<PAGE>


                          SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C.  20549

                                      FORM 10-K

[x]    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
       Act of 1934 [FEE REQUIRED]  For the Year Ended December 31, 1996
                                        OR
[ ]    Transition Report Pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934 [NO FEE REQUIRED]

       For the transition period from              to
                                     -------------  ----------------
       Commission File Number:  0-26184

                              FIRST MUTUAL BANCORP, INC.
                              --------------------------
                (Exact Name of Registrant as Specified in its Charter)

                   DELAWARE                                   37-1339075
                   --------                                ----------------
    (State or Other Jurisdiction of Inc. or Orgn.)    (I.R.S. Employer ID No.)

    135 EAST MAIN STREET, DECATUR, ILLINOIS                     62523
    ---------------------------------------                     -----
    (Address of Principal Executive Office)                  (Zip Code)

                                    (217) 429-2306
                                    --------------
                           (Registrant's telephone number)

             SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
             -----------------------------------------------------------

                                         NONE

             SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
             -----------------------------------------------------------

                       COMMON STOCK, PAR VALUE $0.10 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 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
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 or any amendment to this
Form 10-K. [ X ].

    As of March 26, 1997, there were issued and outstanding 3,741,670 shares of
the Registrant's Common Stock.

    The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the average bid and ask price of such
stock as of March 26, 1997 was approximately $56.125 million.


                         DOCUMENTS INCORPORATED BY REFERENCE

1.  Parts II and III of Form 10-K--Portions of Annual Report to Stockholders
    for the year ended December 31, 1996.
2.  Part III of Form 10-K--Portions of Proxy Statement for 1997 Annual Meeting
    of Stockholders.

<PAGE>


                                        PART I

ITEM 1.  BUSINESS

FIRST MUTUAL BANCORP, INC.

    First Mutual Bancorp, Inc. (the "Company") is a Delaware corporation that
was organized in December 1994.  On June 30, 1995, the Company acquired 100% of
the capital stock of First Mutual Bank, S.B. (the "Bank"), and sold 4,700,000
shares of common stock in a subscription offering for a purchase price of $10.00
per share (the "Offering").  Net proceeds from the Offering were $41.6 million.
The Company retained 50% of the net Offering proceeds and used a portion of the
proceeds to originate a loan to the Bank's Employee Stock Ownership Plan, and
used the balance of the net proceeds to purchase all of the common stock of the
Bank.  Immediately following the Offering, the only significant assets of the
Company were the common stock of the Bank, the loan to the ESOP, and $18.9
million in cash, cash equivalents, and certificates of deposit.

    The business of the Company and its subsidiaries will be discussed herein
as activities of the Company (on a consolidated basis), and references to the
Company's historical investment activities include the activities of the Bank
prior to June 30, 1995 unless otherwise noted.

    The Company employs executive officers and a support staff if and as the
need arises.  Such personnel are provided by the Bank and are paid separate
remuneration for such services.  At December 31, 1996, the Company had total
consolidated assets of $331.8 million, total consolidated deposits of $202.9
million, and consolidated stockholders' equity of $62.2 million. The Company's
executive office is located at 135 East Main Street, Decatur, Illinois  62523
and its telephone number is (217) 429-2306.

FIRST MUTUAL BANK, S.B.

    First Mutual Bank, S.B. is an Illinois-chartered savings bank headquartered
in Decatur, Illinois.  The Bank's deposits are insured by the FDIC under the
SAIF.  The Bank has been a member of the Federal Home Loan Bank System since
1953.

    The Bank is primarily engaged in the business of attracting deposits from
the general public in the Bank's market area and using such funds, together with
borrowings and funds from other sources, to originate mortgage loans secured by
one- to four-family residential real estate.  The Bank also originates
commercial and multi-family loans, and consumer loans.  At December 31, 1996,
residential one- to four-family loans represented 75.3% of the Bank's net loan
portfolio, and commercial and multi-family loans represented 12.1% of the Bank's
net loan portfolio.

    The Bank also invests in mortgage-backed securities primarily issued or
guaranteed by the United States Government or agencies thereof and maintains a
portion of its assets in liquid investments, such as overnight funds at the FHLB
of Chicago, and deposits in other financial institutions.  At December 31, 1996,
such liquid investments, which included interest-earning deposits in other
financial institutions, and United States Government and federal agency
obligations, totalled $29.7 million, or 9.0% of total assets.

    The Bank's principal sources of funds are deposits, funds received from the
sale, amortization and prepayment of loans and advances from the FHLB of
Chicago.  Principal sources of income are interest income on mortgage loans,
consumer loans, commercial loans and investment securities, investment sales
commissions, deposit service fee income, fees for mortgage loan servicing and
gain on sale of loans.  The Bank's principal expenses are interest paid on
deposits and employee compensation and benefits.

                                          2


<PAGE>


    The Bank is headquartered in Decatur, Illinois and operates nine offices in
its market area of Central Illinois consisting of Macon, DeWitt, Shelby and
Champaign Counties.

MARKET AREA/LOCAL ECONOMY

    The Company conducts operations through its main office in Decatur,
Illinois, which is located in Central Illinois, and through eight branch offices
in three nearby counties.  The population of Decatur is approximately 85,000 and
the population of the Company's primary market area is approximately 332,000 as
of the 1990 census. Most employment in the Company's primary market area is in
the agriculture and agriculture-related industries, but also includes
significant construction equipment, automotive, manufacturing and service
businesses.  At December 31, 1996, the unemployment rate in Macon County was
8.1%, Shelby County was 6.0%, DeWitt County was 5.4%, and Champaign County was
3.1% compared to the national rate of 5.4%. Major employers in the Company's
primary market area include Caterpillar Tractor Co., Inc., A.E. Staley Co.,
Inc., The Archer Daniels Midland Company, The University of Illinois, Firestone
Tire & Rubber Company, and Illinois Power Company.

    The Company's business and operating results are significantly affected by
the general economic conditions prevalent in its primary market area.  The
Bank's primary market area is projected to experience only moderate population
growth for the foreseeable future.

    The Company faces significant competition in attracting deposits from
commercial banks, other savings institutions and credit unions.  The Company
also faces significant competition in the origination of loans from savings
institutions, mortgage banking companies, insurance companies and commercial
banks, many of which have greater financial and marketing resources.
Notwithstanding the foregoing, the Company's deposit market share has remained
stable.

RECENT DEVELOPMENTS

    On January 3, 1997, the Bank completed an acquisition of three branch
offices from First of America Bank-Illinois, N.A. ("FOA").  The branch offices,
located in Lincoln, Taylorville and Pontiac, Illinois included an aggregate of
approximately $146 million in deposits, certain real estate and personal
property associated with the branches, and certain loans associated with the
branches.  The consideration paid to the Company for the assumption of deposits
in excess of assets acquired was approximately $120.5 million.  The Bank intends
to continue to operate the acquired branches as banking branches in a manner
previously operated by FOA.

                                          3


<PAGE>


ANALYSIS OF LOAN PORTFOLIO

    Set forth below is selected data relating to the composition of the
Company's loan portfolio, including loans held for sale, by type of loan as of
the dates indicated.


<TABLE>
<CAPTION>




                                                                          AT DECEMBER 31,
                         -----------------------------------------------------------------------------------------------------------
                                 1996                   1995                  1994                    1993               1992
                         ---------------------   -------------------   --------------------  -------------------- ------------------
                          AMOUNT       PERCENT    AMOUNT   PERCENT      AMOUNT     PERCENT    AMOUNT    PERCENT    AMOUNT    PERCENT
                         --------     --------   -------- ---------    --------   ---------  --------  ---------  --------   -------
                                                                      (DOLLARS IN THOUSANDS)
<S>                       <C>          <C>       <C>         <C>       <C>         <C>      <C>        <C>       <C>       <C>
Real estate loans:
  Residential one- to
    four-family (1). . .  $213,082      75.25%   $187,381     85.32%   $179,578     90.29%  $176,424      88.32%  $164,579   87.29%
  Commercial and
    multi-family . . . .    34,306      12.11      23,168     10.55      16,992      8.55     21,713      10.87     22,177   11.76
                          --------    ------     --------    ------    --------    ------   --------      ------  --------   -----
    Total real estate
    loans. . . . . . . .   247,388      87.36     210,549     95.87     196,570     98.84    198,137      99.19    186,756   99.05
Commercial loans . . . .     7,775       2.75       4,289      1.95          --        --         --         --         --      --
Consumer loans:
  Auto . . . . . . . . .    29,111      10.28       3,390      1.55       1,429       .72      1,201        .60        744     .39
  Home improvement . . .       931       0.33         795       .36         595       .30        459        .23        453     .24
  Home equity. . . . . .     1,149       0.41       1,233       .56       1,337       .67      1,415        .71        876     .46
  Passbook . . . . . . .       256       0.09         222       .10         249       .12        305        .15        367     .20
  Student. . . . . . . .        --         --          --        --         246       .12        392        .20        189     .10
  Other. . . . . . . . .     2,153       0.76       1,338       .61       1,026       .52      1,032        .52      1,450     .77
                          --------    ------     --------    ------    --------    ------   --------     ------   --------  ------
   Total consumer loans.    33,600      11.87       6,978      3.18       4,882      2.45      4,804       2.41      4,079    2.16
                          --------    ------     --------    ------    --------    ------   --------     ------   --------  ------
   Total loans receivable  288,763     101.98     221,816    101.00     201,452    101.29    202,941     101.60    190,835  101.21

Less:
 Undisbursed loan proceeds   4,656       1.65       1,139       .52       1,480       .74     2,080        1.04      1,152     .61
 Unearned discount and net
  deferred loan fees/(costs)  (306)     (0.11)       (121)     (.05)        (62)     (.03)      (13)       (.01)        19     .01
 Allowance for loan losses   1,244       0.44       1,172       .53       1,148       .58     1,129         .57      1,112     .59
                          --------    ------     --------    ------    --------    ------  --------      ------   --------  ------
  Total loans receivable,
      net. . . . . . . .  $283,169    100.00%    $219,626    100.00%   $198,886    100.00% $199,745      100.00%  $188,552  100.00%
                          --------    ------     --------    ------    --------    ------  --------      ------   --------  ------
                          --------    ------     --------    ------    --------    ------  --------      ------   --------  ------

</TABLE>
____________________________________
(1)  Including loans held for sale.

                                                                      4


<PAGE>


ORIGINATIONS, PURCHASES AND SALES OF LOANS

  Set forth below is a table showing the Company's loan originations,
purchases, sales and repayments for the periods indicated.

<TABLE>
<CAPTION>



                                                                     YEAR ENDED DECEMBER 31,
                                                              -------------------------------------
                                                                 1996          1995          1994
                                                              ----------     ---------     --------
                                                                          (IN THOUSANDS)

<S>                                                          <C>            <C>            <C>
Loans receivable at beginning of period . . . . . . .        $221,816       $201,452       $202,941
Originations:
Real estate:
  Residential one- to four-family:
    ARM loans . . . . . . . . . . . . . . . . . . . .          41,234         15,790         25,586
    Fixed rate loans. . . . . . . . . . . . . . . . .          28,658         23,387         23,021
  Commercial and multi-family:
    ARM loans . . . . . . . . . . . . . . . . . . . .          13,082          6,653          1,733
    Fixed rate loans. . . . . . . . . . . . . . . . .           3,707            538             --
Commercial. . . . . . . . . . . . . . . . . . . . . .          19,778          7,198             --
Consumer:
  Auto. . . . . . . . . . . . . . . . . . . . . . . .          32,261          2,826            939
  Home improvement. . . . . . . . . . . . . . . . . .             615            588            412
  Home equity . . . . . . . . . . . . . . . . . . . .           1,085          1,206          1,158
  Student . . . . . . . . . . . . . . . . . . . . . .              --             71            266
  Other . . . . . . . . . . . . . . . . . . . . . . .           4,668          1,963          1,929
                                                             --------       --------       --------
     Total originations . . . . . . . . . . . . . . .         145,088         60,220         55,044

Purchases:
Real estate:
   Residential 1-4 family:
     ARM loans. . . . . . . . . . . . . . . . . . . .          17,147         14,254          3,645
                                                             --------       --------       --------
        Total purchases . . . . . . . . . . . . . . .          17,147         14,254          3,645

Transfer of mortgage loans
   to foreclosed real estate. . . . . . . . . . . . .              87            144            114
  Repayments. . . . . . . . . . . . . . . . . . . . .          82,410         42,374         48,825
  Loan sales. . . . . . . . . . . . . . . . . . . . .          12,791         11,592         11,239
                                                             --------       --------       --------
   Total loans receivable at end of period. . . . . .        $288,763       $221,816       $201,452
                                                             --------       --------       --------
                                                             --------       --------       --------
</TABLE>

LENDING ACTIVITIES

     GENERAL.  The Company's loan portfolio consists primarily of conventional
mortgage loans secured by one- to four-family residences.  At December 31, 1996,
the Company's net loan portfolio totalled $283.2 million, of which $213.1
million, or 75.3%, consisted of one- to four-family residential mortgage loans.
The remainder of the Company's net loan portfolio at such date consisted of
commercial real estate and multi-family real estate loans (12.1%), consumer
loans (11.9%), and commercial loans (2.8%).  Historically, the principal lending
activity of the Company has been the origination of mortgage loans for the
purpose of financing or refinancing one- to four-family residential properties
in the Company's primary market area.  While the Company expects to continue
this emphasis in the future, management is also attempting to increase the
origination of commercial real estate and commercial business loans, as well as
consumer loans, particularly as necessary to supplement one- to four-family
residential mortgage lending.

