<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
          For the fiscal year ended December 31, 1999

                                       OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
          For the transition period from _______ to _______

                         Commission File Number 1-13676


                            KANKAKEE BANCORP, INC.
            (Exact name of Registrant as specified in its charter)

           Delaware                                           36-3846489
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                            Identification Number)

310 S. Schuyler Avenue, Kankakee, Illinois                               60901
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code: (815) 937-4440


          Securities Registered Pursuant to Section 12(b) of the Act:
                                                  Name of Each Exchange
                Title of Each Class               on which Registered
                -------------------               ------------------------
     Common Stock, par value $.01 per share       American Stock Exchange


          Securities Registered Pursuant to Section 12(g) of the Act:
                                      NONE
                                (Title of Class)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
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]

================================================================================
<PAGE>

     As of March 1, 2000, the Registrant had issued and outstanding 1,236,383
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 1, 2000, was
$23,543,038.*



                      DOCUMENTS INCORPORATED BY REFERENCE

     PARTS II and IV of Form 10-K--Portions of the 1999 Annual Report to
Stockholders.
     PART III of Form 10-K--Portions of the Proxy Statement for the 2000 Annual
Meeting of Stockholders.



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

*    Based on the last reported price ($21.50) of an actual transaction in the
     Registrant's Common Stock on March 1, 2000, and reports of beneficial
     ownership filed by directors and executive officers of the Registrant and
     by beneficial owners of more than 5% of the outstanding shares of Common
     Stock of the Registrant; however, such determination of shares owned by
     affiliates does not constitute an admission of affiliate status or
     beneficial interest in shares of the Registrant's Common Stock.
<PAGE>

                            KANKAKEE BANCORP, INC.

                        1999 ANNUAL REPORT ON FORM 10-K

                               Table of Contents

                                                                     Page Number
                                                                     -----------

                                    PART I

Item    1.  Business.......................................................... 4
Item    2.  Properties........................................................47
Item    3.  Legal Proceedings.................................................48
Item    4.  Submission of Matters to a Vote of Security Holders...............48

                                    PART II

Item    5.  Market for the Registrant's Common Stock and Related
             Security Holder Matters..........................................48
Item    6.  Selected Financial Data...........................................48
Item    7.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations..............................48
Item   7a.  Quantitative and Qualitative Disclosures About Market Risk........48
Item    8.  Financial Statements and Supplementary Data.......................49
Item    9.  Changes in and Disagreements With Accountants on
             Accounting and Financial Disclosure..............................49

                                    PART III

Item   10.  Directors and Executive Officers of the Registrant................49
Item   11.  Executive Compensation............................................50
Item   12.  Security Ownership of Certain Beneficial Owners and
             Management.......................................................50
Item   13.  Certain Relationships and Related Transactions....................50
Item   14.  Exhibits, Financial Statement Schedules, and Reports on 8-K.......52

Form 10-K Signature Page......................................................53

                                       3
<PAGE>

                                    PART I

Item 1.  Business

                                  THE COMPANY

General

     Kankakee Bancorp, Inc., a Delaware corporation (the "Company"), is a
savings and loan holding company registered under the Home Owner's Loan Act, as
amended (the "HOLA"). The Company's primary business activity is acting as the
holding company for Kankakee Federal Savings Bank, a federally chartered savings
bank (the "Bank"). The Bank has two subsidiaries, KFS Service Corp. ("KFS"), and
its wholly-owned subsidiary, KFS Insurance Agency, Inc., which engage in the
business of providing securities brokerage services and insurance and annuity
products to its customers and appraisal services to the Bank and other lenders
in the Kankakee area. All references to KFS include KFS Insurance Agency, Inc.,
unless clearly indicated otherwise. The Company was organized in 1992, in
connection with the Bank's conversion from the mutual to the stock form of
organization (the "Conversion") which was completed on December 30, 1992. As
part of the Conversion, the Company issued 1,750,000 shares of its common stock,
$.01 par value per share (the "Common Stock"), at a price of $9.875 per share.
On March 24, 1995, the Company's Common Stock was listed on the American Stock
Exchange ("AMEX") under the symbol "KNK". Prior to March 24, 1995, the Company's
Common Stock was quoted on The Nasdaq Stock Market under the symbol "KNKB".

     The Bank is the Company's only financial institution subsidiary and was
initially chartered as an Illinois state savings and loan association in 1885.
The Bank converted to a federally chartered savings and loan association in 1937
and changed its name to Kankakee Federal Savings Bank in connection with its
conversion to stock form in 1992. All references to the Company include the Bank
and KFS unless clearly indicated otherwise, except that references to the
Company at or before December 30, 1992 refer to the Bank and KFS on a
consolidated basis.

     The Company and the Bank are subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision (the "OTS") and
the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member of
the Federal Home Loan Bank System (the "FHLB System") and its deposits are
insured by the Savings Association Insurance Fund ("SAIF") to the maximum extent
permitted by the FDIC.

     The Bank serves the financial needs of families and local businesses in its
primary market areas through its main office located at 310 S. Schuyler Avenue,
Kankakee, Illinois and fourteen branch offices located in the communities of
Ashkum, Bourbonnais, Bradley, Braidwood, Champaign, Coal City (2), Diamond,
Dwight, Herscher, Hoopeston, Manteno, Momence and Urbana, Illinois. At December
31, 1999, the Company had consolidated assets of $404.7 million, deposits of
$355.0 million and stockholders' equity of $36.2 million.

                                       4
<PAGE>

     Branch offices in Braidwood, Coal City and Diamond, Illinois were acquired
on January 29, 1998, when the Company completed the acquisition of Coal City
National Bank ("CCNB") from Coal City Corporation, a multi-bank holding company
headquartered in Chicago, Illinois. At the time of purchase, CCNB had total
assets of $56.0 million, deposits of $51.7 million and stockholders' equity of
$3.7 million. The transaction, which was accounted for as a purchase, resulted
in the recording of approximately $3.8 million in intangible assets.

     The Company engages in a general full service retail banking business and
offers a broad variety of consumer oriented products and services to residents
of its primary market areas. The Company is principally engaged in the business
of attracting deposits from the general public and originating residential
mortgage loans in its primary market areas. The Company also originates
commercial real estate, consumer, multi-family, commercial business and
construction loans. In addition, the Company invests in mortgage-backed
securities, investment securities, certificates of deposit and short-term liquid
assets. The Company also offers a Visa/MasterCard program, debit card services
and, on an agency basis through KFS, securities brokerage services and insurance
and annuity products to the Company's customers and provides appraisal services
for the Bank and others.

     In February 1998, the Bank received approval from the OTS to begin offering
trust services. While approval for full trust services was received, the Bank
has initially focused on personal trust services and limited employee benefit
plan services.

     The Company's revenues are derived from interest on loans, mortgage-backed
and related securities and investments, service charges and loan origination
fees, loan servicing fees and proceeds from the sale, through KFS, of securities
brokerage services, insurance and annuity products and appraisal services. The
Company's operations are materially affected by general economic conditions, the
monetary and fiscal policies of the federal government and the policies of the
various regulatory authorities, including the OTS and the Board of Governors of
the Federal Reserve System (the "FRB"). The Company's results of operations are
largely dependent upon its net interest income, which is the difference between
the interest it receives on its loan and investment securities portfolios and
the interest it pays on deposit accounts and borrowings.

     The executive offices of the Company are located at 310 S. Schuyler Avenue,
Kankakee, Illinois 60901 and its telephone number at that address is (815) 937-
4440.

Market Area

     The Bank's main office is located at 310 S. Schuyler Avenue, Kankakee,
Illinois. The bank also has fourteen branch offices located in the communities
of Ashkum, Bourbonnais, Bradley, Braidwood, Champaign, Coal City (2), Diamond,
Dwight, Herscher, Hoopeston, Manteno, Momence and Urbana. The Company's market
areas include Kankakee, Champaign, Iroquois and Livingston Counties and portions
of Will, Grundy and Vermilion Counties, Illinois.

                                       5
<PAGE>

     Kankakee is located approximately 35 miles south of the metropolitan
Chicago area. The metropolitan Kankakee area has a population of just under
60,000 and has experienced a slight decrease in population since 1990. Kankakee
County has a mixed agricultural and industrial economy with the largest number
of residents employed in the agricultural, health care, food processing,
chemical and retail redistribution industries. Major employers include Riverside
HealthCare, Provena St. Mary's Hospital, Shapiro Development Center, the Baker
and Taylor Company, CIGNA Companies, Armstrong World Industries, Aventis
Behring, Bunge Edible Oil Corporation, Cognis Corporation, KMART Corporation
Distribution Center and Sears Logistics Services, Inc.

     Champaign/Urbana is located approximately 75 miles south of Kankakee. It is
the location of the original campus of the University of Illinois which employs
17,000 people and has a student body of over 30,000. In addition, the economy of
the Champaign/Urbana market area includes several major medical centers and
agricultural and industrial businesses. Major employers in the Champaign/Urbana
area include Carle Clinic, Provena Covenant Medical Center, Parkland College,
Kraft General Foods, Supervalu, Hobbico and Solo Cup.

     Hoopeston is located approximately 60 miles southeast of Kankakee in
Vermilion County, Illinois. The local economy includes a mix of agriculture and
manufacturing. Other than agriculture, major employers are Silgan Containers,
Inc., Hoopeston Food's, Inc., Food Machinery Corp. (FMC), Hoopeston Community
Memorial Hospital and Schumachers.

     Coal City is located approximately 30 miles northwest of Kankakee in Grundy
County, Illinois. Braidwood is located approximately 25 miles northwest of
Kankakee in Will County, Illinois. Coal City, Braidwood and their surrounding
communities have a population of 12,000 residents. As bedroom communities of the
south Chicago suburbs, the economy in this region is a mix of agricultural,
industrial and service-based businesses. Large corporate employers such as
ComEd, with its Braidwood and Dresden nuclear power plants and Collins Station,
Amoco, Equistar Chemicals, Reichhold Chemicals, Mobil and Caterpillar are within
short driving distances.

Lending Activities

     General. The principal lending activity of the Company is originating first
mortgage loans secured by owner occupied one-to-four family residential
properties located in its primary market areas. In addition, in order to
increase the yield and interest rate sensitivity of its portfolio and in order
to provide more comprehensive financial services to families and community
businesses in the Company's market areas, the Company also originates commercial
real estate, consumer, commercial business, multi-family and construction loans.
From time to time, the Company has also utilized loan purchases to supplement
loan originations.

                                       6
<PAGE>

     Loan and Mortgage-Backed Securities Portfolio Composition. The following
table provides information concerning the composition of the Company's loan and
mortgage-backed securities portfolios in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated. Loans held for sale are
included primarily in one-to-four family real estate loans.

<TABLE>
<CAPTION>
                                                                             December 31,
                               -------------------------------------------------------------------------------------------------
                                      1999                1998                1997                1996                1995
                               -----------------   -----------------   -----------------   -----------------   -----------------
                                 Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent
                                 ------  -------     ------  -------     ------  -------     ------  -------     ------  -------
Real Estate Loans                                                       (Dollars in thousands)
-----------------
<S>                            <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>        <C>      <C>
  One-to-four family.......... $165,089    56.61%  $159,956    59.23%  $157,764    58.22%  $149,544    54.74%  $147,007    54.28%

  Multi-family................    8,923     3.06      5,556     2.06      7,480     2.76     14,172     5.19     14,475     5.35

  Commercial..................   28,869     9.90     21,291     7.88     20,881     7.71     28,721    10.51     28,273    10.44


  Construction or
   development................   14,235     4.88     13,938     5.16      9,004     3.32      5,525     2.02      8,248     3.05

  Mortgage-backed
   securities and parti-
   cipation certificates......   17,600     6.03     18,746     6.94     28,503    10.52     34,713    12.71     36,481    13.47
                               --------    -----   --------    -----   --------    -----   --------    -----   --------    -----

    Total real estate loans
     and mortgage-backed
     securities...............  234,716    80.48    219,487    81.27    223,632    82.53    232,675    85.17    234,484    86.59
                               --------    -----   --------    -----   --------    -----   --------    -----   --------    -----
Other Loans:
------------

  Consumer Loans:

   Deposit account............      788     0.27        827     0.31        820     0.30        588     0.21        745     0.27

   Student....................      151     0.05        231     0.09        825     0.30        918     0.34      1,151     0.43
</TABLE>

                                       7
<PAGE>
<TABLE>
<CAPTION>

                                                                         December 31,
                               -------------------------------------------------------------------------------------------------
                                     1999                1998                1997                1996                1995
                               -----------------   -----------------   -----------------   -----------------   -----------------
                                 Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent
                               --------  -------   -------- --------   -------- --------   -------- --------   -------- --------
<S>                            <C>       <C>       <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>
    Automobile.................   5,541     1.90      3,830     1.42      4,476     1.65      4,033     1.48      3,219     1.19

    Home equity................  17,028     5.84     17,215     6.37     16,795     6.20     14,166     5.19     12,847     4.74

    Home improvement...........       2     0.00          7     0.00         13     0.00         56     0.02        208     0.08

    Mobile home................   2,158     0.74      2,826     1.05      3,293     1.22      3,161     1.16      3,122     1.15

    Credit cards...............   1,286     0.44      1,376     0.51      1,534     0.57      1,705     0.62      1,870     0.69

    Personal...................   7,946     2.73      6,900     2.55      7,407     2.73      5,942     2.17      3,919     1.45
                               --------   ------   --------   ------   --------   ------   --------   ------   --------    -----
      Total consumer loans.....  34,900    11.97     33,212    12.30     35,163    12.97     30,569    11.19     27,081    10.00

Commercial business loans......  22,013     7.55     17,365     6.43     12,185     4.50      9,943     3.64      9,246     3.41
                               --------   ------   --------   ------   --------   ------   --------   ------   --------    -----
    Total other loans..........  56,913    19.52     50,577    18.73     47,348    17.47     40,512    14.83     36,327    13.41
                               --------   ------   --------   ------   --------   ------   --------   ------   --------    -----
Total loans and mortgage-
  backed securities
  receivable................... 291,629   100.00%   270,064   100.00%   270,980   100.00%   273,187   100.00%   270,811   100.00%
                                -------   ======    -------   ======    -------   ======    -------   ======    -------   ======

Less:
-----
  Loans in process.............   1,394               1,671               1,121               1,726                 957

  Deferred fees and
    discounts..................     104                 129                 176                 425                 517

  Allowance for losses
    on loans...................   2,171               2,375               2,130               2,360               2,388
                                  -----               -----               -----               -----               -----

  Total loans and mortgage-
    backed securities
    receivable, net............$287,960            $265,889            $267,553            $268,676            $266,949
                               ========            ========            ========            ========             =======
</TABLE>

                                       8
<PAGE>

     The following table shows the composition of the Company's loan and
mortgage-backed securities portfolios by fixed and adjustable rate at the dates
indicated. Loans held for sale are included primarily as fixed-rate one-to-four
family residential loans.

