<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, 1997
                          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)

            2101 NORTH VETERANS PARKWAY, BLOOMINGTON, ILLINOIS 61704
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number: (309) 661-8700
        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, 1997 were
$22,284,000.

     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 $48,310,316 and is based upon the last sales price as
quoted on The American Stock Exchange for March 10, 1998.

     The Registrant had 2,535,750 shares of Common Stock outstanding as of
March 10, 1998.

         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, 1997, ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-KSB.

     PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF SHAREHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB.


<PAGE>

                                      INDEX
<TABLE>
<CAPTION>

                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
PART I

       Item 1     Description of Business ...............................    1

       Item 2     Properties ............................................   44

       Item 3     Legal Proceedings .....................................   44

       Item 4     Submission of Matters to a Vote of Security Holders ...   44


PART II

       Item 5     Market for Common Equity and
                  Related Stockholder Matters............................   45

       Item 6     Management's Discussion and Analysis
                  or Plan of Operation ..................................   45

       Item 7     Financial Statements ..................................   45

       Item 8     Changes In and Disagreements With Accountants on
                  Accounting and Financial Disclosure ...................   45


PART III

       Item 9     Directors, Executive Officers, Promoters and Control
                  Persons; Compliance With Section 16(a) of the
                  Exchange Act ..........................................   45

       Item 10    Executive Compensation ................................   45

       Item 11    Security Ownership of Certain Beneficial Owners
                  and Management ........................................   46

       Item 12    Certain Relationships and Related Transactions ........   46

       Item 13    Exhibits and Reports on Form 8-K ......................   46

SIGNATURES ..............................................................   48

</TABLE>



<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,
1997, the Company had total assets of $273.6 million, total deposits of $198.6
million and total stockholders' equity of $38.0 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, most 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 and
Fairbury, Illinois which are part of McLean, Woodford and Livingston Counties.
On November 29, 1997, the Bank completed the sale of a branch office in Chenoa,
Illinois to another financial institution. McLean County comprises the greater
Bloomington/Normal metropolitan area and Woodford, Tazewell and Livingston
Counties are adjacent to the greater Bloomington/Normal metropolitan area. The
economy in McLean, Woodford, Tazewell and

                                       1

<PAGE>

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, 1997, the Bank's gross loan portfolio totalled $239.6 million of
total loans outstanding, of which $157.3 million were one- to four-family,
residential mortgage loans, or 65.7% of total gross loans. At such date, the
remainder of the loan portfolio consisted of: $11.6 million of multi-family
loans, or 4.8% of total gross loans; $25.6 million of commercial real estate
loans, or 10.7% of total gross loans; $15.9 million of construction and land
loans, or 6.6% of total gross loans; $16.9 million of commercial loans, or 7.0%
of total gross loans, and $12.3 million of consumer and other loans, or 5.2% of
total gross loans. At that same date, $130.7 million, or 62.1%, 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,
                           ----------------------------------------------------------------------------------------
                                1997             1996              1995             1994            1993
                           ---------------   ---------------  ---------------  ---------------   ----------------
                                   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.....  $157,345  65.65% $161,733  75.15% $141,708  73.87% $140,136   78.04% $120,162   75.34%

 Multi-family............    11,593   4.84    12,520   5.82    10,469   5.46     9,777    5.44    11,673    7.32

 Commercial real estate..    25,610  10.69     8,934   4.15     8,679   4.52     7,847    4.37     9,067    5.69

 Construction and land...    15,862   6.62    12,489   5.80    12,353   6.44     5,131    2.86     4,208    2.64

Commercial...............    16,863   7.04     8,063   3.75     6,865   3.58     4,023    2.24     3,194    2.00

Consumer and other loans.    12,345   5.15    11,444   5.31    11,719   6.11    12,607    7.02    11,112    6.97
                             ------   ----    ------   ----    ------   ----    ------    ----    ------    ----

                            239,618  99.99   215,183   99.98   191,793  99.98   179,521   99.97   159,416   99.96

 Deferred premium on sale
  of  loans.........             33     01        34     .02        39    .02        62     .03        81     .04
                                 --     --        --     ---        --    ---        --     ---        --     ---

  Total gross loans......   239,651  100.00%  215,217  100.00% 191,832 100.00%  179,583  100.00%  159,497  100.00%
                            -------  ------   -------  ------  ------- ------   -------  ------   -------  ------
                                     ------            ------          ------            ------            ------


Less:

 Undisbursed portion of
  loans                       9,049             3,397           2,859             2,129            2,027

 Unearned interest.......        --                --              --                21               25

 Deferred loan fees......       293               265             200               171              270

 Allowance for loan
   losses................       840               512             412               353              388
                            --------           --------         --------         --------         --------

Loans, Net:                 $229,469           $211,042         $188,361         $176,909         $156,787
                            --------           --------         --------         --------         --------
                            --------           --------         --------         --------         --------
</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 $89.2
million, $74.6 million and $51.1 million for the years ended December 31, 1997,
1996 and 1995, respectively.

<TABLE>
<CAPTION>

                                                                  At December 31, 1997
                                   -----------------------------------------------------------------------------------------------
                                             One- to                                                           Consumer
                                              Four-     Multi-     Commercial   Construction   Commercial    and Other     Total
                                              Family    Family    Real Estate    and Land       Loans          Loans       Loans
                                   -----------------------------------------------------------------------------------------------
                                                                     (In thousands)

<S>                                           <C>       <C>       <C>           <C>           <C>            <C>
Amounts due:
   One year or less ......................    1,614          0         344       14,325        12,590         2,307       $ 31,180
   After one year:
     More than one year to three years ...    2,498          0         116          158         1,798         2,582          7,152
     More than three years to five years .    2,764        223       1,295          344           473         3,899          8,998
     More than five years to 10 years ....   16,938        388       8,684          198         1,808         3,043         31,059
     More than 10 years to 20 years ......   52,786      5,396      10,785          770           166           507         70,410
     More than 20 years ..................   80,745      5,586       4,386           67            28             7         90,819
                                             ------     ------      ------        -----         -----        ------       --------
       Total due after December 31, 1998 .   15,573     11,593      25,266        1,537         4,273        10,038        208,438

       Total amount due .................. $157,345   $ 11,593    $ 25,610     $ 15,862      $ 16,863       $12,345       $239,618
                                           --------    --------   --------     --------      --------       -------
                                           --------    --------   --------     --------      --------       -------

Deferred premium on sale of loans.........                                                                                      33

Less:
    Allowance for loan losses..............                                                                                   (840)
    Undisbursed portion of loans...........                                                                                 (9,049)
    Deferred loan fees.....................                                                                                   (293)
                                                                                                                          --------
Loans, net................................                                                                                $229,469
                                                                                                                          --------
                                                                                                                          --------


</TABLE>

                                        4
<PAGE>

     The following table sets forth at December 31, 1997 the dollar amount of
loans contractually due after December 31, 1998, and whether such loans have
fixed interest rates or adjustable interest rates.

