EXHIBIT 13(b)
                        MANAGEMENT DISCUSSION & ANALYSIS





<PAGE>

FIVE-YEAR SUMMARY  (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                              1996         1995(b)      1994(b)(c)    1993(b)(d)    1992(b)(e)
                                                           ----------    ----------     ----------    ----------    ----------
<S>                                                        <C>           <C>           <C>            <C>           <C>       
Income before extraordinary item or the
  cumulative effect of an accounting change                $   50,458    $   63,984    $   53,029     $   49,751    $   30,376

Net income                                                     49,772        63,984        53,029         49,751        36,976

Earnings per share (a):
  Primary:
    Income before extraordinary item or the
      cumulative effect of an accounting change            $     1.33    $     1.70    $     1.42     $     1.38    $     0.92
    Net income                                                   1.31          1.70          1.42           1.38          1.14
  Fully diluted:
    Income before extraordinary item or the
      cumulative effect of an accounting change            $     1.32    $     1.69    $     1.42     $     1.37    $     0.91
    Net income                                                   1.30          1.69          1.42           1.37          1.12

Interest income                                            $  419,050    $  417,308    $  381,864     $  366,711    $  325,057
Interest expense                                              231,741       234,171       204,222        202,493       198,058
Net interest income                                           187,309       183,137       177,642        164,218       126,999
Net gain (loss) on sales of loans and securities                3,490         3,885        (5,164)         7,939         4,606
Provisions for losses on loans                                  9,030         9,738         6,824         10,570        15,779
Other non-interest income                                      42,904        40,406        38,458         36,819        33,417
Non-interest expense                                          148,772       118,602       120,367        118,964       101,540

Total assets                                               $5,700,431    $5,471,108    $5,501,824     $5,181,772    $4,309,067
Loans receivable and mortgage-related securities            5,163,256     4,887,561     4,972,938      4,532,456     3,795,083
Intangible assets                                              12,739        21,481        26,726         31,392        23,278
Deposits                                                    4,444,932     4,424,525     4,381,455      4,388,122     3,531,062
Borrowings                                                    769,526       570,508       708,446        455,797       487,237
Stockholders' equity                                          410,511       384,917       327,308        280,643       239,979
Shares outstanding (a)                                     36,802,484    37,095,456    36,407,323     34,822,610    34,998,891
Stockholders' equity per share (a)                         $    11.15    $    10.38    $     8.99     $     8.06     $    6.86
Dividends paid per share (a)                                     .510          .384          .320           .280          .176
Dividend payout ratio                                             39%           23%           23%            20%           16%

Return on average assets (f)                                    0.91%         1.17%          .99%           .99%          .92%
Return on average equity (f)                                   12.48%        18.03%        17.21%         19.15%        17.57%
Average equity to average assets                                7.32%         6.50%         5.72%          5.17%         5.25%
</TABLE>

(a)  As adjusted  for a 5-for-4  stock split on December  30, 1996 and a 2-for-1
     stock split on March 5, 1993.

(b)  In February 1995, the company acquired FirstRock Bancorp, Inc. of Rockford,
     Illinois in a  stock-for-stock  merger  transaction.  This  transaction was
     accounted for as a pooling-of-interests  and, accordingly,  results for all
     periods  presented  have been restated to include the results of FirstRock,
     except the  earnings  per share  information  for 1992 is based only on the
     historical  net  income and  weighted  average  shares of common  stock and
     common  stock  equivalents  of the  company  prior to the  October  2, 1992
     conversion of FirstRock.

(c)  In February 1994, the company acquired NorthLand Savings Bank of Wisconsin,
     SSB of Ashland,  Wisconsin in a stock-for-stock  merger  transaction.  This
     transaction  was  accounted  for  as  a  pooling-of-interests.   Since  the
     NorthLand  acquisition  was  immaterial  in relation to the company,  prior
     years' results have not been restated.

(d)  In January 1993, the company's  major  subsidiary,  First  Financial  Bank,
     acquired  Westinghouse  Federal  Bank,  FSB d/b/a  United  Federal  Bank of
     Galesburg,  Illinois  for cash.  In addition,  in August 1993,  the company
     completed  the  assumption  of  deposits  and the  purchase  of the  branch
     facilities of four Quincy, Illinois-area branches of American Savings. Each
     acquisition has been accounted for as a purchase.

(e)  In separate  transactions during 1992, the company completed the assumption
     of  deposits  and  the  purchase  of  branch   facilities  of  ten  Peoria,
     Illinois-area branches from the LaSalle Talman Bank, FSB and the Resolution
     Trust Corporation. Each acquisition has been accounted for as a purchase.

(f)  Ratio  is  based  upon  income  prior  to  the  extraordinary  item  or the
     cumulative effect of an accounting change.

                                       -1-

<PAGE>

QUARTERLY DATA

The following  table sets forth the  company's  unaudited  quarterly  income and
expense data for 1996 and 1995.

<TABLE>
<CAPTION>
                                            Dec. 31,  Sept. 30,   June 30,    March 31,  Dec. 31,  Sept. 30,  June 30,     March 31,
                                              1996       1996       1996         1996      1995      1995       1995         1995
                                            --------   --------    --------    --------  --------   --------  --------    --------
<S>                                         <C>        <C>         <C>         <C>       <C>        <C>       <C>         <C>     
Dollars in thousands, except per share amounts)
Interest income:
  Loans and mortgage-related
     securities                             $101,743   $102,397    $ 95,438    $ 99,367  $100,880   $101,258  $101,011    $ 99,362
  Investments                                  4,689      4,660       6,501       4,255     3,739      3,895     3,723       3,440
                                            --------   --------    --------    --------  --------   --------  --------    --------
     Interest income                         106,432    107,057     101,939     103,622   104,619    105,153   104,734     102,802

Interest expense:
  Deposits                                    50,103     49,302      49,678      50,367    50,768     50,939    49,949      45,167
  Borrowings                                   9,028      9,443       6,534       7,286     8,108      8,525     9,278      11,437
                                            --------   --------    --------    --------  --------   --------  --------    --------

     Interest expense                         59,131     58,745      56,212      57,653    58,876     59,464    59,227      56,604
                                            --------   --------    --------    --------  --------   --------  --------    --------

Net interest income                           47,301     48,312      45,727      45,969    45,743     45,689    45,507      46,198
Provisions for losses on loans                (2,100)    (2,850)     (2,180)     (1,900)   (2,673)    (2,873)   (2,073)     (2,119)
Gain on sales of assets (a)                      952      1,384         837         274     1,045      2,542       286          38
Non-interest income                           11,437     10,986      10,541       9,983     9,862     10,220    10,083      10,215
                                            --------   --------    --------    --------  --------   --------  --------    --------
                                              57,590     57,832      54,925      54,326    53,977     55,578    53,803      54,332
Federal deposit insurance premiums (b)         1,997     31,339       2,542       2,561     2,594      2,517     2,529       2,529
Amortization of intangible assets (c)            902      5,524       1,265       1,264     1,311      1,312     1,311       1,311
Acquisition expense (d)                           --         --          --          --        --         --        --       6,458
Other non-interest expense                    25,114     26,208      24,486      25,570    21,426     23,941    24,663      26,700
                                            --------   --------    --------    --------  --------   --------  --------    --------
Income (loss) before income taxes and
  extraordinary item                          29,577     (5,239)     26,632      24,931    28,646     27,808    25,300      17,334
Income taxes (benefit)                        10,337     (1,542)      9,051       7,597     9,587     10,015     8,995       6,507
                                            --------   --------    --------    --------  --------   --------  --------    --------
Income (loss) before extraordinary
  item                                        19,240     (3,697)     17,581      17,334    19,059     17,793    16,305      10,827
Extraordinary item                                --         --          --        (686)       --         --        --          --
                                            --------   --------    --------    --------  --------   --------  --------    --------
Net income (loss)                           $ 19,240   $ (3,697)   $ 17,581    $ 16,648  $ 19,059   $ 17,793  $ 16,305    $ 10,827
                                            ========   ========    ========    ========  ========   ========  ========    ========

Earnings (loss) per share:
  Primary                                   $    .51   $   (.10)   $    .46    $    .44  $    .50   $    .47  $    .43    $    .29
   Fully diluted                                 .51       (.10)        .46         .44  $    .50   $    .47       .43         .29

Cash dividends per share                    $   .150   $   .120    $   .120    $   .120  $   .096   $   .096  $   .096    $   .096
</TABLE>

(a)  Includes  net gains and losses on the  disposition  of loans held for sale,
     available for sale securities and other assets.

(b)  On  September  30, 1996 the Omnibus  Appropriations  Act of 1997 was signed
     into law which provided for the recapitalization of the Savings Association
     Insurance Fund ("SAIF") of the Federal  Deposit  Insurance  Corporation and
     resulted in a one-time charge to SAIF-insured  institutions.  The effect of
     the charge on the  company's  third  quarter 1996 results was $28.8 million
     before taxes and $18.4 million net of taxes, or $0.48 per share.

(c)  During the third quarter of 1996,  the company  changed its  accounting for
     certain  goodwill  and core  deposit  intangibles,  relating  primarily  to
     acquisitions  in the early  1980's,  to  conform to the  company's  current
     15-year maximum amortization term for such assets. The total charges during
     the third  quarter  1996 for  goodwill  and  intangibles  were $4.2 million
     before taxes and $3.6 million net of taxes, or $0.10 per share.

(d)  In February 1995, the company acquired FirstRock Bancorp, Inc. of Rockford,
     Illinois  through an exchange of stock.  This transaction was accounted for
     as a  pooling-of-interests.  In the  first  quarter  of 1995,  the  company
     incurred  acquisition charges of $6.5 million before taxes and $4.0 million
     net of taxes, or $0.10 per share.



                                       -2-

<PAGE>




                             SPECIAL NOTE REGARDING
                           FORWARD-LOOKING STATEMENTS

This report  contains  certain  "forward-looking  statements."  First  Financial
Corporation ("FFC") desires to take advantage of the "safe harbor" provisions of
the  Private  Securities  Litigation  Reform Act of 1995 and is  including  this
statement for the express  purpose of availing  itself of the protections of the
safe  harbor  with  respect  to all of such  forward-looking  statements.  These
forward-looking  statements,  which are included in Management's  Discussion and
Analysis and in the President's letter,  describe future plans or strategies and
include FFC's  expectations of future  financial  results.  The words "believe,"
"expect," "anticipate,"  "estimate," "project," and similar expressions identify
forward-looking  statements.  FFC's ability to predict  results or the effect of
future plans or strategies is inherently  uncertain.  Factors which could affect
actual  results  include but are not  limited to i) general  market  rates,  ii)
general economic conditions, iii)  legislative/regulatory  changes, iv) monetary
and fiscal policies of the U.S. Treasury and the Federal Reserve,  v) changes in
the quality or composition of FFC's loan and investment  portfolios,  vi) demand
for loan  products,  vii)  deposit  flows,  viii)  competition,  ix)  demand for
financial  services in FFC's markets,  and x) changes in accounting  principles,
policies or  guidelines.  These factors  should be considered in evaluating  the
forward-looking  statements,  and undue  reliance  should  not be placed on such
statements.