<TABLE>
<CAPTION>
                                                                         December 31,
                               -------------------------------------------------------------------------------------------------
                                     1999                1998                1997                1996                1995
                               -----------------   -----------------   -----------------   -----------------   -----------------
                                 Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent
                               --------  -------   -------- --------   -------- --------   -------- --------   -------- --------
<S>                            <C>       <C>      <C>       <C>        <C>      <C>        <C>      <C>        <C>      <C>
Fixed-Rate Loans and                                                 (Dollars in thousands)
Mortgage-Back Securities
------------------------
  Real estate:

    One-to-four family....... $83,407    28.60%   $75,352    27.90%   $56,908    21.00%   $50,758    18.58%  $51,620    19.06%

    Multi-family.............     693     0.24        390     0.14        ---      ---        ---      ---       ---      ---

    Commercial...............   7,664     2.63      2,076     0.77      1,392     0.51      3,520     1.29     6,128     2.26

    Construction or
      development............   2,380     0.82      2,708     1.00      1,711     0.63        690     0.25     1,583     0.58

  Mortgage-backed securities.  11,731     4.02      9,296     3.44     12,502     4.61     17,489     6.40    18,341     6.77
                             --------   ------   --------   ------   --------   ------   --------   ------   -------    -----

  Total real estate loans
   and mortgage-backed
      securities............. 105,875    36.31     89,822    33.25     72,513    26.75     72,457    26.52    77,672    28.67

Consumer.....................  18,826     6.46     19,087     7.07     19,918     7.35     17,065     6.25    14,876     5.49

Commercial business..........  11,215     3.85      8,020     2.97      3,005     1.11      2,867     1.05     2,665     0.98
                             --------   ------   --------   ------   --------   ------   --------   ------   -------    -----

  Total fixed-rate loans
  and  mortgage-backed
    securities............... 135,916    46.62    116,929    43.29     95,436    35.21     92,389    33.82    95,213    35.14
                             --------   ------   --------   ------   --------   ------   --------   ------   -------   ------

Adjustable-Rate Loans and
Mortgage-Backed Securities
--------------------------
  Real estate:
    One-to-four family.......  81,682    28.01     84,604    31.33    100,856    37.22     98,786    36.16    95,387    35.22
</TABLE>

                                       9
<PAGE>

<TABLE>
<CAPTION>
                                                                              December 31,
                                    ----------------------------------------------------------------------------------------------
                                         1999                1998                1997                1996               1995
                                    ---------------     ---------------     ---------------     ---------------    ---------------
                                    Amount  Percent     Amount  Percent     Amount  Percent     Amount  Percent    Amount  Percent
                                    ------  -------     ------  -------     ------  -------     ------  -------    ------  -------
<S>                                <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>       <C>      <C>
  Multi-family...................    8,230     2.82      5,166     1.92      7,480     2.76     14,172     5.19    14,475     5.35

  Commercial.....................   21,205     7.27     19,215     7.11     19,489     7.19     25,201     9.22    22,145     8.18

  Construction or
   development...................   11,855     4.06     11,230     4.16      7,293     2.69      4,835     1.77     6,665     2.47

  Mortgage-backed securities.....    5,869     2.01      9,450     3.50     16,001     5.91     17,224     6.31    18,140     6.70
                                   -------   ------    -------   ------    -------   ------    -------   ------   -------   ------
   Total real estate loans
    and mortgage-backed
    securities...................  128,841    44.17    129,665    48.02    151,119    55.77    160,218    58.65   156,812    57.92

Consumer.........................   16,074     5.51     14,125     5.23     15,245     5.63     13,504     4.94    12,205     4.51

Commercial business..............   10,798     3.70      9,345     3.46      9,180     3.39      7,076     2.59     6,581     2.43
                                   -------   ------    -------   ------    -------   ------    -------   ------   -------   ------
  Total adjustable-rate loans
   and mortgage-backed
   securities....................  155,713    53.38    153,135    56.71    175,544    64.78    180,798    66.18   175,598    64.86
                                   -------   ------    -------   ------    -------   ------    -------   ------   -------   ------
  Total loans and mortgage-
   backed securities.............  291,629   100.00%   270,064   100.00%   270,980   100.00%   273,187   100.00%  270,811   100.00%
                                   -------   ======    -------   ======    -------   ======    -------   ======   -------   ======

Less:

  Loans in process...............    1,394               1,671               1,121               1,726                957

  Deferred fees and discounts....      104                 129                 176                 425                517

  Allowance for losses on loans..    2,171               2,375               2,130               2,360              2,388
                                   -------             -------             -------             -------            -------
   Total loans and mortgage-
    backed securities
    receivable, net.............. $287,960            $265,889            $267,553            $268,676           $266,949
                                  ========            ========            ========            ========           ========
</TABLE>

                                       10
<PAGE>

     The following schedule illustrates the interest rate sensitivity of the
Company's loan and mortgage-backed securities portfolio at December 31, 1999.
Loans that have adjustable or renegotiable interest rates are shown as maturing
in the period during which the contract matures. The schedule does not reflect
the effects of possible prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>
                                                                Real Estate
                              ---------------------------------------------------------------------------------
                              One-to-four family and
                                  Mortgage-Backed             Multi-family and              Construction or
                                    Securities                  Commercial                    Development
                              -----------------------      ----------------------        ----------------------
                                             Weighted                    Weighted                      Weighted
                                             Average                     Average                       Average
                              Amount           Rate        Amount          Rate          Amount          Rate
                              ------         --------      ------        --------        ------        --------
<S>                          <C>             <C>           <C>           <C>             <C>           <C>
Due During Twelve                                          (Dollars in thousands)
Month Periods
Ending
December 31,
------------
2000(1)..................... $  1,328          8.33%       $ 6,756         8.67%         $11,597         9.01%
2001 and 2002...............    2,223          8.66          1,793         8.83            1,133         9.02
2003 and 2004...............    2,450          8.05          4,064         7.95              109         8.75
2005 and 2009...............   24,792          7.09          7,479         8.56              413         8.19
2010 and 2024...............   97,212          6.95         15,760         8.15              983         7.40
2025 and following..........   54,684          7.22          1,940         8.70                -            -
                             --------                      -------                       -------
  Total..................... $182,689                      $37,792                       $14,235
                             ========                      =======                       =======

                                                                Commercial
                                    Consumer                     Business                        Total
                              -----------------------      ----------------------        ----------------------
                                             Weighted                    Weighted                      Weighted
                                             Average                     Average                       Average
                              Amount           Rate        Amount          Rate          Amount          Rate
                              ------         --------      ------        --------        ------        --------
<S>                          <C>             <C>           <C>           <C>             <C>           <C>
Due During Twelve
Month Periods
Ending
December 31,
2000(1)..................... $ 3,601            12.14%    $13,003            8.70%     $ 36,285            9.12%
2001 and 2002...............   7,351             9.43       3,872            8.64        16,372            9.04
2003 and 2004...............  15,167             8.57       3,183            8.58        24,973            8.42
2005 and 2009...............   7,993             7.50         499            7.31        41,176            7.45
2010 and 2024...............     788            10.04       1,456            8.27       116,199            7.15
2025 and following..........       -                -           -               -        56,624            7.27
                             -------                      -------                      --------
  Total..................... $34,900                      $22,013                      $291,629
                             =======                      =======                      ========
</TABLE>
-----------------------------
(1)  Includes demand loans and loans having no stated maturity.

                                       11
<PAGE>

     As of December 31, 1999, the total amount of loans and mortgage-backed
securities due after December 31, 2000, which had predetermined interest rates
was $123.7 million, while the total amount of loans and mortgage-backed and
related securities due after such date which had floating or adjustable interest
rates was $131.6 million.

     Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the aggregate amount of loans that the Bank is permitted to
make to any one borrower is generally limited to 15% of unimpaired capital and
surplus (25% if the security for such loan has a "readily ascertainable" market
value or 30% for certain residential development loans). At December 31, 1999,
the Bank's regulatory loan-to-one borrower limit was $4.7 million. On the same
date, the Bank's largest total of loans to one borrower was $4.4 million.

     All of the Company's lending activities are conducted in accordance with
policies adopted by its Board of Directors. The Company is an equal opportunity
lender. Decisions on loan applications are made on the basis of detailed
applications and property valuations (consistent with the Company's written
appraisal policy) prepared by qualified appraisers. The loan applications are
designed primarily to determine the borrower's ability to repay and the more
significant items on the application are verified through use of credit reports,
financial statements, tax returns and/or third-party confirmations.

     The Company requires evidence of marketable title and lien position as well
as appropriate title and other insurance on all loans secured by real property
in amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan.

     One-to-Four Family Residential Real Estate Lending. The cornerstone of the
Company's lending program is the origination of loans secured by mortgages on
owner-occupied one-to-four family residences. At December 31, 1999, $165.1
million, or 56.6% of the Company's loan and mortgage-backed securities
portfolio, consisted of loans secured by one-to-four family residences. At that
date, the average outstanding residential loan balance was approximately $52,300
and the largest outstanding residential loan had a book value of $871,000.
Substantially all of the residential loans originated by the Company are secured
by properties located in the Company's primary market areas.

     In order to reduce its exposure to changes in interest rates, the Company
originates Adjustable Rate Mortgages ("ARM"), subject to market conditions and
consumer preference. The Company continues to originate long term fixed-rate
residential loans. Through the end of 1999, the Company sold substantially all
of such loans in the secondary market, except its fixed-rate residential loans
having terms of 20 years or less, and which met predetermined minimum interest
rates, as was consistent with its asset/liability management objectives.
Currently, the Company is retaining all fixed-rate one-to-four family
residential loans it originates, except for Federal Housing Administration and
Veterans' Administration loans.

                                       12
<PAGE>

     Most of the Company's fixed-rate loans are originated with terms which
conform to secondary market standards (i.e., Freddie Mac standards). Most of the
Company's fixed-rate residential loans have contractual terms to maturity of 15
to 30 years. Under the Company's current policy, the Company retains most of the
fixed-rate loans that it originates. Through the end of 1999, the Company sold,
with servicing retained, most of the fixed-rate loans it originated, except for
loans with terms of 20 years or less which met, or exceeded, certain
predetermined minimum interest rates. The predetermined minimum interest rate
was evaluated on a regular basis and adjusted, as necessary. At December 31,
1999, the Company had $67.1 million of 15 year fixed-rate residential loans and
$16.3 million of 30 year fixed-rate residential loans in its portfolio.

     The Company offers ARM loans at rates, terms and fees determined in
accordance with market and competitive factors. The Company's current one-to-
four family residential ARMs are fully amortizing loans with contractual
maturities of up to 30 years. The interest rates on the ARMs originated by the
Company are subject to adjustment at stated intervals based on a margin over a
specified index and are subject to annual as well as lifetime adjustment limits.
The Company's current ARMs do not permit negative amortization of principal and
carry no prepayment penalty. At December 31, 1999, the Company had $37.2
million, $3.4 million, and $41.1 million of one-year, three-year and five-year
ARMs, respectively.

     The Company's delinquency experience on its ARMs has generally been similar
to that on fixed-rate residential loans. Of the $630,000 of one-to-four family
loans delinquent 60 days or more at December 31, 1999, $490,000 (or 0.3% of one-
to-four family loans) consisted of ARMs and $140,000 (or 0.1% of the Company's
one-to-four family loans) represented fixed-rate loans.

     The Company evaluates both the borrower's ability to make principal,
interest and escrow payments and the value of the property that will secure the
loan. The Company originates residential mortgage loans with loan-to-value
ratios generally up to 95% except for a program applicable to first time home
buyers where this ratio can go up to 97% with private mortgage insurance and/or
other collateral. On any mortgage loan exceeding an 80% loan-to-value ratio at
the time of origination, the Company generally requires private mortgage
insurance in an amount intended to reduce the Company's exposure to 80% or less
of the appraised value of the underlying property.

     In September 1999, the Company announced a $30,000 grant program to assist
qualified first-time home buyers in purchasing owner-occupied single-family
homes in the Company's market areas. The program provides one-time grants of up
to $1,000 to assist qualified applicants who meet low-to-moderate income
guidelines.