<TABLE>
<CAPTION>

                                             Due After December 31, 1998
                                             ---------------------------
                                           Fixed     Adjustable     Total
                                           -----     ----------     -----
                                                     (In thousands)
<S>                                        <C>       <C>            <C>
Mortgage loans:
    One- to four-family...........        $67,414      $88,317     $155,731
    Multi-family..................            581       11,012       11,593
    Commercial real estate........          7,912       17,354       25,266
    Construction and land.........            494        1,043        1,537
Commercial loans..................            184        4,089        4,273
Consumer and other loans..........          1,466        8,572       10,038
                                            -----        -----       ------

    Total loans ...........               $78,051     $130,387     $208,438
                                          -------     --------     --------
                                          -------     --------     --------
</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, 1997, the
Bank serviced $93.0 million of loans for others and for the years ended December
31, 1997, 1996 and 1995 had $205,000, $209,000 and $251,000, 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

                                        5
<PAGE>

loans or participations secured by properties located in its primary market
area, at December 31, 1997, the Bank had $5.1 million in loans, or 2.13%, of
total gross 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 Illinois, New Mexico, Michigan,
Ohio 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, 1997, the
Bank had $418,000 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, 1997, the Bank had forward commitment contracts
outstanding which required the delivery of $3.3 million 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,
                                           -------------------------------------------------
                                               1997              1996                1995
                                           ------------    ---------------      ------------
                                                           (IN THOUSANDS)
<S>                                          <C>                <C>               <C>
Net loans:
Beginning balance........................    $214,069           $188,361          $176,910
    Loans originated:
    One- to four-family..................      73,342             90,084            54,683
    Multi-family.........................       9,746              6,780             3,360
    Commercial real estate...............      17,053              2,863             2,512
    Construction and land................       2,455              1,153             1,327
    Commercial...........................      22,454              6,514             8,120
    Consumer and other(1)................       9,075              8,576            10,243
                                             --------           --------          --------
      Total loans originated.............     134,125            115,970            80,245
                                             --------           --------          --------

      Total..............................     348,194            304,331           257,155
                                             --------           --------          --------
Net gain on loan sales ..................         418                236               268

Less:
    Principal repayments and
      other, net...........................    89,172             74,602            51,100
    Loan charge-offs, net..................       188                 67                64
    Proceeds from sale of mortgage loans...    27,020             15,132            17,898
    Transfer of mortgage loans to REO......       369                697                --
                                             --------           --------          --------

Loans, net(2) .............................  $231,863           $214,069          $188,361
                                             --------           --------          --------
                                             --------           --------          --------
</TABLE>

----------

(1)      Consumer and other loans  primarily  consist of home equity  loans and
         lines of credit secured by mortgages, automobile and personal loans.
(2)      Includes mortgage loans held for sale.  There were no loans held for
         sale at December 31, 1995.


     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, 1997 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, 1997, one- to four-family mortgage loans totalled $157.3
million, or 65.7%, of total gross loans. The Bank currently offers a number of
adjustable-rate mortgage loans with

                                        7
<PAGE>

terms of up to 30 years and interest rates 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 $227,150 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, 1997, the Bank's multi-family loan portfolio was $11.6 million, or 4.8%, 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

                                        8
<PAGE>

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 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, 1997, was $4.4 million. The OTS, after
reviewing applications from the Bank, has approved an increase in the loan to
one borrower limit for four of the Bank's borrowers to 30.0% of the Bank's
capital, which at December 31, 1997 increased their individual loan to one
borrower limit to $8.8 million. In addition, the Bank generally requires a
debt service ratio of a maximum of 110.0% 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.

     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, 1997, was $4.4 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 or five 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 110.0%. At December 31,
1997, the Bank's commercial real estate loan portfolio totalled approximately
$25.6 million or 10.7% of total loans.


                                        9
<PAGE>

     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, 1997, the Bank had $7.0 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, $4.3 million had been drawn on such
lines of credit or construction loans for the construction of 31 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, 1997 was $4.4 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.

     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.

     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 $700,000 and are
generally secured by receivables, inventories, equipment and other assets of the
business. The Bank generally requires personal guarantees on its commercial

                                       10
<PAGE>

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, 1997, the Bank had $16.9 million of commercial loans, of which
$1.8 million, or 10.7%, were unsecured. As part of its operating strategy,
the Bank intends to increase its emphasis on secured commercial lending.

     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, 1997, consumer loans amounted to $12.3 million, or 5.2%, of the
Bank's total loan portfolio of which $6.9 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 90% 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 five (5) 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 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.


                                       11
<PAGE>

     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, 1997 the Bank was servicing
$93.0 million of loans for others and for the year ended December 31, 1997, the
Bank's servicing fees totalled $205,000.

     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, 1997, the Bank had $605,000 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,
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

                                       13

<PAGE>

have been established, actual losses are 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, 1997, the Bank had no assets designated as Special
Mention, Doubtful or Loss and $1,538,000, and of assets classified as
Substandard. Assets classified as Substandard consisted of 15 one- to
four-family loans with an aggregate outstanding balance of $1,464,900 and 3
commercial asset-based loan with an aggregate outstanding balance of $33,700 and
4 consumer and other loans with an aggregate outstanding balance of $39,400.