                                       -3-

<PAGE>




                              RESULTS OF OPERATIONS
              COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995


General.  FFC reported net income of $49.8 million for 1996 as compared to $64.0
million for 1995. Net income for 1996 includes i) a one-time after-tax charge of
$18.4 million or $0.48 per share,  associated with the  recapitalization  of the
Savings   Association   Insurance   Fund  ("SAIF")   (see  "Recent   Legislative
Developments" for further information),  ii) a one-time after-tax charge of $3.6
million  or  $0.10  per  share  relating  to a  change  in  accounting  for  the
amortization of goodwill and other  intangible  assets and iii) an extraordinary
after-tax charge of $686,000 or $0.02 per share, resulting from costs associated
with the early redemption of subordinated  notes. Net income for 1995 includes a
one-time  charge  relating  to  the  acquisition  of  FirstRock  Bancorp,   Inc.
("FirstRock")  of  Rockford,  Illinois  during the first  quarter  of 1995.  The
acquisition  charge  aggregated  $4.0 million or $0.10 per share on an after-tax
basis.

The returns on average assets and average equity, excluding the one-time charges
and  extraordinary  item,  were  1.31%  and  17.91%,  respectively,  for 1996 as
compared to 1.25% and 19.16%, respectively, for 1995.

Fully diluted  earnings per share decreased to $1.30 in 1996 from $1.69 in 1995.
Excluding  the impact of the factors  noted above for both 1996 and 1995,  fully
diluted earnings per share would have been $1.90 in 1996, up from $1.79 in 1995.

Net Interest  Income.  Net interest  income  increased  $4.2 million during 1996
primarily due to an increase in average balances of interest-earning  assets and
a decrease in interest-bearing liabilities from $5.21 billion and $5.02 billion,
respectively, in 1995 to $5.27 billion and $5.01 billion, respectively, in 1996.
The net  interest  margin of 3.56% for 1996 was up from the 3.51%  reported  for
1995. The increase in average  interest-earning  assets in 1996 was augmented by
an  improvement  in the  earning-asset  ratio from 103.78% in 1995 to 105.10% in
1996. The average yield on  interest-earning  assets (8.00% in 1995 versus 7.95%
in 1996)  decreased  by 5 basis  points,  which was similar to the 4 basis point
decrease  in the average  cost of  interest-bearing  liabilities  (4.66% in 1995
versus 4.62% in 1996).  At the end of 1996,  FFC's net interest margin was 3.35%
as  compared  to 3.46%  at year  end  1995.  The  margin  at the end of 1996 was
negatively impacted by the credit card and  mortgage-related  securities ("MBS")
sales  during  1996,  as  discussed  in  "Loans  Receivable"  as well  as  "Non-
Performing  MBSs".  This  factor,  however,  is  offset  by a  higher  level  of
interest-earning  assets and a greater  earning  asset ratio at the end of 1996.
Also,  FFC's net interest margin is historically at its lowest point at year end
due to seasonal  factors  including,  but not limited to, i) the disbursement of
borrowers'  mortgage loan escrow accounts for real estate taxes, ii) high levels
of credit  card  activity  during the  fourth  quarter,  and iii) a slowdown  in
residential  purchase  and  construction  mortgage  loan  activity in the fourth
quarter.

Provisions  for  Losses On  Loans.  The  provisions  for loan  losses  decreased
$700,000 to $9.0  million for 1996  compared to $9.7 million for the same period
in 1995. Charge-offs for 1996 exceeded provisions due to i) charge-offs relating
to the  manufactured  housing  portfolio  which  were  provided  for in  earlier
periods, ii) lower provisions were added for residential mortgage loans based on
current evaluations of the portfolio,  and iii) the $47.9 million portion of the
credit card portfolio sold in 1996 had a greater level of charge-offs

                                       -4-

<PAGE>



than the retained portfolio. For further discussion of the allowances for losses
on loans and related loan portfolio  information,  see "Allowances for Losses on
Loans and Foreclosed Properties" and "Loans Receivable."

Non-Interest Income. Non-interest income increased $2.1 million to $46.4 million
for 1996 from $44.3 million in 1995.  Deposit fee income  increased $1.8 million
in  1996,  primarily  due  to  overdraft  fees  relating  to the  growth  of the
"Absolutely Free Checking" product in 1996. Service fees on loans sold decreased
$900,000 in 1996 as the average  servicing  margin  decreased due to competitive
conditions in the secondary  mortgage market into which mortgage loans are sold.
Insurance  and  brokerage  commissions  increased  $500,000  in  1996  as  FFC's
insurance  agency  subsidiary   realized  continued  growth.  The  net  gain  on
disposition of loans, MBSs, and investment securities decreased $400,000 in 1996
from  1995  levels  due to the net  effect  of i) a net  realized  loss of $13.1
million on the sale of available-for-sale  MBSs during 1996 (see "Non-Performing
MBSs"),  ii) a $1.5  million  gain  on  sale  of  available-for-sale  investment
securities  in 1996 as opposed  to a $1.2  million  gain in 1995,  iii) an $11.2
million net gain  realized  on the  previously  mentioned  sale of a credit card
affinity  portfolio  with  outstanding  balances  of  $47.9  million  and iv) an
increase  of $1.1  million  on  gains  achieved  upon  the  sale of loans in the
secondary  mortgage  market and the realization of related  originated  mortgage
servicing  rights  ("OMSRs").  Gains  realized  from the sale of loans,  and the
recognition of related OMSRs,  increased in 1996 due to the lower  interest-rate
environment  prevailing  during the first half of 1996 as compared  to 1995,  as
borrowers  shifted to longer-term  fixed-rate  financing.  FFC sells  long-term,
fixed-rate mortgage loans in the normal course of interest-rate risk management.
Gains  or  losses  realized  from  the  sale of  loans  held  for  sale  and the
recognition of related OMSRs can fluctuate  significantly  from period to period
depending upon volatility of interest rates and the volume of loan originations.
Thus,  results  of sales  in any one  period  may not be  indicative  of  future
results.

As a result of the credit card sale noted above,  it is  anticipated  that FFC's
future  earnings from its credit card  portfolio will be lower until the size of
that  portfolio  increases  through new account  openings.  During  1996,  First
Financial  Bank  ("FF  Bank")  received   regulatory   approvals  to  charter  a
limited-purpose national credit card bank ("CEBA-Bank") which now operates FFC's
credit card programs. The CEBA-Bank,  an operating subsidiary of FF Bank, became
operational  in late 1996 and has the  authority to export  Wisconsin  rates and
fees nationwide to all FFC credit card customers under the National Bank Act. It
is expected that uniform application of law will i) reduce compliance costs, ii)
reduce the risk of violation of diverse and varied local laws and iii) allow FFC
to  enhance  its  credit  card  rate  and  fee  structure,  thereby  potentially
increasing  FFC's  profitability  depending  upon  customer  behavior  and other
factors.  However, it is not management's intention to expand the scope of FFC's
credit card operations  beyond its Midwest  regional  markets as a result of the
formation of the CEBA-Bank.

Non-Interest  Expense.  Non-interest  expense  increased  $30.2 million for 1996
primarily due to the one-time $28.8 million SAIF assessment  charge and the $4.2
million  goodwill  accounting  change.  For  further  information  on the charge
related  to  the   recapitalization   of  the  SAIF,  see  "Recent   Legislative
Developments."  On an ongoing  basis,  FFC's annual  Federal  Deposit  Insurance
Corporation  ("FDIC")  assessment  will  decrease  to  6.4  cents  per  $100  of
assessable deposits from the rate of 23 cents per $100 which was in effect prior
to the September 30, 1996  assessment.  Based upon current  levels of assessable
deposits,  FFC's  annual  deposit  insurance  premium is  expected to decline by
approximately $7.2 million,  or $0.12 per share on an after-tax basis (excluding
funding costs related to the one-time

                                       -5-

<PAGE>



assessment).  The $4.2 million increase in the amortization of goodwill and core
deposit   intangibles   relates  primarily  to  FFC's   re-evaluation  of  these
intangibles  in  accordance  with  Statement of Financial  Accounting  Standards
("Statement") No. 72 ("Accounting for Certain Acquisitions of Banking and Thrift
Institutions") with regard to early 1980's  acquisitions.  Excluding these items
and the $6.5 million  acquisition-related  charge in 1995, non-interest expenses
increased  $3.6 million over 1995 levels.  This increase  consists  primarily of
compensation  and benefits  expense due to i) normal employee merit increases in
1996 and ii) a lesser benefit ($1.5 million in 1996 versus $3.0 million in 1995)
realized from the  utilization  of an Employee  Stock  Ownership  Plan ("ESOP"),
acquired in the FirstRock  transaction,  in place of FFC's normal profit sharing
contribution.  The ESOP was used  entirely  in place of profit  sharing in 1995,
while both the ESOP and profit sharing were used in 1996. The ESOP shares, which
were purchased in 1992, are grandfathered from Statement of Position ("SOP") No.
93-6 issued by the American Institute of Certified Public  Accountants.  Expense
for ESOP shares  allocated to FFC  employees  was recorded at cost as opposed to
market value as required by SOP No. 93-6 for shares  acquired  after 1992. As of
year end 1996, all ESOP shares have been fully allocated to FFC employees and no
future grandfathered benefit will be available.

Income Taxes.  Income tax expense decreased $9.7 million for 1996 as compared to
1995. This decrease is related to i) the decrease in pre-tax income in 1996 as a
result of the noted one-time items and ii) the  realization  during 1996 of $3.4
million in credits  upon the  completion  of a federal tax audit for the taxable
years 1989 through 1991 as well as the  resolution  of other tax matters.  These
factors  resulted in either refunds of taxes  previously  paid or a reduction in
deferred tax asset allowances which had been previously provided. As a result of
the above factors, FFC's effective tax rate declined from 35.4% in 1995 to 33.5%
in 1996.

Extraordinary  Item. In January  1996,  FFC redeemed all of its  outstanding  8%
Subordinated Notes due November 1999, which aggregated $54.9 million at the date
of redemption. The net after-tax cost associated with this redemption,  $686,000
or $0.02 per share, has been reported as an extraordinary charge in 1996.

Current and Pending Accounting Developments.  The Financial Accounting Standards
Board  ("FASB")  issued   Statement  No.  123   ("Accounting   for  Stock  Based
Compensation")  which FFC adopted in 1996.  The  Statement  requires that a fair
value based  method be used to value  employee  compensation  plans that include
stock  based  awards.  The  Statement  permits  a company  to  either  recognize
compensation expense under Statement No. 123 or continue to use prior accounting
rules which do not consider the market value of stock in certain award plans. If
adoption  of  the  Statement's  fair  value  procedures  are  not  used  in  the
computation of compensation  expense in the income  statement,  the company must
disclose in a note to the financial statements the pro forma impact of adoption.
FFC has elected not to recognize additional compensation expense under Statement
No. 123, but has provided  necessary  disclosures in Note Q to the  consolidated
financial statements. As such, there is no effect of FFC's adoption of Statement
No. 123 on its results of operations.

