================================================================================

                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

        / X /    Annual Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                   For the fiscal year ended December 31, 1996

        /   /    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                                       36-409033
(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(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, 1997, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $94,319,00.

         As of March 1, 1997, 7,009,250 shares of Registrant's common stock were
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

         PORTIONS OF THE REGISTRANT'S 1996 ANNUAL REPORT TO STOCKHOLDERS ARE
INCORPORATED BY REFERENCE IN PART II.

         PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1997 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, 1996

                                TABLE OF CONTENTS


                                     PART I
ITEM 1.   BUSINESS...........................................................  1
ITEM 2.   PROPERTIES......................................................... 33
ITEM 3.   LEGAL PROCEEDINGS.................................................. 33
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 33

                                     PART II
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY
          AND RELATED STOCKHOLDER MATTERS.................................... 34
ITEM 6.   SELECTED FINANCIAL DATA............................................ 34
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 34
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 34
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE........................................... 34

                                    PART III
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 35
ITEM 11.  EXECUTIVE COMPENSATION............................................. 35
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
          OWNERS AND MANAGEMENT.............................................. 35
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 35

                                     PART IV
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
          ON FORM 8-K........................................................ 35



                                      (i)

<PAGE>



                                     PART I


ITEM 1.       BUSINESS

                                    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 non-interest income such as service charges and other
fees. The Association's non-interest expenses primarily consist of employee
compensation and benefits, occupancy expenses, federal deposit insurance
premiums, net costs of real estate owned, 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, 1996.

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.



                                        1

<PAGE>



         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 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 of
its 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, 1996, the Association had gross loans receivable
outstanding of $264.6 million of which $259.8 million, or 98.17%, were one- to
four-family, residential mortgage loans. The remainder consisted of $2.6 million
of multifamily mortgage loans, or 0.99% of gross loans; $815,000 of commercial
real estate mortgage loans, or 0.31% of gross loans; $750,000 of construction
and land loans, or 0.28% of gross loans; and $661,000 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.


                                        2

<PAGE>



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


<TABLE>
<CAPTION>
                                                          AT DECEMBER 31,
                              ----------------------------------------------------------------------
                                       1996                    1995                    1994           
                              ----------------------    --------------------    --------------------  
                                             PERCENT                 PERCENT                 PERCENT  
                                AMOUNT      OF TOTAL    AMOUNT      OF TOTAL    AMOUNT      OF TOTAL  
                              --------      --------    ------      --------    ------      --------  
                                                       (DOLLARS IN THOUSANDS)
<S>                           <C>            <C>      <C>            <C>      <C>            <C>     
MORTGAGE LOANS:
  One- to four-family ....... $259,785        98.17%  $265,115        98.09%  $267,727        97.63%  
  Multifamily ...............    2,628         0.99      3,106         1.15      4,118         1.50   
  Construction and land .....      750         0.28        456         0.17        859         0.31   
  Commercial ................      815         0.31        891         0.33        862         0.31   
                              --------      -------   --------      -------   --------      -------   
     Total mortgage loans ...  263,978        99.75    269,568        99.74    273,566        99.75   
                              --------      -------   --------      -------   --------      -------   

OTHER LOANS:
  Passbook savings (secured
    by savings and time
    deposits) ...............      573         0.23        627         0.23        576         0.21   
  Consumer installment loans.       88         0.03         92         0.03        100         0.04   
  Home improvement loans ....       --           --         --           --         --           --   
                              --------      -------   --------      -------   --------      -------   
     Total other loans ......      661         0.25        719         0.26        676         0.25   
                              --------      -------   --------      -------   --------      -------   

        Gross loans ......... $264,639       100.00%  $270,287       100.00%  $274,242       100.00%  
                              ========      =======   ========      =======   ========      =======   

LESS:
  Loans in process........... $    872                $    418                $    150                
  Deferred loan fees.........    1,516                   1,890                   2,403                
  Allowance for loan losses..      945                     826                     649                
                              --------                --------                --------                
        Loans, net.........   $261,306                $267,153                $271,040                
                              ========                ========                ========                



<CAPTION>
                                             AT DECEMBER 31,
                              ----------------------------------------------
                                       1993                    1992
                              ----------------------    --------------------
                                             PERCENT                 PERCENT
                                AMOUNT      OF TOTAL    AMOUNT      OF TOTAL
                              --------      --------    ------      --------
                                         (DOLLARS IN THOUSANDS)
<S>                           <C>            <C>      <C>            <C>   
MORTGAGE LOANS:
  One- to four-family ....... $298,117        97.54%  $284,549        96.92%
  Multifamily ...............    4,587         1.50      5,165         1.76
  Construction and land .....    1,130         0.37      1,371         0.47
  Commercial ................    1,039         0.34      1,568         0.53
                              --------      -------   --------      -------
     Total mortgage loans ...  304,873        99.75    292,653        99.68
                              --------      -------   --------      -------

OTHER LOANS:
  Passbook savings (secured
    by savings and time
    deposits) ...............      631         0.21        798         0.27
  Consumer installment loans.      120         0.04        134         0.04
  Home improvement loans ....       --           --         17         0.01
                              --------      -------   --------      -------
     Total other loans ......      751         0.25        949         0.32
                              --------      -------   --------      -------

        Gross loans ......... $305,624       100.00%  $293,602       100.00%
                              ========      =======   ========      ======= 

LESS:
  Loans in process........... $    505                $    876
  Deferred loan fees.........    3,034                   2,992
  Allowance for loan losses..      409                     548
                              --------                --------
        Loans, net.........   $301,676                $289,186
                              ========                ========
</TABLE>




                                        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, 1996.
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 $41.7 million
for the year ended December 31, 1996.