     The Company has worked to make its interest-earning assets more interest
rate sensitive by, among other things, originating and purchasing variable rate
loans, such as ARM loans, by originating medium-term consumer loans and
adjustable-rate commercial loans, and by investing primarily in short- and
medium-term securities. The Company continues to actively originate fixed rate
mortgage loans secured by one- to four-family residential properties with terms
ranging from 10 to 30 years.  One- to four-family fixed rate loans of greater
than 15-year maturities are generally originated with the expectation that they
will be sold in the secondary mortgage market.  The Company generally

                                            5


<PAGE>

retains servicing on its sold mortgage loans and receives monthly servicing fee
income.  In the past, the Company has had a relatively small portfolio of
mortgage-backed securities.  At December 31, 1996, however, the Company had no
investments in mortgage-backed securities.  The ability of the Company to
originate ARM loans is substantially affected by market interest rates and
consumer preference for fixed rate loans in lower market interest rate
environments.  At December 31, 1996, approximately $154.8 million, or 62.6% of
the Company's mortgage loan portfolio consisted of loans with adjustable
interest rates.

     For the years ended December 31, 1996, 1995 and 1994, respectively, the
Company purchased $17.1 million, $14.3 million and $3.6 million of residential
one- to four-family loans. For such periods, the Company did not purchase any
commercial real estate and multi-family real estate loans.  Such purchases in
the aggregate represented less than 6.0% of the Company's total loans receivable
as of December 31, 1996.

     ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS.  The Company's primary
lending activity is the origination of one- to four-family, owner-occupied,
residential mortgage loans secured by property located in the Company's primary
market area.  Mortgage loans originated by the Company are almost entirely
secured by properties located in the Company's primary market area.  If local
loan demand is insufficient to meet desired levels of mortgage loan
originations, the Company may originate loans in parts of central Illinois
outside the Company's primary market area.  The Company also purchases
single-family mortgage loans from other lenders, which purchases totalled $17.1
million in 1996.  The Company may continue such purchases to supplement local
mortgage loan originations to the extent market conditions dictate and to the
extent attractive purchases are identified.  The Company uses the same
underwriting criteria in evaluating the credit quality of purchased residential
mortgage loans as it does for residential mortgage loans that it originates
directly.  As a result, there have been no significant differences in the
delinquency rate of purchased versus originated residential mortgage loans.  At
December 31, 1996, the Company had $213.1 million, or 75.3%, of its net loan
portfolio invested in mortgage loans secured by one- to four-family residences.

     The Company currently offers residential mortgage loans for terms ranging
from 10 to 30 years, and with adjustable or fixed interest rates.  The
origination of fixed rate mortgage loans versus ARM loans is monitored on an
ongoing basis and is affected significantly by the level of market interest
rates, customer preference, the Company's interest rate gap position and loan
products offered by the Company's competitors.  Particularly in a relatively low
interest rate environment, borrowers typically prefer fixed rate loans to ARM
loans.  Therefore, even if management's strategy is to emphasize ARM loans,
market conditions may be such that there is greater demand for fixed rate
mortgage loans.  For the year ended December 31, 1996, the Company originated
$28.7 million of fixed rate residential mortgage loans and $41.2 million of
residential ARM loans.  During 1995, the Company originated $23.4 million of
fixed rate residential mortgage loans and $15.8 million of residential ARM
loans. During 1994, the Company originated $23.0 million of fixed rate
residential mortgage loans and $25.6 million of residential ARM loans.

     The Company offers fixed rate loans for terms ranging from 10 to 30 years.
The Company's fixed rate loans generally are originated and underwritten for
resale in the secondary mortgage market.  Whether the Company can or will sell
fixed rate loans to the secondary market, however, depends on a number of
factors including the yield on the loan and the term of the loan, market
conditions and the Company's current interest rate risk position.  For example,
15-year fixed rate loans with above market yields are likely to be retained by
the Company.  The Company's fixed rate mortgage loans are amortized on a monthly
basis with principal and interest due each month.  Residential real estate loans
often remain outstanding for significantly shorter periods than their
contractual terms because borrowers may refinance or prepay loans at their
option.

     The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive.  However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Company as predictable cash flows as long-term, fixed rate loans.  ARM loans
carry increased credit risk associated with potentially higher monthly payments
by borrowers as market interest rates increase.  It is possible, therefore,
during periods of rising interest rates, that the risk of default on ARM loans
may increase due to the upward adjustment of interest costs to the borrower.

                                            6


<PAGE>

     The Company currently offers ARM loans that adjust every 1, 3 or 5 years
from the date of origination, with interest rate adjustment limitations
generally of up to two percentage points per year and with a cap of up to 6
percentage points on total interest rate increases over the life of the loan.
The Company has used different interest indexes for ARM loans in the past, and
currently uses the Constant Maturity Treasury Index.  The Company also has
purchased ARM loans with various interest rate indexes. Consequently, the
interest rate adjustments on the Company's portfolio of ARM loans do not reflect
changes in a particular interest rate index.  ARM loans secured by residential
real estate totalled $125.7 million, or 59.0%, of the Company's total
residential real estate loan portfolio at December 31, 1996.

     The Company's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Company the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan.  Due-on-sale clauses are an important means of
adjusting the rates on the Company's fixed rate mortgage loan portfolio, and the
Company has generally exercised its rights under these clauses.

     COMMERCIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS.
The Company originates, and to a lesser extent purchases, commercial real estate
and multi-family residential real estate loans typically secured by apartment
buildings, nursing homes and commercial buildings.  At December 31, 1996, $34.3
million, or 12.1%, of the Company's net loan portfolio consisted of commercial
and multi-family real estate loans.  At December 31, 1996, all of the Company's
commercial real estate loans and multifamily residential real estate loans were
secured by properties located within the State of Illinois.  At that date, the
largest commercial real estate loan had a principal balance of $777,000, and the
largest multi-family residential real estate loan had a principal balance of
$1.6 million.  At December 31, 1996, no commercial or multi-family real estate
loans in the Company's loan portfolio were delinquent or had been placed on
non-accrual status.  The Company expects to expand its investment in commercial
real estate loans, subject to market conditions and the availability of
attractive investment opportunities.

     Loans secured by commercial and multi-family real estate generally involve
a greater degree of credit risk than one- to four-family residential mortgage
loans and carry larger loan balances.  This increased credit risk is a result of
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 commercial
and multi-family real estate is typically dependent upon the successful
operation of the related business and real estate property.  If the cash flow
from the project is reduced, the borrower's ability to repay the loan may be
impaired.

     COMMERCIAL BUSINESS LOANS.  The Company intends to continue to increase its
investment in commercial business loans, subject to market conditions, the
Company's underwriting guidelines, and the availability of attractive lending
opportunities in the Company's market area.  The Company employs an experienced
senior commercial lending officer for this purpose. Such commercial business
loans include working capital lines of credit, inventory and accounts receivable
loans, equipment financing and term loans.  Maximum loan-to-value ratios range
from 50% (if used equipment is pledged) to 100% (if deposits at the Company are
pledged).  Loan terms vary from one year for lines of credit to 10 years for
equipment, term and business acquisition loans.  The interest rates on such
loans can be fixed or variable.

     Commercial real estate and commercial business lending typically involve
larger average loan balances and greater credit risk as compared to residential
lending.  In order to attempt to reduce risks related to the expected increase
in the Company's commercial lending, the Company employs an experienced
commercial lending officer.  The Company also intends to limit its commercial
business lending to small-  and medium-sized businesses in its market area.

     CONSUMER LOANS.  As of December 31, 1996, consumer loans totalled $33.6
million, or 11.9%, of the Company's net loans receivable.  The principal types
of consumer loans offered by the Company are automobile loans, home improvement
loans, home equity loans and passbook loans. Consumer loans are offered on a
fixed interest rate

                                            7


<PAGE>


and variable interest rate basis.  The Company's originations of automobile
loans are primarily through its participation in the indirect dealer loan
market. The Company's home improvement loans and home equity loans are generally
secured by the borrower's principal residence.

     The Company's underwriting standards for consumer loans include a
determination of the applicant's credit history and an assessment of ability to
meet existing obligations and payments on the proposed loan.  The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment, and additionally from any verifiable
secondary income.  Creditworthiness of the applicant is a primary consideration;
however, the underwriting process also includes a comparison of the value of the
collateral in relation to the proposed loan amount.

     Consumer loans tend to have higher interest rates than residential mortgage
loans, but also tend to have a higher risk of default than residential mortgage
loans.  See "--Delinquent Loans and Non-Performing Assets" and "--Allowances for
Loan Losses" for information regarding the Company's loan loss experience and
reserve policy.

     LOAN MATURITY SCHEDULE.  The following table sets forth certain information
at December 31, 1996 regarding the dollar amount of loans maturing in the
Company's portfolio based on their contractual terms to maturity.  Scheduled
principal repayments are included in the maturity category in which the payment
is due.  Demand loans, loans having no stated schedule of repayments, and
overdrafts are reported as due in one year or less.

<TABLE>
<CAPTION>


                                                                          4          6           11
                                                                       THROUGH    THROUGH      THROUGH     BEYOND
                                  YEAR 1       YEAR 2       YEAR 3     5 YEARS    10 YEARS     15 YEARS    15 YEARS      TOTAL
                                  ------       ------       ------     -------    --------     --------    --------    ---------

                                                                           (IN THOUSANDS)

<S>                              <C>          <C>         <C>         <C>          <C>         <C>          <C>        <C>
Real estate loans:
  Residential one- to
    four-family . . . . . . .    $13,170      $9,886      $10,083     $21,283      $54,478     $33,529      $70,653    $213,082
  Commercial real estate. . .      7,757       1,481        1,310       2,390       16,689       2,711        1,968      34,306
Commercial loans. . . . . . .      6,282         424          513         506           50          --           --       7,775
Consumer loans. . . . . . . .      9,388       7,099        6,971       9,639          503          --           --      33,600
                                   -----       -----        -----       -----          ---          --           --      ------
     Total. . . . . . . . . .    $36,597     $18,890      $18,877     $33,818      $71,720     $36,240      $72,621    $288,763
                                 -------     -------      -------     -------      -------     -------      -------    --------
                                 -------     -------      -------     -------      -------     -------      -------    --------

</TABLE>

The following table sets forth the dollar amount of all loans at December 31,
1996 that are scheduled to mature after December 31, 1997 and that have
predetermined interest rates and floating or adjustable interest rates.

<TABLE>
<CAPTION>

                                                            FLOATING OR
                                             FIXED RATE   ADJUSTABLE RATE     TOTAL
                                             ----------   ---------------  -----------
                                                          (IN THOUSANDS)

<S>                                         <C>             <C>            <C>
Real estate loans:
  Residential one- to four-family . . .     $ 77,225          $122,687       $199,912
  Commercial real estate. . . . . . . .          855            25,694         26,549
Commercial loans. . . . . . . . . . . .        1,394                99          1,493
Consumer loans. . . . . . . . . . . . .       24,206                 6         24,212
                                            --------          --------       --------
     Total. . . . . . . . . . . . . . .     $103,680          $148,486       $252,166
                                            --------          --------       --------
                                            --------          --------       --------
</TABLE>

     LOAN SOLICITATION AND PROCESSING.   Loan originations are derived from a
number of sources such as real estate broker referrals, existing customers,
borrowers, builders, attorneys and walk-in customers.  Upon receipt of a loan
application, a credit report is made to verify specific information relating to
the applicant's employment, income, and credit standing.  In the case of a real
estate loan, an appraisal of the real estate intended to secure the proposed
loan is undertaken by an independent appraiser approved by the Company.  A loan
application file is first reviewed by an underwriter in the Company's loan
department who checks applications for accuracy and

                                            8


<PAGE>

completeness, and verifies the information provided.  Loans with principal
balances of $500,000 or less must be approved by the Company's management.
Loans with principal balances between $500,001 and $2.0 million must be approved
by the President and two non-employee directors of the Company.  Loans with
principal balances over $2.0 million and up to $3.0 million must be approved by
the President and three non-employee directors of the Company.  Finally, loans
with principal balances in excess of $3.0 million must be approved by the
Company's full Board of Directors.  Fire and casualty insurance are required at
the time the loan is made and throughout the term of the loan.  Once the loan is
approved a loan commitment is promptly issued to the borrower.

