<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
       OF 1934 [FEE REQUIRED] FOR THE YEAR ENDED DECEMBER 31, 1997 OR

[ ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 [NO FEE REQUIRED] For the transaction period from
                           to
       -------------------    ----------------------

                       Commission File Number: 0-22394

                        FIRST FINANCIAL BANCORP, INC.
                        -----------------------------
             (Exact Name of Small Business Issuer in its Charter)

           DELAWARE                                         36-3899034
-------------------------------                -------------------------------
(State or Other Jurisdiction of                (I.R.S. Employer Identification
Incorporation or Organization)                               Number)


121 E. LOCUST STREET, BELVIDERE, ILLINOIS                   61008
-----------------------------------------                 ----------
(Address of Principal Executive Offices)                  (Zip Code)

                                 (815) 544-3167
               ---------------------------------------------------
               (Registrant's Telephone Number including area code)

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

                                      NONE
                                      ----

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

                     COMMON STOCK, PAR VALUE $.10 PER SHARE
                      -------------------------------------
                                (Title of Class)

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

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

    As of February 28, 1998, there were issued and outstanding 416,452 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of March 16, 1998, was $8,261,269.

    Transitional Small Business Disclosure Format (check one): YES      NO  X
                                                                  -----   -----

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.


<PAGE>   2





                                     PART I

ITEM 1.       DESCRIPTION OF BUSINESS

GENERAL

     First Financial Bancorp, Inc. (the "Company") is a Delaware corporation
organized on June 25, 1993 by First Federal Savings and Loan Association of
Belvidere (the "Mutual Association") for the purpose of acquiring all of the
capital stock of the First Federal Savings Bank (the "Bank") issued in the
conversion of the Mutual Association from mutual to stock form (the
"Conversion"). The Company is registered as a savings and loan holding company
with the Office of Thrift Supervision (the "OTS"). To date, the Company has not
engaged in any material operations other than to hold all of the issued and
outstanding stock of the Bank. See "First Federal Savings Bank" below. At
December 31, 1997, the majority of the Company's assets consisted of the
investment in the Bank. At December 31, 1997, the Company, on an unconsolidated
basis, had total assets of $7.7 million and stockholders' equity of $7.6
million.

     The Company employs executive officers and a support staff if and as the
need arises. Such personnel are provided by the Bank and the Company pays the
Bank a management fee of $565 per month for such services. The Company neither
owns nor leases any real property. It presently utilizes the premises, equipment
and furniture of the Bank without the direct payment of any rental fees to the
Bank. The Company's executive office is located at 121 Locust Street, Belvidere,
Illinois 61008 and its telephone number is (800) 544-3093.

FIRST FEDERAL SAVINGS BANK

     GENERAL. The Bank is a federally chartered savings institution
headquartered in Belvidere, Illinois. The Bank's predecessor, the Mutual
Association, was founded in July 1922 as "Belvidere Building and Loan
Association," a state-chartered stock institution. In 1936, the Mutual
Association converted to mutual ownership under the name "Belvidere Federal
Savings and Loan Association" and received its federal mutual charter. In 1995,
the Bank changed its name from "First Federal Savings Bank of Belvidere" to
"First Federal Savings Bank." The Bank conducts business from two full-service
offices located in Belvidere, Illinois. Its deposits are insured up to the
maximum allowable amount by the Federal Deposit Insurance Corporation (the
"FDIC"). The Bank is a community-oriented savings institution engaged primarily
in the business of originating one- to four-family residential mortgage loans in
its primary market area. To a lesser extent, the Bank also originates
multi-family and commercial real estate loans and a variety of consumer loans.
The Bank also invests in various types of securities and assets that are
permissible investments for federal savings banks, including federal funds,
mortgage-backed securities, and securities issued or guaranteed by the United
States Government or agencies thereof. The Bank funds its lending and investment
activities primarily from deposits received at its branch locations, repayment
of principal and interest on its mortgage loans, and by borrowings from the
Federal Home Loan Bank of Chicago (the "FHLB"). At December 31, 1997, the Bank
had total consolidated assets of $82.5 million, total deposits of $65.0 million,
FHLB advances of $6.7 million, and stockholders' equity of $7.2 million.

     MARKET AREA. The Bank is a community-oriented savings institution offering
a variety of financial products and services to the communities it serves. The
Bank's primary market area is Boone and Winnebago Counties, located in northern
Illinois. To a lesser extent, the Bank also originates loans in counties in
Illinois contiguous to Boone and Winnebago Counties. Management believes that
its offices

<PAGE>   3

are located in communities that can generally be characterized as stable
residential neighborhoods of predominately one- to four-family residences. The
Bank's principal market for deposits is concentrated in the neighborhoods
surrounding its two full service offices in Belvidere, Illinois.

     As of 1990, the aggregate population of Boone and Winnebago Counties was
approximately 284,000. As of December, 1997, the unemployment rate was 4.2% for
the Rockford metropolitan statistical area, which includes Boone, Winnebago and
Ogle Counties, compared to 4.4% nationally.

     Until the early 1980's, the economy of northern Illinois and, in
particular, the greater Rockford area was typical of many communities in the
Midwest, consisting of a large agricultural base, most employment provided by
large manufacturing industries, a large pool of skilled labor, and an extensive
transportation infrastructure to support heavy industry. Boone and Winnebago
Counties shared in the nationwide economic downturn of the early 1980's which
adversely affected heavy industry. Since the early 1980's, the economy of Boone
and Winnebago Counties has improved by reducing its reliance on heavy industry
and by attracting and retaining a diverse array of industrial, retail and
service companies. Currently, manufacturing accounts for less than 34% of
employment and no single company or industry dominates employment in the area.
While no firm employs more than 3% of the work force, there are many major
companies and employers in the Bank's market area, such as Sundstrand
Corporation, Chrysler Corporation, Camcar Textron, Dean Foods, United Parcel
Service, Motorola, five area hospitals, Champion International, Central Rubber,
Ingersoll Milling Machine, Woodward Governor Company, Pillsbury/Green Giant,
Inc., Barber-Colman Company, Amerock Corp., Abar Ipsen, Belvedere Company, Inc.,
Franklin Wire Works and Atwood Industries, Inc. Additionally, from the early
1980's, the Chicago metropolitan market has grown westward towards the Bank's
market area.

     The Bank faces significant competition in the origination of loans from
savings and loan associations, other savings banks, mortgage banking companies,
insurance companies, and commercial banks, many of which have greater financial
and marketing resources. The Bank also faces significant competition in
attracting deposits. Historically, most direct competition for deposits has been
from savings and loan associations, savings institutions, commercial banks and
credit unions. The Bank faces additional competition for deposits from
short-term money market funds and other corporate and government securities
funds and from other financial institutions such as brokerage firms and
insurance companies. Competition has also increased as a result of the lifting
of restrictions on the interstate operations of financial institutions.

     LENDING ACTIVITIES

     Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one- to four-family residences and,
to a lesser extent, multi-family residences and commercial properties. At
December 31, 1997, the Bank's gross loan portfolio totalled $55.0 million, of
which $32.7 million, or 59.4%, were one- to four-family residential mortgage
loans held for investment. At December 31, 1997, $10.6 million, or 19.3%, of the
Bank's gross loan portfolio consisted of one- to four-family mortgage loans with
adjustable interest rates.

     The remainder of the Bank's mortgage loans at December 31, 1997 consisted
of $10.0 million of multi-family, commercial real estate, and other mortgage
loans and mortgage loans held for sale, representing 18.2% of gross loans. The
Bank's consumer loans consist of home improvement loans, home equity loans,
savings account loans, automobile loans, credit card loans, and other loans that
totalled $12.3 million, or 22.4%, of gross loans at December 31, 1997.

                                       2
<PAGE>   4
     Analysis of Loan and Mortgage-Backed Securities Portfolios.  The following
table sets forth the composition of the Bank's loan portfolio, including loans
held for sale, and the mortgage-backed securities portfolio, in dollar amounts
and in percentages of the respective portfolios at the dates indicated.



<TABLE>
<CAPTION>
                                                                                  At December 31,
                                                                ----------------------------------------------------
                                                                           1997                     1996
                                                                ------------------------  --------------------------
                                                                  Amount       Percent       Amount       Percent
                                                                ----------  ------------  ------------  ------------
<S>                                                             <C>         <C>            <C>          <C>
First mortgage loans:
  1-4 family residential ....................................   $  28,511          51.78%  $    52,417         70.22%
  1-4 family residential, purchased .........................       4,224           7.67         7,792         10.44
  Held for sale .............................................       2,352           4.27            --          0.00
  Other .....................................................       7,651          13.90         5,279          7.07
                                                                ----------  ------------   -----------  ------------
    Total first mortgage loans ..............................      42,738          77.62        65,488         87.73
Other loans .................................................      12,324          22.38         9,157         12.27
                                                               ----------   ------------   -----------  ------------
    Total loans receivable ..................................      55,062         100.00%       74,645        100.00%
                                                                            ============                ============

Less:
  Undisbursed loan proceeds .................................           --                         197
  Unearned discounts, premiums and deferred loan
    origination fees, net ...................................           59                         165
  Allowance for loan losses .................................          531                         468
                                                                ----------                 -----------
    Total loans receivable, net .............................   $   54,472                 $    73,815
                                                                ==========                 ===========

Mortgage-backed securities:
  FHLMC .....................................................           --            --%           --            --%
  FNMA ......................................................           --            --            --            --
  GNMA ......................................................           --            --            --            --
  Collateralized mortgage obligations .......................           --            --            --            --
                                                                ----------  ------------  ------------  ------------
    Total mortgage-backed securities ........................           --            --%           --            --%
                                                                ==========  ============                ============
  Premiums and discounts, net ...............................           --
                                                                ----------                ------------
    Total mortgage-backed securities, net ...................           --                          --
                                                                ==========                ============


Mortgage-backed securities available for sale (at fair value):
  FHLMC .....................................................           --            --% $      1,094         11.97%
  FNMA ......................................................           --            --         1,751         19.17
  GNMA ......................................................        1,625        100.00         4,282         46.87
  Collateralized mortgage obligations .......................           --            --         2,009         21.99
                                                                ----------  ------------  ------------  ------------
    Total mortgage-backed securities available for sale .....   $    1,625        100.00% $      9,136        100.00%
                                                                ==========  ============  ============  ============


Mortgage-backed securities held to maturity  (at amortized cost):
  FHLMC .....................................................           --            --% $         --            --%
  FNMA ......................................................          236         27.76           271         26.06
  GNMA ......................................................           --            --            --            --
  Collateralized mortgage obligations .......................          614         72.24           769         73.94
    Total mortgage-backed securities held to maturity .......          850        100.00%        1,040        100.00%
                                                                            ============                ============
  Premiums and discounts, net ...............................           14                          17
                                                                ----------                ------------
    Total mortgage-backed securities
      held to maturity, net .................................   $      864                $      1,057
                                                                ==========                ============
</TABLE>



<TABLE>
<CAPTION>

                                                                                    At December 31,
                                                                 ------------------------------------------------
                                                                        1995 (1)                    1994 (2)
                                                                --------------------------  ---------------------
                                                                    Amount       Percent        Amount    Percent
                                                                ------------  ------------  ------------  -------
<S>                                                             <C>           <C>            <C>          <C>
(Dollars in Thousands)
First mortgage loans:
  1-4 family residential .....................................  $     37,536         73.52%  $    35,529    75.69%
  1-4 family residential, purchased ..........................         1,605          3.14         1,848     3.94
  Held for sale ..............................................           390          0.76           777     1.65
  Other ......................................................         4,960          9.71         3,191     6.80
                                                                ------------  ------------   -----------  -------
    Total first mortgage loans ...............................        44,491         87.14        41,345    88.08
Other loans ..................................................         6,567         12.86         5,594    11.92
                                                                ------------  ------------   -----------  -------
    Total loans receivable ...................................        51,058        100.00%       46,939   100.00%
                                                                              ============                =======

Less:
  Undisbursed loan proceeds ..................................           252                         216
  Unearned discounts, premiums and deferred loan
    origination fees, net ....................................           246                         252
  Allowance for loan losses ..................................           330                         310
                                                                ------------                 -----------
    Total loans receivable, net ..............................  $     50,230                 $    46,161
                                                                ============                 ===========

Mortgage-backed securities:
  FHLMC ......................................................  $         --            --%  $        --       --%
  FNMA .......................................................            --            --            --       --
  GNMA .......................................................            --            --            --       --
  Collateralized mortgage obligations ........................            --            --            --       --
                                                                ------------  ------------   -----------  -------
    Total mortgage-backed securities .........................            --            --%           --       --%
                                                                              ============   ===========  =======
  Premiums and discounts, net ................................            --                          --
                                                                ------------                 -----------
    Total mortgage-backed securities, net ....................  $         --                 $        --
                                                                ============                 ===========

Mortgage-backed securities available for sale (at fair value):
  FHLMC ......................................................  $        832          9.76%  $        --       --%
  FNMA .......................................................         1,295         15.20            --
  GNMA .......................................................         4,376         51.36            --
  Collateralized mortgage obligations ........................         2,018         23.68            --       --
                                                                ------------  ------------   -----------  -------
    Total mortgage-backed securities available for sale ......  $      8,521        100.00%  $        --       --%
                                                                ============  ============   ===========  =======

Mortgage-backed securities held to maturity
 (at amortized cost):
  FHLMC ......................................................           135         10.41%  $       889     8.55%
  FNMA .......................................................           302         23.28         1,767    17.01
  GNMA .......................................................            --            --         4,790    46.11
  Collateralized mortgage obligations ........................           860         66.31         2,943    28.33
                                                                ------------  ------------   -----------  -------
    Total mortgage-backed securities held to maturity ........         1,297        100.00%       10,389   100.00%
                                                                              ============                =======
  Premiums and discounts, net ................................            21                         307
                                                                ------------                 -----------
    Total mortgage-backed securities
      held to maturity, net ..................................  $      1,318                 $    10,696
                                                                ============                 ===========
</TABLE>



<TABLE>
<CAPTION>
                                                                         At December 31,
                                                                  -----------------------------
                                                                                1993
                                                                  -----------------------------
                                                                      Amount           Percent
                                                                  ------------        ---------
<S>                                                              <C>              <C>
(Dollars in Thousands)
First mortgage loans:
  1-4 family residential .....................................   $     26,608            62.85%
  1-4 family residential, purchased ..........................          2,202             5.20
  Held for sale ..............................................          8,443            19.95
  Other ......................................................            619             1.46
                                                                 ------------     ------------
    Total first mortgage loans ...............................         37,872            89.46
Other loans ..................................................          4,462            10.54
                                                                 ------------     ------------
    Total loans receivable ...................................         42,334           100.00%
                                                                                  ============

Less:
  Undisbursed loan proceeds ..................................            495
  Unearned discounts, premiums and deferred loan
    origination fees, net ....................................            196
  Allowance for loan losses ..................................            343
                                                                 ------------
    Total loans receivable, net ..............................   $     41,300
                                                                 ============

Mortgage-backed securities:
  FHLMC ......................................................   $      1,036            10.21%
  FNMA .......................................................          2,087            20.56
  GNMA .......................................................          4,320            42.56
  Collateralized mortgage obligations ........................          2,708            26.67
                                                                 ------------     ------------
    Total mortgage-backed securities .........................         10,151           100.00%
                                                                                  ============
  Premiums and discounts, net ................................            285
                                                                 ------------
    Total mortgage-backed securities, net ....................   $     10,436
                                                                 ============

Mortgage-backed securities available for sale (at fair value):
  FHLMC ......................................................   $         --               --%
  FNMA .......................................................             --               --
  GNMA .......................................................             --               --
  Collateralized mortgage obligations ........................             --               --
                                                                 ------------     ------------
    Total mortgage-backed securities available for sale ......   $         --               --%
                                                                 ============     ============

Mortgage-backed securities held to maturity
 (at amortized cost):
  FHLMC ......................................................   $         --               --%
  FNMA .......................................................             --               --
  GNMA .......................................................             --               --
  Collateralized mortgage obligations ........................             --               --
                                                                 ------------     ------------
    Total mortgage-backed securities held to maturity ........             --               --%
                                                                 ============     ============
  Premiums and discounts, net ................................             --
                                                                 ------------
    Total mortgage-backed securities
      held to maturity, net ..................................   $         --
                                                                 ============
</TABLE>

--------------------------
(1)  The Company reclassified substantially all of its mortgage-backed
     securities to available-for-sale in December 1995 under a window of
     opportunity provided under SFAS 115.
(2)  The Company adopted FASB 115 "Accounting for Certain Debt and Equity
     Securities" as of January 1, 1994, which resulted in the Company's
     classifying all mortgage-backed securities as available for sale, held to
     maturity or trading.










<PAGE>   5





         Loan Maturity Schedule. The following table sets forth certain
information as of December 31, 1997, regarding the dollar amount of gross loans
maturing in the Bank's portfolio based on their contractual terms to maturity.
Demand loans and credit card loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. All other loans are included in the period in which the final
contractual repayment is due.


<TABLE>
<CAPTION>
                                                                                                  Beyond
                                               Within     1-3        3-5      5-10       10-20      20
                                              1 Year     Years      Years     Years      Years    Years      Total
                                              ------     -----      -----     -----      -----    -----      -----
                                                                          (In Thousands)
<S>                                          <C>       <C>       <C>        <C>       <C>       <C>      <C>
First mortgage loans (1)....................  $ 1,023   $ 5,917   $  6,484   $ 8,527   $ 4,723  $ 16,604  $  42,738
Other loans (2).............................    3,334     1,835      3,223       988     2,944        --     12,324
                                              -------   -------   --------   -------   -------  --------  ---------
    Total...................................  $ 4,357   $ 7,752   $  9,707   $ 9,515   $ 7,667  $ 16,064  $  55,062
                                              =======   =======   ========   =======   =======  ========  =========


</TABLE>

-----------------
(1) Includes loans held for sale at market value.
(2) Within 1 year includes $754,000 in credit card receivables.


         The following table sets forth the dollar amount of all gross loans at
December 31, 1997, which have predetermined interest rates and have floating or
adjustable interest rates and which are due after December 31, 1998.

<TABLE>
<CAPTION>
                                                                Fixed         Adjustable          Total
                                                                            (In Thousands)
<S>                                                           <C>             <C>              <C>
First mortgage loans (1).............................          $31,071         $  10,644        $   41,715
Other loans..........................................            4,987             4,003             8,990
                                                               -------         ---------        ----------
      Total..........................................          $36,058         $  14,647        $   50,705
                                                               =======         =========        ==========
</TABLE>

----------------------------
(1)   Includes loans held for sale at market value.


         Originating and Selling One- to Four-Family Mortgage Loans. The Bank's
primary lending activity is the origination of first mortgage loans secured by
one- to four-family residential properties. Single family residential
owner-occupied mortgage loans are underwritten in conformity with the criteria
established by the Federal National Mortgage Association ("FNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage
Association ("GNMA"), the Federal Home Administration ("FHA") and the Department
of Veteran's Affairs (the "VA"), and are eligible for sale to such agencies,
with the exception of loans exceeding applicable agency dollar limits. To a
lesser extent, the Bank originates loans secured by non-owner occupied one- to
four-family residential real estate.

         One- to four-family residential mortgage loans originated by the Bank
are generally for terms ranging from three to 30 years, amortize on a monthly
basis, and have principal and interest due each month. Such real estate loans
often remain outstanding for significantly shorter periods than their
contractual terms to maturity, particularly in a declining interest rate
environment. Borrowers may refinance or prepay loans at their option without
penalty. One- to four-family residential mortgage loans originated by the Bank
customarily contain "due-on-sale" clauses which permit the Bank to accelerate
the indebtedness of the loan upon transfer of ownership of the mortgaged
property. Due-on-sale clauses are an important means of increasing the interest
rate on existing mortgage loans during periods of rising interest rates.



                                       4
<PAGE>   6

         The Bank originates fixed-rate mortgage loans amortized on a monthly
basis with principal and interest due monthly. In recent years the Bank has
generally retained in its loan portfolio only fixed-rate mortgage loans with
terms of less than 15 years and has held for sale or sold on a non-recourse
basis fixed-rate mortgage loans with terms greater than or equal to 15 years,
subject to the Bank's interest-rate risk management policies. In 1997, a
significant portion of the company's portfolio fixed-rate mortgage loans were
sold in conjunction with the restructuring of the balance sheet (See
Management's Discussion and Analysis -- Financial Condition). Fixed-rate
mortgage loans with terms greater than 15 years are generally held for sale or
sold on a non-recourse basis, with servicing retained (except for FHA and VA
loans, which are sold on a servicing-released basis).


         The Bank has purchased participating interests in first mortgage loans.
Management's analysis of such loans in terms of underwriting, collection
techniques, evaluation of reserves and delinquency status is the same as for
one- to four-family residential mortgage loans originated by the Bank. Based on
the foregoing, management of the Bank does not believe that such participations
present any materially greater risk of delinquency than one- to four-family
residential mortgage loans originated by the Bank.

         The Bank also originates ARM loans to reduce interest rate risk. The
Bank originates one-year ARM loans which adjust in relationship to U.S. Treasury
rates. ARM loans are originated with terms ranging from 15 to 30 years.
Currently, ARM loans originated by the Bank provide for maximum adjustments of
2% per adjustment, with overall interest rate caps of 6% and interest rate
floors of 1% under the initial interest rate. The Bank originated $1.2 million
in ARM loans during the year ended December 31, 1997, as compared to $4.1
million for the year ended December 31, 1996.

         The Bank's current lending policy generally is to originate and retain
in its portfolio ARM loans. During the year ended December 31, 1997, the Bank
originated $1.2 million in ARM loans, and at December 31, 1997, $10.6 million,
or 19.3%, of the Bank's gross loan portfolio consisted of ARM loans. ARM loans
generally pose a risk that as interest rates rise, the amount of a borrower's
monthly loan payment also rises, thereby increasing the potential for
delinquencies and loan losses. At the same time, the marketability of such loans
may be adversely affected by higher rates.

         The Bank's lending policies generally limit the maximum loan-to-value
ratio on one- to four-family mortgage loans secured by owner-occupied properties
to 80% of the lesser of the appraised value or purchase price of the property.
The Bank originates some loans with up to 97% loan-to-value ratios on which it
charges a higher effective interest rate; however, the Bank's policy is to
require private mortgage insurance on loans with a loan-to-value ratio in excess
of 80%.

         Commercial Real Estate and Multi-Family Lending. The Bank originates
commercial real estate and multi-family loans on a limited basis. At December
31, 1997, such loans represented 17.9% of the Bank's mortgage loan portfolio and
13.9% of the Bank's gross loan portfolio. The Bank generally does not solicit
such loans, and originates such loans selectively and on a case-by-case basis.
During 1998, the Bank plans to expand its commercial real estate loan portfolio
as a means to increase net interest margins and overall profitability. The Bank
originated $0.5 million of commercial and multi-family real estate loans in
1997. At December 31, 1997, the Bank's commercial real estate and multi-family
real estate loan portfolio totalled $7.7 million. The largest loan at December
31, 1997 was $690,000.

         The Bank's commercial real estate loans typically are secured by office
buildings, retail shopping stores, light industrial/warehouse facilities and
ecumenical buildings. The Bank generally makes such loans in amounts up to 80%
of the appraised value of the property.

                                       5
<PAGE>   7

         The Bank's multi-family loans are typically secured by residential
properties containing 6, 8 or 12 dwelling units located in its primary market
area. None of the Bank's multifamily loans are secured by residential properties
containing more than 64 units. The Bank makes such loans in amounts up to 80% of
the appraised value of the property. The Bank generally requires a positive cash
flow on all multi-family properties. Multi-family loans are offered with fixed
or adjustable interest rates. Fixed-rate and adjustable rate loans generally
bear interest rates which are keyed to interest rates paid on U.S. Treasury
issues.

         Multi-family and commercial real estate loans generally are for larger
loan amounts and involve greater risks than one- to four-family residential
mortgage loans. Because payments on loans secured by such properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to a greater extent to adverse conditions in the
real estate market or the economy. The Bank seeks to minimize these risks in a
variety of ways, including limiting the size of such loans and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan. The Bank
obtains appraisals on each property in accordance with applicable regulations.

         Consumer, Home Equity and Other Lending. The Bank also offers a variety
of consumer loans which consist primarily of home equity loans, but which also
include home improvement loans, installment loans secured by automobiles,
savings account loans and other secured and unsecured consumer loans.