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

<TABLE>
<CAPTION>

                                              AT DECEMBER 31, 1997                            AT DECEMBER 31, 1996
                                        -----------------------------------        ------------------------------------------
                                           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.................      8       $497         9        $782          3         $279         8         $500
Multi-family........................     --        --         --         --          --          --         --          --
Commercial real estate..............     --        --         --         --          --          --         --          --
Construction and land...............     --        --         --         --          --          --         --          --
Commercial..........................     --        --          3          34          2            5         1           14
Consumer and other loans............      7         63        11         132          5           54        16           53
                                         ---      -----      ----      ------        ----       -----      ----        -----
     Total..........................     15       $560        23         948         10         $338        25         $567
                                         ---      -----      ----      ------        ----       -----      ----        -----
                                         ---      -----      ----      ------        ----       -----      ----        -----
Delinquent loans to total loans, net                                    0.41%                                          0.27%

</TABLE>

<TABLE>
<CAPTION>

                                              AT DECEMBER 31, 1995
                                      ------------------------------------
                                         60-89 DAYS        90 DAYS OR MORE
                                      -----------------   -----------------
                                                PRINCIPAL          PRINCIPAL
                                       NUMBER   BALANCE   NUMBER   BALANCE
                                      OF LOANS  OF LOANS  OF LOANS OF LOANS
                                      --------  -------   -------  --------
<S>                                   <C>       <C>       <C>      <C>
One- to four-family.................         5      304        16       610
Multi-family........................        --       --        --        --
Commercial  real estate.............        --       --         1       100
Construction and land...............        --       --        --        --
Commercial..........................        --       --        --        --
Consumer and other loans............        12       98        37       238
                                           ---      ---       ---       ---
     Total..........................        17      402        54       948
                                           ---      ---       ---       ---
                                           ---      ---       ---       ---
Delinquent loans to total loans, net                                   0.50%

</TABLE>

                                       14
<PAGE>

     Non-Performing Assets and Restructured Loans. The following table sets
forth information regarding non-accrual loans, restructured loans and REO. At
December 31, 1997, the Bank had two restructured loans totalling $341,000, 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, 1997,
1996, 1995, 1994 and 1993, 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 $47,000, $11,000, $26,000,
$30,000 and $19,000, respectively.


<TABLE>
<CAPTION>

                                                                       AT DECEMBER 31,
                                               -----------------------------------------------------------------------
                                                  1997           1996            1995           1994          1993
                                               -----------    -----------     ----------     ----------    -----------
                                                                         (DOLLARS IN THOUSANDS)

<S>                                            <C>            <C>              <C>          <C>            <C>
Non-accrual loans:
  Mortgage loans:
    One- to four-family.................       $   647        $   133           $178        $   209        $   225
    Multi-family........................             0              0              0             --             --
    Commercial real estate..............             0              0              0             --             --
  Construction and land.................             0              0              0             40             --
  Commercial ...........................             0             14              0             --             71
  Consumer and other loans..............            56             51            133             81            106
                                                ------         ------           ----        -------        -------
    Total non-accrual loans.............           737            198            311            330            402

Loans contractually past due 90 days or
  more, other than non-accruing.........           211            369            637            209            326
                                                ------         ------           ----        -------        -------
    Total non-performing loans..........           948            567            948            539            728
Real estate owned, net(1)...............           605            697             --             39            197
                                                ------         ------           ----        -------        -------
    Total non-performing assets.........        $1,553         $1,264           $948        $   578        $   925
                                                ------         ------           ----        -------        -------
                                                ------         ------           ----        -------        -------
Restructured loans(2)...................        $  341         $  463           $364        $   375        $   400
                                                ------         ------           ----        -------        -------
                                                ------         ------           ----        -------        -------
Allowance for estimated loan
  losses as a percent of loans receivable(3)      0.36%         0.24%           0.22%          0.20%          0.25%
Allowance for estimated loan losses as
   a percent of non-performing loans(4).         88.61         90.30           43.46          65.49          53.30
Non-performing loans as a percent
   of loans receivable(3)(4)............          0.41          0.27            0.50           0.30           0.46
Non-performing assets as
  a percent of total assets(5)..........          0.57          0.48            0.41           0.25           0.40

----------

(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 REO.

                                       15
<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, 1997, the Bank's allowance for loan losses was
$840,000, or 0.36%, of total loans and 88.61% of non-performing loans as
compared to $512,000, or 0.24%, of total loans and 90.30% of non-performing
loans as of December 31, 1996. The Bank had total non-performing loans of
$948,000 and $567,000 at December 31, 1997 and December 31, 1996, respectively
and non- performing loans to total loans of .41% and 0.27%, 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.


                                                           AT OR FOR THE YEAR ENDED DECEMBER 31,
                                          ------------------------------------------------------------------------
                                             1997            1996           1995            1994           1993
                                          -----------     ----------     ----------      ----------     ----------
                                                                       (IN THOUSANDS)

<S>                                              <C>            <C>            <C>             <C>            <C>
Balance at beginning of period.........          $512           $412           $353            $388           $449
Provision .............................           516            167            123              81            211
Charge-offs:
    One- to four-family................          (106)           (47)           (59)            (29)            --
    Multi-family.......................            --             --             --              --           (262)
    Commercial.........................            --             --             --             (50)            --
    Commercial real estate.............           (50)            --             --              (3)            (4)
    Construction and land..............            --             --             --              --             --
    Consumer...........................           (32)           (20)            (5)            (34)            (6)
                                              -------        -------        -------        --------       --------
       Net charge-offs.................          (188)           (67)           (64)           (116)          (272)
                                              -------        -------        -------        --------       --------
Balance at end of period...............          $840           $512           $412            $353           $388
                                              -------        -------        -------        --------       --------
                                              -------        -------        -------        --------       --------
Net charge-off as a percent of
average loans (net)....................          0.08%          0.03%          0.04%           0.07%          0.17%
                                              -------        -------        -------        --------       --------
                                              -------        -------        -------        --------       --------
</TABLE>

                                       16
<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,
                           --------------------------------------------------------------------------------------------------
                                        1997                        1996                             1995
                           --------------------------------  -------------------------------  -------------------------------
                                                   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)
                             --------  ---------   --------  -------  ---------     --------  -------- ---------    ---------
                                                           (DOLLARS IN THOUSANDS)
<S>                           <C>       <C>       <C>         <C>       <C>          <C>        <C>     <C>          <C>
Mortgage loans:
    One- to four-family..     $332      39.52%    65.66%      $170      33.21%       75.17%     $150    36.41%       73.87%
    Multi-family.........       61       7.26      4.84         52      10.16         5.82        32     7.77         5.46
    Commercial real
         estate..........      116      13.81     10.69         36       7.03         4.15        28     6.80         4.52
    Construction
         and land........       40       4.76      6.62         46       8.98         5.80        16     3.88         6.44
Commercial...............      213      25.36      7.04         68      13.28         3.75        56    13.59         3.58
Consumer and
     other loans.........       78       9.29      5.15        140      27.34         5.31       130    31.55         6.11
    Total allowance
                              ----     ------    ------       ----     ------       ------      ----   ------       ------
      for loan losses....     $840     100.00%   100.00%      $512     100.00%      100.00%     $412   100.00%      100.00%
                              ----     ------    ------       ----     ------       ------      ----   ------       ------
                              ----     ------    ------       ----     ------       ------      ----   ------       ------

