounts.  The difference between the market price and
the cost of the shares  committed to be released is recorded as an adjustment to
paid-in  capital.  Dividends  on  allocated  ESOP  shares  will be recorded as a
reduction of retained  earnings;  dividends on  unallocated  ESOP shares will be
reflected as a reduction of debt.

Shares will be considered  outstanding for earnings per share  calculations when
they  are  committed  to be  released;  unallocated  shares  are not  considered
outstanding.

                                      (24)
<PAGE>

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


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

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

EARNINGS PER SHARE have been  computed  based upon the weighted  average  common
shares (including ESOP shares)  outstanding  during each year. All share and per
share  amounts in prior years have been  adjusted to reflect the effect of a 20%
stock dividend paid during 2000.

NOTE 2 -- DEPOSIT PURCHASE

On October 15,  1999,  the Bank  purchased  certain  assets and assumed  certain
liabilities  related to National City Bank's  Harlan,  Kentucky,  location.  The
assets  included  $16,759,000  of cash and  $12,000 of  personal  property.  The
liabilities  consisted of $17,120,000 of customer deposits and $110,000 of other
liabilities.  A premium of $459,000  is being  amortized,  using an  accelerated
method, over seven years.

                                      (25)

<PAGE>

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


NOTE 3 -- INVESTMENT SECURITIES
<TABLE>
<CAPTION>
                                                               GROSS            GROSS
                                           AMORTIZED        UNREALIZED        UNREALIZED          FAIR
                                              COST             GAINS            LOSSES            VALUE
                                         ---------------------------------------------------------------------
<S>                                          <C>                  <C>                             <C>
JUNE 30, 2001
   Available for sale
     U. S. Treasury                          $  1,000             $  24                           $  1,024
     Corporate bonds                            7,735                50          $    (2)            7,783
     Federal agencies                          22,767               256              (60)           22,963
     Municipals                                 1,021                64                              1,085
     Mortgage-backed securities                24,146               219             (110)           24,255
                                         ---------------------------------------------------------------------

         Total investment securities          $56,669              $613            $(172)          $57,110
                                         =====================================================================

JUNE 30, 2000
   Available for sale
     U. S. Treasury                          $  2,497              $  3        $      (1)         $  2,499
     Federal agencies                          21,431                             (1,220)           20,211
     Municipals                                 1,018                 8                              1,026
     Mortgage-backed securities                13,604                 1             (669)           12,936
                                         ---------------------------------------------------------------------
         Total available for sale              38,550                12           (1,890)           36,672
                                         ---------------------------------------------------------------------

   Held to maturity
     Federal agencies                          13,201                               (665)           12,536
     Mortgage-backed securities                11,496                12             (538)           10,970
                                         ---------------------------------------------------------------------
         Total held to maturity                24,697                12           (1,203)           23,506
                                         ---------------------------------------------------------------------

         Total investment securities          $63,247               $24          $(3,093)          $60,178
                                         =====================================================================
</TABLE>
                                      (26)

<PAGE>

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


The amortized  cost and fair value of securities  available for sale at June 30,
2001, by contractual maturity,  are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.

                                         AVAILABLE FOR SALE
                                   ----------------------------------
                                      AMORTIZED         FAIR
JUNE 30                                 COST                 VALUE
---------------------------------------------------------------------

Within one year                        $  1,000          $  1,023
One to five years                        15,377            15,629
Five to ten years                         7,970             8,009
After ten years                           8,176             8,194
                                   ----------------------------------
                                         32,523            32,855
Mortgage-backed securities               24,146            24,255
                                   ----------------------------------

       Totals                           $56,669           $57,110
                                   ==================================

Securities  with a carrying value of $4,850,000  and $9,697,000  were pledged at
June  30,  2001 and 2000 to  secure  certain  deposits  and for  other  purposes
permitted or required by law.

Proceeds  from  sales  of  securities   available  for  sale  during  2001  were
$3,649,998.  Gross gains on those  sales of $13,074 and gross  losses of $13,744
were realized on those sales.  There were no sales of  securities  available for
sale during 2000.

Unrealized  holding  gains  (losses)  on  trading  securities  of  $259,697  and
$(170,992) were included in earnings in 2001 and 2000.