     If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage.  The borrower must provide proof of fire and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan.  Title insurance or an attorney's
opinion based on a title search of the property is required on all loans secured
by real property.

     LOAN ORIGINATION FEES.  In addition to interest earned on loans, the
Company may charge loan origination fees.  The ability of the Company to impose
loan origination fees is influenced by the demand for mortgage loans and
competition from other lenders in the Company's market area.  In recent years,
the Company has generally not charged loan origination fees.  To the extent that
loans are originated or acquired for the Company's portfolio, Statement of
Financial Accounting Standards No. 91 ("Statement 91") requires that the Company
defer loan origination fees and costs, and amortize such amounts as an
adjustment of yield over the life of the loan by use of the level yield method.
Fees deferred under Statement 91 are recognized into income immediately upon the
sale of the related loan.  At December 31, 1996, the Company had $306,000 of net
deferred loan costs.  Loan origination fees (costs) vary with the volume and
type of loans and commitments made and purchased and with competitive conditions
in the mortgage markets, which in turn respond to the demand and availability of
money.

     In addition to loan origination fees, the Company also receives loan
servicing fees.  The Company recognized fees of $123,000, $115,000 and $111,000
for the years ended December 31, 1996, 1995, and 1994, respectively.

     LOANS TO ONE BORROWER.  The Bank is subject to the same
loans-to-one-borrower limits as those applicable to national banks, which under
current regulations limit loans to one borrower to an amount equal to 15% of
unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral (generally, financial
instruments and bullion, but not real estate).  Illinois law regarding loans to
one borrower is similar to federal law.  At December 31, 1996, the Bank's
largest real estate related borrower had an aggregate principal outstanding
balance of $3.5 million, which balance did not exceed the Bank's loans-to-one
borrower limit of $7.8 million at December 31, 1996.

REAL ESTATE LENDING GUIDELINES

     Regulations limit the amount that a savings institution may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination.  Such regulations permit a maximum
loan-to-value ratio of 97% for residential property (100% for loans guaranteed
by the Veterans Administration) and 90% for all other real estate loans.  The
Company's lending policies limit the maximum loan-to-value ratio on both fixed
rate mortgage loans and ARM loans to 80% of the lesser of the appraised value or
the purchase price of the property to serve as security for the loan without
private mortgage insurance.  The Company also makes real estate loans with
loan-to-value ratios in excess of 80%.  For real estate loans with loan-to-value
ratios of between 80% and 90%, the Company requires the first 25% of the loan to
be covered by private mortgage insurance.  For real estate loans with
loan-to-value ratios between 90% and 97%, the Company requires the first 30% of
the loan to be covered by private mortgage insurance.  The Company requires fire
and casualty insurance, as well as title insurance or an opinion of counsel
regarding good title, on all properties securing real estate loans made by the
Company.

                                            9


<PAGE>

     Effective December 19, 1993, all financial institutions were required to
adopt and maintain comprehensive written real estate lending policies that are
consistent with safe and sound banking practices.  These lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Guidelines") adopted by the Federal banking agencies, including
the FDIC.  The Guidelines set forth uniform regulations prescribing standards
for real estate lending.  Real estate lending is defined as extension of credit
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate,
regardless of whether a lien has been taken on the property.

     The policies must address certain lending considerations set forth in the
Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements.  These policies must also be
appropriate based upon the size of the institution and the nature and scope of
its operations, and must be reviewed and approved by the institution's board of
directors at least annually.  The LTV ratio framework, with an LTV ratio being
the total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans.  If not a first lien, the lender must combine all
senior liens when calculating this ratio.  The Guidelines, among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%); construction (commercial, multi-family and nonresidential) (80%);
improved property (85%); and owner occupied one- to four-family residential (no
maximum ratio, however, any LTV ratio in excess of 90% requires appropriate
insurance or readily marketable collateral).

     Certain institutions are permitted to make real estate loans that do not
conform to the established LTV ratio limits up to 100% of the institution's
total capital.  Within this aggregate limit, total loans for all commercial,
agricultural, multi-family and other non-one- to four-family residential
properties should not exceed 30% of total capital.  An institution will come
under increased supervisory scrutiny as the total of such loans approaches these
levels.  Certain loans are exempt from the LTV ratios (E.G., those guaranteed by
a government agency, loans to facilitate the sale of real estate owned, and
loans renewed, refinanced or restructured by the original lender(s) to the same
borrower(s) where there is no advancement of new funds, etc.).

MORTGAGE-BACKED SECURITIES

     The Company occasionally invests in mortgage-backed securities issued or
guaranteed by the United States Government or agencies thereof.  Investments in
mortgage-backed securities are made either directly or by exchanging mortgage
loans for such securities.  These securities consist primarily of adjustable
rate mortgage-backed securities issued or guaranteed by the Federal National
Mortgage Administration ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC"), and the Government National Mortgage Administration ("GNMA").  Total
mortgage-backed securities decreased to zero at December 31, 1996 from $933,000
at December 31, 1992, due to repayments.

     The Company's objective in investing in mortgage-backed securities varies
from time to time depending upon market interest rates, local mortgage loan
demand, and the Company's level of liquidity.  Mortgage-backed securities also
have lower credit risk because principal and interest on these securities are
either insured or guaranteed by the United States Government or agencies
thereof.

                                           10


<PAGE>

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


                                                 YEAR ENDED DECEMBER 31,
                                        ----------------------------------------
                                           1996           1995           1994
                                        ----------     ----------     ----------
                                                     (IN THOUSANDS)

Mortgage-backed securities at
  beginning of period . . . . . . . .     $  --          $  --         $  103
  Repayments. . . . . . . . . . . . .        --             --           (103)
Discount (premium) amortization . . .        --             --             --
                                          -----          -----         ------
Mortgage-backed securities at end
  of period . . . . . . . . . . . . .     $  --          $  --         $   --
                                          -----          -----         ------
                                          -----          -----         ------

     The Bank had no mortgage-backed securities at December 31, 1996, 1995 and
1994.


DELINQUENCIES, NON-PERFORMING AND CLASSIFIED ASSETS


     The Company's collection procedures provide that when a mortgage loan is 15
days past due, a computer-generated late charge notice is sent to the borrower
requesting payment plus the late charge. During the first 30 days a telephone
call is made or a letter is sent to the borrower, stressing the importance of
reinstating the loan and obtaining reasons for the delinquency.  If the
delinquency continues for 60 days, a property inspection is generally made.  The
contact with the borrower becomes more urgent and frequent, with a demand for a
definite payment plan.  When a loan continues in a delinquent status for 90 days
or more, and a repayment schedule has not been made or kept by the borrower, a
notice of intent to foreclose is then sent to the borrower, giving 30 days to
cure the delinquency.  If not cured, foreclosure proceedings are initiated.

     Commercial and consumer loan customers are assessed a late charge when
payment is not received within 10 days of the due date.  Telephone contact is
initiated within 20 days of the payment due date to request the payment and to
determine if additional collection action will be needed.  If a plan to remedy
the delinquency cannot be carried out, legal remedies such as repossession,
foreclosure and deficiency judgments are initiated.

NON-PERFORMING ASSETS

     Loans are reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of additional interest
is doubtful.  Mortgage loans are placed on non-accrual status generally when
either principal or interest is 90 days or more past due and management
considers the interest uncollectible.  Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.

     Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is classified as REO until such time as it is sold.  When
REO is acquired, it is recorded at the lower of the unpaid principal balance of
the related loan plus accrued interest, or its fair market value, less estimated
selling expenses.  Any further write-down of REO is charged against earnings.
At December 31, 1996, 1995, and 1994, the Company owned approximately $77,000,
$51,000 and $67,000, respectively, net of valuation reserves, of property
acquired as a result of foreclosure or by deed in lieu of foreclosure and
classified as REO.  In recent years, the Company has worked aggressively to
reduce REO by improving collection procedures and tightening loan underwriting
standards.

                                           11


<PAGE>

DELINQUENT LOANS AND NON-PERFORMING ASSETS

     The following table sets forth information regarding loans delinquent for
90 days or more and real estate owned by the Company at the dates indicated.

<TABLE>
<CAPTION>


                                                                                 AT DECEMBER 31,
                                                           ---------------------------------------------------------
                                                            1996         1995         1994        1993        1992
                                                          --------     --------     --------    --------    --------
                                                                           (DOLLARS IN THOUSANDS)

DELINQUENT LOANS - NON-ACCRUAL:
------------------------------
<S>                                                         <C>          <C>         <C>         <C>        <C>
  One- to four-family residential . . . . . . . . . . . .    $ 30        $179         $ 57        $249      $199(1)
  Commercial. . . . . . . . . . . . . . . . . . . . . . .      74          --           --          --           --
  Consumer. . . . . . . . . . . . . . . . . . . . . . . .       4          --           --          --           --
 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    ----       -----         ----        ----       ------
     Total delinquent loans-non-accruing. . . . . . . . .     108         179           57         249          199

DELINQUENT LOANS - 90 DAYS OR MORE ACCRUING: (2)
-------------------------------------------
  One- to four-family residential . . . . . . . . . . . .     268         526          431         295          367
  Consumer loans. . . . . . . . . . . . . . . . . . . . .     124          11            6          --           14
                                                             ----        ----         ----        ----         ----
     Total delinquent loans accruing. . . . . . . . . . .     392         537          437         295          381
                                                             ----        ----         ----        ----         ----
Total non-performing loans. . . . . . . . . . . . . . . .     500         716          494         544          580
Total real estate owned (3) . . . . . . . . . . . . . . .      77          51           67          72          125
                                                             ----        ----         ----        ----         ----
       Total non-performing assets. . . . . . . . . . . .    $577        $767         $561        $616         $705
                                                             ----        ----         ----        ----         ----
                                                             ----        ----         ----        ----         ----

Total non-performing loans to net loans receivable. . . .    .18%        .33%         .25%        .27%         .31%
Total non-performing loans to total loans . . . . . . . .    .17%        .32%         .25%        .27%         .30%
Total non-performing loans to total assets. . . . . . . .    .15%        .26%         .20%        .24%         .24%
Total non-performing loans and REO to total assets. . . .    .17%        .28%         .22%        .27%         .30%
</TABLE>

__________________________________
(1)  Includes one restructured loan with a principal balance of $30,258 at
     December 31, 1992.
(2)  Represents loans that are well secured and in the process of collection,
     with collection expected within 30 days.
(3)  Represents property acquired by the Company through foreclosure or deed in
     lieu of foreclosure.  Upon acquisition, this property is recorded at fair
     value.


     The following table sets forth information with respect to loans past due
60-89 days in the Company's portfolio at the dates indicated.

<TABLE>
<CAPTION>


                                                                                 AT DECEMBER 31,
                                                            --------------------------------------------------------
                                                              1996        1995         1994       1993        1992
                                                            --------    --------     --------   --------    --------
                                                                           (IN THOUSANDS)

<S>                                                        <C>          <C>         <C>           <C>         <C>
Loans past due 60-89 days:
    One- to four-family residential . . . . . . . .          $821        $596         $696        $799         $749
    Commercial real estate. . . . . . . . . . . . .            --          18           48          54           71
    Consumer loans. . . . . . . . . . . . . . . . .           260          --           23          --            2
                                                             ----         ----        ----         ----        ----
        Total past due 60-89 days . . . . . . . . .        $1,081        $614         $767        $853         $822
                                                           ------         ----        ----         ----        ----
                                                           ------         ----        ----         ----        ----
</TABLE>

                                                                     12


<PAGE>


     The following table sets forth information with respect to the Company's
delinquent loans and other problem assets at December 31, 1996.

