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

                                    FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
       (Mark One)

           /X/  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997

                                       OR

          / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                 For the transition period from ----- to -------

                         COMMISSION FILE NUMBER 0-28696

                           HOME BANCORP OF ELGIN, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                        36-4090333
(STATE OR OTHER JURISDICTION OF                          (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                          IDENTIFICATION NO.)

                  16 NORTH SPRING STREET, ELGIN, ILLINOIS 60120
                (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE-ZIP CODE)
                            TELEPHONE (847) 742-3800

           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 $.01 PER SHARE
                                (Title of class)

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

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

          As of March 1, 1998, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrant was
approximately $127,689,000.

          As of March 1, 1998, 6,855,799 shares of Registrant's common stock
were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

PORTIONS OF THE REGISTRANT'S 1997 ANNUAL REPORT TO STOCKHOLDERS ARE INCORPORATED
BY REFERENCE IN PART II.

PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1998 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE IN PART III
--------------------------------------------------------------------------------



<PAGE>




                           HOME BANCORP OF ELGIN, INC.
                           ANNUAL REPORT ON FORM 10-K
                            FOR THE FISCAL YEAR ENDED
                                DECEMBER 31, 1997

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                      PART I
<S>            <C>                                                                                            <C>
ITEM 1.        BUSINESS ......................................................................................    1
ITEM 2.        PROPERTIES ....................................................................................   28
ITEM 3.        LEGAL PROCEEDINGS .............................................................................   28
ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...........................................   29

                                                      PART II
ITEM 5.        MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .........................   29
ITEM 6.        SELECTED FINANCIAL DATA........................................................................   29
ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS .........................................................................   29
ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................   29
ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................................................   29
ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
               FINANCIAL DISCLOSURE ..........................................................................   29

                                                     PART III
ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............................................   30
ITEM 11.       EXECUTIVE COMPENSATION ........................................................................   30
ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................   30
ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................................................   30

                                                      PART IV
ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ...............................   30

</TABLE>




<PAGE>



                                     PART I

ITEM 1.  BUSINESS

GENERAL

          On September 26, 1996, Home Federal Savings and Loan Association of
Elgin ("Home Federal" or the "Association") completed its conversion from mutual
to stock form and became a wholly-owned subsidiary of Home Bancorp of Elgin,
Inc. ("Home Bancorp" or the "Company"). On such date, the Company sold 7,009,250
shares of its common stock, par value $0.01 per share (the "Common Stock"), to
the public, at a per share price of $10.00. The conversion of the Association
from mutual to stock form, the formation of the Company as the holding company
for the Association and the issuance and sale of the Common Stock are herein
referred to collectively as the "Conversion." The Conversion raised $62.4
million in net proceeds, of which 50% was retained by the Company and 50% was
used by the Company to purchase all of the outstanding capital stock of the
Association. The Company used $5.6 million of retained net proceeds to fund a
loan to its Employee Stock Ownership Plan ("ESOP") to purchase 8% of the Common
Stock issued in the Conversion.

          The Company's principal business activity consists of the ownership of
the Association. The Company also invests in short-term investment grade
marketable securities and other liquid investments. The Company has no
significant liabilities (other than those of the Association). The Company
neither owns nor leases any property but instead uses the premises and equipment
of the Association. At the present time, the Company does not employ any persons
other than certain officers of the Association who do not receive any extra
compensation as officers of the Company. The Company utilizes the support staff
of the Association from time to time, as needed. Additional employees may be
hired as deemed appropriate by the management of the Company. Unless otherwise
disclosed, the information presented in this Annual Report on Form 10-K
represents the activity of the Association for the period prior to September 26,
1996 and the activity of Home Bancorp and subsidiary consolidated thereafter.

          The Association's principal business consists of attracting deposits
from the public and investing those deposits, along with funds generated from
operations, primarily in loans secured by mortgages on one- to four-family
residences. The Association's results of operations are dependent primarily on
net interest income, which is the difference between the interest income earned
on its interest-earning assets, such as loans and securities, and the interest
expense on its interest-bearing liabilities, such as savings deposits. The
Association also generates noninterest income such as service charges and other
fees. The Association's noninterest expenses primarily consist of employee
compensation and benefits, occupancy expenses, federal deposit insurance
premiums, net costs of real estate owned, advertising and promotion, automated
teller machine, professional services, stationery, printing and office supplies,
data processing fees and other operating expenses. The Association's results of
operations are also significantly affected by general economic and competitive
conditions (particularly changes in market interest rates), government policies
and actions of regulatory agencies. The Association exceeded all of its
regulatory capital requirements at December 31, 1997.

MARKET AREA

          The Association has been, and intends to continue to be, a
community-oriented savings institution offering a variety of financial services
to meet the needs of the communities which it serves. The Association's market
area is composed of the areas surrounding its branch offices, while its lending
area is larger and includes portions of Cook, Kane, Lake, McHenry, DuPage and
DeKalb counties in Illinois. In addition to its administrative home office and
check processing center in Elgin, Illinois, the Association operates four other
branch offices. The branch offices are located in Crystal Lake, Roselle,
Bartlett and South Elgin, Illinois.

          The Association's market area is largely suburban in nature and is
located primarily in the Northwestern suburbs of Chicago. Management considers
the area's economy to be strong, and a major reason for such strength is a well
balanced economic base that is not dominated by a single industrial sector. The
introduction

                                        1

<PAGE>



of riverboat gambling on the Fox River in Elgin has also contributed to an
increase in economic activity and growth in and around Elgin.

          Management believes that the Association's success as a home lender
has been due, in part, to the favorable income, population and housing
demographics in Elgin and in the Association's market area. At the same time,
the growth of the market area and delineated lending area and their proximity to
Chicago has resulted in a highly competitive environment among the many
financial institutions competing for deposits and loans.

COMPETITION

          The Association faces substantial competition for both the savings
deposits it accepts and the loans it makes. The Association's market area has a
high density of financial institutions, including branch offices of major
commercial banks, all of which compete with the Association to varying degrees.
The Association also encounters significant competition for savings deposits
from commercial banks, savings banks and savings and loan associations located
in its market area, as well as competition for savings deposits from non-bank
institutions such as brokerage firms, insurance companies, money market mutual
funds, other mutual funds (such as corporate and government securities funds)
and annuities. The Association offers a more limited product line than many
competitors, with an emphasis on product delivery and customer service instead.
The Association competes for savings deposits by offering a variety of customer
services and savings deposit accounts at generally competitive interest rates.
The Association and its competitors are significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, real estate market values, government policies and actions of regulatory
authorities.

          The Association's competition for loans comes principally from savings
banks, savings and loan associations, commercial banks, mortgage bankers,
brokers and other institutional lenders. The Association competes for loans
primarily by emphasizing the quality of its loan services and by charging loan
fees and interest rates that are generally competitive within its delineated
lending area. Changes in the demand for loans relative to the availability of
credit may affect the level of competition from financial institutions that may
be more willing than the Association or its competitors to make credit available
but which have not generally engaged in lending activities in the Association's
delineated lending area in the past. Competition may also increase as a result
of the lifting of restrictions on the interstate operations of financial
institutions.

          Management considers the Association's reputation for customer service
as its major competitive advantage in attracting and retaining customers in its
market area and its delineated lending area. The Association also believes that
it benefits from its community orientation, as well as its established deposit
base and level of core deposits.

LENDING ACTIVITIES

          LOAN PORTFOLIO COMPOSITION. The Association's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences. At December 31, 1997, the Association had gross loans receivable
outstanding of $301.9 million of which $296.8 million, or 98.29%, were one- to
four-family, residential mortgage loans. The remainder consisted of $2.4 million
of multifamily mortgage loans, or 0.79% of gross loans; $755,000 of commercial
real estate mortgage loans, or 0.25% of gross loans; $1.3 million of
construction and land loans, or 0.42% of gross loans; and $761,000 of other
loans, or 0.25% of gross loans.

          The loans that the Association may originate are subject to federal
and state laws and regulations. Interest rates charged by the Association on
loans are affected by the demand for such loans, the supply of money available
for lending purposes and the rates offered by competitors. These factors are in
turn affected by, among other things, economic conditions, monetary policies of
the federal government, including the Board of Governors of the Federal Reserve
System (the "FRB"), and legislative tax policies.

          The following table sets forth the composition of Association's
mortgage and other loan portfolios in dollar amounts and percentages at the
dates indicated.

                                        2

<PAGE>





<TABLE>
<CAPTION>

                                                           AT DECEMBER 31,
                              ----------------------------------------------------------------------------
                                        1997                      1996                       1995
                              -------------------------  ------------------------ -----------------------
                                             PERCENT                    PERCENT                 PERCENT
                                 AMOUNT      OF TOTAL       AMOUNT      OF TOTAL    AMOUNT      OF TOTAL
                              ------------ ------------  ------------ ----------- ----------- ------------
                                                                                    (DOLLARS IN THOUSANDS)
MORTGAGE LOANS:
<S>                            <C>              <C>       <C>           <C>         <C>          <C>
  One- to four-family .......  $  296,769       98.29%    $  259,785      98.17%    $ 265,115     98.09%
  Multifamily ...............       2,394        0.79          2,628       0.99         3,106      1.15
  Construction and land......       1,265        0.42            750       0.28           456      0.17
  Commercial.................         755        0.25            815       0.31           891      0.33
                               ----------     -------     ----------    -------     ---------    ------
     Total mortgage loans....     301,183       99.75        263,978      99.75       269,568     99.74
                               ----------     -------     ----------    -------     ---------    ------

OTHER LOANS:
  Passbook savings (secured
    by savings and time
    deposits)................         679        0.22            573       0.22           627      0.23
  Consumer installment loans.          82        0.03             88       0.03            92      0.03
                               ----------     -------     ----------    -------     ---------    ------
     Total other loans.......         761        0.25            661       0.25           719      0.26
                               ----------     -------     ----------    -------     ---------    ------

          Gross loans........  $  301,944     100.00%    $   264,639     100.00%    $ 270,287    100.00%
                               ==========     =======    ===========    =======     =========    ======

LESS:
  Loans in process...........  $      914                 $      872                $     418
  Deferred loan fees.........       1,305                      1,516                    1,890
  Allowance for loan losses..       1,064                        945                      826
                               ----------                 ----------                ---------
          Loans, net.........  $  298,661                 $  261,306                $ 267,153
                               ==========                 ==========                =========

</TABLE>


                                                 AT DECEMBER 31,
                                 -----------------------------------------------
                                            1994                     1993
                                 ------------------------ ----------------------
                                              PERCENT                   PERCENT
                                  AMOUNT      OF TOTAL       AMOUNT     OF TOTAL
                                 ---------- ------------- ------------ ---------

MORTGAGE LOANS:
  One- to four-family .......   $267,727         97.63%      $298,117     97.54%
  Multifamily ...............      4,118          1.50          4,587      1.50
  Construction and land .....        859          0.31          1,130      0.37
  Commercial ................        862          0.31          1,039      0.34
                                --------        ------       --------    ------
     Total mortgage loans ...    273,566         99.75        304,873     99.75
                                --------        ------       --------    ------

OTHER LOANS:
  Passbook savings (secured
    by savings and time
    deposits) ...............        576          0.21            631      0.21
  Consumer installment loans         100          0.04            120      0.04
                                --------        ------       --------    ------
     Total other loans ......        676          0.25            751      0.25
                                --------        ------       --------    ------

          Gross loans .......   $274,242        100.00%      $305,624    100.00%
                                ========        ======       ========    ======

LESS:
  Loans in process ..........   $    150                     $    505
  Deferred loan fees ........      2,403                        3,034
  Allowance for loan losses .        649                          409
                                                             --------
          Loans, net ........   $271,040                     $301,676
                                ========                     ========


                                        3

<PAGE>



        LOAN MATURITY AND REPRICING. The following table shows the maturity or
period to repricing of the Association's loan portfolio at December 31, 1997.
Loans that have adjustable rates are shown as being due in the period during
which the interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on the Association's loan portfolio totaled $39.7 million
for the year ended December 31, 1997.