During 2001, the Company  engaged a professional  investment-consulting  firm to
assist  in  creating  an  asset  liability  management  strategy.   One  of  the
suggestions of the firm upon implementation of the strategy was that the Company
transfer all  securities  that were  classified as held to maturity to available
for sale. Following this recommendation, the Company transferred debt securities
with an amortized  cost of  $18,975,585  from held to maturity to available  for
sale. The  securities  had an unrealized  gain of  approximately  $212,000.  The
Company  currently has no intentions of  classifying  any  securities as held to
maturity in the future.

                                      (27)
<PAGE>


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


NOTE 4 -- LOANS AND ALLOWANCE

JUNE 30                                                    2001          2000
--------------------------------------------------------------------------------

Commercial real estate and industrial loans            $  14,801      $  11,671
Real estate mortgage loans                               111,783        108,392
Construction loans                                         4,721          6,690
Consumer loans                                             6,276          5,286
                                                       ------------------------
                                                         137,581        132,039
Allowance for loan losses                                   (718)          (645)
                                                       ------------------------

       Total loans                                     $ 136,863      $ 131,394
                                                       ========================


YEAR ENDED JUNE 30                                        2001            2000
--------------------------------------------------------------------------------

Allowance for loan losses
   Balances, beginning of year                         $     645      $   1,212
   Provision (adjustment) for losses                         105           (437)
   Recoveries on loans                                        11              3
   Loans charged off                                         (43)          (133)
                                                       ------------------------

   Balances, end of year                               $     718      $     645
                                                       ========================

Information on impaired loans is summarized below:

JUNE 30                                                    2001           2000
--------------------------------------------------------------------------------

Impaired loans with an allowance                       $   1,387      $   1,563
                                                       ========================

Allowance for impaired loans (included in the
   Company's allowance for loan losses)                $     124      $     293
                                                       ========================

YEAR ENDED JUNE 30                                         2001           2000
--------------------------------------------------------------------------------

Average balance of impaired loans                      $  1,420       $   1,211
Interest income recognized on impaired loans                146              27
Cash-basis interest included above                          146              27

                                      (28)

<PAGE>

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


NOTE 5 -- PREMISES AND EQUIPMENT

JUNE 30                                                2001             2000
--------------------------------------------------------------------------------

Land and improvements                                 $ 1,286           $ 1,226
Buildings                                               2,872             2,284
Furniture and equipment                                 2,369             1,832
Automobiles                                                99               135
                                                      -------------------------
       Total cost                                       6,626             5,477
Accumulated depreciation                               (1,983)           (1,606)
                                                      -------------------------

       Net                                            $ 4,643           $ 3,871
                                                      =========================


NOTE 6 -- DEPOSITS

JUNE 30                                                        2001       2000
--------------------------------------------------------------------------------

Demand deposits                                              $ 17,708   $ 17,323
Savings deposits                                                7,357      7,922
Certificates and other time deposits of
   $100,000 or more                                            53,469     44,377
Other certificates and time deposits                          103,414    102,915
                                                             -------------------

       Total deposits                                        $181,948   $172,537
                                                             ===================

Certificates and other time deposits maturing in years ending June 30

   2002                                                   $116,002
   2003                                                     33,382
   2004                                                      3,951
   2005                                                      1,505
   2006                                                      2,030
   Thereafter                                                   13
                                                   -------------------
                                                          $156,883
                                                   ===================

                                      (29)
<PAGE>

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


NOTE 7 -- SHORT-TERM BORROWINGS AND LINE OF CREDIT

In 2001 and 2000, the Company had available a 90-day revolving line of credit up
to a maximum  of  $15,000,000.  The line of  credit  bears  interest  at a daily
variable rate which is set by the Federal Home Loan Bank.

At June 30, 2001 and 2000,  the Company had drawn $0 and $400,000 on the line of
credit.

This line of credit is  collateralized  by FHLB  stock and  single-family  first
mortgage  loans  with  aggregate   principal   balances  totaling  150%  of  the
outstanding amount.


NOTE 8 -- LONG-TERM DEBT

JUNE 30                                                  2001       2000
--------------------------------------------------------------------------------

Federal Home Loan Bank advances, variable
   rates, due at various dates through March 2010        $12,453     $12,528
                                                    ============================

These advances are collateralized by FHLB stock and single-family first mortgage
loans with aggregate  principal balances totaling 150% of the outstanding amount
of advances or $18,680,000. Advances are subject to restrictions or penalties in
the event of prepayment.