<TABLE>
<CAPTION>
                                                                     AT DECEMBER 31, 1996
                                           -----------------------------------------------------------------------
                                                            MORTGAGE LOANS
                                           ----------------------------------------------
                                            ONE- TO                                                         
                                             FOUR-      MULTI-   CONSTRUCTION                 OTHER          TOTAL
                                           FAMILY(1)   FAMILY(1)   AND LAND    COMMERCIAL     LOANS          LOANS
                                           ---------   --------- ------------  ----------     -----          -----
                                                                        (IN THOUSANDS)                      
<S>                                        <C>          <C>        <C>          <C>          <C>          <C>     
AMOUNT DUE:
   One year or less .....................  $ 10,810     $  454     $    205     $     --     $    558     $ 12,027
                                           --------     ------     --------     --------     --------     --------
AFTER ONE YEAR:
   One to three years ...................    45,021        835           10          288           98       46,252
   More than three years to five years ..    18,491        383          518           29            5       19,426
   More than five years to ten years ....    24,727        257           17           58           --       25,059
   More than ten years to twenty years ..    84,693        699           --          440           --       85,832
   Over twenty years ....................    76,043         --           --           --           --       76,043
                                           --------     ------     --------     --------     --------     --------

TOTAL DUE OR REPRICING AFTER ONE YEAR ...   248,975      2,174          545          815          103      252,612
                                           --------     ------     --------     --------     --------     --------

TOTAL AMOUNTS DUE OR REPRICING, GROSS ...  $259,785     $2,628     $    750     $    815     $    661     $264,639
                                           ========     ======     ========     ========     ========     ========
</TABLE>




         The following table sets forth the dollar amounts in each loan category
at December 31, 1996 that are due after December 31, 1997, and whether such
loans have fixed or adjustable interest rates.

                                        DUE AFTER DECEMBER 31, 1997
                                   -------------------------------------
                                     FIXED      ADJUSTABLE       TOTAL
                                   ---------    ----------     ---------
                                              (IN THOUSANDS)
MORTGAGE LOANS:
  One- to four-family (1)........  $ 194,968     $  54,007     $ 248,975
  Multifamily (1)................      1,539           635         2,174
  Construction and land..........        545            --           545
  Commercial.....................        577           238           815
OTHER LOANS......................        103            --           103
                                   ---------     ---------     ---------
     TOTAL LOANS.................  $ 197,732     $  54,880     $ 252,612
                                   =========     =========     =========

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

(1) FHA/VA loans are included in one- to four-family and multifamily loans.

         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 generally 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, 1996, the Association originated
$36.3 million of loans, compared to $34.0 million and $21.3 million in 1995 and
1994, respectively. Loan repayments exceeded loan originations during this three
year period as a result of a generally rising interest rate environment since
mid-


                                        4

<PAGE>



1994, competitive market conditions and management's decision not to offer loan
products at rates below market.

         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, 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,
                                                           -------------------------------------------------------
                                                               1996                  1995                  1994
                                                           -----------           -----------           -----------
                                                                                (IN THOUSANDS)
<S>                                                        <C>                   <C>                   <C>        
LOANS (GROSS):
     At beginning of period..........................      $   270,287           $   274,242           $   305,624
MORTGAGE LOANS ORIGINATED:
     One- to four-family.............................           35,177                33,157                19,875
     Multifamily.....................................               --                    --                   227
     Construction and land ..........................              623                    76                   266
     Commercial .....................................               --                   119                   225
                                                           -----------           -----------           -----------
          TOTAL MORTGAGE LOANS ORIGINATED............           35,800                33,352                20,593
OTHER LOANS ORIGINATED...............................              478                   614                   755
                                                           -----------           -----------           -----------
          TOTAL LOANS ORIGINATED.....................           36,278                33,966                21,348
                                                           -----------           -----------           -----------
     Principal repayments............................           41,705                37,558                52,458
     Loans sold......................................               --                   169                    --
     Loans transferred to real estate owned and
       in judgment...................................              221                   194                   272
                                                           -----------           -----------           -----------
LOANS (GROSS) AT END OF PERIOD.......................      $   264,639           $   270,287           $   274,242
                                                           ===========           ===========           ===========
</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, 1996, $259.8
million, or 98.2%, of the Association's gross loans consisted of one- to
four-family residential first mortgage loans. Approximately 75% 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, 1996, the Association had residential construction loans
(included in one- to four-family residential mortgage loans) with an aggregate
principal balance of $1.1 million outstanding to borrowers intending to live in
the properties upon completion of construction, at which time such loans convert
into permanent mortgage loans.

    The Association currently offers adjustable-rate mortgage loan programs with
interest rates that 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. 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.


                                        5

<PAGE>


    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, as well as the value of the property securing 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 property securing the loan. The Association may waive the
due on sale clause on loans held in its portfolio for assumption and real estate
sale contracts 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 borrowers'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 the
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 and 25
year terms. At December 31, 1996, the principal balance of the Association's
multifamily mortgage loan portfolio was approximately $2.6 million, or 0.99% of
total gross loans outstanding. The Association's largest multifamily mortgage
loan at December 31, 1996 had an outstanding balance of $325,000 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, 1996, the Association had 11
commercial real estate loans with an aggregate outstanding balance of $815,000,
representing 0.31% of the Association's gross loan portfolio. At that date, all
of such


                                        6

<PAGE>

loans were current and performing in accordance with their terms. At December
31, 1996, the Association's largest commercial real estate loan, the borrower of
which was a church, had an outstanding balance of $217,000.

    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 loan with a
loss payable clause to the Association.

    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, 1996, the Association had no non-residential loans that 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 only interest 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, 1996, the Association had
residential construction loans (included in one- to four-family residential
mortgage loans) with an aggregate principal balance of $1.1 million outstanding
to borrowers intending to live in the properties upon completion of
construction, at which time such loans 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, 1996, the Association had no construction loans
outstanding to builders. While the Association anticipates that it will 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 no more
than 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


                                        7

<PAGE>

mortgage loans. At December 31, 1996, the Association had 25 land mortgage loans
with an aggregate outstanding balance of $750,000 or 0.28% 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 permanent
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 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, 1996, such loans totalled $573,000
representing 0.23% of the Association's gross loan portfolio. The Association
also offers unsecured overdraft protection loans to its qualifying customers. At
December 31, 1996, the total outstanding principal balance of such unsecured
loans was $88,000, representing 0.03% of the Association's gross 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, 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


                                        8

<PAGE>


are more than eight days late in their monthly payments. A five percent (5%)
late charge 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.




