SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
       Act of 1934 
       [FEE  REQUIRED]
        
       For the Fiscal Year Ended September 30, 1997

                                       OR

[  ]   Transition Report Pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934 
       [NO FEE REQUIRED]
         

       For the transition period from _______________ to  ______________________

                         Commission File Number: 0-27304

                             CHARTER FINANCIAL, INC.
             (Exact name of registrant as specified in its charter)

          Delaware                                         37-1345386
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                         Identification Number)

                 114 West Broadway, Sparta, Illinois 62286-1683
                (Address of Principal Executive Offices) Zip Code

                                 (618) 443-2166
                         (Registrant's telephone number)

          Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

          Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.10 per share
                                (Title of Class)

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  twelve  months (or for such shorter  period that the
Registrant  was required to file such  reports) and (2) has been subject to such
requirements for the past 90 days. YES [X[   NO [ ] 

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

         As of December 4, 1997,  there were  issued and  outstanding  4,150,123
shares of the Registrant's Common Stock.
<PAGE>
         The aggregate  market value of the voting stock held by  non-affiliates
of the  Registrant  computed by  reference to the last sale price on December 4,
1997,  as  reported  by the Nasdaq  National  Market,  was  approximately  $71.8
million. (The exclusion from such amount of the market value of the shares owned
by any  person  shall not be deemed an  admission  by the  Registrant  that such
person is an affiliate of the Registrant.)

                       DOCUMENTS INCORPORATED BY REFERENCE

1.       Portions  of Annual  Report to  Stockholders  for the fiscal year ended
         September 30, 1997 (Parts II and IV).

2.       Portions of Proxy Statement for the 1998 Annual Meeting of Stockholders
         (Part III).

<PAGE>
                                     PART I

ITEM 1.  Business

Charter Financial, Inc.

         Charter Financial,  Inc. (the "Company") is a Delaware corporation that
was  organized in June 1995.  The only  significant  asset of the Company is its
investment in Charter Bank, S.B., a wholly-owned  subsidiary of the Company (the
"Bank").  The Company is registered  as a savings and loan holding  company with
the Office of Thrift Supervision (the "OTS").

         The Company  employs  executive  officers and a support staff if and as
the  need  arises.  Such  personnel  are  provided  by the Bank and are not paid
separate  remuneration for such services. At September 30, 1997, the Company had
total  consolidated  assets of $387.0 million,  total  consolidated  deposits of
$276.0 million,  and  consolidated  stockholders'  equity of $58.4 million.  The
Company's  executive  office is located at 114 West Broadway,  Sparta,  Illinois
62286 and its telephone number is (618) 443-2166.

Charter Bank, S.B.

         Charter Bank, S.B. (the "Bank") is an  Illinois-chartered  savings bank
headquartered in Sparta,  Illinois. The Bank conducts its business from its main
office and seven full-service  branches located in Carbondale (2),  Murphysboro,
Steeleville,  DuQuoin,  Anna,  and  Marion,  Illinois.  The Bank was  originally
chartered  in 1894.  The Bank has been a member  of the  Federal  Home Loan Bank
System  since 1936.  The Bank's  deposits  are  insured by the  Federal  Deposit
Insurance Corporation ("FDIC").

         The Bank is a community-oriented  savings bank engaged primarily in the
business of attracting  retail  deposits  from the general  public in the Bank's
market area and using such funds  together with  borrowings and funds from other
sources to primarily  originate  mortgage  loans secured by one- to  four-family
residential real estate and consumer loans. The Bank also originates  commercial
real estate loans, multi-family real estate loans and commercial business loans.
Additionally, the Bank invests in mortgage-backed securities primarily issued or
guaranteed by the United States Government or agencies thereof,  and maintains a
portion  of its assets in liquid  investments,  such as  overnight  funds at the
Federal Home Loan Bank ("FHLB") of Chicago.  The Bank invests in  obligations of
the United  States  Government  or  agencies  thereof,  collateralized  mortgage
obligations, mutual funds, municipal bonds and corporate debentures.

         The Bank's  principal  sources of funds are  deposits,  FHLB  advances,
reverse repurchase agreements,  funds received from the repayment and prepayment
of loans and mortgage-backed  securities,  on-going operations,  and the sale or
maturity of  investment  securities.  Principal  sources of income are  interest
income on residential,  commercial and consumer loans,  interest on investments,
commissions  and fees.  The  Bank's  principal  expenses  are  interest  paid on
deposits,  interest  paid  on  borrowed  money  and  employee  compensation  and
benefits.

         The Bank's principal  executive office is located at 114 West Broadway,
Sparta, Illinois, and its telephone number at that address is (618) 443-2166.
<PAGE>
Reorganization

         On October 15, 1993, the Bank  reorganized  from an  Illinois-chartered
mutual savings bank into an Illinois mutual holding company (the "MHC"). As part
of the  reorganization,  the Bank offered a minority equity interest in the Bank
to its  depositors,  with the MHC retaining  majority  ownership of the Bank. On
December  28,  1995,  the  MHC  merged  with  and  into  the  Company,   then  a
newly-organized Delaware corporation.  In connection therewith, the Company sold
shares of its stock to the members of the MHC and to the  minority  stockholders
of the Bank  (through  the  exchange  of Company  common  stock for Bank  common
stock), thereby becoming the sole stockholder of the Bank.

Forward-Looking Statements

         When used in this Form 10-K and in future  filings by the Company  with
the Securities and Exchange Commission, in the Company's press releases or other
public  or  shareholder  communications,  and in oral  statements  made with the
approval of an authorized  executive officer,  the words or phrases "will likely
result," "are  expected  to," "will  continue,"  "is  anticipated,"  "estimate,"
"project"  or similar  expressions  are  intended to  identify  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995.  Such  statements  are  subject  to  certain  risks and  uncertainties,
including,  among other things,  changes in economic conditions in the Company's
market  area,  changes in  policies  by  regulatory  agencies,  fluctuations  in
interest rates,  demand for loans in the Company's  market area and competition,
that could cause actual results to differ  materially from  historical  earnings
and those  presently  anticipated  or projected.  The Company  wishes to caution
readers not to place  undue  reliance  on any such  forward-looking  statements,
which speak only as of the date made.  The Company wishes to advise readers that
the factors listed above could affect the Company's  financial  performance  and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements  expressed with respect to future periods in any
current statements.

         The  Company  does  not   undertake--and   specifically   declines  any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or  unanticipated
events.

Recent Acquisitions

         In May 1996,  the Bank completed its  acquisition of Community  Savings
Bank, Marion,  Illinois  ("Community"),  whereby it assumed deposit  liabilities
totaling  $49.7  million and $1.5 million in borrowed  money.  The Bank acquired
loans receivable of $45.4 million,  mortgage-backed  securities of $1.3 million,
investment securities of $6.3 million and building and equipment with a value of
$2.0 million. The Bank is operating  Community's office as a branch of the Bank.
The total purchase price to acquire  Community was  approximately  $7.5 million,
which  resulted  in  goodwill  of  approximately  $2.9  million  which  is being
amortized over a 15-year period.

         On January 15, 1997, the Bank completed its acquisition of Home Federal
Savings  Bank,  Carbondale,   Illinois,  for  approximately  $6.3  million.  The
acquisition was accounted for as a purchase and the Bank recorded  approximately
$2.6 million of goodwill.  The goodwill will be amortized over a 15 year period.
<PAGE>
As part of the purchase,  the Bank assumed $23.8 million in deposit liabilities.
The Bank acquired loans receivable of $21.4 million,  mortgage-backed securities
of $1.8  million,  investment  securities  of $3.1  million  and  buildings  and
equipment with a book value of $219,000.

Planned Merger of the Company

         On November 19, 1997, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with Magna Group, Inc. ("Magna"), pursuant to which the
Company will merge with and into a  wholly-owned  subsidiary  of Magna  ("Merger
Sub"),  with Merger Sub as the surviving  entity (the  "Merger").  The Agreement
provides  that each share of the  Company's  Common Stock will be exchanged  for
0.5751 of a share of the common stock,  par value $2.00 per share,  of Magna and
associated  Preferred  Share  Purchase  Rights  issued  pursuant  to the  Rights
Agreement, dated as of November 11, 1988, between Magna and Magna Trust Company.

         Consummation of the Merger is subject to various conditions,  including
approval of the Merger by certain regulatory authorities and by the stockholders
of the Company.  No assurance  can be given as to when or whether the  necessary
approvals  will be obtained,  or, even if  obtained,  when or whether the Merger
will be consummated.

Market Area/Local Economy

         The  Bank is a  community-oriented  savings  bank  offering  a range of
retail banking  services to residents of its market area. The Bank's market area
includes  all of Randolph,  Jackson,  Williamson,  Perry and Union  counties and
portions of Monroe, Washington, Alexander, Pulaski, Jefferson, Johnson, Franklin
and St.  Clair  counties.  Management  believes  that its offices are located in
communities  that  can  generally  be   characterized   as  stable   residential
communities of predominantly one- to four-family  residences.  The Bank's market
for deposits is concentrated in the communities  surrounding its main office and
seven  full-service  branches.  The Bank is the  largest  independent  financial
institution headquartered in its market area.

         The local economy of the Bank's market area consists  primarily of coal
mining,  agriculture,  light  commercial  industry and  government.  The largest
employers   in  the  Bank's   primary   market   area  are   Southern   Illinois
University-Carbondale and Gilster Mary-Lee Corp., a food packaging company.

         The Bank's business and operating results are significantly affected by
the general  economic  conditions  prevalent  in its primary  market  area.  The
population  in the  Bank's  market  area is  expected  to  remain  stable in the
foreseeable future.

         The Bank faces  significant  competition  in  attracting  deposits from
commercial banks,  other savings  institutions and credit unions. The Bank faces
additional  competition  for deposits from short-term  money market funds,  from
other  corporate  and  government  securities  funds  and from  other  financial
institutions  such as brokerage firms and insurance  companies.  Notwithstanding
the foregoing,  the Bank's deposit  market share has remained  stable.  The Bank
also faces  significant  competition  in the  origination  of loans from savings
institutions, mortgage banking companies, credit unions, insurance companies and
commercial banks.
<PAGE>
Lending Activities

         General.  The Bank's loan portfolio  consists primarily of conventional
mortgage loans secured by one- to four-family residences. At September 30, 1997,
the Bank's  loans  receivable,  net,  totaled  $287.7  million,  of which $200.6
million, or 68.60%, consisted of one- to four-family residential mortgage loans.
The  remainder  of the  Bank's  loans  receivable  at  such  date  consisted  of
multi-family  loans (1.05%),  commercial  real estate loans (5.21%),  commercial
business loans (2.69%) and consumer loans (22.45%).  Historically, the principal
lending  activity of the Bank has been the origination of mortgage loans for the
purpose of financing or refinancing one-to four-family residential properties in
the Bank's primary  market area.  For the fiscal year ended  September 30, 1997,
the Bank's residential loan originations (excluding equity lines of credit) were
$29.3 million.  For the fiscal year ended September 30, 1997, the Bank's one- to
four-family  residential mortgage loans increased by $7.3 million, or 3.8%, from
September 30, 1996. In order to expand its loan  portfolio,  in recent years the
Bank has  emphasized  consumer  lending  and the  purchase  of  adjustable  rate
mortgage  ("ARM")  loans secured  primarily by  residential  properties  located
outside of the Bank's market area.

         The Bank has managed to make its interest-earning  assets more interest
rate sensitive by, among other things, originating variable interest rate loans,
such as ARM loans and medium-term  consumer loans, and by investing primarily in
short and  medium-term  securities.  The Bank continues to originate  fixed-rate
mortgage loans secured by one- to four-family  residential properties with terms
ranging  up to 20  years.  The  ability  of the Bank to  originate  ARM loans is
substantially  affected by market  interest  rates and consumer  preference  for
fixed-rate loans in a relatively low interest rate environment. At September 30,
1997,  approximately  $171.4  million,  or  58.6%  of  the  Bank's  total  loans
receivable consisted of loans with variable interest rates.

         During the fiscal year ended September 30, 1997, the Bank sold $917,000
of  student  loans  and  $1.7  million  of one- to four  residential  loans  and
purchased  $907,000 of residential  one- to  four-family  mortgage  loans.  Loan
purchases consist  primarily of ARM loans secured by properties  located outside
the Bank's market area.  Purchased loans in the aggregate  totaled $52.1 million
and  represented  23.8% of the Bank's  total real estate loans at the end of the
fiscal year. For the years ended September 30, 1996 and 1995, respectively,  the
Bank purchased $37.4 million and $25.9 million of residential mortgage loans.

         The Bank also invests in  mortgage-backed  securities  with  adjustable
interest  rates.  At September 30, 1997, the Bank's  mortgage-backed  securities
portfolio  totaled $14.6 million,  or 3.8%, of total assets.  At that date, $5.3
million,  or 36.6%, of the  mortgage-backed  securities had adjustable  interest
rates.  Mortgage-backed  securities  with remaining  terms of five years or less
represent $641,000, or 4.4%, of the mortgage-backed securities portfolio.
<PAGE>
 Analysis of Loan Portfolio. Set forth below is data relating to the composition
of the Bank's loan portfolio by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
                                                                        At September 30,
                                            -----------------------------------------------------------------------
                                                     1997                     1996                     1995
                                            ---------------------    ---------------------    ---------------------
                                                                     (Dollars in Thousands)
<S>                                         <C>           <C>        <C>           <C>        <C>            <C>
Real estate loans:
   Residential:
          1-4 family (1)................    $200,610       68.60%    $193,301       68.78%    $134,640        63.45%              
          Multi-family..................       3,054         1.05       1,749        0.62        1,479         0.70
   Commercial...........................      15,237         5.21      12,677        4.51        9,186         4.33
                                            --------      -------    --------      ------     --------       ------   
          Total real estate loans.......     218,901        74.86     207,727       73.91      145,305        68.48

Commercial business loans...............       7,881         2.69       7,768        2.76        6,634         3.13
Consumer loans:
   Automobile...........................      47,252        16.16      50,292       17.90       49,918        23.52
   Mobile home loans....................         293         0.10         170        0.06          145         0.07
   Education loans......................         550         0.19       1,373        0.49        2,755         1.30
   Loans secured by deposit accounts....       1,821         0.62       1,590        0.57        1,117         0.53
   Other (2)                                  15,735         5.38      12,120        4.31        6,312         2.97
                                            --------      -------    --------      ------     --------       ------  
          Total consumer loans..........      65,651        22.45      65,545       23.33       60,247        28.39
                                            --------      -------    --------      ------     --------       ------   

                Total loans receivable..     292,433      100.00%     281,040     100.00%      212,186      100.00%
                                                          ======                  ======                    ======
Less:
   Loans in process.....................           1                       36                       37
   Unearned discounts, net..............       2,058                    2,648                    3,429
   Deferred loan fees...................         274                      205                      105
   Allowance for loan losses............       2,258                    2,419                    2,232
   Purchase accounting discounts........         192                      245                      309
                                            --------                 --------                 --------
          Total loans receivable, net...    $287,650                 $275,487                 $206,074
                                            ========                 ========                 ========
</TABLE>
----------------

(1)  Includes home equity lines of credit of $2.0 million, $1.6 million and $1.8
     million at September 30, 1997, 1996, and 1995, respectively.