Maturities in years ending June 30

   2002                                           $      82
   2003                                                  88
   2004                                                  96
   2005                                               2,687
   2006                                                   0
   Thereafter                                         9,500
                                             -------------------

                                                    $12,453
                                             ===================

                                      (30)

<PAGE>

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


NOTE 9 -- INCOME TAX

YEAR ENDED JUNE 30                                2001             2000
-------------------------------------------------------------------------------

Income tax expense
   Currently payable
     Federal                                        $758              $546
     State                                            63                44
   Deferred
     Federal                                         (45)              188
     State                                            (9)               10
                                                -------------------------------

       Total income tax expense                     $767              $788
                                                ===============================

Reconciliation of federal statutory to
   actual tax expense
   Federal statutory income tax at 34%              $767              $758
   Effect of state income taxes                       36                36
   Other                                             (36)               (6)
                                                -------------------------------

       Actual tax expense                           $767              $788
                                                ===============================

                                      (31)

<PAGE>

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


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

JUNE 30                                                 2001       2000
-----------------------------------------------------------------------------

ASSETS
   Deferred compensation                                $122        $125
   Deferred compensation--Rabbi trust                     85         106
   Unrealized loss on securities available for sale                  691
   Deposit-based intangibles                              53          25
   Other                                                   5           5
                                                      -----------------------
         Total assets                                    265         952
                                                      -----------------------

LIABILITIES
   Basis in FHLB stock                                  (351)       (312)
   Allowance for loan losses                             (92)       (188)
   Unrealized gain on securities available for sale     (158)
   Depreciation                                          (79)        (51)
                                                      -----------------------
         Total liabilities                              (680)       (551)
                                                      -----------------------
                                                       $(415)       $401
                                                      =======================

Retained earnings include approximately  $2,096,000 for which no deferred income
tax  liability  has been  recognized.  This amount  represents  an allocation of
income  to bad debt  deductions  as of June  30,  1988  for tax  purposes  only.
Reduction  of amounts so allocated  for purposes  other than tax bad debt losses
including  redemption  of bank stock,  payment of excess  dividends,  or loss of
"bank" status,  would create income for tax purposes only, which income would be
subject to the  then-current  corporate  income tax rate. At June 30, 2001,  the
unrecorded  deferred income tax liability on the above amount was  approximately
$800,000.

                                      (32)

<PAGE>

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


NOTE 10 -- OTHER COMPREHENSIVE INCOME--UNREALIZED GAINS (LOSSES) ON SECURITIES
<TABLE>
<CAPTION>
                                                                             2001
                                                          ------------------------------------------
                                                            BEFORE-TAX        TAX        NET-OF-TAX
YEAR ENDED JUNE 30                                           AMOUNT         EXPENSE       AMOUNT
----------------------------------------------------------------------------------------------------

Unrealized gains on securities:
<S>                                                          <C>             <C>           <C>
   Unrealized holding gains arising during the year          $2,318          $(841)        $1,477
   Less: reclassification adjustment for losses
     realized in net income                                      (1)                           (1)
                                                          ------------------------------------------

   Other comprehensive income--net unrealized
     gains on securities                                     $2,319          $(841)        $1,478
                                                          ==========================================

                                                                             2000
                                                          ------------------------------------------
                                                            BEFORE-TAX        TAX        NET-OF-TAX
YEAR ENDED JUNE 30                                           AMOUNT         EXPENSE       AMOUNT
----------------------------------------------------------------------------------------------------

Unrealized losses on securities:
   Unrealized holding losses arising during the year         $ (785)         $ 285         $ (500)
                                                          ==========================================
</TABLE>
                                      (33)

<PAGE>

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


NOTE 11 -- COMMITMENTS AND CONTINGENT LIABILITIES

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

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

                                             2001             2000
                                      ------------------------------------

Commitments to extend credit                  $3,257            $3,016
Standby letters of credit                        517               259

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

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

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

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


NOTE 12 -- DIVIDENDS AND CAPITAL RESTRICTIONS

Without prior approval,  current  regulations allow the Bank to pay dividends to
the Company  not  exceeding  net income for the current  year plus those for the
preceding two years.  The Bank normally  restricts  dividends to a lesser amount
because of the need to maintain an adequate capital structure.