                                                       AT DECEMBER 31, 1996
                                                    --------------------------
                                                        BALANCE         NUMBER
                                                    ---------------     ------
                                                    (IN THOUSANDS)

Residential real estate:
  Loans 60 to 89 days delinquent. . . . . . . . . .     $821             27
  Loans 90 days or more delinquent - Accruing . . .      268              7
  Loans - Not Accruing. . . . . . . . . . . . . . .       30              2

Commercial loans:
  Loans not accruing. . . . . . . . . . . . . . . .       74              1

Commercial real estate:
  Loans 60 to 89 days delinquent. . . . . . . . . .      260             21
  Loans 90 days or more delinquent. . . . . . . . .      124             11
Consumer loans (60 days or more delinquent) . . . .        4              1
Foreclosed real estate and repossessions. . . . . .       77              1
Loans to facilitate sale of real estate owned . . .       94              4


ALLOWANCE FOR LOAN LOSSES

     Management's policy is to provide for estimated losses on the Company's
loan portfolio based on management's evaluation of the potential losses that may
be incurred.  The Company regularly reviews its loan portfolio, including
problem loans, to determine whether any loans require classification or the
establishment of appropriate reserves or allowances for losses.  Such
evaluation, which includes a review of all loans of which full collectability of
interest and principal may not be reasonably assured, considers, among other
factors, the estimated net realizable value of the underlying collateral, the
size and risk exposure of each segment of the loan portfolio, present indicators
such as delinquency rates, the borrower's current financial condition, and the
potential for losses in future periods.  Management calculates the general
allowance for loan losses in part based on past experience, and in part based on
specified percentages of loan balances.  While both general and specific loss
allowances are charged against earnings, general loan loss allowances are added
back to capital in computing risk-based capital under federal and state
regulations.

     During the year ended December 31, 1996, the Company provided $113,000 for
loan losses. During the years ended December 31, 1995, 1994 and 1993, no
provision for loan losses was required.  During the year ended December 31,
1992, the Company provided $825,000 for loan losses.  The Company's allowance
for loan losses totalled $1.2 million at each of December 31, 1996 and 1995, and
$1.1 million at each of December 31, 1994 and 1993.  The provision for the year
ended December 31, 1992 reflected, among other factors, the uncertainties in the
local real estate market, the uncertainties in the local economy, the continued
effects of the recent recession in the local economy, the general deterioration
of real estate values locally and nationally, and the increase in loan balances.
Although the Company maintains its allowance for losses on loans at a level
which it considers to be adequate to provide for potential losses, there can be
no assurance that such losses will not exceed the estimated amounts or that the
Company will not be required to make additions to the allowance for loan losses
in the future.  Future additions to the Company's allowance for loan losses and
changes in the related ratio of the allowance for loan losses to non-performing
loans are dependent upon the economy, changes in real estate values and interest
rates, changes in the mix of the loan portfolio, increases or decreases to the
loan portfolio, the view of the regulatory authorities toward adequate reserve
levels, and inflation.  Management will continue to review the entire loan
portfolio to determine the extent, if any, to which further additional loan loss
provisions may be deemed necessary.

     The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 114 (SFAS No. 114), "Accounting by Creditors for
Impairment of a Loan," which became effective on January 1, 1995.

                                           13


<PAGE>

SFAS No. 114 specifies that allowances for losses on impaired loans should be
determined using the present value of estimated future cash flows of the loan,
discounted at the loan's effective interest rate.  The adoption of SFAS No. 114
did not have a material effect on the Company's financial position, results of
operations or capital.

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

     The following table sets forth the breakdown of the allowance for loan
losses for the periods indicated.  Management believes that the allowance can be
allocated by category only on an approximate basis.  The allocation of the
allowance by category is not necessarily indicative of future losses and does
not restrict the use of the allowance to absorb losses in any category.

<TABLE>
<CAPTION>


                                                                           YEAR ENDED DECEMBER 31,
                                                       ------------------------------------------------------------
                                                          1996         1995         1994         1993        1992
                                                       ----------   ----------   ----------   ----------  ---------
                                                                           (DOLLARS IN THOUSANDS)

<S>                                                    <C>           <C>          <C>         <C>         <C>
Total loans outstanding . . . . . . . . . . . . . .      $288,763    $221,816     $201,452    $202,941     $190,835
Average gross loans outstanding . . . . . . . . . .       255,242     211,413      200,853     197,885      186,597

Allowance balances (at beginning of period) . . . .      $  1,172    $  1,148     $  1,129    $  1,112     $    276

Provision for losses:
  Real estate . . . . . . . . . . . . . . . . . . .           113          --           --          --          825

Charge-offs:
  Real estate . . . . . . . . . . . . . . . . . . .             3           2           39          45            9
  Consumer. . . . . . . . . . . . . . . . . . . . .            63           4            1          --           --
  Commercial. . . . . . . . . . . . . . . . . . . .            19          --           --          --           --
                                                         --------    --------     --------     --------    --------
                                                               85           6           40          45            9
Recoveries:
  Real estate . . . . . . . . . . . . . . . . . . .            40          30           59          60           19
  Consumer. . . . . . . . . . . . . . . . . . . . .             4          --           --           2            1
                                                         --------    --------     --------     --------    --------
                                                               44          30           59          62           20
                                                         --------    --------     --------     --------    --------

    Net (charge-offs) recoveries. . . . . . . . . .          (41)          24           19          17           11
                                                         --------    --------     --------     --------    --------

Allowance balance (at end of period). . . . . . . .      $  1,244    $  1,172     $  1,148    $  1,129     $  1,112
                                                         --------    --------     --------     --------    --------

                                                         --------    --------     --------     --------    --------
Allowance for loan losses as a percent
  of total loans outstanding. . . . . . . . . . . .          .43%        .53%         .57%        .56%         .58%
Net (charge-offs) recoveries as a percent
  of average gross loans outstanding. . . . . . . .        (.02)%        .01%         .01%        .01%         .01%
Ratio of allowance for loan losses
  to total non-performing loans
  at end of period. . . . . . . . . . . . . . . . .       248.80%     163.69%      232.39%     207.54%      191.72%
Ratio of allowance for loan losses
  to total non-performing loans
  and REO at end of period. . . . . . . . . . . . .       215.60%     152.80%      204.63%     183.28%      157.73%
</TABLE>


                                                                     14


<PAGE>

  ALLOCATION OF ALLOWANCE FOR LOAN LOSSES.  The following table sets forth the
allocation of allowance for loan losses by loan category for the periods
indicated.

<TABLE>
<CAPTION>


                                                  AT DECEMBER 31,
                           -------------------------------------------------------------------------------------------------------
                                   1996                 1995                   1994                  1993                 1992
                           --------------------   ------------------   ---------------------  ------------------- ----------------
                                   % OF LOANS           % OF LOANS            % OF LOANS           % OF LOANS          % OF LOANS
                                    IN EACH              IN EACH               IN EACH              IN EACH             IN EACH
                                   CATEGORY TO          CATEGORY TO           CATEGORY TO          CATEGORY TO         CATEGORY TO
                           AMOUNT  TOTAL LOANS  AMOUNT  TOTAL LOANS  AMOUNT   TOTAL LOANS   AMOUNT TOTAL LOANS AMOUNT  TOTAL LOANS
                           ------  -----------  ------  -----------  ------   -----------   ------ ----------- ------  -----------
                                                                    (DOLLARS IN THOUSANDS)
<S>                        <C>      <C>         <C>      <C>         <C>        <C>         <C>     <C>         <C>     <C>
Balance at end of period
    applicable to:
  One- to four-family
    residential mortgages   $580     73.79%      $606     84.48%     $640       89.14%       $512      86.93%    $504     86.24%
  Multi-family
    residential mortgages    258      8.02        366      7.54       334        5.30         453        6.99     437      7.52
  Commercial real estate      74      3.86        121      2.90       150        3.14         140        3.71     148      4.10
  Commercial business. .      78      2.69         44      1.93        --          --          --         --       --        --
  Other. . . . . . . . .     254     11.64         35      3.15        24        2.42          24        2.37      23      2.14
                           -----     ------      ----    ------      ----      ------      ------       ------   ----     -----
    Total allowance for
     loan losses . . . .  $1,244    100.00%    $1,172    100.00%   $1,148      100.00%     $1,129     100.00%  $1,112    100.00%
                          ------    ------     ------    ------    ------      ------      ------     ------   ------    ------
                          ------    ------     ------    ------    ------      ------      ------     ------   ------    ------
</TABLE>

                                                                     15


<PAGE>


INVESTMENT ACTIVITIES

     The Company's securities portfolio consists of United States Government and
agency obligations, corporate debt issues, cash equivalents (including
interest-earning deposits in other financial institutions), and FHLB stock.
Securities totalled $32.9 million, $44.6 million and $41.6 million at
December 31, 1996, 1995 and 1994, respectively.  The Company's portfolio of
interest-earning deposits totalled $6.7 million at December 31, 1996, compared
to $13.7 million at December 31, 1995 and $15.2 million at December 31, 1994,
representing a decrease of $7.0 million and $8.5 million, respectively.  The
Company's securities portfolio is expected to continue to change based on
liquidity needs associated with loan origination activities.

     The Company's liquidity levels may be increased or decreased depending upon
the yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short term demand for funds to be
used in the Company's loan origination and other activities.

     SECURITIES PORTFOLIO.  The following table sets forth, at the dates
indicated, the carrying and market values of the Company's investment securities
portfolio, short-term investments and FHLB stock.  At December 31, 1996, the
market value of the Company's securities, interest-earning deposits in other
financial institutions, and FHLB stock was $33.0 million.

<TABLE>
<CAPTION>



                                                                                         AT DECEMBER 31,
                                                          -------------------------------------------------------------------------
                                                                    1996                     1995                     1994
                                                          ----------------------- ------------------------  -----------------------
                                                          CARRYING      MARKET     CARRYING       MARKET    CARRYING      MARKET
                                                            VALUE        VALUE      VALUE          VALUE     VALUE         VALUE
                                                          -----------  ---------- -----------   ----------  -----------  ----------
                                                                                        (IN THOUSANDS)

<S>                                                        <C>          <C>         <C>         <C>          <C>          <C>
Securities:
  Held to maturity:
    U.S. Government and agency obligations . .              $19,007      $19,063     $19,953      $20,075     $24,580      $24,345
  Available for sale:
    U.S. Government and agency obligations . .                3,983        3,983       9,029        9,029          --           --
    Other. . . . . . . . . . . . . . . . . . .                   17           17           9            9          --           --
                                                            -------      -------      -------     -------     -------      -------
      Total investment securities. . . . . . .               23,007       23,063      28,991       29,113      24,580       24,345
Interest-earning deposits in
  other institutions . . . . . . . . . . . . .                6,730        6,730      13,735       13,735      15,174       15,174
FHLB stock . . . . . . . . . . . . . . . . . .                3,200        3,200       1,920        1,920       1,891        1,891
                                                            -------      -------      -------     -------     -------      -------
    Total investments. . . . . . . . . . . . .              $32,937      $32,993     $44,646      $44,768     $41,645      $41,410
                                                            -------      -------      -------     -------     -------      -------
                                                            -------      -------      -------     -------     -------      -------
</TABLE>

                                           16


<PAGE>


     SECURITIES PORTFOLIO MATURITIES.  The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Company's securities at December 31, 1996.  The average yields are based on
amortized cost.



<TABLE>
<CAPTION>


                                                            AT DECEMBER 31, 1996
                                                 ------------------------------------------
                                                                                       ANNUALIZED
                                                  AVERAGE                               WEIGHTED
                                                  LIFE IN     CARRYING     MARKET        AVERAGE
                                                   YEARS       VALUE        VALUE         YIELD
                                                 ---------  ----------   -----------  -----------
                                                             (DOLLARS IN THOUSANDS)

<S>                                              <C>        <C>          <C>           <C>
Securities:
  Held to maturity:
    U.S. Government agency securities. . . .        1.1      $4,967       $4,979       5.86%
    U.S. Government treasury securities. . .        0.9      14,040       14,084       5.88
  Available for sale:
    U.S. Government treasury securities. . .        1.3       3,983        3,983       5.55
                                                            -------      -------
      Total. . . . . . . . . . . . . . . . .        1.0     $22,990      $23,046       5.82%
                                                            -------      -------
                                                            -------      -------

</TABLE>

<TABLE>
<CAPTION>



                                                                      AT DECEMBER 31, 1996
                                                -----------------------------------------------------------
                                                    ONE YEAR OR LESS       ONE TO FIVE YEARS
                                                ------------------------  -------------------
                                                              ANNUALIZED                ANNUALIZED
                                                               WEIGHTED                 WEIGHTED
                                                 CARRYING       AVERAGE    CARRYING      AVERAGE
                                                  VALUE          YIELD      VALUE         YIELD       TOTAL
                                                 ---------    ---------   ---------     ---------   ---------
                                                                  (DOLLARS IN THOUSANDS)

<S>                                             <C>          <C>          <C>           <C>          <C>
Securities:
  Held to maturity:
    U.S. Government agency securities. . . .     $3,466       5.61%         $1,501        6.42%       $4,967
    U.S. Government treasury securities. . .      6,754       5.60           7,286        6.13        14,040
  Available for sale:
    U.S. Government treasury securities. . .         --         --           3,983        5.55         3,983
                                                 ------                    -------                   -------
      Total. . . . . . . . . . . . . . . . .    $10,220       5.61%        $12,770        5.99%      $22,990
                                                -------                    -------                   -------
                                                -------                    -------                   -------
</TABLE>


SOURCES OF FUNDS

  GENERAL.  Deposits are the major source of the Company's funds for lending
and other investment purposes.  In addition to deposits, the Company derives
funds from the sale, amortization, and prepayment of loans and mortgage-backed
securities, operations, and the sale or maturity of securities.  Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions.  Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources or on a longer term basis for general business purposes.  The
Company is permitted to obtain advances from the FHLB upon the security of the
capital stock of the FHLB it owns and certain of its home mortgage loans and
other assets, provided certain credit standards have been met.

