<PAGE>

                          SECURITIES AND EXCHANGE COMMISSION
                                 Washington, DC 20549

                                     FORM 10-KSB

                        Annual report under Section 13 of the
                           Securities Exchange Act of 1934

                     For the fiscal year ended December 31, 1996
                             Commission File No.: 1-14274

                            CITIZENS FIRST FINANCIAL CORP.
                    (Name of small business issuer in its charter)

            DELAWARE                                     37-1351861
     (State or other jurisdiction of              (I.R.S. Employer I.D. No.) 
     incorporation or organization)                          

                         301 Broadway, Normal, Illinois 61761
         (Address of principal executive offices)         (Zip Code)

                      Issuer's telephone number:  (309) 452-1102
          Securities registered pursuant to Section 12(g) of the Act:  None
             Securities registered pursuant to Section 12(b) of the Act:

                         Common Stock par value $0.01 per share   
                                   (Title of class)

                               American Stock Exchange
                        (Name of exchange on which registered)

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

    Check if there is no disclosure of delinquent filers pursuant to Item 405 
of Regulation S-B contained in this form and no disclosure will be contained, 
to the best of the registrant's knowledge, in definitive proxy or information 
statements incorporated by reference in Part III of this Form 10-KSB or any 
amendment to this Form 10-KSB.  /X/

    Issuer's revenues for its fiscal year ended December 31, 1996 were 
$19,856,986.

    The aggregate market value of the voting stock held by non-affiliates of 
the registrant, i.e., persons other than directors and executive officers of 
the registrant is $40,596,680 and is based upon the last sales price as 
quoted on The American Stock Exchange for March 10, 1997.

    The Registrant had 2,792,000 shares of Common Stock outstanding as of 
March 10, 1997.

    Transitional Small Business Disclosure Format.   Yes / /        No  /X/

                         DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the Annual Report to Stockholders for the year ended December 
31, 1996, are incorporated by reference into Part II of this Form 10-KSB.

    Portions of the Proxy Statement for the 1997 Annual Meeting of 
Shareholders are incorporated by reference into Part III of this Form 10-KSB. 

<PAGE>
                                        INDEX



PART I                                                          PAGE

    Item 1.   Description of Business                             1

    Item 2.   Properties                                         45

    Item 3.   Legal Proceedings                                  46

    Item 4.   Submission of Matters to a Vote of Security 
              Holders                                            46


PART II

    Item 5.   Market for Common Equity and
              Related Stockholder Matters                        47
    
    Item 6.   Management's Discussion and Analysis
              or Plan of Operation                               47

    Item 7.   Financial Statements                               47

    Item 8.   Changes In and Disagreements With Accountants on
              Accounting and Financial Disclosure                47

PART III

    Item 9.   Directors,  Executive Officers,  Promoters and 
              Control Persons; Compliance With Section 16(a) 
              of the Exchange Act                               47

    Item 10.  Executive Compensation                            47

    Item 11.  Security Ownership of Certain Beneficial Owners 
              and Management                                    47

    Item 12.  Certain Relationships and Related Transactions    48

    Item 13.  Exhibits and Reports on Form 8-K                  48


SIGNATURES 

<PAGE>
                                        PART I

Item 1.  Description of Business

General

    Citizens First Financial Corp. (the "Company") was incorporated under 
Delaware law in January 1996.  The Company completed its initial public 
offering of 2,817,500 shares of common stock on May 1, 1996 in connection 
with the conversion of Citizens Savings Bank, F.S.B (the "Bank") from the 
mutual to stock form of ownership (the "Conversion").  The Company is a 
savings and loan holding company and is subject to regulation by the Office 
of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation 
("FDIC") and the Securities and Exchange Commission ("SEC").  Currently, the 
Company does not transact any material business other than through its 
subsidiary, the Bank.  At December 31, 1996, the Company had total assets of 
$261.6 million, total deposits of $202.1 million and total stockholders' 
equity of $40.3 million.

    The Bank was originally chartered in 1888 by the State of Illinois and in 
1989 became a federally chartered savings bank.  The Bank's principal 
business consists of the acceptance of retail deposits from the general 
public in the area surrounding its branch offices and the investment of those 
deposits, together with funds generated from operations and borrowings, 
primarily in one- to four-family residential mortgage loans.  To a lesser 
extent, the Bank also invests in multi-family, commercial real estate, 
consumer and other loans.  The Bank originates loans for investment and for 
sale.  Currently, it is the Bank's policy to sell, on a servicing retained 
basis, all longer-term fixed-rate one- to four-family mortgage loans it 
originates as a method of controlling its growth, managing its interest rate 
risk and increasing its loan servicing fee income.  The Bank's revenues are 
derived principally from interest on its mortgage, consumer and commercial 
loans, loan servicing fees and, to a lesser extent, the interest on its 
securities.  The Bank's primary source of funds are deposits, principal and 
interest payments on loans and securities, and, to a lesser extent, proceeds 
from the sale of loans and securities.  The Bank has two wholly-owned service 
corporations, CSL Service Corporation and Fairbury Financial Services Corp.  
CSL Service Corporation is an Illinois-chartered corporation that has been 
inactive, but began initiating the sale of tax-deferred annuities at the end 
of 1996.  Fairbury Financial Services Corp. is an Illinois-chartered 
corporation that currently services previously sold tax deferred annuities 
and long-term care insurance policies that it sold on an agency basis.

Market Area and Competition

    The Bank is a community-oriented savings institution offering a variety 
of financial products and services to meet the needs of the communities it 
serves.  The Bank's deposit gathering is concentrated in the communities 
surrounding its six offices located in the municipalities of Normal, 
Bloomington, Eureka, Fairbury and Chenoa, Illinois which are part of McLean, 
Woodford and Livingston Counties.  McLean County comprises the greater 
Bloomington/Normal metropolitan area and Woodford, Tazewell and Livingston 
Counties are adjacent to the greater Bloomington/Normalmetropolitan area.  
The economy in McLean, 

                                       1

<PAGE>

Woodford, Tazewell and Livingston Counties has historically benefitted from 
the presence of the national and  regional headquarters of State Farm 
Insurance Company, the Mitsubishi Motors Corporation, Caterpillar, GTE, the 
Eureka Company, Illinois Farm Bureau, Illinois State University and Illinois 
Wesleyan University as well as a variety of agricultural related businesses.  
These counties are the primary market area for the Bank's lending and deposit 
gathering activities.  

    The Bank faces significant competition both in making loans and in 
attracting deposits.  The greater Bloomington/Normal metropolitan area is a 
highly competitive market.  The Bank faces direct competition from a 
significant number of financial institutions operating in its market area, 
many with a state-wide or regional presence and in some cases a national 
presence.  Many of these financial institutions are significantly larger and 
have greater financial resources than the Bank.  The Bank's competition for 
loans comes principally from commercial banks, savings and loan associations, 
mortgage banking companies, credit unions and insurance companies. Its most 
direct competition for deposits has historically come from savings and loan 
associations and commercial banks.  In addition, the Bank faces increasing 
competition for deposits from non-bank institutions such as brokerage firms 
and insurance companies in such areas as short-term money market funds, 
corporate and government securities funds, mutual funds and annuities.  
Competition may also increase as a result of the lifting of restrictions on 
the interstate operations of financial institutions.

Lending Activities

    Loan Portfolio Composition.  The types of loans that the Bank may 
originate are subject to federal laws and regulations.  Interest rates 
charged by the Bank on loans are affected by the demand for such loans and 
the supply of money available for lending purposes and the rates offered by 
competitors.  These factors are, in turn, affected by, among other things, 
economic conditions, monetary policies of the federal government, including 
the Federal Reserve Board, and legislative tax policies.

    The Bank's loan portfolio consists primarily of first mortgage loans 
secured by one- to four-family residences located in its primary market area. 
At December 31, 1996, the Bank's gross loan portfolio totalled $215.2 million 
of total loans outstanding, of which $161.7 million were one- to four-family, 
residential mortgage loans, or 75.2% of total gross loans.  At such date, the 
remainder of the loan portfolio consisted of: $12.5 million of multi-family 
loans, or 5.8% of total gross loans; $8.9 million of commercial real estate 
loans, or 4.1% of total gross loans; $12.5 million of construction and land   
loans, or 5.8% of total gross loans; $8.1 million of commercial loans, or 3.8 
% of total gross loans, and $11.4 million of consumer and other loans, or 5.3%
of total gross loans.  At that same date, $125.4 million, or 58.2%, of the 
Bank's mortgage loans had adjustable interest rates, most of which are indexed
to the one year CMT Index. 

                                       2

<PAGE>

    The following table sets forth the composition of the Bank's loan 
portfolio in dollar amounts and as a percentage of the portfolio at the dates 
indicated.

<TABLE>
<CAPTION>
                                                                  AT DECEMBER 31,
                -------------------------------------------------------------------------------------------------------------------
                         1996                    1995                   1994                   1993                   1992
                ---------------------  ---------------------    ---------------------    ---------------------  -------------------
                          PERCENT                  PERCENT                    PERCENT                PERCENT               PERCENT
                             OF                       OF                         OF                     OF                    OF
                 AMOUNT    TOTAL         AMOUNT     TOTAL         AMOUNT       TOTAL       AMOUNT     TOTAL      AMOUNT     TOTAL
                --------  -------        -------  ----------     --------    ---------    --------   -------  ----------   -------
                                                                      (DOLLARS IN THOUSANDS)
<S>             <C>       <C>            <C>      <C>            <C>        <C>          <C>         <C>      <C>          <C> 
           
Mortgage
  loans:
One- to four-
  family......  $161,733   75.15%       $141,708     73.87%     $ 140,136       78.04%    $120,162    75.34%    $128,465    75.90%
Multi-family..    12,520    5.82          10,469      5.46          9,777        5.44       11,673     7.32       13,654     8.07
Commercial
  real
  estate......     8,934    4.15           8,679      4.52          7,847        4.37        9,067     5.69       10,188     6.02
Construction
  and land....    12,489    5.80          12,353      6.44          5,131        2.86        4,208     2.64        2,787     1.65
Commercial....     8,063    3.75           6,865      3.58          4,023        2.24        3,194     2.00        3,764     2.05
Consumer and
  other
  loans.......    11,444    5.31          11,719      6.11         12,607        7.02       11,112     6.97       10,567     6.24
                --------   -----          ------     -------     --------      ------     --------   ------      -------   ------
                 215,183   99.98         191,793     99.98        179,521       99.97      159,416    99.96      169,125    99.93
Deferred
  premium on
  sale of
  loans.....          34     .02              39       .02             62         .03           81      .04          136
                --------   -------        -------   ------       --------      ------      -------  -------      -------   ------
Total loans...   215,217  100.00%        191,793    100.00%       179,583      100.00%     159,497   100.00%     169,261   100.00%
                --------  --------       --------   -------      --------      -------     -------- --------     -------   ------
                          --------                  -------                    -------     -------- --------     -------   ------
Less:
Undisbursed
  portion of
  loans.......     3,397                   2,859                    2,129                    2,027                 2,093
Unearned
  interest....      --                       --                        21                       25                    36
Deferred loan
  fees........       265                     200                      171                      270                   337       
Allowance for
  loan
  losses......       512                     412                      353                      388                   449
                --------                --------                 --------                 --------              --------  
Total:........  $211,042                $188,361                 $176,909                 $156,787              $166,346
                --------                --------                 --------                 --------              --------  
                --------                --------                 --------                 --------              --------  
</TABLE>
                                             3

<PAGE>

    Loan Maturity.  The following table shows the remaining contractual 
maturity of the Bank's loans at December 31, 1997.  The table does not 
include the effect of future principal prepayments.  Principal repayments on 
total loans were $77.4 million, $50.8 million and $56.7 million for the years 
ended December 31, 1996, 1995 and 1994, respectively.

<TABLE>
<CAPTION>
                                                                            At December 31, 1996
                                           ------------------------------------------------------------------------------
                                           One- to             Commercial                               Consumer
                                            Four-       Multi-    Real       Construction  Commercial   and Other   Total
                                            Family      Family    Estate       and Land      Loans        Loans     Loans
                                           ------------------------------------------------------------------------------
                                                                            (In thousands)
<S>                                          <C>        <C>      <C>         <C>           <C>           <C>       <C>
Amounts due:
    One year or less......................   $  1,439   $    0   $  370      $10,687       $3,153        $ 2,701   $ 18,350
    After one year:
        More than one year to three years.      1,051        0       33           50        3,486          2,774      7,394
        More than three years to five
           years..........................      2,803      183      758          523          469          3,847      8,583
        More than five years to 10 years..     17,896      253    1,937          222          583          1,949     22,840
        More than 10 years to 20 years....     58,003   10,998    5,290          856          325            166     75,638
        More than 20 years................     80,542    1,086      546          150           47              7     82,378
                                             --------  -------   ------      -------       ------        -------   --------
          Total due after December 31,
             1997.........................    160,295   12,520    8,564        1,801        4,910          8,743    196,833
          Total amount due................   $161,734  $12,520   $8,934      $12,488       $8,063        $11,444   $215,183
                                             --------  -------   ------      -------       ------        -------   --------
                                             --------  -------   ------      -------       ------        -------   --------

Deferred premium on sale of loans.........                                                                               34
Less
    Allowance for loan losses.............                                                                              512
    Undisbursed portion of loans..........                                                                            3,397
    Deferred loan fees....................                                                                              265
                                                                                                                   --------
Loans, net................................                                                                         $211,042
                                                                                                                   --------
                                                                                                                   --------
</TABLE>

                                            4

<PAGE>

    The following table sets forth at December 31, 1996 the dollar amount of 
loans contractually due after December 31, 1997, and whether such loans have 
fixed interest rates or adjustable interest rates.

<TABLE>
<CAPTION>
                                            Due After December 31, 1997 
                                          --------------------------------
                                           Fixed    Adjustable     Total
                                          -------   ----------     -----
                                                  (In thousands)
<S>                                       <C>        <C>          <C>
Mortgage loans:
One- to four-family..............         $69,770     $90,525     $160,295
Multi-family.....................             155      12,365       12,520
Commercial real estate...........           1,602       6,962        8,564
Construction and land............             592       1,209        1,801
Commercial loans.................           1,052       3,858        4,910
Consumer and other loans.........           7,364       1,379        8,743
                                          -------    --------     --------
      Total loans....................     $80,535    $116,298     $196,833
                                          -------    --------     --------
                                          -------    --------     --------

</TABLE>

    Origination, Sale, Servicing and Purchase of Loans.  The Bank's loan 
origination activities are conducted primarily by its loan personnel, 
operating at its six branch offices.  All loans originated by the Bank are 
underwritten by the Bank pursuant to the Bank's policies and procedures.  The 
Bank originates both adjustable-rate and fixed-rate mortgage loans, 
commercial loans and consumer loans.  The Bank's ability to originate loans 
is dependent upon the relative customer demand for the type of loan and 
demand for fixed-rate or adjustable-rate loans, which is affected by the 
current and expected future level of interest rates.

    While the Bank has in the past, from time to time, sold adjustable-rate 
one-to four-family loans and retained mortgage loans with terms of 10 years 
or more, it is currently the general policy of the Bank to originate for sale 
in the secondary market one- to four-family fixed-rate mortgage loans with 
maturities exceeding ten years and to originate for investment all 
adjustable-rate one- to four-family mortgage loans and fixed-rate one- to 
four-family mortgage loans with maturities of ten years or less.  The Bank 
has in the past also originated for investment one- to four-family loans for 
investment with maturities of fifteen years if the interest rate was equal to 
or greater than 250 basis points over the Bank's cost of funds and maturities 
of twenty years if the interest rate was equal to or greater than 275 basis 
points over the Bank's cost of funds.  The Bank generally retains the 
servicing rights of loans it sells and sells such loans without recourse.  At 
December 31, 1996, the Bank serviced $80.6 million of loans for others and 
for the years ended December 31, 1996, 1995 and 1994 had $626,000, $540,000 
and $551,000, respectively, of loan servicing fees.  The Bank recognizes, at 
the time of sale, the cash gain or loss on the sale of the loans based on the 
difference between the net cash proceeds received and the carrying value of 
the loans sold.  See "- Lending Activities - Loan Servicing."  Although it is 
the current policy of the Bank to originate and purchase loans or             
participations secured by properties located
                                  
                                       5
<PAGE>

in its primary market area, at December 31, 1996, the Bank had $3.0 million 
in loans, or 1.4%, of total loans, secured by properties located outside of 
its primary market area, specifically various single-family, multi-family and 
commercial real estate loans secured by properties in Chicago, Illinois, New 
Mexico and Florida.  Loans secured by properties located outside an 
institution's primary market area generally involve greater risks than loans 
secured by properties within the institution's market area as the institution 
may not be as familiar with the real estate market or local economy of the 
area where the property is located and may rely on third parties to inspect 
such properties.

