<PAGE>

                                                                     Exhibit 13


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Overview

Kankakee Bancorp, Inc. (the "Company") is the holding company for KFS Bank,
F.S.B. (the "Bank"). All references to the Company in the following discussion
include the Bank and the Bank's wholly-owned service corporation, KFS Service
Corporation ("KFS"), unless indicated otherwise. In the last two years, the
Company has continued to implement much of the strategic plan developed in
early 2000, resulting in significant asset and core earnings growth. Net income
rose 26% in 2001, but declined by 32% in 2002 due to asset quality issues which
resulted in almost $4.0 million in provision for losses on loans during the
year. Assets grew from $459.9 million in 2000 to $546.4 million at the end of
2002, representing an increase of 19% over the two-year period.

The Company has also continued an aggressive capital management plan over the
last two years. As part of this strategy, the Company made open market
purchases of its own stock, repurchasing 83,600 common shares at an average
cost of $38.30 per share in 2002 and 64,200 common shares at an average cost of
$24.03 per share in 2001. During the first quarter of 2003 through February 28,
2003, the Company repurchased 193,270 additional shares of stock at a total
cost of $7.7 million. Since converting to a stock organization in 1992, the
Company has repurchased 946,389 shares at anaverage cost of $26.72 per share.
In addition, the Company is continuously evaluating balance sheet opportunities
to augment and leverage its strong capital base to maximize stockholders'
return on equity. The Company will continue to evaluate opportunities in 2003
in an effort to resume a positive earnings trend.

The Company's results of operations are dependent primarily on net interest
income, which is the difference, or "spread", between the interest income
earned on its loans, mortgage-backed securities and investment portfolios and
its cost of funds, consisting of interest paid on its deposits and on borrowed
funds. The Company's operating expenses principally consist of employee
compensation and benefits, occupancy, marketing and other general and
administrative expenses. The Company's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.

Economic Climate
During 2001, the Federal Open Market Committee ("the FOMC") lowered its target
short-term interest rates by a total of four and three-quarters percentage
points. The federal funds target went from 6.50% to 1.75% and the Federal
Reserve discount rate went from 6.00% to 1.25%. The federal funds rate is the
rate at which financial institutions borrow from each other, while the discount
rate is the rate at which member banks borrow from the Federal Reserve. In
November 2002, the FOMC reduced its target short-term interest rates by an
additional fifty basis points. This action lowered the federal funds target to
1.25% and the Federal Reserve discount rate to 0.75%. As was the case in 2001,
the FOMC cited a slowing economy and recessionary trends as the primary reasons
for the November 2002 move. Lower short-term interest rates would tend to
stimulate economic activity by reducing the financing costs on borrowed funds
for both businesses and individuals.

A slowing economy would usually result in some increase in problem assets, and
could possibly result in some increase in loan losses. In a slowing economy or
recession, cash flows and profits of commercial customers decrease, which could
result in an increase in delinquencies. Additionally, individual borrowers
experience cash flow problems from job loss, reduction in investment returns or
other causes. This could also result in an increase in delinquencies. Due in
part to recent economic conditions, the Company experienced an increase of
delinquencies and problem loans. During the third quarter of 2002, this
resulted in a substantial increase in the Company's provision for losses on
loans during that quarter and a higher than expected provision for losses on
loans during the fourth quarter.

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

10

<PAGE>



While some economic indicators are pointing toward a recovery, others are still
weak, indicating that the economy remains slow. During 2002, a number of
accounting and corporate governance problems at large, publicly-held companies
came to light, contributing to the volatility in the markets, which could
impact the speed at which the economy moves into a full recovery. If the
economy does move into a full recovery, then the next FOMC interest rate move
would likely be an increase in its target rates.

Changing interest rates, because of the Company's current structure of assets
and liabilities, could have a detrimental effect on the Company's interest rate
spread and results of operations. The Company had a negative cumulative
one-year gap of 5.0% at December 31, 2001 and a positive cumulative one-year
gap of 9.7% at December 31, 2002. A positive gap indicates that an increase in
market interest rates might positively affect net interest income and the
results of operations, due to assets maturing, and repricing, from their
current rates to higher rates, more quickly than liabilities will mature and
reprice to higher rates. Management believes that the Company's current level
of interest rate sensitivity is reasonable, in light of the current market
rates and the possibility of increasing market rates. However, significant
fluctuations in interest rates may have an adverse effect on the Company's
financial condition and results of operations.

Recent Business Initiatives
During the late 1990s, the Company experienced significant growth and
improvement in its office facilities and a widening of its market areas. This
was accomplished through the acquisition of a bank, the opening of several new
offices and the replacement of an outdated office building. There were also
significant changes and improvements in products and services brought about
through the use of technology.

During this same period, the Company began the process of shifting its
operating philosophy to a sales orientation and away from traditional
approaches to banking services. Management continues to support and encourage
this process, recognizing that changes, particularly of this type and
magnitude, require employee education and customer communication. These changes
in philosophy and culture require not only time but allocation of other Company
resources. None of these efforts were without cost, and have been, and, to some
degree, will continue to be, reflected in operating expenses and net income.

In the first quarter of 2000, management initiated an aggressive growth
strategy which was aimed at increasing deposits and growing the loan portfolio,
which resulted in the reduction of the size of the investment portfolio. The
strategy, which continued into the first quarter of 2001, was intended to
improve earnings in a number of ways which included:

  .  Improved utilization of facilities and increased productivity of personnel;

  .  Increased capital leverage; and

  .  Improved asset yields, due to increased commercial and consumer lending
     and the replacement of investments with fixed-rate mortgage loans.

It was recognized that such a strategy would:

  .  Likely increase the cost of funds, due to aggressive deposit pricing and
     the potential need to borrow money at wholesale market rates;

  .  Necessitate the assumption of an increased level of interest rate risk,
     due to aggressive loan pricing and the need to retain longer term,
     fixed-rate mortgages for the portfolio.

In response to rapidly falling interest rates during 2001, the Company modified
its growth strategy and, once again, began to sell its fixed-rate mortgage
originations in the secondary market. This modified strategy remained in effect
through 2002.


MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                                                                             11

<PAGE>



During 2002, the Company has initiated a number of strategies to improve
profitability and enhance stockholder value. These include:

  .  The Company has conducted an evaluation of the branch network and other
     service delivery systems, including locations, market areas, physical
     layouts, accessibility, market potentials and corporate identity. As part
     of this process, the organizational structure, including lines of
     authority, job functions and supervisory responsibilities, was also
     reviewed. A number of changes have resulted from this process. These
     include:

    .  the recent change of the name of the Bank to KFS Bank, F.S.B., effective
       December 1, 2002;

    .  the announced construction of a new office in Bradley, Illinois, to
       replace an in-store office, as well as a new office in Bourbonnais,
       Illinois. Construction of the new Bradley office is scheduled to begin
       this spring;

    .  the renovation of the Coal City main office, and the planned renovation
       of offices in Bourbonnais, Manteno and Momence, all in Illinois. The
       Coal City office renovation has been completed, the renovations at
       Bourbonnais are underway and will be completed, along with those at
       Manteno and Momence, during the second quarter of 2003;

    .  the announcement in October 2002 of the sale of the Bank's branch office
       in Hoopeston, Illinois, which was completed on February 14, 2003; and

    .  the elimination of three positions at the vice president level.

  .  The Company's wholly-owned subsidiary, KFS Bank, F.S.B., invested $8.0
     million in Bank Owned Life Insurance (commonly referred to as "BOLI").
     This investment provides non-taxable current income through increases in
     cash surrender values of these policies. Net income of $349,000 from this
     investment was recorded during 2002.

  .  The Bank implemented a capital utilization strategy in which $30.0 million
     of adjustable-rate, mortgage-backed securities were purchased using
     borrowed funds. This strategy increased net interest income and pre-tax
     income for 2002 by $411,000.

  .  The Company issued $10.0 million in variable-rate trust preferred
     securities, as part of a large pool of such securities. These securities
     are includable, within specified limits, in regulatory capital, and the
     funds have been used primarily for the repurchase of stock.

  .  Starting in the fourth quarter of 2002 and continuing into the first
     quarter of 2003, the Company initiated, and substantially completed,
     changes in the composition of its board, in the roles of outside
     directors, and in the organizational structure of the Company and the
     Bank. This was done in light of the announced resignation of the CEO,
     formulation of plans to search for a new CEO and the recent enactment of
     new laws and regulations that address the need to improve corporate
     governance of and financial reporting by public companies. These new laws
     and regulations emphasize greater independence of board members and higher
     levels of expertise and experience for board members.

Results of Operations
The Company's results of operations depend primarily on the level of its net
interest and non-interest income and its control of operating expenses. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned from or paid on them.

Net Interest Income Analysis
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and resultant yields,
as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.