The FASB has also issued  Statement  No. 125,  ("Accounting  for  Transfers  and
Servicing of Financial  Assets and  Extinguishments  of  Liabilities")  which is
effective  for  transfers  occurring  after  December 31, 1996.  This  Statement
provides  accounting  and  reporting  standards  for  transfers and servicing of
financial  assets  and  extinguishments  of  liabilities  based on a  consistent
application of a financial-components approach that focuses on control.

                                       -6-

<PAGE>




The FASB  subsequently  issued  Statement  No. 127,  in  December,  1996,  which
provided  for the  deferral  of the  effective  date of  certain  provisions  of
Statement No. 125 to years ending after December 31, 1997.  Management  believes
that the effect of  adopting  these  Statements  will not be  material  to FFC's
financial condition or the results of its operations.



                                       -7-

<PAGE>



                              RESULTS OF OPERATIONS
              COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994


General.  FFC reported net income of $64.0  million for the year ended  December
31, 1995,  which  represents an increase of $11.0 million from the $53.0 million
reported  for 1994.  Net income for 1995  included  $4.0  million,  or $0.10 per
share, of  acquisition-related  expenses incurred relative to the acquisition of
FirstRock during 1995. Earnings for 1994 were affected by an after-tax charge of
$5.9 million,  or $0.16 per share,  relating to allowances  established to cover
possible losses on a portion of FFC's MBS portfolio.  The FirstRock  acquisition
was  accounted  for  as  a  pooling-of-interests,   and  accordingly,  financial
statements for all periods  presented have been restated to include  FirstRock's
operations.  The  annualized  returns on average  assets and average  equity for
1995, excluding the acquisition charge, were 1.25% and 19.16%, respectively,  as
compared to 0.99% and 17.21%, respectively, for 1994. Fully diluted earnings per
share  increased  to $1.69  per share  for 1995 as  compared  to $1.42 per share
reported for 1994.  Excluding the  acquisition  charge,  fully diluted  earnings
would have been $1.79 per share for 1995.

Net  Interest  Income.  Net  interest  income  increased  $5.5 million to $183.1
million during 1995 from $177.6 million for 1994. The net interest margin, which
is net  interest  income as a  percentage  of average  interest-earning  assets,
increased to 3.51% for 1995 from 3.46%  reported for 1994.  Interest  income and
interest expense  increased $35.4 million and $30.0 million,  respectively,  for
1995 as  compared  to 1994.  The average  balances  of  interest-earning  assets
increased  from $5.14  billion in 1994 to $5.21  billion in 1995,  while average
balances of interest-bearing liabilities increased to $5.02 billion in 1995 from
$4.98  billion in 1994.  The  increase  in average  interest-earning  assets was
complemented   by  i)  a  slightly   lower  increase  in  the  average  cost  on
interest-bearing  liabilities  (4.10% in 1994 versus  4.66% in 1995) than in the
average  yield of  interest-earning  assets (7.43% in 1994 versus 8.00% in 1995)
and ii) an  improvement  in the  ratio of  earning  assets  to  interest-bearing
liabilities to 103.78% in 1995 from 103.21% in 1994.

Provisions for Losses On Loans. Provisions for losses on loans increased to $9.7
million for 1995 compared to $6.8 million for 1994. The increased provisions for
losses on loans reflects i) growth in the overall loan portfolio during 1995 and
ii) increased net credit card charge-offs in 1995 as that portfolio continues to
increase  in  size.  The  increase  in  credit  card  charge-offs   reflected  a
traditionally higher experience for that portfolio, although FFC's experience is
well below national credit card averages.

Non-Interest Income.  Non-interest income increased $11.0 million during 1995 as
compared to 1994 due to the net effect of several factors,  the most significant
of which  related  to a 1994  pre-tax  $9.0  million  MBS  impairment  loss (see
"Non-Performing  MBSs").  Deposit account service fees increased $1.5 million in
1995 as a result of i) increased  overdraft  fees  relating to the growth of the
"Absolutely Free Checking" product during 1995 and ii) introduction of automated
teller machine  charges in certain  markets  during 1995.  Loan fees and service
charges  increased $1.3 million in 1995 as a result of i) increased  credit card
fees as that  portfolio  continued to grow and ii)  increased  interchange  fees
resulting  from a  successful  debit card  program.  Service  fees on loans sold
decreased  in 1995 as i) the  loan  servicing  portfolio  decreased  from  $2.42
billion at the end of 1994 to $2.33 billion at year end 1995 and ii) the average
servicing margin  decreased in 1995 due to the continuing  impact of competitive
conditions in the secondary market into which mortgage loans are sold.

                                       -8-

<PAGE>




Excluding  the  effect of i) a 1994 gain of $1.3  million  on the sale of credit
card loans and ii) a $400,000 gain realized in 1994 upon the sale of the finance
company receivables of a savings bank which FFC acquired in 1994, gains on sales
of loans increased $1.7 million in 1995. This increase was due to a $1.7 million
gain realized in 1995 as a result of the  capitalization of originated  mortgage
servicing rights upon FFC's adoption of Statement No.
122 ("Accounting for Mortgage Servicing Rights").

Non-Interest Expense. Non-interest expenses decreased approximately $1.8 million
in 1995 as compared to 1994,  primarily due to the net effect of i)  acquisition
costs and charges  totaling  $6.5  million  incurred  relative to the  FirstRock
acquisition  and ii) the  cost  savings  resulting  from  the  consolidation  of
operations  following  that  acquisition.  The  acquisition  costs  included  i)
transaction-related  costs,  including investment banker fees, attorney fees and
accounting   fees,   ii)  payments   relating  to   employment/change-in-control
agreements upon termination of certain FirstRock senior officers, iii) retention
bonuses and severance payments made to other FirstRock employees, iv) writedowns
of assets not needed by FFC in the conduct of FirstRock's business following the
acquisition  and v) other  writeoffs/accruals  relating to those  contracts  and
business practices of FirstRock not having future value to FFC.

The 1995 decreases in non-interest  expense  resulting from the consolidation of
FirstRock  operations  are most  noticeably  apparent  in the  compensation  and
benefits  expense  category,  which declined $6.2 million in 1995 including $3.0
million  resulting from the utilization of the former  FirstRock's ESOP in place
of FFC's normal profit sharing contribution for 1995.

Non-interest  expenses  decreased as a percentage of average assets to 2.05% for
1995 as compared to 2.24% in 1994. The improvement in this ratio reflects i) the
aforementioned expense reductions resulting from the FirstRock acquisition,  ii)
cost savings of $1.0 million realized after the 1994 consolidation of FFC's then
existing  banking  subsidiaries,  iii)  decreases in  writedowns  on  foreclosed
commercial real estate and iv) ongoing expense control measures.

The  ratio  of  controllable  non-interest  expenses  to  average  total  assets
decreased to 1.96% for 1995 as compared to 2.12% for 1994.  In  addition,  FFC's
efficiency ratio improved to 47.89% for 1995 as compared to 52.58% for 1994.

Income Taxes.  Income tax expense increased $4.4 million for 1995 over 1994. The
effective income tax rate, as a percent of pre-tax income, decreased to 35.4% in
1995 from 36.7% in 1994. The decrease in the effective tax rate for 1995 relates
to i)  implementation  of tax  planning  strategies  and ii) the  change  in the
valuation allowance of certain deferred tax assets established in prior years.

Accounting  Changes.  Effective  January 1, 1995, FFC adopted Statement No. 122,
which requires that a mortgage banking enterprise  recognize as a separate asset
the  rights to service  mortgage  loans for  others,  whether  those  rights are
purchased  or  originated.  In  accordance  with the  Statement,  an  enterprise
acquiring  mortgage  servicing rights through either the origination or purchase
of mortgage loans and the subsequent sale or  securitization of those loans with
servicing rights retained,  should allocate the total cost of the mortgage loans
to the servicing rights and to the loans (without the mortgage servicing rights)
based on their  relative  fair values.  As a result of the adoption of Statement
No. 122 in 1995, FFC realized

                                       -9-

<PAGE>



pre-tax income of $1.7 million ($1.1 million after tax, or $0.03 per share) upon
the capitalization of originated mortgage servicing rights.

Effective  January 1, 1995,  FFC  adopted  Statement  No.  114  ("Accounting  by
Creditors for  Impairment of a Loan").  Statement No. 114,  which was amended by
Statement No. 118, requires that impaired loans be measured at the present value
of expected future cash flows discounted at the loan's effective  interest rate,
or, as a practical expedient,  at the loan's observable market price or the fair
value of the  collateral  if the loan is collateral  dependent.  The adoption of
Statements  No.  114  and 118  had no  significant  effect  on  FFC's  financial
condition or results of operations.


                                      -10-

<PAGE>



AVERAGE INTEREST-EARNING ASSETS, AVERAGE INTEREST-BEARING LIABILITIES,  INTEREST
RATE SPREAD AND NET INTEREST MARGIN

The  following  table sets forth the  weighted  average  yields  earned on FFC's
consolidated loan and investment portfolios, the weighted average interest rates
paid on deposits and borrowings,  the interest rate spread between yields earned
and rates paid and the net interest margin during the years 1996, 1995 and 1994.

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                   1996                                       1995                      
                                    ----------------------------------        ----------------------------------        
                                     Average                     Average        Average                    Average      
                                     Balance       Interest       Rate          Balance       Interest      Rate        
                                    ----------     --------      -------      ----------      --------     -------      
                                                                                      (Dollars in thousands)
<S>                                 <C>            <C>             <C>        <C>             <C>            <C>        
Interest-earning assets:
   Mortgage loans (1)(2)            $2,281,284     $175,508        7.69%      $2,384,057      $183,434       7.69%      
   Mortgage-related secur-
     ities (1)                       1,357,520       97,251        7.16        1,388,338        98,821       7.12       
   Other loans (1)                   1,281,412      126,186        9.85        1,182,380       120,256      10.17       
   U.S. Government and agency
     securities                        173,351       10,285        5.93          127,598         6,709       5.26       
   Other securities                     51,571        3,123        6.06           68,254         4,091       5.99       
   Cash equivalents                     90,154        4,460        4.95           28,371         1,651       5.82       
   FHL Bank stock                       33,101        2,237        6.76           35,323         2,346       6.64       
                                    ----------     --------      ------       ----------      --------     ------       

                                     5,268,393      419,050        7.95        5,214,321       417,308       8.00       
Interest-bearing liabilities:
   Passbook                            668,563       18,309        2.74          730,363        21,017       2.88       
   Checking                            459,543        4,298        0.94          433,904         4,202       0.97       
   Money market accounts               343,759       11,215        3.26          311,479        10,450       3.36       
   Certificates                      2,973,467      165,628        5.57        2,969,537       161,154       5.43       
   FHL Bank advances                   448,842       24,900        5.55          444,110        26,742       6.02       
   Other borrowings                    118,770        7,391        6.22          134,801        10,606       7.87       
                                    ----------     --------      ------       ----------      --------     ------       

                                     5,012,944      231,741        4.62        5,024,194       234,171       4.66       
                                    ----------     --------      ------       ----------      --------     ------       
Net earning assets and
   interest rate spread             $  255,449                     3.33%      $  190,127                     3.34%      
                                    ==========                   ======       ==========                   ======       