<CAPTION>

                                                 AT DECEMBER 31,
                          ---------------------------------------------------------------
                                        1994                          1993
                          ------------------------------   ------------------------------
                                                 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..     $102     28.90%    78.07%     $125       32.22%      75.38%
    Multi-family.........       20      5.67      5.44        28        7.22        7.32
    Commercial real
         estate..........       22      6.23      4.37        24        6.19        5.69
    Construction
         and land........       24      6.80      2.86        16        4.12        2.64
Commercial...............       69     19.55      2.24        57       14.69        2.00
Consumer and
     other loans.........      116     32.85      7.02       138       35.56        6.97
                               ---     -----      ----       ---     --------     -------
    Total allowance
      for loan losses....     $353    100.00%   100.00%     $388      100.00%     100.00%
                               ---     -----      ----       ---     --------     -------
                               ---     -----      ----       ---     --------     -------
</TABLE>

----------

(1)      The deferred premium on sale of loans of $33,000, $34,000, $39,000,
         $62,000 and $81,000 has been netted with one- to four-family mortgage
         loans in computing percent of loans to total loans.

                                       17

<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, 1997,
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
5.74%. 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 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

                                       18

<PAGE>



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, 1997, 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, 1997, 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.


                                       19

<PAGE>

<TABLE>
<CAPTION>



                                                                AT DECEMBER 31, 1997
                                ------------------------------------------------------------------------------------
                                                         MORE THAN
                                             MORE THAN   6 MONTHS    MORE THAN   MORE THAN    MORE THAN    MORE THAN
                                3 MONTHS     3 MONTHS      TO       1 YEAR TO   2 YEARS TO   3 YEARS TO   4 YEARS TO
                                 OR LESS     6 MONTHS    1 YEAR      2 YEARS     3 YEARS       4 YEARS     5 YEARS
                                ---------   ----------  ----------  ----------   ---------   ----------  -----------
                                                               (DOLLARS IN THOUSANDS)
<S>                             <C>         <C>         <C>         <C>         <C>         <C>            <C>
INTEREST-EARNING ASSETS:
   Short-term deposits.........    $3,317   $        0  $        0  $        0   $       0   $        0     $      0
   Investment securities.......     1,002            0           0       1,246           0        1,966        1,007
   Loans receivable............    27,135       27,959      37,713      57,975      15,137        8,548        9,486
   Mortgage-backed securities..       342          336         395       1,076         985          903          828
   FHLB stock..................     2,453            0           0           0           0            0            0
                                  -------    ---------   ---------   ---------   ---------   ----------     --------
     Total                        $34,249      $28,295     $38,108     $60,297     $16,122      $11,417      $11,321
                                  -------    ---------   ---------   ---------   ---------   ----------     --------
                                  -------    ---------   ---------   ---------   ---------   ----------     --------

INTEREST-BEARING LIABILITIES:
   Money market savings........     8,961            0           0           0           0            0            0
   Passbook accounts...........       503          488         946       1,778       1,565        1,377        1,211
   NOW accounts................       459          445         863       1,623       1,428        1,257        1,106
   Certificate accounts........    22,424       20,445      53,702      35,624      12,357        2,631        1,145
                                   ------       ------      ------      ------     -------     --------      -------
                                   32,347       21,378      55,511      39,025      15,350        5,265        3,462

FHLB advances..................     4,200            0       2,000       9,000       8,000            0        7,969
                                  -------   ----------     -------      ------     -------      -------      -------
     Total.....................   $36,547      $21,378     $57,511     $48,025     $23,350       $5,265      $11,431
                                  -------    ---------   ---------   ---------   ---------   ----------     --------
                                  -------    ---------   ---------   ---------   ---------   ----------     --------

Assets minus liabilities.......    (2,298)       6,917     (19,403)     12,272      (7,228)       6,152         (110)
Cumulative interest-rate
  sensitivity gap..............    (2,298)       4,619     (14,784)     (2,512)     (9,740)      (3,588)      (3,698)
Cumulative interest-rate gap
  as a percent of total assets.     (0.84)%       1.69%      (5.40)%     (0.92)%     (3.56)%      (1.31)%      (1.35)%
Cumulative interest-rate gap a
  percent of total
  interest-earning assets......     (0.89)%       1.79%      (5.74)%     (0.97)%     (3.78)%      (1.39)%      (1.43)%
Cumulative interest-earning assets
  as a percent of cumulative
  interest-bearing liabilities.     93.71%      107.97%      87.19%      98.46%      94.79%       98.13%       98.18%


<CAPTION>

                                 AT DECEMBER 31, 1997
                                ----------------------
                                MORE THAN      TOTAL
                                 5 YEARS      AMOUNT
                                ---------   ----------

<S>                             <C>            <C>
INTEREST-EARNING ASSETS:
   Short-term deposits.........  $        0      $ 3,317
   Investment securities.......          46        5,267
   Loans receivable............      48,749      232,702
   Mortgage-backed securities..       9,170       14,035
   FHLB stock..................           0        2,453
                                 ----------     --------
     Total                          $57,964     $257,773
                                 ----------     --------
                                 ----------     --------

INTEREST-BEARING LIABILITIES:
   Money market savings........           0        8,961
   Passbook accounts...........       8,887       16,755
   NOW accounts................       8,109       15,290
   Certificate accounts........         349      148,677
                                    -------      -------
                                     17,345      189,683

FHLB advances..................       2,775       33,944
                                    -------      -------
     Total.....................     $20,120     $223,627
                                    -------     ---------
                                    -------     ---------
Assets minus liabilities.......      37,844
Cumulative interest-rate
  sensitivity gap..............      34,146
Cumulative interest-rate gap
  as a percent of total assets.       12.48%
Cumulative interest-rate gap a
  percent of total
  interest-earning assets......       13.25%
Cumulative interest-earning assets
  as a percent of cumulative
  interest-bearing liabilities.      115.27%

</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.


                                       20

<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,
1997, as calculated by the OTS.