         The Bank began a controlled re-entry into indirect auto lending during
the year ended December 31, 1994. During 1997 the Bank increased its
participation in the indirect auto market. Management of the Bank does not,
however, currently anticipate that indirect auto loans will constitute a
significant part of its consumer loan portfolio in the immediate future.

         The Bank offers home equity loans which are line of credit loans
secured by a first or second mortgage on one- to four-family, owner-occupied
residential properties located in its market area. Home equity line of credit
loans are offered with adjustable interest rates only and currently have terms
of five to twenty years. The Bank also offers fixed-rate fixed-term second
mortgage and home improvement loans. As of December 31, 1997, the Bank's
consumer and commercial loan portfolio totalled $12.3 million, or 22.4%, of the
Bank's gross loan portfolio. Of the consumer loan portfolio, home improvement,
second mortgage and home equity loans comprised $6.8 million, or 13.0%, of the
Bank's gross loan portfolio, and other loans (approximately $2.4 million of
which were secured by automobiles) comprised $6.7 million, or 12.1%, of the
Bank's gross loan portfolio.

         In addition, the Bank offers unsecured consumer loans through its Visa
and MasterCard programs. Management believes that these loans, which carry a
higher rate of interest, can enhance net interest income when offered in
conjunction with a prudent credit risk policy and collection program. Such loans
made up $0.8 million or 1.4% of the gross loan portfolio as of December 31,
1997.

         Consumer loans entail greater risks than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
unsecured or secured by rapidly depreciable assets such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance, since there is
a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, the remaining deficiency in some cases does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of

                                       6
<PAGE>   8

various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. The
Bank's level of consumer loan delinquencies generally has been low. No assurance
can be given, however, that the Bank's delinquency rate on consumer loans will
continue to remain low in the future.

         Loan Concentration. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") amended the Home Owners' Loan Act of 1933
("HOLA") to limit the amount of credit a savings institution could extend to any
single borrower or related group of borrowers generally to 15% of the savings
institution's unimpaired capital and surplus. The applicable regulations also
provide that additional amounts of credit may be extended to such borrowers, in
certain circumstances, in amounts up to 10% of the savings institution's
unimpaired capital and surplus, if such credit is secured by readily marketable
collateral, which generally does not include real estate. Loans originated prior
to the enactment of the FIRREA, however, are deemed to comply with the limits
imposed by the FIRREA if made in accordance with the then applicable lending
limits. At December 31, 1997, the Bank had no loans in excess of its loan to one
borrower limitation. At December 31, 1997, the maximum dollar amount of loans to
one borrower that the Bank was authorized to make was $1,153,000. At that date,
the largest concentration of loans to one borrower totalled $690,000.


         Loan Origination, Purchase, Sale and Servicing Activities. Mortgage
loan applications are accepted at the Bank's Locust Street Office, and by
commissioned loan originators employed by the Bank who accept applications from
throughout the Bank's market area. The Bank also accepts consumer loan
applications at its Locust Street office. Loans are generated through the Bank's
marketing efforts, its present customers, walk-in customers and referrals from
real estate brokers, builders, local businesses and commissioned loan
originators. The Bank generally originates one- to four-family residential
mortgage loans in conformity with FNMA, FHLMC and other agency guidelines to
facilitate the sale of fixed-rate residential mortgage loans in the Bank's
secondary mortgage market operations. The Bank also originates loans in amounts
exceeding agency guidelines.


         Each fixed-rate mortgage loan that is originated for sale is held in
the Bank's held for sale portfolio until a commitment has been obtained from
FNMA, FHLMC or another financial institution to purchase the loan or group of
loans. The Bank's loans are sold without recourse. Generally ARM loans and
fixed-rate loans with terms of less than 15 years are retained in the Bank's
portfolio. Gains or losses resulting from sales of loans are recorded at the
time of sale and are determined by the difference between the net sales proceeds
and the carrying value of loans sold.

         The Bank has capitalized the cost of mortgage servicing rights ("MSRs")
on mortgages originated after December 31, 1994 which have been sold or
securitized. The allocation of the total cost of the mortgages to MSRs and the
mortgages (without MSRs) is based on their relative fair values. MSRs are
amortized in proportion to and over the period of estimated net servicing
income.

         The gross servicing fee income from loans originated is generally 1/4%
to 3/8% of the total balance of the loan serviced. When servicing is retained at
other than a normal servicing fee, an additional gain or loss is recognized and
an excess servicing fee receivable or payable is recorded at the time of sale
based upon the net present value of expected amounts to be received or paid
resulting from the difference between the contractual interest rates received
from the borrowers and the rate paid to the buyer. The resulting servicing fee
premium or discount is amortized or accreted to loan servicing income over the
estimated remaining life of the loans sold.

                                       7
<PAGE>   9


         At December 31, 1997, the Bank's portfolio of loans serviced for
others totalled $69.2 million. Loan servicing fees and charges for the years
December 31, 1997, 1996 and 1995 were $209,000, $198,000 and $185,000,
respectively.


         The table below shows the Bank's loan originations, sales and
repayments of loans for the periods indicated.

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                               --------------------------------------------------
                                                                  1997                1996               1995
                                                               -----------        ------------       -----------
                                                                                  (In Thousands)

<S>                                                            <C>                <C>                 <C>
Loans receivable and loans held for sale (gross):
   At beginning of the period........................          $  74,645           $   51,058          $  46,939
                                                               ---------           ----------          ---------

Originations:
   First mortgage loans:
      1-4 family residential, portfolio..............              4,234               21,797              6,466
      1-4 family residential, held for sale..........             12,502                6,492              7,650
      Other..........................................                483                1,115              1,717
                                                               ---------           ----------          ---------
        Total first mortgage loans...................             17,219               29,404             15,833
   Other loans.......................................             10,049                6,286              6,453
                                                               ---------           ----------          ---------
           Total originations........................             27,268               35,690             22,286

Principal repayments.................................            (17,827)              (5,350)           (10,663)
Sale of first mortgage loans.........................            (29,614)              (6,753)            (7,504)
                                                               ---------           ----------          ---------
   Net loan activity.................................            (20,173)              23,587              4,119
                                                               ---------           ----------          ---------
At end of the period.................................          $  54,472           $   74,645          $  51,058
                                                               =========           ==========          =========
</TABLE>


         Loan Approval Procedures and Authority. The Bank accepts consumer loan
applications at its Locust Street office and mortgage loan applications at its
Locust Street office. For all loans originated by the Bank, upon receipt of a
completed loan application from a prospective borrower, a credit report is
ordered, income and certain other information generally is verified and, if
necessary, additional financial information is required. All borrowers of one-
to four-family residential mortgage loans are qualified pursuant to applicable
agency guidelines except that the Bank may make loans in amounts exceeding
applicable agency limits. The Bank's policies require appraisals on all real
estate intended to secure a proposed loan, which currently are performed by
independent appraisers designated and approved by the Bank. The Board annually
approves the independent appraisers used by the Bank and reviews the Bank's
appraisal policy. It is the Bank's policy to obtain title insurance on all real
estate first mortgage loans. Borrowers must also obtain hazard insurance prior
to closing. Borrowers generally are required to advance funds on a monthly basis
together with each payment of principal and interest to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes and hazard insurance premiums.

         Certain officers have authority to approve loans up to specified dollar
amounts. All one- to four-family first mortgage loans of $300,000 or less may be
approved by the Vice President of Lending. One- to four-family mortgage loans in
excess of $300,000 must be approved by the Loan Committee. Secured and unsecured
consumer loans may be approved by the Vice President of Lending in amounts up to
$50,000 for secured and unsecured loans. Consumer loans in excess of these
amounts must be approved by the Loan Committee. All mortgage loans and consumer
loans are ratified by the Board of Directors at its regular monthly meetings.

                                       8
<PAGE>   10


         Mortgage-Backed Securities. The Bank also invests in mortgage-backed
securities. At December 31, 1997, net mortgage-backed securities totalled $2.5
million, or 3.0%, of total assets consisting of $0.6 million of fixed-rate
mortgage-backed securities and $1.9 million of adjustable-rate mortgage-backed
securities. As of December 31, 1997, mortgage-backed securities were insured or
guaranteed by either the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA"), or the Federal Home Loan
Mortgage Corporation ("FHLMC"), or in the case of collateralized mortgage
obligations ("CMOs"), backed by the collateral of such agencies. At December 31,
1997, 1996 and 1995, the amortized cost of the Bank's net mortgage-backed
securities portfolio totalled $2.5 million, $10.2 million, and $9.8 million,
respectively.


         The Bank maintains its mortgaged-backed securities investments in two
separate portfolios, a held-to-maturity portfolio, which consists of
mortgage-backed securities purchased with the intent to hold to maturity and an
available-for-sale portfolio, which consists of securities held for liquidity
and asset/liability management purposes. Mortgage-backed securities in the
held-to-maturity portfolio are accounted for on an amortized cost basis and
those in the available-for-sale portfolio are accounted for on a market value
basis with unrealized profit and losses affecting stockholders' equity pursuant
to SFAS 115. Such securities are liquid and, therefore, they are categorized as
available for sale. In 1995, the Bank reclassified substantially all of its
held-to-maturity portfolio to the available-for-sale classification, allowing
for active management of more of the Bank's portfolio.

         Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgage loans with varying
interest rates and maturities. The mortgage loans backing the mortgage-backed
securities can be either fixed-rate or ARM loans. The interest rate risk
characteristics of the underlying pool of mortgages as well as the prepayment
risk are passed on to the holder of the mortgage-backed securities.
Consequently, in a declining interest rate environment there is a risk that
mortgage-backed securities will prepay faster than anticipated thereby adversely
affecting the yield to maturity and the related market value of the
mortgage-backed securities. Moreover, there can be no assurance that the Bank
would be able to reinvest the cash flow from prepaid mortgage-backed securities
into comparable yielding investments. In a rising interest rate environment the
value of the mortgage-backed securities may be impaired since the risk of
default of mortgage-backed securities backed by ARM loans is increased, and the
mortgage-backed securities with fixed-rate underlying mortgage loans will be
worth less as investors seek higher yielding investments.

         Set forth below is a table showing the Bank's purchases, sales and
repayments of mortgage-backed securities for the periods indicated.

<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                                ------------------------------------------------
                                                                   1997                1996               1995
                                                                ----------         ------------       ----------
                                                                                   (In Thousands)
<S>                                                            <C>                   <C>               <C>
Mortgage-backed securities (net):
   At beginning of the period........................           $ 10,193             $  9,839           $ 10,696

   Purchases.........................................                 --                1,753                137
   Sales   ..........................................             (6,954)                  --                 --
   Principal repayments (1)..........................               (736)              (1,335)              (818)
   Unrealized loss on mortgage-backed
      securities available for sale..................                (14)                 (64)              (176)
                                                                --------             --------           --------
   At end of the period..............................           $  2,489             $ 10,193           $  9,839
                                                                ========             ========           ========
</TABLE>

------------
(1)  Includes amortization/accretion of premiums/discounts.

                                       9
<PAGE>   11
         Set forth below is a table showing the Bank's ARM and fixed-rate
mortgage-backed securities for the periods indicated.


<TABLE>
<CAPTION>
                                                                            At December 31,
                                              -------------------------------------------------------------------------
                                                       1997                    1996                        1995
                                              -------------------      --------------------       ---------------------
                                                                           (In Thousands)
<S>                                           <C>          <C>          <C>          <C>          <C>          <C>
Mortgage-backed securities, net:
  Adjustable rate (1) ..................      $ 1,867       75.01%      $ 6,995       68.63%      $ 7,132       72.61%
  Fixed-rate (2) .......................          622       24.99         3,198       31.37         2,707       27.39
                                              -------      ------       -------      ------       -------      ------
    Total mortgage-backed securities, net.    $ 2,489      100.00%      $10,193      100.00%      $ 9,839      100.00%
                                              =======      ======       =======      ======       =======      ======
</TABLE>
---------------------

(1)  Includes CMOs with carrying value of $318,000 and $317,000 in 1996 and
     1995, respectively.

(2)  Includes CMOs with carrying value of $622,000, $2,778,000, and $2,883,000
     in 1997, 1996 and 1995, respectively.

DELINQUENCIES AND CLASSIFIED ASSETS.

         Delinquent Loans. The Asset Review Committee performs a monthly review
of all delinquent loans, which is then presented to the Board of Directors. The
procedures taken by the Bank with respect to delinquencies vary depending on the
nature of the loan and period of delinquency.

         The Bank's policies generally provide that delinquent mortgage loans be
reviewed and that a written late charge notice be mailed no later than the 15th
day of delinquency. The policies also require telephone contacts for loans more
than 30 days delinquent and no later than the 40th day of delinquency to
ascertain the reasons for the delinquency and the prospects of repayment. A
second telephone contact is attempted after a loan has been delinquent for 45
days. Face-to-face interviews and collection notices are generally required for
FHA and VA loans more than 60 days delinquent and, on a case by case basis, for
other mortgage loans. After 90 days, the Bank will either set a date by which
the loan must be brought current, enter into a written forbearance agreement,
foreclose on any collateral or take other appropriate action. The Bank's
policies regarding delinquent consumer loans are similar except that telephone
contacts and correspondence will generally occur after a consumer loan is more
than 15 days delinquent.

         The Bank's general policy is to continue to accrue interest on all
loans 59 days past due and discontinue the accrual of interest on a case-by-case
basis. The Bank will discontinue the accrual of interest on loans and establish
a reserve upon a determination that the loan may result in a loss. Interest on
loans contractually delinquent 60 days or more is excluded from earnings unless,
in management's judgment, collectibility is highly probable, collection efforts
are in progress, and the loans are adequately collateralized. Property acquired
by the Bank as a result of a foreclosure on a mortgage loan is classified as
real estate owned ("REO") and is recorded at the lower of the investment on the
related loan or fair value at the date of acquisition and carried at the lower
of cost or fair value, less selling costs. At December 31, 1997, the Bank had
$41,000 in loans that were 90 days or more delinquent, of which $7,000 were
secured by one- to four-family residences, and $34,000 in consumer loans. At
December 31, 1997, the Bank had no REO.

         In 1995 the Bank adopted SFAS 114, "Accounting by Creditors for
Impairment of a Loan", which was amended by SFAS 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures". SFAS 114 requires
that impaired loans, those on which the Bank will be unable to collect all
amounts due, including principal and interest under the contractual terms of the
loan, be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or at the loan's market price
or the fair value of the collateral, if the loan is collateral dependent. SFAS
114 is applicable to all creditors and to all loans regardless of whether they
are collateralized and does permit the collective valuation of impairment for
large groups of smaller-balance homogenous loans. The impact of adopting SFAS
114 in 1995 has not been material to the Bank since all of the Bank's impaired
loans are collateral dependent and the method of measuring loss on these loans
has not changed from the prior year.



                                       10
<PAGE>   12


         Classified Assets. Federal regulations require the classification of
loans and other assets such as debt and equity securities, considered by the OTS
to be of lesser quality, as "substandard", "doubtful" or "loss" assets. The
Bank's classification policies provide that assets will be classified according
to OTS regulations. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified as "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full", on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management. As of
December 31, 1997, the Bank had $678,000 of loans classified as substandard,
$106,000 in loans classified as doubtful or loss, and $179,000 of loans
classified as special mention in loans 89 days or less. The Bank had $934,000 in
classified assets less than 89 days, which were delinquent at December 31, 1997.


         The following table sets forth the amount of outstanding loans
classified at December 31, 1997, in each of the categories listed.

<TABLE>
<CAPTION>
                                                                                    At December 31, 1997
                                                                       --------------------------------------------
                                                                                     Doubtful     Special
                                                                       Substandard    or Loss     Mention     Total
                                                                       -----------    -------     -------     -----
                                                                                      (In Thousands)
<S>                                                                      <C>           <C>        <C>      <C>
Loans delinquent 90 days or more:
   Accruing.......................................................       $     --      $  --      $  --    $    --
   Non-accruing:
      First mortgage loans:
        1-4 family residential....................................       $     --      $   7      $  --    $     7
        Other loans...............................................             --         --         --         --
   Other loans....................................................              4         30         --         34
                                                                         --------      -----      -----    -------
           Total..................................................              4         37         --         41
                                                                         --------      -----      -----    -------

        Total classified loans delinquent 90 days or more.........              4         37         --         41
                                                                         --------      -----      -----    -------

Loans delinquent 60-89 days:
   Accruing.......................................................       $     --      $  --      $  --    $    --
Non-accruing:
   First mortgage loans:
      1-4 family residential......................................       $    283      $  96      $  --    $   379
      Other loans.................................................             61         --         --         61
   Other loans....................................................             67         10         --         77
                                                                         --------      -----      -----    -------
      Total.......................................................            411        106         --        517
                                                                         --------      -----      -----    -------
   Total classified loans delinquent 60-89 days...................            411        106         --        517
                                                                         --------      -----      -----    -------

Other accruing classified loans...................................             --         --        179        179
Other non-accruing classified loans...............................            267         --          0        267
                                                                         --------      -----      -----    -------
   Total other classified loans...................................            267         --        179        446
                                                                         --------      -----      -----    -------
           Total classified loans.................................       $    682      $ 143      $ 179    $ 1,004
                                                                         ========      =====      =====    =======
</TABLE>


         The Bank's policies provide that the Board of Directors review a report
of all classified assets on a monthly basis and that such classified asset
reports be provided to the OTS on a quarterly basis. When the Bank determines
that an asset should be classified, it generally does not establish a specific
allowance for such asset unless it determines that a loss on such asset is
evident. The Bank may increase, however,

                                       11
<PAGE>   13

its general valuation allowance in an amount deemed prudent. General valuation
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. The Bank's
policies provide for the establishment of a specific allowance equal to 100% of
each asset classified as "loss" or to charge-off such amount. A savings
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS which can
order the establishment of additional general or specific loss allowances. The
Bank reviews the problem loans in its portfolio on a monthly basis to determine
whether any loans require classification in accordance with applicable
regulations and believes its classification policies are consistent with OTS
policies. The Company streamlined its review of non-performing and delinquent
loans during 1997. Generally, loans are considered non-accrual, and therefore
non-performing, at an earlier point in the delinquency cycle under the new
review process.

         The specific valuation allowances established by the Bank for different
categories of loans at the dates shown, were as follows.

<TABLE>
<CAPTION>
                                                           At December 31,
                                                    ----------------------------
                                                    1997        1996       1995
                                                    ----------------------------
                                                             (In Thousands)
<S>                                               <C>         <C>         <C>
Mortgage loans .............................       $   -       $   -       $   -
Direct consumer loans ......................           8          13          18
Indirect consumer loans ....................           2           2           9
                                                   -----       -----       -----
        Total ..............................       $  10       $  15       $  27
                                                   =====       =====       =====
</TABLE>

         Delinquent Loans and Non-Performing Assets. The following table sets
forth information regarding delinquent loans, other non-accruing loans, and REO
at the dates indicated. As of the dates indicated, the Bank did not have any
material restructured loans within the meaning of SFAS 15, as amended by SFAS
114.

<TABLE>
<CAPTION>
                                                                             At December 31,
                                                    --------------------------------------------------------------
                                                       1997          1996         1995          1994          1993
                                                    ----------    ----------   ----------    ----------    -------
                                                                         (Dollars in Thousands)

<S>                                                  <C>          <C>           <C>          <C>          <C>
Loans delinquent 90 days or more:
   Accruing:
      First mortgage loans:
        1-4 family residential................       $     --      $    --       $   196      $     11      $   126
      Other loans.............................             --           --             3             4           20
                                                     --------      -------       -------      --------      -------
           Total..............................             --           --           199            15          146
                                                     --------      -------       -------      --------      -------
   Non-accruing:
      First mortgage loans:
        1-4 family residential................              7          113            82            74           93
        Other loans...........................             --            4            --            --           --
      Other loans.............................             34           27           118            40           61
                                                     --------      -------       -------      --------      -------
           Total..............................             41          144           200           114          154
                                                     --------      -------       -------      --------      -------

Loans delinquent 89 days or less:
   First mortgage loans:
        1-4 family residential................            380           --            --            --           --
        Other loans...........................            289           --            --            --           --
   Other loans................................            115            2            19            --           --
                                                     --------      -------       -------      --------      -------
           Total non-performing loans.........            784          146           418           129          300
Total real estate owned, net of related
   allowance for losses.......................             --           --            --            --           --
                                                     --------      -------       -------      --------      -------
           Total non-performing assets........       $    825      $   146       $   418      $    129      $   300
                                                     ========      =======       =======      ========      =======

Total non-performing loans to net loans
   receivable (1).............................           1.51%        0.20%         0.83%         0.28%        0.73%
</TABLE>

                                       12

<PAGE>   14


<TABLE>
<S>                                                   <C>          <C>             <C>         <C>          <C>
Total non-performing loans to
   total assets...............................           1.00         0.15          0.56          0.18         0.44
Total non-performing loans and REO to
   total assets...............................           1.00         0.15          0.56          0.18         0.44
</TABLE>

(1) Net loans receivable includes loans held for sale.

         Delinquent Loans. The following table sets forth information with
respect to loans delinquent 60-89 days in the Bank's loan portfolio at the dates
indicated.

<TABLE>
<CAPTION>
                                                                             At December 31,
                                                    --------------------------------------------------------------
                                                       1997          1996         1995          1994          1993
                                                    ----------    ----------   ----------    ----------    -------
                                                                             (In Thousands)
<S>                                                  <C>          <C>           <C>          <C>           <C>
Loans delinquent 60-89 days:
   First mortgage loans:
      1-4 family residential(1)...............       $    379      $    33       $   122      $    143      $   427
      Other first mortgage loans..............             61           --            --            --           --
      Other loans.............................             77           31            12            15           27
                                                     --------      -------       -------      --------      -------
        Total loans delinquent 60-89 days.....       $    517      $    64       $   134      $    158      $   454
                                                     ========      =======       =======      ========      =======
</TABLE>


(1)  Includes loans sold with recourse of $19,000 at December 31, 1994 and
     $12,000 at December 31, 1993.

         The following table sets forth information with respect to the Bank's
delinquent loans and other problem assets at December 31, 1997.

<TABLE>
<CAPTION>
                                                                           At December 31, 1997
                                                                        ----------------------------
                                                                        Balance               Number
                                                                        -------               ------
                                                                           (Dollars In Thousands)
        <S>                                                            <C>                      <C>
         First mortgage loans:
            1-4 family residential and other:
            Loans 30-59 days delinquent.........................        $  1,353                   32
            Loans 60-89 days delinquent.........................             379                    9
            Loans 90 days or more delinquent....................               7                    3
            Other first mortgage loans 60-89 days delinquent....              61                    1
         Other loans:
               Loans 30-59 days delinquent......................             151                   22
               Loans 60-89 days delinquent......................              77                    8
               Loans 90 days or more delinquent.................              34                    9
         Real estate owned......................................              --                   --
         Loans to facilitate sale of real estate owned..........              --                   --
                                                                        --------              -------
         Total delinquent loans and other problem assets........        $  2,062                   84
                                                                        ========              =======
</TABLE>


         Allowance for Loan Losses. An allowance for loan losses is maintained
at a level considered adequate to absorb future loan losses. Management of the
Bank, in determining the provision for loan losses, considers the risks inherent
in its loan portfolio and changes in the nature and volume of its loan
activities, along with the general economic and real estate market conditions.
The Bank utilizes a two tier approach: (i) identification of problem loans and
the establishment of specific loss allowances on such loans; and (ii)
establishment of general valuation allowances on the remainder of its loan
portfolio of which credit cards and other credit lines are reserved against the
total credit lines. The Bank maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of potential
problem loans. Such system takes into consideration, among other things,
delinquency status, size of loans, type of collateral and financial condition of
the borrowers. Specific loan loss allowances are established for identified
loans based on a review of such information and/or appraisals of the underlying
collateral. Although the Bank maintains its allowance for losses on loans at a
level which it considers to be adequate

                                       13




<PAGE>   15
to provide for potential losses, there can be no assurance that such losses will
not exceed the estimated amounts or that the Bank will not be required to make
additions to the allowance for losses on loans in the future. Future additions
to the Bank's allowance for loan losses and any changes in the related ratio of
the allowance for loan losses to non-performing loans are dependent upon the
economy, changes in real estate values and interest rates, the view of the
regulatory authorities toward adequate reserve levels, and inflation.

Analysis of the Allowance for Loan Losses. The following table sets forth
information with respect to the Bank's allowance for loan losses at or for the
dates indicated.