     The Company, on occasion, originates loans in excess of $240,000 (the
Freddie Mac maximum during 1999). As of December 31, 1999, the Company had 41
residential mortgage loans having an aggregate balance of $12.7 million with
original balances in excess of $240,000

                                       13
<PAGE>

("Jumbo Loans"). The Company's historical delinquency experience on its Jumbo
Loans has been excellent.

     The Company is an approved one-to-four family lender for both the Federal
Housing Administration ("FHA") and the Veterans' Administration ("VA"). The
Company sells, with servicing released, all FHA and VA loans it originates to
other investors. During 1999, eight such loans totaling $505,000 were originated
and sold. Borrowers are notified at the time of application that their loan will
be sold to, and serviced by, a party other than the Company.

     Multi-Family and Commercial Real Estate Lending. The Company also makes
multi-family and commercial real estate loans in its primary market areas. At
December 31, 1999, the Company had $37.8 million in multi-family and commercial
real estate loans, representing 13.0% of the Company's total loan and mortgage-
backed securities portfolio. Included in such loans were $1.1 million of
participation interests in multi-family and commercial real estate loans which
were purchased from other lenders.

     The Company's multi-family portfolio includes loans secured by residential
buildings (including university student housing) located primarily in the
Company's primary market areas. The Company's commercial real estate portfolio
consists of loans on a variety of non-residential properties including nursing
homes, churches and other commercial buildings.

     The Company has originated both adjustable and fixed-rate multi-family and
commercial real estate loans. Rates on the Company's adjustable-rate multi-
family and commercial real estate loans generally adjust in a manner consistent
with the Company's ARMs. Multi-family and commercial real estate loans are
generally underwritten in amounts of up to 75% of the appraised value of the
underlying property.

     The table below sets forth by type of property taken as collateral, the
number, loan amount and outstanding balance of the Company's multi-family and
commercial real estate loans (including purchased loan participations) at
December 31, 1999 and the amounts of such loans which were non-performing or "of
concern" at December 31, 1999. The amounts shown do not reflect allowances for
losses.

                                      Original  Outstanding      Amount
                             Number     Loan     Principal   Non-Performing
                            of Loans   Amount     Balance    or of Concern
                            --------  --------  -----------  --------------
                                        (Dollars in thousands)
Multi-family residential...       22   $10,464      $ 8,924          $1,106
Improved real estate.......       19    10,088        4,174           1,779
Churches...................       17     3,739        2,903             ---
Agricultural related.......       14     1,198        1,090              20
Industrial and warehouse...       49    20,119       12,250              69
Retail.....................       20     6,651        4,202              80
Office.....................        8     1,697        1,285             ---
Other......................       36     3,263        2,964             ---
                                 ---   -------      -------          ------
   Total...................      185   $57,219      $37,792          $3,054
                                 ===   =======      =======          ======

                                       14
<PAGE>

     Multi-family residential and commercial real estate loans generally present
a higher level of risk than loans secured by one-to-four family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans.

     Purchased Loan Participations. In order to supplement lending activities
during periods of low loan volume, the Company has from time to time purchased
participation interests in multi-family and commercial real estate loans
originated and serviced by other lenders. Prior to purchase, the Company reviews
each participation to ensure that the underlying loan complies with the
Company's lending policy as in effect at the time of purchase.

     The following table presents information regarding the Bank's multi-family
and commercial real estate loan participations at December 31, 1999. At December
31, 1999, the Bank had $424,000 of purchased loans and participation interests
in one-to-four family loans.

<TABLE>
<CAPTION>
                                                                                                           Amount
                                                             Original      Outstanding     Unfunded         Non-
                                Month of    Original Loan  Participation   Balance at    Commitment at   Performing
  Type of Security/Location    Origination     Amount         Amount      Dec. 31, 1999  Dec. 31, 1999  or of Concern
-----------------------------  -----------  -------------  -------------  -------------  -------------  -------------
                                               (Dollars in thousands)
<S>                            <C>          <C>            <C>            <C>            <C>            <C>
Apartment buildings:
  Everett, Washington             09/12/86         $5,500         $1,375         $1,106            ---         $1,106
                                                                                 ======                        ======
</TABLE>

     The purchase of loan participations involves the same risks as the
origination of the same type of loans as well as additional risks related to the
purchaser's lower level of control over the origination and subsequent
administration of the loan. Also, most of the loan participations currently on
the Company's books are on projects located out-of-state. Out-of-state
investments are considered to carry a higher degree of risk due to the
difficulty of monitoring such investments.

     Commercial Business Lending. Federally chartered savings institutions, such
as the Bank, are authorized to make secured or unsecured loans and issue letters
of credit for commercial, corporate, business and agricultural purposes and to
engage in commercial leasing activities, up to a maximum of 20% of total assets.
However, any amount exceeding 10% of total assets must represent small business
loans as defined by the OTS.

     In order to increase the proportion of interest rate sensitive and
relatively high yielding loans in its portfolio, and as a part of its effort to
provide more comprehensive financial services in the communities serviced by its
offices, the Company originates secured and unsecured commercial loans to local
businesses. Currently, the Company's commercial business lending activities
encompass loans with a broad variety of purposes including working capital,
accounts receivable, inventory, equipment and agriculture. The Company does not
have any energy or foreign loans.

                                       15
<PAGE>

     At December 31, 1999, the Company had $22.0 million in commercial business
loans outstanding (representing 7.6% of the Company's total loan and mortgage-
backed securities portfolio) with additional commercial business loan
commitments totaling $6.3 million, most of which were undrawn lines of credit.
In addition, at December 31, 1999, the Company had seventeen letters of credit
outstanding, in an aggregate amount of $2.1 million. Most of the Company's
commercial business loans have terms to maturity of five years or less and
adjustable or floating interest rates. At December 31, 1999, the Company had
fifteen commercial business loans with balances of $250,000 or more, in an
aggregate amount of $8.1 million.

     The Company recognizes the generally increased risks associated with
commercial business lending. The Company's commercial business lending policy
emphasizes credit file documentation and analysis of the borrower's character,
management capabilities, capacity to repay the loan, the adequacy of the
borrower's capital and collateral as well as an evaluation of the industry
conditions affecting the borrower. Analysis of the borrower's past, present and
future cash flows is also an important aspect of the Company's credit analysis.

     The following table sets forth information regarding the number and amount
of the Company's commercial business loans and the amounts of such loans which
were non-performing and "of concern" as of December 31, 1999.
<TABLE>
<CAPTION>
                                                        Total     Outstanding      Amount
                                             Number      Loan      Principal   Non-Performing
                                            of Loans  Commitment    Balance    or of Concern
                                            --------  ----------  -----------  --------------
                                                         (Dollars in thousands)
Secured Loans:
<S>                                         <C>       <C>         <C>          <C>
 Accounts receivable......................         9     $ 1,165      $ 1,140             $18
 Inventory................................         5       6,206          590             ---
 Equipment................................        66       4,335        3,078               5
 Other business assets....................        34       5,568        3,783             ---
 Stocks and bonds.........................        15       1,277        1,239             ---
 Heavy duty vehicles......................        92       5,418        4,293             ---
 Other motor vehicles.....................        22       1,244          701              29
 Crops....................................         5       2,038          855             ---
 Stand-by letters of credit...............         5       1,676          ---             ---
 Beneficial interest in real estate trust.        29       6,392        4,350             ---
Unsecured loans...........................        71       2,886        1,984             ---
Unsecured stand-by letters of credit......        12         417          ---             ---
                                                 ---     -------      -------             ---
 Total commercial business loans..........       365     $38,622      $22,013              52
                                                 ===     =======      =======             ===
</TABLE>

     Consumer Lending. Management believes that offering consumer loan products
helps to expand the Company's customer base and to create stronger ties to its
existing customer base. In addition, because consumer loans generally have
shorter terms to maturity and/or adjustable-rates and carry higher rates of
interest than do residential mortgage loans, they can be valuable
asset/liability management tools. The Company currently originates substantially
all of its consumer loans in its market areas. At December 31, 1999, the
Company's consumer loans totaled $34.9 million or 12.0% of the Company's loan
and mortgage-backed securities portfolio.

                                       16
<PAGE>

     The Company offers a variety of secured consumer loans, including home
equity and home improvement loans, education loans (which carry a guaranty from
a State agency), loans secured by savings deposits, mobile home and automobile
loans. Although the Company primarily originates consumer loans secured by real
estate, deposits or other collateral, the Company also makes unsecured personal
loans. In addition, the Company offers unsecured consumer loans through its Visa
and MasterCard credit card programs.

     The Company offers mobile home loans in order to provide affordable
housing. All of the Company's mobile home loans have been originated with fixed-
rates of interest and are generally made in amounts of up to a maximum of 90% of
the buyer's cost. As of December 31, 1999, mobile home loans totaled $2.2
million or approximately 0.7% of the Company's gross loan and mortgage-backed
securities portfolio.

     The Company also offers student loans in compliance with the guidelines
established by the Federal Family Education Loan Program. Historically, such
loans were 100% guaranteed as to principal and interest by the Illinois Student
Assistance Commission. Loans originated after October 1, 1993, however, are 100%
guaranteed as to interest and 98% guaranteed as to principal. As of December 31,
1999, the Company held $151,000 of such loans, which represents 0.1% of the
Company's loan and mortgage-backed securities portfolio.

     Unsecured personal loans are made to borrowers for a variety of personal
needs and are usually limited to a maximum of $3,000, with a minimum loan amount
of $1,000. Lines of credit extended through the Company's Visa and MasterCard
credit card programs are generally limited to $5,000. Underwriting standards for
the Company's credit card program are substantially the same as for personal
loans.

     Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. The greater risk inherent in
consumer loans has been emphasized by recent nationwide increases in personal
bankruptcies. Although the level of delinquencies in the Company's consumer loan
portfolio has generally been low (at December 31, 1999, $388,000, or
approximately 1.1% of the consumer loan portfolio was 90 days or more
delinquent), there can be no assurance that delinquencies will not increase in
the future.

     Construction Lending. Historically, construction lending was a relatively
minor part of the Company's business activities. However, in light of the
economic recovery in its principal market areas and in order to increase the
yield on, and the proportion of, interest rate sensitive loans in its portfolio
and to provide more comprehensive financial services to families and community
businesses within its market areas, the Company expanded its construction
lending. At December 31, 1999, the Company had $2.0 million of residential
construction loans and $588,000 of lot loans to borrowers intending to live in
the properties upon completion of construction.

                                       17
<PAGE>

     On occasion, the Company also originates construction loans to builders and
developers for the construction of one-to-four family residences, multi-family
residences and commercial real estate and the acquisition and development of
one-to-four family lots in the Company's primary market areas. Construction
loans to builders of one-to-four family residences generally carry terms of up
to one year and may provide for the payment of interest and loan fees from loan
proceeds. At December 31, 1999, the Bank had approximately $3.4 million in loans
to builders of residences, and $4.5 million in loans on commercial construction.
In addition, on the same date, the Company had $3.7 million of subdivision loans
to developers for the development of one-to-four family lots.

     Most of the Company's construction loans have been originated with fixed
rates and terms of 12 months or less. Construction loans to owner occupants are
generally made in amounts of up to a maximum loan-to-value ratio of 80% (75% in
the case of commercial real estate). The Company's construction loans to persons
other than owner occupants generally involve larger principal balances than do
its one-to-four family residential loans. At December 31, 1999, only six of the
Company's construction loans had a principal balance in excess of $500,000. The
total principal balances of these loans was $7.2 million.

     The table below sets forth the number and amount of the Company's
construction loans at December 31, 1999, by type of security property.
<TABLE>
<CAPTION>
                                                Total     Outstanding      Amount
                                     Number      Loan      Principal   Non-Performing
                                    of Loans  Commitment    Balance    or of Concern
                                    --------  ----------  -----------  --------------
                                                 (Dollars in thousands)
<S>                                 <C>       <C>         <C>          <C>
One-to-four family residential.....       23     $ 9,576      $ 5,212           $ ---
Multi-family residential...........        1         540          540             ---
Land acquisition and development...       38      10,651        6,849             ---
Church.............................        2         202          190             ---
Retail and Industrial..............        4       1,462        1,444             ---
                                          --     -------      -------           -----
     Total.........................       68     $22,431      $14,235           $ ---
                                          ==     =======      =======           =====
</TABLE>

     Construction lending to persons other than owner occupants is generally
considered to involve a higher level of credit risk than one-to-four family
residential lending due to the concentration of principal in a limited number of
loans and borrowers and the effects of general economic conditions on
construction projects, real estate developers and managers. In addition, the
nature of these loans is such that they are more difficult to evaluate and
monitor.

     Originations, Purchases and Sales of Loans. The Company originates real
estate and other loans through employees located at each of the Company's
offices. Walk-in customers and referrals from real estate brokers and builders
are also important sources of loan originations. The Company does not generally
utilize the services of mortgage brokers.

     From time to time, in order to supplement its loan production, particularly
during periods of low loan demand, the Company purchases residential and other
loans from third parties. Under

                                       18
<PAGE>

its loan purchase policies, prior to purchase, the Company reviews each loan to
assure that it complies with its normal underwriting standards. While the
Company will continue to evaluate loan purchase opportunities as they arise, the
Company currently anticipates limiting its future purchases of out-of-area non-
residential loans.

     Through the end of 1999, the Company sold a majority of its 30-year, fixed-
rate loan production in the secondary market. In addition, the Company sold a
portion of its newly originated conventional 15-year, fixed-rate residential
mortgage loans and conventional 20-year, fixed-rate residential mortgage loans
bearing an interest rate of less than a specified level, with servicing
retained. The specified rate level was evaluated on a regular basis and
adjusted, as necessary. The Company's sales during recent years have been made
through sales contracts entered into after the Company has committed to fund the
loan. When loans are designated for sale, the Company attempts to limit interest
rate risk created by forward commitments by limiting the number of days between
the commitment and closing, charging fees for commitments and limiting the
amounts of its uncovered commitments outstanding at any one time.