<TABLE>
<CAPTION>

                                                                                            NPV AS % OF PORTFOLIO
                                            NET PORTFOLIO VALUE                                VALUE OF ASSETS
                               ------------------------------------------------   --------------------------------
          CHANGE IN
       INTEREST RATES
       IN BASIS POINTS                                                   %
        (RATE SHOCK)                AMOUNT          $ CHANGE          CHANGE         NPV RATIO        CHANGE (1)
-----------------------------    ---------------   -------------    -------------   -------------    ---------------
                                                              (DOLLARS IN THOUSANDS)
<S>                                 <C>            <C>               <C>             <C>             <C>
            400.............         24,752         (11,814)             (32)%             9.58%           (355)
            300.............         28,396          (8,170)             (22)%            10.76%           (237)
            200.............         31,770          (4,796)             (13)%            11.80%           (134)
            100.............         34,615          (1,951)              (5)%            12.62%            (51)
            0...............         36,566                                               13.13%
            (100)...........         37,403             837                2%             13.28%             15
            (200)...........         37,036             470                1%             13.06%             (7)
            (300)...........         36,727             161                0%             12.86%            (27)
            (400)...........         37,246             680                2%             12.91%            (22)

---------------------
</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.


                                       21

<PAGE>


REAL ESTATE OWNED

     At December 31, 1997, the Bank had $605,000 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, 1997, the Bank's portfolio of
investment and mortgage-backed securities totaled $19.3 million, all of which
was 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.


                                       22

<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. The Bank
has also decreased its level of investments in investment securities and
mortgage-backed securities from $29.4 million at December 31, 1996, to
$19.3 million at December 31, 1997. The Board of Directors reviews all of the
activity in the investment portfolio on a monthly basis.

     At December 31, 1997, the Bank had $14.0 million in mortgage-backed
securities, or 5.1% of total assets, which were guaranteed by GNMA or insured by
either FNMA or FHLMC. Of the $14.0 million, $7.2 million had adjustable interest
rates, most of which were subject to maximum annual rate adjustments up to a
maximum interest rate of 10.83% 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, 1997 were
available for sale.



                                       23

<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,
                                         -------------------------------------------------------------------------------
                                                   1997                        1996                       1995
                                         ------------------------    ------------------------   ------------------------
                                                        PERCENT                     PERCENT                    PERCENT
                                           AMOUNT       OF TOTAL      AMOUNT       OF TOTAL       AMOUNT      OF TOTAL
                                         -----------   ----------    ---------    -----------   ----------   -----------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                            <C>          <C>          <C>            <C>          <C>           <C>
Investment securities:
     U.S. Treasuries..................... $       --           --%     $    --             --%      $3,994         52.62%
     Federal agencies....................      4,219        80.10        5,188          82.93        2,014         26.53
     Marketable equitable securities.....      1,002        19.00        1,000          15.98        1,000         13.18
     CMOs................................         46         0.90           68           1.09          582          7.67
                                         -----------      -------     --------        -------      -------       -------
         Total investment securities.....   $  5,267       100.00%      $6,256         100.00%      $7,590        100.00%
                                         -----------      -------     --------        -------      -------       -------
                                         -----------      -------     --------        -------      -------       -------

     Investment securities available
        for sale.........................   $  5,267                    $5,256                      $1,598

     Investment securities held
        to maturity......                         --                     1,000                       5,992
                                         -----------                  --------                     -------
         Total investment securities.....   $  5,267                    $6,256                      $7,590
                                         -----------                  --------                     -------
                                         -----------                  --------                     -------

Mortgage-backed securities:
     FHLMC...............................   $  5,430        38.69%     $11,050          47.80%      $7,254         41.96%
     GNMA................................      1,455        10.37        2,488          10.77        3,035         17.55
     FNMA................................      7,150        50.94        9,577          41.43        7,000         40.49
                                         -----------      -------     --------        -------      -------       -------
       Total mortgage-backed securities..    $14,035       100.00%     $23,115         100.00%     $17,289        100.00%
                                         -----------      -------     --------        -------      -------
                                         -----------      -------     --------        -------      -------


Mortgage-backed securities available
    for sale.............................    $14,035                   $23,115                     $17,289
Mortgage-backed securities held to
    maturity.............................         --                        --                          --
                                         -----------                  --------                     -------
     Total mortgage-backed securities....    $14,035                   $23,115                     $17,289
                                         -----------                  --------                     -------
                                         -----------                  --------                     -------

</TABLE>

                                       24

<PAGE>



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

<TABLE>
<CAPTION>

                                                                                 FOR THE YEAR
                                                                              ENDED DECEMBER 31,
                                                                  1997               1996               1995
                                                            -----------------   ---------------   ----------------
                                                                              (IN THOUSANDS)
<S>                                                               <C>               <C>                <C>
Beginning balance .......................................         $29,371           $24,879            $38,255

Purchases of securities available for sale...............           1,992            19,841              1,000

Purchases of securities held to maturity.................              --                --              3,474
Less:
Proceeds from maturities and principal
  paydowns on securities available for sale..............          (5,342)           (4,015)            (7,017)
Proceeds from sales of securities
  available for sale.....................................          (5,996)           (6,044)            (5,152)
Proceeds from maturities and principal
  paydowns on securities held to maturity................          (1,000)           (5,000)            (7,028)
Net gain (loss) on sale of securities....................               4               (15)               (18)
Amortization of premium .................................             (52)              (61)               (31)
Change in net unrealized gain (loss)
 on securities available for sale........................             325              (214)             1,396
                                                                 --------          --------           --------
Ending balance...........................................         $19,302           $29,371            $24,879
                                                                 --------          --------           --------
                                                                 --------          --------           --------
</TABLE>


                                       25

<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,
                                                   ---------------------------------------------------------------------------------
                                                             1997                         1996                        1995
                                                   -------------------------   --------------------------   ------------------------
                                                    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...................      $  4,219      $  4,219       $  4,188      $  4,188     $      15   $       15
   CMOs.........................................            46            46             68            68           582          582
   Marketable equity securities.................         1,002         1,002          1,000         1,000         1,000        1,000
   Mortgage-backed securities:
     FHLMC......................................         5,430         5,430         11,050        11,050         7,254        7,254
     GNMA.......................................         1,455         1,455          2,488         2,488         3,035        3,035
     FNMA.......................................         7,150         7,150          9,577         9,577         7,000        7,000
                                                      --------     ---------        -------       -------       -------      -------
       Total mortgage-backed securities
            available for sale..................        14,035        14,035         23,115        23,115        17,289       17,289
                                                      --------      --------       --------      --------       -------      -------
       Total investments and
            mortgage-backed securities
            available for sale..................        19,302        19,302         28,371        28,371        18,886       18,886
                                                      --------      --------       --------      --------       -------       ------
Held to maturity:
   U.S. Government and agency...................            --            --          1,000           991         5,992        5,999
   CMOs.........................................            --            --             --            --            --           --
   Mortgage-backed securities:
     FHLMC......................................            --            --             --            --            --           --
                                                   -----------   -----------      ---------     ---------     ---------    ---------
       Total held to maturity...................            --            --          1,000           991         5,992        5,999
                                                   ------------  -----------        -------      --------       -------      -------
       Total investment securities..............       $19,302       $19,302        $29,371       $29,362       $24,878      $24,885
                                                   ------------  -----------        -------      --------       -------      -------
                                                   ------------  -----------        -------      --------       -------      -------
</TABLE>


                                       26

<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, 1997.