                                           MANAGEMENT'S DISCUSSION AND ANALYSIS

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

12

<PAGE>



<TABLE>
<CAPTION>
                                Year Ended December 31, 2002 Year Ended December 31, 2001 Year Ended December 31, 2000
                                --------------------------   --------------------------   --------------------------
                                  Average    Interest          Average    Interest          Average    Interest
                                Outstanding  Earned/  Yield/ Outstanding  Earned/  Yield/ Outstanding  Earned/  Yield/
                                  Balance      Paid    Rate    Balance      Paid    Rate    Balance      Paid    Rate
                                -----------  -------- ------ -----------  -------- ------ -----------  -------- ------
                                                              (Dollars in thousands)
<S>                             <C>          <C>      <C>    <C>          <C>      <C>    <C>          <C>      <C>
Interest-earning assets:
Loans receivable (1)...........  $394,523    $ 27,615  7.00%  $368,955    $ 28,403  7.70%  $303,499    $ 24,220  7.98%
Mortgage-backed securities
 (2)...........................    34,118       1,944  5.70%    13,938         970  6.96%    17,488       1,222  6.99%
Investments securities (3).....    38,751       1,898  4.90%    43,599       2,529  5.80%    60,764       3,788  6.23%
Other interest-earning assets..    28,082         518  1.84%    14,980         709  4.73%    13,915         966  6.94%
FHLB stock.....................     2,634         139  5.28%     2,325         148  6.37%     1,903         143  7.51%
                                 --------    --------         --------    --------         --------    --------
Total interest-earning assets..   498,108      32,114  6.45%   443,797      32,759  7.38%   397,569      30,339  7.63%
                                             --------                     --------         --------    --------
Other assets...................    37,185                       29,551                       29,827
                                 --------                     --------                     --------
Total assets...................  $535,293                     $473,348                     $427,396
                                 ========                     ========                     ========
Interest-bearing liabilities:
Time deposits..................  $254,239      10,412  4.10%  $251,367      13,952  5.55%  $231,198      12,981  5.61%
Savings deposits...............    72,196       1,397  1.94%    62,035       1,573  2.54%    59,637       1,502  2.52%
Demand and NOW deposits........   100,445       1,485  1.48%    88,715       1,861  2.10%    77,776       1,835  2.36%
Borrowings.....................    63,038       2,793  4.43%    27,692       1,343  4.85%    18,662       1,119  6.00%
                                 --------    --------         --------    --------         --------    --------
Total interest-bearing
 liabilities...................   489,918      16,087  3.28%   429,809      18,729  4.36%   387,273      17,437  4.50%
                                 --------    --------         --------    --------         --------    --------
Other liabilities..............     4,170                        3,751                        2,951
                                 --------                     --------                     --------
Total liabilities..............   494,088                      433,560                      390,224
                                 --------                     --------                     --------
Stockholders' equity...........    41,205                       39,788                       37,172
                                 --------                     --------                     --------
Total liabilities and
 stockholders' equity..........  $535,293                     $473,348                     $427,396
                                 ========                     ========                     ========
Net interest income............              $ 16,027                     $ 14,030                     $ 12,902
                                             ========                     ========                     ========
Net interest rate spread.......                        3.16%                        3.02%                        3.13%
                                                       ====                         ====                         ====
Net earning assets.............  $  8,190                     $ 13,988                     $ 10,296
                                 ========                     ========                     ========
Net yield on average interest-
 earning assets (net interest
 margin).......................                        3.22%                        3.16%                        3.25%
                                                       ====                         ====                         ====
Average interest-earning assets
 to average interest-bearing
 liabilities...................               101.67%                      103.25%                      102.66%
                                             ========                     ========                     ========
</TABLE>
--------
(1) Calculated including loans held for sale, and net of deferred loan fees,
    loan discounts, loans in process and the allowance for losses on loans.
(2) Calculated including mortgage-backed securities available-for-sale.
(3) Calculated including investment securities available-for-sale and
    certificates of deposit.

The following table sets forth weighted average yields on the Company's
interest-earning assets, the weighted average interest rates on
interest-bearing liabilities and the interest rate spread between the Company's
weighted average yields and rates at the dates indicated. Non-accruing loans
have been included in the table as loans carrying a zero yield.

<TABLE>
<CAPTION>
                                                             As of December 31,
                                                             -----------------
                                                             2002   2001  2000
                                                             -----  ----- -----
 <S>                                                         <C>    <C>   <C>
 Weighted average yield on:
  Loans receivable (1)...................................... 6.64%  7.12% 8.12%
  Mortgaged-backed securities (2)........................... 5.46%  6.82% 7.09%
  Investment securities (3)................................. 4.74%  5.46% 6.04%
  Other interest-earning assets............................. 1.13%  1.41% 6.08%
  Combined weighted average yield on interest-earning assets 6.01%  6.79% 7.74%
 Weighted average rate paid on:
  Saving deposits........................................... 1.29%  2.08% 2.57%
  Demand and NOW deposits................................... 1.24%  1.61% 2.55%
  Certificates.............................................. 3.62%  4.97% 6.09%
  Borrowings................................................ 4.29%  4.47% 6.25%
  Combined weighted average rate paid on interest-bearing
    liabilities............................................. 2.88%  3.78% 4.89%
 Spread..................................................... 3.13%  3.01% 2.85%
</TABLE>
--------
(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale.
(3) Includes investment securities available for sale and certificates of
    deposit.


MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                                                                             13

<PAGE>



The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels and volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (i) changes in volume (i.e., changes in volume multiplied by old rate) and
(ii) changes in rate (i.e., changes in rate multiplied by old volume). For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated have been allocated proportionately to the change due to
volume and the change due to rate.

<TABLE>
<CAPTION>
                                         Year Ended December 31,     Year Ended December 31,
                                              2002 vs. 2001               2001 vs. 2000
                                       --------------------------  -----------------------------
                                           Increase
                                          (Decrease)               Increase (Decrease)
                                            Due to        Total         Due to           Total
                                       ---------------   Increase  ------------------   Increase
                                       Volume    Rate   (Decrease)  Volume     Rate    (Decrease)
                                       ------  -------  ---------- -------   -------   ----------
                                                        (Dollars in thousands)
<S>                                    <C>     <C>      <C>        <C>       <C>       <C>
Interest earning assets:
 Loans receivable..................... $2,527  ($3,315)  ($  788)  $ 5,063   ($  880)   $ 4,183
 Mortgage-backed securities...........  1,113     (139)      974      (247)       (5)      (252)
 Investment securities................   (263)    (368)     (631)   (1,012)     (247)    (1,259)
 Other interest-earning assets........    432     (623)     (191)       74      (331)      (257)
 Federal Home Loan Bank stock.........     19      (28)       (9)       25       (20)         5
                                       ------  -------   -------   -------   -------    -------
   Total interest-earning assets...... $3,828  ($4,473)  ($  645)  $ 3,903   ($1,483)   $ 2,420
                                       ======  =======   =======   =======   =======    =======
Interest bearing liabilities:
 Certificate accounts................. $  161  ($3,701)  ($3,540)  $ 1,122   ($  151)   $   971
 Savings deposits.....................    295     (471)     (176)       60        11         71
 Demand and NOW deposits..............    305     (681)     (376)      243      (217)        26
 Borrowings...........................  1,555     (105)    1,450       474      (250)       224
                                       ------  -------   -------   -------   -------    -------
   Total interest-bearing liabilities. $2,316  ($4,958)  ($2,642)  $ 1,899   ($  607)   $ 1,292
                                       ======  =======   =======   =======   =======    =======
Net interest income...................                    $1,997                        $ 1,128
                                                         =======                        =======
</TABLE>

Comparison of Operating Results for 2002 to 2001
General
Consolidated net income was $2.2 million, or $1.86 per share (diluted), for the
year ended December 31, 2002 compared to $3.3 million, or $2.62 per share
(diluted), for the year ended December 31, 2001. The 32% decrease in net income
occurred primarily due to an increase in problem loans which led to the
recording of $4.0 million in provision for losses on loans during 2002.

Net Interest Income
Net interest income was $16.0 million for the year ended December 31, 2002, an
increase of $2.0 million, or 14.2%, during 2002 compared to 2001. Net interest
income increased primarily due to the decrease in interest expense exceeding
the decrease in interest income. The decrease in interest income resulted from
the decrease in the average rate of interest on interest earning assets, which
was partially offset by an increase in the average balance of interest-earning
assets. The decrease in interest expense resulted from the decrease in the
average rate of interest on interest-bearing liabilities, which was partially
offset by an increase in the average balance of interest-bearing liabilities.

Interest Income
Interest income totaled $32.1 million for the year ended December 31, 2002, a
decrease of $645,000 or 2.0%, as compared to $32.8 million for 2001. This
resulted from a decrease in the yield


                                           MANAGEMENT'S DISCUSSION AND ANALYSIS

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

14

<PAGE>


earned on assets from 7.38% during 2001 to 6.45% during 2002, which was
partially offset by a $54.3 million increase in average interest-earning assets
from $443.8 million during 2001 to $498.1 million during 2002.

Interest on loans was $27.6 million for 2002, a decrease of $788,000, or 2.8%,
as compared to 2001. This was primarily attributable to the effect of a
decrease in the yield on loans from 7.70% during 2001 to 7.00% during 2002,
which was partially offset by an increase of $25.6 million in average
outstanding loans. The decrease in interest earned on loans resulted in part
from the Company's sale during 2002 of a substantial portion of its long-term,
fixed-rate, one-to-four family loan originations.

Interest earned on mortgage-backed securities was $1.9 million for 2002,
compared to $970,000 for 2001. This represented an increase of 100.3% between
the years and was primarily due to an increase of $20.2 million in average
mortgage-backed securities, which was partially offset by a decrease in the
yield on mortgage-backed securities to 5.70% during 2002 from 6.96% during
2001. The increase in average balances of mortgage-backed securities was the
result of the implementation of a $30.0 million leveraging strategy late in the
first quarter of 2002.

Interest earned on investment securities and other interest-earning assets and
dividends on Federal Home Loan Bank of Chicago ("FHLB") stock totaled $2.6
million for 2002, compared to $3.4 million for 2001. This represented a
decrease of 24.5% during 2002. This was primarily due to a decrease in average
yield on these assets from 5.56% in 2001 to 3.68% in 2002, which was partially
offset by an increase in the average balance of these assets from $60.9 million
in 2001 to $69.5 million in 2002. The increase in these assets was partially
due to cash flows resulting from loan sales.

Interest Expense
Interest expense was $16.1 million for 2002, or $2.6 million (14.1%) less than
in 2001. This was due to a decrease in average rates to 3.28% for 2002 from
4.36% for 2001, which was partially offset by an increase of $60.1 million in
the average balance of interest-bearing liabilities to $489.9 million for 2002
from $429.8 million for 2001. During 2002, average deposits increased by $24.8
million, with $21.9 million (88.3%) of the increase in average deposits in
non-certificate accounts. The ratio of average certificates of deposit to
average total deposits decreased from 62.5% in 2001 to 59.6% in 2002. The
decreases in the average cost of funds were the result of market interest rates
trending lower throughout 2001 and well into 2002.

During 2002, $2.8 million of the Company's interest expense, compared to $1.3
million during 2001, related to advances from the FHLB and other borrowed
money. The increase in interest expense on borrowed funds was the result of a
$35.3 million increase in average balance of borrowed funds from $27.7 million
in 2001 to $63.0 million in 2002, which was partially offset by a decrease in
the average interest rate on borrowed funds to 4.43% in 2002 from 4.85% in 2001.

Provision for Losses on Loans
The Company recorded a $4.0 million provision for losses on loans during 2002
compared to a $502,000 provision during 2001. Charge-offs during 2002 decreased
to $81,000 from $103,000 during 2001. Recoveries during 2002 increased to
$33,000 from $26,000 in 2001. The ratio of net charge-offs to average
outstanding loans was 0.01% in 2002 and 0.02% in 2001. A substantial portion of
the increase in the provision for losses on loans during 2002 took place during
the third quarter of the year, when the Company recorded additions of $3.1
million. These reserves related to commercial real estate and real estate
development loans. Real estate development loans relate to land acquisition,
development planning, land improvements, such as streets and utilities, and
either building construction or sales of developed parcels. The two principal
sets of problem loans were made, in one case, to a group of related borrowers
and, in the other case, to an individual borrower. The lead borrower of the
group filed a petition for bankruptcy protection under Chapter 11 on October
18, 2002.



MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                                                                             15

<PAGE>



Based on the then-available information, management was able to identify the
Company's exposure under the credits at the end of the third quarter, and the
allowance for losses on loans was increased accordingly. During the fourth
quarter, based on additional information obtained from the bankruptcy process,
the continuing review of the loans involving the related borrowers and
discussions with the related parties, an additional $258,000 in reserves for
losses on loans were recorded relative to these loans. It is possible that the
Company will have to take future charges in relation to these loans. Management
currently believes that the Company's maximum additional exposure under these
loans is approximately $2.5 million. However, management has concluded that it
is not appropriate at this time to add additional reserves for this amount, and
is continuing to examine the loans with the parties involved to determine the
best course of action to realize maximum satisfaction of these credits.

The allowance for losses on loans is maintained at a level believed adequate by
management to absorb probable losses in the loan portfolio. Management's
methodology to determine the adequacy of the allowance for losses on loans
considers specific credit reviews, past loan loss experience, current economic
conditions and trends, and the volume, growth and composition of the loan
portfolio. Based upon the Company's quarterly analysis of the adequacy of the
allowance for losses on loans, considering remaining collateral of loans with
more than a normal degree of risk, historical loan loss percentages and
economic conditions, it is management's belief that the $6.5 million allowance
for losses on loans at December 31, 2002 was adequate. However, there can be no
assurance that the allowance for losses on loans will be adequate to cover all
losses.

Each credit on the Company's internal loan "watch list" is evaluated
periodically to estimate potential losses. In addition, minimum loss estimates
for each category of watch list credits are provided for based on management's
judgment which considers past loan loss experience and other factors. For
installment and real estate mortgage loans, specific allocations are based on
past loss experience adjusted for recent portfolio growth and economic trends.
The total of the estimated loss exposure resulting from the analysis is
considered the allocated portion of the allowance for losses on loans. The
amounts specifically provided for individual loans and pools of loans are
supplemented by an unallocated portion of the allowance for losses on loans.
This unallocated amount is determined based on management's judgment which
considers, among other things, the risk of error in the specific allocations,
other potential exposure in the loan portfolio, economic conditions and trends,
and other factors.

The allowance for losses on loans is charged when management determines that
the prospects of recovery of the principal of a loan have significantly
diminished. Subsequent recoveries, if any, are credited to the allowance for
losses on loans. Credit card loans are charged off at the earliest of notice of
bankruptcy, when at least 120 days past due, or when otherwise deemed to be
uncollectible. All other installment loans that are 90 to 120 days past due are
charged off monthly unless the loans are insured for credit loss or where
scheduled payments are being received. Real estate mortgage loans are written
down to fair value upon the earlier of receipt of a deed of foreclosure or upon
completion of foreclosure proceedings. Commercial and other loan charge-offs
are made based on management's on-going evaluation of non-performing loans. In
order to strengthen and expand the commercial loan review process, a new
position at the vice president level has been created and staffed at the Bank.
This officer, an experienced lender, is responsible for reviewing credit and
other loan quality issues on both existing and proposed commercial business and
commercial real estate loans. Net charge-offs have not exceeded .08% of average
loans for the last five years, and averaged less than .04% of average loans
during those five years. However, in light of the magnitude of the provision
for losses on loans during 2002, it is anticipated that the ratio of net charge
offs to average loans will increase during 2003, and possibly 2004. This will
result from charge offs occurring when final determinations of loss are made on
the loans for which reserves were established in 2002.


                                           MANAGEMENT'S DISCUSSION AND ANALYSIS

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

16

<PAGE>



The following is a summary of loan loss experience and nonperforming assets for
the years ended December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                           2002        2001
                                                          --------   --------
                                                         (Dollars in thousands)
   <S>                                                   <C>         <C>
   Total loans.......................................... $390,763    $396,371
   Total assets.........................................  546,404     490,280
   Allowance for losses on loans........................    6,524       2,582
   Net loan charge-offs.................................       48          77
   Net loan charge-offs as a percentage of average loans     0.01%       0.02%
   Nonperforming loans.................................. $ 10,273    $  1,121
   Nonperforming assets.................................   11,069       2,201
   Nonperforming assets to total assets.................     2.03%       0.45%
   Allowance for losses on loans to total loans.........     1.67%       0.65%
   Allowance for losses on loans to nonperforming loans.    63.51%      230.3%
</TABLE>

The Company will continue to monitor and adjust its allowance for losses on
loans based on management's analysis of its loan portfolio and general economic
conditions.

Other Income
Other income increased $948,000 for 2002 to $4.6 million, compared to $3.6
million for 2001. The 26.3% increase in other income was the result of
increases of $787,000 in gain on the sale of loans, $392,000 in other income,
$182,000 in fee income and $24,000 in gain on the sale of real estate held for
sale. These increases were partially offset by a decrease of $37,000 in
insurance commissions, and by a $401,000 net gain on the sale of securities
during 2001, which did not recur during 2002. The increase in the gain on the
sale of loans was the result of an increase of $35.5 million (147.7%) in loan
sales in 2002 to $59.6 million from $24.1 million in 2001. Current estimates
indicate that the volume of loans sold during 2003 will be significantly less
than those of 2002, although greater than those of 2001. The increase in fee
income was primarily the result of an increase in checking related fees due to
an increase in the number of checking accounts and to an increase in discount
fees related to debit cards. The increase in other income was primarily the
result of $349,000 in income from the Bank's $8.0 million investment in Bank
Owned Life Insurance. The decrease in insurance premiums was due to reduced
volume of sales of insurance related products.

Other Expenses
Other expenses were $13.5 million for 2002, as compared to $12.2 million for
2001. This represented an increase of $1.3 million or 10.2% during 2002. There
were increases in other expenses of $771,000 (35.3%), compensation and benefits
of $751,000 (11.7%), telephone and postage of $21,000 (5.0%) and data
processing costs of $13,000 (3.2%). These increases were partially offset by
decreases in advertising of $61,000 (15.9%), furniture and equipment expenses
of $34,000 (5.3%), the provision for losses on foreclosed assets of $33,000
(36.8%) and amortization of intangibles of $191,000 (50.9%). The increase in
compensation and benefits was the result of three primary factors, including a
general increase in compensation levels, an increase of $126,000 in insurance
costs and a $402,000 provision for an employee incentive compensation plan. The
increase in occupancy costs was primarily the result of an increase in repair
and maintenance work during the year. The data processing cost increase was
primarily due to increased maintenance costs associated with new equipment. The
major reason for the increase in other expenses, and a significant factor in
the overall increase in general and administrative expenses, was costs related
to a proxy contest in connection with the annual meeting in April, 2002.

Income Taxes
Federal income tax expense was $884,000 for 2002, as compared to $1.6 million
for 2001. This decrease was the result of the decrease in pre-tax income and to
an increase in non-taxable income resulting from the Bank's investment in BOLI.
The Company's effective tax rate was 34% for 2001 and 28.4% for 2002. A summary
of the significant tax components is provided in Note 10 of the Notes to
Consolidated Financial Statements included later in this report.


MANAGEMENT'S DISCUSSION AND ANALYSIS

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                                                                             17

<PAGE>



Comparison of Operating Results for 2001 to 2000
General
Consolidated net income was $3.3 million, or $2.62 per share (diluted), for the
year ended December 31, 2001 compared to $2.6 million, or $1.99 per share
(diluted), for the year ended December 31, 2000. The 26% increase in net income
occurred primarily due to the continuing success of strategic initiatives begun
in 2000.

Net Interest Income
Net interest income was $14.0 million for the year ended December 31, 2001, an
increase of $1.1 million, or 8.7%, during 2001 as compared to 2000. Net
interest income increased primarily due to the increase in interest income
exceeding the increase in interest expense. The increase in interest income
resulted from the increase in the average balance of interest-earning assets,
which was partially offset by a decrease in the average rate of interest on
interest-earning assets. The increase in interest expense resulted from the
increase in the average balance of interest-bearing liabilities, which was
partially offset by a decrease in the average rate of interest on
interest-bearing liabilities.

Interest Income
Interest income totaled $32.8 million for the year ended December 31, 2001, an
increase of $2.5 million or 8.0%, as compared to $30.3 million for 2000. This
resulted from a $46.2 million increase in average interest-earning assets from
$397.6 million during 2000 to $443.8 million during 2001, which was partially
offset by a decrease in the yield earned on assets from 7.63% during 2000 to
7.38% during 2001.

Interest on loans was $28.4 million for 2001, an increase of $4.2 million, or
17.3%, as compared to 2000. This was primarily attributable to the effect of an
increase of $65.5 million in average outstanding loans, which was partially
offset by a decrease in the yield on loans from 7.98% during 2000 to 7.70%
during 2001. The increase in interest income on loans and the decrease in
interest earned on investment securities discussed below resulted in part from
the Company's continued efforts during 2000 and 2001 to shift its asset mix to
higher yielding loans.

Interest earned on mortgage-backed securities was $970,000 for 2001, as
compared to $1.2 million for 2000. This represented a decrease of 20.6% between
the periods and was primarily due to a decrease of $3.6 million in average
mortgage-backed securities, and to a decrease in the yield on mortgage-backed
securities to 6.96% during 2001 from 6.99% during 2000.

Interest earned on investment securities and other interest-earning assets and
dividends on FHLB stock totaled $3.4 million for 2001, as compared to $4.9
million for 2000. This represented a decrease of 30.9% during 2001. This was
primarily due to a decrease in the average balance of these assets from $76.6
million in 2000 to $60.9 million in 2001 and to a decrease in average yield on
these assets from 6.39% in 2000 to 5.56% in 2001.

Interest Expense
Interest expense was $18.7 million for 2001, or $1.3 million (7.4%) greater
than in 2000. This was due to an increase of $42.5 million in the average
balance of interest-bearing liabilities to $429.8 million for 2001 from $387.3
million for 2000, which was partially offset by a decrease in average rates to
4.36% for 2001 from 4.50% for 2000. During 2001, the deposit mix of average
deposits remained stable with the ratio of average certificates of deposit to
average total deposits decreasing slightly from 62.7% in 2000 to 62.5% in 2001.
The decreases in the average cost of funds were the result of market interest
rates trending lower throughout 2001.