<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                    --------------------------------------------------------------
                                                       1997          1996         1995          1994          1993
                                                    ----------    ----------   ----------    ----------    -------
                                                                         (Dollars in Thousands)

<S>                                               <C>           <C>           <C>          <C>           <C>
Total net loans outstanding (1)...............     $   54,472    $  73,815     $  50,233    $   46,161    $  41,300
Average loans outstanding (1).................         63,282       67,621        48,205        41,383       39,815

Allowance balances:
  At beginning of period......................     $      468    $     330     $     310    $      343    $     169
  Provision for losses:
    First mortgage loans......................             10           72            34             1           62
    Other loans...............................             78          110             5             3          117
  Charge-offs:
    Other loans...............................             27           44            19            38           10
  Recoveries:
    Other loans...............................              2           --            --             1            5
                                                   ----------    ---------     ---------    ----------    ---------
  At end of period............................     $      531    $     468     $     330    $      310    $     343
                                                   ==========    =========     =========    ==========    =========


Allowance for loan losses as a percent of
  total loans outstanding at end of period....           0.97%        0.63%        0.66%         0.67%        0.83%
Net loans charged off as a percent of
  average loans outstanding...................           0.04         0.07          0.04          0.09         0.01
Ratio of allowance for loan losses to total
  non-performing loans at end of period.......          64.36       320.55         78.95        240.31       114.33
Ratio of allowance for loan losses to total
  non-performing assets at end of period......          64.36       320.55         78.95        240.31       114.33

</TABLE>


(1)  Includes loans held for sale.

         Allocation of Allowance for Loan Losses. The following table sets forth
the allocation for loan losses by loan category for the periods indicated.



<TABLE>
<CAPTION>
                                                                                   At December 31,
                                             ------------------------------------------------------------------------------------
                                                        1997                         1996                         1995
                                             --------------------------    -------------------------     ------------------------
                                                           % of Loans                   % of Loans                    % of Loans
                                                             In Each                       In Each                     In Each
                                                           Category to                   Category to                  Category to
                                              Amount       Total Loans     Amount        Total Loans     Amount       Total Loans
                                              ------       -----------     ------        -----------     ------       -----------
                                                                                (Dollars in Thousands)
<S>                                          <C>           <C>             <C>           <C>              <C>           <C>
Balance at end of period applicable to:
First mortgage loans:
   1-4 family residential ..............      $132           59.45%        $168           80.66%          $133           76.67%
   Held for sale .......................        00            4.27           00              00             00            0.76
   Other ...............................        86           13.90           40            7.07             37            9.71
Other loans ............................       313           22.38          260           12.27            160           12.86
                                              ----          ------         ----          ------           ----          ------
     Total allowance for loan losses....      $531          100.00%        $468          100.00%          $330          100.00%
                                              ====          ======         ====          ======           ====          ======
</TABLE>

                                       14
<PAGE>   16

         SECURITIES ACTIVITIES. Federally chartered savings institutions have
the authority to invest in various types of liquid assets, including U.S.
Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured associations and savings institutions,
certain bankers' acceptances, repurchase agreements and federal funds. Subject
to various restrictions, federally chartered savings institutions may also
invest their assets in commercial paper, investment grade corporate debt
securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly. Additionally, the Bank must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. Historically, the Bank has
maintained liquid assets above the minimum OTS requirements, and its average
liquidity ratio of 16.21% for December 1997 exceeded the 4% regulatory liquidity
requirement. The Bank believes that its average level of liquid assets is
adequate to meet its normal daily activities.


         The securities policy of the Bank established by the Board of Directors
attempts to provide and maintain liquidity, generate a favorable return on
securities without incurring undue interest rate and credit risk, and complement
the Bank's lending activities. The Bank's policies generally limit securities to
investments qualifying as eligible securities under OTS regulations. At December
31, 1997, the Bank had securities (including FHLB stock) in the aggregate amount
of $17.4 million with a market value of $17.5 million. At December 31, 1997, the
Bank's securities portfolio consisted of $10.8 million of U.S. Government and
federal agency obligations, an increase of $6.8 million since December 31, 1996.
The Bank also invests in ARM mutual funds which invest in FNMA, FHLMC and other
federal agency obligations. At December 31, 1997, the Bank had invested $0.2 in
ARM mutual funds. The value of the ARM mutual funds fluctuates with changes in
the value of the underlying securities. However, the Bank believes that the risk
of loss on these securities is minimal given the type of securities underlying
the ARM mutual funds. The Bank maintains its securities in two separate
portfolios, a held-to-maturity portfolio, which consists of securities purchased
with the intent to hold to maturity and an available-for-sale portfolio, which
consists of securities held for liquidity and asset/liability management
purposes. Securities in the held-to-maturity portfolio are accounted for on an
amortized cost basis and those in the available-for-sale portfolio are accounted
for on a market value basis with unrealized profits and losses affecting
stockholders' equity pursuant to SFAS 115. Such securities are liquid and
therefore they are categorized as available for sale. In 1995 the Bank
reclassified substantially all of its held-to-maturity portfolio to the
available-for-sale classification, allowing for active management of more of the
Bank's portfolio.


         For information regarding the Bank's mortgage-backed securities
portfolio see"--Lending Activities--Mortgage-Backed Securities."

                                       15
<PAGE>   17

         Securities Portfolio. The following table sets forth the carrying value
of the Company's securities portfolio, including FHLB stock, at the dates
indicated. At December 31, 1997, the market value of the Company's securities
portfolio, including FHLB stock and certificates of deposit, was approximately
$17.5 million.

<TABLE>
<CAPTION>
                                                                                  At December 31,
                                                               ---------------------------------------------------
                                                                  1997                 1996                 1995
                                                               ----------           ----------           ----------
                                                                                  (In Thousands)
<S>                                                           <C>                   <C>                  <C>
Securities available for sale (at fair value)
   U.S. Treasury notes.............................           $   2,245             $    502             $   1,610
   FHLB structured notes...........................                 477                  458                 3,990
   Other government agency notes...................               8,073                3,074                 3,315
   FNMA common stock...............................                  68                   45                    37
   AMF ARM Mutual Fund (1).........................                 193                  181                   171
   HBI Equity Trust (2)............................                 191                  269                   129
   Corporate debt securities.......................               1,783                  250                   252
   Commercial paper................................               1,477                   --                    --

Securities held to maturity (at amortized cost):
   U.S. Treasury notes.............................           $      --             $     --             $      --
   FHLB structured notes...........................                  --                   --                    --
   Other government agency structured notes........                  --                   --                    --
   Other government agency obligations.............                  --                   --                    --
   Corporate debt securities.......................                  --                   --                    --
   Municipal securities............................                  --                   78                    81
Certificates of deposit............................               2,099                   --                   200
FHLB stock.........................................                 910                1,148                   481
                                                              ---------             --------             ---------
      Total investments............................           $  17,516             $  6,005             $  10,266
                                                              =========             ========             =========
</TABLE>

------------------
(1)      AMF ARM Mutual Fund is managed by Asset Management Fund for Financial
         Institutions, Inc.
(2)      HBI Equity Trust is managed by Howe Barnes Investments, Inc.



                                       16
<PAGE>   18


SECURITIES PORTFOLIO MATURITIES.

     The following table sets forth the scheduled maturities, amortized cost and
market values and weighted average yields for the Bank's investment portfolio
and FHLB Stock at December 31, 1997.


<TABLE>
<CAPTION>
                                                                    At December 31, 1997
                                    ---------------------------------------------------------------------------------
                                       One Year or Less   One to Five Years   Five to Ten Years    Beyond Ten Years
                                    -------------------  ------------------   ------------------   ------------------
                                              Weighted             Weighted             Weighted             Weighted
                                     Market   Average    Market    Average    Market    Average    Market    Average
                                     Value     Yield     Value      Yield     Value      Yield     Value      Yield
                                  ---------  ---------   --------  --------   --------  --------   --------  --------
<S>                               <C>          <C>      <C>         <C>      <C>         <C>      <C>         <C>
(Dollars in Thousands)
Securities available for sale:
  U.S. Treasury notes ..........  $   2,245      5.79%  $      --        --  $      --        --  $      --        --
  FHLB structured notes ........         --        --         477      4.55%        --        --         --        --
  Other government agency ......      3,199      5.68%      3,264      6.32%       402      6.02%      1,208     6.86%
  FNMA common stock ............         --        --          --        --         --        --         --        --
  AMF ARM Fund .................         --        --          --        --         --        --         --        --
  HBI Equity Trust .............         --        --          --        --         --        --         --        --
  Corporate debt securities (1)       1,251      6.16%        531      6.25%        --        --         --        --
Commercial paper (2) ...........      1,478      5.91%         --        --         --        --         --        --
                                  ---------             ---------            ---------            ---------
  Total securities
     available for sale ........      8,173      5.82%      4,272      6.11%       402      6.02%     1,208      6.86%
                                  ---------             ---------            ---------            ---------

<CAPTION>
                                              Weighted              Weighted             Weighted            Weighted
                                  Amortized   Average    Amortized  Average  Amortized   Average  Amortized   Average
                                     Cost      Yield       Cost      Yield     Cost       Yield      Cost      Yield
                                  ---------  --------  ----------  --------- ---------  --------- ---------  --------
<S>                               <C>          <C>      <C>         <C>      <C>         <C>      <C>         <C>
Securities held to maturity ....         --         --         --        --         --        --         --        --
                                  ---------             ---------            ---------            ---------
Certificates of deposit ........      1,999      6.15%        100      6.85%        --        --         --        --
FHLB stock .....................         --        --         --         --         --        --         --        --
                                  ---------             ---------            ---------            ---------
Total securities ...............  $  10,172             $   4,372            $     402             $  1,208
                                  =========             =========            =========            =========
<CAPTION>
                                                      At December 31, 1997
                                          ---------------------------------------------
                                                   Total Investment Securities
                                          ---------------------------------------------

                                          Average                              Weighted
                                          Life in    Amortised     Market       Average
                                           Years        Cost       Value         Yield
                                          -------    ---------    -------      --------

<S>                                        <C>        <C>         <C>         <C>
(Dollars in Thousands)
Securities available for sale:
U.S. Treasury notes ............            0.68     $ 2,241     $ 2,245        5.79%
FHLB structured notes ..........            2.28         500         477        4.55%
Other government agency ........            3.63       8,056       8,073        6.14%
FNMA common stock ..............              --           4          68          --
AMF ARM Fund ...................              --         193         193        5.86%
HBI Equity Trust ...............              --         105         191          --
Corporate debt securities (1) ..            1.20       1,782       1,783        6.18%
Commercial paper (2) ...........            0.26       1,478       1,477        5.91%
                                                     -------     -------
Total securities
 available for sale ............            2.45(3)   14,359      14,507        6.01%(4)
                                                     -------     -------
<CAPTION>
                                          Average                              Weighted
                                          Life in     Carrying     Market      Average
                                           Years        Value      Value        Yield
                                          -------     -------     ------       --------
<S>                                         <C>      <C>         <C>           <C>
Securities held to maturity ....              --          --          --             --
                                                     -------     -------
Certificates of deposit ........              --       2,099       2,099           6.13%
FHLB stock .....................              --         910         910           7.00%
                                                     -------     -------
Total securities ...............                     $17,368     $17,516
                                                     =======     =======
</TABLE>


(1)  Includes corporate debt securities issued by U.S. Steel Corporation
     ($250,000 in book value and $250,000 in market value), Lehman Brothers
     Corporation ($498,000 in book value and $499,000 in market value), Lockheed
     Martin Corporation ($503,000 in book value and $503,000 in market value)
     and Commonwealth Edison Corporation ($531,000 in book value and $531,000 in
     market value).

(2)  Includes commercial paper issued by Paine Webber Group ($988,000 in book
     value and $988,000 in market value) and AT&T Capital ($489,000 in book
     value and $490,000 in market value).

(3)  Includes only U.S. Government and agency obligations and structured notes;
     corporate and commercial paper; the AMF ARM Mutual Fund is a daily
     investment deposit, FHLB Stock, HBI Equity Trust, and FNMA Common Stock do
     not have fixed maturities.

(4)  The weighted average yield does not include the FNMA Common Stock and HBI
     Equity Trust.


                                      17

<PAGE>   19

SOURCES OF FUNDS.


     General. Deposits are the major source of the Bank's funds for investment
and lending purposes. In addition to deposits, the Bank derives funds from the
amortization and prepayment of mortgage-backed securities and loans, the
maturity of securities, proceeds from the sales of loans, operations and
advances from the FHLB. Scheduled principal repayments on mortgage-backed
securities and loans are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions.


         Deposits. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank's deposits consist of passbook savings,
NOW, money market and certificate accounts. The Bank also offers its depositors
Individual Retirement Accounts ("IRAs"). The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The overall amount of deposit
accounts held by the Bank, however, has not fluctuated significantly. The Bank's
deposits are obtained primarily from the areas in which its offices are located.
The Bank relies primarily on customer service and long-standing relationships
with customers to attract and retain these deposits. Certificate accounts in
excess of $100,000 are not actively solicited by the Bank nor does the Bank use
brokers to obtain deposits. Further, the Bank developed strategies which focused
on pricing and retention in certain areas of the deposit base. Management
constantly monitors the Bank's deposit accounts, for activity, type of account
and total balances, competition rates, and the Bank's cost of funds, adjusting
accordingly. Based on historical experience, management believes it will retain
a large portion of such accounts upon maturity.

         Deposit Activity. The following table sets forth the dollar change in
deposit accounts of the Bank for the periods indicated.


<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                               ---------------------------------------------------
                                                                 1997                 1996                 1995
                                                               --------            ----------           ----------
                                                                                 (In Thousands)
<S>                                                           <C>                 <C>                  <C>
Deposits...........................................            $ 296,079           $  252,238            $ 130,730
Withdrawals........................................              297,384              255,617              127,030
                                                              ----------            ---------            ---------
  Net increase (decrease) before interest credited.               (1,305)              (3,379)               3,700
Interest credited..................................                3,017                2,987                2,733
                                                              ----------            ---------            ---------
  Net increase (decrease) in deposit accounts......           $    1,712            $    (392)           $   6,433
                                                              ==========            =========            =========
</TABLE>


                                      18

<PAGE>   20

           Deposit Flow. The following table sets forth the change in dollar
amount of deposit accounts in the various types offered by the Bank between the
dates indicated.


<TABLE>
<CAPTION>
                                           Balance                              Balance
                                             at            %                      at             %
                                         December 31,  of Total      Incr.    December 31,    of Total     Incr.
                                            1997       Deposits     (Decr.)      1996         Deposits    (Decr.)
                                         -----------   --------     -------  -------------   ----------   -------
                                                                   (Dollars in Thousands)
<S>                                     <C>            <C>         <C>         <C>           <C>         <C>
Club accounts.......................     $    26          0.04%    $   (4)      $    30          0.05%       --
Non-interest-bearing NOW accounts...       4,371          6.47      2,696         1,675          2.54      (458)
NOW accounts........................       4,826          7.14        (87)        4,913          7.46      (455)
Passbook accounts...................       8,739         12.94        (61)        8,800         13.37      (681)
Money market deposit accounts.......       6,760         10.01       (293)        7,053         10.71      (199)
Certificates of deposit which mature:
    within 12 months................      20,058         29.69     (3,686)       23,744         36.06    (1,740)
    within 12-36 months.............      22,251         32.94     12,686         9,565         14.53     2,523
    beyond 36 months................         519          0.77     (9,539)       10,058         15.28       618
                                         -------      --------     ------       -------      --------   -------
      Total.........................     $67,550        100.00%    $1,712       $65,838        100.00%  $  (392)
                                         =======      ========     ======       =======      ========   =======

<CAPTION>
                                         Balance                             Balance
                                           at             %                     at
                                       December 31,    of Total   Incr.    December 31,
                                          1995        Deposits    (Decr.)      1994
                                       ------------  ---------   -------   ------------
                                                      (Dollars in Thousands)
<S>                                     <C>           <C>       <C>          <C>
Club accounts.......................    $    30         0.05%   $    --       $     30
Non-interest-bearing NOW accounts...      2,133         3.22        580          1,553
NOW accounts........................      5,368         8.11        (23)         5,391
Passbook accounts...................      9,481        14.31     (1,717)        11,198
Money market deposit accounts.......      7,252        10.95      2,537          4,715
Certificates of deposit which mature:
    within 12 months................     25,484        38.48      3,824         21,660
    within 12-36 months.............      7,042        10.63     (3,193)        10,235
    beyond 36 months................      9,440        14.25      4,425          5,015
                                        -------      -------    -------       --------
      Total.........................    $66,230       100.00%   $ 6,433       $ 59,797
                                        =======      =======    =======       ========
</TABLE>


                                       19


<PAGE>   21


         Deposit Portfolio. Deposit accounts in the Bank as of December 31,
1997, were represented by the various types of deposit programs described below.

<TABLE>
<CAPTION>
     Weighted                                                                                            Percent
      Average                                                                                            of Total
     Interest                                                                          Account           Deposit
       Rate               Term              Deposits                                   Balances          Accounts
     --------             ----              --------                                   --------          --------
                                                                                    (In Thousands)
     <S>             <C>                    <C>                                       <C>                <C>
       0.00%              None              Non-interest-bearing NOW accounts         $  4,371             6.47%
       1.00               None              NOW accounts                                 4,826             7.14
       1.75               None              Passbook and club accounts (1)               8,765            12.98
       4.21               None              Money market deposit accounts                6,760            10.01

                                            Certificates of Deposit (1)
                                            ---------------------------

       4.72          1-5 months             Fixed term, fixed-rate                         453             0.67
       4.61          6-11 months            Fixed term, fixed-rate                       6,201             9.18
       5.14          12-17 months           Fixed term, fixed-rate                       4,599             6.80
       5.00          18 months              Fixed term, variable rate                      119             0.18
       4.16          18-23 months           Fixed term, fixed-rate                          40             0.06
       4.59          24-29 months           Fixed term, fixed-rate                         310             0.46
       4.61          30-35 months           Fixed term, fixed-rate                       2,163             3.20
       6.02          36-47 months           Fixed term, fixed-rate (3)                   7,488            11.09
       4.83          48-51 months           Fixed term, fixed-rate                          14             0.02
       6.67          60 months              Fixed term, fixed-rate                      12,452            18.43
                       or greater
       5.73          Various                Negotiated Jumbo (3)                         8,989            13.31
     ------                                                                           --------          -------
       4.36% (2)                                                                      $ 67,550           100.00%
     ======                                                                           ========          =======
</TABLE>

------------------
(1) IRA accounts are generally offered throughout all terms stated above with a
    balance outstanding of $7.7 million.
(2) Includes the effect of non-interest-earning demand accounts totalling
    $4.4 million.
(3) With respect to $8.0 million in deposit amounts, includes a one-time
    option to increase rate within the 36 month term.


         Certificates of Deposit by Rates. The following table sets forth the
certificates of deposit classified by rates as of the dates indicated.

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                --------------------------------------------------
                                                                   1997                1996                 1995
                                                                   ----                ----                 ----
Rates:                                                                            (In Thousands)
------
<S>                                                           <C>                   <C>                  <C>
3.99% or less......................................           $      211            $   3,274            $   4,010
4.00% - 5.99%......................................               25,593               24,084               17,149
6.00% - 7.99%......................................               16,976               15,861               20,610
8.00% - 8.75%......................................                   48                  148                  197
                                                              ----------            ---------            ---------
   Total...........................................           $   42,828            $  43,367            $  41,966
                                                              ==========            =========            =========
</TABLE>




                                       20
<PAGE>   22
         Certificates of Deposit Maturity Schedule. The following table sets
forth the amount and maturities of certificates of deposit at December 31, 1997.

<TABLE>
<CAPTION>
                                                                        Amount Due
                                        ---------------------------------------------------------------------------
                                        One Year      1-2        2-3        3-4        4-5   Five and more
                                         or Less     Years      Years      Years      Years      Years       Total
                                         -------     -----      -----      -----      -----      -----       -----
                                                                      (In Thousands)
<S>                                    <C>          <C>        <C>        <C>       <C>        <C>         <C>
Rate
3.99% or less.......................    $   211          --         --         --         --         --    $    211
4.00 - 5.99%........................     17,811       4,857      2,045        537        343         --      25,593
6.00 - 7.99%........................      2,036       2,583     11,248        981        128         --      16,976
8.00 - 8.75%........................         --          --         --         --         48         --          48
                                        -------     -------   --------    -------    -------    -------    --------
   Total............................    $20,058     $ 7,440   $ 13,293    $ 1,518    $   519    $    --    $ 42,828
                                        =======     =======   ========    =======    =======    =======    ========
</TABLE>

         Large Certificates of Deposit. The following table indicates the amount
of the Bank's certificates of deposit of $100,000 or more by time remaining to
maturity at December 31, 1997.

<TABLE>
<CAPTION>
                  Maturity Period                                                       Amount
                  ---------------                                                       ------
                                                                                    (In Thousands)
                 <S>                                                                  <C>
                  Three months or less..........................................       $ 2,643
                  Over three through six months.................................         3,265
                  Over six through 12 months....................................           300
                  Over 12 months................................................         2,781
                                                                                       -------
                        Total...................................................       $ 8,989
                                                                                       =======
</TABLE>

--------------
(1) With respect to $8.0 million in deposit amounts, includes one-time option to
increase rate within the 36 month term.


         Securities with a net amortized cost of $8.2 million were pledged to
secure certain deposit accounts in excess of federal deposit insurance limits at
December 31, 1997. Of the $9.0 million of large certificates of deposit, $4.6
million are from one large municipal depositor.


         BORROWINGS. Deposits are the Bank's primary source of funds. The Bank
also obtains advances from the FHLB. Such advances are made pursuant to several
different credit programs, each of which has its own interest rate, range of
maturities and collateral requirements. The maximum amount that the FHLB will
advance to member institutions, including the Bank, for purposes other than
meeting withdrawals, fluctuates from time to time in accordance with the
policies of the FHLB System and the Federal Housing Finance Board. The maximum
amount of FHLB advances to a member institution generally is reduced by
borrowings from any other source. At December 31, 1997, the Bank had $6.7
million in advances from the FHLB.

                                       21

<PAGE>   23

         FHLB ADVANCES. The following table sets forth certain information
regarding FHLB advances taken by the Bank during the periods indicated.

<TABLE>
<CAPTION>
                                                                         During the Year Ended December 31,
                                                               ---------------------------------------------------
                                                                  1997                 1996                  1995
                                                                  ----                 ----                  ----
                                                                               (Dollars in Thousands)
<S>                                                          <C>                   <C>                  <C>
Weighted average rate paid.........................                 6.03%                5.84%                6.24%

Maximum balance....................................           $   21,450            $  23,150            $   3,500
Average balance (1)................................               12,515               13,746                  503
</TABLE>

-----------------
(1) Calculated using average daily balances.

         SUBSIDIARY ACTIVITIES. First Financial Services of Belvidere, Illinois,
Inc. ("FFSI"), a wholly owned subsidiary of the Bank, administers and sells, on
an agency basis, mortgage-related insurance products such as mortgage life
insurance, credit life insurance and disability insurance. FFSI also sells on an
agency basis a variety of annuity products, principally to customers of the
Bank. In May 1994, FFSI hired additional staff to expand its sales of annuity
and insurance products in its market area. FFSI owns the full service office at
1021 North State Street and leases this office to the Bank. The Bank manages the
operations of FFSI and receives $900 per month for such management services.

         At December 31, 1997, FFSI had $766,154 in total assets, $31,190 in
total liabilities and $734,964 in stockholders' equity. For the years ended
December 31, 1997, 1996 and 1995, FFSI had net income of $3,985, $6,104 and
$10,725, respectively. There has been no lending activity between FFSI and the
Bank for the years ended December 31, 1997, 1996 and 1995.

         PERSONNEL. As of December 31, 1997, the Bank had 28 full-time
employees, 9 part-time employees and 3 full-time commissioned loan originators.
The employees are not represented by a collective bargaining unit, and the Bank
considers its relationship with its employees to be good.

         FEDERAL AND STATE TAXATION.

         General. The Company and the Bank report their income on a calendar
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.

         In August 1996, legislation was enacted that repeals the reserve method
of accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes. As a result, the Bank is required to recapture that
portion of the reserve that exceeds the amount which could have been deducted
under the experience method for post-1987 tax years, and now account for bad
debts for federal income tax purposes on the same basis as commercial banks. The
recapture will occur over a six-year period beginning in 1998 since the
institution meets certain residential lending requirements. The legislation did
not have a material impact on the Company or the Bank.