<TABLE>
<CAPTION>

                                                                         AT DECEMBER 31, 1997
                                                                          MORTGAGE LOANS
                                             --------------------------------------------------------------------------------
                                              ONE- TO
                                               FOUR-         MULTI-    CONSTRUCTION                      OTHER        TOTAL
                                              FAMILY         FAMILY      AND LAND        COMMERCIAL      LOANS        LOANS
                                              ------         ------    ------------      ----------      -----        -----
                                                                          (IN THOUSANDS)
<S>                                            <C>           <C>          <C>              <C>           <C>         <C>
AMOUNT DUE:
   One year or less..........................  $ 20,921      $  553       $   69           $ 34          $664        $ 22,241
                                               --------      ------       ------           ----          ----        --------
AFTER ONE YEAR:
   One to three years .......................    31,911         403           29             --            80          32,423
   More than three years to five years ......    26,809         401        1,167            312            17          28,706
   More than five years to ten years ........    36,184         133           --            245            --          36,562
   More than ten years to twenty years ......    71,350         904           --            164            --          72,418
   Over twenty years ........................   109,594          --           --             --            --         109,594
                                               --------      ------       ------           ----          ----        --------

TOTAL DUE OR REPRICING AFTER ONE YEAR .......   275,848       1,841        1,196            721            97         279,703
                                               --------      ------       ------           ----          ----        --------

TOTAL AMOUNTS DUE OR REPRICING, GROSS........  $296,769      $2,394       $1,265           $755          $761        $301,944
                                               ========      ======       ======           ====          ====        ========
</TABLE>

        The following table sets forth the dollar amounts in each loan category
at December 31, 1997 that are due after December 31, 1998, and whether such
loans have fixed or adjustable interest rates.


<TABLE>
<CAPTION>
                                                                             DUE AFTER DECEMBER 31, 1998
                                                              -----------------------------------------------------
                                                                  FIXED              ADJUSTABLE               TOTAL
                                                                  -----              ----------               -----
                                                                                  (IN THOUSANDS)
<S>                                                           <C>                   <C>                   <C>
MORTGAGE LOANS:
  One- to four-family ...................................     $ 227,367             $  48,481             $ 275,848
  Multifamily ...........................................         1,323                   518                 1,841
  Construction and land..................................         1,186                    10                 1,196
  Commercial.............................................           481                   240                   721
OTHER LOANS..............................................            97                    --                    97
                                                              ---------             ---------             ---------
     TOTAL LOANS.........................................     $ 230,454             $  49,249             $ 279,703
                                                              =========             =========             =========
</TABLE>

        ORIGINATIONS, PURCHASES, SALE AND SERVICING OF LOANS. Loan originations
are developed from continuing business with depositors and borrowers, referrals
from real estate agents, builders, and walk-in customers. Loans are originated
by the Association's staff of salaried employees. While the Association
originates both fixed-rate and adjustable-rate loans, its ability to originate
loans is dependent upon demand for loans in its delineated lending area. Demand
is affected by the local economy and interest rate environment. The Association
retains all newly originated fixed-rate and adjustable-rate mortgage loans in
its portfolio. The Association does not normally sell mortgage loans nor has it
purchased mortgage loans. The Association sold two loans in 1995 in the amount
of $169,000 on a servicing-released basis to a community housing group.

        During the year ended December 31, 1997, the Association originated
$77.1 million of loans, compared to $36.3 million and $34.0 million in 1996 and
1995, respectively. Loan originations exceeded loan repayments in 1997 primarily
as a result of more aggressive advertising of the Association's loan products.
Loan repayments exceeded loan originations during the years ended December 31,
1996 and 1995 as a result of a generally rising interest rate environment and
competitive market conditions.

        In periods of economic uncertainty, the Association's ability to
originate a large dollar volume of mortgage loans with acceptable underwriting
characteristics may be substantially reduced or restricted with a resultant
decrease in operating earnings. While the Association generally does not sell
loans, and presently has no intention to do so,

                                        4

<PAGE>



it may consider selling loans in the future depending on market conditions and
the asset/liability management position of the Association. The Association does
not service loans for others and has no current plans to begin such servicing.

        The following table sets forth the Association's loan originations, loan
sales and principal repayments by loan type for the periods indicated.

<TABLE>
<CAPTION>

                                                                    FOR THE YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------------
                                                                1997             1996             1995
                                                                ----             ----             ----
                                                                            (IN THOUSANDS)
<S>                                                           <C>              <C>              <C>
LOANS (GROSS):
     At beginning of period..............................     $   264,639      $   270,287      $   274,242
MORTGAGE LOANS ORIGINATED:
     One- to four-family.................................          75,037           35,177           33,157
     Multifamily.........................................             380               --               --
     Construction and land ..............................             838              623               76
     Commercial .........................................             241               --              119
                                                              -----------      -----------      -----------
          TOTAL MORTGAGE LOANS ORIGINATED................          76,496           35,800           33,352
OTHER LOANS ORIGINATED...................................             627              478              614
                                                              -----------      -----------      -----------
          TOTAL LOANS ORIGINATED.........................          77,123           36,278           33,966
                                                              -----------      -----------      -----------
     Principal repayments................................          39,718           41,705           37,558
     Loans sold..........................................              --               --              169
     Loans transferred to real estate owned and
       in judgment.......................................             100              221              194
                                                              -----------      -----------      -----------
LOANS (GROSS) AT END OF PERIOD...........................     $   301,944      $   264,639      $   270,287
                                                              ===========      ===========      ===========
</TABLE>

        ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The Association's
residential first mortgage loans consist of loans to purchase or refinance one-
to four-family, owner-occupied residences and, to a lesser extent, secondary
residences in the Association's lending area. At December 31, 1997, $296.8
million, or 98.3%, of the Association's gross loans consisted of one- to
four-family residential first mortgage loans. Approximately 77% of the one- to
four-family residential first mortgage loans provided for fixed rates of
interest. The Association's one- to four-family loans typically provide for
repayment of principal over a fixed period not to exceed 30 years. The
Association competitively prices one- to four-family residential mortgage loans.
At December 31, 1997, the Association had residential construction loans
(included in one- to four-family residential mortgage loans) with an aggregate
principal balance of $2.5 million outstanding to borrowers intending to live in
the properties upon completion of construction, at which time such loans would
convert into permanent mortgage loans.

        The Association currently offers fixed rate mortgage loan programs and
adjustable rate mortgage loan programs with interest rates which adjust either
every three or five years. An adjustable-rate mortgage loan may carry an initial
interest rate that is less than the fully-indexed rate for the loan. All
adjustable-rate mortgage loans offered by the Association have lifetime interest
rate caps or ceilings. Generally, adjustable-rate mortgage loans pose credit
risks somewhat greater than the credit risk inherent in fixed-rate loans
primarily because, as interest rates rise, the underlying payments of the
borrowers rise, increasing the potential for default. It is the Association's
policy to underwrite its adjustable rate mortgage loans based on the initial
interest rate due to the relatively long period of time prior to the first
adjustment. For the year ended December 31, 1997, 77.4% of the mortgage loans
originated were at fixed rates.

        In underwriting one- to four-family residential first mortgage loans,
the Association evaluates both the borrower's credit history and ability to make
monthly payments, and the value of the property securing the loan. All
properties are appraised by independent appraisers approved by the Board of
Directors. The Association requires borrowers to obtain title insurance, fire
and property insurance (including flood insurance, where appropriate) naming the
Association as an insured party in an amount not less than the amount of the
loan. The Association's one- to four-family mortgage loans do not contain
prepayment penalties and do not permit negative amortization of principal. Real
estate loans originated by the Association generally contain a "due on sale"
clause allowing the Association to declare the unpaid principal balance due and
payable upon the sale of the security

                                        5

<PAGE>



property. The Association may waive the due on sale clause on loans held in its
portfolio when it is in the Association's best interest.

        The Association adheres to its Board-approved underwriting guidelines
for loan originations, which though prudent in approach to credit risk and
evaluation of collateral, allow management flexibility with respect to
documentation of certain matters and certain credit requirements. Although such
underwriting guidelines are less rigid than comparable Federal National Mortgage
Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC")
underwriting guidelines, the Association underwrites the substantial majority of
residential mortgage loans in accordance with FNMA's guidelines.

        The Association does not currently originate residential mortgage loans
if the ratio of the loan amount to the value of the property securing the loan
(I.E., the "loan-to-value" ratio) exceeds 97%. If the loan-to-value ratio is 90%
or greater, the Association requires that borrowers obtain private mortgage
insurance in amounts intended to reduce the Association's exposure to 80% or
less of the lower of the appraised value or the purchase price of the underlying
real estate.

        MULTIFAMILY MORTGAGE LENDING. The Association originates multifamily
mortgage loans generally secured by five- to ten-unit apartment buildings
located in the Association's delineated lending area. In reaching its decision
on whether to make a multifamily loan, the Association considers the
qualifications of the borrower (including the financial resources and income
level of the borrower, the borrower's experience in owning or managing similar
properties and the Association's lending experience with the borrower) as well
as the underlying property. Some of the factors considered with respect to the
underlying property include: the net operating income of the mortgaged premises
before debt service and depreciation; the debt service ratio (the ratio of the
property's net cash flow to debt service requirements); and the ratio of loan
amount to appraised value. Pursuant to the Association's underwriting policies,
a multifamily mortgage loan may only be made in an amount up to 75% of the
appraised value of the underlying property. The Association's multifamily
mortgage loans are generally fixed-rate loans and may be made with terms up to
15 years. Adjustable rate loans are offered with 3 or 5 year adjustments with 25
year terms. Properties securing a loan are appraised by an independent appraiser
approved by the Board of Directors. Title and hazard insurance are required on
all loans. At December 31, 1997, the principal balance of the Association's
multifamily mortgage loan portfolio was approximately $2.4 million, or 0.79% of
total gross loans outstanding. The Association's largest multifamily mortgage
loan at December 31, 1997 had an outstanding balance of $322,000 and is secured
by a 5-unit apartment building and an adjacent 6-unit apartment building.

        Mortgage loans secured by apartment buildings and other multifamily
residential properties are generally larger and involve a greater degree of risk
than one- to four-family residential mortgage loans. Because payment on loans
secured by multifamily 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 Association seeks to minimize these risks through its
underwriting policies, which require such loans to be qualified at origination
on the basis of the property's income and debt service ratio.

        COMMERCIAL REAL ESTATE LENDING. The Association occasionally originates
mortgage loans secured by commercial real estate properties located in its
delineated lending area. The Association's commercial real estate portfolio
consists of loans secured by a variety of non-residential properties, including
six mortgage loans secured by buildings owned by local churches and six loans
secured by small office buildings. At December 31, 1997, the Association had 12
commercial real estate loans with an aggregate outstanding balance of $755,000,
representing 0.25% of the Association's total loan portfolio. At that date, all
of such loans were current and performing in accordance with their terms. At
December 31, 1997, the Association's largest commercial real estate loan, the
borrower of which was a church, had an outstanding balance of $175,000.

        Appraisals on properties securing commercial real estate loans
originated by the Association are performed by an independent appraiser approved
by the Board of Directors at the time the loan is made. In addition, the
Association's underwriting procedures generally require verification of the
borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property. The
Association also requires title and hazard insurance for at least the principal
amount of the mortgage with a loss payable clause to the Association.


                                        6

<PAGE>



        Mortgage loans secured by commercial real estate properties, like
multifamily mortgage loans, generally present a higher level of risk than loans
secured by one- to four-family residences. This greater risk is attributable to
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on
income-producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
multifamily residential and commercial real estate is typically dependent upon
the successful operation of the related real estate project. If the cash flow
from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired. At December
31, 1997, the Association had no non-residential loans which were 30 days or
more delinquent.

        CONSTRUCTION AND LAND LENDING.  As a result of the relatively high level
of construction activity in the Association's delineated lending area, the
Association makes construction loans to individuals for the construction of
their primary residences and to builders for residential construction.