During 2001, $1.3 million of the Company's interest expense, compared to $1.1
million during 2000, related to advances from the FHLB. The increase in
interest expense on borrowed funds was the result of a $9.0 million increase in
average balance of borrowed funds from $18.7 million to $27.7 million in 2001,
which was partially offset by a decrease in the average interest rate on
borrowed funds to 4.85% in 2001 from 6.00% in 2000.


MANAGEMENT'S DISCUSSION AND ANALYSIS

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18

<PAGE>



Provision for Losses on Loans
The Company recorded a $502,000 provision for losses on loans during 2001
compared to a $50,000 provision during 2000. Charge-offs during 2001 decreased
to $103,000 from $135,000 during 2000. Recoveries during 2001 decreased to
$26,000 from $70,000 in 2000. The ratio of net charge-offs to average
outstanding loans was 0.02% in 2001 and in 2000. The increase in the provision
for losses on loans during 2001 was the result of several factors, including
the increase in the total loan portfolio and the increase in classified assets.
Additionally, based on management's review of the adequacy of the allowance for
losses on loans, the provision in 2000, as well as in the prior two years, was
somewhat lower than might otherwise have been expected. This was due to the
Company having acquired a significant amount of reserves with the purchase of
Coal City National Bank in 1998.

Other Income
Other income increased $1.1 million for 2001 to $3.6 million, compared to $2.5
million for 2000. The 43.4% increase in other income was the result of
increases of $411,000 in fee income, $401,000 in the net gain on the sale of
securities, $329,000 in gain on sale of loans held for sale and $37,000 in
other income. These increases were partially offset by decreases of $84,000 in
insurance commissions and $12,000 in gain on the sale of office related
property. The increase in net gain on the sale of securities was the result of
a $441,000 gain on a $5.0 million investment in securities available-for-sale,
which was partially offset by a loss of $40,000 on the sale of non-marketable
equity securities. The increase in the gain on the sale of loans was the result
of a resumption in loan sales during the year. The increase in fee income was
primarily the result of an increase in checking related fees due to an increase
in discount fees related to debit cards. The increase in other income was the
result of a $50,000 increase in appraisal fees in 2001 compared to 2000. The
decrease in insurance premiums was due to reduced volume of sales of insurance
related products.

Other Expenses
Other expenses were $12.2 million for 2001, as compared to $11.5 million for
2000. This represented an increase of $759,000 or 6.6% during 2001. There were
increases in compensation and benefits of $307,000 (5.0%), other expenses of
$248,000 (12.8%), occupancy costs of $144,000 (13.1%), telephone and postage of
$69,000 (19.1%), advertising of $47,000 (13.7%), and data processing costs of
$43,000 (11.9%). These increases were partially offset by decreases in
furniture and equipment expenses of $47,000 (7.0%), the provision for losses on
foreclosed assets of $48,000 (34.7%) and amortization of intangibles of $3,000
(0.7%). The increase in compensation and benefits was the result of several
factors, including a small increase in total employees, increased health
insurance costs and, due to an unusually low rate of employee turnover, an
increase in retirement benefits. The increase in occupancy costs was primarily
the result of an increase in repair and maintenance work during the year. The
increase in advertising was due in part to the promotion of an on-line banking
system which was begun mid-year. The data processing cost increase was
primarily due to increased maintenance costs associated with new equipment. The
increase in telephone and postage expense was due in part to an extensive
mailing related to privacy policy disclosures and to the increase in checking
accounts. The increase in other expenses was due to several factors, including
increases in expenses related to debit cards and ATMs and a second provision
for the Company's grant program for first-time home buyers. The first provision
was made in 1999.

Income Taxes
Federal income tax expense was $1.6 million for 2001, as compared to $1.3
million for 2000. This increase was primarily the result of the increase in
pre-tax income. The Company's effective tax rate was 34% for both 2001 and
2000. A summary of the significant tax components is provided in Note 10 of the
Notes to Consolidated Financial Statements included later in this report.

Financial Condition
Total assets increased by $56.1 million or 11.4% to $546.4 million at December
31, 2002, from $490.3 million at December 31, 2001. The increase in total
assets during 2002 was primarily attributed to increases in mortgage-backed
securities, cash and cash equivalents, investment securities and other assets,
which were partially offset by a decrease in loans.


MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                                                                             19

<PAGE>



Cash and cash equivalents increased by $20.7 million to $47.4 million at
December 31, 2002, from $26.7 million at December 31, 2001. The increase was
primarily attributed to loan sales and to increases in deposits and borrowings,
which were partially offset by growth in mortgage-backed securities and
investment securities.

At December 31, 2002, investment securities available-for-sale totaled $44.5
million, an increase of $9.7 million or 27.9% from the amount classified as
available-for-sale at December 31, 2001. The increase was the result of
purchases totaling $17.5 million of available-for-sale securities and a
positive adjustment of $756,000 in the market value of available-for-sale
securities which were partially offset by maturities and calls of $8.5 million
of such securities during the year ended December 31, 2002.

At December 31, 2002, mortgage-backed securities available-for-sale totaled
$38.2 million, an increase of $26.6 million or 228.1% from the amount
classified as available-for-sale at December 31, 2001. The increase in
mortgage-backed securities available-for-sale was the result of the purchase of
$34.6 million of such securities and a positive adjustment to market value of
$799,000, which were partially offset by principal repayments totaling $8.8
million.

During the year ended December 31, 2002, net loans decreased by $9.6 million or
2.4% to $384.2 million from $393.8 million at December 31, 2001. The decrease
was the result of the origination of $100.8 million of real estate loans, the
purchase of $2.2 million of real estate loans, the origination of $52.5 million
of consumer and commercial business loans, the purchase of $866,000 of
commercial business loans and loan repayments which totaled $161.4 million.
During the course of the year in 2002, market rates decreased marginally
following a significant decrease in the prior year. The Company experienced a
high volume of loan origination for the second consecutive year, particularly
with mortgage loans and both real estate and non-real estate commercial loans.
The volume in mortgage loans resulted from a competitive price structure and a
high volume of refinancing of both the Company's mortgage loans and those of
other lenders. While interest rates remain very low going into 2003, the volume
of loan originations is expected to decrease because of current economic
conditions and level of refinancing that has already taken place.

Loans held for sale totaled $128,000 at December 31, 2002, compared to $829,000
at December 31, 2001. During 2002, $56.8 million of loans held for sale were
originated which were offset by $57.5 million in the sale of such loans.
Additionally, $1.8 million of commercial real estate loans were sold.

The Company participates in government-sponsored, insured and guaranteed loan
programs, such as those offered by the Veterans' Administration and the Federal
Housing Authority ("FHA") but does not aggressively seek such originations.
During 2002, three FHA loans totaling $355,000 were originated and sold with
servicing released. Borrowers under these programs are notified at the time of
application that their loan will be sold to, and serviced by, a party other
than the Company.

Held-to-maturity investment securities decreased by $398,000 to $1.1 million at
December 31, 2002, from $1.5 million at December 31, 2001. This 26.2% decrease
was the result of the maturity of $593,000 of held-to-maturity securities,
which was partially offset by the purchase of $195,000 of held-to-maturity
securities.

Real estate held for sale decreased by $153,000, (32.6%) to $316,000 at
December 31, 2002 from $469,000 at December 31, 2001. The decrease was the
result of the disposal of nine one-to-four family properties, the disposal of
two commercial properties and write downs to fair value totaling $32,000. The
decreases were partially offset by the transfer of seven one-to-four family
properties to real estate held for sale during the year ended December 31,
2002, and to additional capital expenditures incurred.

Deposits increased by $16.6 million (4.0%) to $432.0 million at December 31,
2002, from $415.5 million at December 31, 2001. The increase resulted from a
$2.6 million increase in certificates of deposit, and a $14.0 million increase
in passbook savings, checking and money market accounts.


                                           MANAGEMENT'S DISCUSSION AND ANALYSIS

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

20

<PAGE>



Borrowed money increased by $29.7 million (99.0%) to $59.7 million at December
31, 2002, from $30.0 million at December 31, 2001. Borrowed money consisted of
$32.1 million in advances from the FHLB and $27.6 million in funds from
securities sold under agreements to repurchase. During 2002, borrowed money
from the FHLB was primarily used for both short-term and long-term cash
management requirements. Borrowed money from securities sold under agreements
to repurchase was part of a strategy designed to increase the leverage on the
Company's capital and enhance earnings.

As discussed earlier, the Company issued $10.0 million in variable-rate trust
preferred securities, as part of a large pool of such securities. These funds
were used primarily for the repurchase of the Company's stock.

Stockholders' equity on a per share basis increased by 4.1% from $33.86 at
December 31, 2001, to $35.26 at December 31, 2002. Total stockholders' equity
decreased by $84,000 (0.2%) to $41.1 million at December 31, 2002. The decrease
in stockholders' equity was attributed to the repurchase of 83,612 shares of
Company common stock at a total cost of $3.2 million and the payment of
dividends of $680,000 during the year ended December 31, 2002. These decreases
were substantially offset by net income of $2.2 million, an increase in the
market value adjustment on available-for-sale securities, which, net of
provision for income taxes, amounted to $1.0 million, and proceeds from the
exercise of stock options totaling $539,000.

Critical Accounting Policies
Accounting policies, the implementation of which requires difficult, complex or
subjective judgments on the part of management are critical to the Company's
financial condition and results of operations, and they may relate to matters
that are inherently uncertain. Changes in facts and circumstances can result in
material changes in estimates determined under these policies. Changes in
interest rates, deterioration in the performance of the economy, changes in
laws and regulations and deterioration in the financial condition of borrowers
are among those facts and circumstances that could affect the evaluation
process. Management believes that the Company's critical accounting policies
include determining the allowance for losses on loans and the impairment, if
any, in goodwill. A summary of significant accounting policies may be found in
Note 1 to the consolidated financial statements.

Asset Quality
Asset quality is an important aspect of the economic condition of a financial
institution such as the Company. Measurements of asset quality are indicators
of both the current strength of a financial institution and of its ability to
generate the desired returns from its business activities.