                                      (34)

<PAGE>

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


NOTE 13 -- REGULATORY CAPITAL

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

There are five capital categories defined in the regulations,  ranging from well
capitalized to critically  undercapitalized.  Classification of a bank in any of
the  undercapitalized  categories can result in actions by regulators that could
have a material  effect on a bank's  operations.  At June 30, 2001 and 2000, the
Bank is categorized as well  capitalized  and met all subject  capital  adequacy
requirements.  There  are no  conditions  or  events  since  June 30,  2001 that
management believes have changed the Bank's classification.

The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
                                                                              REQUIRED FOR               TO BE WELL
                                                       ACTUAL               ADEQUATE CAPITAL1           CAPITALIZED1
                                             -------------------------------------------------------------------------------
                                                 AMOUNT        RATIO       AMOUNT       RATIO        AMOUNT       RATIO
                                             -------------------------------------------------------------------------------
AS OF JUNE 30, 2001
   Total risk-based capital1 (to risk-
<S>                                              <C>            <C>          <C>          <C>        <C>           <C>
     weighted assets)                            $17,886        15.74%       $9,089       8.00%      $11,361       10.00%
   Tier 1 capital1 (to risk-weighted assets)      18,718        16.48         4,544       4.00         6,816        6.00
   Core capital1 (to adjusted total assets)       18,718         8.65         8,657       4.00        10,821        5.00
   Core capital1 (to adjusted tangible            18,718         8.67         4,317       2.00           N/A         N/A
     assets)
   Tangible capital1 (to adjusted total           18,718         8.65         3,246       1.50           N/A         N/A
     assets)

AS OF JUNE 30, 2000
   Total risk-based capital1 (to risk-
     weighted assets)                            $18,238        18.33%       $7,960       8.00%     $  9,950       10.00%
   Tier 1 capital1 (to risk-weighted assets)      17,638        17.77         3,980       4.00         5,970        6.00
   Core capital1 (to adjusted total assets)       17,638         8.59         8,214       4.00        10,267        5.00
   Core capital1 (to adjusted tangible            17,638         8.56         4,123       2.00           N/A         N/A
     assets)
   Tangible capital1 (to adjusted total           17,638         8.59         3,080       1.50           N/A         N/A
     assets)
</TABLE>
1As defined by regulatory agencies

                                      (35)
<PAGE>

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


NOTE 14 -- EMPLOYEE BENEFIT PLANS

PENSION PLAN
The  Company is a  participant  in a pension  fund known as The  Pentegra  Group
(formerly  the  Financial   Institutions   Retirement  Fund).  This  plan  is  a
multi-employer  plan; separate actuarial valuations are not made with respect to
each participating  employer. Plan benefits are fully vested after five years of
service and are based on an employee's  years of service and a percentage of the
employee's average salary,  using the five highest  consecutive years proceeding
retirement. The Bank's funding policy is to make contributions to the plan equal
to the amount accrued as pension  expense.  The Bank incurred no expense for the
years ended June 30, 2001 or 2000.

EMPLOYEE STOCK OWNERSHIP PLAN
The  Bank has an  Employee  Stock  Ownership  Plan  (Plan)  for the  benefit  of
participating  employees.  Generally, all employees age 21 or older are eligible
to participate upon completion of one year of service. The Plan contains 101,177
shares of Company  stock,  all of which are  allocated.  The cost of the Plan is
borne by the Company through  contributions to an employee stock ownership trust
in amounts  determined by the Board of Directors.  The contributions to the Plan
in 2001 and 2000 were $8,000 and $21,489, respectively.

DEFERRED COMPENSATION AGREEMENTS (RABBI TRUSTS)
Prior to its conversion,  the Bank maintained an unfunded deferred  compensation
plan for members of the Board of Directors who elected to participate in any one
year.  Benefits  were  payable  upon  a  participating   director's  retirement,
resignation,  disability or death unless the plan  committee  permitted  earlier
distributions in the event of a participant's  emergency or necessity.  The Bank
established  individual  grantor trusts (Rabbi trusts) for each director who had
deferred  compensation,  contributed funds sufficient to equal the deferred fees
for each  director  and  purchased  a total of 44,473  shares  of HFB  Financial
Corporation  common stock at its  conversion  date. The assets of the individual
Rabbi trusts are available to the general  creditors of the Bank in the event of
the Bank's  insolvency.  In 1994,  the Bank adopted a new Deferred  Compensation
Agreement for the directors similar to the old agreement.  All deferred payments
are paid to these same Rabbi trusts.