<TABLE>
<CAPTION>

                                                                   AT DECEMBER 31, 1997
                                         -------------------------------------------------------------------------
                                                                       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...........     $      --      -- %         $4,219      6.22%         $   --       -- %
Marketable equity securities.........         1,002     5.86              --       --               --       --
CMOs.................................            46     6.63              --       --               --       --
Mortgage-backed securities:
    FHLMC............................           133     8.11              --       --            1,711      6.76
    GNMA.............................            --                       --       --            1,138      6.72
    FNMA.............................            31     8.72              --       --               --       --
                                           --------                  -------                 ---------
    Total mortgage-backed............           164      --               --                        --
                                           --------                  -------                 ---------
    Total Investment Securities......        $1,212                   $4,219                    $2,849
                                           --------                  -------                 ---------
                                           --------                  -------                 ---------

</TABLE>

There were no held to maturity securities at December 31, 1997.

<TABLE>
<CAPTION>


                                                      AT DECEMBER 31, 1997
                                        -------------------------------------------------
                                          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...........       $    --      -- %        $ 4,219     6.22%
Marketable equity securities.........            --      --            1,002     5.86
CMOs.................................            --      --               46     6.63
Mortgage-backed securities:
    FHLMC............................         3,586     6.41           5,430     6.56
    GNMA.............................           317     7.33           1,455     6.85
    FNMA.............................         7,119     6.16           7,150     6.17
                                          ---------                  -------
    Total mortgage-backed............        11,022                   14,035     6.39
                                           --------                   ------
    Total investment securities......       $11,022                  $19,302
                                          ---------                  -------
                                          ---------                  -------
</TABLE>

There were no held to maturity securities at December 31, 1997.

                                       27

<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, 1997, the average balance of
core deposits (savings, NOW, money market and non-interest-bearing checking
accounts) totaled $49.5 million, or 25.0%, 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
$206.7 million for 1996 to an average balance of $198.4 million for the year
ended December 31, 1997. 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:

<TABLE>
<CAPTION>

                                                  FOR THE YEAR ENDED DECEMBER 31,
                                        --------------------------------------------------
                                             1997             1996              1995
                                         ------------     -------------     --------------
                                                         (IN THOUSANDS)
<S>                                      <C>              <C>               <C>
Net withdrawals..........................    $(11,024)      $(16,381)          $(5,956)
Interest credited on deposit accounts....       7,532          8,642             6,562
                                            ----------       -------          --------
Total increase (decrease) in deposit
accounts.................................   $  (3,492)       $(7,739)             $606
                                            ----------       -------          --------
                                            ----------       -------          --------

</TABLE>


                                       28

<PAGE>



     At December 31, 1997, the Bank had $15.4 million in certificate accounts in
amounts of $100,000 or more.

     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,
                               -----------------------------------------------------------------------------------
                                          1997                        1996                        1995
                               -------------------------- ---------------------------- ---------------------------
                                         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.........  $9,703     4.89%  2.92%     $10,440   5.05%     3.04%    10,127     4.84%    2.89%
Passbook accounts.............  16,921     8.53   2.53       18,163   8.79      2.53     18,342     8.77     2.50
NOW accounts..................  14,930     7.53   2.02       14,534   7.03      2.02     16,318     7.81     2.02
Non-interest-bearing accounts.   7,993     4.03    --         7,580   3.67        --      5,906     2.83       --
                                ------    -----              ------  -----               ------    -----
     Total....................  49,547    24.98              50,717  24.54               50,693    24.25
                                ------    -----              ------  -----               ------    -----

Certificate accounts:
   Less than six months.......   1,099      .55   4.39        1,268    0.61     4.27      3,983     1.91     4.36
   Six through 12 months......  60,864    30.68   5.44       51,923   25.13     5.47     54,136    25.90     5.63
   Over 12 through 24 months..  39,711    20.02   5.93       36,260   17.55     6.04     37,640    18.01     6.19
   Over 24 months.............  47,138    23.77   6.31       66,486   32.17     6.06     62,569    29.93     6.61
                               -------   ------             -------  ------             -------   ------
   Total certificate accounts  148,812    75.02             155,937   75.46             158,328    75.75
                               -------   ------             -------  ------             -------   ------
Total average deposits........ 198,359   100.00%           $206,654  100.00%           $209,021   100.00%
                               -------   ------             -------  ------             -------   ------
                               -------   ------             -------  ------             -------   ------
</TABLE>



                                       29

<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, 1997.


<TABLE>
<CAPTION>


                                                 PERIOD TO MATURITY FROM DECEMBER 31, 1997
                          ----------------------------------------------------------------------------------------
                            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%..........           79            84              23             --               26             249
   4.01 to 6.00%.......       76,658        21,988           2,436            971              550              --
   6.01 to 8.00%.......       18,185        13,367           9,078            734              569             100
   8.01 to 10.00%......        1,649           185             820            926               --              --
                               -----           ---             ---            ---           ------          ------

       Total...........      $96,571       $35,624         $12,357         $2,631           $1,145            $349
                             -------       -------         -------         ------           ------            ----
                             -------       -------         -------         ------           ------            ----

<CAPTION>

                                      AT DECEMBER 31,
                          ----------------------------------------
                             1997         1996           1995
                          ----------   -----------   -------------
                                       (IN THOUSANDS)
<S>                       <C>           <C>              <C>
Certificate accounts:
0 to 4.00%.............   $      461    $      330         $ 2,179
4.01 to 6.00%..........      102,603       111,729          93,144
6.01 to 8.00%..........       42,033        36,622          60,518
8.01 to 10.00%.........        3,580         3,967           3,830
                               -----         -----           -----

   Total...............     $148,677      $152,648        $159,671
                            --------      --------        --------
                            --------      --------        --------