Earning asset ratio                     105.10%                                   103.78%                               
                                    ==========                                ==========                                

Average interest-earning
   assets, net interest income,
   and net interest margin on
   average interest-earning
   assets                           $5,268,393     $187,309        3.56%      $5,214,321      $183,137       3.51%      
                                    ==========     ========      ======       ==========      ========     ======       
</TABLE>
<PAGE>

                                    
                                                            1994
                                            ------------------------------------
                                              Average                    Average
                                              Balance       Interest      Rate
                                            ----------      --------     -----
                                    
Interest-earning assets:
   Mortgage loans (1)(2)                    $2,304,429      $176,914       7.68%
   Mortgage-related secur-
     ities (1)                               1,507,334        89,379       5.93
   Other loans (1)                           1,027,942       100,755       9.80
   U.S. Government and agency
     securities                                121,521         6,331       5.21
   Other securities                            106,378         4,912       4.62
   Cash equivalents                             38,371         1,522       3.97
   FHL Bank stock                               34,416         2,051       5.96
                                            ----------      --------     ------

                                             5,140,391       381,864       7.43
Interest-bearing liabilities:
   Passbook                                    833,291        25,159       3.02
   Checking                                    473,850         6,426       1.36
   Money market accounts                       297,604         8,943       3.00
   Certificates                              2,848,596       134,291       4.71
   FHL Bank advances                           436,019        21,335       4.89
   Other borrowings                             91,151         8,068       8.85
                                            ----------      --------     ------

                                             4,980,511       204,222       4.10
                                            ----------      --------     ------
Net earning assets and
   interest rate spread                     $  159,880                     3.33%
                                            ==========                   ======

Earning asset ratio                             103.21%
                                            ==========

Average interest-earning
   assets, net interest income,
   and net interest margin on
   average interest-earning
   assets                                   $5,140,391      $177,642       3.46%
                                            ==========      ========     ======


(1)  Includes non-accruing loans and/or MBSs.

(2)  Includes loans held for sale.

                                      -11-

<PAGE>



RATE VOLUME ANALYSIS

The most significant  impact on FFC's net income between periods is derived from
the  interaction  of  changes  in the  volume  of and  rates  earned  or paid on
interest-earning assets and interest-bearing  liabilities. The volume of earning
dollars in loans and  investments,  compared  to the volume of  interest-bearing
liabilities  represented by deposits and  borrowings,  combined with the spread,
produces the changes in net interest income between periods.

The following table shows the relative contribution of changes in average volume
and average  interest  rates to changes in net  interest  income for the periods
indicated.  The change in interest income and interest  expense  attributable to
changes in both volume and rate, which cannot be segregated,  has been allocated
proportionately to the change due to volume and the change due to rate.

<TABLE>
<CAPTION>
                                                     Year Ended December 31, 1996                  Year Ended December 31, 1995
                                                        Compared to Year Ended                        Compared to Year Ended
                                                           December 31, 1995                             December 31, 1994
                                                ---------------------------------------       -------------------------------------
                                                  Rate           Volume          Total          Rate         Volume         Total
                                                --------        --------       ---------      --------      --------      -------
                                                                                 (Dollars in thousands)
<S>                                             <C>             <C>            <C>           <C>           <C>           <C>   
Interest-earning assets:
        Mortgage loans (1)(2)                   $    (19)       $ (7,907)      $ (7,926)      $    394      $  6,126      $  6,520
        Mortgage-related securities (1)              635          (2,205)        (1,570)        16,898        (7,456)        9,442
        Other loans (1)                           (3,910)          9,840          5,930          3,908        15,593        19,501
        U.S. Government and agency securities        943           2,633          3,576             59           319           378
        Other securities                              42          (1,010)          (968)         1,226        (2,047)         (821)
        Cash equivalents                            (282)          3,091          2,809            592          (463)          129
        FHL Bank stock                                41            (150)          (109)           240            55           295
                                                --------        --------       --------       --------      --------      --------
            Total                               $ (2,550)       $  4,292          1,742       $ 23,317      $ 12,127        35,444
                                                ========        ========       ========       ========      ========      ========


Interest-bearing liabilities:
        Passbook                                $   (984)       $ (1,724)        (2,708)      $ (1,140)     $ (3,002)       (4,142)
        Checking                                    (147)            243             96         (1,718)         (506)       (2,224)
        Money market accounts                       (294)          1,059            765          1,077           430         1,507
        Certificates                               4,260             214          4,474         20,973         5,890        26,863
        FHL Bank advances                         (2,124)            282         (1,842)         5,004           403         5,407
        Other borrowings                          (2,049)         (1,166)        (3,215)          (977)        3,515         2,538
                                                --------        --------       --------       --------      --------      --------
            Total                               $ (1,338)       $ (1,092)        (2,430)      $ 23,219      $  6,730        29,949
                                                ========        ========       ========       ========      ========      --------


            Increase in net interest income                                    $  4,172                                   $  5,495
                                                                               ========                                   ========
</TABLE>

(1)  Includes non-accruing loans and/or MBSs.

(2)  Includes loans held for sale.


                                      -12-

<PAGE>



NET INTEREST MARGIN AT YEAR END


The following  table sets forth the weighted  average yields on FFC's loan, MBS,
and investment  security  portfolios,  the weighted average cost of deposits and
borrowings,  the interest rate spread  between the yields and costs at each year
end as well as the resulting net interest margin at the indicated dates.


                                                        December 31,
                                             1996           1995          1994
                                             ----           ----          ----

Weighted average yield:
   Mortgage loans                             7.69%          7.74%         7.65%
   Mortgage-related securities                7.13           7.15          6.42
   Other loans                                9.57           9.99          9.81
   Investments                                6.21           5.64          5.40
                                             -----          -----         -----
   Combined weighted average yield on
     loans and investments                    7.89           8.03          7.64

Weighted average cost:
   Deposits and advance payments from
     borrowers for taxes and insurance        4.59           4.55          4.14
   Borrowings                                 5.58           6.31          6.07
                                             -----          -----         -----
   Combined weighted average cost
     of deposits and borrowings               4.73           4.75          4.41
                                             -----          -----         -----

Interest rate spread                          3.16%          3.28%         3.23%
                                             =====          =====         =====

Net interest margin                           3.35%          3.46%         3.37%
                                             =====          =====         =====


                                      -13-

<PAGE>



FINANCIAL CONDITION


GENERAL

Total  assets of FFC were  $5.70  billion at the end of 1996  compared  to $5.47
billion at year-end 1995.  Stockholders'  equity increased to $410.5 million, or
7.20% of total  assets,  at December  31,  1996 from  $384.9  million and 7.04%,
respectively, at the end of 1995.

LIQUIDITY AND CAPITAL RESOURCES

On an  unconsolidated  basis,  FFC had cash of $35.6  million.  During 1996, FFC
redeemed its  subordinated  debt of $54.9  million at par plus accrued  interest
with the proceeds of a $50.0 million cash dividend received from FF Bank.

FF Bank is subject to certain regulatory  limitations relative to its ability to
pay  dividends  to FFC.  Management  believes  that FFC  will  not be  adversely
affected by these dividend  limitations and that projected future dividends from
FF Bank will be sufficient to meet the parent  company's  liquidity  needs.  See
Note L to the consolidated  financial statements for further discussion of these
limitations.  In addition to dividends from FF Bank, FFC also could sell capital
stock or debt  issues  through  the capital  markets as  alternative  sources of
funds.

FFC also has  available an unused  line-of-credit  in the amount of  $18,000,000
which is available  through April 1997. The  line-of-credit  agreement  contains
various  covenants  relative to the  operations of FFC and FF Bank.  All of such
covenants  were  met  during  1996.  See  Note J to the  consolidated  financial
statements for further discussion.

FF Bank is required to maintain  minimum  levels of liquid  assets as defined by
Office of Thrift Supervision ("OTS") regulations. This requirement, which may be
varied by the OTS, is based upon a percentage of average deposits and short-term
borrowings.  The  required  ratio  is  currently  5%.  FF Bank is  currently  in
compliance  with this  requirement.  FF Bank's  principal  sources  of funds are
amortization  and  prepayment  of loan  and MBS  principal,  deposits,  sales of
mortgage loans  originated for sale,  FHL Bank  advances,  other  borrowings and
funds provided from operations.  These funds are used to meet loan  commitments,
make other investments, fund deposit withdrawals and repay borrowings.

Total consolidated liquidity,  consisting of cash, cash equivalents,  short-term
securities and investment securities, decreased $23.5 million during 1996. Total
consolidated  liquidity,  as a percent of total assets,  decreased from 6.81% at
the end of 1995 to 6.12% at the end of 1996,  as a result  of the net  effect of
FFC's various operating, investing and financing activities.

Operating activities resulted in a net cash inflow of $148.7 million.  Operating
cash flows for 1996  included  earnings  of $49.8  million  and  $320.1  million
realized  from the sale of mortgage  loans held for sale,  less  $225.2  million
disbursed for loans originated for sale.

Investing  activities in 1996 resulted in a net cash outflow of $355.9  million.
Major  investing  activities  resulting in cash outflows were $916.0 million for
the purchase of investment  and  mortgage-related  securities and $825.9 million
for the origination of loans for portfolio. The

                                      -14-

<PAGE>



most significant cash inflows from investing  activities were principal payments
of $669.6  million and $195.2  million  received on loans  receivable  and MBSs,
respectively,  as well as $97.3  million  from the  proceeds  of  maturities  of
investment securities. In addition, $419.6 million was received upon the sale of
securities available for sale.

Financing  activities  for 1996 resulted in a net cash inflow of $189.2  million
represented by a net increase in deposits of $21.5 million and a net increase in
borrowings of $199.0  million,  offset by cash outflows of $19.0 million in cash
dividends  paid to FFC  stockholders  and  $14.4  million  for the  purchase  of
treasury stock.

At December 31, 1996,  FFC had  outstanding  commitments  to originate  mortgage
loans totaling $30.2 million and no commitments  outstanding to purchase  loans.
At that date,  FFC also had  commitments  outstanding  to sell $20.7  million of
mortgage  loans  that  were  held for sale or for  which  FFC was  committed  to
originate. Loans held for sale totaled $19.1 million at the end of 1996. FFC had
commitments of $150.0 million to purchase U.S. Government  agency-backed MBSs at
year-end 1996. Management believes liquidity levels are proper and that adequate
capital and borrowings are available  through the capital markets,  the FHL Bank
of Chicago and other sources.