                                        9

<PAGE>




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


<TABLE>
<CAPTION>
                                           AT DECEMBER 31, 1996                              AT DECEMBER 31, 1995                 
                             ------------------------------------------------- -------------------------------------------------  
                                    60-89 DAYS             90 DAYS OR MORE            60-89 DAYS             90 DAYS OR MORE      
                             ------------------------ ------------------------ ------------------------  -----------------------  
                               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........        20      $  869           14      $  937           24       $1,093           16      $  915     
Multifamily................        --          --           --          --           --           --           --          --     
Construction and land......        --          --           --          --            2           48           --          --     
Commercial.................        --          --           --          --           --           --           --          --     
Other......................        --          --           --          --           --           --            1           1     
                                -----       -----        -----       -----        -----        -----        -----       -----     
    Total..................        20      $  869           14      $  937           26       $1,141           17      $  916     
                                =====      ======        =====      ======        =====       ======        =====      ======     

Delinquent loans to
 total loans (1)...........                  0.33%                    0.36%                     0.42%                    0.34%    
                                            =====                    =====                     =====                    =====     


<CAPTION>
                                           AT DECEMBER 31, 1994
                             ------------------------------------------------
                                    60-89 DAYS             90 DAYS OR MORE
                             ------------------------  ----------------------
                               NUMBER      PRINCIPAL     NUMBER     PRINCIPAL
                              OF LOANS      BALANCE     OF LOANS     BALANCE
                             -----------  -----------  ----------  ----------
                                          (DOLLARS IN THOUSANDS)

<S>                                <C>      <C>              <C>     <C>   
One- to four-family........        10       $  516           18      $  974
Multifamily................        --           --           --          --
Construction and land......         2           53            1          12
Commercial.................        --           --           --          --
Other......................        --           --           --          --
                                -----        -----        -----       -----
    Total..................        12       $  569           19      $  986
                                =====       ======        =====      ======

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

<TABLE>
<CAPTION>

                                                          AT DECEMBER 31, 1993                              
                               ---------------------------------------------------------------------------  
                                           60-89 DAYS                            90 DAYS OR MORE            
                               -----------------------------------    ------------------------------------  
                                   NUMBER             PRINCIPAL           NUMBER             PRINCIPAL      
                                  OF LOANS             BALANCE           OF LOANS             BALANCE       
                               ---------------    ----------------    ---------------    -----------------  
                                                         (DOLLARS IN THOUSANDS)  

<S>                               <C>               <C>                  <C>                <C>             
One- to four-family.........         33             $1,412                  26             $1,642           
Multifamily.................          1                 92                  --                 --           
Construction and land.......          1                 40                  --                 --           
Commercial..................         --                 --                  --                 --           
Other.......................         --                 --                  --                 --           
                                  -----              -----               -----              -----           
    Total...................         35             $1,544                  26             $1,642           
                                  =====             ======               =====             ======           

Delinquent loans to
 total loans (1)............                          0.51%                                  0.54%          
                                                     =====                                  =====           

</TABLE>



<TABLE>
<CAPTION>

                                                       AT DECEMBER 31, 1992                  
                               ------------------------------------------------------------------
                                           60-89 DAYS                        90 DAYS OR MORE 
                               -----------------------------------    --------------------------- 
                                   NUMBER             PRINCIPAL          NUMBER         PRINCIPAL 
                                  OF LOANS             BALANCE          OF LOANS         BALANCE  
                               ---------------    ----------------    ------------    ----------- 
                                                       (DOLLARS IN THOUSANDS)  
                                                                                               
<S>                               <C>               <C>                  <C>            <C>    
One- to four-family.........         44             $2,334                  45          $2,354 
Multifamily.................         --                 --                  --              -- 
Construction and land.......         --                 --                  --              -- 
Commercial..................         --                 --                  --              -- 
Other.......................         --                 --                   3               2 
                                  -----              -----               -----           ----- 
    Total...................         44             $2,334                  48          $2,356 
                                  =====             ======               =====          ====== 
                                                                                               
Delinquent loans to                                                                            
 total loans (1)............                          0.81%                               0.81%
                                                     =====                               ===== 
 
</TABLE>

----------

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


                                       10

<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 increased $54,000 from $496,000 at December 31, 1995 to $550,000
at December 31, 1996. The $54,000 net increase was the result of two new REO
properties, which was partially offset by the disposition of three properties,
which dispositions resulted in a net gain to the Association of $21,000.

         NON-PERFORMING ASSETS. Loans 90 days or more delinquent are reviewed 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 collateralized
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
1996, 1995 and 1994, the amounts of additional interest income that would have
been recorded on non-accrual loans, had they been current, totalled $68,000,
$36,000 and $59,000, respectively. These amounts were not included in interest
income for the respective periods. For all periods presented, the Association
had no troubled-debt restructurings (which involve forgiving a portion of
interest or principal on 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 $434,000 at
December 31, 1996. 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,
                                              ------------------------------------------------------
                                               1996        1995        1994        1993        1992
                                              ------      ------      ------      ------      ------
                                                               (DOLLARS IN THOUSANDS)
<S>                                           <C>         <C>         <C>         <C>         <C>   
Non-accrual loans:
  One- to four-family ...................     $  937      $  915      $  974      $1,642      $2,354
  Multifamily ...........................         --          --          --          --          --
  Construction and land .................         --          --          12          --          --
  Commercial ............................         --          --          --          --          --
  Other loans ...........................         --           1          --          --           2
                                              ------      ------      ------      ------      ------
    Total non-performing loans ..........        937         916         986       1,642       2,356
                                              ------      ------      ------      ------      ------

Total real estate owned and in judgment .        550         496         514         433         629
                                              ------      ------      ------      ------      ------

Total non-performing assets .............     $1,487      $1,412      $1,500      $2,075      $2,985
                                              ======      ======      ======      ======      ======