Non-performing assets include foreclosed assets, loans that have been placed on
non-accrual status, loans 90 days or more past due that continue to accrue
interest and restructured troubled debt. During


MANAGEMENT'S DISCUSSION AND ANALYSIS

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                                                                             21

<PAGE>


the year ended December 31, 2002, total non-performing assets increased by $8.9
million, or 402.9%, to $11.1 million from $2.2 million at December 31, 2001.
Changes in the individual loan categories are detailed in the following table:

<TABLE>
<CAPTION>
                                                       December 31,
                                                  ---------------------
                                                   2002    2001  Change
                                                  ------- ------ ------
                                                  (Dollars in thousands)
        <S>                                       <C>     <C>    <C>
        Non-accruing loans
         Real estate:
           One-to-four family.................... $ 1,115 $  572 $  543
           Multi-family..........................     118     --    118
           Commercial............................   3,039     33  3,006
           Construction and development..........   1,687     --  1,687
           Commercial business...................     875    125    750
                                                  ------- ------ ------
               Total.............................   6,834    730  6,104
                                                  ------- ------ ------
        Accruing loans delinquent 90 days or more
         Real estate:
           Commercial............................   2,516     --  2,516
           Consumer..............................     290    375    (85)
           Commercial business...................     633     16    617
                                                  ------- ------ ------
               Total.............................   3,439    391  3,048
                                                  ------- ------ ------
        Total non-performing loans...............  10,273  1,121  9,152
        Foreclosed assets........................     316    469   (153)
        Troubled debt restructuring..............     480    611   (131)
                                                  ------- ------ ------
        Total non-performing assets.............. $11,069 $2,201 $8,868
                                                  ======= ====== ======
</TABLE>

Based on its review of non-performing loans at December 31, 2002, and the
increased and continuing level of review of the commercial business and
commercial real estate loan portfolios, management, at this time, does not
anticipate that the Company will incur material losses in excess of established
reserves. However, there can be no assurance that adverse developments, either
in the general or local economy, or in the operation of individual businesses,
would not result in possible losses.

Company management performs a quarterly analysis of the adequacy of the
allowance for losses on loans. Management classifies problem assets into one of
four categories: Substandard, Doubtful, Loss and Special Mention. During the
year ended December 31, 2002, total classified assets increased by $7.2 million
to $16.0 million from $8.8 million at December 31, 2001. This increase was due
to increases of $3.4 million in assets classified as Loss, $31,000 in assets
classified as doubtful and $4.5 million in assets classified as Special
Mention. These increases were partially offset by a decrease of $703,000 in
assets classified as Substandard. The increase in assets categorized as Loss
was due to the inclusion of $3.5 million in commercial loans and real estate
development loans on which specific reserves for losses on loans were
established in the last six months of 2002. The increase in loans classified as
Special Mention was the result of decreases experienced by borrowers in cash
flows and business activity in a slow economic environment.

For additional information with respect to asset quality, please refer to the
sections on Provision for Losses on Loans, which are part of the analysis of
the Company's results of operations.

Asset/Liability Management
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity gap. An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that same time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest



                                           MANAGEMENT'S DISCUSSION AND ANALYSIS

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22

<PAGE>


rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income. During a period of
falling interest rates, a negative gap would tend to result in an increase in
net interest income while a positive gap would tend to adversely affect net
interest income. At December 31, 2002, total interest-earning assets maturing
or repricing within one year exceeded total interest-bearing liabilities
maturing or repricing in the same period by $53.0 million, representing a
positive cumulative one-year gap equal to 9.7% of total assets.

In an attempt to manage its exposure to changes in interest rates, management
closely monitors the Company's interest rate risk. The Bank has a funds
management committee, consisting of the president, certain vice presidents and
the controller of the Bank, which meets weekly and reviews the Bank's interest
rate risk position and evaluates its current asset/liability pricing and
strategies. This committee adjusts pricing and strategies as needed and makes
recommendations to the Bank's board of directors regarding significant changes
in strategy. In addition, on a quarterly basis the board reviews the Bank's
asset/liability position, including simulations of the effect on the Bank's
capital of various interest rate scenarios.

In managing its asset/liability mix, the Company, at times, depending on the
relationship between long-term and short-term interest rates, market conditions
and consumer preferences, may place somewhat greater emphasis on maximizing its
net interest margin than on better matching the interest rate sensitivity of
its assets and liabilities in an effort to improve its net income. Management
believes that the increased net income resulting from a mismatch in the
maturity of its asset and liability portfolios can, during periods of declining
or stable interest rates, provide returns that justify the increased exposure
to sudden and unexpected increases in interest rates which can result from such
a mismatch.

The Company attempts to manage its interest rate risk to the extent consistent
with its interest margin objectives through management of the mix of its assets
and liabilities in a number of ways, including the following:

  .  To the extent requested in its lending areas, the Company has offered its
     one-to-four family residential lending program on adjustable rate
     mortgages ("ARMs"). However, ARMs are not currently in great demand, and
     only about 13% of one-to-four family residential loans originated in 2002
     were ARMs. The remaining 87% of the one-to-four family loan originations
     during 2002 were for fixed rates with maturities ranging from ten years to
     30 years. At December 31, 2002, approximately $64.4 million, or 28.2%, of
     the Company's one-to-four family residential loan portfolio consisted of
     ARMs.

  .  The Company has increased originations of commercial business and
     construction loans having adjustable or floating interest rates,
     relatively short terms to maturity, or a combination thereof.

  .  The Company has continued its origination of consumer loans having terms
     to maturity that are significantly shorter than residential loans.

  .  The Company regularly reviews its policy on newly originated fixed-rate
     mortgage loans, as to the question of which loans, if any, should be
     retained in portfolio versus which should be sold in the secondary market.
     Trends in the economy, trends in market interest rates, the Company's
     interest margin and the Company's current asset/liability mix are among
     the factors considered. Changes resulting from these reviews take effect
     on a specific calendar date and impact either those loans which are
     applied for on or after that date, or those loans which are closed on or
     after that date.

At December 31, 2002, the Company held $164.1 million of fixed-rate one-to-four
family loans, of which $66.9 million had original terms of more than 15 years
(i.e., long-term loans). These loans are carried as part of the Company's
permanent loan portfolio and are intended to be held until maturity. Prior to
2000, the Company's policy was to sell substantially all newly originated 30
year, fixed-rate loans. During 2000, the Company began to retain substantially
all newly originated 30 year, fixed-


MANAGEMENT'S DISCUSSION AND ANALYSIS

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                                                                             23

<PAGE>


rate loans, as part of its growth strategy. During 2001, market interest rates
declined steadily in response to the actions of the FOMC. As interest rates
decreased, the Company began selling newly originated, fixed-rate loans.
Initially, newly originated loans with maturities greater than 20 years were
sold, adjusted later to include newly originated loans with maturities greater
than 15 years, until by the fourth quarter of 2001 virtually all
newly-originated, fixed-rate loans were designated for sale. This policy
continued through 2002 with the exception of approximately $10.0 million in
fixed rate, one-to-four family loans with terms of 20 years or less which were
designated for portfolio at the time of origination. At December 31, 2002,
there were $128,000 of fixed-rate loans classified as held for sale.

The Company currently does not enter into derivative financial instruments,
including futures, forwards, interest rate risk swaps, option contracts, or
other financial instruments with similar characteristics. However, the Company
is party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers such as
commitments to extend credit and letters of credit. Commitments to extend
credit and letters of credit are not recorded as an asset by the Company until
the commitment is accepted and funded or the letter of credit is exercised.

The Company's exposure to market risk is reviewed on a regular basis by the
funds management committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. Tools used by management include the standard GAP report and the
quarterly Office of Thrift Supervision (the "OTS" report measuring interest
rate sensitivity. The OTS report provides the Company the economic value of
each type of asset, liability, and off-balance sheet contract under the
assumption that the Treasury yield curve shifts instantaneously and parallel up
and down by 100 to 300 basis points in 100 basis point increments. The Company
has no market risk sensitive instruments held for trading purposes. It appears
that the Company's market risk is reasonable at this time. The following
condensed GAP report summarizing the Company's interest rate sensitivity sets
forth the interest rate sensitivity of the Bank's assets and liabilities at
December 31, 2002. Except as stated below, the amounts of assets and
liabilities shown which reprice or mature during a particular period are
determined in accordance with the earlier of the term to repricing or maturity
of the asset or liability. The Bank has assumed that its passbook and statement
savings accounts, checking accounts and money market accounts, which totaled
$175.8 million at December 31, 2002, are withdrawn at the annual percentage
rates, or range of rates, of 32%, 30% to 33% and 32% to 47%, respectively.
Ranges of withdrawal rates result from varying interest rates within account
types. Certificate accounts are assumed to reprice at the date of contractual
maturity.


<TABLE>
<CAPTION>
                                                                             Maturing or Repricing
                                                          -----------------------------------------------------------
                                                                     4 Months
                                                            1-3       to One    Over 1-3  Over 3-5   Over 5
                                                           Months      Year      Years     Years     Years    Total
                                                          --------  ---------  ---------  --------  -------  --------
                                                           Amount     Amount     Amount    Amount    Amount   Amount
                                                          --------  ---------  ---------  --------  -------  --------
<S>                                                       <C>       <C>        <C>        <C>       <C>      <C>
Fixed rate one-to-four family (including mortgage-
 backed securities, commercial real estate and
 construction loans)..................................... $ 21,737   $ 34,900   $ 57,277   $33,190  $46,014  $193,118
Adjustable rate one-to-four family (including mortgage-
 backed securities, commercial real estate and
 construction loans).....................................   54,833     87,050     11,831    10,046       --   163,760
Commercial business loans................................   21,269      5,969      5,350       999      126    33,713
Consumer loans...........................................   20,815      6,115      8,313     2,618    1,048    38,909
Investment securities and other..........................   42,736     16,440      8,435    12,980    2,817    83,408
                                                          --------  ---------  ---------  --------  -------  --------
   Total interest-earning assets.........................  161,390    150,474     91,206    59,833   50,005   512,908
                                                          --------  ---------  ---------  --------  -------  --------
Savings deposits.........................................    4,827     16,768     25,614    12,731   12,581    72,521
Checking and money market................................    7,498     26,090     38,358    16,754   14,542   103,242
Certificates.............................................   61,950    120,363     62,996    10,742       --   256,051
FHLB advances............................................    6,300      5,900     11,400     8,500       --    32,100
Other borrowings.........................................    9,200         --     18,400        --       --    27,600
                                                          --------  ---------  ---------  --------  -------  --------
   Total interest-bearing liabilities....................   89,775    169,121    156,768    48,727   27,123   491,514
                                                          --------  ---------  ---------  --------  -------  --------
Interest-earning assets less interest-bearing liabilities $ 71,615  ($ 18,647) ($ 65,562)  $11,106  $22,882  $ 21,394
                                                          ========  =========  =========  ========  =======  ========
Cumulative interest-rate sensitivity gap................. $ 71,615   $ 52,968  ($ 12,594) ($ 1,488) $21,394
                                                          ========  =========  =========  ========  =======
Cumulative interest-rate gap as a percentage of assets...    13.11%      9.69%     -2.30%    -0.27%    3.92%
                                                          ========  =========  =========  ========  =======
</TABLE>


                                           MANAGEMENT'S DISCUSSION AND ANALYSIS

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

24

<PAGE>


Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARMs, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels could deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an interest rate increase.