    The Bank engages in certain hedging activities to facilitate the sale of 
its one- to four-family mortgage loans in an attempt to minimize interest 
rate risk from the time that loan commitments are made to the time until the 
loans are packaged and sold.  The Bank currently utilizes forward loan sale 
commitment contracts with the FHLMC as its method of hedging its loan sales 
in an attempt to protect the Bank from fluctuations in market interest rates 
("forward commitment contracts") from the time of the loan commitment to the 
time of sale.  Generally, such forward commitment contracts obligate the Bank 
to deliver loans or agency mortgage-backed securities to the FHLMC at a date 
not greater than 60 days in the future at a specified price. During the time 
the Bank enters into the forward commitment contract to the date of delivery, 
the Bank processes and closes loans, thereby protecting the price of 
currently processed loans from interest rate fluctuations that may occur from 
the time the interest rate on the loan is fixed to the time of sale.  For the 
year ended December 31, 1996, the Bank had $236,000 in net gains attributable 
to the sale of loans, including any hedging gains or losses related to its 
forward commitment contract activity.  It is the policy of the Bank that the 
Bank generally not have more than $5 million of aggregate mortgage loan 
applications at any given time that are not covered by forward commitment 
contracts.  Accordingly, the Bank monitors the volume of its loan 
applications and trends in market interest rates to determine the amount of 
forward sale commitment contracts which it will enter into at any point in 
time.  At December 31, 1996, the Bank had forward commitment contracts 
outstanding which required the delivery of $163,000 of one- to four-family 
mortgage loans 45 days in the future.  The Bank's utilization of such forward 
commitment contracts involves certain risks in the event the Bank is unable 
to deliver loans that it has committed to sell which may result in the Bank 
being required to buy whole loans at a premium for delivery under the 
contract or may result in other losses associated with such activity.

                                         6

<PAGE>

    The following table sets forth the Bank's loan originations, purchases, 
sales and principal repayments for the periods indicated:

<TABLE>
<CAPTION>

                                            For the Year Ended December 31,
                                            --------------------------------
                                             1996         1995         1994
                                            ------       ------       ------
                                                   (In thousands)
<S>                                        <C>          <C>          <C>
Net loans:
Beginning balance.....................     $188,361     $176,910     $156,787
  Loans originated:
     One- to four-family..............       90,084       54,683       57,233
     Multi-family.....................        6,780        3,360          808
     Commercial real estate...........        2,863        2,512        1,396
     Construction and land............        1,153        1,327        8,421
     Commercial.......................        6,514        8,120        6,160
     Consumer and other(1)............        8,576       10,243       12,105
                                           --------     --------     --------
       Total loans originated.........      115,970       80,245       86,123
                                           --------     --------     --------
              Total...................      304,331      257,155      242,910
                                           --------     --------     --------
Less:
     Principal repayments and other,
        net...........................       77,393       50,832       56,684   
     Loan charge-offs, net............           67           64          117
     Proceeds from sale of mortgage
        loans.........................       15,132       17,898        9,160
     Transfer of mortgage loans to
        REO...........................          697         --             39
                                           --------     --------     --------
Loans, net(2).........................     $211,042     $188,361     $176,910
                                           --------     --------     --------
                                           --------     --------     --------
</TABLE>

______________________

(1) Consumer and other loans primarily consist of home equity loans and lines 
    of credit secured by mortgages, automobile and personal loans.

(2) There were no significant amounts of loans held for sale at any of the 
    period ends presented.

    One- to Four-Family Mortgage Lending.  The Bank currently offers both 
fixed-rate and adjustable-rate mortgage loans secured by one- to four-family 
residences located in the Bank's primary market area, with maturities of up 
to thirty years.  While the Bank has in the past purchased or originated such 
loans secured by properties outside its market area, substantially all of 
such loans at December 31, 1996 were secured by property located in the 
Bank's primary market area.  One- to four-family mortgage loan originations 
are generally obtained from the Bank's loan representatives operating in its 
branch offices and their contacts with the local real estate industry, 
existing or past customers, and members of the local communities.

    At December 31, 1996, one- to four-family mortgage loans totalled $161.7 
million, or 75.2%, of total gross loans.  Of the one- to four-family mortgage 
loans outstanding at that date, 41.8% were fixed-rate loans and 58.2% were 
adjustable-rate mortgage loans.  The Bank currently offers a number of 
adjustable-rate mortgage loans with terms of up to 30 years and interest rates 

                                        7

<PAGE>

which adjust annually from the outset of the loan or which adjust 
annually after a 1, 3 or 5-year initial period in which the loan has a fixed 
rate.  The interest rates for the majority of the Bank's adjustable-rate 
mortgage loans are indexed to the one year CMT Index.  Interest rate 
adjustments on such loans are limited to 2% annual adjustment cap and a 
maximum adjustment of 6% over the life of the loan.  

    The Bank also offers its adjustable-rate one- to four-family loans with 
initial interest rates that are 50 to 100 basis points below its fully 
indexed rate for a period of one or three years and which adjust to a rate 
currently 2.75% over the CMT Index on an annual basis thereafter.  The Bank 
qualifies borrowers for such loans at the initial interest rates.  
Accordingly, such loans generally bear a greater degree of risk than other 
types of one- to four-family adjustable-rate loans or loans where the 
borrower is qualified at the fully indexed rate as there is an increased risk 
of default by the borrower after the initial upward rate adjustment due to 
the increase in the interest rate charged on such loans and corresponding 
increase in monthly payments.  

    The origination of adjustable-rate residential mortgage loans, as opposed 
to fixed-rate residential mortgage loans, helps reduce the Bank's exposure to 
increase in interest rates.  However, adjustable-rate loans generally pose 
credit risks not inherent in fixed-rate loans, primarily because as interest 
rates rise, the underlying payments of the borrower rise, thereby increasing 
the potential for default.  Adjustable-rate loans originated with below fully 
indexed market rates involve greater risks as a borrower's payment may 
increase by a greater amount thereby increasing the potential for default.  
Periodic and lifetime caps on interest rate increases help to reduce the 
risks associated with its adjustable-rate loans but also limit the interest 
rate sensitivity of its adjustable-rate mortgage loans.  

    The Bank currently originates one- to four-family residential mortgage 
loans in amounts up to 95% of the lower of the appraised value or the selling 
price of the property securing the loan up to a maximum amount of $214,600 
for loans originated for sale.  The Bank currently requires private mortgage 
insurance to be obtained for loans in excess of an 80% loan to value ratio 
for loans originated for sale, however, the Bank generally does not require 
private mortgage insurance on loans originated for investment unless the loan 
to value ratios are in excess of 90%.  Mortgage loans originated by the Bank 
generally include due-on-sale clauses which provide the Bank with the 
contractual right to deem the loan immediately due and payable in the event 
the borrower transfers ownership of the property without the Bank's consent. 
Due-on-sale clauses are an important means of adjusting the yields on the 
Bank's fixed-rate mortgage loan portfolio and the Bank has generally 
exercised its rights under these clauses.

    Multi-Family Lending.  The Bank originates fixed and adjustable-rate 
multi-family mortgage loans generally secured by 5 to 70 unit apartment and 
student housing buildings located in the Bank's primary market area.  At 
December 31, 1996, the Bank's multi-family loan portfolio was $12.5 million, 
or 5.9%, of total loans.  In reaching its decision on whether to make a 
multi-family loan, the Bank considers the qualifications and financial 
condition of the borrower as well as the value and condition underlying 
property.  The factors considered by the Bank include:  the net operating 
income of the mortgaged premises before debt service and depreciation; the 
debt coverage ratio (the ratio of net earnings to debt service); and the 
ratio of loan amount to appraised value.  Pursuant to the Bank's underwriting 
policies, a multi-family mortgage loan may only be made in an amount up to 
85% of the lower of the appraised value 

                                        8

<PAGE>

or sales price of the underlying property with terms of up to 25 years.  The 
Bank's adjustable-rate multi-family loans are originated with rates that 
adjust annually or which are fixed for the first three years and adjust 
annually thereafter based upon the CMT Index plus a margin of 3.5%.  The 
maximum amount of the Bank's multi-family loans are limited by the Bank's 
loans to one borrower limit which, at December 31, 1996, was $4.5 million.  
In addition, the Bank generally requires a debt service ratio of a maximum of 
1.2% and the personal guarantee of the borrower.  The Bank also requires an 
appraisal on the property conducted by an independent appraiser and title 
insurance. 

    When evaluating the qualifications of the borrower for a multi-family 
loan, the Bank considers the financial resources and income level of the 
borrower, the borrower's experience in owning or managing similar property 
and the Bank's lending experience with the borrower.  The Bank's underwriting 
policies require that the borrower be able to demonstrate management skills 
and the ability to maintain the property from current rental income.  The 
Bank's policy requires borrowers to present evidence of the ability to repay 
the mortgage and a history of making mortgage payments on a timely basis.  In 
making its assessment of the creditworthiness of the borrower, the Bank 
generally reviews the financial statements, employment and credit history of 
the borrower, as well as other related documentation.  The Bank's largest 
multi-family loan at December 31, 1996, had an outstanding balance of $3.4 
million and is secured by a 68-unit apartment complex located in Normal, 
Illinois.

    Loans secured by apartment buildings and other multi-family residential 
properties generally involve larger principal amounts and a greater degree of 
risk than one- to four-family residential mortgage loans.  Because payments 
on loans secured by multi-family properties are often dependent on successful 
operation or management of the properties, repayment of such loans may be 
subject to a greater extent to adverse conditions in the real estate market 
or the economy.  The Bank seeks to minimize these risks through its 
underwriting policies, which require such loans to be qualified at 
origination on the basis of the property's income and debt coverage ratio.  
As part of its operating strategy, the Bank intends to increase its 
multi-family lending in its primary market area depending on market demand 
for such loans.

    Commercial Real Estate Lending.  The Bank originates adjustable-rate 
commercial real estate loans that are generally secured by properties used 
for business purposes such as small office buildings or a combination of 
residential and retail facilities located in the Bank's primary market area.  
The Bank's underwriting procedures provide that commercial real estate loans 
may generally be made in amounts up to 80% of the lower of the appraised 
value or sales value of the property, subject to the Bank's current 
loans-to-one-borrower limit, which at December 31, 1996, was $4.5 million.  
These loans may be made with terms up to 25 years and are generally offered 
at interest rates which adjust in accordance with the CMT Index or prime 
rate, as reported in the Wall Street Journal, annually or annually after a 
three year period. The Bank's underwriting standards and procedures are 
similar to those applicable to its multi-family loans, whereby the Bank 
considers the net operating income of the property and the borrower's 
expertise, credit history and profitability.  The Bank has generally required 
that the properties securing commercial real estate loans have debt service 
coverage ratios of at least 1.1%.  At December 31, 1996, the Bank's 
commercial real estate loan portfolio totalled approximately $8.9 million or 
4.2% of total loans.  The largest commercial real estate loan in the Bank's 
portfolio 
                                           9

<PAGE>

at December 31, 1996, was a $735,000 loan secured by a theater/restaurant 
located in Peoria, Illinois.

    Loans secured by commercial real estate properties, like multi-family 
loans, generally involve larger principal amounts and a greater degree of 
risk than one- to four-family residential mortgage loans.  Because payments 
on loans secured by commercial real estate properties are often dependent on 
successful operation or management of the properties, repayment of such loans 
may be subject to adverse conditions in the real estate market or the 
economy.  The Bank seeks to minimize these risks through its underwriting 
standards, which require such loans to be qualified on the basis of the 
property's income and debt service ratio.

    Construction and Land Lending.  The Bank originates loans for the 
acquisition and development of commercial and residential property located in 
its primary market area.  These loans are offered to local developers and 
individuals.  The majority of the Bank's construction loans are originated 
primarily to finance the construction of one- to four-family, owner-occupied 
residential properties and multi-family properties located in the Bank's 
primary market area.  Such loans are offered for the construction of 
properties that are pre-sold or for which permanent financing has been 
secured, as well as for properties that are not pre-sold or for which 
permanent financing has not been secured.  At December 31, 1996, the Bank had 
$11.4 million of construction lines of credit and construction loans 
committed to the construction of one- to four-family properties that were not 
pre-sold or for which permanent financing had not been secured and, at such 
date, $8.4 million had been drawn on such lines of credit or construction 
loans for the construction of 75 one- to four-family properties.  
Construction loans are generally offered with terms up to six months for 
residential property and up to one year for multi-family and commercial 
property. The Bank also offers developers construction loans in the form of a 
line of credit whereby the borrower may draw upon such line of credit only as 
individual properties are released for construction.  Construction loans may 
be made in amounts up to 80% of the estimated cost of construction, although 
the Bank will lend up to 85% of the estimated cost of construction if the 
property is pre-sold, subject to the Bank's current limitation on 
loans-to-one-borrower which at December 31, 1996 was $4.5 million.  With 
respect to construction loans, the Bank's policy is to require borrowers to 
secure permanent financing commitments from generally recognized lenders for 
an amount equal to or greater than the amount of the loan.  Loan proceeds are 
disbursed in increments as construction progresses and as inspections 
warrant.  Land development loans are offered on a selective basis and the 
terms determined on a case by case basis, but generally do not exceed 75% of 
the actual cost or current appraised value of the property, whichever is 
less.  The largest construction loan in the Bank's portfolio at December 31, 
1996 for the construction of a sixty-unit apartment complex, was a $1.8 
million loan originated in April 1996.

    Construction and land development financing is generally considered to 
involve a higher degree of credit risk than long-term financing on improved, 
owner-occupied real estate.  Risk of loss on a construction loan is dependent 
largely upon the accuracy of the initial estimate of the property's value at 
completion of construction or development compared to the estimated cost 
(including interest) of construction.  If the estimate of value proves to be 
inaccurate, the Bank may be confronted with a project, when completed, having 
a value which is insufficient to assure full repayment.   

                                      10

<PAGE>

    Commercial Lending.  The Bank offers commercial loans to businesses 
operating in the Bank's primary market area on a selective basis.  Such loans 
are generally offered with terms up to 15 years in amounts up to $250,000 and 
are generally secured by receivables, inventories, equipment and other assets 
of the business.  The Bank generally requires personal guarantees on its 
commercial loans.  The Bank also offers commercial loans to businesses on an 
unsecured basis on a selective basis.  These types of loans are made to 
existing customers and are of a short duration, generally less than six 
months.  At December 31, 1996, the Bank had $8.1 million of commercial loans, 
of which $339,000, or 4.2%, were unsecured, and the largest of which was a 
$142,800 loan to a local convenience store secured by substantially all 
assets of the business.  As part of its operating strategy, the Bank intends 
to increase its emphasis on secured commercial lending by training existing 
loan personnel and hiring additional commercial loan personnel.

    Unlike mortgage loans, which generally are made on the basis of the 
borrower's ability to make repayment from his or her employment and other 
income, and which are secured by real property whose value tends to be more 
easily ascertainable, commercial business loans are of higher risk and 
typically are made on the basis of the borrower's ability to make repayment 
from the cash flow of the borrower's business.  As a result, the availability 
of funds for the repayment of commercial business loans may be substantially 
dependent on the success of the business itself. Further, the collateral 
securing the loans may depreciate over time, may be difficult to appraise and 
may fluctuate in value based on the success of the business.

    Consumer and Other Lending.  The Bank's portfolio of consumer and other 
loans primarily consist of fixed-rate, fixed-term home equity loans, 
adjustable home equity lines of credit, loans secured by automobiles, home 
improvement loans, loans secured by deposit accounts and unsecured personal 
loans.  As of December 31, 1996, consumer loans amounted to $11.4 million, or 
5.3%, of the Bank's total loan portfolio of which $4.3 million were home 
equity loans.  Consumer loans are generally originated in the Bank's primary 
market area.  Fixed-rate, fixed-term home equity loans and adjustable home 
equity lines of credit are offered in amounts of 80% of the appraised value 
if the Bank does not hold the first mortgage on the property and up to 85% of 
the appraised value if the Bank holds the first mortgage with a maximum loan 
amount of $100,000. Fixed-rate, fixed-term home equity loans are offered with 
terms up to 15 years and home equity lines of credit are offered with terms 
up to five years. Automobile loans are offered with maximum terms of up to 
six years and have interest rates established by the age of the automobile.  
Unsecured consumer loans are made with a maximum maturity of 24 months and 
the maximum loan amount based on a borrower's financial condition.