     When loans have been sold, the Company virtually always retains the
responsibility for servicing such loans. At December 31, 1999, excluding
mortgage-backed securities, approximately $1.8 million of the Company's loan
portfolio consisting of purchased loans and purchased participations was
serviced by others and the Company serviced $70.5 million of loans for others.
During the year ended December 31, 1999, the Company received fee income of
$186,000 in connection with loans serviced for others.

                                       19
<PAGE>

     The following table shows the loan origination, purchase and repayment
activities of the Company for the periods indicated.
<TABLE>
<CAPTION>


                                                    Year Ended December 31,
                                               -------------------------------
                                                   1999       1998       1997
                                                   ----       ----       ----
                                                     (Dollars in thousands)
<S>                                              <C>        <C>        <C>
Originations By Type:
---------------------
  Adjustable-Rate:
    Real estate - one-to-four family...........  $ 15,318   $ 17,315   $20,180
                - multi-family.................         -         99         -
                - commercial...................    23,884     17,434     8,911
    Non-real estate - consumer.................    12,976     12,930    16,521
                  - commercial business........    16,304     12,531     8,085
                                                 --------   --------   -------
          Total adjustable-rate................    68,482     60,309    53,697
                                                 --------   --------   -------
  Fixed-Rate:
    Real estate - one-to-four family...........    29,516     62,295    20,354
                - multi-family.................         -          -         -
                - commercial...................     6,104      3,204     3,757
    Non-real estate - consumer.................    14,600      9,672    13,470
                  - commercial business........    14,806      7,244     2,870
                                                 --------   --------   -------
          Total fixed-rate.....................    65,026     82,415    40,451
                                                 --------   --------   -------
          Total loans originated...............   133,508    142,724    94,148
                                                 --------   --------   -------

Purchases:
----------
  Real estate - one-to-four family.............         -          -         -
              - commercial.....................     1,366          -       260
  Non-real estate - consumer...................         -          -         -
                - commercial business..........         -        300     1,920
  Loans acquired with CCNB.....................         -     17,958         -
                                                 --------   --------   -------
           Total loans.........................     1,366     18,258     2,180
  Mortgage-backed securities...................     6,992      8,772         -
  Mortgage-backed securities
        acquired with CCNB.....................         -        286         -
                                                 --------   --------   -------
           Total purchased.....................     8,358     27,316     2,180
                                                 --------   --------   -------

Sales and Repayments:
---------------------
Sales:
  Real estate - one-to-four family.............     9,587     35,654     6,565
              - commercial.....................     1,050        191         -
  Non-real estate - consumer...................       365      1,089       493
                - commercial business..........         -          -         -
                                                 --------   --------   -------
          Total loans..........................    11,002     36,934     7,058
  Mortgage-backed securities...................         -          -         -
                                                 --------   --------   -------
          Total sales..........................    11,002     36,934     7,058
  Principal repayments.........................   107,671    133,538    89,386
                                                 --------   --------   -------
          Total reductions.....................   118,673    170,472    96,444
                                                 --------   --------   -------
  Decrease in other items, net.................    (1,628)      (484)   (2,091)
                                                 --------   --------   -------
          Net increase (decrease)..............  $ 21,565   $   (916)  $(2,207)
                                                 ========   ========   =======
</TABLE>

                                       20
<PAGE>

     Delinquency Procedures. When a borrower fails to make a required payment on
a loan, the Company attempts to cause the delinquency to be cured by contacting
the borrower. In the event a real estate loan payment is past due for 90 days or
more the Company performs an in-depth review of the loan status, the condition
of the property and circumstances of the borrower. Based upon the results of its
review, the Company may negotiate and accept a repayment program with the
borrower, accept a voluntary deed in lieu of foreclosure or, when deemed
necessary, initiate foreclosure proceedings.

     Unsecured consumer loans are charged-off if they remain delinquent for 120
days. Secured consumer loans are liquidated and charged-off to the extent the
debt exceeds the fair value of the collateral. The Company's procedures for
repossession and sale of consumer collateral are subject to various requirements
under Illinois consumer protection laws.

     Delinquencies in the Company's commercial business loan portfolio are
handled on a case-by-case basis under the direction of the chief lending
officer. Generally, personal contact is made with the borrower when the loan is
15 days past due. Depending on the nature of the loan and the type of
collateral, if any, securing the loan, the Company may negotiate and accept a
modified payment program or take such other actions as the circumstances
warrant.

     Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until it is sold. When
property is acquired, it is recorded at its estimated fair value at the date of
acquisition, and any write-down resulting therefrom is charged to the allowance
for losses on loans. Upon acquisition, all costs incurred in maintaining the
property are expensed. Costs relating to the development and improvement of the
property, however, are capitalized to the extent of its fair value.

                                       21
<PAGE>

     The following table sets forth the Company's loan delinquencies by type, by
amount and by percentage of type at December 31, 1999.

<TABLE>
<CAPTION>

                                           Loans Delinquent For:
                             -----------------------------------------------------     Total 60 Days or More
                                60-89 Days                  90 Days and Over                 Delinquent
                             -------------------         -------------------------  ------------------------------
                                              Percent                     Percent                         Percent
                                              of Loan                     of Loan                         of Loan
                             Number  Amount   Category   Number  Amount  Category   Number    Amount      Category
                             ------  ------   --------   ------  ------  ---------  ------  -----------   --------
<S>                          <C>     <C>      <C>        <C>     <C>     <C>        <C>     <C>           <C>
                                                         (Dollars in thousands)
Real Estate:
  One-to-four family........      4    $157       0.10%      11  $  473      0.29%      15       $  630       0.39%
  Multi-family..............     --      --         --       --      --        --       --           --         --
  Commercial................     --      --         --        4     887      3.07        4          887       3.07
  Construction and
    development.............     --      --         --       --      --        --       --           --         --

Consumer....................     18     202       0.58       39     388      1.11       57          590       1.69
Commercial business.........     --      --         --       --      --        --       --           --        ---
                                ---    ----                 ---  ------                ---       ------
       Total................     22    $359       0.13       54  $1,748      0.64       76       $2,107       0.77
                                ===    ====                 ===  ======                ===       ======
</TABLE>


     The following table sets forth the Company's loan delinquencies by type, by
amount and by percentage of type at December 31, 1998.

<TABLE>
<CAPTION>
                                           Loans Delinquent For:
                             -----------------------------------------------------     Total 60 Days or More
                                60-89 Days                  90 Days and Over                 Delinquent
                             -------------------         -------------------------  ------------------------------
                                              Percent                     Percent                         Percent
                                              of Loan                     of Loan                         of Loan
                             Number  Amount   Category   Number  Amount  Category   Number    Amount      Category
                             ------  ------   --------   ------  ------  ---------  ------  -----------   --------
<S>                          <C>     <C>      <C>        <C>     <C>     <C>        <C>     <C>           <C>
                                                         (Dollars in thousands)
Real Estate:
  One-to-four family.......      10    $505       0.32%      16  $  606      0.38%      26       $1,111       0.70%
  Multi-family.............      --      --         --       --      --        --       --           --         --
  Commercial...............       2      68       0.32        7     306      1.44        9          374       1.76
  Construction and
    development............      --      --         --       --      --        --       --           --         --

Consumer...................      17     122       0.37       52     438      1.32       69          560       1.69
Commercial business........      --      --         --        4     131      0.75        4          131       0.75
                                ---    ----                 ---  ------                ---       ------
       Total...............      29    $695       0.28       79  $1,481      0.59      108       $2,176       0.87
                                ===    ====                 ===  ======                ===       ======
</TABLE>

                                       22
<PAGE>

     Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. The regulations have also created a Special Mention category,
consisting of assets which do not currently expose a savings institution to a
sufficient degree of risk to warrant classification, but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as Substandard or Doubtful require the institution to
establish prudent general allowances for losses on loans. If an asset or portion
thereof is classified as Loss, the institution must either establish specific
allowances for losses on loans in the amount of 100% of the portion of the asset
classified Loss, or charge off such amount. If an institution does not agree
with an examiner's classification of an asset, it may appeal this determination
to the Regional Director of the OTS. On the basis of management's review of its
assets, at December 31, 1999, on a net basis, the Company had classified $2.3
million of its assets as Special Mention, $2.5 million as Substandard and
$50,000 as Loss. No assets were classified as Doubtful at December 31, 1999. The
Company's classified assets consist of the non-performing loans and loans and
other assets of concern discussed herein.

     Non-Performing Assets. The following table sets forth the amounts and
categories of non-performing assets of the Company. Loans are reviewed quarterly
and any loan whose collectibility is doubtful is placed on non-accrual status.
Real estate loans are placed on non-accrual status when either principal or
interest is 90 days or more past due, unless, in the judgment of management,
collectibility is considered highly probable and collection efforts are in
progress, in which case interest would continue to accrue. At December 31, 1999,
there were 42 loans with outstanding principal balances totaling $1.2 million
which were 90 days or more past due and continuing to accrue interest.

     Interest accrued and unpaid at the time a consumer loan is placed on non-
accrual status is charged against interest income. Subsequent payments are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
For all years presented, the Company had no troubled debt restructurings other
than those included in the non-performing assets table. Foreclosed assets
include assets acquired in settlement of loans. The loan and foreclosed asset
amounts shown are stated net of the specific reserves which have been
established against such assets.

                                       23
<PAGE>

<TABLE>
<CAPTION>
                                                         December 31,
                                          -------------------------------------------
                                           1999     1998     1997     1996     1995
                                          -------  -------  -------  -------  -------
<S>                                       <C>      <C>      <C>      <C>      <C>
                                                    (Dollars in thousands)
Non-accruing loans:
  One-to-four family(1).................. $  473   $  606   $  659   $  524   $  516
  Multi-family...........................    ---      ---      ---      ---      ---
  Commercial.............................     80      265      207    1,396      111
  Construction and development...........    ---      ---      669      ---      ---
  Consumer...............................    ---      ---      ---      ---      ---
  Commercial business....................    ---       90      ---      ---      ---
                                          ------   ------   ------   ------   ------
     Total...............................    553      962    1,535    1,920      627
                                          ------   ------   ------   ------   ------

Accruing loans delinquent more
 than 90 days:
  One-to-four family(1)..................    ---      ---      ---      ---      ---
  Multi-family...........................    ---      ---      556      557      557
  Commercial.............................    807       41       73    1,005      ---
  Construction and development...........    ---      ---      234      170      169
  Consumer...............................    388      438      399      177      108
  Commercial business....................    ---       40       19       45      ---
                                          ------   ------   ------   ------   ------
     Total...............................  1,195      519    1,281    1,954      834
                                          ------   ------   ------   ------   ------

Foreclosed assets:
  One-to-four family.....................    344      387      ---       96       84
  Multi-family...........................    ---      ---      ---      ---      675
  Commercial.............................    157    1,489    1,317       69       69
  Construction and development...........    ---      ---      ---      ---      ---
  Consumer...............................     68      ---        3      ---      ---
  Commercial business....................    ---      ---      ---      ---      ---
                                          ------   ------   ------   ------   ------
     Total foreclosed assets.............    569    1,876    1,320      193      828
                                          ------   ------   ------   ------   ------

Troubled debt restructuring
  Real estate:
  One-to-four family.....................    122      ---      209      ---      ---
  Commercial.............................    342      ---      ---      ---      ---
                                          ------   ------   ------   ------   ------
     Total troubled debt restructuring...    464      ---      209      ---      ---
                                          ------   ------   ------   ------   ------

Total non-performing assets.............. $2,781   $3,357   $4,345   $4,067   $2,289
                                          ======   ======   ======   ======   ======
Total as a percentage of total
  assets.................................   0.69%    0.82%    1.27%    1.16%    0.64%
                                          ======   ======   ======   ======   ======
</TABLE>

-------------------------
(1)  Includes loans held for sale.


     For the years ended December 31, 1999 and 1998, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $32,000 and $44,000, respectively. The
amount that was included in interest income on such loans was $26,000 and
$29,000 for 1999 and 1998, respectively.

                                       24
<PAGE>

     Analysis of Allowance for Losses on Loans. The following table sets forth
an analysis of the Company's allowance for losses on loans.

<TABLE>
<CAPTION>
                                                       Year Ended
                                                      December 31,
                                       -------------------------------------------
<S>                                    <C>      <C>      <C>      <C>      <C>
                                        1999     1998     1997     1996     1995
                                       -------  -------  -------  -------  -------
                                                 (Dollars in thousands)
Balance at beginning of period........ $2,375   $2,130   $2,360   $2,388   $2,251

Charge-offs:
  One-to-four family..................     21       20      ---      ---      ---
  Multi-family........................    ---      ---      ---      ---      ---
  Commercial real estate..............     29      ---      ---      ---      ---
  Construction........................    ---      ---      160      ---      ---
  Consumer............................    114      160      136      125       59
  Commercial business.................    123       44      ---        1      ---
                                       ------   ------   ------   ------   ------
                                          287      224      296      126       59
                                       ------   ------   ------   ------   ------

Recoveries:
  One-to-four family..................    ---      ---      ---      ---      ---
  Multi-family........................    ---      ---      ---      ---      ---
  Commercial real estate..............     16      ---      ---      ---      ---
  Construction........................    ---      ---      ---      ---      ---
  Consumer............................     42       71       33       56       20
  Commercial business.................     25      ---      ---      ---        3
                                       ------   ------   ------   ------   ------
                                           83       71       33       56       23
                                       ------   ------   ------   ------   ------

Net charge-offs.......................   (204)    (153)    (263)     (70)     (36)
Additions charged to operations.......    ---      ---       33       42      173
Additions through acquisitions........    ---      398      ---      ---      ---
                                       ------   ------   ------   ------   ------
Balance at end of period.............. $2,171   $2,375   $2,130   $2,360   $2,388
                                       ======   ======   ======   ======   ======

Ratio of net charge-offs during the
  period to average loans
  outstanding during the period.......   0.08%    0.06%    0.11%    0.03%    0.02%
                                       ======   ======   ======   ======   ======

Ratio of net charge-offs during the
  period to average non-
  performing assets..................    6.65%    3.97%    6.25%    2.20%    1.58%
                                       ======   ======   ======   ======   ======
</TABLE>


     The balance in the allowance for losses on loans and the related amount
charged to operations is based upon periodic evaluations of the loan portfolio
by management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, and management's estimate of future potential losses.