The Rabbi  trusts did not purchase any shares of stock in 2001 and 2000. A total
of 1,670 shares were  distributed  to a trust  beneficiary in 2001 and 2000. The
Bank's  liability  at June 30,  2001 and 2000 for both  plans was  $574,300  and
$655,800.  Deferred amounts are included in other liabilities.  The stock in the
grantor  trusts is shown as a  contra-capital  account until  distributed to the
directors over a five-year period beginning at their retirement,  resignation or
death. The amount charged to expense was $5,000 and $9,000 for 2001 and 2000.

                                      (36)

<PAGE>

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


NOTE 15 -- STOCK OPTION PLAN

The Company has an incentive stock option plan in which 144,500 shares have been
reserved for future  issuance by the Company to directors  and  employees of the
Company and its  subsidiary.  The plan  provides for a term of ten years,  after
which  no  awards  may be  made,  unless  earlier  terminated  by the  Board  of
Directors.  At June 30,  2001,  options  to  purchase  143,641  shares  had been
granted.

Under the  Company's  incentive  stock  option plan,  which is accounted  for in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock  Issued to  Employees,  and related  interpretations,  the Company  grants
selected  executives and other key employees  stock option awards which vest and
become fully exercisable  immediately.  During 2000, the Company  authorized the
grant of options  for up to 4,768  shares of the  Company's  common  stock.  The
exercise  price of each  option,  which has a  ten-year  life,  was equal to the
market  price of the  Company's  stock on the date of the grant;  therefore,  no
compensation expense was recognized. No options were granted during 2001.

Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma  disclosures  of net income and  earnings  per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated using an option-pricing model with the following
assumptions:

                                                                        2000
                                                                ---------------

Risk-free interest rate                                                  6.8%
Dividend yield                                                           3.5%
Volatility factor of expected market price of common stock              20.0%

Weighted-average expected life of the options                        10 years

Under  SFAS No.  123,  compensation  cost is  recognized  in the  amount  of the
estimated  fair value of the options and  amortized to expense over the options'
vesting  period.  The options  granted during 2000 vested  immediately.  The pro
forma effect on net income and earnings per share of this statement for the year
ended June 30, 2000 are as follows:

                                                                   2000
                                                             ------------------

Net income                           As reported                     $1,442
                                     Pro forma                        1,430

Basic earnings per share             As reported                      $1.09
                                     Pro forma                         1.08

Diluted earnings per share           As reported                      $1.08
                                     Pro forma                         1.07

                                      (37)
<PAGE>

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


The following is a summary of the status of the Company's  stock option plan and
changes in that plan as of and for the years ended June 30, 2001 and 2000.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30                                      2001                          2000
--------------------------------------------------------------------------------------------------------
                                                            WEIGHTED-                     WEIGHTED-
                                                             AVERAGE                       AVERAGE
            OPTIONS                            SHARES     EXERCISE PRICE    SHARES     EXERCISE PRICE
--------------------------------------------------------------------------------------------------------
<S>                                            <C>             <C>           <C>          <C>
Outstanding, beginning of year                 27,014          $7.53         33,013       $  6.26
Granted                                                                       4,768         10.63
Exercised                                       5,300           5.00         10,766          5.00
                                            --------------               --------------

Outstanding, end of year                       21,714           8.15         27,014          7.53
                                            ==============               ==============

Options exercisable at year end                21,714           8.15         27,014          7.53

Weighted-average fair value of options
   granted during the year                                                                  $3.64
</TABLE>
As of June 30, 2001, the 21,714 options outstanding have exercise prices ranging
from $5.00 to $10.75 and a weighted-average  remaining  contractual life of 4.30
years.

                                      (38)
<PAGE>

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


NOTE 16 -- EARNINGS PER SHARE

Earnings per share were computed as follows:
<TABLE>
<CAPTION>
                                                               YEAR ENDED JUNE 30, 2001
                                                 ------------------------------------------------------
                                                                   WEIGHTED AVERAGE      PER SHARE
                                                      INCOME            SHARES             AMOUNT
                                                 ------------------------------------------------------
<S>                                                     <C>             <C>                 <C>
NET INCOME                                              $1,489
                                                 ==================
BASIC EARNINGS PER SHARE
  Income available to common stockholders               $1,489          1,245,799           $1.20
EFFECT OF DILUTIVE SECURITIES
  Stock options                                                            15,269
                                                 -------------------------------------
DILUTED EARNINGS PER SHARE
  Income available to common stockholders
    and assumed conversions                             $1,489          1,261,068           $1.18
                                                 ======================================================