    Loan Approval Procedures and Authority.  The Board of Directors 
establishes the lending policies and loan approval limits of the Bank.  The 
Board of Directors has established a Loan Committee comprised of four (4) 
directors, an Executive Officer Loan Committee comprised of the President and 
Senior Vice President of Lending, a Senior Officer Loan Committee comprised 
of the Senior Vice President of Lending and the Vice President of Commercial 
Lending, and a Staff Loan Committee comprised of various corporate officers.  
The Board of Directors has authorized the following committees to approve 
loans up to the amounts indicated:  secured loans in excess of $500,000 and 
unsecured loans in excess of $75,000 may be approved by the Director Loan 
Committee; secured loans up to $500,000 and unsecured loans up to $75,000 may 
be approved by the President and Senior Vice President of Lending; all 
secured loans to commercial clients up to $250,000 and unsecured loans up to 
$75,000 may be approved by the Senior Vice 

                                      11

<PAGE>

President of Lending and Vice President of Commercial Loans; and all secured 
loans to $350,000 and unsecured loans to $75,000 may be approved by the Staff 
Loan Committee.

    Additionally, the Bank recently adopted approval procedures which allow 
branch managers and loan officers to approve loans up to $10,000 for any 
purpose.

    For all loans originated by the Bank, upon receipt of a completed loan 
application from a prospective borrower, a credit report is ordered and 
certain other information is verified by an independent credit agency.  If 
necessary, additional financial information may be required.  An appraisal of 
real estate intended to secure a proposed loan generally is required to be 
performed by an appraiser designated and approved by the Bank.  For proposed 
mortgage loans, the Board annually approves independent appraisers used by 
the Bank and approves the Bank's appraisal policy.  The Bank's policy is to 
obtain title and hazard insurance on all mortgage loans and the Bank may 
require borrowers to make payments to a mortgage escrow account for the 
payment of property taxes and private mortgage insurance, if required. 

    Loan Servicing.  The Bank generally services all loans it retains for 
investment and also services a portfolio of one- to four-family mortgage 
loans for others which is primarily generated from its loan sale activity.  
Loan servicing includes collecting and remitting loan payments, accounting 
for principal and interest, making inspections as required of mortgaged 
premises, contacting delinquent mortgagors, supervising foreclosures and 
property dispositions in the event of unremedied defaults, making certain 
insurance and tax payments on behalf of the borrowers and generally 
administering the loans.  The gross servicing fee paid to the Bank for loans 
it services for others is generally 25 to 50 basis points of the interest 
paid on the loan.  The Bank currently does not purchase servicing rights 
related to mortgage loans originated by other institutions.  At December 31, 
1996 the Bank was servicing $80.6 million of loans for others and for the 
year ended December 31, 1996, the Bank's servicing fees totalled $626,000.

    Delinquencies and Classified Assets.  Management and the Board of 
Directors perform a monthly review of all delinquent loans.  The procedures 
taken by the Bank with respect to delinquencies vary depending on the nature 
of the loan and period of delinquency.  The Bank generally requires that 
delinquent mortgage loans be reviewed and that a delinquency notice be mailed 
no later than the 10th day of delinquency and a late charge is assessed after 
20 days for mortgage loans and 10 days after the due date for consumer loans. 
The Bank's policies provide that telephone contact will be attempted to 
ascertain the reasons for delinquency and the prospects of repayment. When 
contact is made with the borrower at any time prior to foreclosure, the Bank 
will attempt to obtain full payment or work out a repayment schedule with the 
borrower to avoid foreclosure.  It is the Bank's general policy to 
discontinue accruing interest on all loans which are past due 90 days where 
the principal and accrued interest amount to over 90% of the net realizable 
value of the collateral. Property acquired by the Bank as a result of 
foreclosure on a mortgage loans is classified as "real estate owned" and is 
recorded at the lower of the unpaid principal balance and accrued interest or 
fair value less costs to sell at the date of acquisition and thereafter.  
Upon foreclosure, it is the Bank's policy to require an appraisal of the 
property and, thereafter, appraisal of the property on an as-needed basis.  
At December 31, 1996, the Bank had $697,000 in foreclosed real estate.

                                         12

<PAGE>

    Federal regulations and the Bank's Classification of Assets Policy 
require that the Bank utilize an internal asset classification system as a 
means of reporting problem and potential problem assets.  The Bank has 
incorporated the OTS' internal asset classifications as a part of its credit 
monitoring system.  The Bank currently classifies problem and potential 
problem assets as "Substandard," "Doubtful" or "Loss" assets.  An asset is 
considered Substandard if it is inadequately protected by the current net 
worth and paying capacity of the obligor or of the collateral pledged, if 
any.  Substandard assets include those characterized by the distinct 
possibility that the insured institution will sustain "some loss" if the 
deficiencies are not corrected.  Assets classified as Doubtful have all of 
the weaknesses inherent in those classified Substandard with the added 
characteristic that the weaknesses present make collection or liquidation in 
full, on the basis of currently existing facts, conditions and values, highly 
questionable and improbable.  Assets classified as Loss are those considered 
uncollectible and of such little value that their continuance as assets 
without the establishment of a specific loss reserve is not warranted.  
Assets which do not currently expose the insured institution to sufficient 
risk to warrant classification in one of the aforementioned categories but 
possess weaknesses are required to be designated "Special Mention."

    When an insured institution classifies one or more assets, or portions 
thereof, as Substandard or Doubtful, it is required to establish a general 
valuation allowance for loan losses in an amount deemed prudent by 
management.  General valuation allowances, which is a regulatory term, 
represent loss allowances which have been established to recognize the 
inherent risk associated with lending activities, but which, unlike specific 
allowances, have not been allocated to particular problem assets.  When an 
insured institution classifies one or more assets, or portions thereof, as 
Loss, it is required either to establish a specific allowance for losses 
equal to 100% of the amount of the assets so classified or to charge off such 
amount.

    A savings institution's determination as to the classification of its 
assets and the amount of its valuation allowances is subject to review by the 
OTS, which can order the establishment of additional general or specific loss 
allowances.  The OTS, in conjunction with the other federal banking agencies, 
recently adopted an interagency policy statement on the allowance for loan 
and lease losses.  The policy statement provides guidance for financial 
institutions on both the responsibilities of management for the assessment 
and establishment of adequate allowances and guidance for banking agency 
examiners to use in determining the adequacy of general valuation guidelines. 
 Generally, the policy statement recommends that institutions have effective 
systems and controls to identify, monitor and address asset quality problems; 
that management has analyzed all significant factors that affect the 
collectibility of the portfolio in a reasonable manner; and that management 
has established acceptable allowance evaluation processes that meet the 
objectives set forth in the policy statement.  As a result of the declines in 
local and regional real estate market values and the significant losses 
experienced by many financial institutions, there has been a greater level of 
scrutiny by regulatory authorities of the loan portfolios of financial 
institutions undertaken as part of the examination of institutions by the OTS 
and the FDIC.  While the Bank believes that it has established an adequate 
allowance for loan losses, there can be no assurance that regulators, in 
reviewing the Bank's loan portfolio, will not request the Bank to materially 
increase at that time its allowance for loan losses, thereby negatively 
affecting the Bank's financial condition and earnings at that time.  Although 
management believes that adequate specific and general loan loss allowances 
have been established, actual losses are 

                                               13

<PAGE>

dependent upon future events and, as such, further additions to the level of 
specific and general loan loss allowances may become necessary.

    The Bank's senior management reviews and classifies the Bank's loans on a 
quarterly basis and reports the results of its review to the Board of 
Directors.  The Bank classifies loans in accordance with the management 
guidelines described above. At December 31, 1996, the Bank had no assets 
designated as Special Mention or classified as Doubtful and, $1,298,000, and 
$37,000 of assets classified as Substandard, and Loss, respectively.  Assets 
classified as Substandard consisted of 12 one- to four-family loans with an 
aggregate outstanding balance of $1,075,800, one commercial real estate loan 
and one commercial asset-based loan with an aggregate outstanding balance of 
$131,600 and 16 consumer and other loans with an aggregate outstanding 
balance of $90,600.

                                    14

<PAGE>

     The following table sets forth delinquencies in the Bank's loan portfolio 
as of the dates indicated:

<TABLE>
<CAPTION>

                                      At December 31, 1996                            At December 31, 1995
                             --------------------------------------------     ------------------------------------------
                                 60-89 Days           90 Days or More            60-89 Days            90 Days or More
                             ---------------------   --------------------    --------------------    ------------------
                                        Principal               Principal               Principal               Principal
                              Number     Balance      Number     Balance      Number     Balance      Number     Balance
                             of Loans    of Loans    of Loans    of Loans    of Loans    of Loans    of Loans    of Loans
                             --------   ---------    --------    --------    --------    ---------   ---------   --------
                                                                      (Dollars in thousands)
<S>                          <C>        <C>          <C>          <C>         <C>         <C>         <C>         <C>      
One- to four-family........      3         279          8           500          5           304        16          610
Multi-family...............     --          --         --            --         --            --        --           --
Commercial real estate.....     --          --         --            --         --            --         1          100
Construction and land......     --          --         --            --         --            --        --           --
Commercial.................      2           5          1            14         --            --        --           --
Consumer and other loans...      5          54         16            53         12            98        37          238
                             --------   ----------   --------     -------     --------      -----      ----        ----
    Total..................     10         338         25           567         17           402        54          948
                             --------   ----------   --------     -------     --------      -----      ----        ----
                             --------   ----------   --------     -------     --------      -----      ----        ----  
Delinquent loans to total
  loans, net...............                                        0.27%                                           0.50%

<CAPTION>
                                            At December 31, 1994
                              ---------------------------------------------------
                                   60-89 Days                90 Days or More
                              -----------------------      ----------------------
                                           Principal                   Principal
                              Number        Balance       Number        Balance
                              of Loans      of Loans      of Loans      of Loans
                              --------     ----------     --------     ----------  
                                             (Dollars in thousands)
<S>                           <C>           <C>           <C>          <C>
One- to four-family........     18           $505            13           $365
Multi-family...............     --             --            --             --
Commercial real estate.....     --             --            --             --
Construction and land......     --             --             1             40
Commercial.................      1              4            --             --
Consumer and other loans...     36            254            26            134
                              ----           ----          ----           ----
Total....................       55           $763            40           $539
                              ----           ----          ----           ----
                              ----           ----          ----           ----
Delinquent loans to total
  loans, net,..............                                               0.30%
</TABLE>

                                         15


<PAGE>

     Non-Performing Assets and Restructured Loans.  The following table sets 
forth information regarding non-accrual loans, restructured loans and REO.  
At December 31, 1996, the Bank had two restructured loans totalling $463,000, 
one of which consisted of a 50 percent participation in an office building 
located in New Mexico and the other a commercial office building in 
Bloomington, Illinois.  It is the policy of the Bank to cease accruing 
interest on loans 90 days or more past due where the principal and accrued 
interest amounts to over 90% of the net realizable value of the collateral 
and charge off all accrued interest at the time of foreclosure with respect 
to mortgage loans, and after 120 days with respect to consumer loans.  For 
the years ended December 31, 1996, 1995, 1994, 1993 and 1992, the amount of 
additional interest income that would have been recognized on non-accrual 
loans if such loans had continued to perform in accordance with their 
contractual terms was $11,000, $26,000, $30,000, $19,000 and $125,000, 
respectively.  

<TABLE>
<CAPTION>

                                                                                At December 31,
                                                     --------------------------------------------------------------------
                                                        1996          1995          1994          1993          1992 
                                                     ----------   ------------   ----------    ----------    -----------
                                                                           (Dollars in thousands)    
<S>                                                   <C>          <C>           <C>           <C>           <C>

Non-accrual loans:                                                          
  Mortgage loans:
    One- to four-family.............................  $  133        $  178        $  209         $  225        $  371
    Multi-family....................................       0             0            --             --           538
    Commercial real estate..........................       0             0            --             --            --
  Construction and land.............................       0             0            40             --            --
  Commercial........................................      14             0            --             71             7
  Consumer and other loans..........................      51           133            81            106            86
                                                     ---------     -----------   ----------    ----------    -----------
    Total non-accrual loans.........................     198           311           330            402         1,002
Loans contractually past due 90 days or 
  more, other than non-accruing.....................     369           637           209            326           313
                                                     ---------     -----------   ----------    ----------    -----------
    Total non-performing loans......................     567           948           539            728         1,315
Real estate owned, net(1)...........................     697            --            39            197           340
                                                     ---------     -----------   ----------    ----------    -----------
    Total non-performing assets.....................  $1,264        $  948        $  578         $  925        $1,655
                                                     =========     ===========   ==========    ==========    ===========
Restructured loans(2)...............................  $  463        $  364        $  375         $  400        $   --
                                                     =========     ===========   ==========    ==========    ===========
Allowance for estimated loan 
  losses as a percent of loans receivable(3)........       0%         0.22%         0.20%          0.25%          0.27%
Allowance for estimated   loan losses as
  a percent of non-performing loans(4)..............   90.30         43.46         65.49          53.30          34.14
Non-performing loans as a percent 
  of loans receivable(3)(4).........................    0.27          0.50          0.30           0.46           0.79
Non-performing assets as 
  a percent of total assets(5)......................    0.48          0.41          0.25           0.40           0.72

</TABLE>

----------------
(1)  REO balances are shown net of related valuation allowances.
(2)  The restructuring of these loans resulted in lengthening of the loan 
     terms and, for the commercial office building loan, a slight 
     modification to the original interest rate, which will not result in the
     foregoing of any principal or interest payments.  Accordingly, the Bank 
     has not foregone any interest income as a result of this restructuring.
(3)  Loans includes loans, net, excluding allowance for loan losses.
(4)  Non-performing loans consist of all 90 days or more past due and other 
     loans which have been identified by the Bank as presenting uncertainty 
     with respect to the collectibility of interest or principal.
(5)  Non-performing assets consist of non-performing loans and real estate 
     owned (REO). 

                                     16

<PAGE>

     Allowance for Loan Losses.  The Bank's allowance for loan losses is 
established through a provision for loan losses based on management's 
evaluation of the risks inherent in its loan portfolio and the general 
economy.  The allowance for loan losses is maintained at an amount 
management considers adequate to cover estimated losses in loans 
receivable which are deemed probable and estimable based on information 
currently known to management.  The allowance is based upon a number of 
factors, including current economic conditions, actual loss experience and 
industry trends.  In addition, various regulatory agencies, as an 
integral part of their  examination process, periodically review the 
Bank's allowance for loan losses.  Such agencies may require the Bank to 
make additional provisions for estimated loan losses based upon judgments 
different from those of management.  As of December 31, 1996, the Bank's 
allowance for loan losses was $512,000, or 0.24%, of total loans and 
90.30% of non-performing loans as compared to $412,000, or 0.22%, of total 
loans and 43.46% of non-performing loans as of December 31, 1995.  The 
Bank had total non-performing loans of $567,000 and $948,000 at December 
31, 1996 and December 31, 1995, respectively and non-performing loans to 
total loans of 0.27% and 0.50%, respectively.  The Bank will continue to 
monitor and modify its allowances for loan losses as conditions dictate.  
While management believes that, based on information currently available, 
the Bank's allowance for loan losses is sufficient to cover losses 
inherent in its loan portfolio at this time, no assurances can be given that 
the Bank's level of allowance for loan losses will be sufficient to cover 
future loan losses incurred by the Bank or that future adjustments to the 
allowance for loan losses will not be necessary if economic and other 
conditions differ substantially from the economic and other conditions 
used by management to determine the current level of the allowance for 
loan losses.  Management may in the future increase its level of loan 
loss allowances as a percentage of total loans and non-performing loans 
in the event it increases the level of multi-family, commercial real estate, 
commercial, construction and land and consumer lending as a percentage of 
its total loan portfolio.  

     The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the following table.