Total non-performing loans to
  total loans(1) ........................       0.36%       0.34%       0.36%       0.54%       0.81%
Total non-performing assets to
  total assets ..........................       0.42%       0.46%       0.49%       0.62%       0.86%
</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 Office of Thrift
Supervision ("OTS") internal asset classifications as a part of its credit
monitoring system. The Association currently classifies problem and


                                       11

<PAGE>



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 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, 1996, 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
                                 ------       ------      ------      ------      ------      ------      ------       ------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                   <C>    <C>              <C>    <C>                     <C>                      <C>    
Mortgage loans:
   One- to four-family........        4      $   434          14     $   937          --     $    --          --      $    --
                                -------      -------    --------     -------     -------     -------    --------      -------
Total mortgage loans..........        4          434          14         937          --          --          --           --
                                -------      -------    --------     -------     -------     -------    --------      -------
Real estate owned and in
 judgement:
   One- to four-family........       --           --           4         511          --          --          --           --
   Multifamily................       --           --          --          --          --          --          --           --
   Construction and land......       --           --           1          39          --          --          --           --
   Commercial.................       --           --          --          --          --          --          --           --
                                -------      -------     -------     -------     -------     -------     -------      -------
Total real estate owned
  and in judgment.............       --           --           5         550          --          --          --           --
                                -------      -------     -------     -------     -------     -------     -------      -------
Total.........................        4      $   434          19     $ 1,487          --     $    --          --      $    --
                                =======      =======     =======     =======     =======     =======     =======      =======
</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


                                       12

<PAGE>



different from those of management. At December 31, 1996, the Association's
allowance for loan losses was 0.36% of total loans as compared to 0.31% as of
December 31, 1995. The Association had non-accrual loans of $937,000 and
$916,000 at December 31, 1996 and December 31, 1995, respectively, representing
0.36% and 0.34% of total loans at such respective dates. The Association will
continue to monitor and modify its allowance for loan losses as conditions
dictate.

         The OTS, in conjunction with the other federal banking agencies, has
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 analyze all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish 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 loses 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.



                                       13

<PAGE>



         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,
                                              -------------------------------------------------------------------------
                                                  1996           1995            1994           1993             1992
                                                --------       --------        --------       --------         --------
                                                                         (DOLLARS IN THOUSANDS)
<S>                                             <C>            <C>             <C>            <C>              <C>     
Total loans outstanding at end of period(1)...  $262,251       $267,979        $271,689       $302,085         $289,734
                                                --------       --------        --------       --------         --------

Balance at beginning of year..................       826            649             409            548              355
Provision for loan losses.....................       120            180             240            240              256
Charge-offs:
  One- to four-family.........................        --             --              --             --               --
  Multifamily.................................        --             --              --           (141)              --
  Construction and land.......................        --             --              --             --               --
  Commercial..................................        --             --              --             --               --
  Other.......................................        (1)            (3)             --             --               --
                                                --------       --------        --------       --------         --------
     Total charge-offs........................        (1)            (3)             --           (141)              --
                                                --------       --------        --------       --------         --------
Allocation to reserve for uncollected
  interest....................................        --             --              --           (238)             (63)
                                                --------       --------        --------       --------         --------

Balance at end of year........................  $    945       $    826        $    649       $    409         $    548
                                                ========       ========        ========       ========         ========

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           0.31            0.24           0.14             0.19
Allowance for loan losses to total
 non-performing loans at end of period........    100.85          90.17           65.82          24.91            23.26
</TABLE>

----------

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


                                       14
<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
gross loans at the dates indicated.


<TABLE>
<CAPTION>
                                                                    AT DECEMBER 31,
                              -----------------------------------------------------------------------------------------
                                         1996                             1995                            1994
                              ------------------------         -------------------------        -----------------------
                                           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 ....      $ 890         98.17%             $ 779         98.09%             $ 602        97.63%
  Multifamily ............         25          0.99                 25          1.15                 25         1.50
  Construction and land...         14          0.28                  7          0.17                 11         0.31
  Commercial..............         16          0.31                 15          0.33                 11         0.31
Other.....................         --          0.25                 --          0.26                 --         0.25
                                -----        ------              -----        ------              -----       ------
     Total................      $ 945        100.00%             $ 826        100.00%             $ 649       100.00%
                                =====        ======              =====        ======              =====       ======
</TABLE>


<TABLE>
<CAPTION>

                                                                          AT DECEMBER 31,
                                     -----------------------------------------------------------------------------------
                                                        1993                                          1992
                                     ------------------------------------------   --------------------------------------
                                                               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)
Mortgage loans:
<S>                                       <C>                    <C>                   <C>                  <C>   
  One- to four-family ............        $ 378                  97.54%                $ 384                96.92%
  Multifamily ....................           16                   1.50                   150                 1.76
  Construction and land...........            8                   0.37                     7                 0.47
  Commercial......................            7                   0.34                     7                 0.53
Other.............................           --                   0.25                    --                 0.32
                                          -----                  -----                 -----                -----
     Total........................        $ 409                  100.00%               $ 548                100.00%
                                          =====                  ======                =====                ======

</TABLE>

INVESTMENT ACTIVITIES

         INVESTMENT POLICY. The investment policy of the Company, 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 Company'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 Company's asset/liability structure.

         The 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 investment policy
prohibits investment in derivative securities.

         MORTGAGE-BACKED AND U.S. TREASURY SECURITIES. At December 31, 1996, the
carrying value of mortgage-backed securities totalled $142,000 or 0.04%, of
total assets. The fair value of these mortgage-

                                       15
<PAGE>


backed securities totalled $143,000 at December 31, 1996. All mortgage-backed
securities in the Association's portfolio were held to maturity and carried at
amortized cost.

         At December 31, 1996, all securities in the Association's
mortgage-backed securities portfolio were directly insured or guaranteed by
GNMA, which provides the certificate holder a guarantee of timely payments of
interest and scheduled principal payments, whether or not they have been
collected. The Association's mortgage-backed securities portfolio had a weighted
average rate of 6.97% at December 31, 1996.