  DEPOSITS.  Consumer and commercial deposits are attracted principally from
within the Company's primary market area through the offering of a broad
selection of deposit instruments including non-interest-bearing, NOW, Super NOW,
passbook savings, money market deposit, term certificate accounts and individual
retirement accounts.  The Company occasionally accepts deposits of $100,000 or
more and may offer negotiated interest rates on such deposits.  Deposit account
terms vary according to the minimum balance required, the time periods the funds
must remain on deposit and the interest rate, among other factors.  The Company
regularly evaluates its internal cost of funds, surveys rates offered by
competing institutions, reviews the Company's cash flow requirements for lending
and liquidity and executes rate changes when deemed appropriate.  The Company
does not obtain funds through brokers,

                                           17


<PAGE>

nor does it solicit funds outside its market area.  In recent years the
Company's total deposits have remained relatively stable.

  SAVINGS PORTFOLIO.  Deposits in the Company as of December 31, 1996, were
represented by the various types of deposit programs described below.

<TABLE>
<CAPTION>


WEIGHTED
AVERAGE                                                                                         PERCENTAGE
INTEREST       MINIMUM                                              MINIMUM                     OF TOTAL
  RATE          TERM           CHECKING AND SAVINGS                 AMOUNT        BALANCES       SAVINGS
---------    ----------        --------------------                --------      ----------    -----------
                              (DOLLARS IN THOUSANDS, EXCEPT MINIMUM AMOUNTS)

<S>           <C>            <C>                                <C>               <C>         <C>
               None           Non interest-bearing                     $200         $2,634          1.30%
                              NOW accounts and
  2.86%        None             Super NOW                         0 - 5,000         24,416          12.03
  2.50         None           Passbooks                               0-100         14,140           6.97
  4.23         None           Money market accounts (2)         2,500-5,000         17,394           8.57

<CAPTION>

                              CERTIFICATES OF DEPOSIT(1)
                              -----------------------
<S>           <C>            <C>                                <C>               <C>         <C>
  4.25         1-5  months    Fixed term, fixed rate                  2,500          1,060           0.52
  4.69         6-11 months    Fixed term, fixed rate            1,000-2,500         14,209           7.00
  5.38         12-17 months   Fixed term, fixed rate              500-5,000         50,462          24.87
  5.34         18-23 months   Fixed term, fixed rate                    100          8,304           4.09
  6.31         24-29 months   Fixed term, fixed rate            500 - 2,500         17,247           8.50
  5.95         30-35 months   Fixed term, fixed rate                    100         11,069           5.46
  5.76         36-47 months   Fixed term, fixed rate                    500         12,354           6.09
  6.01         48-59 months   Fixed term, fixed rate                    100          1,530           0.75
  6.01         60 months
                 or greater   Fixed term, fixed rate              500-2,500         24,478          12.06
  7.55         Various        Fixed term, fixed rate                  1,000           100            0.05
  5.62         Various        Negotiated jumbo/Special (2)          100,000          3,526           1.74
                                                                                  --------        -------
                                                                                  $202,923         100.00%
                                                                                  --------        -------
                                                                                  --------        -------
</TABLE>
_________________________
(1) IRA and Keogh accounts have balances outstanding of $22,808,114.
(2) Minimum negotiable.

                                                                     18


<PAGE>


  DEPOSIT FLOWS.  The following table sets forth the change in dollar amount of
deposits in the various types of deposit accounts offered by the Company between
the dates indicated.

<TABLE>
<CAPTION>



                           BALANCE   DEPOSIT    INCR.   BALANCE    DEPOSIT     INCR.    BALANCE    DEPOSIT      INCR.
                           12/31/96     %      (DECR)   12/31/95      %       (DECR)    12/31/94      %        (DECR)
                           --------  -------   ------   --------   -------    ------    --------   -------     ------
                                                        (DOLLARS IN THOUSANDS)
<S>                         <C>      <C>      <C>        <C>        <C>      <C>       <C>         <C>       <C>
Non interest-bearing demand   $2,634   1.30%     $1,200    $1,434      .75%      $241  $  1,193      .60%    $  (100)
NOW accounts and
  Super NOW . . . . . . . .   24,416   12.03      4,243    20,173    10.48         84    20,089     10.03        549
Passbooks . . . . . . . . .   14,140    6.97    (3,922)    18,062     9.39     (2,444)   20,506     10.24      (3,489)
Money market deposit
  accounts. . . . . . . . .   17,394    8.57      9,425     7,969     4.14     (2,014)    9,983      4.99      (1,752)
Certificates of deposit
  which mature:
   within 12 months . . . .   95,127   46.88     15,325    79,802    41.46    (25,097)  104,899     52.39      11,916
   within 12-36 months. . .   34,572   17.04    (14,706)   49,278    25.60     20,499    28,779     14.37     (11,514)
   beyond 36 months . . . .   14,640    7.21     (1,110)   15,750     8.18        954    14,796      7.38       3,438
                            --------  ------   --------  --------   ------   --------  --------    ------    --------
     Total deposits . . . . $202,923  100.00%  $ 10,455  $192,468    100.00% $ (7,777) $200,245    100.00%   $   (952)
                            --------  ------   --------  --------   ------   --------  --------    ------    --------
                            --------  ------   --------  --------   ------   --------  --------    ------    --------

<CAPTION>

                              BALANCE   DEPOSIT    INCR.    BALANCE
                              12/31/93     %      (DECR)    12/31/9
                             ---------  -------  ---------  ---------
                                      (DOLLARS IN THOUSANDS)
<S>                          <C>        <C>       <C>       <C>
Non interest-bearing demand    $1,293      .64%   $   (95)   $  1,388
NOW accounts and
  Super NOW . . . . . . . .    19,540     9.71        395      19,145
Passbooks . . . . . . . . .    23,995    11.93      1,556      22,439
Money market deposit
  accounts. . . . . . . . .    11,735     5.83      1,193      10,542
Certificates of deposit
  which mature:
   within 12 months . . . .    92,983    46.22    (22,771)    115,754
   within 12-36 months. . .    40,293    20.03      3,127      37,166
   beyond 36 months . . . .    11,358     5.64      6,370       4,988
                             --------   ------   --------    --------
     Total deposits . . . .   201,197   100.00%  $(10,225)   $211,422
                             --------   ------   --------    --------
                             --------   ------   --------    --------

</TABLE>

<PAGE>


     CERTIFICATES OF DEPOSIT BY RATES.  The following table sets forth the
certificates of deposit in the Company classified by rates as of the dates
indicated:

<TABLE>
<CAPTION>



                                                       AT DECEMBER 31,
                                        -------------------------------------------
                                           1996            1995            1994
                                        -----------    ------------    ------------
                                                      (IN THOUSANDS)
<S>                                     <C>           <C>               <C>
3.99% or less . . . . . . . . . . .      $      --      $      --        $  21,264
4.00-5.99%. . . . . . . . . . . . .         96,816         97,966          115,062
6.00-7.99%. . . . . . . . . . . . .         47,523         46,851           11,136
8.00-9.99%. . . . . . . . . . . . .             --             13            1,012
                                         ---------      ---------        ---------
                                         $ 144,339      $ 144,830        $ 148,474
                                         ---------      ---------        ---------
                                         ---------      ---------        ---------
</TABLE>

     CERTIFICATES OF DEPOSIT MATURITY SCHEDULE.  The following table sets forth
the amounts and maturities of certificates of deposit at December 31, 1996.

<TABLE>
<CAPTION>


                                                                                          AMOUNT DUE
                                           ----------------------------------------------------------------------------------
                                            LESS THAN        1-2           2-3            3-4      AFTER 4
RATE                                        1 YEAR           YEARS        YEARS         YEARS       YEARS          TOTAL
----                                        --------         -----        -----           -----      -------      ---------
                                                                                        (IN THOUSANDS)

<C>                                       <C>            <C>          <C>           <C>           <C>           <C>
4.00- 5.99%. . . . . . . . . . . .         $70,573        $18,596     $ 6,560       $    348       $  739       $ 96,816
6.00- 7.99%. . . . . . . . . . . .          24,554          3,907       5,509         11,073        2,480         47,523
                                           -------        -------      ------         ------       ------       --------
                                           $95,127        $22,503     $12,069       $ 11,421       $3,219       $144,339
                                           -------        -------      ------         ------       ------       --------
                                           -------        -------      ------         ------       ------       --------
</TABLE>

     LARGE CERTIFICATES OF DEPOSIT.  The following table indicates the amount
of the Company's certificates of deposit of $100,000 or more by time remaining
until maturity as of December 31, 1996.


                                                        CERTIFICATES
     MATURITY PERIOD                                     OF DEPOSIT
     ---------------                                    ------------
                                                       (IN THOUSANDS)

     Three months or less. . . . . . . . . . . . . . .     $2,688
     Three through six months. . . . . . . . . . . . .      2,632
     Six through twelve months . . . . . . . . . . . .      3,034
     Over twelve months. . . . . . . . . . . . . . . .      3,739
                                                           ------
     Total . . . . . . . . . . . . . . . . . . . . . .    $12,093
                                                          -------
                                                          -------


     DEPOSIT ACTIVITY.  The following table sets forth the change in total
deposits of the Company for the periods indicated:

<TABLE>
<CAPTION>


                                                                             YEAR ENDED DECEMBER 31,
                                                                     ---------------------------------------

                                                                      1996           1995            1994
                                                                    --------       --------        --------
                                                                                (IN THOUSANDS)

<S>                                                               <C>            <C>             <C>
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . .        $346,917       $321,466       $252,519
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . .        (344,292)      (336,381)      (259,967)
                                                                   --------       --------       --------
  Net increase (decrease) before interest credited. . . . .           2,625        (14,915)        (7,448)
Interest credited . . . . . . . . . . . . . . . . . . . . .           7,830          7,138          6,496
                                                                   --------       --------       --------
  Net increase (decrease) in deposits . . . . . . . . . . .         $10,455        $(7,777)         $(952)
                                                                   --------       --------       --------
                                                                   --------       --------       --------
</TABLE>

                                           20


<PAGE>

BORROWINGS

     Savings deposits are the primary source of funds of the Company's lending
and investment activities and for its general business purposes.  If the need
arises, the Company may also rely upon advances from the FHLB of Chicago to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements.  Advances from the FHLB are typically secured by the Company's
one- to four-family mortgage loans on improved residential property which are
not more than 90 days delinquent.  At December 31, 1996, the Company had $62.8
million in advances outstanding from the FHLB.  The Company does not have any
other short-term or long-term borrowings outstanding.

     The FHLB functions as a central reserve bank providing credit for the
Company and other member savings associations and financial institutions.  As a
member, the Company is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally securities which are
obligations of, or guaranteed by, the United States Government) provided certain
standards related to creditworthiness have been met.  The FHLB has established
advance limitations based on three factors: total borrowings to assets, FHLB
stock holdings and available eligible collateral.  Under the
total-borrowings-to-assets limitation, FHLB advances, when combined with other
borrowings, may not exceed 35% of the Company's total assets.  Under the FHLB
capital stock holdings limitation, FHLB advances are limited to twenty times the
Company's current amount of FHLB capital stock holdings.  Finally, under the
available eligible capital limitation, FHLB advances are limited to 60% of the
unpaid principal of eligible one- to four-family mortgage loans.

SUBSIDIARY ACTIVITIES

     In addition to the Bank, the Company has one indirect subsidiary, First
Mutual Corporation, an Illinois corporation.  First Mutual Corporation is
engaged in the business of selling, on an agency basis, investment products
(consisting primarily of fixed annuities and mutual funds, but including equity
securities) as well as property and casualty insurance to retail customers.  At
December 31, 1996, the Company had a $127,000 equity investment in the
subsidiary.  For the year ended December 31, 1996,  First Mutual Corporation had
a net loss of $36,000.