                                       25
<PAGE>

     While management believes that it uses the best information available to
determine the allowance for estimated losses on loans, unforeseen market
conditions could result in adjustments to the allowance for estimated losses on
loans and net earnings could be significantly affected if circumstances differ
substantially from the assumptions used in making the final determination.

<TABLE>
<CAPTION>
                                                                   December 31,
                 -------------------------------------------------------------------------------------------------------------
                          1999                  1998                  1997                   1996                 1995
                 ---------------------   -------------------   -------------------   -------------------   -------------------
                            Percent of            Percent of            Percent of            Percent of            Percent of
                            Loans in              Loans in              Loans in              Loans in              Loans in
                               Each                 Each                   Each                 Each                  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>
One-to-four
  family.......... $  313        60.24%  $  415        63.65%  $  521        65.06%  $  408        62.71%  $  403        62.74%

Multi-family......     66         3.26       83         2.21      172         3.09      451         5.94      437         6.18

Commercial real
  estate..........    611        10.54      469         8.47      444         8.61      496        12.04      561        12.07

Construction or
  development.....    208         5.19      301         5.55      150         3.71      294         2.32      272         3.52

Consumer..........    207        12.74      208        13.21      215        14.50      185        12.82      170        11.56

Commercial
  business........    600         8.03      556         6.91      352         5.03      276         4.17      259         3.95

Unallocated.......    166          ---      343          ---      276          ---      250          ---      286          ---
                   ------       ------   ------       ------   ------       ------   ------       ------   ------       ------

     Total........ $2,171       100.00%  $2,375       100.00%  $2,130       100.00%  $2,360       100.00%  $2,388       100.00%
                   ======       ======   ======       ======   ======       ======   ======       ======   ======       ======
</TABLE>

                                       26
<PAGE>

Investment Activities

     The Company has traditionally invested in U.S. Government securities and
agency obligations of both long and short terms to supplement its lending
activities. During recent years, the Company has refocused its investment
activities on short and medium term securities, although the Company has
retained a number of longer term securities in its portfolio which are held for
investment. In addition, from time to time, the Bank has acquired securities for
trading purposes. The Company's securities held for trading are recorded on the
Company's books at market value. At December 31, 1999, the Bank did not own any
securities of a single issuer which exceeded 10% of the Bank's stockholder's
equity, other than U.S. Government or federal agency obligations.

     The Company is required by federal regulations to maintain a minimum amount
of liquid assets that may be invested in specified securities and is also
permitted to make certain other securities investments. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
provided. As of December 31, 1999, the Bank's liquidity ratio (liquid assets as
a percentage of net withdrawable savings and current borrowings) was 20.0% as
compared to the OTS requirement of 4%.

                                       27
<PAGE>

     The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                         December 31,
                                                  ----------------------------------------------------------
                                                          1999               1998                1997
                                                  ------------------  ------------------  ------------------
                                                    Book      % of      Book      % of      Book      % of
                                                    Value     Total     Value     Total     Value     Total
                                                  ---------  -------  ---------  -------  ---------  -------
<S>                                               <C>        <C>      <C>        <C>      <C>        <C>
                                                                    (Dollars in thousands)
Investment Securities (1):
   U.S. government securities.....................  $13,449   19.85%    $21,690   27.60%    $ 7,587    19.33%
   Federal agency obligations.....................   51,307   75.73      53,865   68.54      28,876    73.56
   Municipal bonds................................      306    0.45         342    0.44          70     0.18
   Non-marketable equity securities...............      501    0.74         501    0.64         501     1.28
   Mutual fund shares.............................      377    0.56         388    0.49         360     0.92
                                                    -------  ------     -------  ------     -------   ------
         Subtotal.................................   65,940   97.33      76,786   97.71      37,394    95.27
FHLB Stock........................................    1,811    2.67       1,801    2.29       1,856     4.73
                                                    -------  ------     -------  ------     -------   ------
         Total investment securities and FHLB
            stock.................................  $67,751  100.00%    $78,587  100.00%    $39,250   100.00%
                                                    =======  ======     =======  ======     =======   ======

Average remaining life or term to repricing of
   investment securities excluding FHLB stock
   and non-marketable securities..................33 months           43 months           52 months

Other Interest-Earning Assets:
   Federal funds sold.............................  $ 6,322   37.67%    $18,525   58.10%    $ 8,575    38.91%
   Money market funds.............................    4,653   27.72      13,311   41.74       5,067    22.99
   FHLB overnight investments.....................    5,759   34.31         ---     ---       6,793    30.83
   Certificates of deposit........................       50    0.30          50    0.16       1,602     7.27
                                                    -------  ------     -------  ------     -------  -------
      Total.......................................  $16,784  100.00%    $31,886  100.00%    $22,037   100.00%
                                                    =======  ======     =======  ======     =======  =======
</TABLE>
---------------------
(1)  Includes securities available-for-sale.

                                       28
<PAGE>

     The composition and maturities of the investment securities portfolios,
excluding Federal Home Loan Bank of Chicago ("FHLB of Chicago") stock and
non-marketable equity securities at December 31, 1999, are indicated in the
following table.

<TABLE>
<CAPTION>
                                                     At December 31, 1999
                             ---------------------------------------------------------------------
                              Less Than     1 to 5       5 to 10       Over      Total Investment
                               1 Year        Years        Years      10 Years       Securities
                             -----------  -----------  -----------  -----------  -----------------

                             Book Value   Book Value   Book Value   Book Value      Book Value
                             -----------  -----------  -----------  -----------  -----------------
<S>                          <C>          <C>          <C>          <C>          <C>
                                          (Dollars in thousands)
Securities available-for-
  sale:
U.S. government
 securities................      $13,449      $   ---       $  ---        $ ---            $13,449
Federal agency
 obligations...............        3,488       43,110        4,709          ---             51,307
Mutual fund
 shares....................          377          ---          ---          ---                377
                                 -------      -------       ------        -----             ------
Total......................      $17,314      $43,110       $4,709        $ ---            $65,133
                                 =======      =======       ======        =====            =======
Weighted average
 yield.....................         5.46%        5.94%        6.40%         ---%              5.85%
                                 =======      =======       ======        =====            =======


Securities held-to-
  maturity:
Municipal Bonds............      $    35      $    40       $  167        $  64            $   306
                                 =======      =======       ======        =====            =======
Weighted average
 yield.....................         5.77%        5.25%        4.63%        6.40%              5.21%
                                 =======      =======       ======        =====            =======
</TABLE>



Sources of Funds

     General. Deposit accounts have traditionally been the principal source of
the Company's funds for use in lending and for other general business purposes.
In addition to deposits, the Company derives funds from loan repayments and cash
flows generated from operations. Scheduled loan payments are a relatively stable
source of funds, while deposit inflows and outflows and the related cost of such
funds have varied. Other potential sources of funds available to the Bank
include borrowings from the FHLB of Chicago and reverse repurchase agreements.

     Deposits. The Company attracts both short-term and long-term deposits by
offering a wide assortment of accounts and rates. The Company offers commercial
demand, regular statement savings accounts, NOW accounts, money market accounts,
fixed interest rate certificates of deposit with varying maturities and
individual retirement accounts. Deposit account terms vary, according to the
minimum balance required, the time period the funds must remain on deposit and

                                       29
<PAGE>

the interest rate, among other factors. The Company has not actively sought
deposits outside of its primary market area.

     The following table sets forth the savings flows at the Company during the
periods indicated:

                            Year Ended December 31,
                       ----------------------------------
                         1999       1998         1997
                       ---------  ---------  ------------
                            (Dollars in thousands)
Opening balance....... $346,803   $280,022      $277,348
Deposits..............  955,019    872,751       533,933
Withdrawals...........  958,610    869,404       541,843
Purchased deposits....      ---     51,688           ---
Increase (decrease)
  before  interest
  credited............   (3,591)    55,035        (7,910)
Interest credited.....   11,765     11,746        10,584
                       --------   --------      --------

Ending balance........ $354,977   $346,803      $280,022
                       ========   ========      ========

Net increase.......... $  8,174   $ 66,781      $  2,674
                       ========   ========      ========

Percent increase......     2.36%     23.85%         0.96%
                       ========   ========      ========



     The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Company at the dates indicated.

                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                    December 31,
                             ----------------------------------------------------------
                                    1999                1998                1997
                             ------------------  ------------------  ------------------
                                       Percent             Percent             Percent
                                         of                   of                  of
                              Amount    Total     Amount    Total     Amount    Total
                             --------  --------  --------  --------  --------  --------
Transaction and                                (Dollars in thousands)
Savings
Deposits(1):
------------
<S>                         <C>       <C>       <C>       <C>       <C>       <C>
Commercial Demand
 0%......................... $ 17,011     4.79%  $ 15,327     4.42%  $  9,720     3.47%
Savings Accounts
 2.44%......................   60,699    17.10     60,583    17.47     50,727    18.12
NOW Accounts
 2.70%......................   44,291    12.48     46,553    13.42     32,759    11.70
Money Market
 Accounts
  2.92%.....................   14,566     4.10     13,655     3.94      6,699     2.39
                             --------   ------   --------   ------   --------   ------

Total Non-Certificates......  136,567    38.47    136,118    39.25     99,905    35.68
                             --------   ------   --------   ------   --------   ------
Certificates:
------------

0.00 - 4.99%................   67,699    19.07     29,665     8.55      2,561     0.91
5.00 - 5.49%................   67,810    19.10     36,662    10.57     41,636    14.87
5.50 - 5.99%................   48,156    13.57    114,663    33.06    103,602    37.00
6.00 - 7.99%................   34,386     9.69     29,390     8.48     32,025    11.44
8.00 - over.................        6     0.00         23     0.01         97     0.03
                             --------   ------   --------   ------   --------   ------

Total Certificates..........  218,057    61.43    210,403    60.67    179,921    64.25
                             --------   ------   --------   ------   --------   ------
Accrued Interest............      353     0.10        282     0.08        196     0.07
                             --------   ------   --------   ------   --------   ------
Total Deposits.............. $354,977   100.00%  $346,803   100.00%  $280,022   100.00%
                             ========   ======   ========   ======   ========   ======
</TABLE>
--------------------------

(1) Rates on transaction and savings deposits are those in effect on December
    31, 1999.

                                       31
<PAGE>

     The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1999.


<TABLE>
<S>                     <C>       <C>       <C>       <C>       <C>           <C>       <C>
                          0.00-     5.00-     5.50-     6.00-                           Percent
                          4.99%     5.49%     5.99%     7.99%   8% and Over      Total  of Total
                        -------   -------   -------   -------   -----------   --------  --------
                                                  (Dollars in thousands)
Certificate Accounts
Maturing
In Quarter Ending:
------------------

March 31, 2000......... $25,331   $ 7,700   $11,334   $ 4,156         $ ---   $ 48,521     22.25%
June 30, 2000..........  20,177     6,185     5,788     3,189           ---     35,339     16.21
September 30, 2000.....  10,491     9,631     3,517     1,250           ---     24,889     11.41
December 31, 2000......   6,544    12,583     8,815     3,370           ---     31,312     14.36
March 31, 2001.........   3,093     9,897     2,967    10,246             6     26,209     12.02
June 30, 2001..........   1,426    12,740     4,885       780           ---     19,831      9.09
September 30, 2001.....     207     1,829     6,116     7,701           ---     15,853      7.27
December 31, 2001......      92     1,378       264     1,302           ---      3,036      1.39
March 31, 2002.........     210     1,132       739       382           ---      2,463      1.13
June 30, 2002..........      99       460       483       523           ---      1,565      0.72
September 30, 2002.....       2        48        56       561           ---        667      0.31
December 31, 2002......      22       356        42       763           ---      1,183      0.54
Thereafter.............       5     3,871     3,150       163           ---      7,189      3.30
                        -------   -------   -------   -------   -----------   --------    ------

   Total............... $67,699   $67,810   $48,156   $34,386         $   6   $218,057    100.00%
                        =======   =======   =======   =======   ===========   ========    ======

   Percent of total....   31.05%    31.10%    22.08%    15.77%         0.00%
                        =======   =======   =======   =======   ===========
</TABLE>

                                       32
<PAGE>

     The following table indicates the amount of the Company's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1999.

                                              Maturity
                                -------------------------------------
                                           Over     Over
                                3 Months  3 to 6   6 to 12    Over
                                or Less   Months   Months   12 months   Total
                                --------  -------  -------  ---------  --------
                                            (Dollars in thousands)

Certificates of deposit less
 than $100,000 (1).............. $40,768  $30,137  $49,541    $69,821  $190,267
Certificates of deposit of
 $100,000 or more (1)...........   5,185    2,099    4,495      5,290    17,069
Public funds (2)................   2,568    3,103    2,165      2,885    10,721
                                 -------  -------  -------    -------  --------
Total certificates of
 deposit........................ $48,521  $35,339  $56,201    $77,996  $218,057
                                 =======  =======  =======    =======  ========

---------------------------
(1)  Excluding public funds.
(2)  Deposits from governmental and other public entities.