(2)  Includes personal loans and creditline checking.
<PAGE>
         Residential  Real Estate Loans.  The Bank's primary lending activity is
the origination of one- to  four-family,  owner-occupied,  residential  mortgage
loans secured by property located in the Bank's market area. Loans are generated
through the Bank's marketing efforts,  its existing customers and referrals from
mortgage bankers, real estate brokers,  builders and local businesses.  The Bank
generally has limited its real estate loan  originations  to finance  properties
located within its market area. When local loan demand has been  insufficient to
meet desired  levels of mortgage loan  originations,  which has been the case in
recent years, the Bank has purchased ARM loans secured by residential properties
located outside of its market area. The Bank uses similar underwriting  criteria
in evaluating  residential  mortgage loans for purchase as it uses in evaluating
residential mortgage loans that it originates  directly.  At September 30, 1997,
the Bank had $200.6 million,  or 68.60%, of its total loans receivable  invested
in mortgage loans secured by one- to four-family residences.

         Historically,  the delinquency  rate on purchased loans has been higher
than that of loans originated by the Bank. Management believes this is primarily
due to the fact that the Bank  generally  does not  service  most loans which it
purchases,  thereby  making it more difficult to monitor  delinquent  borrowers.
However,  in fiscal year 1996, the Bank  experienced  relatively low delinquency
rates on  purchased  loans.  At  September  30,  1997 and 1996,  purchased  loan
delinquencies totaled $408,000 and $238,000,  respectively, and represented 0.8%
and 0.3% of purchased loans outstanding,  respectively.  The delinquency rate on
loans  originated  by the Bank at September 30, 1997 and 1996 was 0.5% and 0.9%,
respectively,  of  originated  loans  outstanding.  While  the Bank  intends  to
continue to purchase  loans as it deems  appropriate,  it will attempt to reduce
overall  credit  risk  by  increasing  the  geographic  diversity  of  its  loan
portfolio.

         The Bank  currently  originates  loans  primarily  for retention in its
portfolio.  However,  the Bank has been  approved to originate and service loans
for the Federal National Mortgage Association ("FNMA"). During fiscal year 1997,
the Bank sold $1.7  million  in loans to FNMA.  The Bank's  fixed-rate  mortgage
loans are  amortized  on a monthly  basis with  principal  and interest due each
month.  Residential real estate loans often remain outstanding for significantly
shorter periods than their  contractual terms because borrowers may refinance or
prepay loans at their option.

         The Bank  currently  offers ARM loans for terms ranging up to 30 years.
The Bank also offers fixed-rate  residential  mortgage loans with terms of up to
20 years.  The Bank  currently  offers ARM loans that adjust  every year,  every
three years or every five years from the date of origination, with interest rate
adjustment limitations up to two percentage points per year and with a cap of up
to six  percentage  points on total interest rate increases over the life of the
loan.  The Bank has used different  interest  indices for ARM loans in the past,
and currently  uses the  one-year,  three-year  or five-year  Constant  Maturity
Treasury Index. The Bank also has purchased ARM loans with various interest rate
indices.  Consequently, the interest rate adjustments on the Bank's portfolio of
ARM loans do not reflect changes in a particular  interest rate index. ARM loans
secured by residential  one- to four family real estate totaled $149.8  million,
or 74.7%, of the Bank's total one- to four-family  residential real estate loans
at September 30, 1997. The  origination of fixed-rate  mortgage loans versus ARM
loans is  monitored  on an ongoing  basis and is affected  significantly  by the
level of market interest rates,  customer  preference,  the Bank's interest rate
gap position and loan products  offered by the Bank's  competitors.  As interest
<PAGE>
rates  increase,  borrowers  may prefer ARM loans to fixed rate loans due to ARM
loans' lower interest rates.  Although it is management's  strategy to emphasize
ARM  loans,  market  conditions  may  occur  where  there  will be a demand  for
fixed-rate  loans.  The Bank will  continue to  emphasize  ARM loans by offering
competitive  pricing and  service,  and as a result ARM loan  originations  have
exceeded  fixed-rate mortgage loan originations in recent years. During the year
ended  September  30,  1997,  the Bank  originated  $9.1  million of  fixed-rate
residential  and  multi-family  mortgage  loans and $25.5  million of ARM loans.
During fiscal years 1996 and 1995,  the Bank  originated  $11.1 million and $1.7
million of fixed-rate  residential  and  multi-family  mortgage  loans and $15.9
million and $13.4 million of ARM loans, respectively.

         The primary  purpose of  offering  ARM loans is to make the Bank's loan
portfolio interest rate sensitive. However, as the interest income earned on ARM
loans varies with prevailing  interest  rates,  such loans do not offer the Bank
predictable  cash  flows as do  long-term,  fixed-rate  loans.  ARM loans  carry
increased  credit risk associated with  potentially  higher monthly  payments by
borrowers as general market interest rates increase. It is possible,  therefore,
during periods of rising  interest  rates,  that the risk of  delinquencies  and
defaults  on ARM loans may  increase  due to the upward  adjustment  of interest
costs to the borrower,  thereby  resulting in increased loan  delinquencies  and
possibly additional loan losses.

         The  Bank's  residential  first  mortgage  loans  customarily   include
due-on-sale clauses, which are provisions giving the Bank the right to declare a
loan  immediately  due and payable in the event,  among other  things,  that the
borrower sells or otherwise  disposes of the underlying real property serving as
security for the loan.  Due-on-sale  clauses are an important  means of imposing
assumption  fees  and  increasing  the  interest  rate  on the  Bank's  mortgage
portfolio during periods of rising interest rates.

         All  financial   institutions   are  required  to  adopt  and  maintain
comprehensive written real estate lending policies that are consistent with safe
and sound banking practices.  These lending policies must reflect  consideration
of the Interagency  Guidelines for Real Estate Lending  Policies  adopted by the
federal  banking  agencies,  including  the OTS and FDIC,  in December 1992 (the
"Guidelines"). The Guidelines set forth, pursuant to the mandates of the Federal
Deposit  Insurance  Corporation  Improvement  Act of 1991,  uniform  regulations
prescribing standards for real estate lending. Real estate lending is defined as
extension of credit secured by liens on interests in real estate or made for the
purpose of financing the  construction  of a building or other  improvements  to
real estate, regardless of whether a lien has been taken on the property.

         The policies must address certain lending  considerations  set forth in
the Guidelines,  including  loan-to-value  ("LTV") limits,  loan  administration
procedures,  underwriting standards,  portfolio  diversification  standards, and
documentation,  approval and reporting requirements. These policies must also be
appropriate  based upon the size of the  institution and the nature and scope of
its operations,  and must be reviewed and approved by the institution's board of
directors at least annually.  The LTV ratio  framework,  with an LTV ratio being
the total amount of credit to be extended  divided by the appraised value of the
property  at the time the credit is  originated,  must be  established  for each
category of real estate loan.  If not a first lien,  the lender must combine all
senior liens when calculating  this ratio.  The Guidelines,  among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%);  construction   (commercial,   multi-family  and  nonresidential)  (80%);
improved  property (85%) and owner occupied one to four family  residential  (no
maximum ratio, however any LTV ratio in excess of 90% should require appropriate
insurance or readily marketable collateral).
<PAGE>
         Certain  institutions  are  permitted to make real estate loans that do
not  conform  with  the   established  LTV  ratio  limits  up  to  100%  of  the
institution's  total capital.  Within this aggregate limit,  total loans for all
commercial,   agricultural,   multifamily  and  other  non-one-  to  four-family
residential  properties  should not exceed 30% of total capital.  An institution
will come  under  increased  supervisory  scrutiny  as the  total of such  loans
approaches  these  levels.  Certain  loans are exempt from the LTV ratios (e.g.,
those  guaranteed by a government  agency,  loans to facilitate the sale of real
estate  owned,  loans  renewed,  refinanced  or  restructured  by  the  original
lender(s) to the same  borrower(s)  where there is no  advancement of new funds,
etc.).

         Regulations  limit  the  amount  that a  savings  association  may lend
relative  to the  appraised  value of the real  estate  securing  the  loan,  as
determined  by an appraisal at the time of loan  origination.  Such  regulations
permit a maximum  LTV  ratio of 100% for  residential  property  and 90% for all
other real estate loans. The Bank's lending policies,  however,  generally limit
the  maximum  LTV  ratio on both  fixed-rate  loans  and ARM loans to 95% of the
lesser of the appraised value or the purchase price of the property securing the
loan  in  the  case  of  loans  secured  by one to  four  family  owner-occupied
properties.  The maximum loan-to-value ratio on other types of real estate loans
is generally the lesser of 80% of the appraisal  value or the purchase  price of
the property.

         When  underwriting  residential real estate loans, the Bank reviews and
verifies each loan applicant's  income and credit history.  Management  believes
that  stability  of income and past  credit  history are  integral  parts of the
underwriting process. Generally, the applicant's total monthly mortgage payment,
including all escrow amounts, is limited to 28% of the applicant's total monthly
income.  In addition,  total  monthly  obligations  of the  applicant  excluding
mortgage  payments,  are limited to 8% of the applicant's  gross monthly income.
Thus, a residential  real estate loan  applicant's  total debt service to income
ratio should not exceed 36%. Written appraisals are reviewed on each real estate
property  offered to secure an applicant's  loan. For real estate loans with LTV
ratios of between 85% and 95%, the Bank requires private mortgage insurance. The
Bank requires fire and casualty  insurance,  as well as title insurance,  on all
properties securing real estate loans.

         The Bank also offers home equity  lines of credit  which are  generally
secured by the  borrower's  principal  residence.  The maximum  amount of a home
equity line of credit can be up to 100% of the  appraised  value of a borrower's
real  estate  collateral  less the  amount of any  prior  mortgages  or  related
liabilities.  Home equity lines of credit are approved with adjustable  interest
rates at a margin  above a  market  index  such as the  prime  interest  rate as
published in The Wall Street Journal. The Bank's home equity lines of credit are
currently  approved  at  1-1/2%  to  2-1/2%  percentage  points  above the prime
interest  rate as published in The Wall Street  Journal.  The maximum term for a
home equity line of credit is 15 years.

         Commercial Real Estate and Multi-Family  Residential Real Estate Loans.
The Bank originates  commercial real estate and  multi-family  residential  real
estate loans. At September 30, 1997, $15.2 million, or 5.21%, of the Bank's loan
portfolio  consisted of commercial real estate loans and $3.1 million, or 1.05%,
consisted of multi-family  real estate loans. The Bank's  commercial real estate
loans are secured  primarily  by  improved  properties  such as  offices,  small
building facilities and other non-residential  buildings.  The maximum LTV ratio
for commercial real estate loans  originated or purchased by the Bank is 80%. At
<PAGE>
September 30, 1997,  approximately  93.1% of the Bank's  commercial  real estate
loans and multi-family  residential real estate loans were secured by properties
located within the State of Illinois.  At that date, the largest commercial real
estate loan had a principal balance of $1.0 million.  At September 30, 1997, the
largest  multi-family  residential  real estate loan had a principal  balance of
$405,000 and was performing in accordance with its terms.

         The  underwriting  standards  employed by the Bank for commercial  real
estate and multi-family residential real estate loans include a determination of
the applicant's  credit history and an assessment of the applicant's  ability to
meet existing obligations and payments on the proposed loan. The income approach
is primarily utilized to determine whether income generated from the applicant's
business or real estate offered as collateral is adequate to repay the loan. The
value of the real  estate  offered  as  collateral  is  reviewed  by the Bank in
relation to the  proposed  loan  amount.  Generally,  the loan amount  cannot be
greater  than 80% of the  value  of the  real  estate.  Written  appraisals  are
obtained  by the Bank  from  either  licensed  or  certified  appraisers  on all
multi-family   and  commercial   real  estate  loans.   The  Bank  assesses  the
creditworthiness  of the  applicant  by  reviewing a credit  report or obtaining
other public records regarding the applicant.

         Loans  secured by commercial  and  multi-family  real estate  generally
involve a greater  degree of credit risk than one-to  four-  family  residential
mortgage loans and carry larger loan balances.  This increased  credit risk is a
result of several factors,  including the effects of general economic conditions
on income producing properties and the successful operation or management of the
properties  securing the loans.  Furthermore,  the repayment of loans secured by
commercial  and  multi-family  real  estate  is  typically  dependent  upon  the
successful  operation of the related business and real estate  property.  If the
cash flow from the project is reduced,  the borrower's ability to repay the loan
may be impaired.