                                                               YEAR ENDED JUNE 30, 2000
                                                 ------------------------------------------------------
                                                                   WEIGHTED AVERAGE      PER SHARE
                                                      INCOME            SHARES             AMOUNT
                                                 ------------------------------------------------------

NET INCOME                                              $1,442
                                                   ===================
BASIC EARNINGS PER SHARE
  Income available to common stockholders               $1,442          1,321,443           $1.09
EFFECT OF DILUTIVE SECURITIES
  Stock options                                                            11,058
                                                   -----------------------------------
DILUTED EARNINGS PER SHARE
  Income available to common stockholders
    and assumed conversions                             $1,442          1,332,501           $1.08
                                                   ====================================================
</TABLE>
                                      (39)

<PAGE>

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


NOTE 17 -- FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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

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

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

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

                                      (40)
<PAGE>

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


The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
                                                            2001                               2000
                                                --------------------------------------------------------------------
                                                   CARRYING            FAIR            CARRYING           FAIR
JUNE 30                                             AMOUNT             VALUE            AMOUNT            VALUE
--------------------------------------------------------------------------------------------------------------------

ASSETS
<S>                                                <C>               <C>             <C>               <C>
   Cash and cash equivalents                       $  13,888         $  13,888       $    3,171        $    3,171
   Trading assets, at fair value                       1,049             1,049              759               759
   Investment securities available for sale           57,110            57,110           36,672            36,672
   Investment securities held to maturity                                                24,697            23,505
   Loans, net                                        136,863           142,967          131,394           131,252
   FHLB stock                                          1,527             1,527            1,420             1,420
   Interest receivable                                 1,791             1,791            1,908             1,908

LIABILITIES
   Deposits                                          181,948           180,962          172,537           169,495
   Short-term borrowings                                                                    400               400
   Long-term debt                                     12,453            12,614           12,528            12,292
   Interest payable                                      962               962              851               851
</TABLE>

NOTE 18 -- CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

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

                             CONDENSED BALANCE SHEET

JUNE 30                                               2001        2000
------------------------------------------------------------------------------

ASSETS
   Cash and cash equivalents                          $    25      $   261
   Trading assets, at fair value                        1,049          759
   Investment in common stock of subsidiary            19,269       16,819
   Other assets                                           126          147
                                               -------------------------------

         Total assets                                 $20,469      $17,986
                                               ===============================

STOCKHOLDERS' EQUITY                                  $20,469      $17,986
                                               ===============================

                                      (41)
<PAGE>

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


                          CONDENSED STATEMENT OF INCOME

YEAR ENDED JUNE 30                                   2001          2000
-----------------------------------------------------------------------------

INCOME
   Dividends from subsidiary                       $   426       $   800
   Net gain (loss) on trading securities               260          (163)
   Other income                                          2            34
                                                -----------------------------
         Total income                                  688           671

EXPENSES
   Other expenses                                       62            24
                                                -----------------------------

INCOME BEFORE INCOME TAX AND EQUITY IN
   UNDISTRIBUTED INCOME OF SUBSIDIARY                  626           647

INCOME TAX EXPENSE (BENEFIT)                            82           (52)
                                                -----------------------------

INCOME BEFORE EQUITY IN UNDISTRIBUTED
   INCOME OF SUBSIDIARY                                544           699

EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY           945           743
                                                -----------------------------

NET INCOME                                          $1,489        $1,442
                                                =============================

                                      (42)
<PAGE>

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


                        CONDENSED STATEMENT OF CASH FLOWS

YEAR ENDED JUNE 30                                           2001        2000
-------------------------------------------------------------------------------

OPERATING ACTIVITIES
   Net income                                               $ 1,489     $ 1,442
   Adjustments to reconcile net income to net
     cash provided by operating activities
     Equity in undistributed earnings of subsidiary            (945)       (743)
     Net change in
       Trading assets, at fair value                           (290)        256
       Other assets and other liabilities                        21         (47)
     Other                                                       (7)         (9)
                                                            -------------------
         Net cash provided by operating activities              268         899
                                                            -------------------