</TABLE>

                                       30

<PAGE>



     Borrowings. At December 31, 1997, the Bank had $33,944,000 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:

<TABLE>
<CAPTION>

                                                             AT OR FOR THE YEAR
                                                             ENDED DECEMBER 31,
                                              -------------------------------------------------------
                                                   1997               1996                1995
                                              ---------------   ----------------   ------------------
                                                             (DOLLARS IN THOUSANDS)
<S>                                            <C>                   <C>                 <C>

FHLB advances:
   Average balance outstanding.............        $33,858             $8,099               $1,346
                                                   -------             ------               ------
                                                   -------             ------               ------
   Maximum amount outstanding at
      any month-end during the period......         46,067             19,550                3,500
                                                   -------             ------               ------
                                                   -------             ------               ------

   Balance outstanding at end of period....         33,944             16,250                   --
                                                   -------             ------               ------
                                                   -------             ------               ------

Weighted average interest rate
      during the period....................           6,09%              6.01%                5.29%
                                                   -------             ------               ------
                                                   -------             ------               ------

   Weighted average interest rate at end
       of period...........................           6.08%              5.80%                 N/A
                                                   -------             ------               ------
                                                   -------             ------               ------
</TABLE>

SUBSIDIARY ACTIVITIES

     CSL Service Corporation ("CSL") and Fairbury Financial Service Corp.
("Fairbury Financial") are wholly-owned subsidiaries of the Bank. CSL sells
tax-deferred annuities on an agency basis. Fairbury Financial is inactive.

PERSONNEL

     As of December 31, 1997, the Bank had 80 authorized full-time employee
positions and 39 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.

                                       31

<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
Office of Thrift Supervision ("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-K 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

                                       32

<PAGE>



authorized by OTS regulation, and no multiple savings and loan holding company
may acquire more than 5% the voting stock of a company engaged in impermissible
activities.

     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 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
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 as principal that are not permissible for
a national bank.



                                       33

<PAGE>



     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 at least 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 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, 1997, the
Bank met each of its capital requirements and it is anticipated that the Bank
will not be subject to the interest rate risk component.

     The following table presents the Bank's capital position at December 31,
1997.

<TABLE>
<CAPTION>

                                                             EXCESS                      CAPITAL
                                                                            ---------------------------------
                         ACTUAL           REQUIRED        (DEFICIENCY)          ACTUAL           REQUIRED
                         CAPITAL           CAPITAL           AMOUNT            PERCENT            PERCENT
                    -----------------   -------------   -----------------   --------------    ---------------
                                                     (DOLLARS IN THOUSANDS)
<S>                      <C>            <C>                  <C>                <C>              <C>
Tangible............      $29,947        $  4,068             $25,879            11.08              1.50%
Core (Leverage).....       29,947          10,848              19,099            11.08              4.00
Risk-based..........       30,770          13,316              17,454            18.49              8.00

</TABLE>

     Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the

                                       34

<PAGE>



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
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. 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. The SAIF was undercapitalized due primarily to a
statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF. As required by the Funds Act, the FDIC imposed a special assessment
of 65.7 basis points on SAIF assessable 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 was generally tax deductible. The SAIF Special Assessment
recorded by the Bank amounted to $1.37 million on a pre-tax basis and $839,000
million on an after-tax basis.

     The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the fund
which primarily insures commercial bank deposits. Beginning on January 1, 1997,
BIF deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 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

                                       35

<PAGE>



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 voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the 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 quarterly assessment rate for fiscal 1997 ranged from 1.58 to
1.63 basis points and the premium paid for this period was $101,000. A
significant increase in SAIF insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of the Bank.

     Under the FDI Act, 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. Various proposals to eliminate the federal thrift charter, create
a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. Some bills would require federal savings institutions to
convert to a national bank or some type of state charter by a specified date
under some bills, or they would automatically become national banks. Under some
proposals, converted federal thrifts would generally be required to conform
their activities to those permitted for the charter selected and divestiture of
nonconforming assets would be required over a two year period, subject to two
possible one year extensions. State chartered thrifts would become subject to
the same federal regulation as applies to state commercial banks. A more recent
bill passed by the House Banking Committee would allow savings institutions to
continue to exercise activities being conducted when they convert to a bank
regardless of whether a national bank could engage in the activity. Holding
companies for savings institutions would become subject to the same regulation
as holding companies that control commercial banks, with some limited
grandfathering, including savings and loan holding company activities. The
grandfathering would be lost under certain circumstances such as a change in
control of the Company. The Bank is unable to predict whether such legislation
would be enacted or the extent to which the legislation would restrict or
disrupt its operations.

     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,
1997, the Bank's limit on loans

                                       36

<PAGE>



to one borrower was $4.4 million.  The OTS, after reviewing application from
the Bank, has approved an increase in the loan to one borrower limit for four
of the Bank's borrowers to 30% of the Bank's capital, which at December 31,
1997 increased their individual loan to one borrower limit to $8.8 million.
At December 31, 1997, the Bank's largest aggregate outstanding balance of
loans to one borrower was $7.5 million.

     QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is either must qualify as a
"domestic building and loan association" as defined in the Internal Revenue Code
or 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, 1997, the Bank maintained 90.41% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered "qualified thrift investments."

     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, 1997, the Bank was a Tier
1 Bank.

     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 was 5% for fiscal 1997, but is subject to change 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. In 1997,
OTS

                                       37

<PAGE>



regulations also required each savings institution to maintain an average daily
balance of short-term liquid assets of at least 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 OTS has recently lowered the liquidity requirement from 5% to
4% and eliminated the 1% short term liquid asset requirement. The Bank's
liquidity ratio for December 31, 1997 was 10.4%, 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, 1997 totaled $72,000.

     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 ("insiders"), 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 involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.

                                       38

<PAGE>



     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; asset quality; earnings; 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). The Federal Reserve Board
regulations generally required for most of 1997 that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$49.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $49.3
million, the reserve requirement was $1.48 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 $49.3 million. The first $4.4 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Bank maintained
compliance with the foregoing requirements. For 1998, the Federal Reserve Board
has decreased from $49.3 to $47.8 million the amount of transaction accounts
subject to the 3% reserve requirement and to increase the amount of exempt
reservable balances from $4.4 million to $4.7 million. 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.



                                       39

<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 1997 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 average

                                       40

<PAGE>


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 $832,000.

     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 levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was 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 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.