<TABLE>
<CAPTION>

                                                               At or For the Year Ended December 31,
                                                     -------------------------------------------------------------
                                                          1996         1995         1994        1993        1992
                                                     ------------    ---------    --------    --------    --------
                                                                          (In thousands)
<S>                                                   <C>             <C>         <C>          <C>         <C>
                                                                         
Balance at beginning of period.....................      $412          $353         $388        $449        $415
Provision..........................................       167           123           81         211          66
Charge-offs:
   One- to four-family (recoveries)................        47            59           29          --          (1)
   Multi-family....................................        --            --           --         262          --
   Commercial......................................        --            --           50          --          --
   Commercial real estate..........................        --            --            3           4          23
   Construction and land...........................        --            --           --          --          --
   Consumer........................................        20             5           34           6          10
                                                       ---------      --------     --------   ---------    -------
     Net charge-offs...............................       (67)          (64)        (116)       (272)        (32)
                                                       ---------      --------     --------   ---------    -------
Balance at end of period...........................      $512          $412         $353        $388         $449
                                                       =========      ========     ========   =========    =======
Net charge-off as a percent of
average loans (net)................................      0.03%         0.04%        0.07%       0.17%        0.02%
                                                       --------       --------     --------   ---------    -------    
                                                       --------       --------     --------   ---------    -------    

</TABLE>

                                     17

<PAGE>

     The following tables set forth the Bank's percent of allowance for loan 
losses to total allowance for loan losses and the percent of loans to total 
loans in each of the categories listed at the dates indicated.

<TABLE>
<CAPTION>


                                                                       At December 31,   
                        --------------------------------------------------------------------------------------------------------
                                      1996                                  1995                                 1994
                        --------------------------------    ---------------------------------    ---------------------------------
                                                Percent                              Percent                             Percent
                                                 of Loans                            of Loans                            of Loans
                                   Percent of   in Each                 Percent of   in Each                Percent of   in Each
                                   Allowance    Category                Allowance    Category               Allowance    Category
                                   to Total     to Total                to Total     to Total               to Total     to Total
                        Amount     Allowance    Loans (1)    Amount     Allowance    Loans (1)   Amount     Allowance    Loans (1)
                       --------  ------------- ----------   --------  ------------- ----------  --------  ------------- ----------
<S>                    <C>        <C>          <C>           <C>      <C>            <C>        <C>       <C>           <C>       
                                                                   (Dollars in thousands)


Mortgage loans:
 One- to four-family    $170        33.21%       75.17%      $150        36.41%       73.87%      $102        28.90%       78.07%

 Multi-family........     52        10.16         5.82         32         7.77         5.46         20         5.67         5.44
 
 Commercial real
   estate............     36         7.03         4.15         28         6.80         4.52         22         6.23         4.37 

 Construction
   and land..........     46         8.98         5.80         16         3.88         6.44         24         6.80         2.86

Commercial...........     68         13.28        3.75         56        13.59         3.58         69        19.55         2.24 

Consumer and
   other loans.......    140         27.34        5.31        130        31.55         6.11        116        32.85         7.02
                       --------     --------     --------    --------   --------    --------   --------    --------      --------


   Total allowance
    for loan losses..   $512         100.00%     100.00%     $412       100.00%      100.00%      $353       100.00       100.00%
                       --------     --------     --------    --------   --------    --------   --------    --------      --------
                       --------     --------     --------    --------   --------    --------   --------    --------      --------
</TABLE>


<TABLE>
<CAPTION>


                                                      At December 31,
                                --------------------------------------------------------------------------
                                                1993                                    1992
                                -----------------------------------     ----------------------------------

                                                        Percent                                  Percent  
                                                        of Loans                                 of Loans
                                           Percent of   in Each                     Percent of   in Each
                                           Allowance    Category                    Allowance    Category
                                           to Total     to Total                    to Total     to Total
                                Amount     Allowance    Loans (1)        Amount     Allowance    Loans (1)
                               --------- ------------ ------------     ---------- ------------ -----------
                                                   (Dollars in thousands)
<S>                             <C>      <C>          <C>              <C>         <C>          <C>  
Mortgage loans:
 One- to four-family.........   $125        32.22%      75.38%            $154        34.30%      75.97%

 Multi-family................     28         7.22        7.32               42         9.35        8.07

 Commercial real
    estate...................     24         6.19        5.69               10         2.23        6.02

 Construction
    and land.................     16         4.12        2.64               32         7.13        1.65

Commercial...................     57        14.69        2.00               67        14.92        2.05

Consumer and
    other loans..............    138        35.56        6.97              144        32.07        6.24
                              --------    --------    --------          --------   ----------    ---------

    Total allowance
     for loan losses.........   $388       100.00%     100.00%            $449       100.00%     100.00%
                              --------    --------    --------          --------   ----------    ---------
                              --------    --------    --------          --------   ----------    ---------
</TABLE>
__________________
(1)  The deferred premium on sale of loans of $34,000, $39,000, $62,000, 
     $81,000 and $136,000 has been netted with one- to four-family mortgage 
     loans in computing percent of loans to total loans. 

                                     18

<PAGE>

Management of Interest Rate Risk

     The principal objective of the Company's interest rate risk management 
function is to evaluate the interest rate risk included in certain balance 
sheet accounts, determine the level of risk appropriate given the Bank's 
business strategy, operating environment, capital and liquidity requirements 
and performance objectives, and manage the risk consistent with Board of 
Directors' approved guidelines.  Through such management, the Company seeks 
to reduce the vulnerability of its operations to changes in interest rates.  
The Company monitors its interest rate risk as such risk relates to its 
operating strategies.  The Company's Board of Directors reviews the Bank's 
interest rate risk position on a quarterly basis.  The Bank's Asset/Liability 
Committee is comprised of the Bank's senior management under the direction of 
the Board of Directors, with the Committee responsible for reviewing with the 
Board of Directors its activities and strategies, the effect of those 
strategies on the Company's net interest margin, the market value of the 
portfolio and the effect that changes in the interest rates will have on the 
Company's portfolio and the Company's exposure limits.  The extent of the 
movement of interest rates is an uncertainty that could have a negative 
impact on the earnings of the Company. 

     In recent years, the Bank has utilized the following strategies to manage
interest rate risk:  (1) originating for investment adjustable-rate 
residential mortgages and fixed-rate one- to four-family loans with 
maturities of 10 years or less; (2) generally selling one- to four-family 
mortgage loans with maturities exceeding 10 years in the secondary market 
without recourse and on a servicing retained basis; and (3) investing in 
shorter term investment securities which may generally bear lower yields as 
compared to longer term investments, but which better position the Company 
for increases in market interest rates.  The primary analytical tool utilized 
by the Company to monitor its interest rate risk is a modeling tool utilized 
by the OTS which estimates the change in its net portfolio value over a range 
of interest rate scenarios ("net portfolio value model").  Based on such net 
portfolio value model, the OTS prepares for the Bank on a quarterly basis an 
analysis of the Company's interest rate risk based on data submitted by the 
Bank.

     The matching of assets and liabilities may be analyzed by examining the 
extent to which such assets and liabilities are "interest rate sensitive" and 
by monitoring a bank's interest rate sensitivity "gap."  An asset or 
liability is said to be interest rate sensitive within a specific time period 
if it will mature or reprice within that time period.  The interest rate 
sensitivity gap is defined as the difference between the amount of 
interest-earning assets maturing or repricing within a specific time period 
and the amount of interest-bearing liabilities maturing or repricing within 
that time period.  At December 31, 1996, the Company's one-year gap position, 
the difference between the amount of interest-earning assets maturing or 
repricing within one year and interest-bearing liabilities maturing or 
repricing within one year, was negative 9.0%.  A gap is considered positive 
when the amount of interest rate sensitive assets exceeds the amount of 
interest rate sensitive liabilities.  A gap is considered negative when the 
amount of interest rate sensitive liabilities exceeds the amount of interest 
rate sensitive assets.  Accordingly, during a period of rising interest 
rates, an institution with a negative gap position would be in a worse 
position to invest in higher yielding assets which, consequently, may result  
in the cost of its interest-bearing liabilities increasing at a rate faster 
than its yield on interest-earning assets than 

                                     19

<PAGE>

if it had a positive gap. During a period of falling interest rates, an 
institution with a negative gap would tend to have its interest-bearing 
liabilities repricing downward at a faster rate than its interest-earning 
assets  as compared to an institution with a positive gap which, 
consequently, may tend to positively affect the growth of its net interest 
income.

     The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are 
anticipated by the Company, based upon certain assumptions, to reprice or 
mature in each of the future time periods shown (the "GAP Table").  Except as 
stated below, the amount of assets and liabilities shown which reprice or 
mature during a particular period were determined in accordance with the 
earlier of term to repricing or the contractual maturity of the asset or 
liability.  The table sets forth an approximation of the projected repricing 
of assets and liabilities at December 31, 1996, on the basis of contractual 
maturities, anticipated prepayments, and scheduled rate adjustments within a 
three month period and subsequent selected time intervals.  Annual prepayment 
rates for adjustable-rate and fixed-rate loans are assumed to be 4.5% and 
9.5%, respectively.  Annual prepayment rates for mortgage-backed securities 
are assumed to be 4.5% and 7.5%, respectively.  Money market deposit accounts 
are assumed to be immediately rate-sensitive, while passbook accounts and 
negotiable order or withdrawal ("NOW") accounts are assumed to have decay 
rates of 12% annually.

                                     20

<PAGE>

<TABLE>
<CAPTION>

                                                                 At December 31, 1996
                                     ---------------------------------------------------------------------------------------------
                                     3 Months        More than        More than       More        More than       More      Total
                                      or less        3 Months to     6 Months to      than        3 Years to      than      Amount
                                                     6 Months          1 Year        1 Year to      5 Years      5 Years          
                                                                                      3 Years   
                                     --------        -----------     ------------    ----------   -----------    --------   ------
                                                                                 (Dollars in thousands)
<S>                                  <C>           <C>               <C>              <C>         <C>            <C>        <C>  
Interest-earning assets:
   Short-term deposits                  5,159                --                --            --            --          --    5,159 
   Investment securities                1,499                --               500         2,236         1,953          68    6,256
   Loans receivable                    30,486            13,561            34,375        75,885        12,908      47,967  215,183
   Mortgage-backed securities          12,811               806             2,152         1,347           900       5,099   23,114
   FHLB stock                           1,662                --                --            --            --          --    1,662
                                       ------            ------            ------        ------        ------      ------  -------
      Total                            51,617            14,366            37,027        79,468        15,761      53,134  251,374
                                       ------            ------            ------        ------        ------      ------  -------
                                       ------            ------            ------        ------        ------      ------  -------

Interest-bearing liabilities:
 
   Money market savings                 9,395                --                --            --            --          --    9,395
   Passbook accounts                      497               482               935         5,276         2,251       7,129   16,571
   NOW accounts                           359               348               675         2,537         1,928       6,105   11,950
   Certificate accounts                29,765            24,169            47,679        43,894         6,969         172  152,648
                                       ------            ------            ------        ------        ------      ------  -------


FHLB advances                          10,250                --             2,000         4,000            --          --   16,250
      Total                            50,266            24,999            51,289        55,707        11,148      13,405  206,814
                                       ------            ------            ------        ------        ------      ------  -------
                                       ------            ------            ------        ------        ------      ------  -------


Assets minus liabilities                1,351           (10,633)          (14,262)       23,761         4,613      39,729   44,560

Cumulative interest-rate sensitivity   
gap                                     1,351            (9,281)          (23,543)          218         4,831      44,560       --  

Cumulative interest-rate gap as a 
percent of total assets                 0.52%             (3.55)%           (9.00)%        0.08%         1.85%      17.03%      -- 

Cumulative interest-rate gap as a 
percent of total interest-earning
assets                                  2.62%            (64.61)%          (63.58)%        0.27%        30.65%      83.86%      -- 

Cumulative interest-earning assets as 
a percent of cumulative interest-
bearing liabilities                   102.69%             87.67%            81.40%       100.12%       102.50%     121.55%      --


</TABLE>

--------------------
(1)  Includes total loans net of non-performing loans and the allowance for 
     loan losses.  

    Certain shortcomings are inherent in the method of analysis presented in 
the foregoing table.  For example, although certain assets and liabilities 
may have similar maturities or periods to repricing, they may react in 
different degrees to changes in market interest rates.  Also, the interest 
rates on certain types of assets and liabilities may fluctuate in advance of 
changes in market interest rates, while interest rates on other types may lag 
behind changes in market rates. Additionally, certain assets, such as 
adjustable-rate loans, have features which restrict changes in interest rates 
both on a short-term basis and over the life of the asset.  Further, in the 
event of change in interest rates, prepayment and early withdrawal levels 
would likely deviate significantly from those assumed in calculating the 
table.  Finally, the ability of many borrowers to service their 
adjustable-rate loans may decrease in the event of an interest rate increase.

                                     21

<PAGE>

    Net Portfolio Value.  The Bank's interest rate sensitivity is monitored by
management through the use of the net portfolio value model produced by the 
OTS which generates estimates of the change in the Bank's net portfolio value 
("NPV") over a range of interest rate scenarios.  NPV is the present value of 
expected cash flows from assets, liabilities, and off-balance sheet 
contracts.  The NPV ratio, under any interest rate scenario, is defined as 
the NPV in that scenario divided by the market value of assets in the same 
scenario.  The OTS produces such estimates utilizing its own model, based 
upon data submitted on the Bank's quarterly Thrift Financial Reports on a 
quarterly basis.  The OTS' model assumes estimated loan prepayment rates, 
reinvestment rates and deposit decay rates.  The following table sets forth 
the Bank's NPV as of December 31, 1996, as calculated by the OTS.

<TABLE>
<CAPTION>

                                                                              NPV as % of Portfolio
               Change in                     Net Portfolio Value                 Value of Assets
            Interest Rates             ------------------------------------  ----------------------
            In Basis Points                                        %               NPV              
             (Rate Shock)              Amount     $ Change       Change           Ratio   Change (1)
            ---------------            ------     --------       ------           -----   ---------
                                                    (Dollars in thousands)
              <C>                      <C>         <C>            <C>             <C>       <C> 

                  400                  $17,975    $(15,615)       (46)%           7.36%      (529)
                  300                   22,385     (11,205)       (33)            8.96       (369)
                  200                   26,640      (6,950)       (21)           10.42       (223)
                  100                   30,492      (3,098)        (9)           11.69        (96)
                    0                   33,590         --          --            12.65         --
                 (100)                  35,584       1,994          6            13.22         57
                 (200)                  36,080       2,490          7            13.30         65
                 (300)                  35,755       2,165          6            13.11         46
                 (400)                  36,080       2,490          7            13.13         48

</TABLE>

______________________
(1)  Based on the portfolio value of the Bank's assets assuming no change in 
     interest rates.


    As is the case with the GAP Table, certain shortcomings are inherent in 
the methodology used in the above interest rate risk measurements.  Modeling 
changes in NPV require the making of certain assumptions which may or may not 
reflect the manner in which actual yields and costs respond to changes in 
market interest rates.  In this regard, the NPV model presented assumes that 
the composition of the Bank's interest sensitive assets and liabilities 
existing at the beginning of a period remains constant over the period being 
measured and also assumes that a particular change in interest rates is 
reflected uniformly across the yield curve regardless of the duration to 
maturity or repricing of specific assets and liabilities. Accordingly, 
although the NPV measurements and net interest income models provide an 
indication of the Bank's interest rate risk exposure at a particular point in 
time, such measurements are not intended to and do not provide a precise 
forecast of the effect of changes in market interest rates on the Bank's net 
interest income and will differ from actual results.

                                     22

<PAGE>

Real Estate Owned

    At December 31, 1996, the Bank had $697,000 of foreclosed real estate.  
When the Bank acquires property through foreclosure or deed in lieu of 
foreclosure, it is initially recorded at the lower of the recorded investment 
in the corresponding loan or the fair value of the related assets at the date 
of foreclosure, less costs to sell.  Thereafter, if there is a further 
deterioration in value, the Bank provides for a specific valuation allowance 
and charges operations for the diminution in value.  It is the policy of the 
Bank to have obtained an appraisal on all real estate subject to foreclosure 
proceedings prior to the time of foreclosure.  It is the Bank's policy to 
require appraisals on an as needed basis on foreclosed properties.

Investment Activities

    Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations, 
securities of various federal agencies, certificates of deposit of insured 
banks and savings institutions, bankers' acceptances, repurchase agreements 
and federal funds.  Subject to various restrictions, federally-chartered 
savings institutions may also invest their assets in commercial paper, 
investment-grade corporate debt securities and mutual funds whose assets 
conform to the investments that a federally-chartered savings institution is 
otherwise authorized to make directly.  Additionally, the Bank must maintain 
minimum levels of investments that qualify as liquid assets under OTS 
regulations.  See "Regulation and Supervision- Federal Savings Institution 
Regulation-Liquidity."  Historically, the Bank has maintained liquid assets 
above the minimum OTS requirements and at a level considered to be adequate 
to meet its normal daily activities.