        Loans to individuals to finance the construction of their residences
typically have a term of up to 30 years. The borrower pays interest only during
the construction period. Residential construction loans are generally
underwritten pursuant to the same guidelines used for originating permanent
residential loans, with the loan converting to a permanent mortgage loan upon
completion and final payout. At December 31, 1997, the Association had
residential construction loans (included in one- to four-family residential
mortgage loans) with an aggregate principal balance of $2.5 million outstanding
to borrowers intending to live in the properties upon completion of
construction, at which time such loans would convert into permanent mortgage
loans.

        The Association has in the past originated construction loans to
builders for the construction of pre-sold one- to four-family residences in the
Association's delineated lending area. Such loans generally carry terms of up to
18 months and generally do not permit the payment of interest from loan
proceeds. At December 31, 1997, the Association had two construction loans
outstanding to builders with an aggregate principal balance of $401,000. While
the Association anticipates that it will continue to engage in this type of
lending from time to time in the future, the Association currently expects that
its total volume at any one time will be limited.

        Construction loans are generally originated in amounts of up to a
maximum loan-to-value ratio of 80% of the appraised value of the property. Prior
to making a commitment to fund a construction loan, the Association requires an
independent appraisal of the property. The Association obtains personal
guarantees for all of its construction loans. Personal financial statements of
guarantors are also generally obtained as part of the Association's loan
underwriting. All of the Association's construction loans have been secured by
properties located in its delineated lending area.

        The Association also originates land loans for individual building
sites. These loans are generally to individuals for eventual use as their
primary residence, and such mortgage loans are generally underwritten pursuant
to the same guidelines used for permanent residential loans. Terms of land loans
offered by the Association generally require a loan-to-value ratio of 80% of the
appraised value of the property and are 5-year balloon loans with higher
interest rates than the comparable one- to four-family residential mortgage
loans. At December 31, 1997, the Association had 32 land mortgage loans with an
aggregate outstanding balance of $1,265,000 or 0.42% of the Association's gross
loan portfolio.

        Construction lending generally affords the Association an opportunity to
receive interest at rates higher than those obtainable from residential lending
and to receive higher origination and other loan fees. Nevertheless,
construction lending to persons other than owner-occupants is generally
considered to involve a higher level of credit risk than one- to four-family
residential lending due to the concentration of principal in a limited number of
loans and borrowers and the effects of general economic conditions on
construction projects, real estate developers and managers. In addition, the
nature of these loans is such that they are more difficult to evaluate and
monitor. The Association's risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost (including interest) of the
project. If the estimate of value proves to be inaccurate, the Association may
be confronted, at or prior to the maturity of the loan, with a project having an
insufficient value to assure full repayment and/or the possibility of having to
make substantial investments to complete and sell the project. Because defaults
in repayment may not occur during the construction period, it may be difficult
to identify problem loans at an early stage. When loan payments become

                                        7

<PAGE>



due, the cash flow from the property may not be adequate to service the debt.

        CONSUMER LENDING.  The Association also offers consumer loans secured by
savings deposit accounts. At December 31, 1997, such loans totaled $679,000
representing 0.22% of the Association's total loan portfolio. The Association
also offers unsecured overdraft protection loans to its qualifying customers. At
December 31, 1997, the total outstanding principal balance of such unsecured
loans was $82,000, representing 0.03% of the Association's total loan portfolio.

        LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
establishes the lending policies of the Association and reviews properties
offered as security. For all loans originated by the Association, upon receipt
of a completed loan application from a prospective borrower, a credit report is
ordered and certain other information is verified by an independent credit
agency, and, if necessary, additional financial information is required to be
submitted by the borrower. An appraisal of any real estate intended to secure
the proposed loan is required. Appraisals currently are performed by an
independent appraiser designated and approved by the Association. The Board of
Directors annually approves the independent appraisers used by the Association
and approves the Association's appraisal policy. It is the Association's policy
to obtain for all real estate loans title and hazard insurance naming the
Association as an insured party in an amount not less than the amount of the
loan.

        Upon the approval of an application for a real estate mortgage loan by
two senior officers, the loan may be closed and the proceeds disbursed, provided
that the following requirements are satisfied: (i) loans with a principal
balance of up to $250,000 must be reviewed by the loan committee, which must
report the results of its review to the Board of Directors; (ii) loans with a
principal balance in excess of $250,000 but less than $400,000 must be approved
by three senior officers at the level of vice-president or higher, with
ratification by the Board of Directors at its next scheduled meeting; and (iii)
loans with a principal balance equal to or greater than $400,000 are reviewed
and approved by the full Board of Directors. Second mortgage loans are made by
the Association only if the first mortgage on the subject property is also held
by the Association. The total amount of the first and second mortgages on the
property may not exceed 80% of the property's appraised value, unless otherwise
approved by two senior officers of the Association. Applications for passbook
and consumer loans are approved at the level of branch or savings supervisor.
The foregoing lending limits are reviewed annually and revised, as needed, by
the Board of Directors.

DELINQUENCIES AND NON-PERFORMING ASSETS

        DELINQUENCY PROCEDURES. When a borrower fails to make a required payment
on a loan, the Association attempts to cause the delinquency to be cured by
implementing collection procedures. With respect to residential mortgage loans
originated by the Association, late notices are mailed to borrowers who are more
than eight days late in their monthly payments. A late charge equal to five
percent (5%) of the monthly principal and interest payment is assessed for loans
that are past due more than 15 days. If payments remain uncollected, additional
written and verbal contacts are made on a continuing basis with the borrower
between 18 and 90 days after the due date.

        All loans 90 or more days delinquent are submitted to the Board of
Directors for its review. The Board of Directors determines the appropriate
course of action for those loans where collection efforts are unsuccessful. Its
options include modification of the loan, forbearance, deeds in lieu of
foreclosure or foreclosure.


                                        8

<PAGE>




        The following tables set forth delinquencies of the Association's loan
portfolio by type of loan at the dates indicated:


<TABLE>
<CAPTION>

                                         AT DECEMBER 31, 1997                           AT DECEMBER 31, 1996
                            ---------------------------------------------- ----------------------------------------------
                                  60-89 DAYS            90 DAYS OR MORE          60-89 DAYS            90 DAYS OR MORE
                            ----------------------- ---------------------- ----------------------- ----------------------
                              NUMBER     PRINCIPAL    NUMBER    PRINCIPAL    NUMBER     PRINCIPAL    NUMBER    PRINCIPAL
                             OF LOANS     BALANCE    OF LOANS    BALANCE    OF LOANS     BALANCE    OF LOANS    BALANCE
                            ----------- ----------- ---------- ----------- ----------- ----------- ---------- -----------
                                                         (DOLLARS IN THOUSANDS)
<S>                            <C>       <C>           <C>       <C>          <C>        <C>          <C>      <C>
One- to four-family........       22      $1,072          14     $  963          20      $  869          14    $   937
Multifamily................      --          --           --         --          --          --          --         --
Construction and land......      --          --           --         --          --          --          --         --
Commercial.................      --          --           --         --          --          --          --         --
Other......................      --          --           --        --           --          --          --         --
                               -----      ------       -----     ------       -----      ------       -----    -------
    Total..................       22      $1,072          14     $  963          20      $  869          14    $   937
                               =====      ======       =====     ======       =====      ======       =====    =======


Delinquent loans to                         0.36%                  0.32%                   0.33%                  0.36%
 total loans (1)...........               ======                 ======                  ======                =======


</TABLE>


                                       AT DECEMBER 31, 1995
                           ---------------------------------------------
                                 60-89 DAYS            90 DAYS OR MORE
                           ----------------------- -------------------
                             NUMBER     PRINCIPAL    NUMBER    PRINCIPAL
                            OF LOANS     BALANCE    OF LOANS    BALANCE
                           ----------- ----------- ---------- ---------
                                        (DOLLARS IN THOUSANDS)
One- to four-family........      24     $ 1,093          16     $  915
Multifamily................      --          --          --         --
Construction and land......       2          48          --         --
Commercial.................      --          --          --         --
Other......................      --          --           1          1
                              -----     -------       -----     ------
    Total..................      26     $ 1,141          17     $  916
                              =====     =======       =====     ======
Delinquent loans to                        0.42%                  0.34%
 total loans (1)...........             =======                 ======





<TABLE>
                                         AT DECEMBER 31, 1994                           AT DECEMBER 31, 1993
                             ---------------------------------------------  --------------------------------------------
                                  60-89 DAYS            90 DAYS OR MORE          60-89 DAYS            90 DAYS OR MORE
                             ---------------------   ---------------------  ---------------------   --------------------
                              NUMBER     PRINCIPAL    NUMBER     PRINCIPAL   NUMBER     PRINCIPAL    NUMBER     PRINCIPAL
                             OF LOANS     BALANCE    OF LOANS     BALANCE  OF LOANS      BALANCE    OF LOANS     BALANCE
                             --------    ---------   --------    --------- --------     ---------   --------    ---------
                                                                 (DOLLARS IN THOUSANDS)
<S>                          <C>         <C>         <C>         <C>             <C>     <C>             <C>    <C>
One- to four-family........       10      $  516          18     $  974          33      $1,412          26     $1,642
Multifamily................       --          --          --         --           1          92          --         --
Construction and land......        2          53           1         12           1          40          --         --
Commercial.................       --          --          --         --          --          --          --         --
Other......................       --          --          --         --          --          --          --         --
                               -----      ------       -----     ------       -----      ------       -----     ------
    Total..................       12      $  569          19     $  986          35      $1,544          26     $1,642
                               =====      ======       =====     ======       =====      ======       =====     ======

Delinquent loans to
 total loans (1)...........                 0.21%                  0.36%                   0.51%                  0.54%
                                          ======                 ======                  ======                 ======
</TABLE>


(1) Total loans represent gross loans less deferred loan fees and loans in
process.

                                        9

<PAGE>


         REAL ESTATE OWNED. Property acquired by the Association as a result of
foreclosure or deed in lieu of foreclosure is classified as real estate owned
("REO"). When property is acquired, it is recorded at the lower of cost or
estimated fair value, less the estimated cost of disposition. After acquisition,
all costs incurred in maintaining the property are expenses. Costs relating to
the development and improvement of the property, however, are capitalized to the
extent of net realizable value. The Association obtains an independent appraisal
on an REO property as soon as practicable after it takes possession of the
property. REO decreased $264,000 from $550,000 at December 31, 1996 to $286,000
at December 31, 1997, which was the result of adding two properties and
disposing of three properties in 1997.

         NON-PERFORMING ASSETS. Loans 90 days or more delinquent are reviewed
quarterly by the Association's Asset Classification Committee quarterly, and any
loan whose collectibility is doubtful is placed on non-accrual status. The Asset
Classification Committee provides the Association's Board of Directors with a
quarterly assessment of asset quality. It is the Association's policy to place
loans on non-accrual status when either principal or interest is 90 days or more
past due, unless, in the judgment of management, the loan is well collaterized
and in the process of collection. Interest accrued and unpaid at the time a loan
is placed on non-accrual status is charged against interest income, depending on
the assessment of the ultimate collectibility of the loan. During the years
ended December 31, 1997, 1996 and 1995, the amounts of additional interest
income that would have been recorded on non-accrual loans, had they been
current, totaled $55,000, $68,000 and $36,000, respectively. These amounts were
not included in interest income for the respective periods. For all periods
presented, the Association has had no troubled-debt restructurings (which
involved forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates). Other loans which
may be potential problems are designated by management as special mention, and
such loans totaled $302,000 at December 31, 1997. See "--Classified Assets."

         The following table sets forth information regarding the Association's
non-performing assets at the dates indicated.