         Commercial  Business  Loans.  The Bank originates  commercial  business
loans to  borrowers  located in its market area which are secured by  collateral
other than real estate.  Such commercial business loans are generally secured by
equipment,  inventory  and accounts  receivable,  and generally are offered with
adjustable  rates and various  terms to maturity.  In addition,  the Bank,  on a
limited basis,  originates  loans to automobile  dealerships and one mobile home
dealership for the purpose of allowing  dealerships to finance their  inventory.
The Bank  secures  the  automobile  dealership  loans by  perfecting  a security
interest in the  dealership's  used motor  vehicles.  At September 30, 1997, the
Bank had four automobile  dealership  floor plan loans, the largest of which had
an  outstanding  principal  balance of $675,000  and one mobile home  dealership
floor plan  loan,  which had an  outstanding  balance  of  $232,000.  Commercial
business loans generally bear higher interest rates than residential  loans, but
they  also may  involve  a higher  risk of  default  since  their  repayment  is
generally dependent on the successful operation of the borrower's business.  The
Bank generally obtains personal guarantees from the borrower or a third party as
a condition to originating its commercial  business loans.  Commercial  business
loans totaled $7.9 million,  or 2.69%,  of the Bank's total loans  receivable at
September 30, 1997. At that date,  the Bank's largest  commercial  business loan
other than the  largest  automobile  dealership  floor plan loan had a principal
balance of $669,000, and was secured primarily by equipment and fixtures.

         The  underwriting  standards used by the Bank for  commercial  business
loans  include a  determination  of the  applicant's  ability  to meet  existing
obligations  and payments on the proposed loan from normal cash flows  generated
in the applicant's  business.  The financial  strength of each applicant also is
assessed through review of financial  statements provided by the applicant.  The
<PAGE>
creditworthiness of an applicant is derived from a review of credit reports or a
search  of  public  records.  Once  originated,  commercial  business  loans are
reviewed  periodically by the Bank.  Financial statements are requested at least
annually and are reviewed by the Bank for substantial deviations or changes that
might  affect  repayment of the loan.  Loan  officers of the Bank also visit the
premises of substantial borrowers to observe the business premises,  facilities,
and personnel and to inspect the pledged collateral.  Underwriting standards for
commercial  business  loans are different for each type of loan depending on the
financial  strength  of the  applicant  and the value of  collateral  offered as
security.

         Consumer Loans. As of September 30, 1997,  consumer loans totaled $65.7
million, or 22.45%, of the Bank's total loans receivable. The principal types of
consumer  loans  offered  by the  Bank are  automobile  loans,  personal  loans,
creditline  checking  and loans  secured by  deposit  accounts.  Consumer  loans
generally are offered on a fixed-rate  basis.  The largest  category of consumer
loans in the Bank's  portfolio  consists  of loans  secured by  automobiles.  At
September 30, 1997, consumer loans secured by automobiles totaled $47.3 million,
or 16.16%, of the Bank's total loans receivable.  Automobile loans are generally
offered with maturities of up to 60 months for new automobiles. Loans secured by
used  automobiles  will have maximum terms which vary  depending upon the age of
the  automobile.  The Bank  generally  will not make an  automobile  loan with a
loan-to-value  rate in excess of 80%,  although  the  loan-to-value  rate may be
greater or less  depending  on the  borrower's  credit  history,  debt to income
ratio, home ownership and other banking relationships with the Bank.

         Consumer   loans  entail   greater  risks  than  one-  to   four-family
residential  mortgage  loans,  particularly  consumer  loans  secured by rapidly
depreciable  assets such as  automobiles  or loans that are  unsecured.  In such
cases,  any  repossessed  collateral  for a  defaulted  loan may not  provide an
adequate source of repayment of the outstanding  loan balance,  since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further,  consumer loan  collections are dependent on the borrower's  continuing
financial  stability,  and therefore are more likely to be adversely affected by
job loss, divorce,  illness or personal bankruptcy.  Finally, the application of
various  Federal and state laws,  including  Federal  and state  bankruptcy  and
insolvency  laws,  may limit the amount  which can be recovered on such loans in
the event of a default.  At September 30, 1997,  consumer  loans 90 days or more
delinquent  totaled $289,000,  or 0.4%, of the Bank's consumer loans receivable.
Management  believes  that the Bank's level of consumer  loan  delinquencies  is
relatively low in comparison to other financial  institutions.  No assurance can
be given,  however,  that the Bank's  delinquency  rate on  consumer  loans will
continue to remain low.

         The  underwriting  standards  employed by the Bank for  consumer  loans
include a determination  of the applicant's  credit history and an assessment of
the  applicant's  ability  to meet  existing  obligations  and  payments  on the
proposed loan. The stability of the applicant's monthly income may be determined
by   verification  of  gross  monthly  income  from  primary   employment,   and
additionally from any verifiable  secondary income source.  Creditworthiness  of
the applicant is of primary  consideration;  however,  the underwriting  process
also  includes a comparison  of the value of the  collateral  in relation to the
proposed loan amount.  See  "Delinquencies and Classified Assets" and "Allowance
for Loan Losses" below for information regarding the Bank's loan loss experience
and reserve policy.
<PAGE>
         Loan  Maturity  Schedule.   The  following  table  sets  forth  certain
information  at September 30, 1997 regarding the dollar amount of loans maturing
in the Bank's  portfolio based on their  contractual  terms to maturity.  Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdraft loans are reported as due in one year or less.

<TABLE>
<CAPTION>
                                                  1           3            5          10
                                    Within     Through     Through      Through     Through     Beyond
                                    1 Year     3 Years     5 Years         10       20 Years   20 Years      Total
                                    -------     -------     -------     -------     -------     -------     --------
                                                                     (In Thousands)
<S>                                 <C>         <C>         <C>         <C>         <C>         <C>         <C>
Real estate loans:
   Residential:
          1-4 family ..........     $ 3,661     $ 2,250     $ 6,191     $27,915     $72,997     $87,596     $200,610
          Multi-family ........        --            65         405         231       1,120       1,233        3,054
   Commercial .................         403         222         230       4,114       9,299         969       15,237
Commercial business loans .....       3,473       1,009         931       1,399       1,069        --          7,881
Consumer loans ................       7,854      22,082      30,644       4,733         275          63       65,651
                                    -------     -------     -------     -------     -------     -------     --------
                Total loans
          receivable ..........     $15,391     $25,628     $38,401     $38,392     $84,760     $89,861     $292,433
                                    =======     =======     =======     =======     =======     =======     ========
Mortgage-backed securities, net     $  --       $   641     $  --       $    92     $ 5,325     $ 8,548     $ 14,606
                                    =======     =======     =======     =======     =======     =======     ========

</TABLE>
 
         The  following  table  sets  forth the  dollar  amount of all loans and
mortgage-backed  securities  at  September  30, 1997,  which have  predetermined
interest  rates and have  floating or  adjustable  interest  rates which are due
after September 30, 1998.
<TABLE>
<CAPTION>
                                                                        Floating or
                                                         Fixed Rate     Adjustable       Total
                                                          --------        --------     --------
                                                                      (In Thousands)
<S>                                                       <C>             <C>          <C>
Real estate loans:
Residential:
  1-4 family.....................................         $ 47,241        $149,708     $196,949
  Multi-family...................................              373           2,681        3,054
Commercial.......................................            2,010          12,824       14,834
Commercial business loans........................            2,225           2,183        4,408
Consumer loans...................................           57,797             ---       57,797
                                                          --------        --------     --------
    Total loans receivable.......................         $109,646        $167,396     $277,042
                                                          ========        ========     ========
Mortgage-backed securities, net..................          $9,262           $5,344      $14,606
                                                           =======          ======      =======
</TABLE>
<PAGE>
         Loan  Origination,  Solicitation and Processing.  Loan originations are
derived from a number of sources such as real estate broker referrals,  existing
customers, borrowers, builders, attorneys and walk-in customers. Upon receipt of
a loan  application,  a credit  report  is made to verify  specific  information
relating to the applicant's employment, income, and credit standing. In the case
of a real estate loan,  an  appraisal of the real estate  intended to secure the
proposed loan is undertaken by an independent  appraiser approved by the Bank. A
loan  application  file is first  reviewed by a loan  officer in the Bank's loan
department who checks  applications for accuracy and completeness,  and verifies
the  information  provided.  The  financial  resources  of the  borrower and the
borrower's  credit  history,  as well as the  collateral  securing the loan, are
considered  an  integral  part  of  each  risk  evaluation  prior  to  approval.
Residential real estate loans with principal balances of $125,000 or less may be
approved by either (i) one of the Bank's loan officers,  or (ii) four members of
the Board of Directors  who have  reviewed the loan  application  submitted by a
loan officer.  Loans secured by single family residences with principal balances
in excess of  $125,000  but not more than  $250,000  must be  approved by a loan
officer and either the President or Executive Vice President of the Bank. A real
estate loan on a single  residence  exceeding  $250,000 must also be approved by
one  outside  director.  Loans on two- to  four-family  dwellings  in  excess of
$350,000  must be approved by a loan officer,  the  President or Executive  Vice
President of the Bank and one outside director. Once the loan is approved a loan
commitment is promptly issued to the borrower.

         If the loan is approved,  the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral,  and required
insurance  coverage.  The  borrower  must  provide  proof of fire  and  casualty
insurance  on the  property  serving  as  collateral  which  insurance  must  be
maintained  during the full term of the loan.  Title  insurance or an attorney's
opinion based on a title search of the property is required on all loans secured
by real property.
<PAGE>
         Origination,   Purchases   and  Sale  of  Loans   and   Mortgage-Backed
Securities.  Set forth below is a table showing the Bank's loan originations and
the purchases,  sales and repayments of loans and mortgage-backed securities for
the periods indicated.
<TABLE>
<CAPTION>

                                                                       Year Ended September 30,
                                                               ----------------------------------------
                                                                  1997           1996           1995
                                                               ---------      ---------      ---------
                                                                            (In Thousands)
<S>                                                            <C>            <C>            <C>
Loans receivable, net at beginning of year ...............     $ 275,487      $ 206,074      $ 178,058
                                                               ---------      ---------      ---------
Originations:
          Real Estate:
                Residential(1) ...........................        34,577         26,987         15,070
                Commercial ...............................         3,893          3,149          1,560
          Commercial business loans(2) ...................        23,426         18,806         15,090
          Consumer .......................................        42,424         40,336         35,338
                                                               ---------      ---------      ---------
                Total originations .......................       104,320         89,278         67,058
Loans purchased ..........................................           907         37,363         28,213
Loans acquired from:
          Community Savings Bank .........................          --           45,442           --
          Home Federal Savings Bank ......................        21,388           --             --
Repayments ...............................................      (112,698)      (102,481)       (67,037)
Loans sold ...............................................        (2,631)        (1,549)        (1,723)

Increase (decrease) in other items, net ..................           877          1,360          1,505
                                                               ---------      ---------      ---------
                Total loans receivable, net at end of year     $ 287,650      $ 275,487      $ 206,074
                                                               =========      =========      =========
</TABLE>
---------------
(1)  Includes  advances on equity lines of credit of $5.3 million,  $5.2 million
     and $3.1 million for September 30, 1997, 1996, and 1995, respectively.

(2)  Includes  advances  on  non-mortgage  commercial  lines of  credit of $18.5
     million,  $15.6 million and $13.8 million for September 30, 1997,  1996 and
     1995, respectively.


<PAGE>
Mortgage-Backed Securities

          Set forth below is a table showing the Company's purchases,  sales and
repayments of mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
                                                                           Year Ended September 30,
                                                                   ------------------------------------
                                                                      1997          1996          1995
                                                                              (In Thousands)
<S>                                                                <C>           <C>           <C>
Mortgage-backed securities, net at beginning of year .........     $ 16,632      $ 16,670      $ 16,071
          Purchases ..........................................        1,998         3,096         2,543
          Mortgage-backed securities acquired from:
                Community Savings Bank .......................         --           1,296          --
                Home Federal Savings Bank ....................        1,834          --            --
Sales ........................................................       (1,759)          (64)         --
Repayments ...................................................       (4,238)       (4,225)       (2,443)
Discount (premium) amortization ..............................          (22)          (38)         (119)
Unrealized gain/(loss) on mortgage-backed securities available
  for sale ...................................................          161          (103)          618
                                                                   --------      --------      --------
          Mortgage-backed securities, net at end of year .....     $ 14,606      $ 16,632      $ 16,670
                                                                   ========      ========      ========
</TABLE>

         From time to time the Bank  purchases  real  estate  mortgage  loans in
order to supplement  loan  originations.  During the fiscal year ended September
30, 1997, the Bank purchased $907,000 in loans. At September 30, 1997, purchased
loans totalled $52.1 million and comprised 17.8% of total loans  receivable.  At
September 30, 1997,  $9.0 million of purchased  loans were secured by properties
located  within  the  State of  Illinois  and  $43.1  million  were  secured  by
properties located throughout the United States. Prior to purchasing loans, Bank
personnel will inspect the  properties  securing the loan and perform other "due
diligence" deemed necessary. All purchased loans secured by property outside the
Bank's market area must be approved by the Bank's Board of Directors.

         Loan  Origination  and Other Fees.  In  addition to interest  earned on
loans,  the Bank may charge loan  origination  fees.  The ability of the Bank to
charge loan  origination fees is influenced by the demand for mortgage loans and
competition from other lenders in the Bank's market area. At September 30, 1997,
the Bank had $274,000 of net deferred loan fees. The Bank offered loans with and
without fees during the fiscal year ended September 30, 1997.  Loan  origination
fees are volatile sources of income.  Such fees vary with the volume and type of
loans and commitments made and purchased and with competitive  conditions in the
mortgage markets, which in turn respond to the demand and availability of money.

         In addition to loan origination fees, the Bank also receives other loan
fees  including  late  charges.  The Bank  recognized  fees and late  charges of
$579,000,  $391,000 and $241,000 for the years ended  September 30, 1997,  1996,
and 1995, respectively.

         Loan  Concentration.  With certain  exceptions,  an  Illinois-chartered
savings  bank may not make a loan or extend  credit for  secured  and  unsecured
loans for business,  commercial,  corporate or agricultural purposes to a single
borrower in excess of 15% of the bank's total assets. At September 30, 1997, the
Bank had no loans in  excess  of its loan to one  borrower  limitation.  At that
date, the largest concentration of loans to one borrower totaled $1.8 million.
<PAGE>
Mortgage-Backed Securities

         The Bank occasionally  invests in mortgage-backed  securities issued or
guaranteed  by  the  United  States  Government  or  agencies   thereof.   These
securities,  which consist  primarily of  mortgage-backed  securities  issued or
guaranteed by FHLMC,  FNMA and GNMA, had a total carrying value of $14.6 million
at September 30, 1997.  Included in this amount are $641,000 of  mortgage-backed
securities  with remaining  terms of five years or less.  Total  mortgage-backed
securities  consisted of $9.3 million of fixed rate  mortgage-backed  securities
and $5.3 million of adjustable-rate mortgage-backed securities.