    The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity, generate a favorable 
return on investments without incurring undue interest rate and credit risk.  
Generally, the Bank's investment policy is more restrictive than the OTS 
regulations allow and, accordingly, the Bank has invested primarily in U.S. 
Government and Agency securities, corporate and mortgage-backed securities, 
short-term money market instruments, FDIC insured certificates of deposit 
with maturities not to exceed 90 days, mutual funds which qualify as liquid 
assets under the OTS regulations, federal funds and U.S. government sponsored 
agency issued mortgage-backed securities.  SFAS 115 requires the Bank to 
designate its securities as held to maturity, available for sale or held for 
trading.  The Bank does not currently maintain a portfolio of securities 
categorized as held for trading.  The Bank's investment securities generally 
consist of U.S. Treasury securities, U.S. Agency obligations and 
mortgage-backed and mortgage-related securities.  The Bank's mortgage-backed 
securities consist of pass through certificates representing interests in 
pools of fixed and adjustable rate mortgage loans issued or guaranteed by 
FNMA, FHLMC or GNMA. At December 31, 1996, the Bank's portfolio of investment 
and mortgage-backed securities totalled $29.4 million, of which $28.4 million 
were categorized as available for sale.  In accordance with the Special 
Report of the FASB regarding SFAS 115, on December 31, 1995, the Bank 
transferred all of its CMOs included in its held to maturity portfolio which, 
at such date, had a carrying value and market value of $595,000 and $583,000, 
respectively, to its available for sale portfolio.

                                     23

<PAGE>

    In recent periods, the Bank has primarily invested in securities in order 
to maintain liquid assets for its operations and as a means of utilizing its 
excess funding not necessary for loan originations. In order to better 
position the Bank for an increase in market interest rates, the Bank has 
recently increased its emphasis on investing in shorter term investment 
securities by reinvesting funds from maturing investment and mortgage-backed 
securities in shorter term securities.   The Board of Directors is provided a 
detail of the held to maturity and available for sale investment portfolio on 
a monthly basis.  The Bank has also increased its level of investments in 
investment and mortgage-backed securities from $24.9 million at December 31, 
1995, to $29.4 million at December 31, 1996.  The Board of Directors reviews 
all of the activity in the investment portfolio on a monthly basis.

    At December 31, 1996, the Bank had $23.1 million in mortgage-backed 
securities, or 8.8% of total assets, which were  guaranteed by GNMA or 
insured by either FNMA or FHLMC.  Of the $23.1 million, $15.2 million had 
adjustable interest rates, most of which were subject to maximum annual rate 
adjustments up to a maximum interest rate of 9.48% to 14.75%.  Investments in 
mortgage-backed securities involve a risk that actual prepayments will be 
greater than estimated prepayments over the life of the security, which may  
require adjustments to the amortization of any premium or accretion of any 
discount relating to such instruments thereby reducing the net yield on such 
securities.  There is also reinvestment risk associated with the cash flows 
from such securities or in the event such securities are redeemed by the 
issuer.  In addition, the market value of such securities may be adversely 
affected by changes in interest rates.  All of the Bank's investment in 
mortgage-backed securities at December 31, 1996 were available for sale.

                                     24


<PAGE>

    The following table sets forth the composition of the Bank's investment 
and mortgage securities portfolios in dollar amounts and in percentages at 
the dates indicated:

<TABLE>
<CAPTION>



                                                                                             At December 31,
                                                           --------------------------------------------------------------------
                                                                  1996                    1995                        1994
                                                           -----------------        ----------------          -----------------
                                                                    Percent                 Percent                    Percent 
                                                           Amount   of Total       Amount   of Total         Amount    of Total
                                                           ------   --------       ------   --------         ------    --------
<S>                                                       <C>      <C>            <C>      <C>              <C>       <C>     
                                                                                        (Dollars in thousands)

Investment securities:

   U.S.Treasuries......................................        $0         0%       $3,994     52.62%        $14,434      89.72%
   Federal agencies....................................     5,188     82.93         2,014     26.53           1,031       6.41 
   Marketable equitable securities.....................     1,000     15.98         1,000     13.18
   CMOs................................................        68      1.09           582      7.67            6.23       3.87
                                                           -------   --------      ------    -------        -------    --------
    Total investment securities........................    $6,256    100.00%       $7,590    100.00%        $16,088     100.00%
                                                           -------   --------      ------    -------        -------    --------
                                                           -------   --------      ------    -------        -------    --------

     Investment securities available for sale.........     $ 5,256                 $1,598                   $ 5,974            
     Investment securities held to maturity...........       1,000                  5,992                    10,114
                                                           -------                 ------                   -------
       Total investment securities....................     $ 6,256                 $7,590                   $16,088
                                                           -------                 ------                   -------
                                                           -------                 ------                   -------

Mortgage-backed securities:
   FHLMC..............................................    $11,050     47.80%      $ 7,254     41.96%        $ 7,669      34.60%
   GNMA...............................................      2,488     10.77         3,035     17.55           6,975      31.47
   FNMA...............................................      9,577     41.43         7,000     40.49           7,522      33.93
                                                           -------   --------      ------    -------        -------    -------- 
      Total mortgage-backed securities................    $23,115    100.00%      $17,289    100.00%        $22,166     100.00%
                                                          --------   --------      ------    -------        -------    -------- 
                                                          --------   --------      ------    -------        -------    -------- 

Mortgage-backed securities available for sale..........   $23,115                 $17,289                   $22,051
Mortgage-backed securities held to maturity............         0                       0                       115
                                                          --------                 ------                    ------
     Total mortgage-backed securities..................   $23,115                 $17,289                   $22,166
                                                          --------                 ------                    ------
                                                          --------                 ------                    ------

</TABLE>



                                       25


<PAGE>
 
    The following table sets forth the Bank's securities activities for the 
periods indicated:

<TABLE>
<CAPTION>
                                                              For the Year
                                                            Ended December 31,
                                                  ----------------------------------
                                                     1996        1995        1994
                                                  ----------  ----------  ----------
                                                             (In thousands)
<S>                                                 <C>         <C>         <C>

Beginning balance................................  $24,879      $38,255     $53,761

Purchases of securities available for sale.......   19,841        1,000      11,508

Purchases of securities held to maturity.........       --        3,474       3,490

Less:

Proceeds from maturities and principal 
  paydowns on securities available for sale......   (4,015)      (7,017)    (16,201)

Proceeds from sales of securities
  available for sale.............................   (6,044)      (5,152)     (7,132)

Proceeds from maturities and principal 
  paydowns on securities held to maturity........   (5,000)      (7,028)     (5,080)

Net gain (loss) on sale of securities............      (15)         (18)         --

Amortization of premium...........................     (61)         (31)       (200)

Amortization of hedging losses....................      --           --          --

Change in net unrealized gain (loss) 
 on securities available for sale.................    (214)       1,396      (1,891)
                                                   -------      -------     -------
 
Ending balance.................................... $29,371      $24,879     $38,255
                                                   -------      -------     -------
                                                   -------      -------     -------
</TABLE>

                                       26

<PAGE>


    The following table sets forth certain information regarding the carrying 
and market values of the Bank's investment and mortgage-backed securities, at 
the dates indicated: 


<TABLE>
<CAPTION>

                                                                      At December 31,
                                                   ----------------------------------------------------------------
                                                           1996                 1995                  1994
                                                  --------------------  ---------------------  --------------------
                                                   Carrying    Market    Carrying     Market    Carrying    Market
                                                    Value      Value       Value      Value       Value      Value
                                                  ----------  --------  -----------  --------  ----------  --------
                                                                           (In thousands)
<S>                                               <C>           <C>          <C>       <C>       <C>        <C>
Available for sale:
    U.S. Government and agency...................  $4,188       $4,188       $15        $15      $5,974      $5,974

    CMOs.........................................      68           68       582        582          --          --

    Marketable equity securities.................   1,000        1,000     1,000      1,000          --          --

    Mortgage-backed securities:

         FHLMC...................................  11,050       11,050     7,254      7,254       7,554       7,554

         GNMA....................................   2,488        2,488     3,035      3,035       6,975       6,975

         FNMA....................................   9,577        9,577     7,000      7,000       7,522       7,522
                                                  -------       ------   -------     ------      ------     -------
              Total mortgage-backed securities
                available for sale...............  23,115       23,115    17,289     17,289      22,051      22,051
                                                  -------       ------   -------     ------      ------     -------
              Total investments and 
                mortgage-backed securities 
                available for sale...............  28,371       28,371    18,886     18,886      28,025      28,025
                                                  -------       ------   -------     ------      ------     -------

Held to maturity:

    U.S. Government and agency...................   1,000          991     5,992      5,999       9,491       9,277
    CMOs.........................................      --           --        --         --         623         589

    Mortgage-backed securities:

         FHLMC...................................      --           --        --         --         115         118
                                                  -------       ------   -------     ------      ------     -------
              Total held to maturity.............   1,000          991     5,992      5,999      10,229       9,984
                                                  -------       ------   -------     ------      ------     -------
              Total investment securities........ $29,371      $29,362   $24,878    $24,885     $38,254     $38,009
                                                  -------       ------   -------     ------      ------     -------
                                                  -------       ------   -------     ------      ------     -------
</TABLE>

                                       27


<PAGE>
 
    The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's investment
securities and mortgage-backed securities as of December 31, 1996. 


<TABLE>

<CAPTION>
                                                                   At December 31, 1996
                                           -------------------------------------------------------------            
                                                                    More than One        More than Five
                                           One Year or Less     Year to Five Years     Years to Ten Years
                                           ----------------     ------------------     ------------------
                                                     Weighted              Weighted               Weighted
                                           Carrying  Average     Carrying  Average     Carrying   Average
                                            Value     Yield       Value     Yield      Value      Yield
                                           -------   --------    -------   --------    --------   --------
                                                                  (Dollars in thousands) 

<S>                                        <C>        <C>        <C>        <C>         <C>        <C> 
Available for sale:
U.S. government and agency.............    $ --       --        $ 4,188     6.42%      $   --      --
Marketable equity securities...........   1,000     6.08%            --       --           --      --
CMOs...................................      --       --             68     6.63           --      --
Mortgage-backed securities:    
    FHLMC..............................      --       --            202     8.27           --      --
    GNMA...............................      --       --             --       --           --      --
    FNMA...............................       8     8.85             44     8.82           --      --
                                          ------                  ------                ------
    Total mortgage-backed..............       8     8.85            246     8.37           --      --
                                          ------                  ------                ------ 
    Total available for sale...........   1,008                   4,502                     0
                                          ------                  ------                ------
    Held to maturity:
    U.S. government and agency.........   1,000     6.04             --       --           --      --
                                          ------                  ------    ------      ------   ------- 
    Total hold to maturity.............   1,000                       0                     0
                                          ------                  ------                ------
    Total investment securities          $2,008                  $4,502                 $   0
                                          ------                  ------                ------
                                          ------                  ------                ------


<CAPTION>
                                             At December 31, 1996
                                  ---------------------------------------
                                  More than Ten Years          Total
                                  -------------------  ------------------
                                             Weighted             Weighted
                                  Carrying   Average   Carrying   Average
                                  Value      Yield     Value       Yield
                                  --------  ---------  --------   --------
                                           (Dollars in thousands)
<S>                               <C>       <C>         <C>        <C>
Available for sale:
U.S. government and agency.....     $--       --%       $4,188     6.42%
Marketable equity securities...      --       --         1,000     6.08
CMOs...........................      --       --            68     6.63
Mortgage-backed securities:     
    FHLMC......................  10,848     6.52        11,050     6.55
    GNMA.......................   2,488     6.91         2,488     6.91
    FNMA.......................   9,525     6.42         9,577     6.43
    Total mortgage-backed......  22,861     6.52        23,115     6.53
                                 ------                 ------
    Total available for sale...  22,861                 28,371
                                 ------                 ------
Held to maturity:
    U.S. government and agency..     --      --          1,000     6.04
                                 ------                 ------ 
      Total hold to maturity....      0                  1,000     6.04
                                 ------                 ------ 
Total investment securities     $22,861                $29,371
                                -------                ------- 
                                -------                -------
</TABLE>
                                       28
<PAGE>
 
Sources of Funds

    General.  Deposits, repayments and prepayments of loans and securities, 
proceeds from sales of loans and securities, cash flows generated from 
operations and FHLB advances are the primary sources of the Bank's funds for 
use in lending, investing and for other general purposes.

    Deposits.  The Bank offers a variety of deposit accounts with a range of 
interest rates and terms.  The Bank's deposit accounts consist of savings, 
NOW accounts, checking accounts, money market accounts and certificate 
accounts.  The Bank also offers certificate of deposit accounts with balances 
in excess of $100,000 at negotiated rates (jumbo certificates) and Individual 
Retirement Accounts ("IRAs"). For the year ended December 31, 1996, the 
average balance of core deposits (savings, NOW, money market and 
non-interest-bearing checking accounts) totalled $50.7 million, or 24.5%, of 
total average deposits.  The flow of deposits is influenced significantly by 
general economic conditions, changes in money market rates, prevailing 
interest rates and competition.  The Bank's deposits are obtained 
predominantly from the areas in which its branch offices are located.  The 
Bank relies primarily on customer service and long-standing relationships 
with customers to attract and retain these deposits; however, market interest 
rates and rates offered by competing financial institutions significantly 
affect the Bank's ability to attract and retain deposits.  The Bank uses 
traditional means of advertising its deposit products, including radio and 
print media and generally does not solicit deposits from outside its market 
area. While certificate accounts in excess of $100,000 are accepted by the 
Bank, the Bank does not actively solicit such deposits nor does the Bank 
currently use brokers to obtain deposits.  The Bank has attempted to increase 
its deposit customer base and decrease in its level of dependency on 
certificate accounts by offering interest free checking accounts without 
minimum balance requirements.  The Bank has experienced a decline in 
deposits, from an average balance of $209.0 million for 1995 to an average 
balance of $206.7 million for the year ended December 31, 1996.  Consistent 
with management's operating strategy of controlling the asset size of the 
Bank to a level sustainable by the capital level of the Bank, the decrease in 
deposits has resulted from management not attempting to aggressively price 
deposits to maintain or increase its level of deposits as a source of funding 

    The following table presents the deposit activity of the Bank for the 
periods indicated:


                                          For the Year Ended December 31,
                                       -----------------------------------
                                         1996          1995         1994
                                       -----------  ----------  ----------
                                                  (In thousands)

Net withdrawals........................  $(16,381)    $(5,956)    $(11,308)
Interest credited on deposit accounts..     8,642       6,562        6,691
                                           ------       -----        -----
Total increase (decrease) in deposit
accounts...............................  $(7,739)        $606      $(4,617)
                                         --------        ----      -------
                                         --------        ----      -------

                                       29

 
<PAGE>

    At December 31, 1996, the Bank had $16.4 million in certificate accounts 
in amounts of $100,000.

    The following table sets forth the distribution of the Bank's average 
deposit accounts for the periods indicated and the weighted average nominal 
interest rates on each category of deposits presented.  Averages for the 
periods presented utilize average month-end balances.