COMPETITION

     The Company encounters strong competition both in attracting deposits and
in originating real estate and other loans.  Its most direct competition for
deposits has come historically from commercial banks, other savings banks,
savings associations and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future.  The Company's market area includes branches of several
commercial banks.  Many of these institutions are larger than the Company in
terms of total deposits and number of branches.  As of June 30, 1996, the
Company held approximately 8.4% of all financial institution deposits in Macon
County, where approximately 69.3% of the Company's deposits were located as of
that date.  The Company competes for savings by offering depositors a high level
of personal service and expertise together with a wide range of financial
services.

     The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings banks and savings
associations.  This competition for loans has increased substantially in recent
years as a result of the large number of institutions competing in the Company's
market area as well as the increased efforts by commercial banks to expand
mortgage loan originations.

     The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders.  Factors that affect competition
include general and local economic conditions, current interest rate levels and
the volatility of the mortgage markets.

                                           21


<PAGE>

PERSONNEL

     As of December 31, 1996, the Company and its direct and indirect
subsidiaries had 125 full-time and 28 part-time employees.  None of the
Company's employees is represented by a collective bargaining group.  The
Company believes its relationship with its employees to be good.

                               REGULATION AND SUPERVISION

GENERAL

     The Bank is an Illinois-chartered savings bank and its deposit accounts are
insured up to applicable limits by the Federal government under the Savings
Association Insurance Fund of the FDIC.  The Bank is subject to extensive
regulation by the Illinois Commissioner of Savings and Residential Finance and
the FDIC.  The Bank must file reports with the Commissioner and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with or acquisitions of other depository institutions.  There are periodic
examinations of the Bank by the Commissioner and the FDIC to examine the Bank's
compliance with various regulatory requirements.  This regulation and
supervision establishes a comprehensive framework of activities in which a
savings bank can engage and is intended primarily for the protection of the SAIF
and depositors.  The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes.  Any change in such regulation, whether by the
Commissioner, the FDIC or Congress could have a material impact on the Bank, the
Company and their operations.  The Company, as a bank holding company, will also
be required to file certain reports with, and otherwise comply with the rules
and regulations of the Board of Governors of the Federal Reserve System and the
Commissioner.  Certain of the regulatory requirements applicable  to  the  Bank
and to the Company are referred to below or elsewhere herein.

ILLINOIS SAVINGS BANK AND SAVINGS BANK HOLDING COMPANY LAW AND REGULATION

     In August 1990, Illinois enacted the Savings Bank Act ("SBA"), which
establishes Illinois-chartered savings banks.  Under the SBA, savings banks are
chartered and regulated by the Commissioner and possess all of the powers of
federal and Illinois-chartered savings and loan associations.  The SBA permits
Illinois-chartered savings and loan associations, as well as federally chartered
savings and loan associations and commercial banks, to merge with or convert
directly into an Illinois-chartered savings bank.  Pursuant to this authority,
in December 1992 the Bank converted from an Illinois-chartered savings and loan
association into an Illinois-chartered mutual savings bank.

     As an Illinois-chartered savings bank, the Bank is subject to regulation
and supervision by the Commissioner.  This regulation covers, among other
things, the Bank's internal organization (I.E., charter, bylaws, capital
requirements, examination, supervision, merger transactions, additional offices,
transactions with directors and officers, and composition of the board of
directors).  The Bank is required to file periodic reports with and is subject
to periodic examinations by the Commissioner.  The lending and investment
authority of the Bank is prescribed by Illinois law and regulations, as well as
applicable federal law and regulations, and the Bank is prohibited from engaging
in any activities not permitted by such law and regulations.

     Under Illinois law and Commissioner regulation, savings banks are required
to maintain a minimum core capital to adjusted total assets ratio of 3%.  Core
capital is defined to include common stockholders' equity, non-cumulative
perpetual preferred stock and any related surplus, and minority interests in
equity accounts of consolidated subsidiaries, less (i) any unidentifiable
intangible assets (other than purchased mortgage servicing rights); (ii) the
amount by which purchased mortgage servicing rights exceed the lower of 90% of
determinable fair market value, 90% of original cost, or current amortized book
value; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities that are permissible for a

                                           22


<PAGE>

national bank, activities impermissible for a national bank but only as an agent
for its customers, or mortgage-banking activities.  In calculating adjusted
total assets, adjustments are made to total assets to give effect to the
exclusion of certain assets from capital and to appropriately account for the
investments in and assets of both includable and nonincludable subsidiaries.

     The Commissioner is authorized to require a savings bank to maintain a
higher minimum capital level if the Commissioner determines that the savings
bank's financial condition or history, management or earnings prospects are not
adequate.  If a savings bank's capital ratio falls below the required level, the
Commissioner may direct the savings bank to adhere to a specific written plan
established by the Commissioner to correct the savings bank's capital
deficiency, as well as a number of other restrictions on the savings bank's
operations, including a prohibition on the declaration of dividends by the
savings bank's board of directors.  At December 31, 1996, the Bank's capital
ratio as calculated under Illinois law was 16.0% of total assets, which
substantially exceeded the required amount.

     Under Illinois law, a savings bank may make both secured and unsecured
loans.  However, loans for business, corporate, commercial or agricultural
purposes, whether secured or unsecured, may not in the aggregate exceed 15% of a
savings bank's total assets unless authorized by the Commissioner.  Savings
banks, with the prior written consent of the Commissioner, may also engage in
real estate development activities, provided that the total investment in any
one project may not exceed 15% of total capital, and the total investment in all
projects may not exceed 50% of total capital.  The total loans and extensions of
credit, both direct and indirect, by a savings bank to any person outstanding at
one time may not exceed 15% of the savings bank's total capital.  At
December 31, 1996, the Bank did not have any loans to one borrower that exceeded
this limitation.  For information about the largest borrowers of the Bank, see
"Business of the Company--Lending Activities--Loans to One Borrower."

     The Board of Directors of a savings bank may declare dividends on its
capital stock based upon the savings bank's annualized net profits except that
until the paid-in surplus of the savings bank equals its capital stock, a
dividend may not be declared unless there has been transferred to paid-in
surplus not less than 10% of the net profits of the preceding half year in the
case of quarterly or semiannual dividends, or not less than 10% of the net
profits for the preceding year in the case of annual dividends.  Dividends may
not be declared if a savings bank fails to meet its minimum capital
requirements.  Further written approval of the Commissioner is required before
any dividends exceeding 50% of a savings bank's profits for any calendar year
may be declared.  A dividend may be declared out of retained earnings at any
time.

     Illinois-chartered savings banks may not make a loan to a person owning 10%
or more of its stock, an affiliated person, agent or attorney of the savings
bank, either individually or as an agent or partner of another, except under the
rules of the Commissioner and regulations of the FDIC.  In addition,
Illinois-chartered savings banks generally may not, directly or indirectly, make
a mortgage loan to a director, officer or employee or any partnership, joint
venture, corporation or similar entity employing any such person.  This
restriction does not apply, however, to loans made (i) on the security of
single-family residential property used by the borrower as his or her residence
and (ii) to a non-profit, religious, charitable or fraternal organization or a
corporation in which the savings bank has been authorized to invest by the
Commissioner.  Furthermore, a savings bank may not purchase, lease or acquire a
site for an office building or an interest in real estate from an officer,
director, employee or the holder of more than 10% of the savings bank's stock or
certain affiliated persons as set forth in Illinois law, unless the prior
written approval of the Commissioner is obtained.

     Any depository institution may merge into a savings bank operating under
the SBA.  The Board of Directors of each merging institution must approve a plan
of merger by resolution adopted by majority vote of all members of the
respective boards.  After such approval, the plan of merger must be submitted to
the Commissioner for approval.  The Commissioner may make an examination of the
affairs of each merging institution (and their affiliates).  The Commissioner
shall not approve a merger agreement unless he finds that, among other things:
(i) the resulting institution meets all requirements of the SBA; (ii) the merger
agreement is fair to all persons affected; and (iii) the resulting institution
will be operated in a safe and sound manner.  If approved by the Commissioner,
the plan of merger must be submitted to stockholders of the depository
institution for approval, and may be required to be

                                           23


<PAGE>

submitted to members if a mutual savings bank is one of the constituent
entities.  A two-thirds affirmative vote is required for approval of the plan of
merger.

     The SBA permits an Illinois savings bank holding company to control or own
more than 5% of the voting shares or rights of a savings bank only if the
principal place of business of the savings bank is located in those states in
which a savings bank holding company is permitted to acquire an Illinois savings
bank.  When requested, the Commissioner will review the laws of the state to
determine whether the laws of that state expressly authorize an Illinois savings
bank holding company to acquire a savings bank in that state.

     A savings bank holding company may invest in the stock of or other form of
equity ownership of any company which the board of directors determines to be in
the best interests of stockholders and depositors and such investment must be
documented in the holding company's minutes with reference to such items as
price/earning ratios, future prospects, sources of income and compatibility with
the overall business plan of the holding company.

REGULATION BY THE FDIC

     The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government.  As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
institutions, after giving the Commissioner an opportunity to take such action,
and may terminate the deposit insurance if it determines that the institution
has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.

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

     The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits.  In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC.  The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

     In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
30, 1996.  For the Bank, the assessment amounted to $1.3 million (or $805,000
when adjusted for taxes), based on the Bank's deposits on March 31, 1995.  In
addition, beginning January 1, 1997, pursuant to the legislation, interest
payments on FICO bonds issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation will
be paid jointly by BIF-insured institutions and SAIF-insured institutions.  The
FICO assessment will be 1.29 basis points per $100 in BIF deposits and 6.44
basis points per $100 in SAIF deposits.  Beginning January 1, 2000, the FICO
interest payments will be paid pro rata by banks and thrifts based on deposits
(approximately 2.4 basis points per $100 in deposits).  The BIF and SAIF will be
merged on January 1, 1999, provided the bank and savings institution charters
are merged by that date.  In that event, pro rata FICO sharing will begin on
January 1, 1999.

                                           24


<PAGE>

     While the legislation has reduced the disparity between premiums paid on
BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Bank, and BIF-insured
institutions will continue until at least January 1, 1999.  Under the
legislation, the Bank anticipates that its ongoing annual SAIF premiums will be
approximately $133,000 (prior to the consummation of the Bank's branch
acquisitions on January 3, 1997).  See "Business--Recent Developments."

PROMPT CORRECTIVE ACTION

     Under Section 38 of the Federal Deposit Insurance Act, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions which it regulates.  In 1992, the federal banking
agencies adopted regulations which are intended to implement the system of
prompt corrective action established by Section 38 of the FDIA.  Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if it
has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based
capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or
more and is not subject to specified requirements to meet and maintain a
specific capital ratio of 8.0% or more, (ii) "adequately capitalized" if it has
a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a Tier I leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.

     Section 38 of the FDIA and the implementing regulations also provide that a
federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category if
the institution is in an unsafe or unsound condition or engaging in an unsafe or
unsound practice.  The FDIC may not, however, reclassify a significantly
undercapitalized institution as critically undercapitalized.

     An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized.  Immediately upon becoming undercapitalized, an
institution shall become subject to the provisions of Section 38 of the FDIA,
which sets forth various mandatory and discretionary restrictions on its
operations.

     At December 31, 1996, the Bank was a "well capitalized" institution under
the prompt corrective action regulations of the FDIC.

STANDARDS FOR SAFETY AND SOUNDNESS

     The FDICIA requires the federal banking regulatory agencies to prescribe,
by regulation, standards for all insured depository institutions and depository
institution holding companies relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) audit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits.  The compensation standards would prohibit
employment contracts, compensation or benefit arrangements, stock options plans,
fee arrangements or other compensatory arrangements that would provide excess
compensation, fees or benefits or could lead to material financial loss.  In
addition, the federal banking regulatory agencies would be required to prescribe
by regulation standards specifying: (i) maximum classified assets to capital
ratios; (ii) minimum earnings sufficient to absorb losses

                                           25


<PAGE>

without impairing capital; and (iii) to the extent feasible, a minimum ratio of
market value to book value for publicly traded shares of depository institutions
and depository institution holding companies.

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board requires all depository institutions to maintain
reserves against their transaction accounts (primarily NOW and Super NOW
checking accounts) and non-personal time deposits.  Currently, reserves of 3%
must be maintained against total transaction accounts of $54.0 million or less
(after a $4.2 million exemption), and an initial reserve of $1.6 million plus
10% (subject to adjustment by the Federal Reserve Board to a level between 8%
and 14%) must be maintained against that portion of total transaction accounts
in excess of such amount.  At December 31, 1996, the Bank was in compliance with
applicable requirements.

     The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the Bank's earning assets.