         Set  forth  below is a table  showing  the  composition  of the  Bank's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                                 At September 30,
                                                         -------------------------------------------------------------------
                                                                1997                   1996                     1995
                                                         ------------------     -------------------     --------------------
                                                         Amount     Percent     Amount      Percent      Amount      Percent
                                                                                  (Dollars in Thousands)
<S>                                                      <C>        <C>         <C>         <C>         <C>          <C>
Mortgage-backed securities, net
Available for sale (at market value):
          Adjustable ...............................     $ 5,023     33.99%     $ 5,693      34.23%     $ 4,052       24.31%
          Fixed ....................................       8,381     57.78        9,424      56.66       12,203       73.20
                                                         -------    ------      -------     ------      -------      ------
              Total mortgage-backed securities
                available for sale .................      13,404     91.77       15,117      90.89       16,255       97.51
                                                         -------     ------      -------     ------      -------     ------
     Held to maturity (at cost):
          Adjustable ...............................         321      2.20          368       2.21          415        2.49
          Fixed ....................................         881      6.03        1,147       6.90           --
                                                                     -----      -------     ------      -------      ------

             Total mortgage-backed securities
                held to maturity ...................       1,202      8.23        1,515       9.11           415       2.49
                                                         -------     ------      -------     ------      -------     ------
                   Total mortgage-backed securities,
                      net ..........................     $14,606     100.00%    $16,632     100.00%      $16,670     100.00%
                                                         =======     ======     =======     ======       =======     ======
</TABLE>
         Mortgage-backed  securities  typically are issued with stated principal
amounts,  and the  securities are backed by pools of mortgage loans with varying
interest rates and  maturities.  The mortgage loans backing the  mortgage-backed
securities can be either  fixed-rate  mortgage loans or ARM loans.  The interest
rate risk  characteristics  of the  underlying  pool of mortgages as well as the
prepayment risk are passed on to the holder of the  mortgage-backed  securities.
Consequently,  in a declining  interest  rate  environment  there is a risk that
mortgage-backed securities will prepay faster than anticipated thereby adversely
affecting   the  yield  to  maturity  and  the  related   market  value  of  the
mortgage-backed  securities.  Moreover,  there can be no assurance that the Bank
would be able to reinvest the cash flow from prepaid mortgage-backed  securities
into comparable yielding investments. In a rising interest rate environment, the
value of the  mortgage-backed  securities  with fixed-rate  underlying  mortgage
loans will be less as investors seek higher yielding investments,  and the value
of mortgage-backed securities with adjustable-rate underlying mortgage loans may
be impaired due to contractual limits on interest rate adjustments.
<PAGE>
Delinquencies and Classified Assets

         The Bank's collection  procedures  provide that when a mortgage loan is
15 days  past  due,  a  computer-generated  late  charge  notice  is sent to the
borrower  requesting  payment plus a late charge.  If the mortgage  loan remains
delinquent  after 30 days,  a telephone  call is made or a letter is sent to the
borrower, stressing the importance of reinstating the loan and obtaining reasons
for the delinquency. Older mortgage loans receive a 30-day grace period before a
late charge is assessed.  When a loan  continues  in a delinquent  status for 90
days  or  more,  and a  repayment  schedule  has  not  been  made or kept by the
borrower,  a notice of intent to foreclose upon the underlying  property is then
sent to the  borrower,  giving 30 days to cure the  delinquency.  If not  cured,
foreclosure  proceedings  are  initiated.  Consumer loans receive a 10-day grace
period  before a late charge is  assessed.  Collection  efforts  begin after the
grace period expires.

         In recent years, the Bank has increased its collection  efforts by more
closely monitoring  delinquent loans and management  believes that these efforts
have  contributed to the loan portfolio's low delinquency  levels.  At September
30, 1997, the percentage of loans receivable delinquent 90 days or more to total
loans receivable, net, was 0.52%.

         Delinquent  Loans and  Non-Performing  Assets.  Loans are reviewed on a
regular  basis and are placed on a  non-accrual  status when,  in the opinion of
management,  the collection of additional  interest is doubtful.  Mortgage loans
are placed on non-accrual  status generally when either principal or interest is
90 days or more past due and  management  considers the interest  uncollectible.
Interest  accrued and unpaid at the time a loan is placed on non-accrual  status
is charged against  interest income.  Subsequent  payments are either applied to
the outstanding  principal balance or recorded as interest income,  depending on
management's assessment of the ultimate collectability of the loan.

         During fiscal year 1997,  non-performing loans as a percentage of total
loans receivable, net, decreased from 0.78% as of September 30, 1996 to 0.52% as
of September 30, 1997.

         Real estate  acquired by the Bank as a result of foreclosure or by deed
in lieu of  foreclosure is classified as real estate owned until such time as it
is sold. When real estate owned is acquired,  it is recorded at the lower of the
unpaid  principal  balance of the related loan,  or its fair market value,  less
estimated  selling  expenses.  Any further  write-down  of real estate  owned is
charged against  earnings.  At September 30, 1997, 1996 and 1995, the Bank owned
approximately  $670,000,  $428,000  and  $140,000,   respectively,  of  property
acquired  as a  result  of  foreclosure  or by deed in lieu of  foreclosure  and
classified  as real estate  owned.  In recent  years,  the Bank  believes it has
worked  aggressively  to  minimize  real  estate  owned  property  by  improving
collection procedures and tightening loan underwriting standards.

         Classified  Assets.  Federal  regulations  require  that  each  insured
savings  institution  classify its assets on a regular  basis.  In addition,  in
connection with examinations of insured institutions, Federal examiners have the
authority to identify  problem assets and, if appropriate,  classify them. There
are three  classifications  for problem  assets:  "substandard,"  "doubtful" and
"loss."  Substandard  assets  have  one  or  more  defined  weaknesses  and  are
characterized  by the distinct  possibility  that the insured  institution  will
sustain some loss if the  deficiencies  are not corrected.  Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses  make  collection  or  liquidation  in full on the basis of currently
existing  facts,  conditions  and  values  questionable,  and  there  is a  high
<PAGE>
possibility of loss. An asset classified loss is considered uncollectible and of
such  little  value  that  continuance  as an  asset of the  institution  is not
warranted. For assets classified  "substandard" and "doubtful",  the institution
is required to establish general loan loss reserves in accordance with generally
accepted  accounting  principles.   Assets  classified  "loss"  must  be  either
completely written off or supported by a 100% specific reserve. A classification
category  designated  "special  mention" also must be established and maintained
for  assets  not  currently   requiring   classification  but  having  potential
weaknesses  or risk  characteristics  that could result in future  problems.  An
institution  is required to develop an in-house  program to classify its assets,
including  investments  in  subsidiaries,  on a  regular  basis  and  set  aside
appropriate  loss reserves on the basis of such  classification.  As part of the
periodic  examinations  of the Bank by  regulatory  agencies,  the staff of such
agencies  review  the  Bank's   classifications   and  determine   whether  such
classifications  are adequate.  Such agencies  have, in the past, and may in the
future,  require the Bank to classify  certain  assets which  management has not
otherwise classified or require a classification more severe than established by
management.  At September 30, 1997,  the Bank's  classified  assets totaled $1.8
million,  of which $1.4 million were  classified  substandard  and $359,000 were
classified  loss.  Specific  reserves  have been made for the assets or portions
thereof which are  classified  as loss.  At September 30, 1997,  the Bank had no
assets classified as special mention.

         The following table sets forth  information  regarding loans delinquent
for more than 90 days and real estate acquired by foreclosure by the Bank at the
date indicated.  As of the dates  indicated,  the Bank did not have any material
restructured loans within the meaning of SFAS 15.
<TABLE>
<CAPTION>
                                                         At September 30,
                                       --------------------------------------------------
                                        1997        1996       1995      1994       1993
                                       ------      ------      ----      ----      ------
                                                       (Dollars in Thousands)
<S>                                    <C>         <C>         <C>       <C>       <C>
Nonperforming loans:
   Residential real estate .......     $  827      $1,069      $544      $290      $2,023
   Commercial real estate ........        381         850       --         16          32
   Consumer ......................        289         243       119        97         150
   Commercial business ...........       --          --         --        --         --
                                       ------      ------      ----      ----      ------
      Total nonperforming loans ..      1,497       2,162       663       403       2,205
Total real estate acquired through
      foreclosure (1) ............        670         428       140       210         241
                                       ------      ------      ----      ----      ------
      Total nonperforming assets .     $ 2,167     $2,590      $803      $613      $2,446
                                       ======      ======      ====      ====      ======
Total nonperforming loans
   to loans receivable, net ......       0.52%       0.78%     0.32%     0.23%       1.40%
                                       ======      ======      ====      ====      ======
Total nonperforming loans
   to total assets ...............       0.39%       0.56%     0.23%     0.15%       0.85%
                                       ======      ======      ====      ====      ======
Total nonperforming assets
    to total assets ..............       0.56%       0.67%     0.27%     0.24%       0.94%
                                       ======      ======      ====      ====      ======
</TABLE>
(1)  Represents  the  book  value  of  property  acquired  by the  Bank  through
     foreclosure,  real estate in judgment or in-substance foreclosures,  net of
     valuation reserves.
<PAGE>
         At September  30, 1997,  the Bank's  largest  nonperforming  loan had a
principal  balance of $381,000 and was secured by  commercial  real  estate.  At
September 30, 1997, the Bank's largest property  constituting  real estate owned
by the Bank had a book value of $110,000.  During the year ended  September  30,
1997,  the Bank would have recorded  $49,000 in gross  interest  income on loans
accounted  for on a nonaccrual  basis if such loans had  performed in accordance
with their original  terms.  During the year ended  September 30, 1997, the Bank
did not record any interest income attributable to such non-accrual loans.

Allowance for Loan Losses

         Management's  policy is to provide for  estimated  losses on the Bank's
loan portfolio based on management's evaluation of the potential losses that may
be incurred.  Management regularly reviews the Bank's loan portfolio,  including
problem  loans,  to determine  whether any loans require  classification  or the
establishment of appropriate reserves or allowances for losses. Such evaluation,
which  includes a review of all loans of which full  collectability  of interest
and principal may not be reasonably assured, considers, among other matters, the
estimated  net  realizable  value of the  underlying  collateral.  Other factors
considered by  management  include the size and risk exposure of each segment of
the  loan  portfolio,  present  indicators  such as  delinquency  rates  and the
borrower's current financial  condition,  and the potential for losses in future
periods.  Management  calculates  the general  allowance for loan losses in part
based on past  experience,  and in part based on specified  percentages  of loan
balances.  While both general and specific loss  allowances are charged  against
earnings, a portion of general loan loss allowances are added back to capital to
the extent  permitted in computing  risk-based  capital  under federal and state
regulations.

         During the years ended  September  30,  1997,  1996 and 1995,  the Bank
provided  $321,000,  $170,000 and $360,000,  respectively,  to the allowance for
loan losses.  The Bank's  allowance for loan losses  totaled $2.3 million,  $2.4
million and $2.2 million at September 30, 1997, 1996 and 1995, respectively. The
provisions  for loan losses in recent  years  reflect  management's  decision to
increase  the  emphasis on factors in addition to past loan loss  experience  in
evaluating  the  adequacy of the  allowance  for loan losses.  Accordingly,  the
increased  provision  in fiscal year 1997 was  necessary  to maintain  loan loss
reserves  adequate to absorb  potential  losses  based on  management's  current
estimate  of the value of  underlying  collateral.  Accordingly,  the  increased
provision in fiscal year 1995 was  necessary to establish  loan loss reserves to
cover  the  credit   risk   associated   with  one   commercial   loan  and  the
collateralization  of a commercial  real estate  project  based on  management's
current  estimate of the value of the underlying  collateral.  Although the Bank
maintains  its  allowance  for loan losses at a level which it  considers  to be
adequate to provide for potential  losses,  there can be no assurance  that such
losses  will not  exceed  the  estimated  amounts  or that the Bank  will not be
required  to make  additions  to the  allowance  for loan  losses in the future.
Future  additions  to the Bank's  allowance  for loan  losses and changes in the
related  ratio of the  allowance  for loan  losses  to  nonperforming  loans are
dependent  upon the economy,  changes in real estate values and interest  rates,
the view of the regulatory authorities toward adequate loan loss reserve levels,
and inflation.  Management  will continue to review the entire loan portfolio to
determine the extent,  if any, to which further  additional loan loss provisions
may be deemed necessary.
<PAGE>
         Analysis of the  Allowance For Loan Losses.  The  following  table sets
forth the allowance for loan losses by loan category for the periods  indicated.
The table  reflects the  allowance  for loan losses as a percentage of net loans
receivable.  Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily  indicative  of future  losses and does not  restrict the use of the
allowance to absorb losses in any category.
<TABLE>
<CAPTION>
                                                                       At September 30
                                              ----------------------------------------------------------------
                                                1997          1996           1995          1994          1993
                                              --------      --------      --------      --------      --------
                                                                     (Dollars in Thousands)
<S>                                           <C>           <C>           <C>           <C>           <C>
Total loans outstanding .................     $292,433      $281,040      $212,186      $184,829      $163,365
                                              ========      ========      ========      ========      ========
Average loans receivable, net ...........      285,700       230,765       188,897       168,391       144,923
outstanding
Allowance balance (at beginning of year)      $  2,419      $  2,232      $  2,129      $  2,207      $  1,315
Provision for loan losses ...............          321           170           360           140         1,003
Reserves acquired from:
    Community Savings Bank ..............         --             265          --            --            --
    Home Federal Savings Bank ...........          190          --            --            --            --
Charge-offs:
    Residential real estate .............           87            13            57           116            30
    Commercial real estate ..............           42          --            --            --            --
    Consumer ............................          555           409           293           160           139
    Commercial business .................          145          --            --            --            --
                                              --------      --------      --------      --------      --------
      Total charge-offs .................          829           422           350           276           169
                                              --------      --------      --------      --------      --------
Recoveries:
    Residential real estate .............            9          --               1             6            21
    Consumer ............................          148           174            92            52            37
-----------------------------------------     --------      --------      --------      --------      --------
      Total recoveries ..................          157           174            93            58            58
                                              --------      --------      --------      --------      --------
Allowance balance (at end of year) ......     $  2,258      $  2,419      $  2,232      $  2,129      $  2,207
                                              ========      ========      ========      ========      ========
Allowance for loan losses as a percent
of totalloans outstanding at end of year          0.77%         0.86%         1.05%         1.15%         1.35%
                                              ========      ========      ========      ========      ========
Net loans charged off as a percent of
average  loans receivable, net ..........         0.24%         0.11%         0.14%         0.13%         0.08%
                                              ========      ========      ========      ========      ========