<TABLE>

<CAPTION>
        
                                                                       For the Year Ended December 31,
                                           ------------------------------------------------------------------------------------
                                                    1996                             1995                     1994
                                           ------------------------------  -------------------------  -------------------------
                                                      Percent   Weighted           Percent   Weighted           Percent   Weighted
                                                      of Total  Average            of Total  Average            of Total  Average
                                            Average   Average   Nominal   Average  Average   Nominal   Average  Average   Nominal
                                            Balance   Deposits   Yield    Balance  Deposits   Yield    Balance  Deposits  Yield
                                            -------- ---------- -------- -------- --------- --------- -------- ---------- --------
                                                                                (Dollars in thousands)

<S>                                        <C>        <C>        <C>      <C>      <C>        <C>       <C>       <C>      <C>   

Money market accounts...................   $10,440     5.05      3.04%    10,127    4.84      2.89%     $13,607    6.44%    2.76%
Passbook accounts.......................    18,163     8.79      2.53     18,342    8.77      2.50       20,656    9.77     2.67
NOW accounts............................    14,534     7.03      2.02     16,318    7.81      2.02       17,297    8.18     2.14
Non-interest-bearing accounts...........     7,580     3.67        --      5,906    2.83       --         5,644    2.67       --
                                            ------   -------              ------   ------                ------   ------         
    Total...............................    50,717    24.54               50,693   24.25                 57,204   27.06           
                                            ------   -------              ------   ------                ------   ------  
Certificate accounts:
    Less than six months................     1,268     0.61      4.27      3,983    1.91      4.36       10,804    5.11      2.64
    Six through 12 months...............    51,923    25.13      5.47     54,136   25.90      5.63       52,269   24.72      4.09  
    Over 12 through 24 months...........    36,260    17.55      6.04     37,640   18.01      6.19       26,537   12.55      4.70
    Over 24 months......................    66,486    32.17      6.06     62,569   29.93      6.61       64,588   30.55      5.47
                                            ------    -----               ------  ------                 ------   -----
      Total certificate accounts........   155,937    75.46              158,328   75.75                154,198   72.94      
                                           -------    -----              -------   -----                -------   -----            
Total average deposits..................  $206,654   100.00%            $209,021  100.00%              $211,402  100.00%           
                                          --------   -------            --------  -------              --------  -------       
                                          --------   -------            --------  -------              --------  -------

</TABLE>

                                       30
<PAGE>
 
     The following table presents, by various rate categories, the amount of 
certificate accounts outstanding at the dates indicated and the periods to 
maturity of the certificate accounts outstanding at December 31, 1996.

<TABLE>
<CAPTION>
                                     Period to Maturity from December 31, 1996
                        ---------------------------------------------------------------------
                        Less than    One to     Two to      Three to    Four to    More than
                        One Year   Two years  Three years  Four years  Five Years  Five Years
                        ---------  ---------  -----------  ----------  ----------  ----------
                                                   (In thousands)
<S>                     <C>        <C>        <C>           <C>         <C>         <C>
Certificate accounts:

0 to 4.00%...........        311         0          12           7            0         0

4.01 to 6.00%........     82,881     20,350      7,126         605          658        109

6.01 to 8.00%........     17,922     13,952        693       3,241          751         63

8.01 to 10.00%.......        499      1,589        172         803          904          0
                         -------     ------      -----       -----        -----        ---
    Total............    101,613     35,891      8,003       4,656        2,313        172
                         =======     ======      =====       =====        =====        ===

<CAPTION>
                                   At December 31,
                         ---------------------------------

                            1996         1995       1994
                         ---------    --------    --------
                                   (In thousands)
<S>                      <C>          <C>         <C> 
Certificate accounts:

0 to 4.00%...........     $    330    $  2,179    $ 34,591

4.01 to 6.00%........      111,729      93,144     100,938

6.01 to 8.00%........       36,622      60,518      13,635

8.01 to 10.00%.......        3,967       3,830       7,163
                          --------    --------    --------
    Total............     $152,648    $159,671    $156,327
                          ========    ========    ========
</TABLE>
                                      31

<PAGE>

     Borrowings.  At December 31, 1996, the Bank had $16,250,000 in 
outstanding advances from the FHLB.  It is the policy of the Bank to utilize 
advances from the FHLB as an alternative to retail deposits to fund its 
operations and may do so in the future as part of its operating strategy.  
The FHLB advance was collateralized primarily by certain of the Bank's 
mortgage loans and mortgage-backed securities and secondarily by the Bank's 
investment in capital stock of the FHLB.  FHLB advances are made pursuant to 
several different credit programs, each of which has its own interest rate 
and range of maturities.  The maximum amount that the FHLB will advance to 
member institutions, including the Bank, fluctuates from time to time in 
accordance with the policies of the OTS and the FHLB. 

    The following table sets forth certain information regarding the Bank's 
borrowed funds at or for the periods ended on the dates indicated:

                                                      At or For the Year
                                                      Ended December 31,
                                                  ---------------------------
                                                    1996      1995      1994
                                                  -------    ------    ------
                                                     (Dollars in Thousands)
FHLB advances:
  Average balance outstanding..................   $ 8,099    $1,346    $  788
                                                  =======    ======    ======
  Maximum amount outstanding at
    any month-end during the period............    19,550     3,500     3,000
                                                  =======    ======    ======
  Balance outstanding at end of period.........    16,250         0     3,000
                                                  =======    ======    ======
  Weighted average interest rate
    during the period..........................      6.01%     5.29%     9.62%
                                                  =======    ======    ======
  Weighted average interest rate at end
    of period..................................       5.8%      N/A       6.2%
                                                  =======    ======    ======

Subsidiary Activities

     CSL Service Corporation ("CSL") and Fairbury Financial Service Corp. 
("Fairbury Financial") are wholly-owned subsidiaries of the Bank.  CSL has 
been inactive, but began initiating the sale of tax-deferred annuities at the 
end of 1996.  Fairbury Financial is a service corporation of the Bank that 
previously sold tax-deferred annuities and long-term care insurance policies 
that it sold on an agency basis.

Personnel

     As of December 31, 1996, the Bank had 72 authorized full-time employee 
positions and 30 authorized part-time employee positions.  The employees are 
not represented by a collective bargaining unit and the Bank considers its 
relationship with its employees to be good.

                                      32

<PAGE>

                          REGULATION AND SUPERVISION 

General

     The Company, as a savings and loan holding company, is required to file 
certain reports with, and otherwise comply with the rules and regulations of 
the OTS under the Home Owners' Loan Act, as amended (the "HOLA").  In 
addition, the activities of savings institutions, such as the Bank, are 
governed by the HOLA and the Federal Deposit Insurance Act ("FDI Act"). 

    The Bank is subject to extensive regulation, examination and supervision 
by the OTS, as its primary federal regulator, and the FDIC, as the deposit 
insurer.  The Bank is a member of the Federal Home Loan Bank ("FHLB") System 
and its deposit accounts are insured up to applicable limits by the Savings 
Association Insurance Fund ("SAIF") managed by the FDIC.  The Bank must file 
reports with the OTS and the FDIC concerning its activities and financial 
condition in addition to obtaining regulatory approvals prior to entering 
into certain transactions such as mergers with, or acquisitions of, other 
savings institutions.  The OTS and/or the FDIC conduct periodic examinations 
to test the Bank's safety and soundness and compliance with various 
regulatory requirements.  This regulation and supervision establishes a 
comprehensive framework of activities in which an institution can engage and 
is intended primarily for the protection of the insurance fund 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 regulatory requirements and 
policies, whether by the OTS, the FDIC or the Congress, could have a material 
adverse impact on the Company, the Bank and their operations.  Certain of the 
regulatory requirements applicable to the Bank and to the Company are 
referred to below or elsewhere herein.  The description of statutory 
provisions and regulations applicable to savings institutions and their 
holding companies set forth in this Form 10-KSB does not purport to be a 
complete description of such statutes and regulations and their effects on 
the Bank and the Company.

Holding Company Regulation 

    The Company is a nondiversified unitary savings and loan holding company 
within the meaning of the HOLA.  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 "Federal Savings 
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by 
the Company of another savings institution 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 ("BHC Act"), subject to the prior approval of the OTS, 
and certain activities authorized by OTS regulation.

                                      33

<PAGE>

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

    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 states vary in the extent to which they permit interstate 
savings and loan holding company acquisitions.

    Although savings and loan holding companies are not subject to specific 
capital requirements or specific restrictions on the payment of dividends or 
other capital distributions, HOLA does prescribe such restrictions on 
subsidiary savings institutions as described below. The Bank must notify the 
OTS 30 days before declaring any dividend to the Company.  In addition, the 
financial impact of a holding company on its subsidiary institution is a 
matter that is evaluated by the OTS and the agency has authority to order 
cessation of activities or divestiture of subsidiaries deemed to pose a 
threat to the safety and soundness of the institution.

Federal Savings Institution Regulation

    Capital Requirements.  The OTS capital regulations require savings 
institutions to meet three minimum capital standards:  a 1.5% tangible 
capital ratio, a 3% leverage (core) capital ratio and an 8% risk-based 
capital ratio.  In addition, the prompt corrective action standards discussed 
below also establish, in effect, a minimum 2% tangible capital standard, a 4% 
leverage (core) capital ratio (3% for institutions receiving the highest 
rating on the CAMEL financial institution rating system), and, together with 
the risk-based capital standard itself, a 4% Tier I risk-based capital 
standard.  Core capital is defined as common stockholders' equity (including 
retained earnings), certain noncumulative perpetual preferred stock and 
related surplus, and minority interests in equity accounts of consolidated 
subsidiaries less intangibles other than certain purchased mortgage servicing 
rights and credit card relationships. The OTS regulations also require that, 
in meeting the tangible, leverage (core) and risk-based capital standards, 
institutions must generally deduct investments in and loans to subsidiaries 
engaged in activities not permissible for a national bank.  

     The risk-based capital standard for savings institutions requires the 
maintenance of Tier I (core) and total capital (which is defined as core 
capital and supplementary capital) to risk-weighted assets of 4% and 8%, 
respectively.  In determining the amount of risk-weighted assets, all assets, 
including certain off-balance sheet assets, are multiplied by a risk-weight 
factor of 0% to 100%, as assigned by the OTS capital regulation based on the 
risks OTS believes are inherent

                                      34

<PAGE>

in the type of asset.  The components of Tier I (core) capital are equivalent 
to those discussed earlier.  The components of supplementary capital 
currently include cumulative preferred stock, long-term perpetual preferred 
stock, mandatory convertible securities, subordinated debt and intermediate 
preferred stock and the allowance for loan and lease losses limited to a 
maximum of 1.25% of risk-weighted assets.  Overall, the amount of 
supplementary capital included as part of total capital cannot exceed 100% of 
core capital.

     The OTS regulatory capital requirements also incorporate an interest 
rate risk component.  Savings institutions with "above normal" interest rate 
risk exposure are subject to a deduction from total capital for purposes of 
calculating their risk-based capital requirements.  A savings institution's 
interest rate risk is measured by the decline in the net portfolio value of 
its assets (i.e., the difference between incoming and outgoing discounted 
cash flows from assets, liabilities and off-balance sheet contracts) that 
would result from a hypothetical 200 basis point increase or decrease in 
market interest rates divided by the estimated economic value of the 
institution's assets.  In calculating its total capital under the risk-based 
capital rule, a savings institution whose measured interest rate risk 
exposure exceeds 2% must deduct an amount equal to one-half of the difference 
between the institution's measured interest rate risk and 2%, multiplied by 
the estimated economic value of the institution's assets.  The Director of 
the OTS may waive or defer a savings institution's interest rate risk 
component on a case-by-case basis.  A savings institution with assets of less 
than $300 million and risk-based capital ratios in excess of 12% is not 
subject to the interest rate risk component, unless the OTS determines 
otherwise.  For the present time, the OTS has deferred implementation of the 
interest rate risk component.  At December 31, 1996, the Bank met each of its 
capital requirements, in each case on a fully phased-in basis and it is 
anticipated that the Bank will not be subject to the interest rate risk 
component.






                                                               Capital
                                               Excess     ------------------
                         Actual   Required  (Deficiency)  Actual    Required
                         Capital   Capital     Amount     Percent    Percent
                         -------  --------  ------------  -------   --------
                                       (Dollars in thousands)

Tangible............     $27,627  $ 3,873      $23,754     10.70%      1.50%

Core
(Leverage)..........      27,627    7,746       19,881     10.70       3.00

Risk-based..........      28,122   11,301       16,821     19.91       8.00

     Prompt Corrective Regulatory Action.  Under the OTS prompt corrective 
action regulations, the OTS is required to take certain supervisory actions 
against undercapitalized institutions, the severity of which depends upon the 
institution's degree of undercapitalization.  Generally, a savings 
institution is considered "well capitalized" if its ratio of total capital to 
risk-weighted assets is at least 10%, its ratio of Tier I (core) capital to 
risk-weighted assets is at least 6%, its ratio of core capital to total 
assets is at least 5%, and it is not subject to any order or directive by the 
OTS to meet a specific capital level.  A savings institution generally is

                                      35

<PAGE>

considered "adequately capitalized" if its ratio of total capital to 
risk-weighted assets is at least 8%, its ratio of Tier I (core) capital to 
risk-weighted assets is at least 4%, and its ratio of core capital to total 
assets is at least 4% (3% if the institution receives the highest CAMEL 
rating).  A savings institution that has a ratio of total capital to risk 
weighted assets of less than 8%, a ratio of Tier I (core) capital to 
risk-weighted assets of less than 4% or a ratio of core capital to total 
assets of less than 4% (3% or less for institutions with the highest 
examination rating) is considered to be "undercapitalized."  A savings 
institution that has a total risk-based capital ratio less than 6%, a Tier 1 
capital ratio of less than 3% or a leverage ratio that is less than 3% is 
considered to be "significantly undercapitalized" and a savings institution 
that has a tangible capital to assets ratio equal to or less than 2% is 
deemed to be "critically undercapitalized."  Subject to a narrow exception, 
the banking regulator is required to appoint a receiver or conservator for an 
institution that is "critically undercapitalized."  The regulation also 
provides that a capital restoration plan must be filed with the OTS within 45 
days of the date a savings institution receives notice that it is 
"undercapitalized," "significantly undercapitalized" or "critically 
undercapitalized."  Compliance with the plan must be guaranteed by any parent 
holding company.  In addition, numerous mandatory supervisory actions become 
immediately applicable to an undercapitalized institution, including, but not 
limited to, increased monitoring by regulators and restrictions on growth, 
capital distributions and expansion.  The OTS could also take any one of a 
number of discretionary supervisory actions, including the issuance of a 
capital directive and the replacement of senior executive officers and 
directors.

     Insurance of Deposit Accounts.  Deposits of the Bank are presently 
insured by the SAIF.  Both the SAIF and the Bank Insurance Fund ("BIF"), (the 
deposit insurance fund that covers most commercial bank deposits), are 
statutorily required to be recapitalized to a 1.25% of insured reserve 
deposits ratio.  Until recently, members of the SAIF and BIF were paying 
average deposit insurance premiums of between 24 and 25 basis points.   The 
BIF met the required reserve in 1995, whereas the SAIF was not expected to 
meet or exceed the required level until 2002 at the earliest.  This situation 
was primarily due to the statutory requirement that SAIF members make 
payments on bonds issued in the late 1980's by the Financing Corporation 
("FICO") to recapitalize the predecessor to the SAIF.

     In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately 
adopted a new assessment rate schedule of from 0 to 27 basis points under 
which 92% of BIF members paid an annual premium of only $2,000.  With respect 
to SAIF member institutions, the FDIC adopted a final rule retaining the 
existing assessment rate schedule applicable to SAIF member institutions of 
23 to 31 basis points.  As long as the premium differential continued, it may 
have had adverse consequences for SAIF members, including reduced earnings 
and an impaired ability to raise funds in the capital markets.  In addition, 
SAIF members, such as the Bank could have been placed at a substantial 
competitive disadvantage to BIF members with respect to pricing of loans and 
deposits and the ability to achieve lower operating costs.

    On September 30, 1996, the President signed into law the Deposit 
Insurance Funds Act of 1996 (the "Funds Act") which, among other things, 
imposed a special one-time assessment on SAIF member institutions, including 
the Bank, to recapitalize the SAIF. As required by the Funds Act, the FDIC 
imposed a special assessment of 65.7 basis points on SAIF assessable

                                      36

<PAGE>

deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF 
Special Assessment").  The SAIF Special Assessment was recognized by the Bank 
as an expense in the quarter ended September 30, 1996 and is generally tax 
deductible.  The SAIF Special Assessment recorded by the Bank amounted to 
$1.37 million on a pre-tax basis and $839,000 on an after-tax basis.

     The Funds Act also spreads the obligations for payment of the FICO bonds 
across all SAIF and BIF members.  As of January 1, 1997, BIF deposits are 
assessed for FICO payment at a rate of 20% of the rate assessed on SAIF 
deposits.  Based on current estimates of the FDIC, BIF deposits will be 
assessed on a FICO payment of 1.3 basis points, while SAIF deposits will pay 
an estimated 6.4 basis points.  Full pro rata sharing of the FICO payments 
between BIF and SAIF members will occur on the earlier of January 1, 2000 or 
the date the BIF and SAIF are merged.  The Funds Act specifies that the BIF 
and SAIF will be merged on January 1, 1999, provided no savings associations 
remain as of that time.