<TABLE>
<CAPTION>
                                                                              AT DECEMBER 31,
                                             --------------------------------------------------------------------------------
                                                   1997              1996             1995             1994              1993
                                             ----------------- ---------------- ---------------- ----------------- ----------
                                                                          (DOLLARS IN THOUSANDS)
<S>                                          <C>               <C>               <C>             <C>               <C>
Non-accrual loans:
  One- to four-family.......................   $     963         $     937        $     915        $     974         $   1,642
  Multifamily ..............................          --                --               --               --                --
  Construction and land.....................          --                --               --               12                --
  Commercial................................          --                --               --               --                --
  Other loans...............................          --                --                1               --                --
                                               ---------         ---------        ---------        ---------         ---------
    Total non-performing loans..............         963               937              916              986             1,642
                                               ---------         ---------        ---------        ---------         ---------
Total real estate owned and in judgment.....         286               550              496              514               433
                                               ---------         ---------        ---------        ---------         ---------
Total non-performing assets.................   $   1,249         $   1,487        $   1,412        $   1,500         $   2,075
                                               =========         =========        =========        =========         =========
Total non-performing loans to
  total loans(1)                                    0.32%            0.36%            0.34%             0.36%            0.54%
Total non-performing assets to
  total assets..............................        0.35%            0.42%            0.46%             0.49%            0.62%
</TABLE>

(1) Total loans represent gross loans less deferred loan fees and loans in
process.

         CLASSIFIED ASSETS. Federal regulations and the Association's
Classification of Assets Policy require that the Association utilize an internal
asset classification system as a means of reporting problem and potential
problem assets. The Association has incorporated the OTS internal asset
classifications as a part of its credit monitoring system. The Association
currently classifies problem and potential problem assets as "special mention,"
"substandard," "doubtful" or "loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct

                                       10

<PAGE>



possibility" that the Association will sustain "some loss" if the deficiencies
are not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the Association to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses or unwarranted
financial risk that, if uncorrected, could weaken the asset and increase risk in
the future are required to be designated "special mention."

         When a savings association classifies one or more assets, or portions
thereof, as substandard or doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
The general valuation allowance, which is a regulatory term, represents a loss
allowance which has been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, has not been
allocated to particular problem assets. When a savings association classifies
one or more assets, or portions thereof, as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.

         The Association's Mortgage Servicing Manager reviews the Association's
loans on a monthly basis and provides delinquency reports to the Board of
Directors. The Association's Asset Classification Committee meets on a quarterly
basis and classifies assets in accordance with the management guidelines
described herein.

         The following table sets forth at December 31, 1997, the Association's
carrying value of assets classified as "substandard," "doubtful" or "loss" or
designated as "special mention:"



<TABLE>
<CAPTION>
                                  SPECIAL MENTION         SUBSTANDARD              DOUBTFUL                 LOSS
                                  ---------------         -----------              --------                 ----
                                 NUMBER     AMOUNT      NUMBER     AMOUNT      NUMBER     AMOUNT      NUMBER     AMOUNT
                                 ------     ------      ------     ------      ------     ------      ------     ------
<S>                              <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>
                                                                 (DOLLARS IN THOUSANDS)
Mortgage loans:
   One- to four-family........        4     $  302          14     $  963          --     $   --          --     $   --
                                 ------     ------      ------     ------      ------     ------      ------     ------
Total mortgage loans..........        4     $  302          14     $  963          --     $   --          --     $   --
                                 ------     ------      ------     ------      ------     ------      ------     ------
Real estate owned and in
 judgment:
   One- to four-family........       --         --           3        247          --         --          --         --
   Multifamily................       --         --          --         --          --         --          --         --
   Construction and land......       --         --           1         39          --         --          --         --
   Commercial.................       --         --          --         --          --         --          --         --
                                 ------     ------      ------     ------      ------     ------      ------     ------
Total real estate owned
  and in judgment.............       --         --           4        286          --         --          --         --
                                 ------     ------      ------     ------      ------     ------      ------     ------
Total.........................        4     $  302          18     $1,249          --     $   --          --     $   --
                                 ======     ======      ======     ======      ======     ======      ======     ======
</TABLE>


         ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. The Asset Classification
Committee reviews and approves the allowance for loan loss on a quarterly basis.
The allowance is based upon a number of factors, including current regional and
national economic conditions, actual loss experience and industry trends. In
addition, the OTS, as an integral part of its examination process, periodically
reviews the Association's allowance for loan losses. The OTS may require the
Association to make additional general or specific loan loss allowances based
upon judgments different from those of management. At December 31, 1997 and
1996, the Association's allowance for loan losses was 0.36% of total loans. The
Association had non-accrual loans of $963,000 and $937,000 at December 31, 1997
and December 31, 1996, respectively, representing 0.32% and 0.36% of total loans
at such respective dates. The Association will continue to monitor and modify
its allowance for loan losses as conditions dictate.


                                       11

<PAGE>



         The OTS, in conjunction with the other federal banking agencies,
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management analyzes all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establishes acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
While the Association believes that it has established an adequate allowance for
loan losses, there can be no assurance that regulators, in reviewing the
Association's loan portfolio, will not request the Association to materially
increase its allowance for loan losses, thereby negatively affecting the
Association's financial condition and earnings at that time. Management believes
that the provision for loan losses and the allowance for loan losses are
reasonable and adequate to cover any known losses and any losses reasonably
expected in the existing loan portfolio. While management estimates loan losses
using the best available information, such as independent appraisals for
significant collateral properties, no assurance can be given that future
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding known
problem loans, identification of additional problem loans and other factors,
both within and outside of management's control.

         The following table sets forth activity in the Association's allowance
for loan losses and other ratios at or for
the dates indicated.


<TABLE>
<CAPTION>
                                                             AT OR FOR THE YEAR ENDED DECEMBER 31,
                                               ---------------------------------------------------------------
                                                 1997          1996         1995          1994           1993
                                               --------      --------     --------      --------      --------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                            <C>           <C>          <C>           <C>           <C>
Total loans outstanding at end of period(1).   $299,725      $262,251     $267,979      $271,689      $302,085
                                               --------      --------     --------      --------      --------

Balance at beginning of year................        945           826          649           409           548
Provision for loan losses...................        120           120          180           240           240
Charge-offs:
  One- to four-family.......................         --            --           --            --            --
  Multifamily...............................         --            --           --            --          (141)
  Construction and land.....................         --            --           --            --            --
  Commercial................................         --            --           --            --            --
  Other.....................................         (1)           (1)          (3)           --            --
                                               --------      --------     --------      --------      --------
     Total charge-offs......................         (1)           (1)          (3)           --          (141)
                                               --------      --------     --------      --------      --------
Allocation to reserve for uncollected
  interest..................................         --            --           --            --          (238)
                                               --------      --------     --------      --------      --------

Balance at end of year......................   $  1,064      $    945     $    826      $    649      $    409
                                               ========      ========     ========      ========      ========

Net charge-offs during the period to average
 loans outstanding during the period........         --%           --%          --%           --%         0.05%
Allowance for loan losses to total loans at
 end of period..............................       0.36          0.36         0.31          0.24          0.14
Allowance for loan losses to total
 non-performing loans at end of period......     110.51        100.85        90.17         65.82         24.91
</TABLE>

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

(1) Total loans represent gross loans less deferred loan fees and loans in
process.



                                       12

<PAGE>



         The following table sets forth the Association's allowance for loan
losses allocated by loan category and the percent of loans in each category to
total loans at the dates indicated.


<TABLE>
<CAPTION>
                                                                     AT DECEMBER 31,
                               --------------------------------------------------------------------------------------------
                                          1997                            1996                             1995
                               -----------------------------  ------------------------------  -----------------------------
                                               PERCENT OF                       PERCENT OF                      PERCENT OF
                                                LOANS IN                         LOANS IN                        LOANS IN
                                                  EACH                             EACH                            EACH
                               ALLOWANCE       CATEGORY TO      ALLOWANCE       CATEGORY TO      ALLOWANCE      CATEGORY TO
                                AMOUNT         GROSS LOANS       AMOUNT         GROSS LOANS       AMOUNT        GROSS LOANS
                                ------         -----------       ------         -----------       ------        -----------
                                                                  (DOLLARS IN THOUSANDS)
<S>                            <C>             <C>              <C>             <C>              <C>            <C>
Mortgage loans:
  One- to four-family ......    $ 1,003            98.29%         $ 890             98.17%          $ 779           98.09%
  Multifamily ..............         23             0.79             25              0.99              25            1.15
  Construction and land.....         24             0.42             14              0.28               7            0.17
  Commercial................         14             0.25             16              0.31              15            0.33
  Other.....................         --             0.25             --              0.25              --            0.26
                                -------          -------          -----          --------           -----        --------
     Total..................    $ 1,064           100.00%         $ 945            100.00%          $ 826          100.00%
                                =======          =======          =====          ========           =====        ========
</TABLE>


<TABLE>
<CAPTION>
                                                                            AT DECEMBER 31,
                                      -----------------------------------------------------------------------------------
                                                        1994                                         1993
                                      -------------------------------------------  --------------------------------------
                                                                PERCENT OF                                    PERCENT OF
                                                                 LOANS IN                                      LOANS IN
                                                                   EACH                                          EACH
                                           ALLOWANCE            CATEGORY TO             ALLOWANCE             CATEGORY TO
                                            AMOUNT              GROSS LOANS              AMOUNT               GROSS LOANS
                                            ------              -----------              ------               -----------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                        <C>                <C>                       <C>                   <C>
Mortgage loans:
  One- to four-family ...............      $ 602                 97.63%                 $ 378                  97.54%
  Multifamily .......................         25                  1.50                     16                   1.50
  Construction and land..............         11                  0.31                      8                   0.37
  Commercial.........................         11                  0.31                      7                   0.34
  Other..............................         --                  0.25                     --                   0.25
                                           -----              --------                  -----               --------
     Total...........................      $ 649                100.00%                 $ 409                 100.00%
                                           =====              ========                  =====               ========
</TABLE>


INVESTMENT ACTIVITIES

         INVESTMENT POLICY. The investment policy of the Association, which is
established by the Board of Directors, is based upon its asset/liability
management goals and emphasizes high credit quality and diversified investments
while seeking to optimize net interest income within acceptable limits of safety
and liquidity. The Association's investment goal has been to invest available
funds in short-term, highly liquid instruments that have fixed rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management Strategy," "--Management of Interest Rate Risk" and
"--Liquidity and Capital Resources" in Part II Item 7, of this Report. The
policy is designed to provide and maintain liquidity to meet day-to-day,
cyclical and long-term changes in the Association's asset/liability structure.

         The Association's investment policy permits it to invest in U.S.
government obligations; certain securities of various government-sponsored
agencies, including mortgage-backed securities issued/guaranteed by FNMA, FHLMC
and the Government National Mortgage Association ("GNMA"); certificates of
deposit of insured banks and savings associations; and federal funds. The
Association's investment policy prohibits investment in derivative securities.

         MORTGAGE-BACKED SECURITIES AND U.S. TREASURY SECURITIES. At December
31, 1997, the carrying value of mortgage-backed securities totaled $92,000 or
0.03%, of total assets. The fair value of these mortgage-backed securities
totaled $93,000 at December 31, 1997. All mortgage-backed securities in the
Association's portfolio were held to maturity and carried at amortized cost.


                                       13

<PAGE>



         At December 31, 1997, all securities in the Association's
mortgage-backed securities portfolio were directly insured or guaranteed by
GNMA, thereby providing the certificate holder a guarantee of timely payments of
interest and scheduled principal payments, whether or not they have been
collected. The Associations' mortgage-backed securities portfolio had a weighted
average rate of 6.98% at December 31, 1997.

         Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
borrowings of the Association. In general, mortgage-backed securities issued or
guaranteed by GNMA, FNMA and FHLMC and certain AAA-rated mortgage-backed
pass-through securities are weighted at no more than 20% for risk-based capital
purposes, compared to the 50% risk weighting assigned to most non-securitized
residential mortgage loans. See "Regulation - Regulation Federal Savings
Associations - Capital Requirements."

         The following table sets forth activity in the Association's
mortgage-backed securities held to maturity portfolio for the periods indicated.