Liquidity and Capital Resources
The Company's primary sources of funds are deposits, proceeds from principal
and interest payments on loans and on investment and mortgage-backed
securities. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In a period of declining interest rates,
mortgage loan prepayments generally increase. As a result, the proceeds from
mortgage loan prepayments are invested in lower yielding loans or other
investments which have the effect of reducing interest income. In a period of
rising interest rates, mortgage loan prepayments generally decrease and the
proceeds from such prepayments are invested in higher yielding loans or
investments which would have the effect of increasing interest income.

The Company's liquidity, represented by cash and cash equivalents, is a result
of its operating, investing and financing activities. These activities are
summarized below for the years ended December 31, 2002, 2001 and 2000,
respectively:

<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                         ----------------------------
                                                           2002      2001      2000
                                                         --------  --------  --------
                                                            (Dollars in thousands)
<S>                                                      <C>       <C>       <C>
Net income.............................................. $  2,233  $  3,261  $  2,584
Adjustments to reconcile net income to net cash provided
  (used) by operating activities........................    5,219      (904)    1,437
                                                         --------  --------  --------
Net cash provided by operating activities...............    7,452     2,357     4,021
Net cash used by investing activities...................  (39,541)  (27,596)  (59,140)
Net cash provided by financing activities...............   52,852    26,755    50,172
                                                         --------  --------  --------
Net increase (decrease) in cash and cash equivalents....   20,763     1,516    (4,947)
Cash and cash equivalents at beginning of period........   26,663    25,147    30,094
                                                         --------  --------  --------
Cash and cash equivalents at end of period.............. $ 47,426  $ 26,663  $ 25,147
                                                         ========  ========  ========
</TABLE>

The primary investing activities of the Company are the origination of loans,
the purchase of investment and mortgage-backed securities, and, to a lesser
extent, the purchase of loans and loan participations. During the years ended
December 31, 2002, 2001 and 2000, respectively, the Company's loan originations
totaled $153.3 million, $197.4 million and $175.1 million, respectively.
Purchases of loans totaled $3.1 million for 2002. There were no loans purchased
in either 2001 or 2000. Purchases of mortgage-backed securities totaled $34.6
million, $301,000 and $2.0 million for 2002, 2001 and 2000, respectively. Other
investment activities included the purchase of investment securities which
totaled $17.7 million, $22.8 million and $8.7 million for 2002, 2001 and 2000,
respectively. During 2002, 2001 and 2000, these activities were funded
primarily by maturities of investment securities totaling $9.1 million, $40.7
million and $17.1 million, respectively, by principal repayments on loans and
mortgage-backed securities and proceeds from the sale of mortgaged-backed
securities totaling $170.2 million, $146.2 million and $110.0 million,
respectively, and, by sales of investment securities totaling $5.4 million in
2001. There were no sales of investment securities during either 2002 or 2000.


MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                                                                             25

<PAGE>



The major sources of cash from financing activities during 2002 were a net
increase of $16.6 million in deposit accounts, a net increase of $29.7 million
in borrowed money, the issue of $10.0 million in trust preferred debentures and
proceeds from the exercise of stock options of $539,000. Additionally,
financing activities for 2002 included the purchase of common stock totaling
$3.2 million and the payment of dividends to stockholders totaling $680,000.
The major sources of cash from financing activities during 2001 were a net
increase of $27.4 million in deposit accounts and a $1.0 million net increase
in borrowed money. Additionally, financing activities for 2001 included the
purchase of common stock totaling $1.5 million, the payment of dividends to
stockholders of $583,000 and proceeds from the exercise of stock options of
$278,000. The major sources of cash from financing activities during 2000 were
a net increase of $33.0 million in deposit accounts and a net increase of $17.8
million in borrowed money. Additionally, financing activities for 2000 included
the purchase of common stock totaling $1.0 million, the payment of dividends to
stockholders of $607,000 and proceeds from the exercise of stock options of
$726,000. Net cash used in investing activities was offset by cash provided by
operating and financing activities for 2002, 2001 and 2000.

The Company maintains a certain level of cash and other liquid assets to fund
normal volumes of loan commitments, deposit withdrawals and other obligations.
The OTS regulations currently require each savings association to maintain
sufficient liquidity to ensure its safe and sound operation. Liquidity has
traditionally been measured as a percentage of a base consisting of net
withdrawable accounts plus borrowed money repayable in 12 months or less. The
Bank's liquidity ratio was 13.0% at December 31, 2002.

The Company's most liquid assets are cash, cash in banks and highly liquid,
short-term investments. The levels of these assets are dependent on the
Company's operating, financing, lending and investing activities during any
given period. Securities available-for-sale may also be utilized to meet
liquidity needs. At December 31, 2002, 2001 and 2000, these liquid assets
totaled $47.4 million, $26.7 million, and $25.2 million, respectively. The
level of liquid assets at December 31, 2002 was higher than usual due to a
number of factors including sales of loans and higher than expected prepayments
on loans and mortgage-backed securities. The level of liquid assets at both
December 31, 2001 and December 31, 2000 was somewhat inflated by significant
year-end, holiday weekend deposits at the end of each year.

Liquidity management for the Company is both a daily and long-term function of
the Company's management strategy. Excess funds are generally invested in
short-term investments such as federal funds. In the event that the Company
should require funds beyond its ability to generate them internally, additional
sources of funds are available, including FHLB advances. At December 31, 2002,
the Company had outstanding borrowings totaling $59.7 million, of which $32.1
were advances from the FHLB and $27.6 were funds from securities sold under
agreement to repurchase.

At December 31, 2002, the Company had outstanding commitments to originate
mortgage loans of $12.9 million, of which 95% were at fixed interest rates.
These commitments provided that the loans would be secured by properties
located, for the most part, in the Company's primary market areas. The Company
anticipates that it will have sufficient funds available to meet its current
loan commitments. Certificates of deposit which were scheduled to mature in one
year or less from December 31, 2002, totaled $180.5 million. Based upon the
historically stable nature of the Company's deposit base, management believes
that a significant portion of such deposits will remain with the Company. The
Company also had unused lines of credit provided to customers of $31.1 million
and $23.8 million at December 31, 2002, and 2001, respectively.

At December 31, 2002, the Bank exceeded all of its capital requirements on a
fully phased-in basis. See Note 11 of the Notes to Consolidated Financial
Statements and the discussion of the Company's financial condition above.


                                           MANAGEMENT'S DISCUSSION AND ANALYSIS

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

26

<PAGE>



Dividends
A federal thrift institution is precluded under current regulations of the OTS
from declaring or paying a dividend or repurchasing any of its common stock if
either of such actions would reduce the institution's core, tangible or
risk-based capital levels below its liquidation account balance or any of the
three current minimum regulatory capital requirements. Under presently
effective OTS regulations, the maximum amount of dividends that a thrift
institution will be permitted to pay in any calendar year without prior OTS
approval is limited to the institution's year-to-date net income plus its
retained net income for the preceding two years. The Bank declared and paid
dividends totaling $1.9 million, $1.7 million and $1.3 million to the Company,
its sole stockholder, during 2002, 2001 and 2000, respectively.

Cash dividends in the total amount of $.48 per share were paid by the Company
during 2000 and 2001. Cash dividends in the total amount of $.57 per share were
paid during 2002, with $.12 per share paid in the first quarter and $.15 per
share paid in the remaining three quarters. The Board of Directors of the
Company declared a quarterly cash dividend of $.15 per share payable on
February 28, 2003, to stockholders of record as of February 7, 2003. Future
dividends will depend primarily upon the Company's earnings, financial
condition and need for funds, as well as restrictions imposed by regulatory
authorities regarding dividend payments and net worth requirements.

Mission and Goals
The Company's mission is to provide, safely and profitably, financial services
to families and businesses in the communities served by its offices. In seeking
to accomplish this mission, management has adopted a business strategy designed
to accomplish a number of goals, including:

  .  increase return on equity and increase stockholders' value;

  .  maintain the Bank's tangible capital at a level that exceeds regulatory
     requirements;

  .  maintain a high level of asset quality;

  .  manage the Company's exposure to changes in market interest rates;

  .  increase the Company's interest rate spread; and

  .  to the extent available, take advantage of loan and deposit growth
     opportunities in the Company's principal market areas.

The Company has attempted to achieve these goals by focusing on a number of
areas, including:

  .  management of the Company's capital to enhance stockholders' value;

  .  the origination, to the extent requested in its lending areas, of ARMs on
     residential properties for retention in its portfolio;

  .  actively monitoring local and national economic trends to determine if
     fixed-rate loans originated will be retained in portfolio or sold, with
     servicing retained;

  .  the origination of commercial real estate, consumer, commercial business,
     and, to a lesser extent, multi-family and construction loans;

  .  providing high quality service to enhance customer loyalty; and

  .  offering a variety of financial products and services to serve as
     comprehensively as practicable the financial needs of families and
     community businesses in its market areas.

Special Note Concerning Forward-Looking Statements
This document (including information incorporated by reference) contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and


MANAGEMENT'S DISCUSSION AND ANALYSIS

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

                                                                             27

<PAGE>


assumptions of the Company's management and on information currently available
to management, are generally identifiable by the use of words such as
"believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will,"
"would," "could," "should" or other similar expressions. Additionally, all
statements in this document, including forward-looking statements, speak only
as of the date they are made, and the Company undertakes no obligation to
update any statement in light of new information or future events.

The Company's ability to predict results or the actual effect of future plans
or strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:

  .  The strength of the United States economy in general and the strength of
     the local economies in which the Company conducts its operations which may
     be less favorable than expected and may result in, among other things, a
     deterioration in the credit quality and value of the Company's assets.