FINANCING ACTIVITIES
   Proceeds from exercise of stock options                       27          54
   Cash paid in lieu of fractional shares                        (1)
   Purchase of stock                                            (46)       (407)
   Common stock withdrawn from Rabbi trusts                       8           8
   Cash dividends                                              (493)       (476)
                                                            -------------------
         Net cash used by financing activities                 (504)       (822)
                                                            -------------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                        (236)         77

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                    261         184
                                                            -------------------

CASH AND CASH EQUIVALENTS, END OF YEAR                      $    25     $   261
                                                            ===================


NOTE 19 -- SUBSEQUENT EVENT

Subsequent  to June 30, 2001,  the Board of Directors of the Company  authorized
the Bank to  convert  from a  federally  chartered  savings  bank to a  Kentucky
chartered  commercial bank. The conversion is subject to approval by federal and
Kentucky banking regulators.

                                      (43)

<PAGE>
[LOGO OF BKD, LLP]


                          INDEPENDENT AUDITOR'S REPORT



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


We have audited the  accompanying  consolidated  balance  sheet of HFB Financial
Corporation  and  subsidiary  as of June 30,  2001  and  2000,  and the  related
consolidated statements of income,  stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these consolidated financial statements based on our audits.

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

In our opinion,  the consolidated  financial  statements described above present
fairly, in all material  respects,  the consolidated  financial  position of HFB
Financial  Corporation  and  subsidiary  as of June 30,  2001 and 2000,  and the
results of their  operations  and their cash flows for the years then ended,  in
conformity with accounting principles generally accepted in the United States of
America.

BKD, LLP


Evansville, Indiana
July 13, 2001

                                      (44)
<PAGE>
<TABLE>
<CAPTION>
<S>                                      <C>                                      <C>
                               BOARD OF DIRECTORS

ROBERT V. COSTANZO                       FRANK W. LEE                             FRANCES COFFEY RASNIC
Chairman of the Board of                 Retired Pharmacist                       Manager
the Bank and the Company                 Lee's Drug Store                         Coffey Funeral Home

E. W. NAGLE                              CHARLES A. HARRIS                        EARL BURCHFIELD
Vice Chairman of the Bank                Independent Insurance Agent              Retired Publisher of
and a Director of the Company            Harris Insurance Agency                  Middlesboro Daily News

DAVID B. COOK
President, Chief Executive
Officer and Director of the
Bank and the Company

                               EXECUTIVE OFFICERS

DAVID B. COOK                            STANLEY ALEXANDER, JR.                   KENNETH V. JONES
President and Chief Executive            Chief Financial Officer                  Chief Operating Officer
Officer

                                OFFICE LOCATIONS

MAIN OFFICE                              BRANCH OFFICE                            BRANCH OFFICE
1602 Cumberland Avenue                   Village Center                           500 Fifth Avenue
Middlesboro, Kentucky                    Harlan, Kentucky                         New Tazewell, Tennessee

                                         BRANCH OFFICE
                                         104 Cumberland Avenue
                                         Harlan, Kentucky

                               GENERAL INFORMATION
                                                                                  ANNUAL REPORT ON FORM 10-KSB
INDEPENDENT CERTIFIED                    ANNUAL MEETING                           A copy of the Company's Annual Report on
PUBLIC ACCOUNTANTS                       The 2001 Annual Meeting of Stockholders  Form 10-KSB for the fiscal year ended
BKD, LLP                                 will be held on October 17, 2001 at 2.00 June 30, 2001, as filed with the
20 N. W. Third Street                    p.m.                                     Securities and Exchange Commission, will
Evansville, Indiana  47708               at the Pine Mountain State Resort        be furnished without charge to
                                         Park, Pineville, Kentucky.               stockholders as of the record date for
                                                                                  the 2001 Annual Meeting upon written
GENERAL COUNSEL                          TRANSFER AGENT AND REGISTRAR             request to the Chief Financial Officer,
Joseph Coker                             Registrar & Transfer Company             HFB Financial Corporation, 1602
P. O. Box 134                            10 Commerce Drive                        Cumberland Avenue, Middlesboro, Kentucky.
Jacksboro, Tennessee  37757              Crawford, New Jersey  07016-3572


SPECIAL COUNSEL
Kutak Rock
Suite 1000
1101 Connecticut Ave., N. W.
Washington, D.C.  20036-4374
</TABLE>
                                      (45)