       Borrowings. The Company utilizes borrowings primarily for two purposes.
The first is to purchase mortgage-backed securities in order to generate
additional net interest income and as a method of increasing the leverage on its
capital. The second is as part of the management of short term cash
requirements. The decision to borrow money to purchase mortgage-backed
securities is based on several factors, including the current asset/liability
mix, the regulatory capital position of the Bank and the adequacy of available
interest rate spreads available in such transactions, subject to the limits on
such transactions established by the Board of Directors. Borrowings for such
purposes are derived from securities sold under agreements to repurchase and
advances from the FHLB of Chicago. Borrowings related to short term cash
management are in the form of advances from the FHLB of Chicago. As a member of
the FHLB of Chicago, the Company is authorized to apply for advances from the
FHLB of Chicago. Each FHLB of Chicago credit program has its own interest rate,
which may be fixed or variable, and range of maturities. The FHLB of Chicago may
prescribe the acceptable uses for these advances, as well as limitations on the
size of the advances and repayment provisions. At December 31, 1999, borrowed
money totaled $11.2 million, all of which was in advances from the FHLB of
Chicago. Interest expense on borrowed money totaled $1.0 million during 1999 and
$1.3 million during 1998.

                                       33
<PAGE>

Service Corporation

     Federal savings associations generally may invest up to 2% of their assets
in service corporations, plus an additional 1% of assets if used for community
purposes. In addition, federal savings associations may invest up to 50% of
their regulatory capital in conforming loans to their service corporations. In
addition to investments in service corporations, federal associations are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal savings association may engage in directly.

     KFS was organized by the Company to provide appraisal services to the
Company and others. In addition, since 1983, KFS has offered, on an agency
basis, brokerage services to the Company's customers utilizing the services of
INVEST Financial Corporation, a registered broker-dealer. Finally, KFS has also
invested in an insurance agency. At December 31, 1999, the Company's equity
investment in KFS was approximately $765,000. During 1999, KFS recorded net
consolidated income of $46,000. During 1999 and 1998, gross revenues related to
securities and annuities brokerage, appraisal activities and insurance agency
activities totaled approximately $195,000, $177,000 and $72,000, and $202,000,
$235,000 and $62,000, respectively.

Competition

     The Company faces competition both in originating loans and in attracting
deposits. Competition in originating loans comes primarily from other savings
institutions, commercial banks, credit unions and mortgage bankers who also make
loans secured by real estate located in the Company's primary market areas. The
Company competes for loans principally on the basis of the interest rates and
loan fees it charges, the types of loans it originates and the quality of
services it provides to borrowers.

     The Company faces substantial competition in attracting deposits from other
savings institutions, commercial banks, securities firms, money market and
mutual funds, credit unions and other investment vehicles. The ability of the
Company to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk, convenient locations and other factors. The Company
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours and a customer oriented staff. The
Company estimates its market share of savings deposits in the Kankakee, Coal
City, Hoopeston and Champaign/Urbana market areas to be 18.4%, 65.4%, 16.3% and
less than 1.0%, respectively.

     The authority to offer money market deposits, and the expanded lending and
other powers authorized for savings institutions by federal legislation, has
resulted in increased competition for both deposits and loans between savings
institutions and other financial institutions such as commercial banks.
Competition may increase further as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.

                                       34
<PAGE>

     Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000,
securities firms and insurance companies that elect to become financial holding
companies may acquire banks and other financial institutions. The Gramm-Leach-
Bliley Act may significantly change the competitive environment in which the
Company and the Bank conduct business. The financial services industry is also
likely to become more competitive as further technological advances enable more
companies to provide financial services. These technological advances may
diminish the importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.

Employees

     As of December 31, 1999, the Company had 147 full-time employees and 29
part-time employees. The Company places a high priority on staff development
which involves extensive training, including customer service and sales
training. New employees are selected on the basis of both technical skills and
customer service capabilities. None of the Company's employees are represented
by any collective bargaining group. The Company offers a variety of employee
benefits and management considers its relations with its employees to be
excellent.


                          SUPERVISION AND REGULATION

General

     Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions and
general economic conditions, but also by the requirements of applicable state
and federal statutes and regulations and the policies of various governmental
regulatory authorities, including the Office of Thrift Supervision (the "OTS")
the Board of Governors of the Federal Reserve System (the "Federal Reserve"),
the Federal Deposit Insurance Corporation (the "FDIC"), the Internal Revenue
Service and state taxing authorities and the Securities and Exchange Commission
(the "SEC"). The effect of applicable statutes, regulations and regulatory
policies can be significant, and cannot be predicted with a high degree of
certainty.

     Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits, capital
levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. The system
of supervision and regulation applicable to the Company and its subsidiaries
establishes a comprehensive framework for their respective operations and is
intended primarily for the protection of the FDIC's deposit insurance funds and
the depositors, rather than the shareholders, of financial institutions.

                                       35
<PAGE>

     The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not describe
all of the statutes, regulations and regulatory policies that apply to the
Company and its subsidiaries, nor does it restate all of the requirements of the
statutes, regulations and regulatory policies that are described. As such, the
following is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.

Recent Regulatory Developments

     On November 12, 1999, President Clinton signed legislation that will allow
bank holding companies to engage in a wider range of nonbanking activities,
including greater authority to engage in securities and insurance activities.
Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects
to become a financial holding company may engage in any activity that the
Federal Reserve, in consultation with the Secretary of the Treasury, determines
by regulation or order is (i) financial in nature, (ii) incidental to any such
financial activity, or (iii) complementary to any such financial activity and
does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. The Act specifies certain
activities that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; underwriting and selling insurance; providing financial, investment,
or economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the Federal Reserve under section 4(c)(8) of the Bank Holding Company Act. A
bank holding company may elect to be treated as a financial holding company only
if all depository institution subsidiaries of the holding company are well-
capitalized, well-managed and have at least a satisfactory rating under the
Community Reinvestment Act.

     National banks are also authorized by the Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
(unless otherwise permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries.

     At this time, it is not possible to predict the impact the Act may have on
the Company. Various bank regulatory agencies have just begun issuing
regulations as mandated by the Act. The Federal Reserve has issued an interim
rule that sets forth procedures by which bank holding

                                       36
<PAGE>

companies may become financial holding companies, the criteria necessary for
such a conversion, and the Federal Reserve's enforcement powers should a holding
company fail to maintain compliance with the criteria. The Office of the
Comptroller of the Currency has issued a final rule discussing the procedures by
which national banks may establish financial subsidiaries as well as the
qualifications and safeguards that will be required. In addition, in February,
2000, all federal bank regulatory agencies jointly issued a proposed rule that
would implement the financial privacy provisions of the Act.

     The Act limits the nonbanking activities of unitary savings and loan
holding companies by generally prohibiting any savings and loan holding company
from engaging in any activity other than activities that (i) are currently
permitted for multiple savings and loan holding companies or (ii) are
permissible for financial holding companies (as described above) (collectively
"permissible activities"). The Act also generally prohibits any company from
acquiring control of a savings association or savings and loan holding company
unless the acquiring company engages solely in permissible activities. The Act
creates an exemption from the general prohibitions for unitary savings and loan
holding companies in existence, or formed pursuant to an application pending
before the Office of Thrift Supervision, on or before May 4, 1999.

The Company

     General. The Company, as the sole shareholder of the Bank, is a savings and
loan holding company. As a savings and loan holding company, the Company is
registered with, and is subject to regulation by, the OTS under the Home Owners'
Loan Act, as amended (the "HOLA"). Under the HOLA, the Company is subject to
periodic examination by the OTS. The Company is also required to file with the
OTS periodic reports of the Company's operations and such additional information
regarding the Company and its subsidiaries as the OTS may require.

     Investments and Activities. The HOLA prohibits a savings and loan holding
company, directly or indirectly, or through one or more subsidiaries from: (i)
acquiring control of, or acquiring by merger or purchase of assets, another
savings association or savings and loan holding company without the prior
written approval of the OTS; (ii) subject to certain exceptions, acquiring more
than 5% of the issued and outstanding shares of voting stock of a savings
association or savings and loan holding company except as part of an acquisition
of control approved by the OTS; or (iii) acquiring or retaining control of a
financial institution that is not FDIC-insured.

     A savings and loan holding company may acquire savings associations located
in more than one state in both supervisory transactions involving failing
savings associations and nonsupervisory acquisitions of healthy institutions.
Interstate acquisitions of healthy savings associations, however, are permitted
only if the law of the state in which the savings association to be acquired is
located specifically authorizes the proposed acquisition, by language to that
effect and not merely by implication. State laws vary in the extent to which
interstate acquisitions of savings associations and savings and loan holding
companies are permitted. Illinois law presently permits savings and

                                       37
<PAGE>

loan holding companies located in any state of the United States to acquire
savings associations or savings and loan holding companies located in Illinois,
subject to certain conditions, including the requirement that the laws of the
state in which the acquiror is located permit savings and loan holding companies
located in Illinois to acquire savings associations or savings and loan holding
companies in the acquiror's state.

     A savings and loan holding company that, like the Company, controls only
one savings association subsidiary and either was a savings and loan holding
company on or before May 4, 1999 or became a savings and loan holding company
pursuant to an application pending before the OTS on or before May 4, 1999 (a
"grandfathered company"), is generally not subject to any restrictions on the
types of non-banking activities that the holding company may conduct either
directly or through a non-banking subsidiary, so long as the holding company's
savings association subsidiary constitutes a qualified thrift lender (see "--The
Bank--Qualified Thrift Lender Test"). A savings and loan holding company that
controls only one savings association subsidiary but is not a grandfathered
company is subject to certain restrictions on the non-banking activities in
which it may engage (see "Recent Regulatory Developments"). In all cases,
however, if, the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of a particular activity
constitutes a serious risk to the financial safety, soundness or stability of
its savings association subsidiary, the OTS may require the holding company to
cease engaging in the activity (or divest any subsidiary which engages in the
activity) or may impose such restrictions on the holding company and the
subsidiary savings association as the OTS deems necessary to address the risk.
The restrictions the OTS may impose include limitations on (i) the payment of
dividends by the savings association to the holding company, (ii) transactions
between the savings association and its affiliates and (iii) any activities of
the savings association that might create a serious risk that liabilities of the
holding company and its affiliates may be imposed on the savings association.

     Federal law also prohibits any person or company from acquiring "control"
of a savings association or a savings and loan holding company without prior
notice to the appropriate federal bank regulator. "Control" is defined in
certain cases as the acquisition of 10% of the outstanding shares of a savings
association or savings and loan holding company.

     Dividends. The Delaware General Corporation Law (the "DGCL") allows the
Company to pay dividends only out of its surplus (as defined and computed in
accordance with the provisions of the DGCL) or if the Company has no such
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Additionally, OTS policies provide
that a savings and loan holding company should not pay dividends that are not
supportable by the company's core earnings or that may be funded only by
borrowings or by sales of assets. The OTS also possesses enforcement powers over
savings and loan holding companies to prevent or remedy actions that represent
unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the payment of
dividends by savings and loan holding companies.

                                       38
<PAGE>

     Federal Securities Regulation. The Company's common stock is registered
with the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company
is subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.

The Bank

     General. The Bank is a federally chartered savings association, the
deposits of which are insured by the FDIC's Savings Association Insurance Fund
("SAIF"). As a SAIF-insured, federally chartered savings association, the Bank
is subject to the examination, supervision, reporting and enforcement
requirements of the OTS, as the chartering authority for federal savings
associations, and the FDIC as administrator of the SAIF. The Bank is also a
member of the Federal Home Loan Bank System, which provides a central credit
facility primarily for member institutions.

     Deposit Insurance. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.

     During the year ended December 31, 1999, SAIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2000, SAIF assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.

     The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) has violated any applicable
law, regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management of the Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of the Bank.

     FICO Assessments. Since 1987, a portion of the deposit insurance
assessments paid by SAIF members has been used to cover interest payments due on
the outstanding obligations of the Financing Corporation ("FICO"). FICO was
created in 1987 to finance the recapitalization of the Federal Savings and Loan
Insurance Corporation, the SAIF's predecessor insurance fund. As a

                                       39
<PAGE>

result of federal legislation enacted in 1996, beginning as of January 1, 1997,
both SAIF members and members of the FDIC's Bank Insurance Fund ("BIF") became
subject to assessments to cover the interest payments on outstanding FICO
obligations. These FICO assessments are in addition to amounts assessed by the
FDIC for deposit insurance. Between January 1, 2000 and the final maturity of
the outstanding FICO obligations in 2019, BIF members and SAIF members will
share the cost of the interest on the FICO bonds on a pro rata basis. During the
year ended December 31, 1999, the FICO assessment rate for SAIF members ranged
between approximately 0.058% of deposits and approximately 0.061% of deposits,
while the FICO assessment rate for BIF members ranged between approximately
0.0116% of deposits and approximately 0.0122% of deposits. During the year ended
December 31, 1999, the Bank paid FICO assessments totaling $168,000.

     Supervisory Assessments. All Federal savings associations are required to
pay supervisory assessments to the OTS to fund the operations of the OTS. The
amount of the assessment is calculated using a formula which takes into account
the institution's size, its supervisory condition (as determined by the
composite rating assigned to the institution as a result of its most recent OTS
examination) and the complexity of its operations. During the year ended
December 31, 1999, the Bank paid supervisory assessments to the OTS totaling
$85,000.