         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 of 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,
                                                                     --------------------------------------------------
                                                                        1996                1995                 1994
                                                                     ---------           ---------            ---------
                                                                                       (IN THOUSANDS)
<S>                                                                  <C>                 <C>                  <C>      
Amortized cost at beginning of period...........................     $     187           $     243            $     296
Purchases/sales (net)...........................................            --                  --                   --
Principal repayments............................................           (45)                (56)                 (52)
Premium and discount amortization, net..........................            --                  --                   (1)
                                                                     ---------           ---------            ---------

Amortized cost at end of period.................................     $     142           $     187            $     243
                                                                     =========           =========            =========
</TABLE>


         At December 31, 1996, the carrying value of U.S. Treasury securities
totalled $53.8 million, or 15.09% of total assets. All U.S. Treasury securities
in the Company's portfolio were held to maturity.

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

<TABLE>
<CAPTION>
                                                                         AT DECEMBER 31,
                                             -----------------------------------------------------------------------
                                                      1996                     1995                    1994
                                             ---------------------     ---------------------   ---------------------
                                             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................................ $     142   $     143     $     187   $     193   $     243   $     233
                                             =========   =========     =========   =========   =========   =========

     Other debt securities
      --U.S. Treasury and Agency............ $  53,786   $  53,797     $   5,948   $   6,030   $   5,918   $   5,663
                                             =========   =========     =========   =========   =========   =========
</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, 1996,
by remaining period to contractual maturity. With respect to mortgage-backed
securities, 


                                       16
<PAGE>


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, 1996
                                                               -----------------------------------------------
                                                                                                      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.................      $      70           $      72              7.45%
     Due after 5 years but within 10 years...............             72                  71              6.50
                                                               ---------           ---------         ---------

        Total ...........................................      $     142           $     143              6.97%
                                                               =========           =========         =========

U.S. Treasury and Agency:
     Due in 1 year or less...............................      $  53,786           $  53,797              5.41%
                                                               =========           =========         =========

Total:
     Due in 1 year or less...............................      $  53,786           $  53,797              5.41%
     Due after 1 year but within 5 years.................             70                  72              7.45
     Due after 5 years but within 10 years...............             72                  71              6.50
                                                               ---------           ---------         ---------

         Total...........................................      $  53,928           $  53,940              5.42%
                                                               =========           =========         =========
</TABLE>


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.


                                       17
<PAGE>


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

<TABLE>
<CAPTION>
                                                             FOR THE YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------------------
                                                  1996                   1995                    1994
                                              -----------            -----------             -----------
                                                                    (IN THOUSANDS)

<S>                                           <C>                    <C>                     <C>        
Deposits.................................     $   886,737            $   764,098             $   876,134
Withdrawals..............................        (904,475)              (781,552)               (889,520)
                                              -----------            -----------             -----------
Withdrawals in excess of deposits........         (17,738)               (17,454)                (13,386)
Deposits of branches sold................              --                     --                 (21,822)
Interest credited........................           9,561                  9,488                   9,214
                                              -----------            -----------             -----------
  Total decrease in savings
        deposits.........................     $    (8,177)           $    (7,966)            $   (25,994)
                                              ============           ===========             ===========
</TABLE>


         At December 31, 1996, the Association had $17.3 million in jumbo
certificates of deposit (accounts in amounts over $100,000) maturing as follows.

                                                                      WEIGHTED
MATURITY PERIOD                                 AMOUNT              AVERAGE RATE
                                              ---------             ------------
                                                    (DOLLARS IN THOUSANDS)

  Within three months......................   $   4,500                  5.160%
  After three but within six months........       3,232                  5.569
  After six but within 12 months...........       2,418                  5.545
  After 12 months..........................       7,123                  6.640
                                              ---------              ---------
    Total..................................   $  17,273                  5.951%
                                              =========              =========




                                       18
<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,
                                     ----------------------------------------------------------------------------------------------
                                                           1996                                             1995                   
                                     --------------------------------------------      --------------------------------------------
                                                        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.............  $  42,800              17.0%           2.25%      $  45,001             17.3%            2.25%
Money market accounts..............     16,763               6.7            3.22          17,684              6.8             3.22 
Passbook accounts..................     62,171              24.7            3.00          65,261             25.1             3.04 
Certificates of deposit............    125,192              49.7            5.79         126,847             48.8             5.89 
Non-interest bearing NOW accounts..      4,869               1.9              --           5,179              2.0               -- 
                                     ---------            ------          ------       ---------           ------           ------ 
     Totals........................  $ 251,795            100.00%           4.22%      $ 259,972           100.00%            4.29%
                                     =========            ======          ======       =========           ======           ====== 


<CAPTION>
                                                    AT DECEMBER 31,
                                     -----------------------------------------
                                                         1994
                                     -----------------------------------------
                                                      PERCENT OF      WEIGHTED
                                                         TOTAL         AVERAGE
                                       AMOUNT          DEPOSITS         RATE
                                     ---------        ----------       -------
                                                (DOLLARS IN THOUSANDS)
<S>                                  <C>                <C>              <C>  
NOW/Super NOW accounts.............  $  48,834            18.2%          2.25%
Money market accounts..............     23,545             8.8           3.22
Passbook accounts..................     74,524            27.8           3.00
Certificates of deposit............    121,035            45.2           4.46
Noninterest bearing NOW accounts...         --              --             --
                                     ---------          ------         ------
     Totals........................  $ 267,938          100.00%          3.83%
                                     =========          ======         ======
</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, 1996.