Ratio of allowance for loan losses to
total nonperforming loans at end of year        150.79%       111.89%       336.65%       528.29%       100.09%
                                              ========      ========      ========      ========      ========
</TABLE>
<PAGE>
         Allocation of Allowance for Loan Losses. The following table sets forth
the  allocation  of allowance  for loan losses by loan  category for the periods
indicated.
<TABLE>
<CAPTION>
                                                                          At September 30,
                                          ---------------------------------------------------------------------------
                                              1997                         1996                        1995
                                                    % of Loans                   % of Loans                 % of Loans
                                                     in Each                      in Each                    in Each
                                                    Category to                  Category to                Category to
                                          Amount    Total Loans       Amount     Total Loans     Amount     Total Loans
                                                                      (Dollars in Thousands)
<S>                                       <C>           <C>           <C>           <C>          <C>           <C>
Balance at end of year applicable to:
Residential real estate .............     $  528         69.65        $  557         69.40%      $  723         64.15%
Commercial real estate ..............        390          5.21           544          4.51          152          4.33
Consumer ............................      1,160         22.45         1,148         23.33        1,120         28.39
Commercial business .................        180          2.69           170          2.76          187          3.13
Credit enhancement ..................       --                                        --             50            --
                                          ------        ------        ------         ------      ------        ------

    Total allowance for loan losses .     $2,258        100.00%       $2,419        100.00%      $2,232        100.00%
                                          ======        ======        ======        ======       ======        ======
</TABLE>
Investment Activities

         The Bank's investment  portfolio  consists  primarily of obligations of
the United  States  Government  and agencies  thereof,  collateralized  mortgage
obligations, mutual funds, municipal bonds, corporate debentures and FHLB stock.
The Bank's portfolio of investment securities totaled $59.2 million at September
30, 1997.  The Bank's  holdings of FHLB stock  totaled $2.6 million at September
30, 1997.  The Bank's total  investment  in  interest-bearing  deposits was $5.0
million at September 30, 1997. Total investment securities at September 30, 1997
were $58.9 million.

         The Bank is required  under federal  regulations  to maintain a minimum
amount of liquid assets that may be invested in specified short-term  securities
and certain other  investments.  The Bank  generally has  maintained a liquidity
portfolio  in  excess  of  regulatory  requirements.  Liquidity  levels  may  be
increased or decreased depending upon the yields on investment  alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other  opportunities  and its  expectation  of the level of yield
that will be available in the future, as well as management's  projections as to
the short-term  demand for funds to be used in the Bank's loan  origination  and
other activities.  The Bank's average liquidity ratio for fiscal year ended 1997
was 5.36%, which was adequate to meet its normal business activities.
<PAGE>
         Investment Portfolio. The following table sets forth the carrying value
of the Bank's investment  securities  portfolio,  interest-bearing  deposits and
FHLB stock at the dates  indicated.  At September 30, 1997,  the market value of
the Bank's investment  securities was approximately  $59.3 million. At September
30, 1997 the market  value of the FHLB stock and  interest-bearing  deposits was
approximately equal to the book value of such investments.
<TABLE>
<CAPTION>
                                                                             At September 30,
                                                                    -------------------------------
                                                                      1997        1996        1995
                                                                    -------     -------     -------
                                                                            (In Thousands)
<S>                                                                  <C>         <C>         <C>
Investment securities:
  Available for sale (at market value):
         U.S. Government and agencies ..........................     $37,831     $43,794     $23,281
         Corporate debentures ..................................       2,100       2,116        --
         Collateralized mortgage obligations ...................       5,581       6,157        --
         Municipal bonds .......................................       1,266        --          --
         Equity securities-mutual funds ........................       6,644       6,546       6,167
                                                                     -------     -------     -------
                  Total investment securities available for sale      53,422      58,613      29,448
                                                                     -------     -------     -------
  Held to maturity (at cost):
         U.S. Government and agencies ..........................        --         1,000       5,000
         Corporate debentures ..................................       1,002       3,275       7,632
         Collateralized mortgage obligations ...................       1,936       2,335       8,948
         Municipal bonds .......................................       2,854       2,250       1,756
         Equity securities - mutual funds ......................        --          --          --
                                                                     -------     -------     -------
                  Total investment securities held to maturity .       5,792       8,860      23,336
                                                                     -------     -------     -------
                           Total investment securities .........      59,214      67,473      52,784
Interest-bearing deposits ......................................       4,954       7,476       5,250
FHLB stock, at cost ............................................       2,600       3,050       2,140
                                                                     -------     -------     -------
                            Total investments ..................     $66,768     $77,999     $60,174
                                                                     =======     =======     =======

</TABLE>
<PAGE>
         Investment  Securities  Maturities.  The following table sets forth the
scheduled  maturities,  carrying  values  and  average  yields  for  the  Bank's
investment  securities,  excluding  equity  securities,  at September  30, 1997.
Equity securities  consisting of $6.6 million invested in mutual funds have been
excluded since such instruments have no stated maturity.
<TABLE>
<CAPTION>

                                                                               At September 30, 1997
                                           -----------------------------------------------------------------------------------------
                                                                                                                          More Than
                                             One Year or Less         One to Five Years          Five to Ten Years        Ten Years
                                                      Annualized             Annualized            Annualized             Annualized
                                                       Weighted               Weighted              Weighted                Weighted
                                           Carrying    Average    Carrying     Average   Carrying    Average    Carrying     Average
                                            Value      Yield      Value        Yield      Value       Yield       Value       Yield
                                            -----      -----      -----        -----      -----       -----       -----       -----
                                                                             (Dollars in Thousands)
<S>                                         <C>        <C>       <C>            <C>      <C>           <C>      <C>           <C>
Investment securities:
  Available for sale:
    U.S. Government and agencies ......     $3,405     6.70%     $21,510        6.32%    $8,717        7.26%    $ 4,199       7.76%
    Corporate debentures ..............       --       --          2,100        6.12       --           --           --         --
    Collateral mortgage obligations ...       --       --           --           --          454        5.35       5,127       5.71
    Municipal bonds ...................       --       --           --           --          --          --        1,266       5.24
  Held to maturity:
    U.S. Government and agencies ......       --       --           --           --          --          --           --         --
    Corporate debentures ..............      1,002     6.00         --           --          --          --           --         --
    Collateralized mortgage obligations       --       --           --           --          --          --        1,936       5.86
    Municipal bonds ...................        324     5.04        1,151        4.81        150        6.10        1,229       5.62
                                            ------     ----      -------        ----     ------        ----      -------       ----
      Total investment securities .....     $4,731     6.45%     $24,761        6.23%    $9,321        7.15%     $13,757       6.28%
                                            ======     ====      =======        ====     ======        ====      =======       ====
</TABLE>

Sources of Funds

 General.  Deposits and borrowings are the major sources of the Bank's funds for
lending and other investment purposes. In addition,  the Bank derives funds from
the  repayment  and   prepayment  of  loans  and   mortgage-backed   securities,
operations,  and the sale or maturity of investment  securities.  Scheduled loan
principal  repayments  are a relatively  stable  source of funds,  while deposit
inflows and  outflows  and loan  prepayments  are  influenced  significantly  by
general  interest  rates and market  conditions.  Other sources of funds include
advances  from  the  FHLB  and  reverse  repurchase   agreements.   For  further
information see "Borrowings" below. Borrowings may be used on a short-term basis
to compensate for reductions in the  availability of funds from other sources or
on a longer term basis for general business purposes.

 Deposits.  Consumer and  commercial  deposits are  attracted  principally  from
within the Bank's primary market area through the offering of a broad  selection
of   deposit   instruments   including   interest-bearing   checking   accounts,
noninterest-bearing  checking  accounts,  savings accounts,  money market demand
accounts, term certificate accounts and individual retirement accounts. The Bank
accepts deposits of $100,000 or more and may offer negotiated  interest rates on
such  deposits.  Deposit  account  terms vary  according to the minimum  balance
required,  the time  periods the funds must  remain on deposit and the  interest
rate,  among other factors.  The Bank  regularly  evaluates its internal cost of
<PAGE>
funds, surveys rates offered by competing institutions,  reviews the Bank's cash
flow  requirements  for lending and  liquidity  and  executes  rate changes when
deemed appropriate.  The Bank does not obtain funds through brokers, nor does it
solicit  funds  outside  its market  area.  Further,  the Bank has  rarely  used
premiums  to  attract  deposits.  The Bank  does not  participate  in  marketing
promotions  to attract  individual  retirement  account  funds,  nor does it pay
premium rates for individual  retirement account deposits.  The Bank also enters
into reverse repurchase  agreements with large balance depositors,  particularly
those with  maturing  certificates  of deposit  which  enable the  depositor  to
reinvest   the  maturing   deposit  in  reverse   repurchase   agreements.   See
"Borrowings." In recent years the Bank's total deposits have increased steadily.

 The  following  table sets forth the net change in deposits of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
                                                        At September 30,
                                               1997           1996           1995
                                            ---------      ---------      ---------
                                                        (In Thousands)
<S>                                         <C>            <C>            <C>
Deposits ..............................     $ 859,231      $ 658,951      $ 672,364
Deposits acquired, net of premium .....        23,820         49,724         19,795
Withdrawals ...........................      (864,404)      (663,674)      (690,467)
                                            ---------      ---------      ---------
  Net increase before interest credited        18,647         45,001          1,692
Interest credited .....................         8,610          6,619          5,464
                                            ---------      ---------      ---------
  Net increase in deposits ............     $  27,257      $  51,620      $   7,156
                                            =========      =========      =========
</TABLE>
<PAGE>
         Deposit  Portfolio.  Deposits in the Bank as of September 30, 1997 were
represented by the various types of deposit programs described below.
<TABLE>
<CAPTION>


Weighted
 Average                                                                                                 Percentage
 Interest                                                            Minimum                               of Total
   Rate         Minimum Term           Checking and Savings           Amount             Balance          Deposits
   ----         ------------           --------------------           ------             -------          --------
                                                                                     (In Thousands)
<S>             <C>                    <C>                            <C>              <C>                 <C>
0.00%           None                   Noninterest-bearing checking    $    100        $ 13,382               4.85%
2.69            None                   Interest-bearing checking            100          28,876              10.46
3.84            None                   Money market demand                  100          18,159               6.58
2.78            None                   Savings accounts                     100          24,457               8.86
4.76            None                   Savings accounts                   5,000          17,120               6.21
                                                                                       --------            -------
                                                                                        101,994              36.96
                                                                                       --------            -------


                                       Certificates of Deposit


4.43            3 months               Fixed term, fixed rate               500             100               0.04
4.33            91 days                Fixed term, fixed rate               500           1,111               0.40
5.16            6 months               Fixed term, fixed rate               500          19,693               7.14
5.77            9 months               Fixed term, fixed rate               500          13,994               5.07
5.35            1 year                 Fixed term, fixed rate               500          25,395               9.20
5.59            15 months              Fixed term, fixed rate               500           4,063               1.47
5.47            11/2years              Fixed term, fixed rate               500           8,312               3.01
6.01            21 months              Fixed term, fixed rate               500          18,717               6.78
5.52            2 years                Fixed term, fixed rate               500           7,429               2.69
5.00            2 years                Fixed term, adj. rate (1)          1,000             120               0.04
5.74            21/2years              Fixed term, fixed rate               500          20,965               7.60
5.80            21/2years              Fixed term, fixed rate (2)         2,500          12,058               4.37
5.62            25 months              Fixed term, fixed rate (3)         5,000           2,501               0.91
5.78            3 years                Fixed term, fixed rate               500           6,628               2.40
5.53            4 years                Fixed term, fixed rate               500           5,190               1.88
6.22            5 to 10 years          Fixed term, fixed rate (3)           ---           4,010               1.45
5.79            Various                IRA/QRP                           50-100          17,085               6.19
6.02            Various                Negotiated Jumbo                 100,000           6,615               2.40
                                                                                       --------             ------
                                                                                        173,986              63.04
                                                                                       --------            -------
                                                                      Total            $275,980            100.00%
                                                                                       ========            ======
</TABLE>

(1)  This  deposit  product  adjusts  the  interest  rate paid at each six month
     interval. This product is no longer offered and is nonrenewable.

(2)  This deposit  product  allows the depositor to elect to adjust the interest
     rate paid once during the initial term of the certificate of deposit.

(3)  Certificates are only available on a renewal basis.