     As a result of the Funds Act, the FDIC recently proposed to lower SAIF 
assessment to 0 to 27 basis points effective January 1, 1997, a range 
comparable to that of BIF members.  However, SAIF members will continue to 
make the higher FICO payments described above.  Management cannot predict the 
level of FDIC insurance assessments on an on-going basis, whether the savings 
association charter will be eliminated or whether the BIF and SAIF will 
eventually be merged.

     The Bank's regular assessment rate for fiscal 1996 was 23 basis points 
and the premium paid for this period was $410,000 (exclusive of the 
previously discussed Special Assessment).  A significant increase in SAIF 
insurance premiums would likely have an adverse effect on the operating 
expenses and results of operations of the Bank.

     Insurance of deposits may be terminated by the FDIC upon a finding that 
the institution has engaged in unsafe or unsound practices, is in an unsafe 
or unsound condition to continue operations or has violated any applicable 
law, regulation, rule, order or condition imposed by the FDIC or the OTS.  
The management of the Bank does not know of any practice, condition or 
violation that might lead to termination of deposit insurance.

     Thrift Rechartering Legislation.  The Funds Act provides that the BIF 
and SAIF will merge on January 1, 1999 if there are no more savings 
associations as of that date. That legislation also requires that the 
Department of Treasury submit a report to Congress by March 31, 1997 that 
makes recommendations regarding a common financial institutions charter, 
including whether the separate charters for thrifts and banks should be 
abolished.  Various proposals to eliminate the federal thrift charter, create 
a uniform financial institutions charter and abolish the OTS were introduced 
in the 104th Congress.  It is likely that legislation will be introduced in 
the new Congress addressing the elimination of the savings association 
charter.  However, the Bank is unable to predict whether such legislation 
would be enacted and, if so, the extent to which the legislation would 
restrict or disrupt its operation.

                                      37

<PAGE>

     Loans to One Borrower.  Under the HOLA, savings institutions are 
generally subject to the limits on loans to one borrower applicable to 
national banks.  Generally, savings institutions may not make a loan or 
extend credit to a single or related group of borrowers in excess of 15% of 
its unimpaired capital and surplus.  An additional amount may be lent, equal 
to 10% of unimpaired capital and surplus, if such loan is secured by 
readily-marketable collateral, which is defined to include certain financial 
instruments and bullion.  At December 31, 1996, the Bank's limit on loans to 
one borrower was $4.5 million, although the Bank has received permission to 
raise this limit to $9.0 million for two separate borrowers.  At December 31, 
1996, the Bank's largest aggregate outstanding balance of loans to one 
borrower was $6.8 million.

     QTL Test.  The HOLA requires savings institutions to meet a QTL test.  
Under the QTL test, a savings and loan association is required to maintain at 
least 65% of its "portfolio assets" (total assets less: (i) specified liquid 
assets up to 20% of total assets; (ii) intangibles, including goodwill; and 
(iii) the value of property used to conduct business) in certain "qualified 
thrift investments" (primarily residential mortgages and related investments, 
including certain mortgage-backed securities) in at least 9 months out of 
each 12 month period. 

     A savings institution that fails the QTL test is subject to certain 
operating restrictions and may be required to convert to a bank charter.  As 
of December 31, 1996, the Bank maintained 93.1% of its portfolio assets in 
qualified thrift investments and, therefore, met the QTL test.

     Limitation on Capital Distributions.  OTS regulations impose limitations 
upon all capital distributions by savings institutions, such as cash 
dividends, payments to repurchase or otherwise acquire its shares, payments 
to shareholders of another institution in a cash-out merger and other 
distributions charged against capital. The rule establishes three tiers of 
institutions, which are based primarily on an institution's capital level.  
An institution that exceeds all fully phased-in capital requirements before 
and after a proposed capital distribution ("Tier 1 Bank") and has not been 
advised by the OTS that it is in need of more than normal supervision, could, 
after prior notice but without obtaining approval of the OTS, make capital 
distributions during a calendar year equal to the greater of (i) 100% of its 
net earnings to date during the calendar year plus the amount that would 
reduce by one-half its "surplus capital ratio" (the excess capital over its 
fully phased-in capital requirements) at the beginning of the calendar year 
or (ii) 75% of its net income for the previous four quarters.  Any additional 
capital distributions would require prior regulatory approval.  In the event 
the Bank's capital fell below its regulatory requirements or the OTS notified 
it that it was in need of more than normal supervision, the Bank's ability to 
make capital distributions could be restricted.  In addition, the OTS could 
prohibit a proposed capital distribution by any institution, which would 
otherwise be permitted by the regulation, if the OTS determines that such 
distribution would constitute an unsafe or unsound practice.  In December 
1994, the OTS proposed amendments to its capital distribution regulation that 
would generally authorize the payment of capital distributions without OTS 
approval provided that the payment does not cause the institution to be 
undercapitalized within the meaning of the prompt corrective action 
regulation. However, institutions in a holding company structure would still 
have a prior notice requirement.  At December 31, 1996, the Bank was a Tier 1 
Bank.

                                      38

<PAGE>

     Liquidity.  The Bank is required to maintain an average daily balance of 
specified liquid assets equal to a monthly average of not less than a 
specified percentage of its net withdrawable deposit accounts plus short-term 
borrowings.  This liquidity requirement is currently 5% but may be changed 
from time to time by the OTS to any amount within the range of 4% to 10% 
depending upon economic conditions and the savings flows of member 
institutions.  OTS regulations also require each member savings institution 
to maintain an average daily balance of short-term liquid assets at a 
specified percentage (currently 1%) of the total of its net withdrawable 
deposit accounts and borrowings payable in one year or less.  Monetary 
penalties may be imposed for failure to meet these liquidity requirements.  
The Bank's liquidity and short-term liquidity ratios for December 31, 1996 
were 5.0% and 3.59% respectively, which exceeded the applicable requirements. 
 The Bank has never been subject to monetary penalties for failure to meet 
its liquidity requirements.

     Assessments.  Savings institutions are required to pay assessments to 
the OTS to fund the agency's operations.  The general assessments, paid on a 
semi-annual basis, are computed upon the savings institution's total assets, 
including consolidated subsidiaries, as reported in the Bank's latest 
quarterly thrift financial report. The assessments paid by the Bank for the 
fiscal year ended December 31, 1996 totalled $66,000 (exclusive of the 
previously discussed Special Assessment).

     Branching.   OTS regulations permit nationwide branching by federally 
chartered savings institutions to the extent allowed by federal statute.  
This permits federal savings institutions to establish interstate networks 
and to geographically diversify their loan portfolios and lines of business.  
The OTS authority preempts any state law purporting to regulate branching by 
federal savings institutions.

     Transactions with Related Parties.  The Bank's authority to engage in 
transactions with related parties or "affiliates" (e.g., any company that 
controls or is under common control with an institution, including the 
Company and its non-savings institution subsidiaries) is limited by Sections 
23A and 23B of the Federal Reserve Act ("FRA").  Section 23A limits the 
aggregate amount of covered transactions with any individual affiliate to 10% 
of the capital and surplus of the savings institution.  The aggregate amount 
of covered transactions with all affiliates is limited to 20% of the savings 
institution's capital and surplus.  Certain transactions with affiliates are 
required to be secured by collateral in an amount and of a type described in 
Section 23A and the purchase of low quality assets from affiliates is 
generally prohibited.  Section 23B generally provides that certain 
transactions with affiliates, including loans and asset purchases, must be on 
terms and under circumstances, including credit standards, that are 
substantially the same or at least as favorable to the institution as those 
prevailing at the time for comparable transactions with non-affiliated 
companies.  In addition, savings institutions are prohibited from lending to 
any affiliate that is engaged in activities that are not permissible for bank 
holding companies and no savings institution may purchase the securities of 
any affiliate other than a subsidiary.

     The Bank's authority to extend credit to executive officers, directors 
and 10% shareholders, as well as entities such persons control, is governed 
by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.  Among 
other things, such loans are required to be made on terms substantially the 
same as those offered to unaffiliated individuals and to not

                                      39

<PAGE>

involve more than the normal risk of repayment.  Regulation O also places 
individual and aggregate limits on the amount of loans the Bank may make to 
such persons based, in part, on the Bank's capital position and requires 
certain board approval procedures to be followed.  

     Enforcement.  Under the FDI Act, the OTS has primary enforcement 
responsibility over savings institutions and has the authority to bring 
actions against the institution and all institution-affiliated parties, 
including stockholders, and any attorneys, appraisers and accountants who 
knowingly or recklessly participate in wrongful action likely to have an 
adverse effect on an insured institution.  Formal enforcement action may 
range from the issuance of a capital directive or cease and desist order to 
removal of officers and/or directors to institution of receivership, 
conservatorship or termination of deposit insurance.  Civil penalties cover a 
wide range of violations and can amount to $25,000 per day, or even $1 
million per day in especially egregious cases.  Under the FDI Act, the FDIC 
has the authority to recommend to the Director of the OTS enforcement action 
to be taken with respect to a particular savings institution.  If action is 
not taken by the Director, the FDIC has authority to take such action under 
certain circumstances.  Federal law also establishes criminal penalties for 
certain violations.

     Standards for Safety and Soundness.  The federal banking agencies have 
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness 
("Guidelines") and a final rule to implement safety and soundness standards 
required under the FDI Act.  The Guidelines set forth the safety and 
soundness standards that the federal banking agencies use to identify and 
address problems at insured depository institutions before capital becomes 
impaired.  The standards set forth in the Guidelines address internal 
controls and information systems; internal audit system; credit underwriting; 
loan documentation; interest rate risk exposure; asset growth; and 
compensation, fees and benefits.  If the appropriate federal banking agency 
determines that an institution fails to meet any standard prescribed by the 
Guidelines, the agency may require the institution to submit to the agency an 
acceptable plan to achieve compliance with the standard, as required by the 
FDI Act. The final rule establishes deadlines for the submission and review 
of such safety and soundness compliance plans when such plans are required.

Federal Reserve System

     The Federal Reserve Board regulations require savings institutions to 
maintain non-interest earning reserves against their transaction accounts 
(primarily NOW and regular checking accounts).  During fiscal 1996, the 
Federal Reserve Board regulations generally required that reserves be 
maintained against aggregate transaction accounts as follows: for accounts 
aggregating $52.0 million or less (subject to adjustment by the Federal 
Reserve Board) the reserve requirement is 3%; and for accounts aggregating 
greater than $52.0 million, the reserve requirement is $1.6 million plus 10% 
(subject to adjustment by the Federal Reserve Board between 8% and 14%) 
against that portion of total transaction accounts in excess of $52.0 
million.  The first $4.3 million of otherwise reservable balances (subject to 
adjustments by the Federal Reserve Board) are exempted from the reserve 
requirements. The Bank is in compliance with the foregoing requirements.  The 
balances maintained to meet the reserve requirements imposed by the Federal 
Reserve Board may be used to satisfy liquidity requirements imposed by the 
OTS.

                                      40

<PAGE>

                         FEDERAL AND STATE TAXATION

Federal Taxation

     General.  The Company and the Bank report their income on a consolidated 
basis and the accrual method of accounting, and are subject to federal income 
taxation in the same manner as other corporations with some exceptions, 
including particularly the Bank's reserve for bad debts discussed below.  The 
following discussion of tax matters is intended only as a summary and does 
not purport to be a comprehensive description of the tax rules applicable to 
the Bank or the Company.  The Bank has not been audited by the Internal 
Revenue Service or State of Illinois in the last 5 years.  For its 1996 
taxable year, the Bank is subject to a maximum federal income tax rate of 35%.

     Bad Debt Reserves.  For fiscal years beginning prior to 1996, thrift 
institutions which qualified under certain definitional tests and other 
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted 
to use certain favorable provisions to calculate their deductions from 
taxable income for annual additions to their bad debt reserve.  A reserve 
could be established for bad debts on qualifying real property loans 
(generally secured by interests in real property improved or to be improved) 
under (i) the Percentage of Taxable Income Method (the "PTI Method") or (ii) 
the Experience Method.  The reserve for nonqualifying loans was computed 
using the Experience Method.

     The Small Business Job Protection Act of 1996 (the "1996 Act"), which 
was enacted on August 20, 1996, requires savings institutions to recapture 
(i.e., take into income) certain portions of their accumulated bad debt 
reserves.  The 1996 Act repeals the reserve method of accounting for bad 
debts effective for tax years beginning after 1995.  Thrift institutions that 
would be treated as small banks are allowed to utilize the Experience Method 
applicable to such institutions, while thrift institutions that are treated 
as large banks (those generally exceeding $500 million in assets) are 
required to use only the specific charge-off method.  Thus, the PTI Method of 
accounting for bad debts is no longer available for any financial 
institution.  

     Use of the PTI Method had the effect of reducing the marginal rate of 
federal tax on the Bank's income to 32%, exclusive of any minimum or 
environmental tax, as compared to the maximum corporate federal income tax 
rate of 35%.  

     A thrift institution required to change its method of computing reserves 
for bad debts will treat such change as a change in method of accounting, 
initiated by the taxpayer, and having been made with the consent of the IRS.  
Any Section 481(a) adjustment required to be taken into income with respect 
to such change generally will be taken into income ratably over a six-taxable 
year period, beginning with the first taxable year beginning after 1995, 
subject to the residential loan requirement.

    Under the residential loan requirement provision, the recapture required 
by the 1996 Act may be suspended for each of two successive taxable years, 
beginning with the Bank's current taxable year, in which the Bank originates 
a minimum of certain residential loans based upon the

                                      41

<PAGE>

average of the principal amounts of such loans made by the Bank during its 
six taxable years preceding its current taxable year.

     Under the 1996 Act, for its current and future taxable years, the Bank 
is permitted to use the experience method for making additions to its tax bad 
debt reserves.  In addition, the Bank is required to recapture (i.e., take 
into income) over a six year period the excess of the balance of its tax bad 
debt reserves as of December 31, 1995 over the balance of such reserves as of 
December 31, 1987 (or a lesser amount since the Bank's loan portfolio 
decreased since December 31, 1987).  As a result of such recapture, the Bank 
will incur an additional tax liability of approximately $111,000.   

     Distributions.  Under the 1996 Act, if the Bank makes "non-dividend 
distributions" to the Company, such distributions will be considered to have 
been made from the Bank's unrecaptured tax bad debt reserves (including the 
balance of its reserves as of December 31, 1987) to the extent thereof, and 
then from the Bank's supplemental reserve for losses on loans, to the extent 
thereof, and an amount based on the amount distributed (but not in excess of 
the amount of such reserves) will be included in the Bank's income.  
Non-dividend distributions include distributions in excess of the Bank's 
current and accumulated earnings and profits, as calculated for federal 
income tax purposes, distributions in redemption of stock, and distributions 
in partial or complete liquidation.  Dividends paid out of the Bank's current 
or accumulated earnings and profits will not be so included in the Bank's 
income.

     The amount of additional taxable income triggered by a non-dividend is 
an amount that, when reduced by the tax attributable to the income, is equal 
to the amount of the distribution.  Thus, if the Bank makes a non-dividend 
distribution to the Company, approximately one and one-half times the amount 
of such distribution (but not in excess of the amount of such reserves) would 
be includable in income for federal income tax purposes, assuming a 35% 
federal corporate income tax rate.  The Banks does not intend to pay 
dividends that would result in a recapture of any portion of its bad debt 
reserves.

     SAIF Recapitalization Assessment.  The Funds Act levies a 65.7-cent fee 
on every $100 of thrift deposits held on March 31, 1995.  For financial 
statement purposes, this assessment must be reported as an expense for the 
quarter ended September 30, 1996.  The Funds Act includes a provision which 
states that the amount of any special assessment paid to capitalize SAIF 
under this legislation is deductible under Section 162 of the Code in the 
year of payment.

     Corporate Alternative Minimum Tax.  The Internal Revenue Code of 1986, 
as amended (the "Code") imposes a tax on alternative minimum taxable income 
("AMTI") at a rate of 20%.  Only 90% of AMTI can be offset by net operating 
loss carryovers of which the Bank currently has none.  AMTI is increased by 
an amount equal to 75% of the amount by which the Bank's adjusted current 
earnings exceeds its AMTI (determined without regard to this preference and 
prior to reduction for net operating losses).  In addition, for taxable years 
beginning after December  31, 1986 and before January 1, 1996, an 
environmental tax of .12% of the excess of AMTI (with certain modifications) 
over $2.0 million is imposed on corporations, including the

                                      42

<PAGE>

Bank, whether or not an Alternative Minimum Tax ("AMT") is paid.  The Bank 
does not expect to be subject to the AMT, but may be subject to the 
environmental tax liability.