<TABLE>
<CAPTION>
                                               PERIOD TO MATURITY AT DECEMBER 31, 1996               
                               ----------------------------------------------------------------------
     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%..............         12,498                      --                       10         
5.00% to 5.99%..............         52,235                  18,399                    4,222         
6.00% to 6.99%..............          8,344                   5,404                    7,131         
7.00% and above.............             34                   4,362                   12,553         
                                    -------                 -------                  -------         
     Total..................        $73,111                 $28,165                  $23,916         
                                    =======                 =======                  =======         


<CAPTION>
                                                   AT DECEMBER 31,
                               -------------------------------------------------------
     INTEREST RATE RANGE             1996                1995               1994
----------------------------   ----------------   -----------------   ----------------
                                                   (IN THOUSANDS)
<S>                               <C>                 <C>                <C>     
Below 4.00% ................      $     --            $     16           $ 12,885
4.00% to 4.99%..............        12,508               7,548             48,001
5.00% to 5.99%..............        74,856              69,542             31,067
6.00% to 6.99%..............        20,879              27,216             13,689
7.00% and above.............        16,949              22,525             15,393
                                  --------            --------           --------
     Total..................      $125,192            $126,847           $121,035
                                  ========            ========           ========
</TABLE>




                                       19
<PAGE>


         Savings deposits decreased $8.2 million or 3.1% from $260.0 million at
December 31, 1995 to $251.8 million at December 31, 1996. Savings deposits
decreased $4.7 million as a result of withdrawals directed by depositors for
purchase of stock in the Conversion and $3.5 million as a result of market
conditions and the purchase of stock in the Conversion by account holders that
paid with a check drawn on the Association. In an effort to address the
contraction of deposits, the Association has taken steps to increase core
non-interest 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.
Convenient access to deposit accounts is also being improved with the addition
of a debit card program and home banking via personal computer and phone in 
1997.

         BORROWED FUNDS. The Association utilizes advances from the FHLB of
Chicago as an alternative to retail deposits to fund its operations and may
continue 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, 1996, the maximum
amount of FHLB of Chicago advances available to the Association was $54 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,
                                                                         -------------------------------------------------
                                                                              1996              1995             1994
                                                                         ---------------   --------------   --------------
                                                                                       (DOLLARS IN THOUSANDS)
<S>                                                                        <C>               <C>              <C>     
FHLB of Chicago advances:
  Maximum amount outstanding at any
    month-end during the period.......................................     $  4,000          $  6,000         $  9,000
  Average balance outstanding.........................................          667             1,250              583
  Balance outstanding at end of period................................           --             4,000               --
  Weighted average interest rate during the period....................         5.55%             6.16%            6.69%
  Weighted average interest rate at end of period.....................           --              5.31               --
</TABLE>




                                       20
<PAGE>

PERSONNEL

         At December 31, 1996, the Association had 101 full-time employees and
45 part-time employees. The Association has experienced a low turnover rate
among its employees, and, as of December 31, 1996, 64 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.


                           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, after the
Conversion, the Company and the Association may file consolidated income tax
returns and report their income on a calendar year basis using the accrual
method of accounting and will be 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


                                       21
<PAGE>


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.

         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). In addition, for taxable years beginning after December 31,
1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of
AMTI (with certain modifications) over $2 million is imposed on corporations,
including the Association, whether or not an AMT is paid. Under pending
legislative proposals, the environmental tax would be extended to taxable years
beginning before January 1, 2007. The Association does not expect to be subject
to the AMT, but may be subject to the environmental tax liability.

         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. Under pending
legislative proposals, the 70% dividends received deduction would be reduced to
50% with respect to dividends paid after enactment of such legislation.

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.





                                       22
<PAGE>

                                   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.

         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 10% of an association's
assets on the aggregate amount of commercial 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, 1996, the Association's regulatory limit on loans to one borrower was $9.8
million. However, the Association's lending policy limits loans to any one
borrower to an aggregate of $1 million. At December 31, 1996, the Association's
largest aggregate amount of loans to


                                       23
<PAGE>


one borrower was $364,000, and the second largest borrower had an aggregate
balance of $348,000. 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) certain intangibles, including goodwill and credit card and purchased
mortgage servicing rights, 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 consumer
loans up to 10% of the association's portfolio assets. At December 31, 1996, the
Association maintained 99.11% 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 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. 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 purchased
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,



                                       24
<PAGE>

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 not yet implemented the regulatory requirement
for associations to deduct an interest-rate-risk component in calculating their
risk-based capital. At December 31, 1996, the Association was not required to
maintain any additional risk-based capital under this rule.

         At December 31, 1996, the Association met each of its capital
requirements.

         The table below presents the Association's regulatory capital as
compared to the OTS regulatory capital requirements at December 31, 1996.

<TABLE>
<CAPTION>
                                            ASSOCIATION                    CAPITAL REQUIREMENTS                     EXCESS
                                     ------------------------            ------------------------          -----------------------
                                     AMOUNT           PERCENT            AMOUNT           PERCENT          AMOUNT          PERCENT
                                     ------           -------            ------           -------          ------          -------
                                                                        (DOLLARS IN THOUSANDS)
<S>                                <C>                 <C>              <C>                <C>           <C>                <C>   
Tangible capital..............     $ 65,641            20.05%           $ 4,912            1.50%         $ 60,729           18.55%
Core capital..................       65,641            20.05              9,824            3.00            55,817           17.05
Risk-based capital............       66,586            41.09             12,964            8.00            53,622           33.09
</TABLE>


         A reconciliation between the Association's regulatory capital and GAAP
capital at December 31, 1996 is presented below.

<TABLE>
<CAPTION>
                                          TANGIBLE CAPITAL    CORE CAPITAL     RISK-BASED CAPITAL
                                          ----------------    ------------     ------------------
                                                             (IN THOUSANDS)

<S>                                           <C>              <C>                  <C>     
GAAP capital..............................    $ 65,641         $ 65,641             $ 65,641
Allowance for loan losses includable
  in supplementary capital................          --               --                  945
Regulatory capital........................    $ 65,641         $ 65,641             $ 66,586
</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


                                       25
<PAGE>


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 regulations that would simplify the existing
procedures governing capital distributions by savings associations. Under the
proposed regulations, the approval of the OTS would be required only for capital
distributions by an association that is deemed to be in troubled condition or
that is undercapitalized or would be undercapitalized after the capital
distribution. A savings association would be able to make a capital distribution
without notice to or approval of the OTS if it is not held by a savings
association holding company, is not deemed to be in troubled condition, has
received either of the two highest composite supervisory ratings and would
continue to be adequately capitalized after such distribution. Notice would have
to be given to the OTS by any association that is held by a savings association
holding company or that had received a composite supervisory rating below the
highest two composite supervisory ratings. An association's capital rating would
be determined under the prompt corrective action regulations. See "-Prompt
Corrective Regulatory Action."