<TABLE>
<CAPTION>
                                                                                  FOR THE YEAR ENDED DECEMBER 31,
                                                                        -------------------------------------------------
                                                                            1997                1996               1995
                                                                        -------------      -------------        ----------
                                                                                          (IN THOUSANDS)
<S>                                                                     <C>                <C>                  <C>
Amortized cost at beginning of period...............................    $     142          $     187            $     243
Purchases/sales (net)...............................................           --                 --                   --
Principal repayments................................................          (50)               (45)                 (56)
Premium and discount amortization, net..............................           --                 --                   --
                                                                        ---------          ---------            ---------

Amortized cost at end of period.....................................    $      92          $     142            $     187
                                                                        =========          =========            =========
</TABLE>

         The following table sets forth the amortized cost and fair value of the
Association's mortgage-backed and investment securities held to maturity at the
dates indicated.


<TABLE>
<CAPTION>
                                                                             AT DECEMBER 31,
                                              --------------------------------------------------------------------------
                                                         1997                      1996                     1995
                                              -------------------------- ------------------------ ----------------------
                                                AMORTIZED       FAIR       AMORTIZED     FAIR       AMORTIZED     FAIR
                                                  COST          VALUE        COST        VALUE        COST        VALUE
                                                  ----          -----        ----        -----        ----        -----
                                                                             (IN THOUSANDS)
<S>                                            <C>          <C>           <C>         <C>          <C>         <C>
     Mortgage-backed securities
      --GNMA.................................. $      92    $      93     $     142   $     143    $     187   $     193
                                               =========    =========     =========   =========    =========   =========

     Other debt securities
      --U.S. Treasury and Agency.............. $      --    $      --     $  53,786   $  53,797    $   5,948   $   6,030
                                               =========    =========     =========   =========    =========   =========
</TABLE>

         The following table sets forth certain information regarding the
amortized cost, fair value and weighted average rate of the Association's
mortgage-backed and investment securities held to maturity at December 31, 1997,
by remaining period to contractual maturity. With respect to mortgage-backed
securities, the entire amount is reflected in the maturity period that includes
the final security payment date, and, accordingly, no effect has been given to
periodic repayments or possible prepayments.


<TABLE>
<CAPTION>
                                                                         AT DECEMBER 31, 1997
                                                       ----------------------------------------------------
                                                                                                   WEIGHTED
                                                           AMORTIZED             FAIR               AVERAGE
                                                             COST                VALUE               RATE
                                                       ---------------- ---------------------- ------------
                                                                        (Dollars in thousands)
<S>                                                    <C>                 <C>                     <C>
Mortgage-backed securities:
 Due after 1 year but within 5 years ................  $          92       $          93            6.98%
                                                       -------------       -------------            ----
 Total ..............................................  $          92       $          93            6.98%
                                                       =============       =============            ====
</TABLE>


                                       14

<PAGE>


SOURCES OF FUNDS

         GENERAL. Savings deposits, loan and security repayments and prepayments
and cash flows generated from operations are the primary sources of the
Association's funds for use in lending, investing and for other general
purposes. To a significantly lesser extent, the Association also utilizes funds
borrowed from the FHLB of Chicago.

         SAVINGS DEPOSITS. The Association offers a variety of savings deposit
accounts with a range of interest rates and terms. The Association's savings
deposits consist of passbook accounts, NOW/Super NOW accounts, money market
accounts, checking accounts and certificates of deposit. The Association offers
certificates of deposit with maturities of up to 60 months. The flow of deposits
is influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Association's
deposits are obtained predominantly from the areas in which its branch offices
are located. The Association relies primarily on customer service and
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Association's ability to attract and
retain deposits. Certificate accounts in excess of $100,000 are not actively
solicited by the Association nor does the Association use brokers to obtain
deposits.

         The following table presents the savings deposit activity of the
Association for the periods indicated.


<TABLE>
<CAPTION>
                                                                      FOR THE YEAR ENDED DECEMBER 31,
                                                     ------------------------------------------------------------
                                                             1997                 1996              1995
                                                             ----                 ----              ----
                                                                              (IN THOUSANDS)
<S>                                                     <C>                   <C>               <C>
Deposits............................................    $   776,702           $   886,737       $    764,098
Withdrawals.........................................       (789,523)             (904,475)          (781,552)
                                                        -----------           -----------        -----------
Withdrawals in excess of deposits...................        (12,821)              (17,738)           (17,454)
Interest credited...................................          9,244                 9,561              9,488
                                                        -----------           -----------        -----------
  Total decrease in savings
        deposits....................................    $    (3,577)          $    (8,177)      $     (7,966)
                                                        ===========           ===========       ============
</TABLE>


         At December 31, 1997, the Association had $16.4 million in jumbo
certificates of deposit (accounts in amounts of $100,000 or larger) maturing as
follows:

<TABLE>
<CAPTION>
                                                                                           WEIGHTED
MATURITY PERIOD                                                AMOUNT                    AVERAGE RATE
                                                             ---------                   ------------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                                          <C>                         <C>
  Within three months.....................................   $   4,960                        5.35%
  After three but within six months.......................       4,418                        5.73
  After six but within 12 months..........................       1,468                        5.60
  After 12 months.........................................       5,577                        6.68
                                                             ---------                   ---------
    Total.................................................   $  16,423                        5.92%
                                                             =========                   =========
</TABLE>


                                       15

<PAGE>



         The following table sets forth the distribution of the Association's
savings deposits and the related weighted average interest rates at the dates
indicated.


<TABLE>
<CAPTION>
                                                                                                     AT DECEMBER 31,
                                       ---------------------------------------------------------------------------------------------
                                                            1997                                            1996
                                       ----------------------------------------------  ---------------------------------------------
                                                          PERCENT OF      WEIGHTED                       PERCENT OF      WEIGHTED
                                                             TOTAL         AVERAGE                          TOTAL         AVERAGE
                                           AMOUNT          DEPOSITS         RATE           AMOUNT         DEPOSITS         RATE
                                       ---------------  --------------  -------------  --------------  -------------- --------------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                     <C>             <C>             <C>            <C>             <C>            <C>
NOW/Super NOW accounts................  $  42,716                 17.2%          2.25%   $ 42,800                17.0%        2.25%
Money market accounts.................     16,678                  6.7           3.22      16,763                 6.7         3.22
Passbook accounts.....................     60,880                 24.5           3.00      62,171                24.7         3.00
Certificates of deposit...............    121,908                 49.1           5.84     125,192                49.7         5.79
Noninterest bearing NOW accounts......      6,035                  2.5             --       4,869                 1.9           --
                                        ---------           ----------       --------    --------              ------       ------
     Totals...........................  $ 248,217               100.00%          4.21%   $251,795              100.00%        4.22%
                                        =========           ==========       ========    ========              ======       ======
</TABLE>



<TABLE>
<CAPTION>
                                                    AT DECEMBER 31,
                                      -------------------------------------------
                                                         1995
                                      -------------------------------------------
                                                      PERCENT OF      WEIGHTED
                                                         TOTAL         AVERAGE
                                         AMOUNT        DEPOSITS          RATE
                                      ------------- -------------- --------------
                                                 (DOLLARS IN THOUSANDS)
<S>                                    <C>          <C>            <C>
NOW/Super NOW accounts................ $  45,001              17.3%          2.25%
Money market accounts.................    17,684               6.8           3.22
Passbook accounts.....................    65,261              25.1           3.04
Certificates of deposit...............   126,847              48.8           5.89
Noninterest bearing NOW accounts......     5,179               2.0             --
                                       ---------            ------         ------
     Totals........................... $ 259,972            100.00%          4.25%
                                       =========            ======         ======
</TABLE>


         The following table presents, by interest rate ranges, the amount of
certificates of deposit outstanding at the dates indicated and the periods to
maturity of the certificates of deposit outstanding at December 31, 1997.



<TABLE>
<CAPTION>
                                               PERIOD TO MATURITY AT DECEMBER 31, 1997
                               -----------------------------------------------------------------------
      INTEREST RATE RANGE        LESS THAN ONE YEAR      ONE TO THREE YEARS      FOUR TO FIVE YEARS
------------------------------ ----------------------- ----------------------- -----------------------
                                                             (IN THOUSANDS)
<S>                            <C>                     <C>                     <C>
Below 4.00% ..................      $    --                 $    --                 $    --
4.00% to 4.99%................        2,799                       9                      --
5.00% to 5.99%................       66,471                  13,280                   3,605
6.00% to 6.99%................        2,360                   7,051                  10,115
7.00% and above...............           --                  16,218                      --
                                    -------                 -------                 -------
     Total....................      $71,630                 $36,558                 $13,720
                                    =======                 =======                 =======
</TABLE>


<TABLE>
<CAPTION>
                                                          AT DECEMBER 31,
                               ---------------------------------------------------------------------
      INTEREST RATE RANGE              1997                    1996                    1995
------------------------------ ---------------------- ----------------------- ----------------------
                                                         (IN THOUSANDS)
<S>                            <C>                    <C>                     <C>
Below 4.00% ..................     $      --                $      --               $      16
4.00% to 4.99%................         2,808                   12,508                   7,548
5.00% to 5.99%................        83,356                   74,856                  69,542
6.00% to 6.99%................        19,526                   20,879                  27,216
7.00% and above...............        16,218                   16,949                  22,525
                                   ---------                ---------               ---------
     Total....................     $ 121,908                $ 125,192               $ 126,847
                                   =========                =========               =========
</TABLE>


                                       16

<PAGE>



         Savings deposits decreased $3.6 million or 1.4% from $251.8 million at
December 31, 1996 to $248.2 million at December 31, 1997. This decrease was due
to withdrawals exceeding deposits and interest credited as a result of market
conditions and competition. In an effort to address the contraction of deposits,
the Association has taken steps to increase core noninterest bearing
transactional deposit accounts and related services. These include the
relocation of the South Elgin Office along with the addition of five drive-up
lanes in the heart of the commercial and residential growth area. New services
and products have been implemented to give the Association's customers added
convenience and value. Home Banking, via personal computer or phone, is now
available and is being introduced to customers through statement stuffers and
brochures. Home Banking provides customers access to their accounts by phone for
balance and check inquiry plus transferring between their accounts, and with the
enhanced bill payment center, customers can now conveniently pay their bills
from their personal computer or phone. VISA Check, a debit card program, is also
now available and is growing in numbers of card holders and usage. These two new
products along with other services like Combined Statement and Direct Deposit,
provide customers with more convenient access to their accounts and strengthens
long term relationships by bundling these services. The Association's campaign,
"put it all together," spotlights these new convenient services and encourages
multiple relationships. Included in this campaign is an emphasis on home
mortgage loans. Specific materials have been created that were distributed to
real estate professionals to assist and inform them of the Association's
products and competitive rates. Looking ahead with these new services, products
and promotional materials in place, management is focused on establishing
multiple relationships with existing customers, while attracting new customers.

         BORROWED FUNDS. The Association utilizes advances from the FHLB of
Chicago as an alternative to retail deposits to fund its operations and may do
so in the future as part of its operating strategy. The Association generally
only utilizes FHLB of Chicago borrowings as a source of liquidity. These FHLB of
Chicago advances are collateralized primarily by certain of the Association's
mortgage loans and mortgage-backed securities and secondarily by the
Association's investment in the stock of the FHLB of Chicago. FHLB of Chicago
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB of Chicago will advance to member institutions, including the Association,
fluctuates from time to time in accordance with the policies of the OTS and the
FHLB of Chicago. See "Regulation--Regulation of Federal Savings
Associations--Federal Home Loan Bank System." At December 31, 1997, the maximum
amount of FHLB of Chicago advances available to the Association was $52 million,
based on the Association's current investment in FHLB of Chicago stock.

         The following table sets forth certain information regarding the
Association's borrowed funds for the periods indicated.


<TABLE>
<CAPTION>
                                                                                         AT OR FOR THE
                                                                                    YEAR ENDED DECEMBER 31,
                                                                            1997             1996            1995
                                                                       ---------------  --------------  --------------
                                                                                    (DOLLARS IN THOUSANDS)
<S>                                                                    <C>              <C>             <C>
FHLB of Chicago advances:
  Maximum amount outstanding at any
    month-end during the period.......................................   $10,000          $  4,000        $  6,000
  Average balance outstanding.........................................     2,917               667           1,250
  Balance outstanding at end of period................................     5,000                --           4,000
  Weighted average interest rate during the period....................      5.97%             5.55%           6.16%
  Weighted average interest rate at end of period.....................      6.92                --            5.31
</TABLE>


PERSONNEL

         As of December 31, 1997, the Association has 98 full-time employees and
49 part-time employees. The Association had experienced a low turnover rate
among its employees and, as of December 31, 1997, 69 of the Association's
employees had been with the Association for more than five years. The employees
are not represented by a collective bargaining unit and the Association
considers its relationship with its employees to be good.