     Dividends Received Deduction and Other Matters.  The Company may exclude 
from its income 100% of dividends received from the Bank as a member of the 
same affiliated group of corporations.  The corporate dividends received 
deduction is generally 70% in the case of dividends received from 
unaffiliated corporations with which the Company and the Bank will not file a 
consolidated tax return, except that if the Company or the Bank own more than 
20% of the stock of a corporation distributing a dividend then 80% of any 
dividends received may be deducted.

State and Local Taxation

     State of Illinois.  The Company and the Bank will file a combined 
Illinois income tax return.  For Illinois income tax purposes, they are taxed 
at an effective rate equal to 7.2% of Illinois Taxable Income.  For these 
purposes, "Illinois Taxable Income" generally means federal taxable income, 
subject to certain adjustments (including the addition of interest income on 
state and municipal obligations and the exclusion of interest income on 
United States Treasury obligations).  The exclusion of income on United 
States Treasury obligations has the effect of reducing Illinois taxable 
income.  The Company is also required to file an annual report with and pay 
an annual franchise tax to the State of Illinois.

     Delaware Taxation.  As a Delaware holding company not earning income in 
Delaware, the Company is exempt from Delaware corporate income tax but is 
required to file an annual report with and pay an annual franchise tax to the 
State of Delaware.

Impact of New Accounting Standards

     Accounting for Mortgage Servicing Rights.  In 1995, the FASB also issued 
SFAS No. 122, "Accounting for Mortgage Servicing Rights."  This Statement 
amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities,"  to 
require that a mortgage banking enterprise recognize as separate assets 
rights to service mortgage loans for others, however those services are 
acquired.  This statement was adopted by the Company on January 1, 1995. The 
effect of adopting this statement has been to increase earnings by 
approximately $94,000 and $123,000 during the years ended December 31, 1996 
and 1995, respectively.

     Accounting for Stock-Based Compensation.  The FASB has issued No. SFAS 
123, Accounting for Stock-based Compensation.   SFAS No. 123 establishes a 
fair value based method of accounting for stock-based compensation plans.  
The FASB encourages all entities to adopt this method for accounting for all 
arrangements under which employees receive shares of stock or other equity 
instruments of the employer, or the employer incurs liabilities to employees 
in amounts based on the price of its stock.

     Due the extremely controversial nature of this project, SFAS No. 123 
permits a company to continue the accounting for stock-based compensation 
prescribed in accounting Principals

                                      43

<PAGE>

Board Opinion No. 25, Accounting for Stock Issued to Employees.  If a company 
elects that option, pro forma disclosures of net income (and EPS, if 
presented) are required in the notes to the financial statements as if the 
provisions of SFAS No. 123 had been used to measure stock-based compensation. 
 The disclosure requirements of Opinion No. 25 have been superseded by the 
disclosure requirements of this Statement.  Once an entity adopts the fair 
value based method for accounting for these transactions, that election 
cannot be reversed.

     Equity instruments granted or otherwise transferred directly to an 
employee by a principal stockholder are stock-based employee compensation to 
be accounted for in accordance with either Opinion 25 or SFAS No. 123 unless 
the transfer clearly is for a purpose other than compensation.  The 
accounting requirements of SFAS  No. 123 became effective for transactions 
entered into in fiscal years beginning after December 15, 1995, and the 
disclosure requirements became effective for financial statements for fiscal 
years beginning after December 15, 1995, and the disclosure requirements 
became effective for financial statements for fiscal years beginning after 
December 15, 1995.  Pro forma disclosures required for entities that elect to 
continue to measure compensation cost using Opinion 25 must include the 
effects of all awards granted in fiscal years beginning after December 15, 
1994.  During the initial phase-in period, the effects of applying this 
Statement are not likely to be representative of the effects on reported net 
income for future years because options vest over several years and 
additional awards generally are made each year.

     The Company adopted SFAS No. 123 for 1996, and elected to report the pro 
forma disclosures of net income and earnings per share in the notes to 
financial statements.

     Transfers and Servicing of Financial Assets and Extinguishments of 
Liabilities.  SFAS No. 125, Accounting for Transfers and Servicing of 
Financial Assets and Extinguishments of Liabilities, breaks new ground in 
resolving long-standing questions about whether transactions should be 
accounted for as secured borrowing or as sales.  The Statement provides 
consistent standards for distinguishing transfers of financial assets that 
are sales from transfers that are considered secured borrowings.

     A transfer of financial assets in which the transferor surrenders 
control over those assets is accounted for as a sale to the extent that 
consideration other than beneficial interests in the transferred assets is 
received in exchange.  The transferor has surrendered control over 
transferred assets only if all of the following conditions are met:

    -    The transferred assets have been isolated from the transferor - put
         presumptively beyond the reach of the transferor and its creditors,
         even in bankruptcy or other receivership.

    -    Each transferee obtains the right - free of conditions that constrain
         it from taking advantage of that right - to pledge or exchange those
         interests.

    -    The transferor does not maintain effective control over the transferred
         assets through an agreement that both entitles and obligates the
         transferor to repurchase or redeem them before their maturity or an
         agreement that entitles the transferor to repurchase or redeem
         transferred assets are not readily obtainable.

                                      44

<PAGE>

     This Statement provides detailed measurement standards for assets and 
liabilities included in these transactions.  It also includes implementation 
guidance for assessing isolation transferred assets and for accounting for 
transfers of partial interest, servicing of financial assets, securitization, 
transfers or sales type and direct financing lease receivables, securities 
lending transactions, repurchase agreements, "wash sales," loan syndication 
and participation, risk participation in banker's acceptances, factoring 
arrangements, transfers of receivables with recourse and extinguishment of 
liabilities.

     The Statements supersede FASB Statements No. 76 Extinguishment of Debt, 
and No. 77,  Reporting by Transferors for Transfers of Receivables with 
Recourse, and No. 122, Accounting for Mortgage Servicing Rights, and amends 
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity 
Securities, in addition to clarifying or amending a number of other 
statements and technical bulletins.

     Except as amended by Statement No. 127, this Statement is effective for 
transfers and servicing of financial assets and extinguishments of 
liabilities occurring after December 31,1996 and is to be applied 
prospectively.  Earlier or retroactive application is not permitted.

     The FASB was made aware that the volume of certain transactions and the 
related changes to information systems and accounting processes that are 
necessary to comply with the requirements of Statement No. 125 would make it 
extremely difficult, if not impossible, for some affected enterprises to 
apply the transfer and collateral provisions of Statement No. 125 to those 
transactions as soon as January 1, 1997.  As a result, SFAS No. 127 defers 
for one year the effective date (a) of paragraph 15 of Statement No. 125 and 
(b) for repurchase agreement, dollar-roll, securities lending and similar 
transactions, of paragraphs 9-12 and 237(b) of Statement No. 125.

     Statement No. 127 provides additional guidance on the types of 
transactions for which the effective date of Statement No. 125 had been 
deferred.  It also requires that if it is not possible to determine whether a 
transfer occurring during calendar year 1997 is part of a repurchase 
agreement, dollar-roll securities lending, or similar transaction, then 
paragraphs 9-12 of Statement No. 125 should be applied to that transfer.

     All provisions of Statement No. 125 should continue to be applied 
prospectively and earlier or retroactive application is not permitted.

Item 2.  Properties

     The Bank conducts its business through an executive and full service 
office located in Normal and five other full service branch offices.  The 
Company believes that the Bank's current facilities are adequate to meet the 
present and immediately foreseeable needs of the Bank and the Company. 

                                      45


<PAGE>

<TABLE>

<CAPTION>
                                        Leased        Original
                                          or         Year Leased      Net Book Value at    Deposits per 
       Location                          Owned       or Acquired      December 31, 1996       Office**
---------------------                  ---------   --------------    -------------------- --------------- 
                                                                                 (In thousands)

<S>                                     <C>          <C>               <C>                  <C>   
Executive/Branch Office:
     301 Broadway*                       Owned            1963                 $508            $59,687 
     Normal,
     Illinois 61761

Branch Offices:
     2402 E.Washington*                   Owned            1980                  755             39,389
     Bloomington, Illinois 61704
     1722 Hamilton Road*                  Owned            1995                1,491              4,168
     Bloomington, Illinois 61704
    (opened October 1995)
     115 N. Third Street*                 Owned            1981                  775             58,241
     Fairbury, Illinois 61739
     205 S. Main                          Owned            1974                  180             26,453
     Eureka, Illinois 61530
     314 Crittenden                       Owned            1984                  100              6,674
     Chenoa, Illinois 61726                                                     -----            -------
             
    Total                                                                      $3,809          $194,612
                                                                              --------        ----------
                                                                              --------        ----------
</TABLE>
--------------------
    *    Automated teller machines are located at these offices.
   **   Deposits from closed branches located in Bloomington and El Paso, 
        Illinois totalling $7.8 million are held by the Bank but are not 
        reflected in the table.


Item 3.  Legal Proceedings

    The Company is not involved in any pending legal proceedings other than 
routine legal proceedings occurring in the ordinary course of business.  Such 
routine legal proceedings, in the aggregate, are believed by management to be 
immaterial to the Company's financial condition or results of operations.
     
Item 4.  Submission of Matters to a Vote of Security Holders

    A Special Meeting of Shareholders of Citizens First Financial Corp. was 
held on November 12, 1996, at 10:00 a.m., at the Holiday Inn, 8 Traders 
Circle, Normal, Illinois for the purpose of voting upon the Citizens First 
Financial Corp. 1996 Stock-Based Incentive Plan.

    The results of the voting for the approval of Citizens First Financial Corp.
1996 Stock-Based Incentive Plan were as follows: 


                 FOR         AGAINST        ABSTAIN
             -----------    ---------      ----------
              1,565,442      402,233         28,055
                             -------         ------
                             -------         ------

                                    46



<PAGE>
 
                                       PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

    Information relating to the market for Registrant's common equity and 
related stockholder matters appears in the Registrant's 1996 Annual Report to 
Stockholders on pages 37 and 38, and is incorporated herein by reference.

Item 6.  Management's Discussion and Analysis or Plan of Operation

    The above-captioned information appears under Management's Discussion and 
Analysis of Results of Operations and Financial Condition in the Registrant's 
1996 Annual Report to Stockholders on pages 6 through 12 and is incorporated 
herein by reference.

Item 7.  Financial Statements

    The Consolidated Financial Statements of Citizens First Financial Corp. 
and its subsidiaries, together with the report thereon by Geo. S. Olive & Co. 
LLC for the year ended December 31 1996 appears in the Registrant's 1996 
Annual Report to Stockholders on pages 13 through 36 and are incorporated 
herein by reference.  

Item 8.  Changes In and Disagreements with Accountants on Accounting and 
         Financial Disclosure

    None.


                                       PART III

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

    The information relating to directors and executive officers of the 
Registrant is incorporated herein by reference to the Registrant's Proxy 
Statement for the Annual Meeting of Shareholders to be held on April 21, 1997 
at pages 5 through 7.  

Item 10. Executive Compensation

    The information relating to directors' and executive compensation is 
incorporated herein by reference to the Registrant's Proxy Statement for the 
Annual Meeting of Shareholders to be held on April 21, 1997 at pages 7 
through 13.

Item 11. Security Ownership of Certain Beneficial Owners and Management

    The information relating to security ownership of certain beneficial 
owners and management is incorporated herein by reference to the Registrant's 
Proxy Statement for the Annual Meeting of Shareholders to be held on April 
21, 1997 at pages 5 through 6.


                                        47


<PAGE>

Item 12. Certain Relationships and Related Transactions

    The information relating to certain relationships and related 
transactions is incorporated herein by reference to the Registrant's Proxy 
Statement for the Annual Meeting of Shareholders to be held on April 21, 1997 
at page 13.

Item 13. Exhibits and Reports on Form 8-K

    (a)  The following documents are filed as a part of this report:
                                                           
         (1)  Financial Statements
                                                                              
         Consolidated Financial Statements of the Company
         are incorporated by reference to the following indicated 
         pages of the 1996 Annual Report to Stockholders
         
                                                                         PAGE 
                                                                        ------

         Independent Auditors' Report. . . . . . . . . . . . . . . . . . 13-14

         Consolidated Balance Sheet as of
         December 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . .15

         Consolidated Statement of Income for the 
         years ended December 31, 1996, 1995 and 1994. . . . . . . . . . . .16

         Consolidated Statement of Changes in Stockholders' Equity
         for the years ended December 31, 1996, 1995 and 1994. . . . . . . .17

         Consolidated Statement of Cash Flows for the 
         years ended December 31, 1996, 1995 and 1994. . . . . . . . . . 18-19

         Notes to Consolidated Financial Statements. . . . . . . . . . . 20-36

         The remaining information appearing in the Annual Report to 
         tockholders is not deemed to be filed as part of this report, 
         except as expressly provided herein.

    (2)  Schedules

         All schedules are omitted because they are not required or 
         applicable, or the required information is shown in the consolidated 
         financial statements or the notes thereto.

                                          48

<PAGE>
 
    (3)  Exhibits

         The following exhibits are filed as part of this report.

         3.1    Certificate of Incorporation of Citizens First Financial Corp.*
         3.2    Bylaws of Citizens First Financial Corp.*
         4.0    Stock Certificate of Citizens First Financial Corp.*
         10.1   Citizens Savings Bank, F.S.B. Employee Stock Ownership Plan*
         10.2   Form of Employment Agreement between Citizens Savings Bank, 
                F.S.B. and certain executive officers*
         10.3   Form of Employment Agreement between Citizens First Financial 
                Corp. and certain executive officers*
         10.4   Form of Citizens Savings Bank, F.S.B. Supplemental Executive  
                Retirement Plan*
         10.5   Form of Change in Control Agreement between Citizens Savings 
                Bank,F.S.B. and certain executive officers*
         10.6   Form of Citizens Savings Bank, F.S.B. Supplemental Executive    
                Retirement Plan*
         10.7   Form of  Citizens Savings Bank, F.S.B. Employee Severance 
                Compensation Plan*
         10.8   Citizens First Financial Corp. 1996 Stock-Based Incentive 
                Plan**
         11.0   Computation of earnings per share***
         13.0   Portions of 1996 Annual Report to Stockholders (filed herewith)
         21.0   Subsidiary information is incorporated herein by reference to 
                "Part I - Subsidiaries"
         27.0   Financial Data Schedule
     
---------------------------------------                                     
         *         Incorporated herein by reference to the Exhibits to Form 
                   SB-2, Registration Statement, filed on January 24, 1996 
                   and any amendments thereto, Registration No. 333-556.
         **        Incorporated herein by reference to the Proxy Statement    
                   for the Special Meeting of Shareholders held on November 12, 
                   1996.
         ***       Due to the Company's initial public offering effective May 
                   1, 1996, earnings per share for the year ended December 
                   31, 1996 are not meaningful.

    (b)  Reports on Form 8-K:

         On November 26, 1996, the Company filed a report on Form 8-K in      
         connection with the Company's Board of Directors authorizing         
         management to apply to the Office of Thrift Supervision for permission
         to repurchase up to 10 percent of the outstanding stock of the 
         Company.


                                           49       



<PAGE>                               SIGNATURES


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

                                        50


<PAGE>

CONFORMED                             SIGNATURES


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

                             CITIZENS FIRST FINANCIAL CORP.


                             By:       /s/ C. William Landefeld 
                                       ----------------------------------
                                       C. William Landefeld
                                       President, Chief Executive Officer
                                       and Director

                             Date:     March 28, 1997

    Pursuant to the requirements of the Securities Exchange Act of 1934, this 
report has been signed by the following persons in the capacities and on the 
dates stated.

    Name                     Title                                    Date
   ------                   -------                                  ------

/s/ C. William Landefeld     President, Chief Executive Officer   March 28, 1997
-------------------------    and Director (principal executive
C. William Landefeld         officer)
                             

/s/ Dallas G. Smiley         Senior Vice President, Treasurer     March 28, 1997
-------------------------    and Chief Financial Officer 
Dallas G. Smiley             (principal accounting and financial 
                             officer)

/s/ Bryce A. Sides           Director                             March 28, 1997
-------------------------
Bryce A. Sides

/s/ Jeffrey M. Solberg       Director                             March 28, 1997
-------------------------
Jeffrey M. Solberg


/s/ Lowell M. Thompson       Director                             March 28, 1997
-------------------------
Lowell M. Thompson


/s/ Donald L. Wainscott      Director                             March 28, 1997
-------------------------
Donald L. Wainscott


                                              51