                                      -15-

<PAGE>



LOANS RECEIVABLE

Total  loans  receivable,  including  loans  held for sale,  decreased  to $3.51
billion at the end of 1996 from $3.62 billion at the end of 1995. The components
of this decrease are summarized, by type of loan collateral, as follows:

<TABLE>
<CAPTION>
                                                               December 31,                    Increase
                                                            1996              1995            (Decrease)
                                                         -----------       -----------       -----------
                                                                      (Dollars in thousands)
<S>                                                      <C>               <C>               <C>        
Real estate mortgage loans:
   One- to four-family                                   $1,884,018        $2,038,103        $ (154,085)
   Multi-family                                             238,766           220,772            17,994
   Commercial and other                                     176,911           153,173            23,738
                                                         ----------        ----------        ----------

      Total real estate mortgage loans                    2,299,695         2,412,048          (112,353)

Other loans:
   Consumer                                                 415,155           362,659            52,496
   Home equity                                              296,749           284,700            12,049
   Education                                                269,633           240,650            28,983
   Credit cards                                             179,352           214,107           (34,755)
   Manufactured housing                                     104,783           139,385           (34,602)
   Business                                                  11,728            17,198            (5,470)

Less: net items to loans receivable                         (64,276)          (53,947)          (10,329)
                                                         ----------        ----------        ----------

Total loans receivable (including
        loans held for sale)                             $3,512,819        $3,616,800        $ (103,981)
                                                         ==========        ==========        ==========
</TABLE>

The major components of the decrease of $104.0 million in total loans receivable
during 1996 were a $112.4  million  decrease in real estate  mortgage  loans,  a
$34.8 million  decrease in credit card loans,  and a $34.6  million  decrease in
manufactured housing loans, offset by a $52.5 million increase in consumer loans
and a $29.0 million increase in education loans.

The aggregate real estate  mortgage loans  decreased  $112.4 million during 1996
primarily due to the net effect of i)  originations  of $711.3 million offset by
ii) repayments of $417.8 million, iii) loan sales of $259.8 million, and iv) the
securitization  of $161.1  million of seasoned  fixed-term  fixed-rate  mortgage
loans transferred to the mortgage-related securities portfolio.

Credit card loan balances  decreased  $34.8 million in 1996 as the result of the
sale of a $47.9 million  affinity  group  portfolio.  Manufactured  housing loan
balances  decreased  $34.6  million  as FFC had  previously  ceased  originating
manufactured  housing  loans  and the  portfolio  continues  to  make  scheduled
repayments.

Consumer loan balances  increased  $52.5 million and education  loans  increased
$29.0 million as  originations  outpaced  repayments  for these  product  lines.
Consumer loan balances were  positively  impacted by the continued  success of a
shorter-term fixed-rate mortgage loan product.

MORTGAGE-RELATED SECURITIES

The total carrying value of the MBS portfolio  increased $379.7 million to $1.65
billion  at  December  31,  1996 from  $1.27  billion  at the end of 1995.  This
increase was primarily the net result of i) purchases of $803.3  million and ii)
the securitization of $161.1 million of

                                      -16-

<PAGE>



mortgage loans transferred to the mortgage-related  securities portfolio, offset
by iii) sales of $395.3 million and iv) repayments of $195.2 million. At the end
of 1996,  FFC had  commitments  of $150.0  million to purchase  U.S.  Government
agency-backed MBSs.

The following table sets forth, at the dates  indicated,  the composition of the
MBS portfolio  including issuer,  security type,  amortized cost, fair value and
financial  statement  carrying  value  as well as  classification  according  to
available-for-sale  or  held-to-maturity  status. See Note D to the consolidated
financial  statements for i) a further breakdown of the available-  for-sale and
held-to-maturity classifications of the MBS portfolio and ii) a summary of gains
and losses realized upon the disposition of  available-for-sale  MBSs during the
past three years.

<TABLE>
<CAPTION>
                                       December 31, 1996                       December 31, 1995
                               ----------------------------------      -------------------------------------
                               Amortized      Fair        Carrying     Amortized      Fair        Carrying
Issuer/Security Type              Cost        Value        Value          Cost        Value        Value
--------------------           ----------   ---------     --------     ----------   ---------     ------
                                                          (Dollars in thousands)
<S>                            <C>          <C>           <C>          <C>          <C>           <C>       
U.S. Government agencies:
 Mortgage-backed certi-
      ficates                  $1,089,418   $1,097,105    $1,093,513   $  347,177   $  353,712    $  349,215
 Collateralized mortgage
      obligations                 283,033      273,169       282,894      341,521      331,764       342,190
                               ----------   ----------    ----------   ----------   ----------    ----------
    Total agencies              1,372,451    1,370,274     1,376,407      688,698      685,476       691,405
                               ----------   ----------    ----------   ----------   ----------    ----------

Non-agency:
 Mortgage-backed certi-
  ficates:
    Senior position               276,078      274,473       273,595      485,327      478,484       480,840
    Subordinate position               --           --            --      105,534       97,756        97,905
 Collateralized mort-
      gage obligations                435          444           435          611          637           611
                               ----------   ----------    ----------   ----------   ----------    ----------
    Total non-agencies            276,513      274,917       274,030      591,472      576,877       579,356
                               ----------   ----------    ----------   ----------   ----------    ----------

        Totals                 $1,648,964   $1,645,191    $1,650,437   $1,280,170   $1,262,353    $1,270,761
                               ==========   ==========    ==========   ==========   ==========    ==========

Total carrying value per consolidated 
 financial statements, by classification:
    Available-for-sale portfolio                          $1,048,085                              $  571,293
    Held-to-maturity portfolio                               602,352                                 699,468
                                                          ----------                              ----------
        Total carrying value                              $1,650,437                              $1,270,761
                                                          ==========                              ==========
</TABLE>


Since MBSs are asset-backed securities, they are subject to inherent risks based
upon the future performance of the underlying  collateral (i.e., mortgage loans)
for these  securities.  Among these risks are prepayment risk and  interest-rate
risk. Should general  interest-rate  levels decline,  the MBS portfolio would be
subject to i) prepayments as borrowers  typically would seek to obtain financing
at lower rates,  ii) a decline in interest  income  received on  adjustable-rate
MBSs, and iii) an increase in fair value of fixed-rate MBSs. Conversely,  should
general interest-rate levels increase,  the MBS portfolio would be subject to i)
a longer  term to  maturity as  borrowers  would be less likely to prepay  their
loans, ii) an increase in interest income received on adjustable-rate MBSs, iii)
a decline  in fair value of  fixed-rate  MBSs and iv) a decline in fair value of
adjustable-rate  MBSs to an extent  dependent  upon the  level of  interest-rate
increases,  the time  period to the next  interest-rate  repricing  date for the
individual  security and the applicable  periodic  (annual and/or  lifetime) cap
which  could limit the degree to which the  individual  security  could  reprice
within a given time period.

As noted in the above table, included in FFC's MBS portfolio are non-agency MBSs
having a carrying  value of $274.0  million at December  31,  1996.  Unlike U.S.
Government  agency MBSs which  include a guarantee  of  principal  and  interest
payments on the  underlying  collateral,  non-agency  securities  are  generally
structured  with  a  senior   ownership   position  and  subordinate   ownership
position(s) providing credit support for the senior position. The

                                      -17-

<PAGE>



structure  of  non-agency  MBSs may expose  FFC to credit  risk in  addition  to
interest-rate  risk and  prepayment  risk as  discussed  above.  In this regard,
management  has  instituted a monitoring  system for tracking the major  factors
affecting  the  performance  of a non-agency  MBS  including  i)  delinquencies,
foreclosures,  repossessions and recoveries  relative to the underlying mortgage
loans collateralizing each security, ii) the level of available subordination or
other credit enhancements, iii) the competence of the servicer of the underlying
mortgage  portfolio and iv) the rating  assigned to each security by independent
national rating agencies. This ongoing monitoring process has confirmed that all
non-agency  MBSs continue to be performing.  Although  management  believes that
this portfolio of securities will continue to contractually perform based on its
review,  there can be no assurance  that such  performance  will continue in the
future should economic  conditions,  market conditions,  or other factors change
significantly.

FFC's portfolio of MBSs totaled  approximately  $1.65 billion at the end of 1996
and consisted of either i) U.S. Government agency-backed or ii) rated investment
grade quality by at least one nationally  recognized  independent rating agency,
except as noted below:
<TABLE>
<CAPTION>

                                                 Amortized                    Fair                    Carrying
        Issuer                                     Cost                       Value                     Value
-----------------------------                  ------------                ------------              ------------

                                                                     (Dollars in thousands)

<S>                                            <C>                         <C>                       <C>         
U.S. Government agencies                       $  1,372,451                $  1,370,274              $  1,376,407
Non-agency:
  Securities rated AA or
   above                                            247,887                     249,174                   248,281
  Securities rated below
    AA, but of investment
    grade                                            11,192                      10,568                    10,574
  Securities rated below
    investment grade                                 17,434                      15,175                    15,175
                                               ------------                ------------              ------------
                                               $  1,648,964                $  1,645,191              $  1,650,437
                                               ============                ============              ============
</TABLE>


The non-agency  securities rated below investment grade include four securities,
each  security  having been issued by an  unrelated  company,  with an aggregate
carrying value of $15.2 million.  Based upon i) the results of management's most
current review of the  performance  characteristics  of the underlying  mortgage
loans collateralizing these  below-investment-grade  securities and ii) the fact
that these securities  continue to perform,  management believes that these MBSs
have a net  realizable  value in excess of their  indicated  fair  value  and/or
amortized cost and that any indicated impairment in fair value is not permanent.
Management also has the intent and the ability to retain its investment in these
securities for a period of time sufficient to allow for any anticipated recovery
of market value.

NON-PERFORMING ASSETS

Non-performing   assets   (consisting   of  impaired  and   non-accrual   loans,
non-performing MBSs,  foreclosed  properties,  and other repossessed  collateral
assets)  decreased to $16.0  million at December 31, 1996 from $29.8  million at
December 31, 1995. The 1996 decrease in non-performing  assets relates primarily
to the sale of two non-agency MBSs during 1996 (see "Non-Performing MBSs" below)
and the sale of $1.3  million of real estate  held for sale in 1996.  Other loan
and asset category  fluctuations  substantially offset. As a percentage of total
assets, non-performing assets decreased from 0.54% at December 31, 1995 to 0.28%
at December 31, 1996. During the five years ended December 31, 1996, FFC has not
had any troubled debt  restructurings.  Non-performing  assets are summarized as
follows for the dates indicated:

                                      -18-

<PAGE>
<TABLE>
<CAPTION>


                                                                    December 31,
                                               1996        1995         1994         1993        1992
                                              ------      ------       ------       ------      -----
                                                               (Dollars in thousands)
<S>                                           <C>         <C>          <C>          <C>         <C>    
Non-accrual loans:
   One- to four-family
      residential                             $ 6,325     $ 6,449      $ 5,706      $ 6,361     $ 7,320
   Multi-family residential                     1,607         873          585          374         314
   Commercial real estate                          98         162          271          340       6,496
   Manufactured housing                         1,164         926        1,034        1,063       1,295
   Consumer and other                           2,794       3,836        2,968        2,117       1,961
                                              -------     -------      -------      -------     -------
      Total non-accrual loans                  11,988      12,246       10,564       10,255      17,386

Non-performing MBSs                                --      12,858       15,455           --          --
Real estate judgments                           3,074       1,436        2,503        2,236       2,761
Real estate foreclosed
      properties                                  584       1,538        2,446        6,126      17,262
Real estate held for sale                          --       1,309        1,089           --          --
Repossessed collateral assets                     339         405          267          163         462
                                              -------     -------      -------      -------     -------

      Total non-performing
        assets                                $15,985     $29,792      $32,324      $18,780     $37,871
                                              =======     =======      =======      =======     =======

Non-accrual loans as a
   percentage of net loans                       .34%        .34%         .30%         .33%        .71%

Non-performing assets as a
   percentage of total assets                    .28%        .54%         .59%         .36%        .88%
</TABLE>


Non-Accrual and Impaired Loans. FFC places loans into a non-accrual  status when
loans are contractually  delinquent more than ninety days. When a loan is placed
on  non-accrual  status,  previously  accrued but unpaid  interest is  reversed.
Non-accrual  loans have remained  steady as a percentage of net loans at .34% at
December 31, 1996 and 1995. Total  non-accrual  loans decreased by $200,000 from
year end 1995 to December 31, 1996.  The major factors of this net decrease were
the $700,000 increase in multi-family  residential non-accrual loans offset by a
$1.0 million decrease in consumer and other  non-accrual  loans during 1996. The
$1.0  million  decrease  was split  between  credit  card  non-accrual  loans of
$600,000  and  small  commercial   business   non-accrual   loans  of  $400,000.
Non-accrual loans, in the aggregate, resulted in the nonrecognition of $900,000,
$900,000 and $700,000 of interest which would have been reflected in 1996,  1995
and 1994 income, respectively, if the loans had been contractually current.