  .  The economic impact of past and any future terrorist threats and attacks,
     acts of war or threats thereof, and the response of the United States to
     any such threats and attacks.

  .  The effects of, and changes in, federal, state and local laws, regulations
     and policies affecting banking, securities, insurance and monetary and
     financial matters.

  .  The effects of changes in interest rates (including the effects of changes
     in the rate of prepayments of the Company's assets) and the policies of
     the Board of Governors of the Federal Reserve System.

  .  The ability of the Company to compete with other financial institutions as
     effectively as the Company currently intends due to increases in
     competitive pressures in the financial services sector.

  .  The inability of the Company to obtain new customers and to retain
     existing customers.

  .  The timely development and acceptance of products and services, including
     products and services offered through alternative delivery channels such
     as the Internet.

  .  Technological changes implemented by the Company and by other parties,
     including third party vendors, which may be more difficult or more
     expensive than anticipated or which may have unforeseen consequences to
     the Company and its customers.

  .  The ability of the Company to develop and maintain secure and reliable
     electronic systems.

  .  The ability of the Company to retain key executives and employees and the
     difficulty that the Company may experience in replacing key executives and
     employees in an effective manner.

  .  Consumer spending and saving habits which may change in a manner that
     affects the Company's business adversely.

  .  Business combinations and the integration of acquired businesses which may
     be more difficult or expensive than expected.

  .  The costs, effects and outcomes of existing or future litigation.

  .  Changes in accounting policies and practices, as may be adopted by state
     and federal regulatory agencies and the Financial Accounting Standards
     Board.

  .  The ability of the Company to manage the risks associated with the
     foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Additional information concerning the Company and its business,
including other factors that could materially affect the Company's financial
results, is included in the Company's filings with the Securities and Exchange
Commission.


                                           MANAGEMENT'S DISCUSSION AND ANALYSIS

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

28

<PAGE>

INDEPENDENT AUDITOR'S REPORT
--------------------------------------------------------------------------------

To the Stockholders and Board of Directors
Kankakee Bancorp, Inc.
Kankakee, Illinois

We have audited the accompanying consolidated statements of financial condition
of Kankakee Bancorp, Inc. and Subsidiary as of December 31, 2002 and 2001, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Kankakee Bancorp, Inc. and Subsidiary as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.

/s/ McGladrey & Paller, LLP
Champaign, Illinois
February 6, 2003, except for Note 17 as to which the date is February 24, 2003



INDEPENDENT AUDITOR'S
REPORT

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

                                                                             29

<PAGE>

                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                     KANKAKEE BANCORP, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                        -------------------------
                                                                                            2002         2001
                                                                                        ------------ ------------
<S>                                                                                     <C>          <C>
Assets
   Cash and due from banks............................................................. $ 16,576,706 $ 15,432,128
   Federal funds sold..................................................................   19,178,334    7,112,641
   Money market funds..................................................................   11,670,916    4,117,945
                                                                                        ------------ ------------
       Cash and cash equivalents.......................................................   47,425,956   26,662,714
                                                                                        ------------ ------------
   Certificates of deposit.............................................................       50,000       50,000
                                                                                        ------------ ------------
   Securities:
     Investment securities:
       Available-for-sale, at fair value...............................................   44,459,135   34,755,192
       Held-to-maturity, at cost (fair value: 2002 $1,076,979; 2001 $1,483,946)........    1,066,664    1,464,804
                                                                                        ------------ ------------
       Total investment securities.....................................................   45,525,799   36,219,996
                                                                                        ------------ ------------
   Mortgage-backed securities:
       Available-for-sale, at fair value...............................................   38,179,459   11,635,592
       Held-to-maturity, at cost (fair value: 2002 $25,525; 2001 $38,003)..............       25,525       37,627
                                                                                        ------------ ------------
       Total mortgage-backed securities................................................   38,204,984   11,673,219
                                                                                        ------------ ------------
   Loans, net of allowance for losses on loans of $6,524,306 in 2002 and $2,582,234 in
     2001..............................................................................  384,238,637  393,789,828
   Loans held for sale.................................................................      128,000      828,610
   Real estate held for sale...........................................................      316,170      469,165
   Federal Home Loan Bank stock, at cost...............................................    2,740,500    2,443,300
   Office properties and equipment.....................................................   10,377,731    8,397,173
   Accrued interest receivable.........................................................    2,795,701    2,823,090
   Goodwill............................................................................    3,065,821    3,065,821
   Other intangible assets.............................................................    1,181,212    1,365,280
   Other assets........................................................................   10,353,190    2,491,672
                                                                                        ------------ ------------
Total assets........................................................................... $546,403,701 $490,279,868
                                                                                        ============ ============
</TABLE>

                                                                    (Continued)

30

<PAGE>

<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                           --------------------------
                                                                                               2002          2001
                                                                                           ------------  ------------
<S>                                                                                        <C>           <C>
Liabilities and Stockholders' Equity
   Liabilities
       Deposits
          Noninterest bearing............................................................. $ 28,633,800  $ 25,854,152
          Interest bearing................................................................  403,397,808   389,612,684
       Borrowings.........................................................................   59,700,000    30,000,000
       Trust preferred debentures.........................................................   10,000,000            --
       Advance payments by borrowers for taxes and insurance..............................    1,751,128     1,905,766
       Other liabilities..................................................................    1,814,306     1,716,366
                                                                                           ------------  ------------
   Total liabilities......................................................................  505,297,042   449,088,968
                                                                                           ------------  ------------
   Stockholders' Equity
       Preferred stock, $.01 par value; authorized, 500,000 shares; none outstanding......           --            --
       Common stock, $.01 par value; authorized 3,500,000 shares; shares issued
         1,750,000........................................................................       17,500        17,500
       Additional paid-in capital.........................................................   15,039,598    15,226,853
       Retained income, partially restricted..............................................   38,517,217    36,964,331
       Treasury stock (584,119 and 533,642 shares in 2002 and 2001, respectively), at
         cost.............................................................................  (14,099,004)  (11,622,862)
       Accumulated other comprehensive income.............................................    1,631,348       605,078
                                                                                           ------------  ------------
   Total stockholders' equity.............................................................   41,106,659    41,190,900
                                                                                           ------------  ------------
Total liabilities and stockholders' equity................................................ $546,403,701  $490,279,868
                                                                                           ============  ============
</TABLE>




         See Accompanying Notes to Consolidated Financial Statements.

                                                                             31

<PAGE>

    CONSOLIDATED STATEMENTS OF INCOME KANKAKEE BANCORP, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                                                    -----------------------------------
                                                                       2002        2001        2000
                                                                    ----------- ----------- -----------
<S>                                                                 <C>         <C>         <C>
Interest income:
   Loans........................................................... $27,614,632 $28,403,156 $24,220,459
   Investment securities and other.................................   2,556,068   3,385,323   4,897,215
   Mortgage-backed securities......................................   1,943,688     970,242   1,221,687
                                                                    ----------- ----------- -----------
       Total interest income.......................................  32,114,388  32,758,721  30,339,361
                                                                    ----------- ----------- -----------
Interest expense:
   Deposits........................................................  13,294,191  17,385,414  16,318,219
   Borrowings......................................................   2,792,526   1,343,239   1,118,979
                                                                    ----------- ----------- -----------
       Total interest expense......................................  16,086,717  18,728,653  17,437,198
                                                                    ----------- ----------- -----------
       Net interest income.........................................  16,027,671  14,030,068  12,902,163
Provision for losses on loans......................................   3,990,033     502,500      50,000
                                                                    ----------- ----------- -----------
       Net interest income after provision for losses on loans.....  12,037,638  13,527,568  12,852,163
                                                                    ----------- ----------- -----------
Other income:
   Net gain on sales of securities.................................          --     401,120          --
   Net gain on sales of real estate held for sale..................      51,820      27,484      29,968
   Net gain on sales of loans held for sale........................   1,116,423     329,097         328
   Net gain on sale of property held for expansion.................          --         800      11,552
   Fee income......................................................   2,535,375   2,352,991   1,942,223
   Insurance commissions...........................................      66,701     103,516     187,928
   Other...........................................................     781,810     389,243     341,404
                                                                    ----------- ----------- -----------
       Total other income..........................................   4,552,129   3,604,251   2,513,403
                                                                    ----------- ----------- -----------
Other expenses:
   Compensation and benefits.......................................   7,150,815   6,400,114   6,093,309
   Occupancy.......................................................   1,249,169   1,241,435   1,097,369
   Furniture and equipment.........................................     612,364     646,637     695,048
   Federal deposit insurance premiums..............................      72,067      73,187      72,792
   Advertising.....................................................     325,383     386,847     340,257
   Provision for losses on real estate held for sale...............      57,315      90,643     138,805
   Data processing services........................................     417,055     404,104     361,006
   Telephone and postage...........................................     452,430     431,081     361,987
   Amortization of goodwill and intangible assets..................     184,068     374,748     377,538
   Other general and administrative................................   2,952,814   2,181,691   1,933,943
                                                                    ----------- ----------- -----------
       Total other expenses........................................  13,473,480  12,230,487  11,472,054
                                                                    ----------- ----------- -----------
       Income before income taxes..................................   3,116,287   4,901,332   3,893,512
Income taxes.......................................................     883,546   1,640,350   1,309,950
                                                                    ----------- ----------- -----------
       Net income.................................................. $ 2,232,741 $ 3,260,982 $ 2,583,562
                                                                    =========== =========== ===========
Basic Earnings Per Share........................................... $      1.87 $      2.68 $      2.05
                                                                    =========== =========== ===========
Diluted Earnings Per Share......................................... $      1.86 $      2.62 $      1.99
                                                                    =========== =========== ===========
</TABLE>

         See Accompanying Notes to Consolidated Financial Statements.