                                       17

<PAGE>



                           FEDERAL AND STATE TAXATION

FEDERAL TAXATION

         GENERAL. The following is a discussion of material tax matters and does
not purport to be a comprehensive description of the tax rules applicable to the
Association or the Company. The Association has not been audited by the IRS
during the last five years. For federal income tax purposes, the Company and the
Association will file consolidated income tax returns and 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 Association's tax reserve for bad debts,
discussed below.

RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES

         Prior to the enactment on August 20, 1996 of the Small Business Job
Protection Act of 1996 (the "Small Business Act"), for federal income tax
purposes, thrift institutions such as the Association, which met certain
definitional tests primarily relating to their assets and the nature of their
business, were permitted to establish tax reserves for bad debts and to make
annual additions thereto, which additions could, within specified limitations,
be deducted in arriving at their taxable income. The Association's deduction
with respect to "qualifying loans," which are generally loans secured by certain
interests in real property, could be computed using an amount based on a
six-year moving average of the Association's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the Association's taxable
income (the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve.

         Under the Small Business Act, the PTI Method was repealed and the
Association will be required to use the Experience Method of computing additions
to its bad debt reserve for taxable years beginning with the Association's
taxable year beginning January 1, 1996. In addition, the Association will be
required to recapture (i.e., take into taxable income) over a six-year period,
beginning with the Association's taxable year beginning January 1, 1996, the
excess of the balance of its bad debt reserves (other than the supplemental
reserve) as of December 31, 1995 over the greater of (a) its "base year
reserve," I.E., the balance of such reserves as of December 31, 1987 or (b) an
amount that would have been the balance of such reserves as of December 31, 1995
had the Association always computed the additions to its reserves using the
Experience Method. However, under the Small Business Act such recapture
requirements will be suspended for each of the two successive taxable years
beginning January 1, 1996 in which the Association originates a minimum amount
of certain residential loans during such years that is not less than the average
of the principal amounts of such loans made by the Association during its six
taxable years preceding January 1, 1996. Since the Association has already
provided a deferred tax liability equal to the amount of its bad debt recapture
for financial reporting purposes, the enactment of the Small Business Act will
not adversely impact the Association's financial condition or results of
operation.

         DISTRIBUTIONS. To the extent that the Association makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Association's base year reserve to the extent thereof
and then from its supplemental reserve for losses on loans, and an amount based
on the amount distributed will be included in the Association's taxable income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, distributions in redemption of
stock and distributions in partial or complete liquidation. However, dividends
paid out of the Association's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not constitute non-dividend
distributions and, therefore, will not be included in the Association's income.

         The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of the Association's base year reserve and
supplemental reserve for losses on loans; or an amount that, when reduced by the
tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations approximately one and one-half times the
non-dividend distribution would be includable in gross income for federal income
tax purposes, assuming a 34% federal corporate income tax rate.



                                       18

<PAGE>



         CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986,
as amended (the "Code"), imposes a tax ("AMT") on alternative minimum taxable
income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Association currently has none. AMTI is
also adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Association's AMTI is increased by an amount equal to 75% of
the amount by which the Association's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). The Association does not expect to be subject to the AMT.

         ELIMINATION OF DIVIDENDS; DIVIDENDS RECEIVED DEDUCTION. The Company may
exclude from its income 100% of dividends received from the Association as a
member of the same affiliated group of corporations. A 70% dividends received
deduction generally applies with respect to dividends received from domestic
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if the Company and the Association own more
than 20% of the stock of a corporation paying a dividend.

STATE AND LOCAL TAXATION

         STATE OF ILLINOIS. The Association files a separate Illinois income tax
return. For Illinois income tax purposes, the Association is taxed at an
effective rate equal to 7.3% of Illinois Taxable Income. For these purposes,
"Illinois Taxable Income" generally means federal taxable income, subject to
certain adjustments (including the addition of interest income on state and
municipal obligations and the exclusion of interest income on United States
Treasury obligations). The exclusion of income on United States Treasury
obligations has the effect of reducing the Illinois Taxable Income of the
Association.

         As a Delaware holding company, the Company has registered as a foreign
corporation authorized to transact business in Illinois. As such, it will file
an Illinois Foreign Corporation Annual Report and pay an annual franchise
tax to the State of Illinois.

         STATE OF DELAWARE. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and has paid an annual franchise tax to
the State of Delaware.

                                   REGULATION

GENERAL

         The Association is subject to extensive regulation, examination, and
supervision by the OTS, as its chartering agency, and the FDIC, as its deposit
insurer. The Association's savings deposit accounts are insured up to applicable
limits by the SAIF administered by the FDIC, and the Association is a member of
the FHLB of Chicago. The Association must file reports with the OTS and the FDIC
concerning its activities and financial condition, and it must obtain regulatory
approvals prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions. The OTS and the FDIC conduct
periodic examinations to assess the Association's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which a savings association can engage
and is intended primarily for the protection of the insurance fund and
depositors. The Company, as a savings association holding company, is also
required to file certain reports with, and otherwise comply with, the rules and
regulations of the OTS and of the Securities and Exchange Commission (the "SEC")
under the federal securities laws.

         The OTS and the FDIC have significant discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Association and the operations of both.


                                       19

<PAGE>


         The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.

REGULATION OF FEDERAL SAVINGS ASSOCIATIONS

         BUSINESS ACTIVITIES. The Association derives its lending and investment
powers from the Home Owners' Loan Act, as amended (the "HOLA"), and the
regulations of the OTS thereunder. Under these laws and regulations, the
Association may invest in mortgage loans secured by residential and commercial
real estate, commercial and consumer loans, certain types of debt securities and
certain other assets. The Association may also establish service corporations
that may engage in activities not otherwise permissible for the Association,
including certain real estate equity investments and securities and insurance
brokerage. These investment powers are subject to various limitations, including
(a) a prohibition against the acquisition of any corporate debt security that is
not rated in one of the four highest rating categories; (b) a limit of 400% of
an association's capital on the aggregate amount of loans secured by
non-residential real estate property; (c) a limit of 20% of an association's
assets on the aggregate amount of commercial loans, with the amount of
commercial loans in excess of 10% of assets being limited to small business
loans; (d) a limit of 35% of an association's assets on the aggregate amount of
consumer loans and acquisitions of certain debt securities; (e) a limit of 5% of
assets on non-conforming loans (loans in excess of the specific limitations of
the HOLA); and (f) a limit of the greater of 5% of assets or an association's
capital on certain construction loans made for the purpose of financing what is
or is expected to become residential property.

         LOANS TO ONE BORROWER. Under the HOLA, savings associations are
generally subject to the same limits on loans to one borrower as are imposed on
national banks. Generally, under these limits, a savings association may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of the association's unimpaired capital and surplus. Additional amounts
may be lent, not in excess of 10% of unimpaired capital and surplus, if such
loans or extensions of credit are fully secured by readily-marketable
collateral. Such collateral is defined to include certain debt and equity
securities and bullion, but generally does not include real estate. At December
31, 1997, the Association's regulatory limit on loans to one borrower was $10.4
million. However, the Association's lending policy limits loans to any one
borrower to an aggregate of $1 million. At December 31, 1997, the Association's
largest aggregate amount of loans to one borrower was $401,000, and the second
largest borrower had an aggregate balance of $385,000. The Association is in
compliance with all applicable limitations on loans to one borrower.

         QTL TEST. The HOLA requires a savings association to meet a qualified
thrift lender, or "QTL" test. Under the QTL test, a savings association is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" means, in general, an association's total
assets less the sum of (a) specified liquid assets up to 20% of total assets,
(b) goodwill and other intangible assets, and (c) the value of property used to
conduct the association's business. "Qualified thrift investments" includes
various types of loans made for residential and housing purposes, investments
related to such purposes, including certain mortgage-backed and related
securities, and loans for personal, family, household and certain other purposes
up to a limit of 20% of an association's portfolio assets. Recent legislation
broadened the scope of "qualified thrift investments" to include 100% of an
institution's credit card loans, education loans, and small business loans. A
savings association may also satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code of 1986.
At December 31, 1997, the Association maintained 99.02% of its portfolio assets
in qualified thrift investments. The Association had also met the QTL test in
each of the prior 12 months and was, therefore, a qualified thrift lender.

         A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any Federal Home Loan
Bank and (d) establishing any new branch office in a location not permissible
for a national bank in the association's home state. In addition, within one
year of the date that a savings association ceases to meet the QTL test, any
company controlling the association would have to register under, and become
subject to the requirements of, the Bank Holding Company Act of 1956, as amended
(the "BHC Act"). If the savings association does not requalify under the QTL
test within the three-year period after it failed the QTL test, it

                                       20

<PAGE>



would be required to terminate any activity and to dispose of any investment not
permissible for a national bank and would have to repay as promptly as possible
any outstanding advances from a Federal Home Loan Bank. A savings association
that has failed the QTL test may requalify under the QTL test and be free of
such limitations, but it may do so only once.

         CAPITAL REQUIREMENTS. The OTS regulations require savings associations
to meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets and a risk-based
capital ratio requirement of 8% of core and supplementary capital to total
risk-weighted assets. The OTS and the federal banking regulators have proposed
amendments to their minimum capital regulations to provide that the minimum
leverage capital ratio for a depository institution that has been assigned the
highest composite rating of 1 under the Uniform Financial Institutions Ratings
System will be 3% and that the minimum leverage capital ratio for any other
depository institution will be 4%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the depository
institution. In determining compliance with the risk-based capital requirement,
a savings association must compute its risk-weighted assets by multiplying its
assets and certain off-balance sheet items by risk-weights, which range from 0%
for cash and obligations issued by the United States Government or its agencies
to 100% for consumer and commercial loans, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.

         Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative and other perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and the allowance for loan and lease losses. The
allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk- weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.

         The OTS has promulgated a regulation that requires a savings
association with "above normal" interest rate risk, when determining compliance
with its risk-based capital requirement, to hold additional capital to account
for its "above normal" interest rate risk. Pending the resolution of related
regulatory issues, the OTS has deferred enforcement of this regulation. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) resulting from a hypothetical 2% increase or decrease in market rates
of interest, divided by the estimated economic value of the association's
assets, as calculated in accordance with guidelines set forth by the OTS. At the
times when the 3-month Treasury bond equivalent yield falls below 4%, an
association may compute its interest rate risk on the basis of a decrease equal
to one-half of that Treasury rate rather than on the basis of 2%. A savings
association whose measured interest rate risk exposure exceeds 2% would be
considered to have "above normal" risk. The interest rate risk component is an
amount equal to one-half of the difference between the association's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Any
required deduction for interest rate risk becomes effective on the last day of
the third quarter following the reporting date of the association's financial
data on which the interest rate risk was computed. The regulations authorize the
Director of the OTS to waive or defer an association's interest rate risk
component on a case-by-case basis. The OTS has indefinitely deferred the
implementation of the interest rate risk component in the computation of an
institution's risk-based capital requirements. The OTS continues to monitor the
interest rate risk of individual institutions and retains the right to impose
additional capital requirements on individual institutions. At December 31,
1997, the Association was not required to maintain any additional risk-based
capital under this rule.

         At December 31, 1997, the Association met each of its capital
requirements.


                                       21

<PAGE>



         The table below presents the Association's regulatory capital as
compared to the OTS regulatory capital requirements at December 31, 1997.