         LIQUIDITY. The Association is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances,
specified United States Government, state or 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 5%. OTS regulations also require each
savings association to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Association's average liquidity ratio for the month ended
December 31, 1996 was 20.67% which exceeded the applicable requirements. The
Association has never been subject to monetary penalties for failure to meet its
liquidity requirements.

         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 1996,
the Association paid an assessment of $79,000.

         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



                                       26
<PAGE>


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 benefiting 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.

         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


                                       27
<PAGE>

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 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 on the CAMEL 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 on the CAMEL 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


                                       28
<PAGE>

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 depositary 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.

         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
depositary institutions. Under the new assessment system, which began in 1993,
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


                                       29
<PAGE>

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. Beginning in 1993, the assessment rates
for both the BIF and the SAIF had ranged from 0.23% 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 0.31% of deposits for an
institution in the lowest category (I.E., undercapitalized and substantial
supervisory concern).

         The FDI Act requires that the BIF and the SAIF funds each be
recapitalized until reserves are at least 1.25% of the deposits insured by that
fund. After a fund reached the 1.25% reserve ratio, the assessment rates for
that fund could be reduced. During 1995, the BIF reached the required reserve
ratio, and the FDIC reduced the BIF assessment rates. Effective January 1, 1996,
the BIF assessment rate for "well capitalized" institutions without any
significant supervisory concerns was set at the statutory minimum of $2,000
annually, and the rates for other BIF-insured institutions ranged from 0.03% to
0.27% of deposits. The SAIF remained undercapitalized, and it was not then
expected to be recapitalized until 2001. SAIF reserves had not grown as quickly
as the BIF reserves due to a number of factors, including the fact that a
significant portion of SAIF assessments had been used to make payments on bonds
(the "FICO bonds") issued in the late 1980s by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation.
Accordingly, SAIF-insured institutions continued to pay assessments at rates
that ranged from 0.23% of deposits to 0.31% of deposits. The Association's
assessment rate for the first three quarters of 1996 was 0.23% of deposits.

                  On September 30, 1996, the Deposit Insurance Funds Act of 1996
(the "Funds Act") was enacted into law. The Funds Act amended the Federal
Deposit Insurance Act in several ways to recapitalize the SAIF and reduce the
disparity in the assessment rates for BIF and the SAIF. The Funds Act authorized
the FDIC to impose a special assessment on all institutions with SAIF-assessable
deposits in the amount necessary to recapitalize the SAIF. As implemented by the
FDIC, the special assessment was fixed, subject to adjustment, at 0.657% of an
institution's SAIF-assessable deposits, and the special assessment was paid on
November 27, 1996. The special assessment was based on the amount of
SAIF-assessable deposits held at March 31, 1995, as adjusted under the Funds
Act. For the Association, the special assessment on the deposits held on March
31, 1995, was $1.8 million (before giving effect to any tax benefits).

                  The Funds Act also provides that the FDIC cannot assess
regular insurance assessments for an insurance fund unless required to maintain
or to achieve the designated reserve ratio of 1.25%, except on those of its
member institutions that are not classified as "well capitalized" or that have
been found to have "moderately severe" or "unsatisfactory" financial,
operational or compliance weaknesses. The Association has not been so classified
by the FDIC or the OTS. As a result of the Funds Act and the recapitalization of
the SAIF in the last quarter of 1996, the FDIC reduced the assessment rates for
the SAIF. For the semi-annual period beginning January 1, 1997, the SAIF
assessment rates range from 0 to 27 basis points, which is the same as the
schedule of assessment rates for the BIF.

                  In addition, the Funds Act expanded the assessment base for
the payments on the FICO bonds. Beginning January 1, 1997, the deposits of both
BIF- and SAIF-insured institutions were assessed for the payments on the FICO
bonds. 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 set at 0.0130% for BIF-assessable
deposits and 0.0648% 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 Secretary of the Treasury is required to
conduct a study of relevant factors with respect to the development of a common
charter for all


                                       30
<PAGE>

insured depository institutions and abolition of separate charters for banks and
thrifts and to report the Secretary's conclusions and findings to the Congress
on or before March 31, 1997. Two bills have been introduced in Congress to
eliminate the federal thrift charter, with one requiring the federal thrift to
convert to a bank charter and the other giving the federal thrift the option to
convert to a national or state chartered bank or to a state savings and loan
association.

         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.

         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, 1996, of $2.7 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 $187,000, $202,000 and $187,000 during the years ended December 31,
1996, 1995 and 1994, 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 depositary institutions may be
required to maintain non-interest-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 $49.3 million. The amount of
aggregate transaction accounts in excess of $49.3 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 $4.4 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 non-interest-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


                                       31
<PAGE>


authority over the Company and its non-savings association subsidiaries, if any.
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
acquisition 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.

         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.

                                       32
<PAGE>


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 its 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>
                                                                    DATE
                                                    LEASED OR     LEASED OR       NET BOOK VALUE AT
                                                      OWNED        ACQUIRED       DECEMBER 31, 1996
                                                    ---------     ---------       -----------------

                                                                                   (IN THOUSANDS)

<S>                                                   <C>           <C>                 <C>   
MAIN OFFICE:
    16 North Spring St.
    Elgin, IL ..................................      Owned          1923               $2,377

BRANCHES:
    180 Virginia St.
    Crystal Lake, IL............................      Owned          4/74                  784

    56 East Irving Park Road
    Roselle, IL.................................      Owned          7/75                  315

    300 North McLean Blvd.
    South Elgin, IL.............................      Owned         11/96                1,433

    200 Bartlett Ave.
    Bartlett, IL................................      Owned          9/79                  895

CHECK PROCESSING:
    Mail and Record Retention
    Facility (No Customer Service) Annex
    Fulton St., Elgin, IL.......................      Owned          2/86                  408
</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.



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

         None.




                                       33
<PAGE>

                                    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 22 of the Company's 1996 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 1996 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.