         To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amounts of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses

                                       22
<PAGE>   24

on loans (Excess), such Excess may not, without adverse tax consequences, be
utilized for the payment of cash dividends or other distributions to a
shareholder (including distributions on redemption, dissolution, or liquidation)
or for any other purpose (except to absorb bad debt losses). As of December 31,
1997, the Company's Excess for tax purposes totaled approximately $1.2 million.


         Corporate Alternative Minimum Tax. The Bank is subject to the corporate
alternative minimum tax ("AMT") which is imposed to the extent it exceeds the
Bank's regular income tax for the year. The alternative minimum tax will be
imposed at the rate of 20% of a specially-computed tax base ("AMTI"). Included
in the base will be a number of preference items, including the following:
interest on certain tax-exempt bonds issued after August 7, 1986; and for years
beginning after, an amount equal to 75% of the amount by which the savings
institution's "adjusted current earnings" (as specially defined) exceeds its
taxable income with certain adjustments, including the addition of preference
items. In addition, for purposes of the new alternative minimum tax, the amount
of alternative minimum taxable income that may be offset by net operating losses
is limited to 90% of alternative minimum taxable income. In addition, for
taxable years beginning after 1986, the Bank is subject to an environmental tax
equal to 0.12% of the excess of AMTI (with certain modifications) over $2.0
million dollars.

         State and Local Taxation.

         The Company and its subsidiaries currently file consolidated Illinois
income tax returns. For Illinois income tax purposes, a savings institution's
income is presently taxed at a rate of 7.3%. For these purposes, "net income"
generally means federal taxable income, subject to certain adjustments
(including the addition of interest income on State and municipal obligations
and the exclusion of interest income on United States Treasury obligations). The
exclusion of income on United States Treasury obligations has the effect of
reducing significantly the Illinois taxable income of savings institutions.

         As a Delaware business corporation, the Company (on an unconsolidated
basis) will be required to file annual returns and pay annual fees and an annual
franchise tax to the State of Delaware. These taxes are based on the total
authorized shares of the Company. The Company currently has 1.75 million shares
of stock authorized (1.5 million shares of common stock and 250,000 shares of
preferred stock). The Delaware franchise tax for 1997 was approximately $9,000.

         The Company also is subject to an annual franchise tax and fees from
the State of Illinois. These taxes are based on the total shares issued. The
total franchise tax paid by the Company for the year ended December 31, 1997 was
approximately $4,000.

         Neither the Company nor the Bank has had an audit by the Internal
Revenue Service or the Illinois Department of Revenue within the past five
years, with the exception of a sales and usage tax audit conducted by the
Illinois Department of Revenue.

RECENT ACCOUNTING DEVELOPMENTS

         New Accounting Standards

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. It requires that
all items that are required

                                       23
<PAGE>   25

to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997.

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 requires that
public business enterprises report financial and descriptive information about
reportable operating segments and report selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated.

                                   REGULATION

GENERAL

         First Federal is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, First Federal is subject to broad federal
regulation and oversight extending to all its operations. First Federal is a
member of the FHLB of Chicago and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
As the holding company of the Bank, the Company also is subject to federal
regulation and oversight. The purpose of the regulation of the Company and other
holding companies is to protect subsidiary savings institutions. First Federal
is a member of the Savings Association Insurance Fund ("SAIF") and the deposits
of First Federal are insured by the FDIC. As a result, the FDIC has certain
regulatory and examination authority over First Federal.

         Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.

FEDERAL REGULATION OF SAVINGS INSTITUTIONS

         The OTS has extensive authority over the operations of savings
institutions. As part of this authority, First Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS examination of First Federal was as of
September 1997. When these examinations are conducted by the OTS and the FDIC,
the examiners may require First Federal to provide for higher general or
specific loan loss reserves. All savings institutions are subject to a
semi-annual assessment, based upon the savings institution's total assets, to
fund the operations of the OTS. The Bank's OTS assessment for the year ended
December 31, 1997, was $31,000.

         The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.

                                       24
<PAGE>   26

         In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings institutions are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.

         The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1997, First Federal's lending limit under this restriction was $1.2
million. The Bank is in compliance with the loans-to-one-borrower limit.

         The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.

INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC

         The Bank's deposits are currently insured by the Savings Association
Insurance Fund (the "SAIF"), which is administered by the FDIC. Deposits are
insured up to applicable limits by the FDIC and such insurance is backed by the
full faith and credit of the U.S. Government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of and to
require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings and loan associations,
after giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.

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

         The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also

                                       25
<PAGE>   27

impose special assessments on SAIF members to repay amounts borrowed from the
United States Treasury or for any other reason deemed necessary by the FDIC.

REGULATORY CAPITAL REQUIREMENTS

         Federally insured savings institutions, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings institutions. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.

         The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased and originated
mortgage servicing rights, must be deducted from tangible capital for
calculating compliance with the requirement. At December 31, 1997, the Bank had
$228,000 in mortgage servicing rights which were considered intangible assets.

         The OTS regulations establish special capitalization requirements for
savings institutions that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the institution's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.

         At December 31, 1997, the Bank had tangible capital of $7.2 million, or
8.6% of adjusted total assets, which is approximately $6.0 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

         The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings institution must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At December 31, 1997,
First Federal had no intangibles which were subject to these tests.

         At December 31, 1997, First Federal had core capital equal to $7.2
million, or 8.6% of adjusted total assets, which is $4.7 million above the
minimum leverage ratio requirement of 3% as in effect on that date.

         The OTS risk-based requirement requires savings institutions to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At

                                       26
<PAGE>   28

December 31, 1997, First Federal had no capital instruments that qualify as
supplementary capital and $521,000 of general loss reserves, which was less than
1.25% of risk-weighted assets.

         Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at December 31, 1997.

         In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.

         The OTS has adopted a final rule that requires every savings
institution with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings institution, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS evaluates the process
by which savings institutions may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings institution with less than $300 million in assets and a total risk
weighted capital ratio in excess of 12% is exempt from this requirement unless
the OTS determines otherwise.

         On December 31, 1997, First Federal had total capital of $7.7 million
(including $7.2 million in core capital) and risk-weighted assets of $49.9
million (including $2.7 million in converted off-balance sheet assets); or total
capital of 15.4% of risk-weighted assets. This amount was $3.7 million above the
8% requirement in effect on that date.

         The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings institutions that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risk-based
capital ratio or an 8% risk-based capital ratio). Any such institution must
submit a capital restoration plan and until such plan is approved by the OTS may
not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions.
The OTS is authorized to impose the additional restrictions that are applicable
to significantly undercapitalized institutions.

          As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.

                                       27
<PAGE>   29

         Any savings institution that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized institutions. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.

         The OTS is also generally authorized to reclassify an institution into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.

         The imposition by the OTS or the FDIC of any of these measures on First
Federal may have a substantial adverse effect on the Bank's operations and
profitability. The Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.

LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS

         OTS regulations impose various restrictions or requirements on
institutions with respect to their ability to pay dividends or make other
distributions of capital. OTS regulations prohibit an institution from declaring
or paying any dividends or from repurchasing any of its stock if, as a result,
the regulatory capital of the institution would be reduced below the amount
required to be maintained for the liquidation account established in connection
with its mutual to stock conversion.

         The OTS utilizes a three-tiered approach to permit institutions, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account (see "--Regulatory Capital
Requirements").

         Generally, Tier 1 institutions, which are institutions that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the institution's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before and
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four quarter period.

         Tier 3 associations (which are institutions that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital

                                       28
<PAGE>   30

distribution in excess of the noted safe harbor level must obtain OTS approval
prior to making such distribution. Tier 2 associations proposing to make a
capital distribution within the safe harbor provisions and Tier 1 associations
proposing to make any capital distribution need only submit written notice to
the OTS 30 days prior to such distribution. As a subsidiary of the Company, the
Bank will also be required to give the OTS 30 days' notice prior to declaring
any dividend on its stock. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. See "- Regulatory Capital
Requirements."

         The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
institution may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition (as defined by regulation) and would remain
adequately capitalized (as defined in the OTS prompt corrective action
regulations) following the proposed distribution. Savings institutions that
would remain adequately capitalized following the proposed distribution but do
not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution. The OTS stated it will generally regard as
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings institution may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. As under the current rule, the OTS may object to
a capital distribution if it would constitute an unsafe or unsound practice. No
assurance may be given as to whether or in what form the regulations may be
adopted. The Bank qualifies for Tier 1.

LIQUIDITY

         All savings institutions, including First Federal, are required to
maintain an average daily balance of specified liquid assets equal to a monthly
average of not less than a specified percentage (currently 4%) of its net
withdrawable deposit accounts plus borrowings payable in one year or less. For a
discussion of what the Bank includes in liquid assets, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations." This
liquid asset ratio requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
institutions. Penalties may be imposed upon institutions for violations of
either liquid asset ratio requirement. At December 31, 1997, First Federal was
in compliance with these requirements, with an overall liquid asset ratio of
16.21% and a short-term liquid assets ratio of 13.09%.

ACCOUNTING

         An OTS policy statement applicable to all savings institutions
clarifies and re-emphasizes that the investment activities of a savings
institution must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. First Federal is in compliance with
these amended rules.

         The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.

                                       29
<PAGE>   31

QUALIFIED THRIFT LENDER TEST

         All savings institutions, including the Bank, are required to meet a
qualified thrift lender ("QTL") test. Under the QTL test, a savings association
is required to maintain at least 65% of its "portfolio assets" (total assets
less (i) specified liquid assets up to 20% of total assets, (ii) intangibles,
including goodwill, and (iii) the value of property used to conduct business) in
certain "qualified thrift investments," primarily residential mortgages and
related investments, including certain mortgage-backed and related securities on
a monthly basis in 9 out of every 12 months. A savings institution that fails
the QTL test must either convert to a bank charter or operate under certain
restrictions. As of December 31, 1997, the Bank maintained 73.7% of its
portfolio assets in qualified thrift investments and, therefore, met the QTL
test.

COMMUNITY REINVESTMENT ACT

         Under the Community Reinvestment Act (the "CRA"), as implemented by OTS
regulations, a savings institution has a continuing and affirmative obligation,
consistent with its safe and sound operation, to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions, nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
its examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA rating
system identifies four levels of performance that may describe an institution's
record of meeting community needs: outstanding, satisfactory, needs to improve
and substantial non-compliance. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The CRA regulations were recently
revised. The OTS assesses the CRA performance of a savings institution under
lending, service and investment tests, and based on such assessment, assigns an
institution in one of the four above-referenced ratings. The Bank received a
"satisfactory" CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.

TRANSACTIONS WITH AFFILIATES

         Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as favorable to the
institution as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the institution's capital. Affiliates of the Bank include the Company and any
company which is under common control with the Bank. In addition, a savings
institution may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Bank's subsidiaries are not deemed affiliates, however; the OTS has the
discretion to treat subsidiaries of savings institutions as affiliates on a case
by case basis.

         Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.

                                       30
<PAGE>   32

HOLDING COMPANY REGULATION

         The Company is a unitary savings institution holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over holding companies
and their non-savings institution subsidiaries which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution.

         As a unitary savings institution holding company, the Company generally
is not subject to activity restrictions. If the Company acquires control of
another savings institution as a separate subsidiary, it would become a multiple
savings institution holding company, and the activities of the Company and any
of its subsidiaries (other than the Bank or any other SAIF-insured savings
institution) would become subject to such restrictions unless such other
institutions each qualify as a QTL and were acquired in a supervisory
acquisition.

         If First Federal fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings institution holding companies or their subsidiaries. In
addition, within one year of such failure the Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings institution holding
company. See "--Qualified Thrift Lender Test."

         The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured institution. Such acquisitions are generally
prohibited if they result in a multiple savings institution holding company
controlling savings institutions in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings institution.

FEDERAL SECURITIES LAW

         The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.

         Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.

FEDERAL RESERVE SYSTEM

         The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1997, First Federal was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "--Liquidity."

                                       31
<PAGE>   33

         Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

FEDERAL HOME LOAN BANK SYSTEM

         First Federal is a member of the FHLB of Chicago, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.


         As a member, First Federal is required to purchase and maintain stock
in the FHLB of Chicago. At December 31, 1997, First Federal had $.9 million in
FHLB stock, which was in compliance with this requirement. In past years, First
Federal has received substantial dividends on its FHLB stock. Over the past five
fiscal years dividends on FHLB stock have averaged 6.5% and were 6.8% for 1997.


         Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.

         For the year ended December 31, 1997, dividends paid by the FHLB of
Chicago to the Bank totaled $66,000, which constitute a $9,000 increase from the
amount of dividends received in 1996.

                                       32
<PAGE>   34

EXECUTIVE OFFICERS OF THE REGISTRANT

         Listed below is information, as of December 31, 1997, concerning the
Registrant's executive officers. In addition, all of the executive officers of
the Registrant are officers of the Bank holding the same position as listed
below. There are no arrangements or understandings between the Registrant and
any of persons named below with respect to which he or she was or is to be
selected as an officer.
<TABLE>
<CAPTION>
         Name                          Age                     Position
         ----                          ---                     --------
        <S>                          <C>             <C>
         Steven C. Derr                49            President and Chief Executive Officer

         Patricia J. McCoy             45            Secretary

         Keith D. Hill                 26            Treasurer, Chief Financial Officer

         Donald J. Kucera              59            Vice President

         Robert W. Opperman            36            Vice President
</TABLE>

ITEM 2.  DESCRIPTION OF PROPERTY

         (a) The Bank conducts its business through two full service offices and
one loan origination office. The Bank also maintains an administrative office
for accounting functions separate from its banking offices. The Bank purchased
land in 1996 for a future full service office.

<TABLE>
<CAPTION>
                                                                                                     Net Book Value
                                                                                                     of Property or
                                                                                 Date of                Leasehold
                               Leased or        Originally acquired               Lease               Improvements
Location                         Owned              or Leased                  Expiration              At 12/31/97
--------                       ---------        -------------------            ----------            --------------
                                                                                                     (In Thousands)
<S>                            <C>                  <C>                     <C>                         <C>
Full Service Offices
121 East Locust Street
Belvidere, Illinois  61008     Owned                   1965                          --                  $ 537

1021 North State Street
Belvidere, Illinois  61008     Leased (1)              1978                 December 31, 1998 (1)          346

Full Service Office under
  Construction (2)
7077 Perry Creek Parkway
Rockford, Illinois  61107      Owned                   1996                          --                    952

Administrative Office
217 South State Street
Belvidere, Illinois  61008     Leased                  1991                    April 26, 1998               56
</TABLE>

------------------------
(1)      Leased from FFSI, the Bank's wholly owned subsidiary.
(2)      Land purchased for future full service Branch.


         (b) INVESTMENT POLICIES. For a description of the Company's and the
Bank's policies (all of which may be changed without a vote of the Company's
security holders) and the limitations on the percentage of assets which may be
invested in any one investment, or type of investment with respect to: (1)

                                       33
<PAGE>   35

investments in real estate or interests in real estate; (2) investments in real
estate mortgages; and (3) securities of or interests in persons primarily
engaged in real estate activities, reference is made hereunder to the
information presented above under "Item 1. Description of Business."

(c)     DESCRIPTION OF REAL ESTATE AND OPERATING DATA. Not Applicable; the book
value of each of the Company's properties is less than 10% of the Company's
total consolidated assets at December 31, 1997.

ITEM 3.  LEGAL PROCEEDINGS

         Neither the Company nor the Bank are involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business. Such proceedings in the aggregate are believed by management
to be immaterial to the Company's financial condition and results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted during the fourth quarter of fiscal 1997 to a
vote of security holders.


                                       34
<PAGE>   36
                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND
                  RELATED SHAREHOLDER MATTERS

         From its initial public offering on October 1, 1993 until March 16,
1998, the Company traded on the NASDAQ Small Cap Market under the symbol FFBI.
More restrictive listing requirements implemented in 1998 required the Company
to delist from the Nasdaq Small Cap Market. As of March 17, 1998, the Company
trades on the Over the Counter Bulletin Board system under the symbol FFBI. The
following table sets forth the high and low sales price for the periods
indicated. These prices do not represent actual transactions and do not include
retail markups, markdowns or commissions.

<TABLE>
<CAPTION>
                                                              1997                           1996
                                                ------------------             ------------------
                                                High          Low              High          Low
                                                ----          ---              ----          ---
<S>                                            <C>          <C>               <C>          <C>
First Quarter...............................   $16.50       $15.50            $16.25       $15.50
Second Quarter..............................    18.75        15.50             16.25        15.50
Third Quarter...............................    19.50        18.13             16.13        15.50
Fourth Quarter..............................    21.00        19.00             16.00        15.50
</TABLE>

At December 31, 1997, the Company had 180 holders of record of its common stock
and, the Company estimates, approximately 300 to 325 beneficial owners of its
common stock. The Company paid no cash dividends on its common stock during 1997
and 1996.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

First Financial Bancorp, Inc. (the "Company") completed its initial offering of
common stock on October 1, 1993, in connection with the simultaneous conversion
of First Federal Savings and Loan Association of Belvidere, a federally
chartered mutual savings and loan association to First Federal Savings Bank (the
"Bank"), a federally chartered stock savings bank.

The Company is headquartered in Belvidere, Illinois, and its principal business
currently consists of the operations of its wholly-owned subsidiary, First
Federal Savings Bank. The Company had no operations prior to October 1, 1993,
and accordingly the results of operations prior to this date reflect only those
of the Bank and its subsidiary.

The Bank is a community-oriented savings bank offering traditional deposit and
loan products through its two full service offices in Belvidere.

The Bank invests primarily in one-to four-family mortgage loans, multi-family
and commercial real estate loans, consumer loans, and mortgage-backed
securities, U.S. Government and federal agency securities and other marketable
securities. The Bank also originates one-to four-family mortgage loans for sale,
generally retaining the servicing rights.

The Company's results of operations are primarily dependent on the Bank. The
Bank's primary source of earnings is its net interest income, which is the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. The results of operations are also
affected by non-interest income, such as mortgage loan servicing fees, charges
on deposit accounts, gains on sales of loans and sales of non-insured deposit
products, and non-interest expense, such as compensation and benefits, occupancy
and equipment, data processing, federal deposit insurance premiums, loan
origination and servicing, marketing expenses, professional fees, and other
operating expenses.

                                       35
<PAGE>   37

The Bank has a wholly-owned subsidiary, First Financial Services of Belvidere
Illinois, Inc., which offers annuities and insurance products on an agency basis
at the Bank's full service locations.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995


The following discussion reviews the Company's financial condition and results
of operations and should be read in conjunction with the Consolidated Financial
Statements under Item 7 of this filing. When used in this filing and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases or other public or shareholder communications, and in
oral statements made with the approval of an authorized executive officer, the
words or phrases "are expected to", "estimate", " is anticipated", "project",
"will continue", "will likely result" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties, that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. Factors
which could have a material adverse affect on the operations and future
prospects of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates; general economic conditions; legislative/regulatory
changes; monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board; the quality and
composition of the loan or securities portfolios; demand for loan products;
deposit flows; competition; demand for financial services in the Company's
market areas; and accounting principles, policies, and guidelines. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed below could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.


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

FINANCIAL CONDITION


During the second quarter of 1997, the Company took actions to restructure its
balance sheet for the purposes of reducing interest rate risk, improving the
Company's net interest margin through the redeployment of funds, and
diversifying the Company's balance sheet. As a result of those actions, the
Company realized losses totaling $286,000 net of taxes during the period. The
restructuring included the sale of substantially all of the Company's fixed rate
one- to four-family mortgage loans and the majority of its mortgage-backed
securities and collateralized mortgage-backed obligations. In addition, $7.5
million in fixed rate, fixed term FHLB advances were prepaid.


At December 31, 1997, total assets of the Company were $82.7 million as compared
to $94.5 million at December 31, 1996, a decrease of $11.8 million or 12.5%.
Interest-earning deposits held in other financial institutions increased $2.9
million to $4.1 million at December 31, 1997 from $1.2 million at December 31,
1996. Securities available for sale and held to maturity increased $9.6 million,
or 198.7%, to $14.5 million at December 31, 1997 from $4.9 million at December
31, 1996. The increase in available for sale securities was the result of the
balance sheet restructuring in which assets were sold in the amount of $26.6
million, while FHLB advances in the amount of $13.8 million were repaid
throughout the course of 1997. The excess proceeds were invested in short term
securities and certificates of deposit for future deployment in the loan
portfolio. Mortgage-backed securities available for sale and held to maturity
decreased $7.7 million, or 75.6%, to $2.5 million at December 31, 1997. The
primary reason for the decrease was the sale of $7.0 million of mortgage-backed
securities in conjunction with restructuring the balance sheet. The Company held
first mortgage loans for sale at December 31, 1997 totaling $2.4 million
compared to none at December 31, 1996. Net mortgage loan originations in the
held for sale portfolio were $12.2 million for the year ended December 31, 1997,
as compared to $6.5 million for the year ended December 31, 1996. Proceeds from
the sales of loans held for sale were $9.9 million for the year ended December
31, 1997, as compared to $6.9 million for the year ended December 31, 1996. The
increases reflect the development of a favorable rate environment during 1997 in
addition to the resumption of the sale of 15 year fixed rate mortgage loans.


Loans receivable decreased $21.7 million, or 29.4%, to $52.1 million at December
31, 1997, from $73.8 million at December 31, 1996. The primary event driving
this decrease was the aforementioned sale of a major portion of the Company's
fixed rate mortgage loan portfolio. Fixed rate mortgage loans with a carrying
value of $20.0 million were sold thereby reducing loans receivable
substantially. In addition, scheduled payments and prepayments on portfolio
loans accelerated in the low interest rate environment present during 1997. As
rates declined through the year, borrowers owning adjustable rate and balloon
loans sought to refinance into low fixed rate, fixed term loan products.

                                       36
<PAGE>   38

Much of the Company's remaining one- to four-family mortgage portfolio consisted
of loans of this nature. Partially offsetting the decrease in mortgage loans,
the Company's consumer and commercial loan holdings grew by $3.2 million, or
34.6%, during 1997, to $12.3 million. The Company has been able to pursue its
strategy of diversifying the loan portfolio as a result of attracting lending
staff with experience in many areas of lending.

As the Company has diversified into higher yielding lending products such as
consumer and commercial loans, non-performing assets have increased to $825,000
at December 31, 1997 from $143,000 at December 31, 1996. In addition to the
higher concentration of non-mortgage loans in the loan portfolio, the Company
streamlined its review of non-performing and delinquent loans during 1997.
Generally, loans are considered non-accrual, and therefore non-performing, at an
earlier point in the delinquency cycle under the new review process. Total
non-performing assets represented 1.00% of assets at December 31, 1997, as
compared to 0.15% of assets at December 31, 1996. The increase is the result of
the portfolio composition shift, the implementation of more stringent evaluation
criteria of delinquent loans during 1997 and a general acceptance of bankruptcy
by borrowers nationwide as evidenced by the record number of filings in 1997.
The Company had no real estate owned at December 31, 1997 and 1996.

Premises and equipment increased $0.5 million or 36.4% to $1.9 million at
December 31, 1997 from $1.4 million at December 31, 1996. The increase relates
to the construction of the Company's newest full-service facility in Rockford,
Illinois which is scheduled to open in the Spring of 1998. The facility is the
Company's first de novo branch since 1976.

Deposit accounts increased $1.8 million, or 2.7%, to $67.6 million at December
31, 1997, from $65.8 million at December 31, 1996. Increases in
non-interest-bearing deposits outpaced the decrease in certificates of deposit
during 1997. Certificates of deposit were de-emphasized for the purpose of
market share acquisition as the Company focused on the acquisition of demand
deposits. The Company implemented a Totally Free Checking campaign in its market
during the first quarter of 1997 in an effort to recapture market share and
increase cross sales opportunities. At December 31, 1997, advances from the FHLB
of Chicago totaled $6.7 million compared to $20.5 million outstanding at
December 31, 1996. In addition to the $7.5 million in advances repaid as a
result of the balance sheet restructuring program, scheduled maturities of $6.3
million reduced the outstanding advances.

Stockholders' equity totaled $7.6 million, or 9.23% of total assets, at December
31, 1997, an increase of $0.3 million. Net income of $0.1 million, increases in
the market value of securities available for sale of $0.2 million, the release
of earned ESOP shares and the amortization of stock benefit plans of $0.1
million were partially offset by repurchases of treasury stock of $0.2 million
as the Company repurchased an additional 9,727 shares of stock in the open
market during 1997.

RESULTS OF OPERATIONS-YEAR ENDED DECEMBER 31, 1997

GENERAL.