The increase in non-accrual multi-family residential mortgage loans related to a
group of such  loans to one  borrower.  Management  is closely  monitoring  this
situation to correct the delinquent status.

Non-accrual credit card loans increased  throughout most of 1996, similar to the
national trend for credit card accounts, but dropped to the year-end 1996 levels
as a  result  of the  sale  of an  affinity  credit  card  portfolio  which  was
experiencing  higher than average  delinquencies and charge-offs.  FFC's overall
delinquency   ratios  for  credit   card   accounts  at  year  end  1996  remain
approximately  25% below national  averages  despite trending upward during 1995
and 1996.

For  purposes  of  measuring  impaired  loans as defined in  Statement  No. 114,
"Impairment  of  Loans",   FFC  considers  all   categories  of  loans,   except
multi-family, commercial and other, and business loans as homogeneous categories
and therefore not subject to impairment

                                      -19-

<PAGE>



measurement of individual loans. Impaired loans as determined in accordance with
Statement No. 114 are not significant.

Non-Performing  MBSs.  During 1996, FFC sold two non-agency  MBSs which had been
non-performing  at the end of 1995 and had an amortized  cost of $12.9  million.
Each of these MBSs was structured as a mezzanine security,  which is subordinate
to the senior  position of that issue but is  structured to be superior to other
subordinate positions designed to absorb first losses. FFC had not received full
monthly  payments  on  these  securities  since  1993.  The  payments  had  been
interrupted due to  delinquencies  and  foreclosures in the underlying  mortgage
portfolio  and all of the cash  flows  were  directed  to owners  of the  senior
position.  The underlying loans comprising these securities had been serviced by
a California  institution  under the control of the Resolution Trust Corporation
("RTC").  During 1994 and 1995,  servicing was  transferred  from the RTC to the
trustee  and  subsequently  to a  third-party  servicer.  In  1994,  independent
national  rating  agencies  downgraded  these  mezzanine   securities  to  below
investment  grade.  At that time,  a  writedown  of $9.0  million  was  recorded
reflecting permanent impairment of these securities. Subsequently, the positions
subordinate to FFC were  eliminated and management  determined that the value of
the collateral properties was deteriorating more rapidly than anticipated. Based
on this  deterioration  and the low  probability  for future  improvement in the
condition of these  securities,  FFC sold these  securities at nominal value and
realized a further loss of $12.8 million in 1996.

Also during  1996,  FFC sold the  remainder  of its  mezzanine/subordinated  MBS
portfolio,  having an aggregate  remaining amortized cost of $90.2 million, at a
loss of $4.2 million.

To minimize the risk to FFC from holding such  non-agency  securities,  FFC will
not  purchase  any  mezzanine  or  subordinated  position  MBSs and has  further
strengthened the criteria for other potential non-agency MBS purchases.  FFC has
not purchased any non- agency MBSs since 1992. See "Mortgage-Related Securities"
for further information relative to non-agency MBSs.

Other  Non-Performing  Assets.  Real estate judgments and foreclosed  properties
increased $700,000 from year-end 1995 to December 31, 1996, primarily consisting
of one- to four-family or small multi-family  properties located in the Midwest.
FFC has no non-performing real estate held for sale at December 31, 1996.

Summary. Levels of non-performing and impaired (as defined) assets have declined
significantly  during the five-year period ended December 31, 1996 due to i) the
disposition of the remaining low quality assets received in the acquisition of a
troubled  thrift  institution in 1985, ii) improved  collection and  liquidation
efforts  and  iii)  management's  decision  to  restrict  lending  primarily  to
Wisconsin,   Illinois  and  other   selected   Midwestern   states,   offset  by
non-performing MBSs as discussed above.

All non-performing and impaired assets have been considered by management in its
review of the adequacy of  allowances  for losses or the  carrying  value of the
asset.

ALLOWANCES FOR LOSSES ON LOANS AND FORECLOSED PROPERTIES

FFC's loan  portfolios,  foreclosed  properties and off-balance  sheet financial
guarantees  are  evaluated on a continuing  basis to determine the necessity for
establishing additional

                                      -20-

<PAGE>




allowances for losses. These evaluations consider several factors including, but
not limited to, general economic  conditions,  collateral  value, loan portfolio
composition, prior loss experience and management's estimate of future potential
losses.  This  evaluation  also includes a review of both known loan problems as
well as  potential  problems  based  upon  historical  trends  and  ratios.  The
allowances  for losses on foreclosed  properties are maintained at levels deemed
adequate to absorb  potential future declines in the estimated fair value of the
properties.

A summary of activity in the allowances for losses on loans follows:

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                               1996         1995          1994          1993          1992
                                              ------       ------        ------        ------        -----
                                                             (Dollars in thousands)
<S>                                           <C>          <C>           <C>           <C>           <C>    
Balance at beginning of year                  $25,235      $25,180       $25,905       $19,540       $17,493

Charge-offs:
   Residential real estate                     (1,046)      (1,111)         (864)         (839)       (1,691)
   Commercial real estate                         (52)          (3)         (288)         (501)       (1,044)
   Manufactured housing                        (1,210)      (1,397)       (1,477)       (2,731)       (4,212)
   Credit card                                 (8,906)      (7,912)       (6,658)       (5,890)       (6,142)
   Consumer-related                              (659)        (383)         (371)         (525)         (524)
   Commercial                                    (272)        (281)         (214)           --        (1,367)
                                              -------      -------       -------       -------       -------
      Total charge-offs                       (12,145)     (11,087)       (9,872)      (10,486)      (14,980)
                                              -------      -------       -------       -------       -------

Recoveries:
   Residential real estate                        137          147           604           138           242
   Commercial real estate                          --           80            --            --             3
   Manufactured housing                           158          204           181           179           288
   Credit card                                    757          878           593           653           584
   Consumer-related                                56           86           127           426           131
   Commercial                                      --            9             2            --            --
                                              -------      -------       -------       -------       -------
      Total recoveries                          1,108        1,404         1,507         1,396         1,248
                                              -------      -------       -------       -------       -------

Net charge-offs                               (11,037)      (9,683)       (8,365)       (9,090)      (13,732)

Provisions for losses                           9,030        9,738         6,824        10,570        15,779

Acquired banks' allowances                         --           --           816         4,885            --
                                              -------      -------       -------       -------       -------

Balance at end of year                        $23,228      $25,235       $25,180       $25,905       $19,540
                                              =======      =======       =======       =======       =======

Ratio of net charge-offs to
   average loans outstanding                     .31%         .27%          .25%          .31%          .59%

Ratio of allowances for losses
   on loans to average loans
   outstanding                                   .65%         .71%          .76%          .87%          .84%

Ratio of allowances for losses
  on loans to non-accrual
  loans                                          194%         206%          238%          253%          112%
</TABLE>


                                                       -21-

<PAGE>

A summary of the activity in the allowance  for losses on foreclosed  properties
follows:
<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                               1996         1995          1994          1993         1992
                                              ------       ------        ------        ------       -----
                                                                  (Dollars in thousands)
<S>                                           <C>          <C>           <C>           <C>          <C>   
Balance at beginning of year                  $  993       $1,146        $3,561        $3,377       $2,569
Charge-offs                                     (347)        (213)       (3,415)       (3,335)      (5,016)
Provision                                       (467)          60         1,000         3,519        5,824
                                              ------       ------        ------        ------       ------

Balance at end of year                        $  179       $  993        $1,146        $3,561       $3,377
                                              ======       ======        ======        ======       ======
</TABLE>

The  provisions  for  losses  on  foreclosed  properties  are  included  in  the
consolidated  statements of income in "Net cost of (income  from)  operations of
foreclosed properties."

FFC's  allowances for losses on loans decreased $2.0 million to $23.2 million at
December  31,  1996 from  $25.2  million  at  December  31,  1995.  The ratio of
allowances  for losses on loans to average  loans also  decreased  from year-end
1995 to year-end 1996, from .71% to .65%, respectively.  Management believes the
reduced  allowances  were  warranted  based  on  the  detailed  analysis  of the
allowance levels appropriate for the various loan categories based on historical
data and current trends.

While the aggregate  allowances  decreased  from year-end 1995 to year-end 1996,
some  decreases in allowances for certain loan products were offset by increases
for others.  The major decreases in allowances were a $1.2 million  reduction in
the allowance for the  manufactured  housing loan portfolio  which  continues to
shrink  since FFC  exited  that  market,  and a $1.1  million  reduction  in the
residential  mortgage loan allowance  based on  management's  analysis of recent
loss  experience  and the resolution of certain past problem  borrower  multiple
loan groupings.  The residential mortgage portfolio consists of large numbers of
relatively homogeneous loans.

The credit  card loan  allowance  for loss was  increased  by  $400,000  and the
consumer  loan  allowance  was  increased by  $500,000,  from  year-end  1995 to
year-end 1996. The credit card allowance increase reflects  management's  desire
to maintain a higher ratio of allowances to loans,  namely 3.78% at December 31,
1996  versus  3.00% a year  earlier,  based  on  recent  experience.  While  FFC
continues to experience  loss levels lower than industry  norms,  they are still
higher  than  FFC's  historical  levels.  Consumer  loan  loss  allowances  were
increased  due  primarily  to  the  growth  of the  product  during  1996.  Loss
experience for consumer  loans in 1996 has also  increased  nominally to .10% of
the consumer loan base from .05% the prior year.

The 1996 provisions for losses on loans and foreclosed  properties  totaled $9.0
million and $(467,000),  respectively,  compared to the $9.7 million and $60,000
during 1995. The $1.9 million  reduction in the residential  mortgage  provision
for losses in 1996 was substantially  offset by the $1.8 million increase in the
provision for credit card losses.  The remaining  provisions for loan losses for
other loan products decreased by a total of $600,000.  The provisions for losses
for the years 1994 to 1996 remain at significantly lower levels compared to 1992
when FFC's charge-off  experience  reflected certain portfolios received from an
earlier acquisition which required larger allowances for losses. Also, see "Non-
Performing Assets" for further discussion of this trend.