<TABLE>
<CAPTION>
                                         ASSOCIATION                CAPITAL REQUIREMENTS                  EXCESS
                                    ---------------------         ------------------------         ----------------------
                                    AMOUNT         PERCENT          AMOUNT          PERCENT        AMOUNT         PERCENT
                                    ------         -------          ------          -------        ------         -------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                <C>             <C>             <C>              <C>           <C>             <C>
Tangible capital..............     $ 69,208        20.88%          $ 4,973           1.50%        $ 64,235         19.38%
Core capital..................       69,208        20.88             9,946           3.00           59,262         17.88
Risk-based capital............       70,272        37.23            15,100           8.00           55,172         29.23
</TABLE>

         A reconciliation between the Association's regulatory capital and GAAP
capital at December 31, 1997 is presented below.

<TABLE>
<CAPTION>
                                                     TANGIBLE CAPITAL        CORE CAPITAL        RISK-BASED CAPITAL
                                                     ----------------        ------------        ------------------
                                                                            (IN THOUSANDS)
<S>                                                  <C>                    <C>                  <C>
GAAP capital.....................................       $ 69,208             $ 69,208                  $ 69,208
Allowance for loan losses includable
  in supplementary capital.......................             --                   --                     1,064
Regulatory capital...............................         69,208               69,208                    70,272
</TABLE>

         LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose
limitations upon capital distributions by a savings association, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. At least 30-days written notice must be given to the
OTS of a proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions are
subject to approval by the OTS. An association that has capital in excess of all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, may, after prior notice but without the approval of the OTS, make
capital distributions during a calendar year equal to the greater of (a) 100% of
its net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year, or
(b) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of more
than normal supervision or if it determines that a proposed distribution by an
association would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations, the Association would be
prohibited from making any capital distribution if, after the distribution, the
Association failed to meet its minimum capital requirements, as described above.
See "-- Prompt Corrective Regulatory Action." The OTS has proposed amendments of
its capital distribution regulations to reduce regulatory burdens on savings
associations. If adopted as proposed, certain savings associations will be
permitted to pay capital distributions within the amounts described above for
Tier 1 institutions without notice to, or the approval of, the OTS. However, a
savings association subsidiary of a savings and loan holding company, such as
the Association, will continue to have to file a notice unless the specific
capital distribution requires an application.

         LIQUIDITY. The Association is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, certain bankers'
acceptances, specified United States Government, state and federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement may be changed from time to time by the
OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions, and is currently 4%.
Monetary penalties may be imposed for failure to meet the liquidity requirement.
The Association's average liquidity ratio for the month ended December 31, 1997
was 7.97% which exceeded the applicable requirements. The Association has never
been subject to monetary penalties for failure to meet its liquidity
requirements.


                                       22

<PAGE>



         ASSESSMENTS. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. During January 1997,
the Association paid an assessment of $85,000.

         BRANCHING. Subject to certain limitations, the HOLA and the OTS
regulations permit federally chartered savings associations to establish
branches in any state of the United States. The authority to establish such
branches is available (a) in states that expressly authorize branches of savings
associations located in another state or (b) to an association that qualifies as
a "domestic building and loan association" under the Internal Revenue Code of
1986, which imposes qualification requirements similar to those for a "qualified
thrift lender" under the HOLA. See "-- QTL Test." The authority for a federal
savings association to establish an interstate branch network would facilitate a
geographic diversification of the association's activities. This authority under
the HOLA and the OTS regulations preempts any state law purporting to regulate
branching by federal savings associations.

         COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings association 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
association, to assess the association'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 association. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Association received a
"Satisfactory" CRA rating in its most recent examination.

         In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its assessment areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefitting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices. The amended CRA
regulations also clarify how an institution's CRA performance would be
considered in the application process.

         TRANSACTIONS WITH RELATED PARTIES. The Association's authority to
engage in transactions with its "affiliates" is limited by the OTS regulations
and by Sections 23A and 23B of the Federal Reserve Act (the "FRA"). In general,
an affiliate of the Association is any company that controls the Association or
any other company that is controlled by a company that controls the Association,
excluding the Association's subsidiaries other than those that are insured
depository institutions. The OTS regulations prohibit a savings association (a)
from lending to any of its affiliates that is engaged in activities that are not
permissible for bank holding companies under Section 4(c) of the BHC Act and (b)
from purchasing the securities of any affiliate other than a subsidiary. Section
23A limits the aggregate amount of transactions with any individual affiliate to
10% of the capital and surplus of the savings association and also limits the
aggregate amount of transactions with all affiliates to 20% of the savings
association's capital and surplus. Extensions of credit to affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the association as those prevailing at the time for comparable
transactions with non-affiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to non-affiliated companies.


                                       23

<PAGE>



         The Association's authority to extend credit to its directors,
executive officers, and 10% shareholders, as well as to entities controlled by
such persons, is currently governed by the requirements of Sections 22(g) and
22(h) of the FRA and Regulation O of the FRB thereunder. Among other things,
these provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in excess
of certain limits must be approved by the association's board of directors.

         ENFORCEMENT. Under the Federal Deposit Insurance Act (the "FDI Act"),
the OTS has primary enforcement responsibility over savings associations and has
the authority to bring enforcement action against all "institution- affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser or accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship, or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings association. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.

         STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the FDI Act, as amended
by FDICIA and the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Community Development Act"), the OTS and the federal bank regulatory
agencies have adopted, effective August 9, 1995, a set of guidelines prescribing
safety and soundness standards pursuant to FDICIA, as amended. The guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal stockholder. In addition,
the OTS adopted regulations that authorize, but do not require, the OTS to order
an institution that has been given notice by the OTS that it is not satisfying
any of such safety and soundness standards to submit a compliance plan. If,
after being so notified, an institution fails to submit an acceptable compliance
plan or fails in any material respect to implement an accepted compliance plan,
the OTS must issue an order directing action to correct the deficiency and may
issue an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the OTS may seek
to enforce such order in judicial proceedings and to impose civil money
penalties. The OTS and the federal bank regulatory agencies also proposed
guidelines for asset quality and earnings standards.

         REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the construction of improvements on real estate. The OTS regulations require
each savings association to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Associations are also permitted to make a
limited amount of loans that do not

                                       24

<PAGE>



conform to the proposed loan-to-value limitations so long as such exceptions are
reviewed and justified appropriately. The guidelines also list a number of
lending situations in which exceptions to the loan-to-value standards are
justified.

         PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized to
take other, supervisory actions against undercapitalized savings associations.
For this purpose, a savings association would be placed in one of five
categories based on the association's capital. Generally, a savings association
is treated as "well capitalized" if its ratio of total capital to risk- weighted
assets is at least 10.0%, its ratio of core capital to risk-weighted assets is
at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and
it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings association will be treated as "adequately capitalized"
if its ratio of total capital to risk-weighted assets is at least 8.0%, its
ratio of core capital to risk-weighted assets is at least 4.0%, and its ratio of
core capital to total assets is at least 4.0% (3.0% if the association receives
the highest rating under the Uniform Financial Institutions Rating System). A
savings association that has a total risk-based capital of less than 8.0% or a
leverage ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage
ratio if the association receives the highest rating under the Uniform Financial
Institutions Rating System) is considered to be "undercapitalized." A savings
association that has a total risk-based capital of less than 6.0% or a Tier 1
risk-based capital ratio or a leverage ratio of less than 3.0% is considered to
be "significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "-- Capital Requirements."

         The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching, and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky, and any further operational restrictions deemed
necessary by the OTS.

         If one or more grounds exist for appointing a conservator or receiver
for an association, the OTS may require the association to issue additional debt
or stock, sell assets, be acquired by a depository association holding company
or combine with another depository association. The OTS and the FDIC have a
broad range of grounds under which they may appoint a receiver or conservator
for an insured depository association. Under FDICIA, the OTS is required to
appoint a receiver (or with the concurrence of the FDIC, a conservator) for a
critically undercapitalized association within 90 days after the association
becomes critically undercapitalized or, with the concurrence of the FDIC, to
take such other action that would better achieve the purposes of the prompt
corrective action provisions. Such alternative action can be renewed for
successive 90-day periods. However, if the association continues to be
critically undercapitalized on average during the quarter that begins 270 days
after it first became critically undercapitalized, a receiver must be appointed,
unless the OTS makes certain findings with which the FDIC concurs and the
Director of the OTS and the Chairman of the FDIC certify that the association is
viable. In addition, an association that is critically undercapitalized is
subject to more severe restrictions on its activities, and is prohibited,
without prior approval of the FDIC from, among other things, entering into
certain material transactions or paying interest on new or renewed liabilities
at a rate that would significantly increase the association's weighted average
cost of funds.


                                       25

<PAGE>



         When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
FDICIA.

         INSURANCE OF DEPOSIT ACCOUNTS. The Association is a member of the SAIF,
and the Association pays its deposit insurance assessments to the SAIF. The FDIC
also maintains another insurance fund, the Bank Insurance Fund (the "BIF"),
which primarily insures the deposits of banks and state chartered savings banks.

         Pursuant to FDICIA, the FDIC established a new risk-based assessment
system for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information as of the reporting period ending seven months before the
assessment period. The three capital categories consist of (a) well capitalized,
(b) adequately capitalized, or (c) undercapitalized. The FDIC also assigns an
institution to one of three supervisory subcategories within each capital group.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the regulation, there are
nine assessment risk classifications (I.E., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates currently range from 0.0% of deposits for an institution in the
highest category (I.E., well-capitalized and financially sound, with no more
than a few minor weaknesses) to 0.27% of deposits for an institution in the
lowest category (I.E., undercapitalized and substantial supervisory concern).
The FDIC is authorized to raise the assessment rates as necessary to maintain
the required reserve ratio of 1.25%. As a result of the Deposit Insurance Funds
Act of 1996 (the "Funds Act"), both the BIF and the SAIF currently satisfy the
reserve ratio requirement. If the FDIC determines that assessment rates should
be increased, institutions in all risk categories could be affected. The FDIC
has exercised this authority several times in the past and could raise insurance
assessment rates in the future. If such action is taken by the FDIC, it could
have an adverse effect on the earnings of the Bank.

         The Funds Act also amended the FDIA to expand the assessment base for
the payments on the FICO bonds. Beginning January 1, 1997, the assessment base
for the FICO bonds included the deposits of both BIF- and SAIF- insured
institutions. Until December 31, 1999, or such earlier date on which the last
savings association ceases to exist, the rate of assessment for BIF-assessable
deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The
annual rate of assessments for the payments on the FICO bonds for the
semi-annual period beginning on January 1, 1997 was 0.0130% for BIF-assessable
deposits and 0.0648% for SAIF-assessable deposits. For the semi-annual period
beginning on July 1, 1997, the rates of assessment for the FICO bonds was
0.0126% for BIF- assessable deposits and 0.0630% for SAIF-assessable deposits.

         The Funds Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the thrift charter. The Funds Act required the Secretary of the Treasury to
conduct a study of relevant factors with respect to the development of a common
charter for all insured depository institutions and abolition of separate
charters for banks and thrifts and to report the Secretary's conclusions and
findings to the Congress. The Secretary of the Treasury recommended to the
Congress that the separate charter for thrifts be eliminated only if other
legislation is adopted that permits bank holding companies to engage in certain
non-financial activities. Absent legislation permitting bank holding companies
to engage in such non-financial activities, the Secretary of the Treasury
recommended that the thrift charter be retained. Other legislation has been
introduced in Congress to eliminate the federal thrift charter, but the future
of such legislation is uncertain.

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


                                       26

<PAGE>



         FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB
of Chicago, which is one of the regional Federal Home Loan Banks composing the
Federal Home Loan Bank System. Each Federal Home Loan Bank provides a central
credit facility primarily for its member institutions. The Association, as a
member of the FHLB of Chicago, is required to acquire and hold shares of capital
stock in the FHLB of Chicago in an amount at least equal to the greater of 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year or 1/20 of its advances
(borrowings) from the FHLB of Chicago. The Association was in compliance with
this requirement with an investment in the capital stock of the FHLB of Chicago
at December 31, 1997, of $2.6 million. Any advances from a Federal Home Loan
Bank must be secured by specified types of collateral, and all long-term
advances may be obtained only for the purpose of providing funds for residential
housing finance.