Net income for the year ended December 31, 1997 was $124,000, as compared to a
net loss of $158,000 for the year ended December 31, 1996. Exclusive of the
aforementioned one time charges related to restructuring the Company's balance
sheet and one time charges related to the Company's core processing vendor
conversion of $52,000 net of tax, net income would have been $462,000 for the
year ended December 31, 1997. One time charges in 1996 related to the
disposition of low yielding securities and the Federal Deposit Insurance
Corporation's Savings Association Insurance Fund ("FDIC SAIF") assessment, which
totaled $551,000. After adjusting for these non-recurring events, earnings for
the year ended December 31, 1997 increased 17.6% to $462,000 from $393,000 for
the year ended December 31, 1996.

INTEREST INCOME. Total interest income decreased $0.1 million or 1.0%, to $6.3
million for the year ended December 31, 1997, from $6.4 million for the year
ended December 31, 1996. A decrease in average earning assets of $3.2 million,
or 3.7%, to $84.9 million for the year ended December 31, 1997 from $88.1
million for the year ended December 31, 1996 was partially offset by a 21 basis
point increase in the yield on earning assets to 7.47% for the year ended
December 31, 1997 from 7.26% for the year ended December 31, 1996. Yield
increases were the result of several factors including: i.) the diversification
in the loan portfolio from mortgages to higher yielding consumer and commercial
loans; ii.) the reinvestment of securities sales proceeds from 1996 into fixed
rate securities with higher

                                       37
<PAGE>   39

coupons than the disposed adjustable rate securities; and iii.) teaser rates
expiring on the credit card portfolio in the first quarter of 1997. The volume
driven decrease in total interest income was most notable in first mortgage
loans where average balances decreased $6.8 million to $53.0 million primarily
as the result of the sale of $20.0 million in fixed rate mortgage loans as a
component of restructuring the balance sheet. The Company also recorded a
significant volume-driven decrease in interest income as much of the Company's
mortgage-backed securities holdings were liquidated in conjunction with the
restructuring. The loan portfolio continued its pattern of diversification at an
accelerated pace in 1997 as significant mortgage-related holdings were divested
and personnel with diversified lending backgrounds were added. As a result,
interest income on first mortgage loans decreased $453,000 while interest income
on other loans increased $298,000.

INTEREST EXPENSE. Total interest expense for the year ended December 31, 1997
remained unchanged at $3.8 million. A decrease in interest on FHLB advances and
savings accounts was partially offset by an increase in interest on certificates
of deposit. The decrease in interest on FHLB advances for the year ended
December 31, 1997 was the result of lower average balances as $7.5 million in
FHLB advances were repaid during the balance sheet restructuring. The decrease
in interest expense on savings accounts was the result of a 25 basis point
reduction in rates at the beginning of 1997 as market conditions were favorable
for this pricing structure. Partially offsetting the aforementioned decreases
was an increase in the interest expense on certificates of deposit of $64,000
primarily as a result of higher average balances.

NET INTEREST INCOME. The Company's net interest income before provision for loss
on loans was $2.6 million for the year ended December 31, 1997, unchanged from
December 31, 1996. Effectively, volume driven decreases were substantially
offset by yield/cost driven increases. The Company's net interest spread
increased 10 basis points to 2.61% for the year ended December 31, 1997 from
2.51% for the same period in 1996. Additionally the Company's net interest
margin increased 6 basis points to 3.05% for the year ended December 31, 1997
from 2.99% for the year ended December 31, 1996.

PROVISION FOR LOSS ON LOANS. The Company recorded a provision for loss on loans
of $88,000 for the year ended December 31, 1997, a decrease of $94,000, or
51.6%, from $182,000 for the year ended December 31, 1996. Much of the 1996
provision was driven by the Company's diversification into credit card lending.
During 1997, provisions for losses on credit card receivables were reduced as
average outstanding receivables decreased and chargeoffs registered less than
0.25% of average balances for the year.

NON-INTEREST INCOME. Non-interest income increased $199,000, or 216.3%, to
$291,000 for the year ended December 31, 1997, from $92,000 for the year ended
December 31, 1996. Exclusive of non-recurring losses on sales of securities of
$240,000 and $415,000 during 1997 and 1996, respectively, and non-recurring
losses on sales of loans in 1997 of $157,000, non-interest income increased
$181,000 or 35.7%. Losses on sales of securities and loans during 1997 were the
result of the aforementioned balance sheet restructuring plan while the 1996
securities losses were the result of the sale of dual index floating rate agency
notes purchased in 1993. The $181,000 recurring non-interest income increase was
primarily the result of the gain on the maturity of a unit investment trust of
$69,000, the increase in gains on sales of loans of $46,000 and a $35,000
increase in fees on deposit accounts as the Totally Free Checking program
increased fee income opportunities.

NON-INTEREST EXPENSE. Non-interest expense decreased $0.2 million, or 6.7%, to
$2.6 million for the year ended December 31, 1997, from $2.8 million for the
year ended December 31, 1996. Exclusive of the $417,000 FDIC SAIF assessment in
1996, and core data processing conversion charges of $79,000 in 1997,
non-interest expense increased $0.1 million, or 6.3%. Among the increases in
non-interest expense were compensation and benefits increases of $153,000 as a
result of year over year staffing level increases and mortgage loan origination
activity, increases in other expenses of $87,000 relating to prepayment of FHLB
advances, operational costs of increased transaction account volumes and the
deployment of automated teller machines, a $45,000 increase in marketing and
promotion driven by direct mail marketing campaigns and a $44,000 increase in
occupancy and equipment as the Company's commitment to technological
improvements continued in 1997. Partially offsetting some of the aforementioned
increases in non-interest expense was a $123,000 decrease in federal deposit
insurance premiums as the FDIC SAIF was recapitalized in 1996 and assessment
rates were subsequently reduced as well as $71,000 decrease in loan origination
and servicing primarily as commissions paid on loans originated declined due to
the volume decreases from 1996 to 1997.

                                       38
<PAGE>   40


INCOME TAXES. For the year ended December 31, 1997, income tax expense was
$48,000 compared to an income tax benefit of $102,000 for the year ended
December 31, 1996. The increase from 1996 to 1997 in income tax provision
resulted from the increase in net income before taxes of $432,000, to $172,000
for the year ended December 31, 1997, from ($260,000) for the year ended
December 31, 1996.

YEAR 2000. In 1997, the Company began the process of assessing its data
processing systems' abilities to adequately handle date sensitive information
leading up to and following January 1, 2000. Financial institutions, such as the
Company, are particularly affected by the ability of computers and software to
read dates properly. Little internal programming outside of off-the-shelf word
processing and spreadsheet documents is undertaken internally by the Company.
However, the Company is heavily reliant upon its data processing service bureau
and other vendors of ancillary systems to achieve compliance with their various
products. The Company's exposure from commercial customers is limited due to the
small base of commercial borrowers the Company currently serves. With regard to
systems compliance, the Company has identified and contacted the vendors it
deals with to determine the status of their product's compliance or schedule to
achieve compliance. Management has designated a committee to track the progress
of year 2000 compliance of vendors and to identify those products that may need
to be replaced in the event the vendor falls behind their remediation schedule
or notifies the Company of the intent not to make the product compliant. The
Board of Directors is updated on a quarterly basis of the status of the
committee and the project. Based on responses received to date, the Company
believes that its vendors are actively addressing the year 2000 problem. Testing
of systems and hardware compliance is expected to be performed by current staff
and costs associated with replacement of software and hardware are not expected
to have a material impact on the Company's financial position or its results of
operations.


REGULATORY CAPITAL REQUIREMENTS

The Bank currently exceeds all regulatory capital requirements by a significant
margin. Current federal regulations require savings institutions to maintain a
minimum regulatory tangible capital ratio equal to 1.5% of total adjusted
assets, a minimum 3.0% leverage (core capital) ratio and an 8.0% risk-based
capital ratio.

At December 31, 1997, the Bank was in compliance with these capital
requirements, summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                               Percent
                                                               of Adjusted
                                                   Amount      Assets
                                                   ------      ------

<S>                                               <C>        <C>
              Tangible Capital                     $7,159      8.63%
  Tangible Capital Requirement                      1,244      1.50%
                                                   ------     -----
                        Excess                     $5,915      7.13%
                                                   ======     =====

                  Core Capital                     $7,159      8.63%
  Tangible Capital Requirement                      2,488      3.00%
                                                   ------     -----
                        Excess                     $4,671      5.63%
                                                   ======     =====

      Total Risk-Based Capital                     $7,668     15.38%
Risk-Based Capital Requirement                      3,988      8.00%
                                                   ------     -----
                        Excess                     $3,680      7.38%
                                                   ======     =====
</TABLE>


                                       39
<PAGE>   41



The differences between the Bank's stockholders' equity calculated in accordance
with generally accepted accounting principles (GAAP) and regulatory capital at
December 31, 1997 are summarized as follows (in thousands):

<TABLE>
        <S>                                                              <C>
         GAAP Capital                                                    $7,190
         Net Unrealized Gain on Securities Available for Sale               (31)
                                                                         ------
         Total Tangible and Core Capital                                  7,159

         General Loan Loss Allowances                                       521
         Excess Mortgage Servicing Rights                                   (12)
                                                                         ------
         Total Risk-Based Capital                                        $7,668
                                                                         ======
</TABLE>

As a result of the issuance of regulations by the OTS regarding regulatory
restrictions and enforcement actions against savings institutions deemed to be
"undercapitalized," defined as having total risk-based capital of less than 8.0%
or leverage or core capital of less than 4.0%, the minimum core capital ratio
requirement has been effectively raised to 4.0%. In addition, on August 23,
1993, the OTS issued a final rule for calculating an interest rate risk
component that would be incorporated into the OTS regulatory capital rule. Under
the OTS rule, only savings institutions with "above normal" interest rate risk
exposure would be required to maintain additional capital. That dollar amount of
capital would be in addition to an institution's existing risk-based capital
requirement. Savings institutions with assets less than $300 million and
risk-based capital ratios in excess of 12.0% will not normally be subject to
this new requirement unless they exhibit instances of above normal interest rate
risk which would be of concern to the OTS. The Bank has been formally advised by
the OTS that it is exempt from this requirement.

LIQUIDITY AND CAPITAL RESOURCES


The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, the maturity of investment
securities, custodial balances held for investors on serviced loans, proceeds
from loan sales and, to a lesser extent, advances from the Federal Home Loan
Bank of Chicago. While scheduled repayments and maturities on loans,
mortgage-backed securities and securities are predictable sources of funds,
deposit flows and mortgage prepayments are influenced significantly by general
interest rates, economic conditions and competition.


Regulations of the OTS require that the Bank maintain a minimum ratio of liquid
assets. This requirement is based upon a percentage of the average daily balance
of net deposits and short term borrowings. The regulation was modified in 1997
to expand the eligibility of certain assets for treatment as liquid assets and
to allow the use of actual quarter end net deposit and short term borrowings as
the base upon which the percentage is calculated in an effort to streamline the
regulation. Additionally the required ratio was lowered to 4.0%, its statutory
minimum. The Bank's liquidity ratio was 16.2% at December 31, 1997 and 6.2% at
December 31, 1996. The increase in liquidity is the result of restructuring the
balance sheet. The exchange of long term fixed rate mortgages for short term
liquid securities in addition to the reduction in short term borrowings resulted
in a higher liquidity ratio.

The Company's most liquid assets are cash and cash equivalents, which include
investments and highly liquid, short-term investments. The levels of these
assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At December 31, 1997, cash and
cash equivalents totaled $4.8 million, as compared to $1.7 million at December
31, 1996.

Net cash used in operating activities for the year ended December 31, 1997
consisted primarily of origination of mortgage loans of $12.2 million, which was
partially offset by the proceeds from sales of loans held for sale, net of
origination fees and principal collected of $9.9 million.

Net cash provided by investing activities for the year ended December 31, 1997
consisted primarily of the sale of mortgage loans of $19.7 million, the sales of
mortgage-backed securities of $7.0 million and maturities and calls of
securities available for sale and certificates of deposit of $7.1 million, net
principal repayments on loans of $3.7 million and principal repayments on
mortgage-backed securities of $0.7 million partially offset by purchases of
securities

                                       40
<PAGE>   42

available for sale and certificates of deposit of $18.8 million as well as
purchases of participations in loans of $2.2 million and additional investment
in premises and equipment, predominantly towards the new full-service facility
in Rockford, of $0.6 million.

Net cash used in financing activities for the year ended December 31, 1997, was
primarily the result of repayment of borrowings from the FHLB of $13.8 million.
Partially offsetting the borrowing repayments, was the increase in cash and cash
equivalents due to the inflow of deposits totaling $1.7 million. To a lesser
extent, the repurchase of common stock for treasury and the decrease in advanced
payments for taxes and insurance by borrowers were contributors to the net use
of cash in financing activities.

At December 31, 1997, the Company had outstanding commitments to fund loan
originations and unused lines of credit of $8.2 million and commitments to sell
mortgage loans totaling $2.7 million. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit which are scheduled to mature in one year or less from
December 31, 1997 were $20.1 million. Management believes that a significant
portion of such deposits will remain with the Company.

ASSET/LIABILITY MANAGEMENT

The Company manages its assets and liabilities to control the impact of changing
interest rates on its net interest margin and the level of interest rate risk
within the Company's asset and liability structure. The Company assesses
interest rate risk internally by measuring the impact positive and negative
interest rate shocks will have on both the net portfolio value and the projected
net interest income. The net portfolio value is calculated by computing the net
present value of the cash flows associated with its interest earning-assets and
interest-bearing liabilities. Assumptions are made regarding the prepayment
rates of assets and the decay rates of liabilities based on factors including
the Company's historical experience, the current interest rate environment,
embedded options within the assets and liabilities and industry estimates
produced by major broker/dealers and regulatory authorities. Management believes
the assumptions reasonably represent the anticipated amortization, maturities
and rate adjustments of the underlying assets. Decay rates of deposits are
similarly believed to reasonably represent the anticipated attrition within
those products. Although the assumptions regarding asset and liability
prepayments and decay rates are believed to be reasonable, actual results may
vary substantially due to factors beyond the Company's control.

During 1997, the Company attempted to reduce interest rate risk by: i) selling
most of the Company's fixed rate mortgage loan portfolio and reinvesting the
proceeds in short term liquid securities; ii) originating for portfolio, ARM
loans, shorter term fixed-rate loans and consumer loans and commercial loans;
iii) originating long-term fixed rate loans for sale into the secondary mortgage
market; and iv) investing in other rate sensitive assets.

The holding company does not have rate sensitive assets or liabilities
sufficient to materially impact the measurement of interest rate risk therefore
interest rate risk is measured at the subsidiary level. The following table sets
forth the Company's subsidiary Bank's net portfolio value and earnings at risk
as of December 31, 1997 (dollars in thousands):

<TABLE>
<CAPTION>

Change in         Net Portfolio Value            Net Interest Income
Interest Rates    --------------------------     --------------------------
(basis points)    $ Amount $ Change % Change     $ Amount $ Change % Change
                  --------------------------     --------------------------
<S>               <C>       <C>      <C>         <C>       <C>     <C>
  +400              6,243    (1,484) (19.2%)       2,796    131      4.9%
  +300              6,703    (1,024) (15.3)        2,776    111      4.2
  +200              7,138    (589)   (8.3)         2,755    90       3.3
  +100              7,478    (249)   (3.3)         2,720    55       2.1
  0                 7,727     --      --           2,665    --       --
  -100              7,925     198     2.6          2,607   (58)     (2.2)
  -200              8,240     315     4.1          2,541   (124)    (4.9)
  -300              7,666    (61)    (0.8)         2,401   (264)    (9.9)
  -400              7,222    (505)   (6.5)         2,237   (428)    (16.1)
</TABLE>

                                       41
<PAGE>   43
RATE/VOLUME ANALYSIS

         The following table sets forth certain information relating to the
Company's changes in interest income and interest expense for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
average volume (changes in average volume multiplied by old rate); (ii) changes
in rates (changes in rate multiplied by old average volume); (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume); and
(iv) the net change.

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                      ------------------------------------------------
                                                                         1997 vs. 1996
                                                      ------------------------------------------------
                                                                                               Total
                                                                                  Rate/       Increase
                                                       Volume         Rate       Volume      (Decrease)
                                                       ------         ----       ------      ----------
                                                                   (Dollars in Thousands)
<S>                                                  <C>         <C>           <C>          <C>
Interest-earning assets:
   First mortgage loans (1)......................    $    (519)   $      74     $     (8)    $   (453)
   Other loans...................................          221           59           18          298
   Securities (2)................................          178           27           11          216
   Mortgage-backed securities....................         (250)          (5)           3         (252)
   Interest-earning deposits.....................           51           34           42          127
                                                     ---------    ---------     --------     --------
     Total interest-earning assets...............    $    (319)   $     189     $     66     $    (64)
                                                     ==========   =========     ========     =========

Interest-bearing liabilities:
   Passbook accounts.............................    $      (7)   $     (23)    $     --     $    (30)
   Certificate accounts..........................           52           12           --           64
   NOW and MMDA accounts.........................           (9)           6            1           (2)
   FHLB advances.................................         (130)          97          (15)         (48)
                                                     ---------    ---------     --------     --------
     Total interest-bearing liabilities..........          (94)          92          (14)         (16)
                                                     ----------   ---------     ---------    ---------
     Net change in interest income...............    $    (225)   $      97     $     80     $    (48)
                                                     =========    =========     ========     ========
</TABLE>

------------------------------
(1)     Calculated net of deferred loan fees, loan discounts, loans in process,
        and loan loss reserves, and includes loans held for sale.
(2)     Includes securities available for sale, investment securities held to
        maturity, and FHLB stock.
(3)     Includes interest earned on Federal Home Loan Bank daily investment
        deposit and certificates of deposit in other financial institutions.



                                       42
<PAGE>   44

AVERAGE BALANCE SHEETS

         The following table sets forth certain information relating to the
Company's average balance sheets and reflects the average yield on assets and
the average cost of liabilities for the periods indicated. Average balances are
derived from average daily balances for 1997 and average month end balances for
1996. Management does not believe that the use of average monthly balances for
1996 instead of average daily balances has caused any material differences in
the information presented. The yields and costs include fees that are considered
adjustments to yields. No tax equivalent adjustments were made. Non-accrual
loans have been included in the tables as loans carrying a zero-yield.


<TABLE>
<CAPTION>

                                                                     Year Ended December 31,
                                                ------------------------------------------------------------------
                                                            1997                               1996
                                                ------------------------------------------------------------------
                                                Average               Average      Average               Average
                                                Balance   Interest   Yield/Cost    Balance    Interest  Yield/Cost
                                                -------   --------   ----------    -------    --------  ----------
                                                                     (Dollars in Thousands)
<S>                                            <C>      <C>             <C>       <C>        <C>        <C>
Assets:
   Interest-earning assets:
     First mortgage loans (1).............     $ 52,960   $  4,095      7.73%     $ 59,777   $  4,548      7.61%
     Other loans..........................       10,322        996      9.65%        7,844        698      8.90%
     Securities (2).......................       11,687        711      6.09%        8,605        496      5.77%
     Mortgage-backed securities...........        6,128        368      6.00%       10,252        620      6.05%
     Interest-earning deposits (3)........        3,759        168      4.48%        1,670         41      2.46%
                                               --------   --------                --------   --------
       Total interest-earning assets......       84,856   $  6,338      7.47%       88,148   $  6,403      7.26%
                                                          --------                           --------
     Non-interest earning assets..........        3,405                              2,761
                                               --------                           --------
       Total assets.......................     $ 88,261                           $ 90,909
                                               ========                           ========

Liabilities and Stockholders' Equity:
   Interest-bearing liabilities:
     Passbook accounts....................     $  8,966   $    157      1.75%     $  9,332   $    187      2.00%
     Certificate accounts.................       43,476      2,490      5.73%       42,564      2,426      5.70%
     NOW and MMDA accounts................       12,219        350      2.86%       12,526        352      2.82%
     FHLB advances........................       12,515        754      6.03%       14,934        802      5.37%
                                               --------   --------                --------   --------
       Total interest-bearing liabilities.       77,176   $  3,751      4.86%       79,356   $  3,767      4.75%
                                                          --------                           --------
   Non-interest-bearing deposit accounts..        2,520                              2,563
   Non-interest-bearing liabilities.......        1,041                              1,236
                                               --------                           --------
       Total liabilities..................       80,737                             83,155
   Stockholders' equity...................        7,524                              7,754
                                               --------                           --------
       Total liabilities and stockholders'
         equity...........................     $ 88,261                           $ 90,909
                                               ========                           ========
Net interest income/interest rate
  spread (4)..............................                $  2,587      2.61%                $  2,636      2.51%
                                                          ========   =======                 ========   =======
Net interest-earning assets/
  net interest margin (5).................     $  7,680                           $  8,792
                                               ========                           ========
Ratio of average interest-earning assets..                              3.05%                              2.99%
                                                                     =======                            =======
  to average interest-bearing liabilities.         1.10x                              1.11x
                                               ========                           ========
</TABLE>

-------------------------
(1)     Calculated net of deferred loan fees, loan discounts, loans in process,
        and loan loss reserves, and includes loans held for sale.
(2)     Includes securities available for sale, investment securities held to
        maturity, and FHLB stock.
(3)     Includes interest earned on Federal Home Loan Bank daily investment
        deposit and certificates of deposit in other financial institutions.
(4)     Interest rate spread represents the difference between the average yield
        on total interest-earning assets and the average cost of total
        interest-bearing liabilities.
(5)     Net interest margin represents net interest income as a percentage of
        average interest-earning assets.


                                       43
<PAGE>   45


ITEM 7                       FINANCIAL STATEMENTS

                          FIRST FINANCIAL BANCORP, INC.
                               Belvidere, Illinois

                        CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996






                                    CONTENTS






REPORT OF INDEPENDENT AUDITORS ......................................    1


FINANCIAL STATEMENTS

     CONSOLIDATED STATEMENT OF FINANCIAL CONDITION ..................    2

     CONSOLIDATED STATEMENTS OF INCOME ..............................    3

     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ................    4

     CONSOLIDATED STATEMENTS OF CASH FLOWS ..........................    5

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .....................    7




                                       44
<PAGE>   46




                         REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Stockholders
First Financial Bancorp, Inc.
Belvidere, Illinois


We have audited the accompanying consolidated statements of financial condition
of First Financial Bancorp, Inc. as of December 31, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the two-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Financial
Bancorp, Inc. at December 31, 1997, and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 1997
in conformity with generally accepted accounting principles.



                                                 Crowe, Chizek and Company LLP

Oak Brook, Illinois
January 22, 1998



                                       45
<PAGE>   47
                        FIRST FINANCIAL BANCORP, INC.

                  CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
                                December 31, 1997
                    (In thousands, except per share amounts)

<TABLE>
<S>                                                                          <C>
ASSETS
Cash on hand and non-interest-earning deposits                                $       629
Interest-earning deposits                                                           4,130
                                                                              -----------
     Total cash and cash equivalents                                                4,759

Securities available-for-sale                                                      14,507
Mortgage-backed securities available-for-sale                                       1,625
First mortgage loans held for sale                                                  2,352
Mortgage-backed securities held-to-maturity (fair value $835)                         864
Certificates of deposit                                                             2,099
Loans receivable, net of allowance for losses of $531                              52,120
Accrued interest receivable                                                           526
Premises and equipment                                                              1,891
Federal Home Loan Bank stock                                                          910
Other assets                                                                        1,029
                                                                              -----------

     Total assets                                                             $    82,682
                                                                              ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
     Deposit accounts                                                         $    67,550
     Advances from the Federal Home Loan Bank                                       6,700
     Advance payments by borrowers for taxes and insurance                            202
     Other liabilities                                                                599
                                                                              -----------
         Total liabilities                                                         75,051

Stockholders' equity
     Common stock - $0.10 par value, 1,500,000 shares authorized,
       509,848 shares issued                                                           51
     Additional paid-in capital                                                     3,864
     Retained earnings                                                              5,199
     Treasury stock, at cost, 94,449 shares                                        (1,505)
     Unearned employee stock ownership plan shares                                    (41)
     Unearned stock awards                                                            (25)
     Net unrealized gain on securities available-for-sale,
       net of income taxes of $44                                                      88
                                                                              -----------
         Total stockholders' equity                                                 7,631
                                                                              -----------

              Total liabilities and stockholders' equity                      $    82,682
                                                                              ===========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                      46
<PAGE>   48


                          FIRST FINANCIAL BANCORP, INC.