<PAGE>
Deposit Flow

         The following  table sets forth the change in dollar amount of deposits
in the various types of deposit  accounts  offered by the Bank between the dates
indicated.
<TABLE>
<CAPTION>
                                                                                                                                    
                          Balance at                 Increase       Balance           %      Increase      Balance            %     
                           9/30/97      % Deposits   (Decrease)   at 9/30/96     Deposits   (Decrease)   (Decrease)       Deposits
                           -------      ----------   ----------   ----------     --------   ----------   ----------       --------
                                                                    (Dollars in Thousands)
<S>                       <C>              <C>      <C>           <C>              <C>      <C>           <C>              <C>
Demand Deposits:          $ 13,382           4.85%  $  3,586      $  9,796           3.94%  $  2,158      $  7,638           3.87%
Noninterest-bearing
checking
  Interest-bearing ..       28,876          10.46      2,863        26,013          10.46       (377)       26,390          13.39
checking
  Money market demand       18,159           6.58        710        17,449           7.01        226        17,223           8.74
  Savings accounts ..       41,577          15.07      5,882        35,695          14.35      9,006        26,689          13.54
                          --------         ------    -------      --------         ------   --------      --------         ------
    Total demand
deposits ............      101,994          36.96     13,041        88,953          35.76     11,013        77,940          39.54
                          --------         ------    -------      --------         ------   --------      --------         ------

Certificates of
deposit which
  mature in the
period ending: (1)
  Within 1 year .....      112,180          40.65      2,377       109,803          44.15     36,685        73,118          37.10
  Within 3 years ....       60,305          21.85     16,488        43,817          17.62       (537)       44,354          22.50
  Over 3 years ......        1,501           0.54     (4,649)        6,150           2.47      4,459         1,691           0.86
                          --------         ------    -------      --------         ------   --------      --------         ------

Total certificates of
deposits ............      173,986          63.04     14,216       159,770          64.24     40,607       119,163          60.46
                          --------         ------    -------      --------         ------   --------      --------         ------
      Total deposits      $275,980         100.00%  $ 27,257      $248,723         100.00%  $ 51,620      $197,103         100.00%
                          ========         ======   ========      ========         ======   ========      ========         ====== 
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                         Balance
                          Increase          at               %
                         (Decrease)      9/30/94          Deposits
                         ----------      -------          --------
<S>                       <C>           <C>               <C>
Demand Deposits:          $   (488)     $  8,126           4.28%                          
Noninterest-bearing
checking
  Interest-bearing ..          925        25,465          13.41
checking
  Money market demand       (3,641)       20,864          10.98
  Savings accounts ..       (1,611)       28,300          14.90
                          --------      --------         ------
                    
    Total demand
deposits ............       (4,815)       82,755          43.57
                           --------      --------         ------
                   
Certificates of
deposit which
  mature in the
period ending: (1)
  Within 1 year .....        2,231        70,887          37.32
  Within 3 years ....        9,988        34,366          18.09
  Over 3 years ......         (248)        1,939           1.02
                          --------      --------         ------
                                        
Total certificates of
deposits ............       11,971       107,192          56.43
                          --------      --------         ------
      Total deposits      $  7,156      $189,947         100.00%
                          ========      ========         ====== 
                    
</TABLE>


(1) During the year ended  September 30, 1994,  $1.8 million of  certificates of
deposit were converted into reverse repurchase  agreements and therefore are not
reflected in the deposit totals.
<PAGE>
         Certificates  of Deposit by Rates.  The following  table sets forth the
balances of  certificates  of deposit in the Bank  classified by rates as of the
dates indicated:
<TABLE>
<CAPTION>

                                                   At September 30,
                                      ------------------------------------------
                                        1997              1996             1995
                                      --------         --------         --------
                                                    (In Thousands)
<S>                                   <C>              <C>              <C>
Less than 3.00% .............         $     14         $     26         $     24
3.00 - 4.99% ................            3,111           14,827           42,104
5.00 - 6.99% ................          169,123          141,335           73,668
7.00 - 8.99% ................            1,325            3,086            2,704
9.00 - 10.99% ...............              413              496              663
                                      --------         --------         --------
                                      $173,986         $159,770         $119,163
                                      ========         ========         ========
</TABLE>

         Certificate  of Deposit  Maturity  Schedule.  The following  table sets
forth the  balances and  maturities  of  certificates  of deposit in the Bank at
September 30,1997.
<TABLE>
<CAPTION>

                                             Balance Due
                       Less Than      1-2        2-3        3 Years
                        1 Year       Years      Years       or More        Total
                      --------     -------     -------     --------     --------
                                          (In Thousands)
<S>                   <C>          <C>         <C>         <C>          <C>
Less than 3.00% .     $   --       $  --       $    14     $   --       $     14
 3.00 - 4.99% ...        2,550         519        --             42        3,111
 5.00 - 6.99% ...      108,649      46,148      12,904        1,422      169,123
 7.00 - 8.99% ...          568        --           720           37        1,325
 9.00 - 10.99% ..          413        --          --           --            413
                      --------     -------     -------     --------     --------
                      $112,180     $46,667     $13,638     $  1,501     $173,986
</TABLE>

         Large  Certificates  of Deposit.  The  following  table  indicates  the
balances of  certificates of deposit of $100,000 or more by time remaining until
maturity as of September 30, 1997.
<TABLE>
<CAPTION>
               Maturity Period                    Certificates of Deposit
               ---------------                    -----------------------
                                                    (In Thousands)
<S>                                                   <C>
Three months or less.......................           $    2,516
Three through six months...................                5,858
Six through twelve months..................                3,782
Over twelve months.........................                5,380
                                                       ---------
    Total..................................            $  17,536
                                                       =========
</TABLE>
<PAGE>
Borrowings

         Deposits  are the  primary  source of funds for the Bank's  lending and
investment activities.  If the need arises, the Bank may rely upon advances from
the FHLB to  supplement  its  supply  of  available  funds  and to fund  deposit
withdrawals.  Advances from the FHLB are typically secured by the Bank's one- to
four-family  residential  mortgage  loans,  United States  Government and agency
securities  and  mortgage-backed  securities.  The FHLB  functions  as a central
reserve bank providing credit for the Bank and other member savings associations
and  financial  institutions.  As a member,  the Bank is required to own capital
stock in the FHLB and is  authorized  to apply for  advances on the  security of
such  stock and  certain of its home  mortgages  and other  assets  (principally
securities  which are  obligations  of, or  guaranteed  by,  the  United  States
Government)  provided certain  standards related to  creditworthiness  have been
met.  Advances  are made  pursuant to several  different  programs.  Each credit
program has its own  interest  rate and range of  maturities.  Depending  on the
program,  limitations  on the  amount of  advances  are based  either on a fixed
percentage of a member  institution's  net worth or on the FHLB's  assessment of
the  institution's  creditworthiness.  At September 30, 1997, the Bank had $37.0
million of FHLB advances. From time to time the Bank also enters into agreements
to sell  securities  under  terms  which  require  it to  purchase  the  same or
substantially  similar  securities  by a  specified  date  ("reverse  repurchase
agreements").  Reverse repurchase agreements are considered borrowings which are
secured by the sold securities.  The Bank's reverse  repurchase  agreements have
terms that do not exceed the legal limit of 330 days. At September 30, 1997, the
Bank had reverse repurchase agreements totalling $13.3 million.

         The following table sets forth certain information regarding borrowings
by the Bank at the end of and during the periods indicated.
<TABLE>
<CAPTION>
                                                               For the years ended September 30,
                                                    --------------------------------------------------------
                                                     1997                    1996                     1995
                                                    -------                 -------                 -------- 
                                                                     (Dollars in Thousands)
<S>                                                 <C>                     <C>                      <C>
Weighted average rate paid on: (1)
  Reverse repurchase agreements.............          5.40%                   5.48%                    5.64%
  FHLB advances.............................           5.89                    5.33                     5.51
  ESOP borrowings...........................           8.00                    8.35                     8.60
Reverse repurchase agreements:
  Maximum balance...........................        $13,345                 $14,782                  $15,406
  Average balance...........................         13,320                  13,510                   14,242
FHLB advances:
  Maximum balance...........................         56,491                  60,996                   42,800
  Average balance...........................         44,455                  34,303                   33,607
ESOP borrowings:
  Maximum balance...........................            576                     844                    1,152
  Average balance...........................            112                     751                    1,033
</TABLE>

(1) Calculated using the daily weighted average interest rates.

<PAGE>
Subsidiary Activities

         The  Bank  has  one  wholly  owned  subsidiary,  Sparta  First  Service
Corporation ("Sparta First"), an Illinois  corporation.  Sparta First is engaged
primarily in the business of offering investment products (consisting  primarily
of equity  securities,  fixed and variable  annuities and mutual funds)  through
INVEST  and  INSURE.  Both  INVEST and INSURE  are  service  marks  owned by the
brokerage  and  insurance  agency that  contracts  with Sparta  First to provide
services to customers.

         At September  30, 1997,  the Bank had a $939,000  equity  investment in
Sparta First. For the year ended September 30, 1997 Sparta First had net income
of $135,000.

Competition

         The Bank encounters strong competition both in attracting  deposits and
in  originating  real estate and other loans.  Its most direct  competition  for
deposits has come  historically  from  commercial  banks,  other savings  banks,
savings  associations and credit unions in its market area, and the Bank expects
continued strong competition from such financial institutions in the foreseeable
future.  The Bank  competes  for savings by offering  depositors a high level of
personal service and expertise together with a wide range of financial services.

         The competition for real estate and other loans comes  principally from
commercial banks, mortgage banking companies and other savings banks and savings
associations.  This competition for loans has increased  substantially in recent
years as a result of the large  number of  institutions  competing in the Bank's
market  area as well as the  increased  efforts  by  commercial  banks to expand
mortgage loan originations.

         The Bank competes for loans  primarily  through the interest  rates and
loan fees it charges  and the  efficiency  and  quality of  services it provides
borrowers,  real estate  brokers and builders.  Factors that affect  competition
include general and local economic conditions,  current interest rate levels and
the volatility of the mortgage markets.

         The Bank's market area includes all of Randolph,  Jackson,  Williamson,
Perry and  Union  counties,  and  portions  of  Monroe,  Washington,  Alexander,
Pulaski,  Jefferson,  Johnson, Franklin and St. Clair counties, all of which are
in  Illinois.   The  Bank's   market  area  has  a  large  number  of  financial
institutions.

REGULATION AND SUPERVISION

         General. The Bank is an Illinois-chartered savings bank and its deposit
accounts  are  insured  up to  applicable  limits  by  the  Savings  Association
Insurance Fund ("SAIF") of the FDIC. The Bank is subject to extensive regulation
by the Illinois  Commissioner of Banks and Real Estate (the  "Commissioner") and
the  FDIC.  The  Bank  must  file  reports  with the  Commissioner  and the FDIC
concerning  its  activities  and financial  condition,  in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
or  acquisitions  with  other  depository   institutions.   There  are  periodic
examinations of the Bank by the  Commissioner  and the FDIC to review the Bank's
compliance  with various  regulatory  requirements.  The Bank is also subject to
certain  reserve  requirements  established  by the  Board of  Governors  of the
<PAGE>
Federal Reserve System (the "FRB"). This regulation and supervision  establishes
a  comprehensive  framework of activities in which a savings bank can engage and
is  intended  primarily  for the  protection  of the  SAIF and  depositors.  The
regulatory structure also gives the regulatory  authorities extensive discretion
in connection with their supervisory and enforcement  activities and examination
policies,  including  policies with respect to the  classification of assets and
the  establishment of adequate loan loss reserves for regulatory  purposes.  Any
change in such regulation,  whether by the  Commissioner,  the FDIC, or Congress
could have a material  impact on the operations of the Company and the Bank. The
Company, as a savings and loan holding company, is also required to file certain
reports with, and otherwise comply with the rules and regulations of the OTS and
the Commissioner.  Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein.

         Capital  Maintenance.  Under FDIC  regulations,  the Bank must maintain
minimum levels of capital. The regulations  establish a minimum leverage capital
requirement  of not less than 3% core  capital to total  assets for banks in the
strongest  financial and  managerial  condition,  with a CAMELS Rating of 1 (the
highest rating of the federal  regulators for banks).  For all other banks,  the
minimum leverage capital  requirement is between 4% and 5% of total assets. Core
capital is composed  of the sum of common  stockholders'  equity,  noncumulative
perpetual preferred stock (including any related surplus) and minority interests
in consolidated subsidiaries, minus all intangible assets (other than qualifying
mortgage servicing rights and qualifying  supervisory intangible core deposits),
identified  losses and  investments  in certain  subsidiaries.  At September 30,
1997,  the Bank's  ratio of core  capital to total  adjusted  assets was 12.10%,
which exceeded the minimum leverage requirement.

         The FDIC also  requires  that savings  banks meet a risk-based  capital
standard.  The risk-based  capital  standard  requires the  maintenance of total
capital  (which is defined as core  capital and  supplementary  capital) to risk
weighted assets of 8.0%. In determining the amount of risk-weighted  assets, all
assets,  including  certain  off  balance  sheet  assets,  are  multiplied  by a
risk-weight of 0% to 100%, based on the risks the federal regulators believe are
inherent in the type of asset.  The components of core capital are equivalent to
those  discussed  earlier under the 3% leverage  requirement.  The components of
supplementary  capital currently include cumulative  perpetual  preferred stock,
long-term  perpetual   preferred  stock,   mandatory   convertible   securities,
subordinated  debt and  intermediate  preferred stock and allowance for loan and
lease losses.  Allowance for loan and lease losses  includible in  supplementary
capital is limited to a maximum of 1.25% of risk-weighted  assets.  Overall, the
amount of capital  counted  toward  supplementary  capital cannot exceed 100% of
core capital.  At September  30, 1997,  the Bank's  risk-based  capital to total
assets  ratio  was  22.16%  and as a  result,  the  Bank  exceeded  its  minimum
risk-based capital requirements.
<PAGE>
         Set forth below is a summary of the Bank's  compliance with its capital
requirements as of September 30, 1997.
<TABLE>
<CAPTION>
                                                            At September 30, 1997
                                                          -------------------------
                                                                         Percent of
                                                           Amount           Assets
                                                          -------            -----
                                                           (Dollars in Thousands)
<S>                                                       <C>                <C>
Tier 1 (core) Capital Leverage Ratio:
  Actual level ..................................         $46,800            12.10%
  Required level ................................          11,606             3.00
                                                          -------            -----
  Excess ........................................         $35,194             9.10%
                                                          =======            =====
Tier 1 Risk-based Capital Ratio:
  Actual level ..................................         $46,800            21.30%
  Required level ................................           8,791             4.00
                                                          -------            -----
  Excess ........................................         $38,011            17.30%
                                                          =======            =====
Tier 2 Risk-based Capital Ratio:
  Actual level ..................................         $48,699            22.16%
  Required level ................................          17,579             8.00
                                                          -------            -----
  Excess ........................................         $31,120            14.16%
                                                          =======            =====
</TABLE>

         Illinois  Savings  Bank  and  Savings  Bank  Holding  Company  Law  and
Regulation. In August 1990, Illinois enacted the Savings Bank Act ("SBA"), which
establishes  Illinois-chartered  savings banks. Under the SBA, savings banks are
chartered  and  regulated by the  Commissioner  and possess all of the powers of
federal and  Illinois-chartered  savings and loan associations.  The SBA permits
Illinois-chartered savings and loan associations, as well as federally chartered
savings and loan  associations  and commercial  banks,  to merge with or convert
directly into an Illinois-chartered savings bank.