                                       41
<PAGE>



     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

In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities
with publicly held common stock or potential common stock. SFAS No. 128
simplifies previous standards for computing EPS. SFAS No. 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods. Earlier application is not permitted. SFAS No. 128
requires restatement of all prior period EPS data presented. The Company
adopted SFAS 128 during the fiscal quarter ending December 31, 1997.

In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 summarizes previously issued
disclosure guidance contained within Accounting Principles Board Opinions No.
10 and 15 as well as SFAS No. 47. This statement is effective for financial
statements issued for periods ending after December 15, 1997. Accordingly,
the Company adopted SFAS 129 during the fourth quarter of 1997. There
were no changes to the Company's disclosures pursuant to the adoption of SFAS
No. 129.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components in a  full set of general-purpose
financial statements. Comprehensive income is defined as "the change in
equity of a business
                                       42

<PAGE>


enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during
a period except those resulting from investment by owners and distributions
to owners." The comprehensive income and related cumulative equity impact of
comprehensive income items will be required to be disclosed prominently as
part of the notes to the financial statements. Only the impact of unrealized
gains or losses on securities available for sale is expected to be disclosed
as an additional component of the Company's income under the requirements of
SFAS No. 130. This statement is effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS 130 during 1998.

Also in 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS
14, "Financial Reporting of Segments of a Business Enterprise." SFAS No.
131 establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in annual
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic area and major
customers. SFAS 131 defines operating segments as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. This standard is effective for
financial statement periods  beginning after December 15, 1997 and requires
comparative information for earlier years to be restated. Due to the recent
issuance of this standard, management has  been unable to fully evaluate the
impact, if any, the standard may have on the Company's future financial
statement disclosures.

In addition to historical information, this Report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies
of the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or competition, changes in the
quality or composition of the Bank's loan and investment portfolios, changes
in accounting principles, policies or guidelines, and other economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices. Further description of
the risks and uncertainties to the business are included in detail in Item 1
herein.

                                       43

<PAGE>



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.

<TABLE>
<CAPTION>
                                      LEASED          ORIGINAL
                                        OR          YEAR LEASED        NET BOOK VALUE AT         DEPOSITS PER
             LOCATION                  OWNED         OR ACQUIRED       DECEMBER 31, 1997            OFFICE
----------------------------------   ---------   ------------------   -------------------   -----------------------
                                                              (IN THOUSANDS)
<S>                                  <C>         <C>                  <C>                   <C>
EXECUTIVE/BRANCH OFFICE:
   2101 North Veterans Parkway*
   Bloomington, Illinois  61704        Owned             1997                $3,257                    $6,830
BRANCH OFFICES:
   301 Broadway*
   Normal, Illinois 61761              Owned             1963                   606                    60,856
   2402 E. Washington*
   Bloomington, Illinois 61704         Owned             1980                   731                    42,626
   1722 Hamilton Road*
   Bloomington, Illinois 61704         Owned             1995                 1,347                     7,421
   115 N. Third Street*
   Fairbury, Illinois 61739            Owned             1981                   749                    54,661
   205 S. Main
   Eureka, Illinois 61530              Owned             1974                   116                    26,237
                                                                             -------                 ---------
Total                                                                        $6,806                  $198,633
                                                                             -------                 ---------
                                                                             -------                 ---------
</TABLE>

---------------------
* Automated teller machines are located at these offices.


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
-----------------------------------------------------------

     None.


                                       44

<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 1997 Annual Report to
Stockholders on page 35 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
1997 Annual Report to Stockholders on pages 5 through 8 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 1997 appears in the Registrant's 1997 Annual
Report to Stockholders on pages 12 through 34 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 27, 1998 at
pages 4 through 6.

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 27, 1998 at pages 7 through
9.


                                       45

<PAGE>



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 27, 1998 at
pages 3 through 5.

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 27, 1998 at page 11.

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 1997 Annual Report to
         Stockholders

<TABLE>
<CAPTION>
                                                                                    PAGE
                                                                                    ----
<S>                                                                                 <C>
     Independent Auditors' Report.............................................       12


     Consolidated Balance Sheet as of December 31, 1997 and 1996..............       13

     Consolidated Statement of Income for the years ended December 31, 1997,
     1996 and 1995.................... ......................................        14

     Consolidated Statement of Changes in Stockholders' Equity for the years
     ended December 31, 1997, 1996 and 1995 ................................         15

     Consolidated Statement of Cash Flows for the
     years ended December 31, 1997, 1996 and 1995...........................         16-17

     Notes to Consolidated Financial Statements.............................         18-34

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

</TABLE>

                                       46

<PAGE>

<TABLE>

<S>          <C>

         (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.

         (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. 1997 Stock-Based Incentive Plan**
        11.0  Computation of earnings per share
        13.0  Portions of 1997 Annual Report to Stockholders (filed herewith)
        21.0  Subsidiary information is incorporated herein by reference to "Part I - Subsidiaries"
        23.0  Consent of Geo. S. Olive & Co., LLC
        27.0  Financial Data Schedule

</TABLE>

----------

*        Incorporated herein by reference to the Exhibits to Form SB-2,
         Registration Statement, filed on January 24, 1997 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, 1997.

     (b) Reports on Form 8-K:

                  On December 24, 1997, the Company filed a report on Form 8-K
                  in connection with the Company's completion of its initial
                  stock repurchase program and the completion date of its sale
                  of a branch office in Chenoa, Illinois.

                  On October 28, 1997, the Company filed a report on Form 8-K in
                  connection with the election of Ronald C. Wells as Chairman of
                  the Board of Directors of the Company.

                                       47


<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 31, 1998

         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.

<TABLE>
<CAPTION>

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

<S>                                         <C>                                                         <C>

/s/ C. William Landefeld                    President, Chief Executive Officer and                       March 31, 1998
------------------------                    Director (principal executive officer)
C. William Landefeld


/s/ Dallas G. Smiley                        Senior Vice President, Treasurer and                         March 31, 1998
------------------------                    Chief Financial Officer (principal
Dallas G. Smiley                            accounting and financial officer)


/s/ Bryce A. Sides                          Director                                                     March 31, 1998
------------------------
Bryce A. Sides


/s/ Lyle J. Honegger                        Director                                                     March 31, 1998
------------------------
Lyle J. Honegger


/s/ Lowell M. Thompson                       Director                                                    March 31, 1998
------------------------
Lowell M. Thompson


/s/ Ronald C. Wells                          Director                                                    March 31, 1998
------------------------
Ronald C. Wells

</TABLE>

                                       48