FFC also, in the past, has undertaken  off-balance  sheet financial  guarantees,
totaling $7.3 million at December 31, 1996,  whereby letters of credit have been
issued for industrial

                                      -22-

<PAGE>



development  revenue bonds which were issued by  municipalities  to finance real
estate owned by third parties.  Management has considered these guarantees,  all
of which are  performing,  in its review of the  adequacy of the  allowance  for
losses.  See  Note  N to  the  consolidated  financial  statements  for  further
discussion of off-balance sheet financial guarantees.

Management  believes that the December 31, 1996,  loss  allowances for loans and
foreclosed  properties  are adequate  based upon its current  evaluation of loan
delinquencies,  non-performing and impaired assets,  charge-off trends, economic
conditions and other factors.  Management also continues to pursue all practical
and legal methods of collection,  repossession and disposal, and adheres to high
underwriting  standards  in the  origination  process,  in order to minimize the
necessity for such provisions in the future.


                                      -23-

<PAGE>



A  detailed  analysis  of FFC's  allowances  for  losses  on loans  and  related
charge-off information follows for the dates and years indicated:

<TABLE>
<CAPTION>

                              At December 31, 1996                             At December 31, 1995                         
                              --------------------                             --------------------                         

                                                           Net Charge-offs                                 Net Charge-offs  
                                            Allowance       As A Percent                    Allowance       As A Percent    
                                          As A Percent       Of Average                    As A Percent       Of Average    
                                         Of Outstanding     Related Loans                Of Outstanding     Related Loans   
                              Allowance     Loans In         For The Year      Allowance    Loans In         For The Year   
Type of Loan                   Amount       Category       Ended 12/31/96       Amount      Category       Ended 12/31/95   
------------                  ---------    ----------      --------------      ---------   ----------      --------------   
                                                                                  (Dollars in thousands)
<S>                           <C>              <C>                <C>            <C>            <C>              <C>        
Residential real estate       $ 6,610          .31%               .04%           $ 7,726        .34%             .04%       
Commercial real estate          3,621         2.00                .03              3,823       2.50             (.05)       
Manufactured housing            1,814         1.73                .86              3,034       2.18              .83        
Credit cards                    6,783         3.78               4.04              6,425       3.00             3.51        
Consumer                        3,462          .83                .10              3,029        .84              .05        
Education                          23          .01                .01                 51        .02               --        
Home equity                       572          .19                .07                562        .20              .04        
Commercial                        343         2.92               1.96                585       3.40             1.59        
                              -------                                            -------                                    
                              $23,228          .66%               .31%           $25,235        .70%             .27%       
                              =======        =====              =====            =======      =====            =====        
</TABLE>
                               At December 31, 1994
                               ------------------------

                                                            Net Charge-offs
                                             Allowance       As A Percent
                                            As A Percent       Of Average
                                          Of Outstanding     Related Loans
                              Allowance      Loans In         For The Year
Type of Loan                   Amount        Category       Ended 12/31/94
------------                  ---------     ----------      --------------
Residential real estate        $ 6,990         .31%                .01%
Commercial real estate           3,632        2.53                 .22
Manufactured housing             4,267        2.79                 .81
Credit cards                     6,737        3.36                3.09
Consumer                         2,444         .80                 .08
Education                           46         .02                  --
Home equity                        487         .20                 .02
Commercial                         577        3.03                1.02
                               -------
                               $25,180         .73%                .25%
                               =======       =====               ======



FFC's  allowances for losses on loans were allocated to various loan  categories
as follows for the dates indicated:
<TABLE>
<CAPTION>
                                                             At December 31,

                                        1996                      1995                        1994              
                              ------------------------    ----------------------     -----------------------    

                                         Percent Of                  Percent Of                  Percent Of     
                                        Loans In Each               Loans In Each               Loans In Each  
                                         Category To                 Category To                 Category To    
Type of Loan                  Amount     Total Loans      Amount     Total Loans     Amount      Total Loans    
------------                  ------    -------------     ------    -------------    ------     -------------   
                                                                                     (Dollars in thousands)

<S>                           <C>            <C>         <C>              <C>        <C>              <C>       
Residential real estate       $ 6,610        59.2%       $ 7,726          61.5%      $ 6,990          64.5%     
Commercial real estate          3,621         5.1          3,823           4.2         3,632           4.1      
Manufactured housing            1,814         2.9          3,034           3.8         4,267           4.3      
Credit cards                    6,783         5.0          6,425           5.8         6,737           5.7      
Consumer and other              4,057        27.5          3,642          24.2         2,977          20.9      
Commercial                        343          .3            585            .5           577            .5      
                              -------       -----        -------         -----       -------         -----      
                              $23,228       100.0%       $25,235         100.0%      $25,180         100.0%     
                              =======       =====        =======         =====       =======         =====      
</TABLE>

<PAGE>

                                             At December 31,

                                    1993                        1992
                           -----------------------     -------------------------

                                      Percent Of                    Percent Of
                                     Loans In Each                 Loans In Each
                                      Category To                   Category To
Type of Loan               Amount     Total Loans      Amount       Total Loans
------------               ------    -------------     ------      ------------
                         

Residential real estate    $ 6,792         67.6%       $ 4,140           64.5%
Commercial real estate       5,353          3.6          5,281            4.9
Manufactured housing         4,668          5.1          4,325            5.3
Credit cards                 6,502          6.5          4,034            7.2
Consumer and other           2,590         17.2          1,760           18.1
Commercial                      --           --             --             --
                           -------        -----        -------          -----
                           $25,905        100.0%       $19,540          100.0%
                           =======        =====        =======          =====


                                      -24-

<PAGE>



DEPOSITS

Deposits  increased  $20.4 million  during 1996  including  interest  credits of
$166.7  million  offset by net cash  outflows of $146.3  million.  The  weighted
average  cost of deposits of 4.60% at the end of 1996 was  slightly  higher than
the 4.56% reported at the end of 1995.

BORROWINGS

At December 31, 1996, FFC's consolidated  borrowings increased to $769.5 million
from $570.5 million at the end of 1995. In January 1996, FFC redeemed all of its
outstanding 8% Subordinated  Notes due November,  1999,  which  aggregated $54.9
million  at the date of  redemption.  This  redemption  was  offset  by a $248.7
million  increase in shorter-term FHL Bank advances used to fund the purchase of
primarily adjustable rate U.S. Government agency MBSs. The weighted average cost
of  borrowings  decreased  to 5.58% at the end of 1996 as  compared  to 6.31% at
year-end 1995.

STOCKHOLDERS' EQUITY

Stockholders'  equity at December 31, 1996 was $410.5  million or 7.20% of total
assets,  compared to $384.9  million or 7.04% of total  assets at  December  31,
1995. The dollar increase in  stockholders'  equity resulted from the net effect
of i) net income of $49.8 million, ii) cash dividend payments to stockholders of
$19.0  million,  iii) the  purchase of treasury  stock shares at a cost of $14.4
million (see "Stock Repurchase  Program") and iv) an improvement of $7.3 million
in  the  net   unrealized   holding  gain  on   available-for-sale   securities.
Stockholders' equity per share, as adjusted for the five-for-four stock split on
December 30, 1996,  increased  from $10.38 per share at year-end  1995 to $11.15
per share at year-end 1996.

STOCK REPURCHASE PROGRAM

During the fourth quarter of 1996, FFC announced a six-month 5% stock repurchase
program whereby up to 1,875,000 shares would be repurchased. As of year end, the
company had repurchased 648,395 shares at an average cost of $22.28 per share.

REGULATORY CAPITAL

FF Bank is subject to various OTS capital measurements,  as formulated under the
Federal  Deposit  Insurance  Corporation  Improvement  Act  ("FDICIA"),  and had
regulatory  capital well in excess of all such requirements at December 31, 1996
as summarized below:


                                       OTS Capital Ratios
                        Actual               Required
                        Ratio                  Ratio             Excess
                        -----                  -----             ------

Tangible capital         6.20%                 1.50%               4.70%
Core capital             6.39                  3.00                3.39
Risk-based capital      13.91                  8.00                5.91


The OTS has adopted a final rule,  effective March 4, 1994,  disallowing any new
core  deposit  intangibles,  acquired  after the  rule's  effective  date,  from
counting as regulatory capital.  Core deposit intangibles  acquired prior to the
effective date have been grandfathered for

                                      -25-

<PAGE>



purposes of this rule. At December 31, 1996, FFC had core deposit intangibles of
$11.4 million,  all of which have been grandfathered from this OTS rule. The OTS
has added an  interest-rate  risk  calculation  such that an institution  with a
measured  interest-rate  risk exposure greater than specified levels must deduct
an  interest-rate  risk component when  calculating  the OTS risk-based  capital
requirement. Final implementation of these rules was pending at the end of 1996.
Management  of FFC and FF Bank do not  believe  these  rules will  significantly
impact the capital  requirements of FF Bank or cause FF Bank to fail to meet its
regulatory capital requirements.

For a more detailed discussion of regulatory capital requirements, see Note L to
the consolidated financial statements.

ASSET/LIABILITY MANAGEMENT

The objective of FFC's asset/liability policy is to manage interest-rate risk so
as  to  maximize  net  interest  income  over  time  in  changing  interest-rate
environments.  To this end,  management  believes that  strategies  for managing
interest-rate   risk  must  be  responsive  to  changes  in  the   interest-rate
environment and must recognize and accommodate the market demands for particular
types of deposit and loan products.

Interest-bearing  assets  and  liabilities  can be  analyzed  by  measuring  the
magnitude by which such assets and liabilities are  interest-rate  sensitive and
by  monitoring an  institution's  interest-rate  sensitivity  "gap." An asset or
liability is determined  to be  interest-rate  sensitive  within a specific time
frame if it  matures or  reprices  within  that time  period.  An  interest-rate
sensitivity   "gap"  is  defined  as  the  difference   between  the  amount  of
interest-earning  assets anticipated to mature or reprice within a specific time
period and the amount of interest-costing  liabilities  anticipated to mature or
reprice  within the same time  period.  A gap is  considered  positive  when the
amount of  interest-rate  sensitive  assets exceeds the amount of  interest-rate
sensitive liabilities that mature or reprice within a given time frame. A gap is
considered  negative  when the  amount of  interest-rate  sensitive  liabilities
exceeds  the amount of  interest-rate  sensitive  assets  that mature or reprice
within a specified time period.

Summary gap information for FFC is presented below as of year end 1996 and 1995.


                                      Ratio of Cumulative
                                   Negative Gap To Total Assets

                          One Year            Three Years            Five Years
                          --------            -----------            ----------
December 31, 1996            (1.80)%             (5.00)%              (2.56)%
December 31, 1995            (3.65)              (4.01)               (3.15)


FFC's consolidated  one-year negative gap decreased to $102.6 million,  or 1.80%
of total  assets,  at the end of 1996  from  $199.8  million,  or 3.65% of total
assets, at the end of 1995. FFC's consolidated one-year negative gap position of
1.80% at December 31, 1996 falls within management's  currently acceptable range
of 10%  positive  to 10%  negative.  Traditionally,  management  of FFC  has not
utilized  off-balance  sheet  derivative  financial  instruments  as part of its
efforts to control  interest-rate  risk and no such  instruments  were  utilized
during 1996. In view of the current  interest-rate  environment  and the related
impact on customer behavior,  management  believes that it is important to weigh
and balance the effect of asset/liability management decisions in the short-term
in  its  efforts  to  maintain  net  interest  margins  and  acceptable   future
profitability. As such, management believes that it has

                                      -26-

<PAGE>



been able to achieve a  consistent  net  interest  margin  while  still  meeting
asset/liability management objectives.