     Capital Requirements. Pursuant to the HOLA and OTS regulations, savings
associations, such as the Bank, are subject to the following minimum capital
requirements: a core capital requirement, consisting of a minimum ratio of core
capital to total assets of 3% for savings associations assigned a composite
rating of 1 as of the association's most recent OTS examination, with a minimum
core capital requirement of 4% of total assets for all other savings
associations; a tangible capital requirement, consisting of a minimum ratio of
tangible capital to total assets of 1.5%; and a risk-based capital requirement,
consisting of a minimum ratio of total capital to total risk-weighted assets of
8%, at least one-half of which must consist of core capital. Core capital
consists primarily of permanent stockholders' equity less (i) intangible assets
other than certain supervisory goodwill, certain mortgage servicing rights and
certain purchased credit card relationships and (ii) investments in subsidiaries
engaged in activities not permitted for national banks. Tangible capital is
substantially the same as core capital except that all intangible assets other
than certain mortgage servicing rights must be deducted. Total capital consists
primarily of core capital plus certain debt and equity instruments that do not
qualify as core capital and a portion of the Bank's allowances for loan and
leases losses.

     The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
OTS provide that additional capital may be required to take adequate account of,
among other things, interest rate risk or the risks posed by concentrations of
credit, nontraditional activities, or securities trading activities.

     During the year ended December 31, 1999, the Bank was not required by the
OTS to increase its capital to an amount in excess of the minimum regulatory
requirement. As of

                                       40
<PAGE>

December 31, 1999, the Bank exceeded its minimum regulatory capital requirements
with a core capital ratio of 7.40%, a tangible capital ratio of 7.40% and a
risk-based capital ratio of 13.33%.

     Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution. As of December 31, 1999, the Bank was "well capitalized", as
defined by OTS regulations.

     Dividends. OTS regulations require prior OTS approval for any capital
distribution by a savings association that is not eligible for expedited
processing under the OTS's application processing regulations. In order to
qualify for expedited processing, a savings association must: (i) have a
composite examination rating of 1 or 2; (ii) have a Community Reinvestment Act
rating of satisfactory or better; (iii) have a compliance rating of 1 or 2; (iv)
meet all applicable regulatory capital requirements; and (v) not have been
notified by the OTS that it is a problem association or an association in
troubled condition. Savings associations that qualify for expedited processing
are not required to obtain OTS approval prior to making a capital distribution
unless: (a) the amount of the proposed capital distribution, when aggregated
with all other capital distributions during the same calendar year, will exceed
an amount equal to the association's year-to-date net income plus its retained
net income for the preceding two years; (b) after giving effect to the
distribution, the association will not be at least "adequately capitalized" (as
defined by OTS regulation); or (c) the distribution would violate a prohibition
contained in an applicable statute, regulation or agreement with the OTS or the
FDIC or violate a condition imposed in connection with an OTS-approved
application or notice. The OTS be given prior notice of certain types of capital
distributions, including any capital distribution by a savings association that,
like the Bank, is a subsidiary of a savings and loan holding company, or by a
savings association that, after giving effect to the distribution, would not be
"well-capitalized" (as defined by OTS regulation).

     The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described above,
the

                                       41
<PAGE>

Bank exceeded its minimum capital requirements under applicable guidelines as of
December 31, 1999. Further, under applicable regulations of the OTS, the Bank
may not pay dividends in an amount which would reduce its capital below the
amount required for the liquidation account established in connection with the
Bank's conversion from the mutual to the stock form of ownership in 1992. As of
December 31, 1999, approximately $10.5 million was available to be paid as
dividends to the Company by the Bank. Notwithstanding the availability of funds
for dividends, however, the OTS may prohibit the payment of any dividends by the
Bank if the OTS determines such payment would constitute an unsafe or unsound
practice.

     Insider Transactions. The Bank is subject to certain restrictions imposed
by federal law on extensions of credit to the Company and its subsidiaries, on
investments in the stock or other securities of the Company and its subsidiaries
and the acceptance of the stock or other securities of the Company or its
subsidiaries as collateral for loans. Certain limitations and reporting
requirements are also placed on extensions of credit by the Bank to its
directors and officers, to directors and officers of the Company and its
subsidiaries, to principal stockholders of the Company, and to "related
interests" of such directors, officers and principal stockholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
a director or officer of the Company or one of its subsidiaries or a principal
stockholder of the Company may obtain credit from banks with which the Bank
maintains a correspondent relationship.

     Safety and Soundness Standards. The federal banking agencies have adopted
guidelines which establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. Since the fourth quarter of 1998, and through the first quarter of
2000, the federal banking regulators have issued safety and soundness standards
for achieving Year 2000 compliance, including standards for developing and
managing Year 2000 project plans, testing remediation efforts and planning for
contingencies.

     In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety

                                       42
<PAGE>

and soundness guidelines may also constitute grounds for other enforcement
action by the federal banking regulators, including cease and desist orders and
civil money penalty assessments.

     Branching Authority. Federally chartered savings associations which qualify
as "domestic building and loan associations," as defined in the Internal Revenue
Code, or meet the qualified thrift lender test (see "--The Bank--Qualified
Thrift Lender Test") have the authority, subject to receipt of OTS approval, to
establish or acquire branch offices anywhere in the United States. If a federal
savings association fails to qualify as a "domestic building and loan
association," as defined in the Internal Revenue Code, and fails to meet the
qualified thrift lender test the association may branch only to the extent
permitted for national banks located in the savings association's home state. As
of December 31, 1999, the Bank qualified as a "domestic building and loan
association," as defined in the Internal Revenue Code and met the qualified
thrift lender test.

     Qualified Thrift Lender Test. The HOLA requires every savings association
to satisfy a "qualified thrift lender" ("QTL") test. Under the HOLA, a savings
association will be deemed to meet the QTL test if it either (i) maintains at
least 65% of its "portfolio assets" in "qualified thrift investments" on a
monthly basis in nine out of every 12 months or (ii) qualifies as a "domestic
building and loan association," as defined in the Internal Revenue Code. For
purposes of the QTL test, "qualified thrift investments" consist of mortgage
loans, mortgage-backed securities, education loans, small business loans, credit
card loans and certain other housing and consumer-related loans and investments.
"Portfolio assets" consist of a savings association's total assets less goodwill
and other intangible assets, the association's business properties and a limited
amount of the liquid assets maintained by the association pursuant to the
liquidity requirements of the HOLA and OTS regulations (see "--The Bank--
Liquidity Requirements"). A savings association that fails to meet the QTL test
must either convert to a bank charter or operate under certain restrictions on
its operations and activities. Additionally, within one year following the loss
of QTL status, the holding company for the savings association will be required
to register as, and will be deemed to be, a bank holding company. A savings
association that fails the QTL test may requalify as a QTL but it may do so only
once. As of December 31, 1999, the Bank satisfied the QTL test, with a ratio of
qualified thrift investments to portfolio assets of 78.8%, and qualified as a
"domestic building and loan association," as defined in the Internal Revenue
Code.

     Liquidity Requirements. OTS regulations currently require each savings
association to maintain, for each calendar quarter, an average daily balance of
liquid assets (including cash, certain time deposits, bankers' acceptances, and
specified United States Government, state or federal agency obligations) equal
to at least 4% of either (i) its liquidity base (i.e., its net withdrawable
accounts plus borrowings repayable in 12 months or less) as of the end of the
preceding calendar quarter or (ii) the average daily balance of its liquidity
base during the preceding calendar quarter. This liquidity requirement may be
changed from time to time by the OTS to an amount within a range of 4% to 10% of
the liquidity base, depending upon economic conditions and the deposit flows of
savings associations. The OTS may also require a savings association to maintain
a higher level of liquidity than the minimum 4% requirement if the OTS

                                       43
<PAGE>

deems necessary to ensure the safe and sound operation of the association.
Penalties may be imposed for failure to meet liquidity ratio requirements. At
December 31, 1999, the Bank was in compliance with OTS liquidity requirements,
with a liquidity ratio of 20.0%.

     Federal Reserve System. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $44.3 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $44.3 million, the reserve
requirement is $1.329 million plus 10% of the aggregate amount of total
transaction accounts in excess of $44.3 million. The first $5.0 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank is in compliance with the foregoing requirements. The balances used to
meet the reserve requirements imposed by the Federal Reserve may be used to
satisfy liquidity requirements imposed by the OTS.

Federal and State Taxation

     General. Prior to 1996, savings associations such as the Bank that met
certain definitional tests relating to the composition of assets and income as
defined in the Internal Revenue Code of 1986 were allowed to establish reserves
for bad debts on "qualifying real property loans" based either upon a percentage
of taxable income or the experience method, whichever resulted in a larger
deduction. Reserves for bad debts on nonqualifying loans were based solely upon
the experience method. The experience method reserve amount is calculated as a
function of the actual bad debt experience sustained by the institution over a
period of years, whereas the percentage of taxable income method is a strict
numeric calculation not dependent on actual loss experience.

     The Small Business Job Protection Act of 1996 became law on August 20,
1996. One of the provisions in the new law repealed the special bad debt reserve
methods that had existed for savings associations prior to 1996. The Bank is now
required to compute reserves on all loans under the experience method. The new
law freezes the reserves for bad debts that existed at the end of the last tax
year beginning before January 1, 1988 and requires the Bank to recapture into
taxable income over a six year period the "applicable excess reserve." For the
Bank, the applicable excess reserve is approximately $648,000 which represents
the difference between the reserve balance at December 31, 1995, and the balance
of the reserve at end of the last tax year beginning before January 1, 1988.
One-sixth of the applicable excess reserve ($108,000) has been recaptured into
taxable income during each tax year from 1996 through 1999. Deferred taxes have
previously been established on the applicable excess reserve.

     Retained income of the Bank includes approximately $8,998,000 that
represents tax provisions for losses on loans that have been deducted in excess
of amounts that have been charged against income on the financial statements. No
provision for federal income tax has been made

                                       44
<PAGE>

against this amount. If, in the future, the Bank ceases to qualify as a "bank"
for federal income tax purposes or if these retained earnings are liquidated,
federal income taxes may be imposed at the then-applicable rates. If federal
income taxes had been provided, the deferred liability would have been
approximately $3,059,000.

     In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds
corporation's regular income tax. During the years ended December 31, 1997, 1998
and 1999, the Bank was not required to pay alternative minimum tax.

     The Company, the Bank and its subsidiary file consolidated federal income
tax returns on a calendar year basis using the accrual method of accounting.

     The Bank and its consolidated subsidiaries have been audited by the IRS
with respect to consolidated federal income tax returns through December 31,
1982. With respect to years examined by the IRS, all deficiencies have been
satisfied. 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 Company and its consolidated subsidiaries.


                       EXECUTIVE OFFICERS OF THE COMPANY

     The business experience during the past five years with respect to
executive officers of the Company and the Bank who do not serve on the Company's
Board of Directors is listed below. Each officer is elected annually to serve
until his or her successor is elected and qualified, or until he or she is no
longer employed by the Company or its subsidiaries or is removed by the Board of
Directors. There are no arrangements or understandings between the persons named
and any other person pursuant to which such officers were selected.

     Ronald J. Walters, age 50, is Vice President, Treasurer and Chief Financial
Officer of the Company and Senior Vice President, Treasurer and Chief Financial
Officer of the Bank, positions he has held since August 1992 and January 1985,
respectively. As the Chief Financial Officer of the Bank, Mr. Walters is
responsible for the establishment and supervision of the Bank's accounting,
information technology, and buildings and grounds. Mr. Walters joined the Bank
in 1984 as Controller and Chief Financial Officer, was named Vice President and
Treasurer in 1985, and promoted to Senior Vice President in 1996. Mr. Walters is
a certified public accountant.

     David B. Cox, age 61, was elected President of the Bank in 1993, and a
director of the Bank in 1995. Prior to his election as President, Mr. Cox had
served as Vice President of Operations for the Bank since 1985. Mr. Cox is
responsible for overseeing the day-to-day

                                       45
<PAGE>

operation of the Bank. Mr. Cox joined the Bank in 1956 and has held a variety of
positions including Assistant Vice President, Branch Manager and Assistant
Secretary. Mr. Cox has served as Vice President of the Company since 1992.

     Gerald C. Chantome, age 63, is a Senior Vice President and Chief Commercial
Lending Officer of the Bank, a position he has held since 1995. Previously he
was Vice President of Commercial and Consumer Lending for the Bank, a position
he held since 1988. Mr. Chantome is responsible for oversight of the Bank's
Commercial Lending Department. Prior to joining the Bank, from 1981 to 1988, Mr.
Chantome served as Senior Vice President and director of City National Bank and
Keystone Bancshares located in Kankakee, Illinois. Mr. Chantome was an employee
and officer of City National since 1954.

     Keith M. Roseland, age 50, is a Senior Vice President and Regional
Commercial Lending Officer of the Bank, a position he was appointed to in 1999.
Previously, Mr. Roseland was Regional Branch Manger responsible for the
operation of the Coal City, Diamond and Braidwood, Illinois branches of the Bank
since 1998. He had previously served as President, since 1986, of CCNB, which
was acquired by the Bank in January, 1998. Mr. Roseland had been with CCNB since
1967.

     Carol Hoekstra, age 44, was elected a Senior Vice President of the Bank in
1999. She is also an Assistant Secretary of the Company, a position she has held
since 1992. Previously, she was a Vice President of the Bank since 1995. Mrs.
Hoekstra is responsible for oversight of the Bank's retail mortgage and consumer
lending operations. Mrs. Hoekstra first joined the Bank in 1977. She rejoined
the Bank in 1991 as consumer loan manager, following her return to the area from
Texas where she worked at a commercial bank in consumer lending.