REGULATORY ENFORCEMENT AUTHORITY

     The enforcement powers available to federal banking regulators is
substantial and includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined.  In general, these enforcement actions must be initiated
for violations of laws and regulations and unsafe or unsound practices.  Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.  Applicable
law also requires public disclosure of final enforcement actions by the federal
banking agencies.

COMMUNITY REINVESTMENT ACT

     Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods.  The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA.  The CRA requires the FDIC, in connection
with its examination of a savings institution, to assess the institution's
record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution.  The CRA
requires public disclosure of an institution's CRA rating and requires the FDIC
to provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system.  Failure to achieve a satisfactory CRA
rating may impair the Bank's ability to acquire other financial institutions or
branches.  As of December 31, 1996, the Bank had an "outstanding" CRA rating.

UNIFORM LENDING STANDARD

     Under FDICIA, the federal banking agencies are required to adopt uniform
regulations prescribing standards for extensions of credit that are secured by
liens on interests in real estate or made for the purpose of financing the
construction of a building or other improvements to real estate.  Insured
depository institutions must adopt and maintain written policies that establish
appropriate limits and standards for extensions of credit that are secured by
liens or interests in real estate or are made for the purpose of financing
permanent improvements to real estate.  These policies must establish loan
portfolio diversification standards, prudent underwriting standards (including
loan-to-value limits) that are clear and measurable, loan administration
procedures, and documentation, approval and reporting requirements.  The real
estate lending policies must reflect consideration of the Interagency Guidelines
for Real Estate Lending Policies (the "Interagency Guidelines") that have been
adopted by the federal banking regulators.

                                           26


<PAGE>

     The Interagency Guidelines, among other things, require depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by undeveloped land, the supervisory loan-to-value limit is 65% of the
value of the collateral; (ii) for land development loans, the supervisory limit
is 75%; (iii) for loans for the construction of commercial, multi-family or
other nonresidential property, the supervisory limit is 80%; (iv) for loans for
the construction of one- to four- family properties, the supervisory limit is
85%; and (v) for loans secured by other improved property (E.G., farmland,
commercial property and other income-producing property including
non-owner-occupied, one- to four- family property) the supervisory limit is 85%.

     The Interagency Guidelines indicate that on a case-by-case basis it may be
appropriate to originate or purchase loans with loan-to-value ratios in excess
of the supervisory loan-to-value limits, based on the support provided by other
credit factors.  The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multi-family and other
non-one- to four- family residential properties should not exceed 30% of total
capital.

     The supervisory loan-to-value limits do not apply to certain categories of
loans including loans insured or guaranteed by the United States Government and
its agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of state governments, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured in
connection with a workout, loans to facilitate sales of real estate acquired by
the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.

CAPITAL MAINTENANCE

     Under FDIC regulations the Bank must maintain minimum levels of capital.
The regulations establish a minimum leverage capital requirement (Tier 1 capital
to total average assets) for banks in the strongest financial and managerial
condition, with a CAMEL Rating of 1 (the highest rating of the federal
regulators for banks).  For all other banks, the minimum leverage capital
requirement is between 4% and 5% of total assets.  Tier 1 capital is composed of
the sum of common stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying mortgage
servicing rights and qualify supervisory intangible core deposits), identified
losses and investments in certain subsidiaries.  At December 31, 1996, the
Bank's ratio of Tier 1 capital to total average assets was 16.0%, which exceeded
the minimum leverage requirement.

     The FDIC also requires that savings banks meet a risk-based capital
standard.  The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 and supplementary capital) to risk-weighted
assets of 8.0%.  In determining the amount of risk-weighted assets, all assets,
including certain off balance sheet assets, are multiplied by a risk-weight of
0% to 100%, based on the risks the federal regulators believe are inherent in
the type of asset.  The components of Tier 1 capital are equivalent to those
discussed earlier under the 3% leverage requirement.  The components of
supplementary capital currently include cumulative perpetual preferred stock,
long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and allowance for loan and
lease losses.  Allowance for loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25% of risk-weighted assets.  Overall, the
amount of capital counted toward supplementary capital cannot exceed 100% of
core capital.  At December 31, 1996, the Bank met its risk-based capital
requirements on a fully phased-in basis.

     The FRB has issued regulations that require the Company also to maintain a
minimum level of capital.  In general, the regulations require a leverage
capital ratio of 4% of total assets and a risk-based capital level that is the
same as the Company's risk-based capital requirement.  The FRB also has adopted
a risk-based capital policy that imposes an additional capital standard on bank
holding companies.  Under this regulation, the Company must classify its assets
and certain off-balance sheet activities into categories, and maintain specified
levels of capital for each category.  At December 31, 1996, the Company met all
of its minimum capital requirements.

                                           27


<PAGE>

LOANS-TO-ONE-BORROWER LIMITATIONS

     Savings banks are subject to the same loans-to-one-borrower limits as those
applicable to national banks, which under current regulations limit loans to one
borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus
on an unsecured basis, and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
Illinois law regarding loans to one borrower is similar to federal law.  At
December 31, 1996, the Company's largest real estate related borrower had an
aggregate principal outstanding balance of $3.5 million, which balance did not
exceed the Company's loans-to-one borrower limit of $7.8 million at December 31,
1996.

DIVIDEND LIMITATIONS

     Unless otherwise required by the Commissioner, the Bank may from time to
time declare and pay dividends to the Company, provided that no dividends may be
declared when the Bank's total capital is less than 3% of total assets.  In
addition, written approval of the Commissioner is required before a savings bank
having total capital less than 6% of total assets may pay dividends on capital
stock that exceed 50% of such savings bank's net profits of that year.  Finally,
the Board of Directors of the Bank may quarterly, semi-annually, or annually
declare a dividend on capital stock of so much of the net profits of the Bank
that they shall determine expedient, except that until the paid- in surplus of
the Bank equals its capital stock, no dividend may be declared unless there has
been transferred to paid- in surplus not less than 10% of the net profits of the
preceding half year in the case of quarterly or semi-annual dividends, or not
less than 10% of the net profits for the preceding 2 half year periods in the
case of annual dividends.  The Bank may not declare dividends in excess of its
net profit in any year without the approval of the Commissioner; however, a
stock dividend may be declared out of retained earnings at any time.

ACTIVITIES OF SAVINGS BANKS AND THEIR SUBSIDIARIES

     FDIC and Commissioner regulations provide that, when a savings bank
establishes or acquires a subsidiary or elects to conduct any new activity
through a subsidiary that the savings bank controls, the savings bank must
notify the FDIC and the Commissioner thirty days in advance and provide the
information each agency may, by regulation, require.  Prior Commissioner
approval may be required for certain activities by a savings bank subsidiary.
Savings banks also must conduct the activities of subsidiaries in accordance
with existing regulations and orders.

     The FDIC or the Commissioner may determine that the continuation by a
savings bank of its ownership control of, or its relationship to, the subsidiary
constitutes a serious risk to the safety, soundness or stability of the bank or
is inconsistent with sound banking practices or with the purposes of the Federal
Deposit Insurance Act.  Based upon that determination, the FDIC or the
Commissioner has the authority to order the savings bank to divest itself of
control of the subsidiary.  The FDIC also may determine by regulation or order
that any specific activity poses a serious threat to the SAIF.  If so, it may
require that no SAIF member engage in that activity directly.  At December 31,
1996, the Bank had an investment of $127,000 in its wholly owned subsidiary.

SECURITIES PORTFOLIO POLICY

     Under Commissioner regulations, savings banks are required to adopt and
maintain an investment policy which demonstrates the exercise of prudence in
making investment decisions.  Pursuant to applicable regulations and generally
accepted accounting principles, a financial institution is required to classify
its securities in one of three categories:  securities held to maturity,
securities available for sale or securities held for trading.  Securities held
to maturity may be carried at amortized cost if the bank has documented the
intent and ability to hold the securities until maturity.  Securities available
for sale must be carried at market value.  Securities held for trading must be
valued at market value.  The Bank's Investment Portfolio Policy does not permit
the Bank to maintain a trading portfolio.

                                           28


<PAGE>

TRANSACTIONS WITH AFFILIATES

     Savings banks must comply with Sections 23A and 23B of the Federal Reserve
Act ("Sections 23A and 23B") relative to transactions with affiliates in the
same manner and to the same extent as if they were Federal Reserve member banks.
Generally, Sections 23A and 23B: (i) limit the extent to which an insured
institution or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus; and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to a non-affiliate.  The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guaranty and similar types of transactions.

HOLDING COMPANY REGULATION

     As an Illinois savings bank holding company, the Company must register with
the Commissioner within 90 days after becoming a holding company.  Thereafter,
the Company will be required to file reports as required by the Commissioner, to
maintain books and records as required by the Commissioner, to pay fees and
charges assessed by the Commissioner and to be subject to examinations by the
Commissioner.  Furthermore, the Company will be permitted to engage only in
those activities prescribed by the Commissioner.  Dividends declared by a stock
savings bank subsidiary payable to an Illinois savings bank holding company must
not result in the total capital of the subsidiary decreasing below the minimum
capital requirements set forth by the Commissioner.  Cash dividends may be
declared as often as quarterly by the savings bank subsidiary, after payment or
provision has been made for all expenses, losses, required reserves and
dividends on withdrawable capital.  A stock dividend, however, may be declared
out of undivided profits at any time.

     The Company was also required to file an application with the FRB for
approval to become a bank holding company.  FRB regulations govern the
acquisition of control of banks by companies and individuals, prescribe and
regulate the permissible nonbanking activities in which bank holding companies
may engage (which activities must be closely related and a proper incident to
banking), and set forth the procedure for securing approval for such
transactions and activities.  It is not anticipated that the restrictions on
activities of the Company under regulations of either the Commissioner or the
FRB will adversely affect the activities of the Company.

FEDERAL SECURITIES LAWS

     At the time of the Offering, the Company filed with the Securities and
Exchange Commission (the "SEC") a registration statement under the Securities
Act for the registration of the Common Stock to be issued pursuant to the
Conversion.  Upon completion of the Conversion, the Company's Common Stock was
registered with the SEC under the Exchange Act.  The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.

     The registration under the Securities Act of shares of the Common Stock
that were issued in the Conversion did not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration.  Shares purchased by an affiliate of
the Company are subject to the resale restrictions of Rule 144 under the
Securities Act.  If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the Company
who complies with the other conditions of Rule 144 (including those that require
the affiliate's sale to be aggregated with those of certain other persons) is
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks.  Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.

                                           29


<PAGE>

                               FEDERAL AND STATE TAXATION

GENERAL

     The Company and its subsidiaries file a consolidated federal income tax
return on a December 31, calendar year basis.  Consolidated returns have the
effect of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.  The following discussion of tax matters is intended only
as a summary, and while it does not purport to be a comprehensive description of
all tax rules applicable to the Company or the Bank, all matters deemed material
by management have been discussed.

FEDERAL TAXATION

     FEDERAL TAXATION.  Savings institutions such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes.  The amount of the bad
debt reserve deduction for "non-qualifying loans" is computed under the
experience method.  For tax years beginning before December 31, 1995, the amount
of the bad debt reserve deduction for "qualifying real property loans"
(generally, loans secured by improved real estate) may be computed under either
the experience method or the percentage of taxable income method (based on an
annual election).  If a savings institution elected the latter method, it could
claim, each year, a deduction based on a percentage of taxable income, without
regard to actual bad debt experience.

     Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.

     Under recently enacted legislation, the percentage of taxable income method
has been repealed for years beginning after December 31, 1995, and "large"
banks, i.e., the quarterly average of the bank's total assets or of the
consolidated group of which it is a member, exceeds $500 million for the year,
may no longer be entitled to use the experience method of computing additions to
their bad debt reserve.  A "large" bank must use the direct write-off method for
deducting bad debts, under which charge-offs are deducted and recoveries are
taken into taxable income as incurred. If the Bank is not a "large" bank, the
Bank will continue to be permitted to use the experience method. The Bank will
be required to recapture (I.E., take into income) over a six-year period its
applicable excess reserves, I.E, the balance of its reserves for losses on
qualifying loans and nonqualifying loans, as of the close of the last tax year
beginning before January 1, 1996, over the greater of (a) the balance of such
reserves as of December 31, 1987 (pre-1988 reserves) or (b) in the case of a
bank which is not a "large" bank, an amount that would have been the balance of
such reserves as of the close of the last tax year beginning before January 1,
1996, had the bank always computed the additions to its reserves using the
experience method. Postponement of the recapture is possible for a two-year
period if an institution meets a minimum level of mortgage lending for 1996 and
1997.  As of December 31, 1996, the Bank's bad debt reserve subject to recapture
over a six-year period totaled approximately $893,000.