In this regard,  FF Bank also  measures and evaluates  interest-rate  risk via a
separate  methodology  pursuant  to OTS  regulations.  The net  market  value of
interest-sensitive  assets and  liabilities  is  determined by measuring the net
present  value of future cash flows under  varying  interest  rate  scenarios in
which  interest rates would  theoretically  increase or decrease up to 400 basis
points on a sudden and prolonged basis. This theoretical  analysis at the end of
1996 indicates  that FF Bank's  current  financial  position  should  adequately
protect FF Bank,  and thus FFC, from the effects of rapid rate changes.  The OTS
has proposed an  interest-rate  risk calculation such that an institution with a
measured  interest-rate  risk exposure greater than specified levels must deduct
an  interest-rate  risk component when  calculating  its OTS risk-based  capital
requirement.  The final  implementation  of this rule was  pending at the end of
1996 as the OTS has delayed the  effective  date of the  regulation  pending its
adoption of a process by which an  institution  may appeal an OTS  interest-rate
risk capital  deduction  determination.  At December 31, 1996, FF Bank would not
have  been  required  to deduct  an  interest-rate  risk  component  under  this
regulation.

Asset/Liability  Repricing  Schedule.  The table  below sets forth the  combined
estimated   maturity/repricing   structure  of  FFC's  interest-earning   assets
(including  net items) and  interest-costing  liabilities  at December 31, 1996.
Assumptions  regarding  prepayment  and  withdrawal  rates are based  upon FFC's
historical experience,  and management believes such assumptions are reasonable.
The table does not  necessarily  indicate  the  impact of general  interest-rate
movements on FFC's net interest income because  repricing of certain  categories
of  assets  and  liabilities  through,  for  example,  prepayments  of loans and
withdrawals of deposits,  is beyond FFC's control.  As a result,  certain assets
and  liabilities  indicated  as  repricing  within a stated  period  may in fact
reprice at different  times and at different rate levels.  Certain  shortcomings
are inherent in the method of analysis  presented in the gap 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 on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates,  prepayment and early withdrawal levels
could deviate  significantly  from those assumed in calculating  the data in the
table.



                                      -27-

<PAGE>
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                            Three         Four             Greater        Greater         Greater         Greater
                                            Months        Months          Than One       Than Three      Than Five       Than Ten   
                                             And         Through           Through         Through        Through         Through   
                                            Under        One Year        Three Years     Five Years      Ten Years        20 Years  
                                          ---------      --------        -----------     ----------      ---------       ---------- 
                                                                                         (Dollars in thousands)
<S>                                       <C>            <C>             <C>             <C>             <C>             <C>        
Rate-sensitive assets:
   Investments and interest-
     earning deposits, including
     federal funds (a)(b)                 $    80,404    $     8,179     $    44,806     $    40,236     $       402     $    36,229
   Mortgage-related securities (b)            569,592        799,540          99,017          63,711          78,390          39,867
   Mortgage loans:
     Fixed-rate (c)(d)                         57,803        140,067         302,409         203,495         241,228         147,922
     Adjustable-rate (c)                      192,552        671,286         284,050              --              --              --
   Other loans                                708,093        179,611         203,455          81,079          72,940          24,449
                                          -----------    -----------     -----------     -----------     -----------     -----------
                                            1,608,444      1,798,683         933,737         388,521         392,960         248,467

Rate-sensitive liabilities:
   Deposits (e)(f):
     Checking                                 123,018         26,010          64,951          50,731          79,414          71,768
     Money market accounts                     88,496         73,045         122,100          45,036          38,055           9,661
     Passbook                                 266,302        195,488          52,655          37,911          54,592          34,744
     Certificates of deposit                  603,778      1,375,615         872,114         114,108           3,265              --
   Borrowings                                 757,191            769           4,621           1,119             597           1,910
                                          -----------    -----------     -----------     -----------     -----------     -----------
                                            1,838,785      1,670,927       1,116,441         248,905         175,923         118,083
                                          -----------    -----------     -----------     -----------     -----------     -----------

GAP (repricing difference)                $  (230,341)   $   127,756     $  (182,704)    $   139,616     $   217,037     $   130,384
                                          ===========    ===========     ===========     ===========     ===========     ===========

Cumulative GAP                            $  (230,341)   $  (102,585)    $  (285,289)    $  (145,673)    $    71,364     $   201,748
                                          ===========    ===========     ===========     ===========     ===========     ===========

Cumulative GAP/Total Assets                     (4.04)%        (1.80)%         (5.00)%         (2.56)%          1.25%          3.54%
                                          ===========    ===========     ===========     ===========     ===========     ===========
</TABLE>

FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT DECEMBER 31, 1996
                                        
                                           Greater
                                             Than
                                           20 Years          Total
                                          ----------      --------
                                        
Rate-sensitive assets:
   Investments and interest-
     earning deposits, including
     federal funds (a)(b)                 $    41,440     $   251,696
   Mortgage-related securities (b)                320       1,650,437
   Mortgage loans:
     Fixed-rate (c)(d)                          2,380       1,095,304
     Adjustable-rate (c)                           --       1,147,888
   Other loans                                     --       1,269,627
                                          -----------     -----------
                                               44,140       5,414,952

Rate-sensitive liabilities:
   Deposits (e)(f):
     Checking                                  39,105         454,997
     Money market accounts                      1,073         377,466
     Passbook                                   8,153         649,845
     Certificates of deposit                       --       2,968,880
   Borrowings                                   3,319         769,526
                                          -----------     -----------
                                               51,650       5,220,714
                                          -----------     -----------

GAP (repricing difference)                $   (7,510)     $   194,238
                                          ==========      ===========

Cumulative GAP                            $   194,238
                                          ===========

Cumulative GAP/Total Assets                      3.41%
                                          ===========


(a)  Investments  are adjusted to include FHL Bank stock  totaling $36.2 million
     as investments in the "Greater Than Ten Through 20 Years" category.

(b)  Investment and mortgage-related securities are presented at carrying value,
     including  net  unrealized  holding  gain  or  loss  on  available-for-sale
     securities.

(c)  Based upon 1) contractual  maturity,  2) repricing date, if applicable,  3)
     scheduled repayments of principal and 4) projected prepayments of principal
     based upon FFC's  historical  experience  as modified  for  current  market
     conditions.

(d)  Includes loans held for sale.

(e)  Deposits include $13.4 million of advance payments by borrowers for tax and
     insurance and exclude accrued interest of $7.1 million.

(f)  FFC has assumed  that its  passbook  savings,  checking  accounts and money
     market accounts would have projected annual  withdrawal  rates,  based upon
     FFC's historical experience, of 26%, 34% and 42%, respectively.



                                      -28-

<PAGE>




RECENT LEGISLATIVE DEVELOPMENTS

The  deposits  of  savings  institutions  such  as FF  Bank  are  insured  up to
applicable  limits under the SAIF of the FDIC.  Deposits of commercial banks are
insured under the Bank Insurance Fund ("BIF") of the FDIC. Insured  institutions
pay  assessments  to the  applicable  fund based on  assessment  rate  schedules
determined by the law and FDIC  regulation.  Premium  levels for the BIF and the
SAIF are set in order to permit the funds to be  capitalized at a level equal to
1.25% of total deposits insured by the fund. As the funds reach their designated
ratios,  the FDIC has  authority  to lower  fund  premium  assessments  to rates
sufficient to maintain the designated reserve ratio.

Historically, BIF and SAIF assessment schedules had been identical. In May 1995,
the BIF achieved its designated ratio and the FDIC lowered BIF premium rates for
most BIF-insured  institutions.  Based on various assessment rate modifications,
the majority of BIF members  currently pay only a $2,000 minimum annual premium.
The SAIF had not achieved its designated  reserve ratio and was not  anticipated
to do so prior to the year 2001.  Premium  rates for  SAIF-insured  members were
being assessed at an average of 23.4 cents per $100 of deposits.  As a result of
the modified  assessment rate provisions,  SAIF member  institutions  such as FF
Bank were placed at a competitive disadvantage based on higher deposit insurance
premium obligations.

Congress  passed  legislation  to address this premium  disparity.  The "Deposit
Insurance  Funds  Act of  1996"  ("DIFA")  was  included  as part of an  Omnibus
Appropriations  Act of 1997 that was  signed  into law on  September  30,  1996.
Pursuant  to the terms of the DIFA,  the FDIC was  directed  to impose a special
assessment  on  SAIF-assessable  deposits at a rate that would cause the SAIF to
achieve its  designated  reserve ratio of 1.25% of  SAIF-insured  deposits as of
October 1, 1996.  Pursuant  to the final rule  issued by the FDIC on October 16,
1996, the special  assessment rate was determined to be 65.7 basis points.  This
special  assessment  resulted  in a  one-time  pre-tax  charge  to  FF  Bank  of
approximately  $28.8 million.  With this  recapitalization,  future BIF and SAIF
premiums will be more comparable and FDIC deposit  insurance expense for FF Bank
is anticipated to be significantly lower in future periods.

The DIFA also  provides  for the  merger  of BIF and SAIF into a single  Deposit
Insurance  Fund.  This  provision is projected to be effective  January 1, 1999,
assuming that no insured  depository  institution is a thrift on that date. This
legislation  contemplates  that the thrift  charter will be phased out over that
period  of time.  The DIFA also  calls  for the  Secretary  of the  Treasury  to
undertake a study concerning the development of a common charter for all insured
depository  institutions and the abolition of separate and distinct charters for
banks and thrifts.


                                      -29-

<PAGE>



MARKET PRICE AND DIVIDEND INFORMATION

FFC's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock
MarketSM  ("NASDAQ")  under the symbol of FFHC.  At December 31,  1996,  FFC had
36,802,484 outstanding shares and 4,262 shareholders of record.

The following table presents market price information and cash dividends paid on
FFC's common stock.  The prices  displayed  represent high and low sales prices,
for each quarter over the past two years,  as reported by NASDAQ.  All per share
data  have  been  adjusted  to  reflect a 5-for-4  stock  split  distributed  in
December, 1996.


                                       Market Price                     Cash
                                    High              Low             Dividend
                                    ----              ---             --------
Quarter Ended:

   December 31, 1996               $24.750          $18.800            $ .150
   September 30, 1996               19.300           17.200              .120
   June 30, 1996                    19.300           16.600              .120
   March 31, 1996                   18.400           15.600              .120

   December 31, 1995               $19.000          $16.200            $ .096
   September 30, 1995               17.300           13.600              .096
   June 30, 1995                    14.400           12.200              .096
   March 31, 1995                   13.000           10.800              .096


                                      -30-