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 21 of the Company's 1996 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 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this Item is incorporated herein by
reference to pages 23 through 45 of the Company's 1996 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.



 
                                       34
<PAGE>

                                    PART III


ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following information included on pages 5 through 8, 12 and 17 of
the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders (the
"Proxy Statement") is incorporated herein by reference: "Election of Directors"
and "Compensation of Directors and Executive Officers--Executive Compensation"
and " - Section 16(a) Beneficial Ownership Reporting Compliance."


ITEM 11.      EXECUTIVE COMPENSATION

         The following information included on pages 12 through 16 of the Proxy 
Statement is incorporated herein by reference: "Compensation of Directors and
Executive Officers--Directors' Compensation", "--Executive Compensation,"
"--Employment Agreements," "--Employee Retention Agreement" 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
"--Stock Ownership of Management."


ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The following information included on pages 16 and 17 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, 1996 and 1995 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, 1996, 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.*




                                       35
<PAGE>


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

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

  10.1      Employee Stock Ownership Plan of Home Bancorp of Elgin, Inc. and
            ESOP Trust Agreement*

  10.2      Loan Agreement by and between Home Bancorp of Elgin, Inc. Employee
            Stock Ownership Plan Trust and Home Bancorp of Elgin, Inc. Made and
            Entered Into as of September 26, 1996

  10.3      Form of Executive Employment Agreement between Home Bancorp of
            Elgin, Inc. and certain executive officers*

  10.4      Form of Employment Agreement between Home Federal Savings and Loan
            Association of Elgin and certain executive officers*

  10.5      Form of Employee Retention Agreement between Home Bancorp of Elgin,
            Inc., Home Federal Savings and Loan Association of Elgin and certain
            executive officers*

  10.6      Form of Severance Pay Plan between Home Federal Savings and Loan
            Association of Elgin and certain executive officers*

  13.1      Portions of the Company's 1996 Annual Report to Stockholders

  21.1      Subsidiaries of the Registrant*

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

  99.1      Proxy Statement for the 1997 Annual Meeting of Stockholders of Home
            Bancorp of Elgin, Inc. previously filed with the Securities and 
            Exchange Commission on March 13, 1997


--------------
*    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.

(b)  The Company filed no reports on Form 8-K during the fourth quarter of 1996.




                                       36
<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 20, 1997.

                                  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                 March 20, 1997
---------------------------   and Chief Executive Officer
George L. Perucco             (Principal executive officer)

/s/ Lyle N. Dolan             Executive Vice President and        March 20, 1997
---------------------------   Treasurer (Principal financial
Lyle N. Dolan                 and accounting officer)

/s/Orval M. Graening          Director                            March 20, 1997
---------------------------
Orval M. Graening

/s/ Henry R. Hines            Director                            March 20, 1997
---------------------------
Henry R. Hines

/s/ Donald E. Laird           Director                            March 20, 1997
---------------------------
Donald E. Laird

/s/ Leigh O'Connor            Director                            March 20, 1997
---------------------------
Leigh O'Connor

/s/ Thomas S. Rakow           Director                            March 20, 1997
---------------------------
Thomas S. Rakow

/s/ Richard S. Scheflow       Director                            March 20, 1997
---------------------------
Richard S. Scheflow




                                       37

<PAGE>



================================================================================





                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549









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

                                    EXHIBITS
                                       TO
                                    FORM 10-K

                              SEC File No. 0-28696

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











                           HOME BANCORP OF ELGIN, INC.
                                 ELGIN, ILLINOIS





================================================================================



<PAGE>




DESIGNATION                                DESCRIPTION                     PAGE
-----------                                -----------                     ----


3.1              Certificate of Incorporation of Home Bancorp of
                 Elgin, Inc. (Incorporated by reference to Exhibit
                 3.1 to the Registration Statement on Form S-1, No.
                 333-05909 filed with the Securities and Exchange
                 Commission on June 13, 1996, as amended (the
                 "Registration Statement"))

3.2              Bylaws of Home Bancorp of Elgin, Inc.
                 (Incorporated by reference to Exhibit 3.2 to the
                   Registration Statement)

4.3              Specimen of Stock Certificate of Home Bancorp of
                 Elgin, Inc. (Incorporated by reference to Exhibit
                 4.3 to the Registration Statement)

10.1             Employee Stock Ownership Plan of Home Bancorp
                 of Elgin, Inc. and ESOP Trust Agreement
                 (Incorporated by reference to Exhibit 10.1 to the
                   Registration Statement)

10.2             Loan Agreement by and between Home Bancorp of
                 Elgin, Inc. Employee Stock Ownership Plan Trust
                 and Home Bancorp of Elgin, Inc. made and Entered
                 Into as of September 26, 1996

10.3             Form of Executive Employment Agreement between
                 Home Bancorp of Elgin, Inc. and certain executive
                 officers (Incorporated by reference to Exhibit 10.3
                 to the Registration Statement)

10.4             Form of Employment Agreement between Home Federal
                 Savings and Loan Association of Elgin and certain
                 executive officers (Incorporated by reference to
                 Exhibit 10.4 to the Registration Statement)

10.5             Form of Employee Retention Agreement between
                 Home Bancorp of Elgin, Inc., Home Federal
                 Savings and Loan Association of Elgin and certain
                 executive officers (Incorporated by reference to
                 Exhibit 10.5 to the Registration Statement)


<PAGE>


DESIGNATION                                DESCRIPTION                     PAGE
-----------                                -----------                     ----

10.6             Form of Severance Pay Plan between Home Federal
                 Savings and Loan Association of Elgin and certain
                 executive officers (Incorporated by reference to
                 Exhibit 10.6 to the Registration Statement)

13.1             Portions of the Company's 1996 Annual Report to
                 Stockholders

21.1             Subsidiaries of the Registrant (Incorporated by
                 reference to Exhibit 21.1 to the Registration
                 Statement)

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

99.1             Proxy Statement for the 1997 Annual Meeting of
                 Stockholders of Home Bancorp of Elgin, Inc.
                 previously filed with the Securities and Exchange
                 Commission on March 13, 1997