                        CONSOLIDATED STATEMENTS OF INCOME
                     Years ended December 31, 1997 and 1996
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                         1997          1996
                                                                         ----          ----
<S>                                                                   <C>          <C>
Interest income
     First mortgage loans                                             $   4,095     $  4,548
     Other loans                                                            996          698
     Securities                                                             711          496
     Mortgage-backed securities                                             368          620
     Interest-earning deposits                                              168           41
                                                                      ---------     --------
         Total interest income                                            6,338        6,403

Interest expense
     Deposit accounts                                                     2,997        2,965
     FHLB advances                                                          754          802
                                                                      ---------     --------
         Total interest expense                                           3,751        3,767
                                                                      ---------     --------

NET INTEREST INCOME                                                       2,587        2,636

Provision for loan losses                                                    88          182
                                                                      ---------     --------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                       2,499        2,454

Noninterest income
     Loan servicing fees and charges                                        209          198
     Service charge on deposit accounts                                     208          173
     Gain (loss) on sales of loans                                          (24)          87
     Loss on sale of securities                                            (171)        (415)
     Other                                                                   69           49
                                                                      ---------     --------
         Total noninterest income                                           291           92

Noninterest expense
     Compensation and benefits                                            1,270        1,117
     Occupancy and equipment                                                307          263
     Data processing                                                        250          162
     Federal deposit insurance premiums                                      34          574
     Loan origination and servicing                                          71          142
     Professional fees                                                      100           94
     Marketing and promotion                                                101           56
     Other                                                                  485          398
                                                                      ---------     --------
         Total noninterest expense                                        2,618        2,806
                                                                      ---------     --------


INCOME (LOSS) BEFORE INCOME TAXES                                           172         (260)
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       47
<PAGE>   49
                          FIRST FINANCIAL BANCORP, INC.

<TABLE>
<CAPTION>
                                                                         1997          1996
                                                                         ----          ----
<S>                                                                   <C>          <C>

Provision (benefit) for income taxes                                         48        (102)
                                                                      ---------     -------

NET INCOME (LOSS)                                                     $     124     $  (158)
                                                                      =========     =======

Basic earnings (loss) per share                                       $     .31     $  (.36)
                                                                      =========     =======
Diluted earnings (loss) per share                                     $     .30     $  (.36)
                                                                      =========     ========


</TABLE>

          See accompanying notes to consolidated financial statements.

                                       48
<PAGE>   50
                        FIRST FINANCIAL BANCORP, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     Years ended December 31, 1997 and 1996
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                                 Net
                                                                                               Loss on
                                      Additional                        Unearned   Unearned  Securities
                             Common     Paid-in   Retained   Treasury     ESOP       Stock   Available-
                              Stock     Capital   Earnings     Stock     Shares     Awards    for-Sale    Total
                              -----     -------   --------     -----     ------     ------    --------    -----

<S>                         <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Balance
  January 1, 1996           $     50   $  3,677   $  5,233   $   (460)  $   (149)  $   (31)   $  (448)   $7,872

Net loss                           -          -       (158)         -          -         -          -      (158)

Amortization of RRPs               -          -          -          -          -         5          -         5

Exercise of stock
  options, 8,512 shares            1         67          -          -          -         -          -        68

Release of earned ESOP
  shares, 6,780 shares             -         53          -          -         54         -          -       107

Purchase of treasury stock,
  55,532 shares                    -          -          -       (890)         -         -          -      (890)

Increase in fair value
  of securities available-
  for-sale net of income
  taxes of $166                    -          -          -          -          -         -        321       321
                            --------   --------   --------   --------   --------   -------    -------    ------

Balance at
  December 31, 1996               51      3,797      5,075     (1,350)       (95)      (26)      (127)    7,325

Net income                         -          -        124          -          -         -          -       124

Amortization of RRPs               -          -          -          -          -         1          -         1

Exercise of stock
  options, 250 shares              -          7          -          -          -         -          -         7

Release of earned ESOP
  shares, 6,780 shares             -         60          -          -         54         -          -       114

Purchase of treasury stock,
  9,727 shares                     -          -          -       (155)         -         -          -      (155)

Increase in fair value
  of securities available-
  for-sale net of income
  taxes of $113                    -          -          -          -          -         -        215       215
                            --------   --------   --------   --------   --------   -------    -------    ------

Balance at
  December 31, 1997         $     51   $  3,864   $  5,199   $ (1,505)  $    (41)  $   (25)   $    88    $7,631
                            ========   ========   ========   ========   ========   =======    =======    ======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       49
<PAGE>   51


                          FIRST FINANCIAL BANCORP, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Years ended December 31, 1997 and 1996
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                        1997          1996
                                                                        ----          ----
<S>                                                                <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income (loss)                                                 $     124       $   (158)

 Adjustments to reconcile net income (loss) to net
 cash provided by (used in) operating activities
  Amortization of:
       Premiums, discounts, and deferred fees on
         loans and securities                                             13             25
       Net excess servicing fees and originated
         mortgage servicing rights                                        34             32
       Stock award plans                                                   1              5
       Employee stock ownership plan                                     114            107
  Provision for losses on loans                                           88            182
  (Gain) loss on sale of:
       Loans                                                              24            (87)
       Securities                                                        171            415
       Premises and equipment                                              -             10
  Depreciation of premises and equipment                                 138            114
  Originations of loans held for sale, net of
    origination fees and principal collected                         (12,188)        (6,532)
  Proceeds from sales of loans held for sale                           9,929          6,939
  Change in:
       Deferred income tax                                                22            (14)
       Accrued interest receivable                                        (9)           (64)
       Other assets                                                      (67)          (364)
       Other liabilities                                                  15             38
                                                                   ---------       --------
           Net cash (used in) provided by operations                  (1,591)           648

CASH FLOWS FROM INVESTING ACTIVITIES
 Loan originations net of principal collected on loans                 3,678        (16,374)
 Purchases of:
     Loan participations                                              (2,176)        (7,763)
     Mortgage-backed securities available-for-sale                         -         (1,753)
     Securities available-for-sale                                   (15,746)        (4,900)
     Certificates of deposit                                          (3,098)             -
     Federal Home Loan Bank Stock                                          -           (667)
 Proceeds from:
     Sales of loans                                                   19,685              -
     Sales of securities available-for-sale                              166          3,744
     Sales of mortgage-backed securities available-for-sale            6,954              -
     Maturities and calls of securities available-for-sale             6,050          6,050
     Maturities and calls of securities held-to-maturity                  75            200
     Maturities of certificates of deposit                               999              -
</TABLE>


                                  (Continued)

                                       50
<PAGE>   52
                          FIRST FINANCIAL BANCORP, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Years ended December 31, 1997 and 1996
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                                          1997           1996
                                                                                          ----           ----
<S>                                                                                 <C>           <C>
CASH FLOWS FROM INVESTING ACTIVITIES (continued)
         Sales of Federal Home Loan Bank stock                                       $       238    $         -
         Sales of REO                                                                        122              -
     Principal collected on mortgage-backed securities and
       collateralized mortgage obligations                                                   717          1,303
     Purchases of premises and equipment                                                    (643)          (709)
                                                                                     -----------    -----------
         Net cash provided by (used in) investing activities                              17,021        (20,869)

CASH FLOWS FROM FINANCING ACTIVITIES
     Net increase (decrease) in deposit accounts                                           1,712           (392)
     Net (decrease) increase in advances from the
       Federal Home Loan Bank                                                            (13,750)        20,450
     Issuance of common stock                                                                  7             68
     Repurchases of common stock                                                            (155)          (890)
     Net (decrease) increase in advance payments by borrowers
       for taxes and insurance                                                              (137)            79
                                                                                     -----------    -----------
         Net cash provided by (used in) financing activities                             (12,323)        19,315
                                                                                     -----------    -----------

Net increase (decrease) in cash                                                            3,107           (906)

Cash and cash equivalents at beginning of year                                             1,652          2,558
                                                                                     -----------    -----------

Cash and cash equivalents at end of year                                             $     4,759    $     1,652
                                                                                     ===========    ===========

Supplemental disclosures of cash flow information
Cash paid for:
         Interest                                                                    $     3,837    $     3,679
         Income taxes (refunded)                                                            (179)            70

     Noncash items
         Transfer of held for sale loans to portfolio                                          -             41
         Transfer of portfolio loans to REO                                                  122              -

</TABLE>


        See accompanying notes to consolidated financial statements.

                                       51

<PAGE>   53



                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a description of the significant accounting policies used by
First Financial Bancorp, Inc. (Company) in the preparation of the accompanying
consolidated financial statements.

Description of the Business: First Financial Bancorp, Inc. is the holding
company for its wholly-owned subsidiary, First Federal Savings Bank (Bank), a
federally chartered stock savings bank, and its principal business is the
operation of the Bank.

The Bank's operations consist principally of originating and servicing
residential first mortgage loans secured by properties in northern Illinois from
its facilities in Belvidere and Rockford, Illinois. In addition, the Bank
provides consumer and commercial banking services. The Bank also offers
brokerage and insurance services through its wholly-owned subsidiary, First
Financial Services of Belvidere, Illinois, Inc. Substantially all of the Bank's
income and assets are derived from these activities, conducted primarily with
customers located in northern Illinois.

Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of the Company and the accounts of the Bank and its
wholly-owned subsidiary. All significant intercompany transactions and balances
have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates. The collectibility of
loans, fair values of financial instruments, and status of contingencies are
particularly subject to change.

Cash and Cash Equivalents: For the purpose of the statement of cash flows, cash
and cash equivalents include cash on hand, amounts due from banks, and interest
earning-deposits with original maturities of three months or less. Net cash
flows are reported for customer loan and deposit transactions and
interest-bearing deposits with other banks.

Securities: Securities are classified as held-to-maturity when the Company has
the positive intent and management has the ability to hold those securities to
maturity. Accordingly, they are stated at cost, adjusted for amortization of
premiums and accretion of discounts. All other securities are classified as
available-for-sale since the Company may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in yields
or alternative investments, and for other reasons. These securities are carried
at fair value with unrealized gains and losses charged or credited, net of
income taxes, to a valuation allowance included as a separate component of
stockholders' equity. Realized gains and losses on disposition are based on the
net proceeds and the adjusted carrying amounts of the securities sold, using the
specific identification method.


                                  (Continued)


                                       52

<PAGE>   54




                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Held for Sale: Loans held for sale are reported at the lower of cost,
less applicable deferred loan fees, or estimated fair value in the aggregate.


Loans Receivable, Net: Loans receivable, net are reported at the principal
balance outstanding, net of deferred loan fees and costs, loans in process, the
allowance for loan losses, unearned discounts, and charge-offs.

Loan fees and certain direct origination costs are deferred, and the net
deferred fee or cost is recognized as an adjustment to yield using the
level-yield method over the life of the loans.

Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Because of uncertainties inherent in the
estimation process, management's estimation of credit losses inherent in the
loan portfolio and the related allowance may change materially in the near term.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loans that, in management's judgment, should be
charged-off.

Loan impairment is determined when full payment under the loan term is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as the Company's residential mortgage, consumer, and credit card
loans and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate, or
loan's market price or the fair value of the collateral, if the loan is
collateral dependent. Loans are evaluated for impairment when payments are
delayed, typically 90 days or more, or when the internal grading system
indicates a doubtful classification.

Premises and Equipment: Land is carried at cost. Bank premises, furniture, and
equipment are reported net of accumulated depreciation. Depreciation is recorded
on the straight-line and accelerated methods over the estimated useful lives of
the related assets.

Mortgage Servicing Rights: The Company allocates the cost of mortgage servicing
rights (MSR) on mortgages originated which have been sold. The allocation of the
total cost of the mortgages to MSR and the mortgages (without MSR) is based upon
their relative fair values. Servicing rights are then expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based upon the fair value of the rights. Any impairment is reported as
a valuation allowance.


                                  (Continued)

                                       53



<PAGE>   55

                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

When participating interest in mortgages sold have an average contractual
interest rate, adjusted for normal servicing fees, that differs from the agreed
yield to the purchaser, gains or losses are recognized equal to the present
value of such differential over the estimated remaining life of such loans. The
resulting excess "servicing fee receivable" or "deferred servicing revenue" is
amortized in proportion to and over the period of estimated net servicing
income.

Employee Stock Ownership Plan (ESOP): Unearned ESOP shares are reported as a
reduction of stockholders' equity in the consolidated statements of financial
condition. As ESOP shares are committed to be released, unearned ESOP shares are
credited, and compensation is charged, and the amount of the charge is based on
fair values of the committed-to-be-released shares. For purposes of computing
net income per share, ESOP shares that have been committed to be released are
considered outstanding.

Income Taxes: The provision for income taxes is based on an asset and liability
approach. The asset and liability approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities.

Earnings Per Share: The Company adopted Statement of Accounting Financial
Standards (SFAS) No. 128, "Earnings per Share", as of December 31, 1997. Basic
and diluted earnings per share are computed under this standard for the year
ended December 31, 1997. All prior amounts have been restated to be comparable.
Basic earnings per share is based on net income divided by the weighted average
number of shares outstanding during the period. Diluted earnings per share shows
the dilutive effect of additional common shares issuable under stock options and
the effect of unearned stock awards.


NOTE 2 - SECURITIES

The amortized cost and fair value of securities available-for-sale are as
follows at December 31, 1997:


<TABLE>
<CAPTION>
                                              Amortized    Unrealized    Unrealized       Fair
(Dollars in thousands)                          Cost          Gains        Losses         Value
                                                ----          -----        ------         -----
<S>                                         <C>             <C>         <C>           <C>
     U.S. Treasury                                2,241             4            -          2,245
     U.S. Agency                                  8,556            20           26          8,550
     Equity                                         302           150            -            452
     Corporate                                    1,782             1            -          1,783
     Commercial paper                             1,478             -            1          1,477
                                            -----------     ---------    ---------    -----------

                                            $    14,359     $     175    $      27    $    14,507
                                            ===========     =========    =========    ===========
</TABLE>


                                  (Continued)

                                       54


<PAGE>   56




                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 2 - SECURITIES (Continued)

Contractual maturities of debt securities at December 31, 1997 were as follows.
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.


<TABLE>
<CAPTION>

                                                                                        Securities
                                                                                    Available for-Sale
                                                                                    ------------------
                                                                                 Amortized        Fair
         (Dollars in thousands)                                                    Cost           Value
                                                                                   ----           -----
<S>                                                                            <C>            <C>
         Due in one year or less                                                $    8,170     $     8,173
         Due from one to five years                                                  4,281           4,272
         Due from five to ten years                                                    401             402
         Due after ten years                                                         1,205           1,208
         Equity securities                                                             302             452
                                                                                ----------     -----------

                                                                                $   14,359     $    14,507
                                                                                ==========     ===========

</TABLE>


Proceeds from sales of securities available-for-sale during 1997 and 1996
were $166,000 and $3,744,000. These sales resulted in gross gains of $69,000 in
1997 and gross losses of $415,000 in 1996.

Securities with an amortized cost of $7,492,000 at December 31, 1997 were
pledged to secure certain deposit accounts in excess of federal deposit
insurance limits and other purposes.


NOTE 3 - MORTGAGE-BACKED SECURITIES

The amortized cost and fair value of mortgage-backed securities available-for
sale and held to maturity are as follows at December 31, 1997:

<TABLE>
<CAPTION>
                                                              Amortized    Unrealized   Unrealized       Fair
     (Dollars in thousands)                                     Cost          Gains       Losses         Value
                                                                ----          -----       ------         -----
<S>                                                         <C>          <C>          <C>          <C>
     Available-for-sale

         GNMA                                                 $   1,641    $       9    $      25    $   1,625
                                                              =========    =========    =========    =========

     Held-to-maturity
         FNMA                                                 $     242    $       -    $       6    $     236
         Collateralized mortgage obligations                        622            -           23          599
                                                              ---------    ---------    ---------    ---------

                                                              $     864    $       -    $      29    $     835
                                                              =========    =========    =========    =========
</TABLE>



                                  (Continued)

                                     55

<PAGE>   57

                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 3 - MORTGAGE-BACKED SECURITIES (Continued)

Proceeds from sales of mortgage-backed securities and collateralized
mortgage obligations available-for-sale during 1997 were $6,954,000 which
resulted in gross losses of $240,000.

The carrying amount of mortgage-backed and related securities are net of
unamortized premiums of $64,000 at December 31, 1997.

Mortgage-backed securities with an amortized cost of $703,000 were pledged
to secure certain deposit accounts in excess of federal deposit insurance limits
and for other purposes.


NOTE 4 - LOANS RECEIVABLE, NET

Loans receivable at December 31, 1997 are summarized as follows (dollars in
thousands):

<TABLE>
<S>                                                                                           <C>
         First mortgage loans
              One-to-four-family residential                                                   $    32,735
              Other                                                                                  7,451
                                                                                               -----------
                  Total first mortgage loans                                                        40,186

         Home equity lines of credit                                                                 4,300
         Auto loans                                                                                  2,442
         Second mortgages                                                                            1,249
         Credit card receivables                                                                       754
         Other consumer loans                                                                        2,309
         Commercial loans                                                                            1,470
                                                                                               -----------
              Total loans receivable                                                                52,710
                                                                                               -----------

                  Less:
                      Allowance for loan losses                                                        531
                      Unearned discounts, premiums, and deferred
                        loan origination fees, net                                                      59
                                                                                               -----------
                                                                                                       590
                                                                                               -----------

                                                                                               $    52,120
                                                                                               ===========
</TABLE>

At December 31, 1997, the Company has no loans that were classified as impaired.
The principal balance of loans for which the accrual of interest had been
discontinued totaled $825,000.


                                  (Continued)

                                       56


<PAGE>   58


                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996

NOTE 4 - LOANS RECEIVABLE, NET (Continued)

Activity in the allowance for loan losses for the years ended December 31 is
summarized as follows:


<TABLE>
<CAPTION>
         (Dollars in thousands)                                                           1997       1996
                                                                                          ----       ----
         <S>                                                                           <C>         <C>
         Allowance for loan losses

              Balance at beginning of year                                              $   468    $   330
              Provision charged to income                                                    88        182
              Loan charge-offs                                                              (27)       (44)
              Loan recoveries                                                                 2          -
                                                                                        -------    -------


                  Balance at end of year                                                $   531    $   468
                                                                                        =======    =======
</TABLE>

Loans are made, in the normal course of business, to executive officers and
directors of the Company. The terms of these loans, including interest rates and
collateral, are similar to those prevailing for comparable transactions and
management believes these loans do not involve more than the normal risk of
collectibility. Loans outstanding to related parties at December 31, 1997 total
$229,000.


NOTE 5 - SECONDARY MORTGAGE MARKET OPERATIONS

The Company's financial data with respect to its secondary mortgage market
operations at and for the years ended December 31 is summarized as follows:


<TABLE>
<CAPTION>
         (Dollars in thousands)                                                  1997       1996
                                                                                 ----       ----
         <S>                                                                    <C>        <C>
         Revenues (direct)
              Gain (loss) on sales of loans                                     $ (24)     $  87
              Servicing fees on loans sold                                        171        150
                                                                                -----      -----

                                                                                $ 147      $ 237
                                                                                =====      =====
         Identifiable expenses (direct)
              Amortization of mortgage servicing rights                         $  34      $  32
              Servicing fees on loans sold                                          1          1
                                                                                -----      -----

                                                                                $  35      $  33
                                                                                =====      =====
         Identifiable assets (direct)
               Mortgage servicing rights                                        $ 228      $ 102
               Valuation allowance on MSR                                         (16)       (15)
                                                                                -----      -----

                                                                                $ 212      $  87
                                                                                =====      =====

</TABLE>


                                  (Continued)

                                       57




<PAGE>   59


                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 5 - SECONDARY MORTGAGE MARKET OPERATIONS (Continued)

Mortgage loans serviced for others are not included in the accompanying
consolidated statement of financial condition. Mortgage loans serviced are
primarily for Federal Home Loan Mortgage Corporation and Federal National
Mortgage Association. The unpaid principal balances on these loans at December
31 are summarized as follows:

<TABLE>
<CAPTION>

(Dollars in thousands)                                                              1997           1996
                                                                                    ----           ----
<S>                                                                             <C>            <C>
         Sold with recourse                                                     $    1,234     $     1,583
         Sold without recourse                                                      68,006          51,019
                                                                                ----------     -----------
                                                                                $   69,240     $    52,602
                                                                                ==========     ===========
</TABLE>

Custodial escrow balances maintained in connection with the foregoing loan
servicing were $1,429,000 and $533,000 at December 31, 1997 and 1996,
respectively.

Activity in net mortgage servicing rights for the year ended December 31 is
summarized as follows:

<TABLE>
<CAPTION>

         (Dollars in thousands)                                                      1997           1996
                                                                                     ----           ----
         <S>                                                                    <C>            <C>
         Net balance at beginning of year                                       $       87     $        88
         Additions                                                                     159              31
         Amortization                                                                  (24)            (17)
         Sales                                                                          (9)              -
         Provision for impairment                                                       (1)            (15)
                                                                                ----------     -----------
                                                                                $      212     $        87
                                                                                ==========     ===========
</TABLE>


NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment at December 31, 1997 are summarized as follows (dollars
in thousands):

<TABLE>

<S>                                                                             <C>
                         Land                                                   $      684
                         Office buildings and improvements                             591
                         Furniture, fixtures and equipment                           1,018
                         Facility under construction                                   559
                                                                                ----------
                                                                                     2,852
                         Less accumulated depreciation                                 961
                                                                                ----------

                                                                                $    1,891
                                                                                ==========
</TABLE>

                                  (Continued)

                                       58



<PAGE>   60




                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 7 - DEPOSIT ACCOUNTS

Deposit accounts at December 31, 1997 are summarized as follows (dollars in
thousands):


<TABLE>
                  <S>                                                                 <C>
                  Non-interest-bearing demand deposit accounts                        $     4,371
                  Interest-bearing demand deposit accounts                                  4,826
                  Passbook and club accounts                                                8,765
                  Money market demand accounts                                              6,760
                  Certificates of deposit                                                  42,828
                                                                                      -----------

                                                                                      $    67,550
                                                                                      ===========
</TABLE>


The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was $8,989,000 at December 31, 1997.

At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows (dollars in thousands):

<TABLE>
                  <S>                                                                 <C>
                  1998                                                                $    20,058
                  1999                                                                      7,440
                  2000                                                                     13,293
                  2001                                                                      1,518
                  2002 and thereafter                                                         519
                                                                                      -----------

                                                                                      $    42,828
                                                                                      ===========

</TABLE>


NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)

FHLB advances at December 31, 1997 are summarized as follows (dollars in
thousands):

<TABLE>
<CAPTION>
                                                                                  Weighted
                                                                                  Interest        Amount
                                                                                    Rate        Outstanding
                                                                                    ----        -----------
         <S>                                                                      <C>           <C>
         Advances from Federal Home Loan Bank
              Fixed rate due in 1998                                               5.94%         $   6,700
                                                                                   ====          =========
</TABLE>

The Company adopted a collateral pledge agreement and agreed to keep on hand,
free of all other pledges, liens, and encumbrances, first mortgages with unpaid
principal balances aggregating no less than 167% of the outstanding secured
advances of the Federal Home Loan Bank. All stock in the Federal Home Loan Bank
of Chicago is also pledged as additional collateral for advances.

                                  (Continued)

                                       59

<PAGE>   61

                        FIRST FINANCIAL BANCORP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          December 31, 1997 and 1996

NOTE 9 - INCOME TAXES

The provision (benefit) for income taxes for the years ended December 31 is
summarized as follows (dollars in thousands):

<TABLE>

                                                                                        1997         1996
                                                                                        ----         ----
         <S>                                                                        <C>          <C>
         Current                                                                    $      26    $     (88)
         Deferred                                                                           6           18
         Change in valuation allowance                                                     16          (32)
                                                                                    ---------    ---------

                                                                                    $      48    $    (102)
                                                                                    =========    =========
</TABLE>


A reconciliation of income taxes computed at the statutory federal income
tax rate to actual income taxes recorded above for the years ended December 31
is summarized as follows:


<TABLE>
<CAPTION>
                                                                                        1997          1996
                                                                                        ----          ----

         <S>                                                                          <C>           <C>
         Statutory federal income tax rate                                              34.0%        (34.0)%
         Tax exempt income and officers' life insurance                                 (1.4)         (0.2)
         Other, net                                                                     (5.0)         (5.0)
                                                                                     -------      --------

                                                                                        27.6%        (39.2)%
                                                                                     =======      ========
</TABLE>

No state income taxes were recorded in 1997 and 1996 as a result of excess
qualifying U.S. Government interest, which is tax exempt under Illinois
statutes.