         As  an  Illinois-chartered   savings  bank,  the  Bank  is  subject  to
regulation and supervision by the Commissioner.  This regulation  covers,  among
other things, the Bank's internal organization (i.e., charter,  bylaws,  capital
requirements,  transactions with directors and officers,  and composition of the
board of  directors),  as well as  supervision  of  permissible  activities  and
mergers and  acquisitions.  The Bank is required to file periodic  reports with,
and is subject to  periodic  examinations  at least once within  every  18-month
period by the Commissioner.  The lending and investment authority of the Bank is
prescribed by Illinois law and regulations,  as well as applicable  Federal laws
and regulations,  and the Bank is prohibited from engaging in any activities not
permitted by such laws and regulations.

         Under  Illinois  law,  savings banks are required to maintain a minimum
total  capital to total assets ratio of 3%. The  Commissioner  is  authorized to
require  a  savings  bank to  maintain  a higher  minimum  capital  level if the
Commissioner  determines that the savings bank's financial condition or history,
management or earnings  prospects are not adequate.  If a savings bank's capital
ratio falls below the required level,  the  Commissioner  may direct the savings
bank to adhere to a specific  written plan  established by the  Commissioner  to
<PAGE>
correct  the savings  bank's  capital  deficiency,  as well as a number of other
restrictions  on the savings bank's  operations,  including a prohibition on the
declaration of dividends by the savings  bank's board of directors.  As a matter
of policy, the Commissioner  requires that savings  associations that convert to
savings  banks under the SBA have a minimum  core capital to assets ratio of 6%.
At  September  30,  1997,  the  Bank's  core  capital  ratio was 12.10% of total
adjusted assets, which substantially exceeded the required amount.

         Under  Illinois law, a savings bank may make both secured and unsecured
loans.  However,  loans for  business,  corporate,  commercial  or  agricultural
purposes, whether secured or unsecured, may not in the aggregate exceed 15% of a
savings  bank's total assets  unless  authorized by the  Commissioner.  With the
prior written consent of the Commissioner, savings banks may also engage in real
estate  development  activities,  provided that the total  investment in any one
project may not exceed 15% of total  capital,  and the total  investment  in all
projects may not exceed 50% of total capital.  The total loans and extensions of
credit  outstanding at one time, both direct and indirect,  by a savings bank to
any  borrower  may not  exceed  15% of the  savings  bank's  total  capital.  At
September  30,  1997,  the Bank did not have  any  loans-to-one  borrower  which
exceeded this  limitation.  For information  about the largest  borrowers of the
Bank, see "Lending Activities--Loan Concentration" above.

         Illinois-chartered savings banks generally have all lending, investment
and other powers which are possessed by federal savings banks based in Illinois.
Recent  federal and state  legislative  developments  have reduced  distinctions
between  commercial  banks and savings  institutions in Illinois with respect to
lending and investment  authority.  As federal law has expanded the authority of
federally  chartered  savings  institutions  to engage in activities  previously
reserved for commercial  banks,  Illinois  legislation and regulations  ("parity
legislation")  have given  Illinois-chartered  savings  institutions such as the
Bank the powers of federally chartered savings institutions.

         The board of directors  of a savings bank may declare  dividends on its
capital stock based upon the savings  bank's  annualized net profits except that
until the paid-in  surplus of the  savings  bank  equals its  capital  stock,  a
dividend  may not be  declared  unless  there has been  transferred  to  paid-in
surplus not less than 10% of the net profits of the  preceding  half year in the
case of  quarterly  or  semiannual  dividends,  or not less  than 10% of the net
profits for the preceding  year in the case of annual  dividends.  Dividends may
not be  declared  if a  savings  bank  fails to meet its  capital  requirements.
Further  written  approval of the  Commissioner  is required by any savings bank
having  total  capital  of less than 6% of total  assets  before  any  dividends
exceeding  50% of the  savings  bank's  profits  for any  calendar  year  may be
declared. A stock dividend may be declared out of retained earnings at any time.

         An  Illinois-chartered  savings  bank  may not  make a loan to a person
owning 10% or more of its stock, an affiliated  person,  an agent or an attorney
of the savings bank,  either  individually or as an agent or partner of another,
except under the rules of the  Commissioner  and  regulations of the FDIC.  This
restriction  does not  apply,  however,  to loans  made (i) on the  security  of
single-family residential property used by the borrower as his or her residence,
and (ii) to a non-profit,  religious,  charitable or fraternal organization or a
corporation  in which  the  savings  bank has been  authorized  to invest by the
Commissioner.  Furthermore,  a savings bank may not purchase, lease or acquire a
site for an office  building  or an  interest  in real  estate  from an officer,
director, employee or the holder of more than 10% of the savings bank's stock or
certain  affiliated  persons  as set forth in  Illinois  law,  unless  the prior
written approval of the Commissioner is obtained.
<PAGE>
         The SBA  provides  that any  depository  institution  may merge  into a
savings  bank  operating  under the SBA.  The Board of Directors of each merging
institution must approve a plan of merger by resolution adopted by majority vote
of all members of the respective boards. After such approval, the plan of merger
must be submitted to the Commissioner for approval. The Commissioner may make an
examination of the affairs of each merging  institution (and their  affiliates).
The  Commissioner may not approve a merger agreement unless he finds that, among
other things,  (i) the resulting  institution meets all requirements of the SBA;
(ii) the  merger  agreement  is fair to all  persons  affected;  and  (iii)  the
resulting  institution will be operated in a safe and sound manner.  If approved
by the Commissioner, the plan of merger must be submitted to stockholders of the
depository  institution  for  approval,  and may be required to be  submitted to
members  if a  mutual  savings  bank  is  one  of the  constituent  entities.  A
two-thirds affirmative vote is required for approval of the plan of merger.

         The SBA permits an Illinois  savings bank holding company to control or
own more than 5% of the  voting  shares or rights of a savings  bank only if the
principal  place of business of the savings  bank is located in those  states in
which a savings bank holding company is permitted to acquire an Illinois savings
bank.  When  requested,  the  Commissioner  will review the laws of the state to
determine whether the laws of that state expressly authorize an Illinois savings
bank holding company to acquire a savings bank in that state.

         A savings bank holding company may invest in the stock of or other form
of equity ownership of any company which the board of directors determines to be
in the best interests of stock owners and  depositors,  and such investment must
be documented in the holding  company's  minutes with reference to such items as
price/earning ratios, future prospects, sources of income and compatibility with
the overall business plan of the holding company.

         Community  Reinvestment  Act.  Under  the  Community  Reinvestment  Act
("CRA"),  as  implemented  by FDIC  regulations,  a  savings  institution  has a
continuing  and  affirmative  obligation  consistent  with its  safe  and  sound
operation to help meet the credit needs of its entire  community,  including low
and moderate income  neighborhoods.  The CRA does not establish specific lending
requirements  or  programs  for  financial  institutions  nor  does it  limit an
institution's  discretion  to develop the types of products and services that it
believes are best suited to its particular  community,  consistent with the CRA.
The CRA requires  the FDIC,  in  connection  with its  examination  of a savings
institution,  to assess the institution's  record of meeting the credit needs of
its community and to take such record into account in its  evaluation of certain
applications by such institution.  The Financial  Institutions Reform,  Recovery
and  Enforcement Act of 1989  ("FIRREA")  amended the CRA to require,  effective
July 1, 1990,  public  disclosure of an institution's CRA rating and require the
FDIC to  provide  a  written  evaluation  of an  institution's  CRA  performance
utilizing a four-tiered descriptive rating system which replaced the five-tiered
numerical rating system.

         Insurance of Accounts and  Regulation by the FDIC. The Bank is a member
of the SAIF,  which is  administered  by the FDIC.  Deposits  are  insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States  Government.  As insurer,  the FDIC imposes  deposit
insurance  premiums and is authorized to conduct  examinations of and to require
reporting by FDIC-insured  institutions.  It also may prohibit any  FDIC-insured
institution  from engaging in any activity the FDIC  determines by regulation or
<PAGE>
order to pose a serious risk to the SAIF or the Bank Insurance Fund (the "BIF").
The  FDIC  also  has the  authority  to  initiate  enforcement  actions  against
institutions,  and may terminate the deposit insurance if it determines that the
institution  has  engaged in unsafe or unsound  practices  or is in an unsafe or
unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to  risk-weighted  assets  ("Tier 1  risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.

         The FDIC is authorized to increase  assessment  rates,  on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

         On September 30, 1996,  federal  legislation  was enacted that required
the  SAIF to be  recapitalized  with a  one-time  assessment  on  virtually  all
SAIF-insured  institutions,  including  the  Savings  Bank,  equal to 65.7 basis
points on SAIF-insured deposits maintained by those institutions as of March 31,
1995. The SAIF special  assessment  applicable to the Bank, which was accrued in
fiscal year 1996 and paid to the FDIC in November 1996, was  approximately  $1.5
million.

         As a  result  of  the  SAIF  recapitalization,  the  FDIC  reduced  the
insurance premiums for SAIF-insured  deposits to a range of 0 to 27 basis points
per $100 of domestic deposits, effective January 1, 1997. The Bank qualifies for
the minimum SAIF assessment.  All SAIF-insured  institutions are required to pay
an assessment for the repayment of interest on obligations issued by a federally
chartered  corporation  to provide  financing  ("FICO") for resolving the thrift
crisis in the 1980s,  in an amount  equal to 6.48 basis  points for each $100 in
domestic  deposits.  As a result  of the  recent  legislation  discussed  above,
BIF-insured  institutions  are  also  required  to pay  an  assessment  for  the
repayment of interest on the FICO bonds, in an amount equal to 1.52 basis points
for each $100 in domestic deposits. The assessment on SAIF-insured  institutions
is  expected  to be  reduced  to 2.43  basis  points  for each $100 in  domestic
deposits no later than January 1, 2000, by which point BIF-insured  institutions
will participate fully in the FICO bond interest  repayment.  These assessments,
which  may be  revised  based  upon the  level of BIF and  SAIF  deposits,  will
continue until the bonds mature in 2017.

         Federal Holding Company  Regulation.  The Company is a  non-diversified
savings and loan  holding  company  within the meaning of the Home  Owners' Loan
Act, as amended.  As such, the Company is registered with the OTS and is subject
<PAGE>
to OTS regulations,  examinations,  supervision and reporting  requirements.  In
addition, the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries.  Among other things, this authority permits the OTS to
restrict or prohibit  activities that are determined to be a serious risk to the
subsidiary savings  institution.  The Bank is required to notify the OTS 30 days
before declaring any dividend to the Company.

         As a unitary savings and loan holding company, the Company generally is
not  restricted  under  existing laws as to the types of business  activities in
which it may engage,  provided that the Bank continues to be a Qualified  Thrift
Lender ("QTL").  See "Qualified  Thrift Lender Test" for a discussion of the QTL
requirements.  Upon any  nonsupervisory  acquisition  by the  Company of another
savings  association or savings bank that meets the QTL test and is deemed to be
a savings  institution  by the OTS, the Company would become a multiple  savings
and loan  holding  company (if the  acquired  institution  is held as a separate
subsidiary)  and  would be  subject  to  extensive  limitations  on the types of
business  activities in which it could engage. The HOLA limits the activities of
a multiple  savings and loan  holding  company and its  non-insured  institution
subsidiaries  primarily to  activities  permissible  for bank holding  companies
under  Section  4(c)(8) of the Bank Holding  Company  Act,  subject to the prior
approval of the OTS, and  activities  authorized by OTS  regulation.  The OTS is
prohibited  from  approving  any  acquisition  that  would  result in a multiple
savings and loan holding company controlling  savings  institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies,  and (ii) the acquisition of
a savings  institution  in another  state if the laws of the state of the target
savings institution specifically permit such acquisitions.

         The HOLA  prohibits a savings  and loan  holding  company,  directly or
indirectly, or through one or more subsidiaries,  from acquiring another savings
institution or holding company  thereof,  without prior written  approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary  savings institution,  a non-subsidiary holding
company,  or a  non-subsidiary  company  engaged in activities  other than those
permitted by the HOLA; or acquiring or retaining  control of an institution that
is not federally  insured.  In evaluating  applications by holding  companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources,  future prospects of the company and institution involved, the effect
of the  acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.

         Federal law  generally  provides that no "person,"  acting  directly or
indirectly or through or in concert with one or more other persons,  may acquire
"control," as that term is defined in OTS  regulations,  of a federally  insured
savings  institution  without  giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove of the proposed  acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things,  that (i) the acquisition would substantially  lessen competition;  (ii)
the financial  condition of the acquiring  person might jeopardize the financial
stability  of  the  savings  institution  or  prejudice  the  interests  of  its
depositors;  or (iii) the  competency,  experience or integrity of the acquiring
person or the proposed  management  personnel  indicates that it would not be in
the  interest  of the  depositors  or the  public to permit the  acquisition  of
control by such person.
<PAGE>
         Qualified  Thrift Lender Test.  The QTL test requires an institution to
have at  least  65% of its  portfolio  assets  (as  defined  by  regulation)  in
qualified  thrift  investments  on a  monthly  average  for nine out of every 12
months on a rolling basis. As an  alternative,  the institution may maintain 60%
of its assets in those assets  specified in Section  7701(a)(19) of the Internal
Revenue  Code of 1986,  as amended (the  "Code").  Under  either  standard,  the
required  assets  primarily  consist of  residential  housing  related loans and
investments.  If the Bank fails to meet the QTL test,  the Company will lose its
status as unitary savings and loan holding  company and its business  activities
will be limited to those  permissible for a bank holding  company.  At September
30,  1997,  the Savings Bank met the QTL test and has always met such test since
its effectiveness.