     If an institution ceases to qualify as a "bank" (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the supplemental
reserve are restored to income ratably over a six-year period, beginning in the
tax year the institution no longer qualifies as a bank.  The balance of the
pre-1988 reserves are also subject to recapture in the case of certain excess
distributions to (including distributions on liquidation and dissolution), or
redemptions of, shareholders.

     The Bank files federal income tax returns on a calendar year basis using
the accrual method of accounting.  Savings institutions, such as the Bank, that
file federal income tax returns as part of a consolidated group are required by
applicable Treasury regulations to reduce their taxable income for purposes of
computing the percentage bad debt

                                           30


<PAGE>

deduction for losses attributable to activities of the non-savings institution
members of the consolidated group that are functionally related to the
activities of the savings institution member.

     The Bank has not been audited by the IRS recently with respect to federal
income tax returns.  In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank.

     DELAWARE TAXATION.  As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware.  The Company is also subject to
an annual franchise tax imposed by the State of Delaware.

     CORPORATE ALTERNATIVE MINIMUM TAX.  For taxable years beginning after
December 31, 1986, the Code imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%.  The excess of the tax bad debt reserve deduction
using the percentage of taxable income method over the deduction that would have
been allowable under the experience method is treated as a preference item for
purposes of computing AMTI.  Only 90% of AMTI can be offset by net operating
losses.  For taxable years beginning after December 31, 1989, the adjustment to
AMTI based on book income is an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses).  In
addition, for taxable years beginning after December 31, 1986, and before
January 1, 1996, an environmental tax of .12% of the excess of AMTI (with
certain modifications) over $2.0 million is imposed on corporations, including
the Company, whether or not an alternative minimum tax is paid.  The Company
does not expect to be subject to the alternative minimum tax.

     DISTRIBUTIONS.  To the extent that (i) the Bank's tax bad debt reserve for
losses on qualifying real property loans exceeds the amount that would have been
allowed under the experience method and (ii) the Company makes "non-dividend
distributions" to stockholders that are considered to result in distributions
from the excess tax bad debt reserve or the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Company's taxable income.  Non-dividend distributions
include distributions in excess of the Company'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 Company's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Company's tax bad debt reserves.

     The amount of additional taxable income created from an Excess Distribution
is an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution.  Thus, if certain portions of the Bank's
accumulated tax bad debt reserve are used for any purpose other than to absorb
qualified tax bad debt loans, such as for the payment of dividends or other
distributions with respect to the Company's capital stock (including
distributions upon redemption or liquidation), approximately one and one-half
times the amount so used would be includable in gross income for federal income
tax purposes, assuming a 35% corporate income tax rate (exclusive of state
taxes).  At December 31, 1996, the Bank's accumulated tax bad debt reserve
totalled approximately $10.6 million.  See "Regulation and Supervision" and
"Dividend Policy" for limits on the payment of dividends of the Bank.

     ILLINOIS TAXATION.  The State of Illinois imposes a tax on the Illinois
taxable income of corporations, including savings banks, at the rate of 7.2%.
Illinois taxable income is generally similar to federal taxable income except
that interest from state and municipal obligations is taxable, no deduction is
allowed for state income taxes and a deduction is allowed for certain United
States Government and agency obligations.  The Bank's state income tax returns
were last audited in June 1996 by the Illinois tax authorities.

                                           31


<PAGE>

EXECUTIVE OFFICERS OF THE COMPANY

     Listed below is information, as of December 31, 1996, concerning the
Company's executive officers.  There are no arrangements or understandings
between the Company and any of persons named below with respect to which he or
she was or is to be selected as an officer.

     The following individuals hold positions as executive officers of the
Company as is set forth below opposite their names.

                               EXECUTIVE OFFICERS

NAME                          AGE            CURRENT POSITION

Paul K. Reynolds              48             President and Chief Executive
                                             Officer

Philip J. Duffy               48             Senior Vice President and Senior
                                             Lending Officer

David G. Weber                48             Senior Vice President
                                             Retail Banking/Operations Officer

G. Lynn Brinkman              56             Vice President, Secretary,
                                             Treasurer and Chief Financial
                                             Officer

Gary M. Walters               57             Vice President - Residential
                                             Lending

Jimmy W. Goatley              47             Vice President - Retail
                                             Banking/Operations


     The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors.

     Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.

ITEM 2.   PROPERTIES

     The Company conducts its business through its main office located in
Decatur, Illinois and six branch offices located in four counties.  The
following table sets forth certain information concerning the main office and
each branch office of the Company at December 31, 1996.  At December 31, 1996,
the Company's premises and equipment had an aggregate net book value of
approximately $4.1 million.  The Company believes that its current facilities
are adequate to meet the present and immediately foreseeable needs of the Bank
and the Company.

LOCATION                      YEAR OPENED              OWNED OR LEASED

Main Office                      1926                       Owned
135 East Main St.
Decatur, IL  62525

                                           32


<PAGE>

Fairview Office                  1976                       Leased (1)
855 N. Fairview Ave.
Decatur, IL  62522

Spring Creek Office              1980                       Leased (2)
701 W. Pershing Rd.
Forsyth, IL  62526

Forsyth Office                   1991                       Owned
U.S. Route 51 North
Forsyth, IL  62526

Clinton Office                   1982                       Owned
211 S. Quincy St.
Clinton, IL  61727

Urbana Office                    1983                       Owned
602 S. Vine St.
Urbana, IL  61801

Shelbyville Office               1973                       Owned
318 W. Main
Shelbyville, IL  62565

Brettwood Village
  Kroger Money Mart              1996                       Leased (3)
3070 N. Water St.
Decatur, IL  62526

Airport Plaza Kroger
  Money Mart                     1996                       Leased (4)
1818 S. Airport Plaza Rd.
Decatur, IL  62521
_____________________________
(1)  The lease for the Fairview Office expires on February 28, 2001.
(2)  The lease for the Spring Creek Office was entered into on June 14, 1979 and
     has a term of 20 years.  The Company has four options to renew for five
     years each.
(3)  The lease for the Brettwood Village Kroger Money Mart was entered into on
     March 1, 1996 and terminates on February 28, 2001.
(4)  The lease for the Airport Plaza Kroger Money Mart was entered into on
     August 1, 1996 and terminates on July 31, 2001.


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
proceedings in the aggregate are believed by management to be immaterial to the
Company's financial condition and results of operations.

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

     No matters were submitted to a vote of stockholders during the fourth
quarter of the year ended December 31, 1996.

                                           33


<PAGE>

                                         PART II

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

     Page 12 of the 1996 Annual Report to Stockholders, included herewith as
Exhibit 13 (the "Annual Report"), is herein incorporated by reference.

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     Pages 13 to 15 of the Annual Report are herein incorporated by reference.


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

     Pages 16 to 31 of the Annual Report are herein incorporated by reference.

ITEM 8.   FINANCIAL STATEMENTS

     Pages 32 to 57 of the Annual Report are herein incorporated by reference.

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

     NOT APPLICABLE.

                                        PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT

     Information concerning Directors and Executive Officers of the Company is
incorporated herein by reference  from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders scheduled to be held on April 24, 1997.

ITEM 11.  EXECUTIVE COMPENSATION

     Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on April 24, 1997.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS

     Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
April 24, 1997.

                                           34


<PAGE>

ITEM 13.  TRANSACTIONS WITH CERTAIN RELATED PERSONS

     Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders scheduled to be held on April 24, 1997.

                                         PART IV

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

     (a)(1)    FINANCIAL STATEMENTS

     The following information appearing in the Company's Annual Report to
Stockholders for each of the three years in the period ended December 31, 1996
is incorporated herein by reference in this Form 10-K Annual Report as Exhibit
13.

                                                                        PAGE IN
                                                                         ANNUAL
     ANNUAL REPORT SECTION                                               REPORT
     ---------------------                                              -------
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . .        34

Consolidated Statements of Financial Condition. . . . . . . . . . . .        35

Consolidated Statements of Income . . . . . . . . . . . . . . . . . .        36

Consolidated Statements of Changes in Stockholders' Equity. . . . . .        37

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . .     38-39

Notes to Consolidated Financial Statements. . . . . . . . . . . . . .     39-57

     (a)(2)    FINANCIAL STATEMENT SCHEDULES - All financial statement schedules
have been omitted as the information is either inapplicable or not required
under the related instructions.

     (a)(3)    EXHIBITS

<TABLE>
<CAPTION>

                                                     SEQUENTIAL PAGE
                                                    REFERENCE TO PRIOR         NUMBER WHERE
                                                    FILING OR EXHIBIT        ATTACHED EXHIBITS
   REGULATION S-K                                     NUMBER ATTACHED       ARE LOCATED IN THIS
   EXHIBIT NUMBER               DOCUMENT                   HERETO            FORM 10-K REPORT
   --------------               --------            ------------------      -------------------
<S>                   <C>                         <C>                      <C>

           2            Plan of Reorganization            None                Not Applicable

        3(i)         Certificate of Incorporation          (1)                Not Applicable


         3(ii)                  Bylaws                     (2)                Not Applicable

           4           Instruments defining the            (1)                Not Applicable
                       rights of security holders,
                         including debentures

           9            Voting trust agreement            None                Not Applicable
</TABLE>

                                                                     35


<PAGE>

<TABLE>
<CAPTION>

<S>                 <C>                            <C>                      <C>
       10(i)            Employment Agreement              (1)                Not Applicable
                        with Paul K. Reynolds,
                           President and Chief
                            Executive Officer

       10(ii)        Employee Stock Ownership Plan          (1)                Not Applicable

         11            Statement re: computation          None                Not Applicable
                          of per share earnings

         12            Statement re: computation            Not                Not Applicable
                                of ratios                Required

         13          Annual Report to Stockholders         _____                Exhibit 13

         16               Letter re: change in            None                Not Applicable
                              certifying
                               accountants
</TABLE>

_____________________________
(1)  Incorporated by reference to Exhibits to the Registrant's Registration
     Statement on Form S-1, filed with the Commission on December 23, 1994 (File
     No. 33-87886), as amended.
(2)  Incorporated by reference to Exhibit 3.2 of the Registrant's Registration
     Statement on Form S-1, filed with the Commission on December 23, 1994 (File
     No. 33-87886), as amended.

                                           36


<PAGE>

<TABLE>
<CAPTION>



                                                     SEQUENTIAL PAGE
                                                    REFERENCE TO PRIOR         NUMBER WHERE
                                                    FILING OR EXHIBIT        ATTACHED EXHIBITS
   REGULATION S-K                                     NUMBER ATTACHED       ARE LOCATED IN THIS
   EXHIBIT NUMBER               DOCUMENT                   HERETO            FORM 10-K REPORT
   --------------               --------            ------------------      -------------------

<S>                 <C>                           <C>                      <C>
         18               Letter re: change in
                          accounting principles            None                Not Applicable

         21            Subsidiaries of Registrant        _______                Exhibit 21

         22            Published report regarding          None                Not Applicable
                     matters submitted to vote of
                           security holders

         23              Consent of Experts and          _______               Exhibit 23
                                 Counsel

         24                Power of Attorney              None                Not Applicable

         27             Financial Data Schedule          _______                Exhibit 27

         28             Information from reports          None                Not Applicable
                          furnished to state
                         insurance regulatory
                               authorities

         99               Additional Exhibits              None                Not Applicable


          (b)             Reports on Form 8-K:
</TABLE>

     The Registrant has not filed a Current Report on Form 8-K during the
quarter ended December 31, 1996.

                                           37


<PAGE>

                                       SIGNATURES

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

                              FIRST MUTUAL BANCORP, INC.

Date:  March 28, 1996                   By: /s/ Paul K. Reynolds
                                            ------------------------------------
                                         Paul K. Reynolds, President
                                         Chief Executive Officer and Director

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



By: /s/ C. Robert Chastain                   By: /s/ G. Lynn Brinkman
    ---------------------------------            -------------------------------
     C. Robert Chastain, Chairman of the Board    G. Lynn Brinkman, Vice   and
     Director                                     President, Secretary,
                                                  Treasurer and Chief Financial
                                                  Officer

Date:  March 28, 1996                        Date:  March 28, 1996



By: /s/ Richard J. Welsh                     By: /s/ Roy M. Ousley

    ---------------------------------            -------------------------------
     Richard J. Welsh, Vice Chairman              Roy M. Ousley, Director
     and Director

Date:  March 28, 1996                        Date:  March 28, 1996


By: /s/ Richard L. Jacobs                    By: /s/ Robert D. Nichols
    ---------------------------------            -------------------------------
     Richard L. Jacobs, Director                  Robert D. Nichols, Director

Date:  March 28, 1996                        Date:  March 28, 1996



By: /s/ Glen J. Whitney
    ---------------------------------
     Glen J. Whitney, Director

     Date:  March 28, 1996