         The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of earnings that the
Federal Home Loan Banks can pay as dividends to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. The FHLB of Chicago paid dividends on the capital
stock of $179,000, $187,000 and $202,000 during the years ended December 31,
1997, 1996 and 1995, respectively. If dividends were reduced, or interest on
future Federal Home Loan Bank advances increased, the Association's net interest
income would likely also be reduced.

         FEDERAL RESERVE SYSTEM. The Association is subject to provisions of the
FRA and the FRB's regulations pursuant to which depository institutions may be
required to maintain noninterest-earning reserves against their deposit accounts
and certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained in the amount of 3% of
the aggregate of transaction accounts up to $47.8 million. The amount of
aggregate transaction accounts in excess of $47.8 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.7 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Association is in compliance with the foregoing
reserve requirements. Because required reserves must be maintained in the form
of either vault cash, a noninterest-bearing account at a Federal Reserve Bank,
or a pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Association's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. Federal Home Loan Bank System
members are also authorized to borrow from the Federal Reserve "discount
window," but FRB regulations require such institutions to exhaust all Federal
Home Loan Bank sources before borrowing from a Federal Reserve Bank.

REGULATION OF SAVINGS ASSOCIATION HOLDING COMPANIES

         The Company is a non-diversified unitary savings association holding
company within the meaning of the HOLA, as amended. As such, the Company has
registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and any of its non-savings association subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the financial safety,
soundness, or stability of a subsidiary savings association.

         As a unitary savings association holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Association continues to
satisfy the QTL test. See "-- Regulation of Federal Savings Associations -- QTL
Test" for a discussion of the QTL requirements. Upon any non-supervisory
acquisitions by the Company of another savings association or savings bank that
meets the QTL test and is deemed to be a savings association by the OTS and that
will be held as a separate subsidiary, the Company would become a multiple
savings association holding company and would be subject to limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings association holding company and its non-insured
association subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the BHC Act, subject to the prior approval of
the OTS, and to other activities authorized by OTS regulation.

                                       27

<PAGE>



         Transactions between the Association and the Company and its other
subsidiaries are subject to various conditions and limitations. See "--
Regulation of Federal Savings Associations -- Transactions with Related
Parties." The Association is required to give 30-days written notice to the OTS
prior to any declaration of the payment of any dividends or other capital
distributions to the Company. See "-- Regulation of Federal Savings Associations
-- Limitation on Capital Distributions."

FEDERAL SECURITIES LAWS

         The Company's Common Stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Accordingly, the Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the Exchange Act.

ITEM 2.         PROPERTIES

         The Association conducts its business through its main office and four
branch offices set forth in the table below. The Company conducts it business
through the Association's main office located at 16 North Spring Street, Elgin,
Illinois. The Association believes that its current facilities are adequate to
meet the present and immediately foreseeable needs of the Association and the
Company.

<TABLE>
<CAPTION>
                                                               LEASED OR           DATE           NET BOOK VALUE AT
                                                                 OWNED           ACQUIRED         DECEMBER 31, 1997
                                                                 -----           --------         -----------------
                                                                                                   (IN THOUSANDS)
<S>                                                             <C>              <C>              <C>
MAIN OFFICE:
    16 North Spring St.
    Elgin, IL .............................................       Owned             1923                  $2,285

BRANCHES:
    180 Virginia St.
    Crystal Lake, IL.......................................       Owned             4/74                     747
    56 East Irving Park Road
    Roselle, IL............................................       Owned             7/75                     306
    300 North McLean Blvd.
    South Elgin, IL........................................       Owned            11/96                   1,462
    200 Bartlett Ave.
    Bartlett, IL...........................................       Owned             9/79                     861

CHECK PROCESSING:
    Mail and Record Retention
    Facility (No Customer Service) Annex
    Fulton St., Elgin, IL..................................       Owned             2/86                     372
</TABLE>


ITEM 3.           LEGAL PROCEEDINGS

         The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.



                                       28

<PAGE>



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

         None.

                                     PART II


ITEM 5.           MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS

         The information required by this Item is incorporated herein by
reference to page 24 of the Company's 1997 Annual Report to Stockholders under
the caption "Market for the Company's Common Stock and Related Stockholder
Matters," which section is included in Exhibit 13.1 to this Report.

ITEM 6.           SELECTED FINANCIAL DATA

         The information required by this Item is incorporated herein by
reference to pages 4 and 5 of the Company's 1997 Annual Report to Stockholders
under the caption "Selected Financial and Other Data of the Company," which
section is included in Exhibit 13.1 to this Report.

         The Board of Directors of the Company declared three quarterly
dividends on the Company's Common Stock in the amount of $0.10 per share each,
which totaled $0.30 per share for the fiscal year ended December 31, 1997,
resulting in a dividend payout ratio of 67%. The dividend payout ratio is
calculated by dividing the dividends declared per share by the basic earnings
per share. No dividends were paid on the Company's Common Stock prior to 1997.

ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

         The information required by this Item is incorporated herein by
reference to pages 6 through 22 of the Company's 1997 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which section is included in
Exhibit 13.1 to this Report.

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The information required by this Item is incorporated herein by
reference to page 23 of the Company's 1997 Annual Report to Stockholders under
the caption "Quantitative and Qualitative Disclosures About Market Risk," which
section is included in Exhibit 13.1 to this Report.


ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this Item is incorporated herein by
reference to pages 25 through 49 of the Company's 1997 Annual Report to
Stockholders under the captions "Independent Auditors' Report," "Consolidated
Financial Statements" and "Notes to Consolidated Financial Statements," which
sections are included in Exhibit 13.1 to this Report.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

         None.


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<PAGE>



                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following information included on pages 5 through 8, and page 18 of
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders (the
"Proxy Statement") is incorporated herein by reference: "Election of Directors,"
"Information as to Nominees and Continuing Directors," "Nominees for Election as
Director," "Executive Officers," and "-- Section 16(a) -- Beneficial Ownership
Reporting Compliance."

ITEM 11.          EXECUTIVE COMPENSATION

         The following information included on pages 12 through 17 of the Proxy
Statement is incorporated herein by reference: "Compensation of Directors and
Executive Officers--Directors' Compensation," "--Executive Compensation,"
"--Employment Agreements," "--Employee Retention Agreements" and "--Benefits."

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following information included on pages 3 and 4 of the Proxy
Statement is incorporated herein by reference: "Security Ownership of Certain
Beneficial Owners and Management--Principal Stockholders of the Company" and
"-- Security Ownership of Management."

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The following information included on page 18 of the Proxy Statement is
incorporated herein by reference: "Compensation of Directors and Executive
Officers--Transactions with Certain Related Persons."

                                     PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
                  8-K

                 (a) Listed below are all financial statements and exhibits
                     filed as part of this report:

                 (1) The consolidated balance sheets of Home Bancorp of Elgin,
                     Inc. and subsidiary as of December 31, 1997 and 1996 and
                     the related consolidated statements of operations, changes
                     in stockholders' equity and cash flows for each of the
                     years in the three-year period ended December 31, 1997,
                     together with the related notes and the independent
                     auditors' report of KPMG Peat Marwick LLP, independent
                     certified public accountants.
                 (2) Schedules omitted as they are not applicable.
                 (3) Exhibits

EXHIBIT NO.                            DESCRIPTION
-----------                            -----------

3.1              Certificate of Incorporation of Home Bancorp of Elgin, Inc.*

3.2              Bylaws of Home Bancorp of Elgin, Inc.*

4.3              Specimen of Stock Certificate of Home Bancorp of Elgin, Inc.*

10.1             Home Bancorp of Elgin, Inc. Employee Stock Ownership Plan and
                 Trust Agreement adopted effective as of January 1, 1996.*

10.2             Loan Agreement by and between the Home Bancorp of Elgin, Inc.
                 Employee Stock Ownership

                                       30

<PAGE>



                 Plan Trust and Home Bancorp of Elgin, Inc. made and entered
                 into as of September 26, 1996.**

10.3             Employment Agreement between Home Bancorp of Elgin, Inc. and
                 George L. Purucco made and entered into as of September 26,
                 1996.

10.4             Employment Agreement between Home Bancorp of Elgin, Inc. and
                 Lyle N. Dolan made and entered into as of September 26, 1996.

10.5             Employment Agreement between Home Bancorp of Elgin, Inc. and
                 Kenneth L. Moran made and entered into as of September 26,
                 1996.

10.6             Employment Agreement between Home Federal Savings and Loan
                 Association of Elgin and George L. Perucco made and entered
                 into as of September 26, 1996.

10.7             Employment Agreement between Home Federal Savings and Loan
                 Association of Elgin and Lyle N. Dolan made and entered into as
                 of September 26, 1996.

10.8             Employment Agreement between Home Federal Savings and Loan
                 Association of Elgin and Kenneth L. Moran made and entered into
                 as of September 26, 1996.

10.9             Employee Retention Agreement between Home Federal Savings and
                 Loan Association of Elgin, Home Bancorp of Elgin, Inc. and
                 David G. Towe made and entered into as of September 26, 1996.

10.10            Employee Retention Agreement between Home Federal Savings and
                 Loan Association of Elgin, Home Bancorp of Elgin, Inc. and
                 Raymond G. Bandemer made and entered into as of September 26,
                 1996.

10.11            Employee Retention Agreement between Home Federal Savings and
                 Loan Association of Elgin, Home Bancorp of Elgin, Inc. and
                 Katheen A. Schroeder made and entered into as of September 26,
                 1996.

10.12            Employee Retention Agreement between Home Federal Savings and
                 Loan Association of Elgin, Home Bancorp of Elgin, Inc and Pat
                 A. Lenart made and entered into as of September 26, 1996.

10.13            Form of Severance Pay Plan of Home Federal Savings and Loan
                 Association of Elgin.*

13.1             Portions of the Home Bancorp of Elgin, Inc. 1997 Annual Report
                 to Stockholders.

21.1             Subsidiaries of the Registrant.*

23.1             Consent of KPMG Peat Marwick LLP.

27.1             Financial Data Schedule (Submitted only with filing in
                 electronic format).

99.1             Proxy Statement for the 1998 Annual Meeting of Stockholders of
                 Home Bancorp of Elgin, Inc. (previously filed with the
                 Securities and Exchange Commission on March 12, 1998).

*     Incorporated herein by reference to Registration Statement No. 333-05909
      on Form S-1 of Home Bancorp of Elgin, Inc. filed with the Securities and
      Exchange Commission on June 13, 1996, as amended.

**    Incorporated herein by reference to the Form 10-K for the year ended
      December 31, 1996 filed with the Securities and Exchange Commission on
      March 28, 1997.

(b) The Company filed no reports on Form 8-K during the fourth quarter of 1997.

                                       31

<PAGE>


                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Elgin, State of Illinois, on March 19, 1998.

                                    Home Bancorp of Elgin, Inc.


                                    By:    /s/ George L. Perucco
                                           -------------------------------------
                                           George L. Perucco
                                           President and Chief Executive Officer

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

              NAME                            TITLE                    DATE

/s/ George L. Perucco         Director, President and Chief       March 19, 1998
-----------------------       Executive Officer (Principal
George L. Perucco             executive officer)

/s/ Lyle N. Dolan             Executive Vice President and        March 19, 1998
-----------------------       Treasurer (Principal financial
Lyle N. Dolan                 and accounting officer)

/s/ Orval M. Graening         Director                            March 19, 1998
-----------------------
Orval M. Graening

/s/ Henry R. Hines            Director                            March 19, 1998
-----------------------
Henry R. Hines

/s/ Donald E. Laird           Director                            March 19, 1998
-----------------------
Donald E. Laird

/s/ Leigh C. O'connor         Director                            March 19, 1998
-----------------------
Leigh C. O'Connor

/s/ Thomas S. Rakow           Director                            March 19, 1998
-----------------------
Thomas S. Rakow

/s/ Richard S. Scheflow       Director                            March 19, 1998
-----------------------
Richard S. Scheflow


                                       32