The tax effects of existing temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 are summarized as follows (dollars in thousands):

<TABLE>
<S>     <C>                                                                                     <C>
         Deferred tax assets
              Deferred loan origination fees                                                     $      25
              Bad debt deduction                                                                       135
              Deferred compensation                                                                     60
              Illinois net operating loss carry forwards                                                54
              Other                                                                                      2
                                                                                                 ---------
                                                                                                       276
              Valuation allowance                                                                      (54)
                                                                                                 ---------
                                                                                                       222
         Deferred tax liabilities
              Unrealized gain on securities available-for-sale                                          44
              Depreciation                                                                              30
              FHLB stock dividends, net                                                                 33
              Mortgage servicing rights                                                                 86
                                                                                                 ---------
                                                                                                       193
                                                                                                 ---------

                  Net tax deferred assets                                                        $      29
                                                                                                 =========
</TABLE>




                                  (Continued)

                                       60

<PAGE>   62




                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996

NOTE 9 - INCOME TAXES (Continued)

Management has recorded a valuation allowance to reduce deferred tax assets to
the amount which it estimates will be realized. The Illinois net operating
losses of approximately $1,141,000 expire in years 2000 through 2011.

The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision charged to income on the financial statements. Tax
legislation passed in August 1996 now requires all thrift institutions to deduct
a provision for bad debts for tax purposes based on actual loss experience and
recapture the excess bad debt reserve accumulated in the tax years after 1987.
Retained earnings at December 31, 1997 includes approximately $1,181,000,
consisting of bad debt deductions accumulated prior to 1987, for which no
deferred federal income tax liability has been recognized.


NOTE 10 - BENEFIT PLANS


     Profit-sharing plan:


         The Company has a profit sharing plan which meets the qualifications of
         Section 401(k) of the Internal Revenue Code (Code). Under the plan,
         employees 21 years of age or older with one year of service and 1,000
         hours of service during that period may make pre-tax contributions up
         to applicable limits under the Code. Employees are 100% vested in their
         contributions. Contributions by the Company are discretionary.
         Discretionary employer contributions vest at a rate of 20% per year
         beginning on the third year of service by an employee. Contributions
         totaled $13,000 and $9,000 in 1997 and 1996, respectively.

     Employee stock ownership plan:


         The Company has an employee stock ownership plan (ESOP) that covers
         employees 21 years of age or older with one year of service and 1,000
         hours of service during that period. The ESOP borrowed $271,000 from
         the Company to purchase 33,903 shares of the Company's stock at $8.00
         per share on October 1, 1993. The Company has agreed to make scheduled
         contributions to the ESOP sufficient to service the amount borrowed by
         the ESOP. Contributions made to the ESOP totaled $54,000 in 1997 and
         1996. Compensation expense recognized on the ESOP amounted to $114,000
         and $107,000 in 1997 and 1996, respectively. Unearned ESOP shares
         totaling 5,088, with a carrying amount of $41,000, is reported as a
         reduction to stockholder's equity in the consolidated statement of
         financial condition at December 31, 1997. The fair value of unearned
         ESOP shares approximated $95,000 at December 31, 1997.


                                  (Continued)

                                       61



<PAGE>   63




                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 10 - BENEFIT PLANS (Continued)

     The ESOP shares were as follows:

<TABLE>
<CAPTION>
                                                                                           1997
                                                                                           ----
                  <S>                                                                   <C>
                  Allocated                                                               22,035
                  Committed to be released                                                 6,780
                  Suspense shares                                                          5,088
                                                                                        --------


                       Total                                                              33,903
                                                                                        ========
</TABLE>

     Stock option plans:

         The Company has two stock option plans which grant options to
         individuals to purchase common stock of the Company at a price equal to
         the fair market value at the date of grant, subject to the terms and
         conditions of the plans. The term of the stock options will not exceed
         ten years from the date of grant. 8,747 shares have been authorized
         under the incentive stock option plan for employees, and the options
         are exercisable on a cumulative basis in equal installments at a rate
         of 20% per year commencing at the date of grant. On October 1, 1993,
         36,499 options were granted under the plan to employees at an exercise
         price of $8.00 per share. 9,687 shares have been authorized under the
         stock option plan for outside directors, and the options are
         exercisable on the date of grant. On October 1, 1993, 5,861 options
         were granted under the plan to outside directors at an exercise price
         of $8.00 per share. During 1995 and 1996, additional options were
         granted to employees under the plan. Information about option grants
         are as follows:

<TABLE>
<CAPTION>
                                                                          Weighted
                                                                           Average
                                                                          Number of         Exercise
                                                                           Options            Price
                                                                           -------            -----
         <S>                                                            <C>             <C>
         Outstanding at January 1, 1996                                     26,444      $       8.290
         Granted                                                             2,400             15.500
         Exercised                                                          (8,512)             8.000
         Forfeited                                                          (6,358)             8.000
                                                                       -----------      -------------
             Outstanding at December 31, 1996                               13,974              9.830

         Granted                                                                 -                  -
         Exercised                                                            (250)             8.000
         Forfeited                                                          (1,210)             8.000
                                                                       -----------      -------------

             Outstanding at December 31, 1997                               12,514      $      10.040
                                                                       ===========      =============


</TABLE>

                                  (Continued)

                                       62



<PAGE>   64




                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996

NOTE 10 - BENEFIT PLANS (Continued)


         Options granted and exercisable at December 31, 1997 are 11,094 at a
         weighted average price of $9.35. At December 31, 1997, the range of the
         exercisable price is $8.00 to $15.625 with an average remaining life of
         6 years.

         The Company accounts for its stock option plan under Accounting
         Principle Board Opinion (APBO) No. 25, "Accounting for Stock Issued to
         Employees". Accordingly, no compensation expense has been recognized
         for the 1997 stock option plan in the financial statements. Statement
         of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock
         Based Compensation", became effective for the first time in 1996. This
         statement prescribes new methods for determining compensation expense
         under stock option plans, but allows corporations to use APBO No. 25 if
         they provide pro forma information computed under the new standard. Had
         compensation cost been computed under the methodology contained in SFAS
         No. 123, net income would have been reduced by approximately $2,440 and
         $5,580 for 1997 and 1996, respectively, with no effect on earnings per
         share. In future years, the pro forma effect of not applying the
         standard is expected to increase as additional options are granted. The
         weighted average fair value of the options granted during 1996 is
         estimated at $4.58 on the date of grant using the Black-Scholes option
         value model with the following assumptions: dividend yield of 0, a risk
         free interest rate of 6.5%, expected volatility of stock price of
         11.90%, an assumed forfeiture rate of 0%, and an average life of five
         years.

     Management recognition and retention plans and trusts:

         The Company has two management recognition plans and trusts (RRPs) as a
         method of providing officers and outside directors with a proprietary
         interest in the Company. Such awards are to be earned by the
         individuals, subject to terms of the RRPs. Stock awarded under the plan
         will vest on a cumulative basis in equal installments at a rate of
         33-1/3% per year commencing one year from the date of grant or as
         specified by plan trustees. The number of shares held by the RRPs
         totaled 19,374 shares. On October 1, 1993, 18,471 shares were granted
         to officers and outside directors. The cost of the awards are amortized
         on the straight-line basis over the vesting terms. Compensation expense
         under these plans amounted to $1,000 and $5,000 in 1997 and 1996,
         respectively.



                                  (Continued)


                                       63


<PAGE>   65




                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996



NOTE 11 - EARNINGS PER SHARE

A  reconciliation  of the numerators and  denominators  for earnings per common
share  computations  for the years ended December 31 is presented  below
(dollars and shares in thousands).


<TABLE>
<CAPTION>
                                                                                        1997        1996
                                                                                        ----        ----
     <S>                                                                             <C>         <C>
     BASIC EARNINGS PER SHARE

         Net income (loss) available to common stockholders                         $     124    $    (158)
                                                                                    =========    =========

         Weighted average common shares outstanding                                       403          442
                                                                                    =========    =========


              BASIC EARNINGS PER SHARE                                                    .31         (.36)
                                                                                    =========    =========

     EARNINGS PER SHARE ASSUMING DILUTION
         Net income (loss) available to common stockholders                         $     124    $    (158)
                                                                                    =========    =========

         Weighted average common shares outstanding                                       403          442
         Add:  dilutive effect of assumed exercises:
              Incentive stock options                                                       5            5
                                                                                    ---------    ---------
         Weighted average common and dilutive
           potential shares outstanding                                                   408          447
                                                                                    =========    =========

              DILUTED EARNINGS PER SHARE                                                 0.30        (0.36)
                                                                                    =========    =========
</TABLE>

NOTE 12 - REGULATORY MATTERS

The Bank is subject to regulatory capital requirements administered by the
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgements by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.

The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited as is asset growth and
expansion, and plans for capital restoration are required.



                                  (Continued)

                                       64



<PAGE>   66





                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 12 - REGULATORY MATTERS (Continued)

At year-end, the Bank's regulators categorized the Bank as well capitalized.
Actual capital levels (in millions) and minimum capital required levels were:


<TABLE>
<CAPTION>
                                                                                              Minimum Required
                                                                                                to Be Well
                                                                       Minimum Required      Capitalized Under
                                                                         for Capital         Prompt Corrective
                                                        Actual         Adequacy Purposes     Action Regulations
                                                        ------         -----------------     ------------------

December 31, 1997                                 Amount     Ratio     Amount     Ratio       Amount     Ratio
                                                  ------     -----     ------     -----       ------     -----
<S>                                             <C>        <C>        <C>        <C>          <C>       <C>
Total capital (to risk-weighted assets)          $  7.7     15.4%      $  4.0     8.0%        $ 5.0       10.0%
Tier 1 (core) capital (to risk-weighted
  assets)                                        $  7.2     14.4%      $  2.0     4.0%        $ 3.0        6.0%
Tier 1 (core) capital (to adjusted total
  assets)                                        $  7.2     8.6%       $  2.5     3.0%        $ 4.1        5.0%
Tier 1 capital to average assets                 $  7.2     8.1%       $  3.5     4.0%        $ 4.4        5.0%
Tangible capital (to adjusted total
  assets)                                        $  7.2     8.6%       $  1.2     1.5%          N/A        N/A
</TABLE>


Federal regulations require the Bank to comply with a Qualified Thrift Lender
(QTL) test which requires that 65% of assets be maintained in housing-related
finance and other specified assets. If the QTL test is not met, limits are
placed on growth, branching, new investments, FHLB advances, and dividends or
the institution must convert to a commercial bank charter. Management considers
the QTL test to have been met.

On October 1, 1993, the Bank converted from a federally-chartered mutual savings
and loan association to a federally chartered stock savings bank subsidiary of
First Financial Bancorp, Inc. (Company), a newly formed and registered savings
bank holding company. The Company issued 484,338 shares of common stock at $8.00
per share. The net proceeds, after deducting conversion expenses of $401,000
were $3,473,000 and were recorded as common stock and additional paid-in capital
in the consolidated statement of financial condition. The Company used
$2,200,000 of the net proceeds to acquire all the common stock of the Bank.

As part of the conversion to the stock form of ownership on October 1, 1993, the
Bank established a liquidation account for the benefit of eligible depositors as
of December 31, 1992, the eligibility record date, who continue to maintain
deposits in the Bank after the conversion. The initial balance of the
liquidation account was equal to the retained earnings of the Bank as of
December 31, 1992. In the unlikely event of a complete liquidation of the Bank
each eligible account holder would receive from the liquidation account, a
liquidation distribution based on their proportionate share of the then total
remaining qualifying deposits, prior to any distribution with respect to the
Bank's capital stock.


                                   (Continued)

                                       65



<PAGE>   67




                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK,
  COMMITMENTS, AND CONTINGENCIES

The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and previously approved unused
lines of credit. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
statement of financial condition.

The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
previously approved unused lines of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for loans recorded in the
statement of financial condition. Financial instruments whose contract amounts
represent credit risk at December 31, 1997 are summarized as follows (in
thousands):

<TABLE>
<S>                                                                                             <C>
     Commitments to originate loans; rates range from 7.250% to 9.500%                           $   1,692
     Unused lines of credit                                                                          5,158
     Standby letters of credit                                                                         146
     Commitments to purchase loan participations                                                     1,396
</TABLE>


At December 31, 1997, the Company serviced mortgage loans with unpaid principal
balances of $1,234,000 which were sold under agreements for which the buyers
have recourse options. The Company does not anticipate any significant losses as
a result of these agreements.


NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS

Corporations are required to disclose fair value information about their
financial instruments. SFAS No. 107 defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The methods and assumptions used to determine fair values for each class of
financial instruments are presented below:

The estimated fair value for cash and cash equivalents, interest-bearing
deposits with financial institutions, Federal Home Loan Bank stock, accrued
interest receivable, mortgage servicing rights, NOW, money market and savings
deposits, short-term borrowings, and accrued interest payable are considered to
approximate their carrying values. The estimated fair value for securities
available-for-sale and securities held-to-maturity are based on quoted market
values for the individual securities or for equivalent securities. The estimated
fair value for portfolio loans is based on estimates of the rate the Company
would charge for similar loans at December 31, 1997 applied for the time period
until the estimated payment. The estimated fair value of loans held for



                                  (Continued)


                                       66



<PAGE>   68



                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

sale is based on the prevailing secondary market prices for similar loans at
December 31, 1997. The estimated fair value of certificates of deposit is based
on estimates of the rate the Company would pay on such deposits at December 31,
1997 applied for the time period until maturity. The estimated fair value of
Federal Home Loan Bank advances is based on the estimate of the rate the Company
would pay for such advances at December 31, 1997 for a time period until
maturity. Loan commitments are not included in the table below as their
estimated fair value is immaterial.

<TABLE>
<CAPTION>


                                                                                                 Estimated
         (Dollars in thousands)                                                   Carrying         Fair
                                                                                    Value          Value
                                                                                    -----          -----
          <S>                                                                    <C>             <C>
          Financial instruments in assets
               Cash on hand and in banks                                         $  4,759        $  4,759
               Securities available-for-sale                                       14,507          14,507
               Mortgage-backed securities available-for-sale                        1,625           1,625
               First mortgage loans held for sale                                   2,352           2,366
               Mortgage-backed securities                                             864             835
               Certificates of deposit                                              2,099           2,101
               Loans receivable, net                                               52,120          53,192
               Federal Home Loan Bank stock                                           910             910
               Mortgage servicing rights                                              212             212
               Accrued interest receivable                                            526             526

         Financial instrument liabilities
               DDA, NOW, money market, and passbook savings                        24,722          24,722
               Certificates of deposit                                             42,828          43,312
               FHLB advances                                                        6,700           6,699
               Accrued interest payable                                               144             144
</TABLE>

Other assets and liabilities of the Company that are not defined as financial
instruments such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as loan servicing rights (originated
prior to January 1, 1995), customer goodwill, and similar items.


While the above estimates are based on management's judgement of the most
appropriate factors, there is no assurance that were the Company to have
disposed of these items on December 31, 1997, the fair values would have been
achieved, because the market value may differ depending on the circumstances.
The estimated fair values at December 31, 1997 should not necessarily be
considered to apply at subsequent dates.



                                  (Continued)

                                       67



<PAGE>   69




                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996



NOTE 15 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY)

Presented below are the parent company's condensed balance sheet, condensed
statements of income, and condensed statements of cash flows:


                             CONDENSED BALANCE SHEET
                                December 31, 1997
                                 (In thousands)

<TABLE>
<S>                                                                                              <C>
ASSETS
Cash and cash equivalents                                                                          $       232
Securities available-for-sale                                                                              191
Loans receivable for ESOP                                                                                   61
Investment in subsidiary                                                                                 7,189
Other assets                                                                                                21
                                                                                                   -----------

     Total assets                                                                                  $     7,694
                                                                                                   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
    Other liabilities                                                                              $        63
                                                                                                   -----------
    Stockholders' equity
     Common stock                                                                                           51
     Additional paid-in capital                                                                          3,864
     Retained earnings                                                                                   5,199
     Treasury stock                                                                                     (1,505)
     Other                                                                                                  22
                                                                                                   -----------
         Total stockholders' equity                                                                      7,631
                                                                                                   -----------

              Total liabilities and stockholders' equity                                           $     7,694
                                                                                                   ===========
</TABLE>


                                  (Continued)

                                       68




<PAGE>   70



NOTE 15 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY) (Continued)


                         CONDENSED STATEMENTS OF INCOME
                     Years ended December 31, 1997 and 1996
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                           1997         1996
                                                                                           ----         ----
<S>                                                                                    <C>          <C>
     Interest income                                                                    $      12    $      12
     Gains on sales of securities                                                              69            -
                                                                                        ---------    ---------
         Total income                                                                          81           12

Expense
     Professional fees                                                                         25           14
     Other                                                                                     33           31
                                                                                        ---------    ---------
         Total expense                                                                         58           45
                                                                                        ---------    ---------


INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) AND EQUITY
  IN UNDISTRIBUTED NET INCOME (LOSS) OF SUBSIDIARY                                             23          (33)
Income taxes (benefit)                                                                          8          (11)
                                                                                        ---------    ---------


INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED NET
  INCOME (LOSS) OF SUBSIDIARY                                                                  15          (22)

Equity in undistributed net income (loss) of subsidiary                                       109         (136)
                                                                                        ---------    ---------


NET INCOME (LOSS)                                                                       $     124    $    (158)
                                                                                        =========    =========
</TABLE>


                                  (Continued)

                                       69



<PAGE>   71

                          FIRST FINANCIAL BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE 15 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY) (Continued)


                       CONDENSED STATEMENTS OF CASH FLOWS
                     Years ended December 31, 1997 and 1996
                                 (In thousands)



<TABLE>
<CAPTION>
                                                                                        1997            1996
                                                                                        ----            ----
<S>                                                                                 <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)                                                                $     124        $    (158)
   Adjustments to reconcile net income (loss) to net
     cash provided by (used in) operating activities
   Equity in undistributed net income (loss) of subsidiary                               (109)             136
   Gain on sales of securities available-for-sale                                         (69)               -
   Decrease (increase) in other assets                                                     (7)             (13)
   Increase in other liabilities                                                           44                -
                                                                                    ---------        ---------
   Net cash used in operating activities                                                  (17)             (35)

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of securities available-for-sale                                               -             (106)
   Proceeds from sales of securities available for sale                                   166                -
   Principal collected on loan for ESOP                                                    54               54
                                                                                    ---------        ---------
         Net cash provided by (used in) investing activities                              220              (52)

CASH FLOW FROM FINANCING ACTIVITIES
   Proceeds from sale of common stock                                                       7               68
   Purchase of treasury stock                                                            (155)            (890)
                                                                                    ---------        ---------
   Net cash used in financing activities                                                 (148)            (822)
                                                                                    ---------        ---------

Increase (decrease) in cash and cash equivalents                                           55             (909)

Cash and equivalents at beginning of year                                                 177            1,086
                                                                                    ---------        ---------

CASH AND EQUIVALENTS AT END OF YEAR                                                 $     232        $     177
                                                                                    =========        =========
</TABLE>



                                       70


<PAGE>   72


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

         On January 4, 1996, the Audit Committee of the Board of Directors of
the Company determined to dismiss the firm of Lindgren, Callihan, Van Osdol &
Co., Ltd. ("Lindgren") as independent certified public accountants of the
Company, effective on February 15, 1996.

         During the two years ended December 31, 1997 Lindgren's reports did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. During such
periods, there have been no disagreements between the Company and Lindgren on
any matter of accounting principles or practice, financial statement disclosure,
or auditing scope or procedure, which disagreements would have caused Lindgren
to make reference to the subject matter of such disagreements in connection with
its report. During such periods, Lindgren did not advise the Company of any of
the following matters:

         1.       That the internal controls necessary for the Company to
develop reliable financial statements did not exist;

         2. That information had come to Lindgren's attention that had lead it
to no longer be able to rely on management's representations, or that had made
it unwilling to be associated with the financial statements prepared by
management;

         3. That there was a need to expand significantly the scope of the audit
of the Company or that information had come to Lindgren's attention that if
further investigated (i) may materially impact the fairness or reliability of
either a previously issued audit report or underlying financial statements, or
the financial statements issued or to be issued covering the fiscal periods
subsequent to the date of the most recent financial statements covered by an
audit report (including information that may prevent it from rendering an
unqualified audit report on those financial statements), or (ii) may cause it to
be unwilling to rely on management's representation or be associated with the
Company's financial statements and that, due to its dismissal, Lindgren did not
so expand the scope of its audit or conduct such further investigation; or

         4. That information had come to Lindgren's attention that it had
concluded materially impacted the fairness or reliability of either (i) a
previously issued audit report or the underlying financial statements, or (ii)
the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that, unless resolved to the accountant's
satisfaction, would prevent it from rendering an unqualified audit report on
those financial statements), or that, due to its dismissal, there were no such
unresolved issues as of the date of its dismissal.

         Lindgren has furnished a letter to the SEC stating that it agrees with
the above statements, which letter is filed herewith as Exhibit 16.

         The Audit Committee of the Board of Directors of the Company engaged
the firm of Crowe, Chizek and Company LLP as independent certified accountants
for the Company, effective upon the dismissal of Lindgren.

         During the two years ended December 31, 1997 neither the Company nor
anyone on its behalf had consulted Crowe, Chizek and Company LLP with respect to
any accounting or auditing issues involving the Company. That is, there were no
discussions with the Company regarding the application of accounting principles
to a specified transaction, the type of audit opinion that might be rendered on
the financial statements or any related item.



                                       71

<PAGE>   73



                                    PART III


ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
         PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT



<TABLE>
<CAPTION>
                                                                                           Shares of
                                                                                         Common Stock
                                                                                         Beneficially
                                   Positions Held         Director     Current Term      Owned on the      Percent
       Name              Age      with the Company        Since (1)      to Expire        Record Date     Of Class
       ----              ---    --------------------      ---------      ---------      ---------------   --------
<S>                      <C>    <C>                        <C>            <C>              <C>             <C>
Douglas M. Kratz          45     Director                   1997           1998              20,077        4.82%
Charles G. Popp           40     Director                   1997           1998                 100          *
Steven C. Derr            49     President and Chief        1995           1999              15,665(3)     3.76%
                                 Executive Officer
Nancy Sylvester           50     Director and Chairman      1996           1999               1,218(4)       *
                                 of the Board
James V. Twyning          48     Director                   1997           2000               1,093          *

Richard E. Winkelman      59     Director                   1977           2000               6,387(5)     1.53%
</TABLE>

     Less than 1%.
-------------------------
*
(1)   Reflects the initial appointment of Mr. Winkelman to the Board of
      Directors of the Company's mutual predecessor.
(2)   Includes 2,127 shares awarded, subject to restrictions, pursuant to the
      Employees' Recognition Plan. Includes 6,843 shares subject to options
      granted pursuant to the Incentive Stock Option Plan which are exercisable
      within 60 days of the Record Date. Includes 3,570 shares allocated to Mr.
      Derr's account under the ESOP.
(3)   Includes 700 shares subject to options granted pursuant to the Directors'
      Plan.
(4)   Includes 692 shares subject to options granted pursuant to the Directors'
      Plan and 420 shares awarded, subject to restrictions, pursuant to the
      Directors' Recognition Plan.

         The principal occupation during the past five years of each director,
nominee for director and named executive officer of the Company is set forth
below. References to the "Company" include the Company's mutual predecessor. All
directors and executive officers have held their present positions for five
years unless otherwise stated.

         STEVEN C. DERR is President and Chief Executive Officer of the
Company.  Mr. Derr previously served as Treasurer of the Company, and as
Secretary-Treasurer and Chief Financial Officer of the Bank.  Mr. Derr began
his employment with the Bank in 1984.

         NANCY K. SYLVESTER is a Rock Valley College associate professor,
Professional Registered Parliamentarian, and part owner of Jimmy's Frozen
Custard.

         CHARLES G. POPP is an Attorney specializing in real estate law and a
General Partner of Strom, Sewell, Larson and Popp.

         JAMES V. TWYNING is a Certified Public Accountant who is part owner and
Vice President of Northern Nationalease & Freightliner, a truck leasing firm


                                       72


<PAGE>   74

         DOUGLAS M. KRATZ is Chairman, Chief Executive Officer and Chief
Financial Officer of Financial Services Corporation of the Midwest, Rock Island,
Illinois; Secretary, Treasurer and Director of Richey Corporation, Rock Island,
Illinois; Chairman and Chief Executive Officer of Englehart Corporation,
Bettendorf, Iowa; President, Chief Executive Officer and Director of Four Bears,
Inc., Rock Island, Illinois; and Chairman and Chief Executive Officer of Brammer
Company, LLC, Davenport, Iowa. Mr. Kratz has served as director for the Company
since 1997.