Federal and State Taxation

         Federal  Taxation.   Prior  to  the  enactment  of  recent  legislation
(discussed  below),  savings  institutions  such as the Bank  that  met  certain
definitional  tests relating to the  composition of assets and other  conditions
prescribed by the Code, had been  permitted to establish  reserves for bad debts
and to make annual  additions  thereto  which could,  within  specified  formula
limits,  be taken as a deduction in computing  taxable income for federal income
tax purposes.  The amount of the bad debt reserve deduction for  "non-qualifying
loans" was  computed  under the  experience  method.  The amount of the bad debt
reserve  deduction for "qualifying real property loans" (generally loans secured
by improved real estate) could be computed under either the experience method or
the percentage of taxable income method (based on an annual election).

         In August 1996, legislation was enacted that repeals the reserve method
of  accounting  used by many  thrifts to  calculate  their bad debt  reserve for
federal  income tax purposes.  As a result,  small thrifts such as the Bank must
recapture  that  portion of the reserve  that exceeds the amount that could have
been taken under the experience  method for post-1987 tax years. The legislation
also requires  thrifts to account for bad debts for federal  income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of which
will be delayed until the first taxable year beginning  after December 31, 1997,
provided the institution meets certain  residential  lending  requirements.  The
management  of the  Bank  does not  believe  that the  legislation  will  have a
material impact on the Bank.

         In addition to the regular income tax, corporations,  including savings
institutions  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative  minimum  taxable  income.  For taxable years  beginning
after 1986 and before 1996, corporations, including savings institutions such as
the Bank, were also subject to an environmental tax equal to 0.12% of the excess
of alternative  minimum taxable income for the taxable year (determined  without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.

         The Bank was last audited by the Internal  Revenue  Service for the tax
year ended  September 30, 1991. No changes were necessary to the reported tax as
a result of the audit. For additional  information regarding taxation,  see Note
10 of Notes to Consolidated Financial Statements.
<PAGE>
         Illinois Taxation.  The State of Illinois imposes a tax on the Illinois
taxable income of  corporations,  including  savings banks, at the rate of 7.3%.
Illinois  taxable income is generally  similar to federal  taxable income except
that interest from state and municipal  obligations  is taxable and no deduction
is allowed for state income taxes.  However,  a deduction is allowed for certain
U.S. Government and agency obligations.  The Bank's state income tax returns for
the tax years ended  September 30, 1991, 1990 and 1989, have been audited by the
Illinois tax authorities. Such returns did not have to be amended as a result of
such audit.

Personnel

         As of September 30, 1997, the Bank and its subsidiary had a total of 93
full-time  and  22  part-time  employees.   None  of  the  Bank's  employees  is
represented  by a collective  bargaining  group.  Management  believes  that its
relationship with the Bank's employees is good.

Executive Officers Who Are Not Directors

         The following is a description of the executive  officer of the Company
who is not also a director of the Company.

         Karen P. Jacobus.  Ms. Jacobus, age 38, has served as Controller of the
Bank since 1984. In 1994,  Ms.  Jacobus was also appointed Vice President of the
Bank. Ms. Jacobus was appointed Assistant  Controller in 1982 and served in such
capacity  until her promotion to Controller in 1984. Ms. Jacobus joined the Bank
in 1977.
<PAGE>
ITEM 2.  Properties

         The Bank  conducts  its  business  through its main  office  located in
Sparta,  Illinois  and seven  branch  offices.  The  following  table sets forth
certain  information  concerning  the main office and each branch  office of the
Bank at September  30,  1997.  At September  30, 1997,  the Bank's  premises and
equipment had an aggregate  net book value of  approximately  $5.9 million.  The
Bank believes that its current  facilities  are adequate to meet the present and
immediately  foreseeable  needs  of  the  Bank  and  the  Holding  Company.  All
facilities are owned.

                                           Year               Book Value at
Location                                 Occupied          September 30, 1997
--------                                 --------          ------------------

Main Office..........................      1958               $  660,747
114 West Broadway
Sparta, Illinois  62286

Branch Office........................      1988               $   37,982
358 South Main
Anna, Illinois  62906

Branch Office........................      1983               $  590,347
500 West Main
Carbondale, Illinois  62901

Branch Office........................      1995               $  413,552
Southtown Shopping Center
DuQuoin, Illinois  62832

Branch Office........................      1978               $  428,759
1101 Walnut
Murphysboro, Illinois  62966

Branch Office........................      1991               $  313,281
424 West Broadway
Steeleville, Illinois  62288

Branch Office........................      1996               $1,535,822
1706 West DeYoung Street
Marion, Illinois 62959

Branch Office........................     1997(1)             $  143,597
635 East Walnut
Carbondale, Illinois  62901

------------------
(1) Acquired in January 1997



<PAGE>
ITEM 3.   Legal Proceedings

          There  are  various   claims  and   lawsuits  to  which  the  Bank  is
periodically  involved  incident  to the  Bank's  business.  In the  opinion  of
management,  such claims and lawsuits in the  aggregate  are  immaterial  to the
Bank's financial condition and results of operations.


ITEM 4.   Submission of Matters to a Vote of Security Holders

          During the fourth  quarter of the fiscal year  covered by this report,
the Company did not submit any matters to the vote of security holders.

                                     PART II

ITEM 5.  Market for Registrant's Common Stock and Related Stockholder Matters

         The  section  titled  "Common  Stock and  Related  Matters" of the 1997
Annual Report to  Stockholders  is  incorporated  herein by reference.  No other
sections of such Annual Report are incorporated herein by this reference.

ITEM 6.  Selected Financial Data

         The section titled "Selected  Consolidated Financial and Other Data" of
the 1997 Annual Report to Stockholders is incorporated  herein by reference.  No
other sections of such Annual Report are incorporated herein by this reference.

ITEM 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         The section titled  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations"  of the 1997 Annual Report to  Stockholders
is incorporated herein by reference. No other sections of such Annual Report are
incorporated herein by this reference.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

         The  information  required  by this item  contained  in the 1997 Annual
Report to Stockholders is incorporated herein by reference.

ITEM 8.  Financial Statements and Supplementary Data

         The sections titled "Consolidated  Statements of Financial  Condition,"
"Consolidated   Statements   of   Operations,"   "Consolidated   Statements   of
Stockholders'  Equity,"  "Consolidated  Statements  of Cash Flows" and "Notes to
Consolidated Financial Statements" of the 1997 Annual Report to Stockholders are
incorporated herein by reference.

ITEM 9.  Changes in and Disagreements With Accountants on Accounting and 
         Financial Disclosure

         Not Applicable.


<PAGE>
                                    PART III


ITEM 10. Directors and Executive Officers of the Registrant

         Directors.  Information  concerning  the Directors of the Registrant is
incorporated  herein  by  reference  from  the  Registrant's   definitive  Proxy
Statement dated December 10, 1997 (the "Proxy Statement").

         Executive  Officers.  Information  concerning the Executive Officers of
the Registrant who are not also Directors of the Registrant is contained in Part
I of  this  Form  10-K  under  the  caption  "Executive  Officers  Who  Are  Not
Directors."

         Section 16(a) Beneficial  Ownership Reporting  Compliance.  Information
concerning  compliance  with the reporting  requirements of Section 16(a) of the
Exchange  Act is  incorporated  herein by reference  from the Section  captioned
"Section  16(a)  Beneficial   Ownership  Reporting   Compliance"  in  the  Proxy
Statement.

ITEM 11. Executive Compensation

         Information  concerning the Executive Compensation of the Registrant is
incorporated herein by reference from the Proxy Statement.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

         Information   concerning  security  ownership  of  certain  owners  and
management is  incorporated  herein by reference from the section titled "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.

ITEM 13. Certain Relationships and Related Transactions

         Information  concerning  relationships and transactions is incorporated
herein by  reference  from the section  titled  "Certain  Transactions  with the
Company" in the Proxy Statement.



<PAGE>
                                     PART IV


ITEM 14.  Exhibits, Financial Statement Schedules, and Reports on From 8-K

         (a)(1)  Financial Statements

         The following  information  appearing in the  Registrant's  1997 Annual
Report is  incorporated by reference as Exhibit 13 to this Annual Report on Form
10-K.


                                                                     Page in
                                                                      Annual
      Annual Report Sections                                          Report
      ----------------------                                          ------

Independent Auditors Report.........................................    18

Consolidated Balance Sheets as of September 30, 1997 and 1996.......    19

Consolidated Statements of Income for the years ended 
September 30, 1997, 1996 and 1995...................................    20
                                                                      

Consolidated Statements of Stockholders' Equity for the years 
ended September 30, 1997, 1996 and 1995.............................    21

Consolidated Statements of Cash Flows for the years ended 
September 30, 1997, 1996 and 1995...................................    23

Notes to Consolidated Financial Statements..........................    24

         (a)(2)  Financial Statement Schedules

     All  financial  statement  schedules  have  been  omitted  as the  required
information  is  inapplicable  or has been  included  in the Notes to  Financial
Statements.

         (a)(3)  Exhibits
                                                              Reference to Prior
                                                               Filing or Exhibit
  Regulation S-K                                                Number Attached
  Exhibit Number                    Document                         Hereto
  --------------                    --------                         ------

         2                 Plan of acquisition,                        (1)
                           reorganization, arrangement,
                           liquidation or succession

        3.1                Certificate of Incorporation                (1)

        3.2                Bylaws                                      (1)

         4                 Instruments defining the                    (1)
                           rights of security holders,
                           including debentures
<PAGE>

         9                 Voting trust agreement                     None


       10.1                Employment Agreement between                (1)
                           the Bank and John A. Becker,
                           President and Chief Executive
                           Officer

       10.2                Employment Agreement between               10.2
                           the Bank and Michael R. Howell,
                           Executive Vice President and
                           Treasurer

       10.3                Employment Agreement between               10.3
                           the Bank and Linda M. Johnson,
                           Senior Vice President and Secretary

       10.4                Net Worth Maintenance Agreement             (1)

       10.5                Employee Severance Compensation             (1)
                           Plan

       10.6                1993 Incentive Stock Option Plan            (1)

       10.7                1993 Stock Option Plan for                  (1)
                           Outside Directors

       10.8                Management Recognition and                  (1)
                           Retention Plan and Trust

       10.9                Recognition and Retention Plan              (1)
                           and Trust for Outside Directors

       10.10               Supplemental Executive Retirement           (1)
                           Plan

       10.11               1997 Stock Option Plan                      (2)

       10.12               1997 Recognition and Retention Plan         (2)

        11                 Statement re: computation                   Not
                           of per share earnings                    Required

        12                 Statement re: computation                   Not
                           of ratios                                Required

        13                 Annual Report to Security Holders           13


        16                 Letter re: change in certifying            None
                           accountants

        18                 Letter re: change in accounting            None
                           principles

        21                 Subsidiaries of Registrant                  21
<PAGE>

        22                 Published report regarding                 None
                           matters submitted to vote of
                           security holders

        23                 Consent of Experts                          23

        24                 Power of Attorney                      Not Required

        27                 Financial Data Schedule                     27

        99                 Additional Exhibits                        None



(1)      Filed as exhibits to the  Registrant's  Registration  Statement on Form
         S-1 filed with the SEC on June 22,  1995 as  amended on July 12,  1995.
         All  such  previously  filed  documents  are  hereby   incorporated  by
         reference in accordance with Item 601 of Regulation S-K.
(2)      Filed as an appendix to the Registrant's  Definitive Proxy Statement on
         Schedule 14A filed with the SEC on December 10, 1996.  Such  previously
         filed document is hereby  incorporated  by reference in accordance with
         Item 601 of Regulation S-K.

         (b)      Reports on Form 8-K

         The Registrant did not file any Current  Reports on Form 8-K during the
quarter ended September 30, 1997.
<PAGE>
Signatures

         Pursuant to the  requirements of Section 13 of the Securities  Exchange
Act of 1934,  the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                           CHARTER FINANCIAL, INC.


Date: December 29, 1997             By:    /S/ John A. Becker
                                           ------------------
                                           John A. Becker
                                           President and Chief Executive Officer

 Pursuant to the  requirements  of the Securities  Exchange of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
<S>                                                   <C>
By:  /S/ John A. Becker                               By:    /S/ Michael R. Howell
     ------------------                                      ---------------------
     John A. Becker, President, Chief Executive              Michael R. Howell, Executive Vice President,
       Officer and Chairman of the Board                       Treasurer and Director
     (Principal Executive Officer)                           (Principal Financial Officer)

Date:December 29, 1997                                Date:  December 29, 1997



By:  /S/ Karen P. Jacobus                             By:    /S/ James Clutts
     --------------------                                    ----------------
     Karen P. Jacobus, Vice President and Controller         James Clutts, Director
     (Principal Accounting Officer)

Date:December 29, 1997                                Date:  December 29, 1997



By:  /S/ Carl S. Schlageter                           By:    /S/ Linda M. Johnson
     ----------------------                                  --------------------
     Carl S. Schlageter, Director                            Linda M. Johnson, Senior Vice President and Director


Date:December 29, 1997                                Date:  December 29, 1997



By:  /S/ William A. Norton                            By:    /S/ John Petkas, Jr.
     ---------------------                                   --------------------
     William A. Norton, Director                             John Petkas, Jr., Director


Date:December 29, 1997                                Date:  December 29, 1997
<PAGE>
<CAPTION>
<S>                                                   <C>

By:  /S/ Klondis T. Pirtle                            By:    /S/ Dennis F. Doelitzch
     ---------------------                                   -----------------------
     Klondis T. Pirtle, Director                             Dennis F. Doelitzch, Director



Date:December 29, 1997                                Date:  December 29, 1997


By:  /S/ Ralph Eugene Watson                          By:    /S/ Truman D. Cashman
     -----------------------                                 ---------------------
     Ralph Eugene Watson, Director                           Truman D. Cashman, Director



Date:December 29, 1997                                Date:  December 29, 1997
</TABLE>