     Monte S. Crowl, age 35, has been Vice President of Marketing of the Bank
since January 1993. He is responsible for the Marketing Department. Prior to
joining the Bank in 1989, Mr. Crowl was employed by the Central Bank
Corporation, Cincinnati, Ohio, as a marketing representative from August 1987 to
August 1989.

     Terry L. Ralston, age 50, was elected a Vice President of the Bank in 1998.
He is also Information Technology Manager of the Bank, a position he was
appointed to in 2000. Previously, since joining the Bank in February, 1996, he
was Data Processing Manager. He is responsible for the day-to-day operation of
the Bank's Data Processing Department and Deposit Services Center. He has over
twenty-five years of experience in similar positions with financial institutions
in northern Illinois and southern Wisconsin.

                                       46
<PAGE>

Item 2.  Properties
Offices

     The following table sets forth information concerning the main office and
each branch office of the Bank at December 31, 1999. At December 31, 1999, the
Company's premises had an aggregate net book value of approximately $6.9
million.
<TABLE>
<CAPTION>
                               Year       Owned           Lease               Net
         Location           Opened (1)  or Leased    Expiration Date       Book Value
         --------           ----------  ---------  --------------------  --------------
                                                                         (In thousands)
<S>                         <C>         <C>        <C>                   <C>
Main Office
-----------
310 S. Schuyler Avenue         1958       Owned            N/A               $2,036
Kankakee, Illinois

Full Service Branches
-----------------------        1977       Owned            N/A                   24
Main Street and U.S. 45
Ashkum, Illinois

680 S. Main Street             1974       Owned            N/A                  263
Bourbonnais, Illinois

990 N. Kinzie Avenue           1998      Leased     October 22, 2013 (2)        211
Bradley, Illinois

180 N. Front Street            1998      Leased       July 24, 2000 (3)         ---
Braidwood, Illinois

1001 S. Neil Street            1992       Owned            N/A                  780
Champaign, Illinois

100 S. Broadway                1998      Leased       July 24, 2000 (3)         169
Coal City, Illinois

660 S. Broadway                1998       Owned            N/A                  751
Coal City, Illinois

1275 E. Division Street        1998       Owned            N/A                  377
Diamond, Illinois

302 W. Mazon Avenue            1987       Owned            N/A                  405
Dwight, Illinois

654 N. Park Road               1998       Owned            N/A                  600
Herscher, Illinois

323 E. Main Street             1994       Owned            N/A                  169
Hoopeston, Illinois

310 Section Line Road          1975       Owned            N/A                  220
Manteno, Illinois

200 W. Washington Street       1995       Owned            N/A                  158
Momence, Illinois

1708 S. Philo Road             1998       Owned            N/A                  748
Urbana, Illinois
                                                                             ------
                                                                             $6,911
                                                                             ======
</TABLE>
(1) Year opened refers to the year in which the current facility opened or was
    acquired.
(2) The Bank has an option to cancel this lease at the end of the fifth and
    tenth year by providing notice consistent with the terms of the lease.
(3) The Bank has an option to renew this lease for three consecutive five year
    terms.

                                       47
<PAGE>

     The Company believes that its current facilities are adequate to meet
present and immediately foreseeable needs.

     The Company maintains depositor and borrower customer files on an in-house
system. The net book value of the data processing and computer equipment
utilized by the Company at December 31, 1999 was $122,000.

Item 3. Legal Proceedings

     The Company is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
current legal proceedings cannot be predicted with certainty, it is the opinion
of management that the resolution of these legal actions should not have a
material effect on the Company's consolidated financial position or results of
operations.

Item 4. Submission of Matters to a Vote of Security Holders

     No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1999.

                                    PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

     Page 54 of the 1999 Annual Report to Stockholders is incorporated by
reference.

Item 6. Selected Financial Data

     Pages 8 and 9 of the 1999 Annual Report to Stockholders is incorporated by
reference.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation

     Pages 10 through 26 of the 1999 Annual Report to Stockholders are
incorporated by reference.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

     Pages 10 through 26 of the 1999 Annual Report to Stockholders are
incorporated by reference.

                                       48
<PAGE>

Item 8. Financial Statements and Supplementary Data

     Pages 27 through 52 of the 1999 Annual Report to Stockholders are
incorporated by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

     None

                                   PART III

Item 10. Directors and Officers of the Registrant

     Information concerning directors of the Company is incorporated by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 2000 (the "2000 Proxy Statement"), a copy of which
was filed on March 17, 2000.

     At its monthly meeting on March 14, 2000 the board of directors of the
Company appointed Brenda L. Baird to the board to fill the vacancy created by
the unexpected death of James G. Schneider on February 15, 2000. Mrs. Baird, a
Kankakee County native and president and CEO of a local wireless communication
company, which she established, was also elected to fill the vacancy on the
Bank's board of directors.

Executive Officers Who are Not Directors

     Information regarding the business experience during the past five years
with respect to the executive officers of the Company contained in Part I of
this Form 10-K is incorporated by reference.

Compliance with Section 16(a) of the Exchange Act

     Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers and directors and persons who own more than 10% of
the Company Common Stock file reports of ownership and changes in ownership with
the SEC and with the exchange on which the Company's shares of Common Stock are
traded. Such persons are also required to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on the Company's review of the
copies of such forms furnished to the Company and, if appropriate,
representations made to the Company by any such reporting person concerning
whether a Form 5 was required to be filed for 1999, the Company is not aware
that any of its directors and executive officers or 10% stockholders failed to
comply with the filing requirements of Section 16(a) during 1999.

                                       49
<PAGE>

Item 11. Executive Compensation

     Information concerning executive compensation called for by Item 11 of this
Form 10-K is incorporated by reference from the section in the Company's 2000
Proxy Statement entitled "Executive Compensation." The report of the Company's
Compensation Committee is not incorporated into this Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     Information concerning security ownership of certain beneficial owners and
management called for by Item 12 of this Form 10-K is incorporated by reference
from the section in the Company's 2000 Proxy Statement entitled "Voting
Securities and Principal Holder Thereof."

Item 13. Certain Relationships and Related Transactions

     Information concerning certain relationships and related transactions
called for by Item 13 of this Form 10-K is incorporated by reference from the
section in the Company's 2000 Proxy Statement entitled "Certain Relationships
and Related Transactions."

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

     (a)(1) Consolidated Financial Statements:
     ----------------------------------------

     The following information appearing in the Registrant's 1999 Annual Report
to Stockholders is incorporated by reference in this Annual Report on Form 10-K
as Exhibit 13.
<TABLE>
<CAPTION>
                                                          Pages in
          Annual Report Section                         Annual Report
         ----------------------                         -------------
<S>                                                     <C>
Selected Financial Data.................................     8-9
Management's Discussion and Analysis of
  Financial Condition and Results of Operations.........   10-26
Report of Independent Auditors..........................      27
Consolidated Statements of Financial Condition..........   28-29
Consolidated Statements of Income.......................      30
Consolidated Statements of Stockholders' Equity.........      31
Consolidated Statements of Cash Flows...................   32-33
Notes to Consolidated Financial Statements..............   34-52
Quarterly Financial Information.........................      52
</TABLE>

                                       50
<PAGE>

     With the exception of those sections specifically incorporated by
reference, the Registrant's 1999 Annual Report to Stockholders is not deemed
filed as part of this Annual Report on Form 10-K.

     (a)(2) Financial Statement Schedules:
     ------------------------------------

     Financial statement schedules have been omitted as the required information
is contained in the consolidated financial statements and notes thereto, or
because such schedules are not required or applicable.

     (a)(3) Exhibits:
     ---------------

<TABLE>
<CAPTION>
 Regulation                                               Reference to Prior       Sequential Page Number Where
S-K Exhibit                                               Filing or Exhibit     Attached Exhibits Are Located in
  Number                     Document                  Number Attached Hereto              Form 10-K
-----------    -----------------------------------     ----------------------   --------------------------------
<S>            <C>                                     <C>                      <C>
      3        Articles of Incorporation                       (1)                             N/A
      3        Bylaws                                          (1)                             N/A
      4        Instruments defining the rights of              (1)                             N/A
               security holders, including debentures
     10        Executive Compensation Plans and
               Arrangements

               a.  Stock Option Plan                           (2)                             N/A

               b.  Management Recognition Plan                 (2)                             N/A
                   and Trusts

               c.  Employee Stock Ownership Plan               (1)                             N/A

               d.  Money Purchase Pension Plan                 (1)                             N/A

               e.  401(k) Plan                                 (1)                             N/A

               f.  Kankakee Bancorp, Inc. Bank
                   Incentive Plan and Trust                    (3)                             N/A




     13        1999 Annual Report to Stockholders             N/A
     22        Subsidiaries of Registrant                     N/A
     23        Consent of Independent Auditor                 N/A
     27        Financial Data Schedule                        N/A
     99.1      2000 Proxy Statement                           N/A
     99.2      Rights Agreement                                (4)
</TABLE>
---------------------------
(1)  Filed on September 11, 1992, as exhibits to the Registrant's Registration
     Statement No. 33-51950 on Form S-1. Such previously filed documents are
     hereby incorporated herein by reference in accordance with Item 601 of
     Regulation S-K.

(2)  Filed on March 29, 1993, as exhibits to the Registrant's Annual Report on
     Form 10-K. Such previously filed documents are hereby incorporated herein
     by reference in accordance with Item 601 of Regulation S-K.

                                       51
<PAGE>

(3)  Filed on March 30, 1994, as an exhibit to the Registrant's Annual Report on
     Form 10-K. Such previously filed documents are hereby incorporated herein
     by reference in accordance with Item 601 of Regulation S-K.

(4)  Filed on May 21, 1999, as an exhibit to the Registrant's Form 8-K. Such
     previously filed document is hereby incorporated herein by reference in
     accordance with Item 601 of Regulation S-K.

   (b)  Reports on Form 8-K:
        -------------------
     No reports on Form 8-K have been filed during the three-month period ended
     December 31, 1999.

                                       52
<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.

                            KANKAKEE BANCORP, INC.

Date:  March 24, 2000      By: /s/ William Cheffer
       --------------          -------------------
                               William Cheffer
                               Chief Executive Officer and Chairman of the Board

     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.
<TABLE>
<CAPTION>


<S>                         <C>       <C>
 /s/ William Cheffer        3-24-00   Chief Executive Officer and Chairman
--------------------------  -------   of the Board (Principal Executive Officer)
  William Cheffer            Date

 /s/ Ronald J. Walters      3-24-00   Vice President and Treasurer (Principal
--------------------------  -------   Financial and Accounting Officer)
  Ronald J. Walters          Date

                                      Director
--------------------------  -------
  Brenda L. Baird            Date

 /s/ Charles C. Huber       3-24-00   Director
--------------------------  -------
  Charles C. Huber           Date

 /s/ Wesley E. Walker       3-24-00   Director
--------------------------  -------
  Wesley E. Walker           Date

 /s/ Larry D. Huffman       3-24-00   Director
--------------------------  -------
  Larry D. Huffman           Date

 /s/ Thomas M. Schneider    3-24-00   Director
--------------------------  -------
  Thomas M. Schneider        Date

 /s/ Michael A. Stanfa      3-24-00   Director
--------------------------  -------
  Michael A. Stanfa          Date
</TABLE>

                                       53
<PAGE>

                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
Regulation                                                  Reference to Prior       Sequential Page Number Where
S-K Exhibit                                                  Filing or Exhibit     Attached Exhibits Are Located in
  Number                        Document                  Number Attached Hereto              Form 10-K
-----------    --------------------------------------     ----------------------   --------------------------------
<S>            <C>                                        <C>                      <C>
    3          Articles of Incorporation                          (1)                            N/A
    3          Bylaws                                             (1)                            N/A
    4          Instruments defining the rights of                 (1)                            N/A
               security holders, including debentures
   10          Executive Compensation Plans and
               Arrangements

               a.  Stock Option Plan                              (2)                            N/A

               b.  Management Recognition Plan                    (2)                            N/A
                   and Trusts

               c.  Employee Stock Ownership Plan                  (1)                            N/A

               d.  Money Purchase Pension Plan                    (1)                            N/A

               e.  401(k) Plan                                    (1)                            N/A

               f.  Kankakee Bancorp, Inc. Bank                    (3)                            N/A
                   Incentive Plan and Trust

   13          1999 Annual Report to Stockholders                 N/A
   22          Subsidiaries of Registrant                         N/A
   23          Consent of Independent Auditor                     N/A
   27          Financial Data Schedule                            N/A
   99.1        2000 Proxy Statement                               N/A
   99.2        Rights Agreement                                   (4)
</TABLE>
---------------------------
(1)  Filed on September 11, 1992, as exhibits to the Registrant's Registration
     Statement No. 33-51950 on Form S-1. Such previously filed documents are
     hereby incorporated herein by reference in accordance with Item 601 of
     Regulation S-K.

(2)  Filed on March 29, 1993, as exhibits to the Registrant's Annual Report on
     Form 10-K. Such previously filed documents are hereby incorporated herein
     by reference in accordance with Item 601 of Regulation S-K.

(3)  Filed on March 30, 1994, as an exhibit to the Registrant's Annual Report on
     Form 10-K. Such previously filed documents are hereby incorporated herein
     by reference in accordance with Item 601 of Regulation S-K.

(4)  Filed on May 21, 1999, as an exhibit to the Registrant's Form 8-K. Such
     previously filed document is hereby incorporated herein by reference in
     accordance with Item 601 of Regulation S-K.

                                       54