         RICHARD E. WINKELMAN is the former owner of Winkelman Flowers in
Belvidere, Illinois.  Mr. Winkelman is semi-retired and works for a local
florist.

OWNERSHIP REPORTS BY OFFICERS AND DIRECTORS

         The Common Stock of the Company is registered pursuant to Section
12(g) of the Exchange Act.  The officers and directors of the Company and
beneficial owners of greater than 10% of the Company's Common Stock ("10%
beneficial owners") are required to file reports on Forms 3, 4, and 5 with the
SEC disclosing changes in beneficial ownership of the Common Stock. SEC rules
require disclosure in the Company's Proxy Statement and Annual Report on Form
10-KSB of the failure of an officer, director or 10% beneficial owner of the
Company's Common Stock to file a Form 3, 4 or 5 on a timely basis. The Company
believes that, during the fiscal year ended December 31, 1997, all filing
requirements under SEC rules applicable to the Company's officers, directors and
10% beneficial owners were complied with on a timely basis.


                                       73

<PAGE>   75


ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth the cash compensation for the years
ended December 31, 1997, 1996, and 1995, and certain information as to the total
remuneration paid by the Bank to the named executive officers of the Company.

<TABLE>
<CAPTION>

                                            SUMMARY COMPENSATION TABLE

                                                                                LONG-TERM
                         ANNUAL COMPENSATION                                COMPENSATION AWARDS
--------------------------------------------------------------------  -------------------------------
                          FISCAL
                          YEARS                             OTHER      RESTRICTED
                          ENDED                             ANNUAL       STOCK      OPTIONS/               ALL OTHER
       NAME AND          DECEMBER     SALARY     BONUS   COMPENSATION    AWARD(S)      SARS               COMPENSATION
PRINCIPAL POSITION (1)      31,       ($)(2)      ($)       ($)(3)       ($)(4)      (#)(5)    PAYOUTS      ($)(6)
----------------------   --------    -------      ---    ----------    ---------     ------    -------    ------------
<S>                      <C>        <C>        <C>         <C>         <C>           <C>         <C>       <C>
Steven C. Derr            1997       $78,149    $2,118     $   --      $    --       $6,843      --         $30,836
President and Chief       1996        63,080        --      7.664       18,821        4,474      --          24,887
Executive Officer         1995        62,061        --      3,618       18,523        4,106      --          18,061
</TABLE>


(1)   No other executive officer received salary and bonuses that in the
      aggregate exceeded $100,000 for the years ended December 31, 1997, 1996
      and 1995.

(2)   Amount shown is gross earnings. Includes $5,635, $4,712 and $4,158 for the
      years ended December 31, 1997, 1996 and 1995, respectively, deferred by
      Mr. Derr pursuant to the Bank's 401(k) Plan. Includes $2,102, $2,102 and
      $2,199 for the years ended December 31, 1997, 1996 and 1995, respectively,
      contributed by Mr. Derr to the Bank's Section 125 Plan.

(3)   Includes directors' fees paid for attendance at Board meetings of the Bank
      and the Company. The Bank and the Company provided Mr. Derr with
      membership dues to certain organizations that are not included in the
      summary compensation table because the aggregate amount of such benefits
      does not exceed the lesser of $50,000 or 10% of such officer's
      compensation.

(4)   Includes 1,195 shares, 1,195 shares for Mr. Derr of Common Stock awarded
      on October 1, 1993 pursuant to the Company's Recognition and Retention
      Plan, which shares vested on October 1, 1996, 1995, respectively. The
      value of such shares was determined by multiplying the number of shares
      which became fully vested by the price of the shares of Common Stock on
      October 1, 1996, 1995. The fair market value of such restricted stock on
      December 31, 1997 (based on the closing price of the Common Stock as
      reported on the Nasdaq Small-Cap Market) was approximately $44,401.

(5)   On October 1, 1993, Mr. Derr was awarded 6,843 options to purchase shares
      of the Company's common stock. The options vest in five equal annual
      increments commencing on October 1, 1993 and the exercise price of such
      options is $8.00, the fair market value of the underlying shares of Common
      Stock on the date of grant. The options shown above represent the options
      that were exercisable as of December 31, 1997.

(6)   Includes $28,724, $16,026 and $10,058 allocated to Mr. Derr's account for
      the years ended December 31, 1997, 1996 and 1995, respectively, under the
      Bank's ESOP. Includes $2,112 $1,892 and $3,723 allocated to Mr. Derr's
      account for the years ended December 31, 1996, 1995 and 1994,
      respectively, under the Bank's 401(k) Plan. Includes $4,149 and $4,280 for
      Mr. Derr for the years ended December 31, 1996, 1995, respectively, for
      reimbursement of income taxes on the excess of the fair market value of
      the vested Restricted Stock Award over the price of such shares in the
      initial public offering of the Company.

EMPLOYMENT AND SEVERANCE ARRANGEMENTS


         EMPLOYMENT AGREEMENT.  The Bank has entered into an employment
agreement with Steven C. Derr, President and Chief Executive Officer of the
Bank. The employment agreement is intended to ensure that the Bank will be able
to maintain a stable and competent management base. The continued success of the
Bank depends to a significant degree on the skill and competence of its
President and Chief Executive Officer.

         The employment agreement provides for a three-year term. Commencing on
the first anniversary date and continuing each anniversary date thereafter, the
Board of Directors of the Bank may extend the agreement for an additional year
such that the remaining term shall be three years unless written notice of
non-renewal is given



                                       74

<PAGE>   76


by the Board of Directors after conducting a performance evaluation of the
executive. In addition to the base salary, the agreement provides that the
executive is to receive all benefits provided to permanent full time employees
of the Bank, including among other things, disability pay, participation in
stock benefit plans and other fringe benefits applicable to executive personnel.
The agreement provides for termination by the Bank for cause at any time. In the
event the Bank chooses to terminate the executive's employment for reasons other
than for cause, or upon the termination of the executive's employment for
reasons other than a change in control, as defined, or in the event of the
executive's resignation from the Bank upon (i) failure to re-elect the executive
to his current office, (ii) a material change in the executive's functions,
duties or responsibilities, (iii) relocation of his principal place of
employment, (iv) the liquidation or dissolution of the Bank, or (v) a breach of
the agreement by the Bank, the executive or, in the event of death, his
beneficiary would be entitled to receive an amount equal to the greater of the
remaining payments, including base salary, bonuses and other payments due under
the remaining term of the agreement or three times the average of the
executive's base salary, including bonuses and other cash compensation paid, and
the amount of any benefits received pursuant to any employee benefit plans
maintained by the Bank.

         If termination, voluntary or involuntary, follows a "change in control"
of the Bank or the Company, as defined in the agreement, the executive or, in
the event of death, his beneficiary, would be entitled to a payment equal to the
greater of (i) the payments due under the remaining term of the agreement or
(ii) 2.99 times his average annual compensation over the five years preceding
termination. The Bank would also continue the executive's life, health, and
disability coverage for the remaining unexpired term of the agreement to the
extent allowed by policies maintained by the Bank from time to time. Payments to
the executive under the agreement will be guaranteed by the Company in the event
that payments or benefits are not paid by the Bank.

         The employment agreement provides that for a period of one year
following termination the executive agrees not to compete with the Bank or the
Company in any city, town or county in which the Bank or the Company maintains
an office or has filed an application to establish an office.

         SUPPLEMENTAL EXECUTIVE AGREEMENT. The Company has entered into a
Supplemental Executive Agreement with Mr. Derr. This agreement supplements Mr.
Derr's employment agreement, which provides for a reduced severance payment in
the event benefits paid upon a Change in Control constitute "excess parachute
payments" under the Internal Revenue Code of 1986, as amended. The agreement is
designed to compensate Mr. Derr for any reduction in benefits due him under his
employment agreement and also requires the Company to pay any excise tax to
which Mr. Derr becomes subject due to the "excess parachute payments"
provisions.


DIRECTORS' COMPENSATION


         In 1997, each non-employee director received $830 per month in
directors' fees, plus $630 for attendance at the Bank's annual organizational
meeting.

BENEFITS

         401(k) PLAN. The Bank maintains the First of Belvidere 401(k) Profit
Sharing Plan and Trust (the "401(k) Plan"), a tax deferred compensation plan.
Under the 401(k) Plan, employees 21 years of age or older with twelve months of
service and 1,000 hours of service during that period may make pre-tax
contributions up to applicable limits under the Internal Revenue Code. Employees
are 100% vested in their contributions. The Bank may elect to make contributions
to the 401(k) Plan out of Bank profits. Discretionary employer contributions
vest at a rate of 20% per year beginning in the third year of service by an
employee.

         Benefits are payable when an employee reaches age 65 or the fifth
anniversary after entering the 401(k) Plan, whichever is later. Benefits are
payable whether or not the employee continues to be employed by the Bank upon
reaching age 65. Distributions are made in a lump-sum payment or in an annuity
for the life of the


                                       75


<PAGE>   77



participant, the participant and his or her spouse, or the participant and a
designated beneficiary. Benefits are payable in the event of death, disability
or termination of a participating employee. The Bank allocated $2,112 to the
account of Mr. Derr, as a discretionary employer contribution for the plan year
ended December 31, 1997.

         EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank has established an
ESOP for eligible employees. Employees with a twelve-month period of employment
with the Bank during which they worked at least 1,000 hours and who have
attained age 21 are eligible to participate.

         Benefits generally become 100% vested after seven years of credited
service. Prior to the completion of three years of credited service, a
participant who terminates employment for reasons other than death, retirement
(or early retirement), or disability will not receive any benefit under the
ESOP. ESOP contributions vest at a rate of 20% per year beginning in the third
year of service by an employee. Forfeitures will be reallocated among remaining
participating employees, in the same proportion as contributions. Benefits may
be payable upon death, retirement, early retirement, disability or separation
from service. The Bank's contributions to the ESOP are not fixed, so benefits
payable under the ESOP cannot be estimated. The account of Mr. Derr received
allocations of $28,724 for the plan year ended December 31, 1997.

         STOCK OPTION PLAN. The Board of Directors of the Company maintains the
1993 Incentive Stock Option Plan for officers and employees of the Bank because
it believes that stock options serve as an important means for attracting and
retaining personnel as well as rewarding employees who help the Bank achieve its
business objectives. Moreover, the exercise of stock options is beneficial to
the Bank because it provides additional capital at minimal expense.

         The Board of Directors granted options (with Limited Rights) under the
Incentive Stock Option Plan at an exercise price of $8.00 per share, as follows:
options to purchase 6,843 shares of Common Stock were granted to Mr. Derr;
options to purchase an additional 26,604 shares in the aggregate were granted to
other executive officers of the Bank; and options to purchase 3,052 shares in
the aggregate were granted to other employees of the Bank. The Bank reserved
2,248 shares covered by the Stock Plan for future grant, of which 1,000 and
1,700 were granted at an exercise price of $15.625 and $15.50, respectively, on
August 15, 1995 and November 21, 1996 to employees of the Bank. Options are
exercisable in equal increments over a five year period beginning one year from
the date of grant. Options will be 100% exercisable in the event the optionee
terminates his employment due to death, disability or retirement or in the event
of a change in control of the Bank or the Company.


              AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                         FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                  NUMBER OF SECURITIES
                                                                     UNDERLYING                    VALUE OF
                                                                     UNEXERCISED              UNEXERCISED IN-THE-
                                 SHARES                               OPTIONS AT                MONEY OPTIONS AT
                                ACQUIRED                            FISCAL YEAR-END            FISCAL YEAR-END (2)
                                  UPON             VALUE           ----------------           -------------------
           NAME                 EXERCISE        REALIZED (1)          EXERCISABLE                 EXERCISABLE
           ----                 --------        ------------       ----------------           -------------------
<S>                               <C>              <C>                  <C>                       <C>
Steven C. Derr                     --               --                   6,843                     $88,959

</TABLE>

                                       76


<PAGE>   78


(1)   Equals the difference between the aggregate exercise price of the options
      exercised and the aggregate fair market value of the shares of common
      stock received upon exercise computed using the price of the Common Stock
      as quoted on the Nasdaq Small-Cap Market at the time of exercise.

(2)   Equals the difference between the aggregate exercise price of such options
      and the aggregate fair market value of the shares of common stock that
      would be received upon exercise, assuming such exercise occurred on
      December 31, 1997, at which date the closing price of the Common Stock as
      quoted on the Nasdaq Small-Cap Market was at $21.00.

              STOCK OPTION PLAN FOR OUTSIDE DIRECTORS. The Board of Directors of
  the Company has adopted the Directors' Option Plan for directors who are not
  employees of the Bank because it believes that stock options serve as an
  important means for attracting and retaining qualified directors and
  rewarding  outside directors who help the Bank achieve its business
  objectives. Moreover, the exercise of stock options is beneficial to the Bank
  because it provides additional capital at minimal expense.

          The Directors' Option Plan is a self-administering plan and provides
  for the granting of nonstatutory options for 9,687 shares to directors who are
  not officers or employees of the Bank or the Company. The exercise price of
  each option granted under the Directors' Option Plan is $8.00 per share.
  Options for 1,842 shares of Common Stock were awarded to Director Winkelman.
  Mr. Winkelman has exercised 1,150 of the 1,842 options awarded under the
  Directors' Option Plan. Ms. Sylvester was awarded 700 shares under the
  Directors' Option Plan at an exercise price of $15.50 per share. 3,126 shares
  covered by the Directors' Plan have been reserved for future grant.

          RECOGNITION AND RETENTION PLAN FOR EMPLOYEES. The Board of Directors
  of the Company has adopted the Employees' Recognition Plan as a method of
  providing officers and key employees of the Bank with a proprietary interest
  that is designed as a means of rewarding the service of persons who have
  helped the Bank to achieve its business objectives as well as encouraging such
  persons to remain with the Bank. 18,114 shares of Common Stock were purchased
  by the Employees' Recognition Plan for the benefit of eligible officers and
  employees. Awards are nontransferable and nonassignable and officers of the
  Bank will earn (i.e., become vested in) shares of Common Stock covered by the
  award at a rate of 33-1/3% per year commencing one year from the year from the
  date of the award or as stipulated by the plan trustee. Awards will be 100%
  vested upon termination of employment due to death, disability or retirement
  of the officer or following a change in control of the Bank or the Company.

           RECOGNITION AND RETENTION PLAN FOR OUTSIDE DIRECTORS. The Board of
  Directors of the Company has adopted the Directors' Recognition Plan as a
  method of providing directors who are not employees of the Bank with a
  proprietary interest that is designed as a means of rewarding persons who
  have  helped the Bank to achieve its business objectives as well as
  encouraging such persons to remain with the Bank. 1,260 shares of Common
  Stock were purchased by the Directors' Recognition Plan for the benefit of
  outside directors. Awards are nontransferable and nonassignable and outside
  directors of the Bank will earn (i.e., become vested in) shares of Common
  Stock covered by the award at a rate of 33-1/3% per year commencing one year
  from the year from the date of the award. Awards will be 100% vested upon
  termination of employment due to death, disability or retirement of the
  outside director or following a change in control of the Bank or the Company.
  All current awards are 100% vested.

          DIRECTORS STOCK PURCHASE PROGRAM. The Company has entered into a stock

  purchase program for directors of the Company whereby such persons can
  designate all or a portion of their monthly directors' fees for the purchase
  of additional shares of stock of the Company. The shares will be purchased
  from treasury stock held by the Company, and shall be restricted pursuant to
  the requirements of the SEC and appropriately legended.



  ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
           AND MANAGEMENT


                                       77



<PAGE>   79

            Persons and groups who beneficially own in excess of five percent of
the Common Stock are required to file certain reports with the Securities and
Exchange Commission ("SEC") regarding such ownership pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act"). The following table sets forth, as of
December 31, 1987, the shares of Common Stock beneficially owned by directors
and nominees individually, by named executive officers individually, by
executive officers and directors as a group and by each person who was the
beneficial owner of more than five percent of the Company's outstanding shares
of Common Stock on such date.


<TABLE>
<CAPTION>
                                                          AMOUNT OF SHARES
                                                          OWNED AND NATURE                      PERCENT OF SHARES
         NAME AND ADDRESS OF                                OF BENEFICIAL                        OF COMMON STOCK
          BENEFICIAL OWNER                                    OWNERSHIP                            OUTSTANDING
          ----------------                                    ---------                            -----------
<S>                                                          <C>                                    <C>
DIRECTORS AND OFFICERS (1)


Steven C. Derr                                                 15,665                                  3.76%

Nancy K. Sylvester                                              1,218                                    *

James V. Twyning                                                1,093                                    *

Douglas M. Kratz                                               20,077                                  4.82

Richard E. Winkelman                                            6,387                                  1.53

Charles G. Popp                                                   100                                    *


All executive officers and directors
 as a group (10 persons)                                       51,804                                 12.44


First Federal Savings Bank of Belvidere
 Employee Stock Ownership Plan (2)                             30,767                                  7.39
121 East Locust Street
Belvidere, Illinois 61008

S.C. Investments, L.P. (3)                                     21,362                                  5.13
Webb and O'Neill, Inc.
50 N. Brockway, Suite 3-8
P.O. Box 1186
Palatine, Illinois 60078

National City Bank (4)                                         33,500                                  8.04
National City Center
1900 East 9th Street
Cleveland, Ohio 44114-3484
</TABLE>


--------------------
*Less than 1%.

(1)      Unless otherwise indicated, includes shares held directly by the
         individuals as well as by spouses, in trust and other indirect forms of
         ownership over which shares the individuals effectively exercise sole
         or shared voting and investment power. Includes 1,392 shares of Common
         Stock which outside directors of the Company have the right to acquire
         within 60 days of December 31, 1997 pursuant to the exercise of stock
         options granted under the Company's



                                       78

<PAGE>   80


         1993 Stock Option Plan for Outside Directors (the "Directors' Option
         Plan"). Includes 420 shares awarded, subject to restrictions pursuant
         to the Company's 1993 Recognition and Retention Plan for Outside
         Directors (the "Directors' Recognition Plan"). Includes 8,289 shares of
         Common Stock underlying options awarded to officers under the Company's
         1993 Incentive Stock Option Plan (the "Incentive Stock Option Plan")
         since such options are exercisable within sixty days of December 31,
         1997. Includes 2,127 shares awarded, subject to restrictions, pursuant
         to the Company's 1993 Recognition and Retention Plan for Employees (the
         "Employees' Recognition Plan").

(2)      Under the First Federal Savings Bank of Belvidere Employee Stock
         Ownership Plan (the "ESOP"), shares allocated to participants' accounts
         are voted in accordance with the participants' directions. Unallocated
         shares held by the ESOP are voted by the ESOP Trustee in the manner
         calculated to most accurately reflect the instructions it has received
         from the participants regarding the allocated shares. As of December
         31, 1997, 23,970 shares of Common Stock were allocated under the ESOP.

(3)      The information is based upon Schedule 13G beneficial ownership report,
         dated February 13, 1998, filed by S.C. Investments, L.P.

(4)      The information is based upon Schedule 13G beneficial ownership report,
         dated February 5, 1998, filed by National City Bank.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Financial Institutions Reform, Recovery and Enforcement Act of 1989
requires that all loans or extensions of credit to executive officers and
directors must be made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
the general public and must not involve more than the normal risk of repayment
or present other unfavorable features. In addition, loans made to a director or
executive officer in excess of the greater of (a) $25,000 or 5% of the Bank's
capital and surplus, or (b) $500,000 must be approved in advance by a majority
of the disinterested members of the Board of Directors. All loans made by the
Bank to officers, directors, and executive officers are made in the ordinary
course of business on the same terms and conditions as the Bank would make to
any other customer in the ordinary course of business and do not involve more
than a normal risk of collectibility or present other unfavorable features. At
December 31, 1997, loans to officers, directors and their affiliates aggregated
231,609.71.


ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K

         (a) The following exhibits filed as a part of this Form 10-KSB are as
             follows:


           -  3.1     Certificate of Incorporation of First Financial
                         Bancorp, Inc. (Incorporated by reference to Exhibit 3.1
                         of the Registrant's Registration Statement on Form S-1,
                         as amended, No. 33-65110.)

           -  3.2     Bylaws of First Financial Bancorp, Inc.
                         (Incorporated by reference to Exhibit 3.2 of the
                         Registrant's Registration Statement on Form S-1, as
                         amended, No. 33-65110.)

           -  4       Common Stock Certificate of First Financial Bancorp,
                         Inc. (Incorporated by reference to Exhibit 4 of the
                         Registrant's Registration Statement on Form S-1, as
                         amended, No. 33-65110.)

           -  10.1    Incentive Stock Option Plan (Incorporated by
                         reference to Exhibit 10.1 of the Registrant's
                         Registration Statement on Form S-1, as amended, No.
                         33-65110.)

           -  10.2    Outside Directors Stock Option Plan (Incorporated
                         by reference to Exhibit 10.2 of the Registrant's
                         Registration Statement on Form S-1, as amended, No.
                         33-65110.)



                                       79


<PAGE>   81

           -  10.3    Agreement with Steven C. Derr, President and Chief
                         Executive Officer (Incorporated by reference to Exhibit
                         10.3 of the Registrant's Annual Report on Form 10-KSB,
                          filed on March 29, 1996.)

           -  10.3(a) Severance Agreement with Steven C. Derr, President
                          and Chief Executive Officer, entered into as
                          of December 31, 1997.

           -  10.4    Recognition and Retention Plan and Trust for Employees
                         (Incorporated by reference to Exhibit 10.4 of the
                         Registrant's Registration Statement on Form S-1, as
                         amended, No. 33-65110.)

           -  10.5    Recognition and Retention Plan and Trust for Outside
                         Directors (Incorporated by reference to Exhibit 10.5 of
                         the Registrant's Registration Statement on Form S-1, as
                         amended, No. 33-65110.)

           -  10.6    Employee Severance Compensation Plan (Incorporated by
                         reference to Exhibit 10.6 of the Registrant's
                         Registration Statement on Form S-1, as amended, No.
                         33-65110.)

           -  10.7    Employee Stock Ownership Plan (Incorporated by
                         reference to Exhibit 10.7 of the Registrant's
                         Registration Statement on Form S-1, as amended, No.
                         33-65110.)

           -  10.8    Executive Salary Continuation Agreement with Steven C.
                         Derr, President and Chief Executive Officer.
                         (Incorporated by reference to Exhibit 10.8 of the
                         Registrant's Annual Report on Form 10-KSB, filed on
                         March 29, 1996.)

           -  10.9    Supplemental Executive Agreement with Steven C. Derr,
                         President and Chief Executive Officer. (Incorporated by
                         reference to Exhibit 10.9 of the Registrant's Annual
                         Report on Form 10-KSB, filed on March 29, 1996)

           -  21      Subsidiaries of the Registrant

           -  23      Consents of experts and counsel

           -  27      Financial Data Schedule

          (b)        Reports on Form 8-K:

                     No  reports on Form 8-K were filed during the last quarter
                     of the period covered by the report.



                                       80


<PAGE>   82




                                   SIGNATURES

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




                                       FIRST FINANCIAL BANCORP, INC.



Date:  March  30, 1998                 By: /s/ Steven C. Derr
                                          -----------------------------------
                                          Steven C. Derr
                                          President and Chief Executive
                                            Officer

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


By: /s/ Steven C. Derr                 By: /s/ Keith D. Hill
   --------------------------------       -----------------------------------
   Steven C. Derr, President, Chief       Keith D. Hill, Treasurer
    Executive Officer and Director        (Principal Financial and Accounting
   (Principal Executive Officer)          Officer)

Date:  March 30, 1998                      Date:  March 30, 1998




By: /s/ Douglas M. Kratz               By: /s/ James V. Twyning
   --------------------------------       -----------------------------------
   Douglas M. Kratz, Director             James V. Twyning, Director

Date:  March 30, 1998                      Date:  March 30, 1998




By: /s/ Nancy Sylvester                By: /s/ Richard E. Winkelman
   --------------------------------       -----------------------------------
   Nancy Sylvester, Director and          Richard E. Winkelman, Director
    Chairman of the Board

Date:   March 30, 1998                    Date:  March 30, 1998

By: /s/ Charles G. Popp
   --------------------------------
   Charles G. Popp, Director


Date:  March 30, 1998



                                       81