32

<PAGE>

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 Years Ended December 31, 2002, 2001 and 2000
        --------------------------------------------------------------
                     KANKAKEE BANCORP, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                                                                                              Accumulated  Employee
                                                      Additional                                 Other       Stock
                                             Common    Paid-In      Retained     Treasury    Comprehensive Ownership
                                             Stock     Capital       Income       Stock      Income (Loss) Plan Loan
                                             ------- -----------  -----------  ------------- ------------- ---------
<S>                                          <C>     <C>          <C>          <C>           <C>           <C>
Balance, December 31, 1999.................. $17,500 $16,019,390  $32,309,425  $(10,851,899)  $(1,095,478) $(151,211)
Comprehensive income:
  Net income................................      --          --    2,583,562             --           --         --
  Unrealized gain on securities available-
   for-sale arising during the period, net
   of tax of $624,070.......................      --          --           --             --    1,211,447         --



   Comprehensive income.....................
Purchase of 46,300 shares of treasury
 stock......................................      --          --                 (1,023,572)           --         --
Exercise of stock options...................      --          --           --        654,653           --         --
Adjustment to paid-in capital due to
 exercise of stock options..................      --    (691,141)          --        762,283           --         --
Dividends paid on common stock--$.48
 per share..................................      --          --     (607,027)            --           --         --
Principal payment on ESOP loan..............      --          --           --             --           --    151,211
                                             ------- -----------  -----------  -------------  -----------  ---------
Balance, December 31, 2000..................  17,500  15,328,249   34,285,960   (10,458,535)      115,969         --
Comprehensive income:
  Net income................................      --          --    3,260,982             --           --         --
  Unrealized gain on securities available-
   for-sale arising during the period, net
   of tax of $401,942.......................      --          --           --             --      780,248         --
  Less: Reclassifications adjustment for
   gains included in net income, net of
   tax of $(149,981)........................      --          --           --             --     (291,139)        --



   Comprehensive income.....................
Purchase of 64,200 shares of treasury
 stock......................................      --          --           --    (1,543,360)           --         --
Exercise of stock options...................      --          --           --        172,320           --         --
Adjustment to paid-in capital due to
 exercise of stock options..................      --    (101,396)          --        206,713           --         --
Dividends paid on common stock--$.48
 per share..................................      --          --     (582,611)            --           --         --
                                             ------- -----------  -----------  -------------  -----------  ---------
Balance, December 31, 2001..................  17,500  15,226,853   36,964,331   (11,622,862)      605,078         --
Comprehensive income:
Net income..................................      --          --    2,232,741             --           --         --
Unrealized gain on securities available-for-
 sale arising during the period, net of tax
 of $528,717................................      --          --           --             --    1,026,270         --


   Comprehensive income.....................
Purchase of 83,612 shares of treasury
 stock......................................      --          --           --    (3,202,133)           --         --
Exercise of stock options...................      --          --           --        368,495           --         --
Adjustment to paid-in capital due to
 exercise of stock options..................      --    (187,255)          --        357,496           --         --
Dividends paid on common stock--$.57
 per share..................................      --          --     (679,855)            --           --         --
                                             ------- -----------  -----------  -------------  -----------  ---------
Balance, December 31, 2002.................. $17,500 $15,039,598  $38,517,217  $(14,099,004)  $ 1,631,348  $      --
                                             ======= ===========  ===========  =============  ===========  =========
</TABLE>
<TABLE>
<CAPTION>

                                                 Total
                                             Stockholders'
                                                Equity
                                             -------------
<S>                                          <C>
Balance, December 31, 1999..................  $36,247,727
Comprehensive income:
  Net income................................    2,583,562
  Unrealized gain on securities available-
   for-sale arising during the period, net
   of tax of $624,070.......................    1,211,447
                                              -----------
                                                1,211,447
                                              -----------
   Comprehensive income.....................    3,795,009
Purchase of 46,300 shares of treasury
 stock......................................   (1,023,572)
Exercise of stock options...................      654,653
Adjustment to paid-in capital due to
 exercise of stock options..................       71,142
Dividends paid on common stock--$.48
 per share..................................     (607,027)
Principal payment on ESOP loan..............      151,211
                                              -----------
Balance, December 31, 2000..................   39,289,143
Comprehensive income:
  Net income................................    3,260,982
  Unrealized gain on securities available-
   for-sale arising during the period, net
   of tax of $401,942.......................      780,248
  Less: Reclassifications adjustment for
   gains included in net income, net of
   tax of $(149,981)........................     (291,139)
                                              -----------
                                                  489,109
                                              -----------
   Comprehensive income.....................    3,750,091
Purchase of 64,200 shares of treasury
 stock......................................   (1,543,360)
Exercise of stock options...................      172,320
Adjustment to paid-in capital due to
 exercise of stock options..................      105,317
Dividends paid on common stock--$.48
 per share..................................     (582,611)
                                              -----------
Balance, December 31, 2001..................   41,190,900
Comprehensive income:
Net income..................................    2,232,741
Unrealized gain on securities available-for-
 sale arising during the period, net of tax     1,026,270
 of $528,717................................  -----------
                                                1,026,270
                                              -----------
   Comprehensive income.....................    3,259,011
Purchase of 83,612 shares of treasury
 stock......................................   (3,202,133)
Exercise of stock options...................      368,495
Adjustment to paid-in capital due to
 exercise of stock options..................      170,241
Dividends paid on common stock--$.57
 per share..................................     (679,855)
                                              -----------
Balance, December 31, 2002..................  $41,106,659
                                              ===========
</TABLE>

         See Accompanying Notes to Consolidated Financial Statements.


                                                                             33

<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
               -------------------------------------------------
                     KANKAKEE BANCORP, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                   -------------------------------------------
                                                                        2002           2001           2000
                                                                   -------------  -------------  -------------
<S>                                                                <C>            <C>            <C>
Cash Flows from Operating Activities
 Net income....................................................... $   2,232,741  $   3,260,982  $   2,583,562
 Adjustments to reconcile net income to net cash from operating
   activities:
   Provision for losses on loans..................................     3,990,033        502,500         50,000
   Provision for losses on real estate held for sale..............        57,315         90,643        138,805
   Depreciation and amortization..................................     1,077,906      1,276,306      1,299,133
   Amortization (accretion) of investments, net...................        69,240        (17,790)          (832)
   Accretion of loan fees and discounts, net......................       (52,418)       (37,999)         6,722
   Deferred income tax provision (benefit)........................    (1,400,000)        23,858        (41,838)
   (Increase) decrease in interest receivable.....................        27,389        459,124       (392,716)
   Increase (decrease) in interest payable on deposits............       (95,618)       (99,747)        60,641
   Net gain on sales of loans.....................................    (1,116,423)      (329,097)          (328)
   Net gain on sales of securities................................            --       (401,120)            --
   Net gain on sales of real estate held for sale.................       (51,820)       (27,484)       (29,968)
   Net gain on sale of property held for expansion................            --           (800)       (11,552)
   Federal Home Loan Bank stock dividend..........................      (132,900)      (154,000)      (100,600)
   Increase in cash surrender value of bank owned life insurance..      (349,236)            --             --
   Other, net.....................................................     1,362,990     (1,689,605)       459,383
                                                                   -------------  -------------  -------------
Net cash provided by operations before loan originations and sales     5,619,199      2,855,771      4,020,412
   Origination of loans held for sale.............................   (58,865,231)   (24,884,672)      (327,882)
   Proceeds from sales of loans...................................    60,698,465     24,385,159        328,210
                                                                   -------------  -------------  -------------
Net cash from operating activities................................     7,452,433      2,356,258      4,020,740
                                                                   -------------  -------------  -------------
Cash Flow from Investing Activities
 Investment securities:
   Available-for-sale:
     Purchases....................................................   (17,473,494)   (22,113,099)    (7,499,291)
     Proceeds from sales..........................................            --      5,437,350             --
     Proceeds from calls and maturities...........................     8,500,000     40,070,000     17,000,000
   Held-to-maturity:
     Purchases....................................................      (195,000)      (660,404)    (1,200,000)
     Proceeds from maturities.....................................       592,367        643,166         56,976
 Mortgage-backed securities:
   Available-for-sale:
     Purchases....................................................   (34,567,058)      (300,890)    (1,962,724)
     Proceeds from maturities and paydowns........................     8,779,262      4,936,631      3,702,154
   Held-to-maturity:
     Proceeds from maturities and paydowns........................        12,102         29,241         41,857
 Proceeds from sale of non-marketable equity securities...........            --        460,000             --
 Proceeds from sales of real estate held for sale.................       601,127        361,140        212,951
 Deferred loan fees and costs, net................................        61,808        403,633         90,445
 Loans originated.................................................  (153,318,322)  (197,403,420)  (175,146,655)
 Loans purchased..................................................    (3,078,245)            --             --
 Principal collected on loans.....................................   161,418,997    141,244,204    106,274,103
 Purchases of office properties and equipment, net................    (2,874,396)      (703,108)      (709,549)
 Purchases of bank owned life insurance...........................    (8,000,000)            --             --
                                                                   -------------  -------------  -------------
Net cash from investing activities................................   (39,540,852)   (27,595,556)   (59,139,733)
                                                                   -------------  -------------  -------------
</TABLE>

                                                                    (Continued)

34

<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
               -------------------------------------------------
                     KANKAKEE BANCORP, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                    ----------------------------------------
                                                                        2002          2001          2000
                                                                    ------------  ------------  ------------
<S>                                                                 <C>           <C>           <C>
Cash Flows from Financing Activities
 Net increase in non-certificate of deposit accounts...............   14,017,238    19,012,040     6,165,886
 Net increase in certificate of deposit accounts...................    2,643,152     8,504,202    26,846,363
 Increase (decrease) in advance payments by borrowers for taxes and
   insurance.......................................................     (165,477)       86,831       265,238
 Proceeds from short-term borrowings...............................           --    15,000,000    41,000,000
 Repayments of short-term borrowings...............................           --   (29,000,000)  (27,000,000)
 Proceeds from other borrowings....................................   42,600,000    25,000,000    10,000,000
 Repayments of other borrowings....................................  (12,900,000)  (10,000,000)   (6,200,000)
 Proceeds from issuance of trust preferred debentures..............   10,000,000            --            --
 Proceeds from exercise of stock options...........................      538,736       277,637       725,795
 Dividends paid....................................................     (679,855)     (582,611)     (607,027)
 Purchase of treasury stock........................................   (3,202,133)   (1,543,360)   (1,023,572)
                                                                    ------------  ------------  ------------
Net cash from financing activities.................................   52,851,661    26,754,739    50,172,683
                                                                    ------------  ------------  ------------
Increase (decrease) in cash and cash equivalents...................   20,763,242     1,515,441    (4,946,310)
Cash and cash equivalents:
 Beginning of year.................................................   26,662,714    25,147,273    30,093,583
                                                                    ------------  ------------  ------------
 End of year....................................................... $ 47,425,956  $ 26,662,714  $ 25,147,273
                                                                    ============  ============  ============
Supplemental Disclosures of Cash Flow Information
 Cash paid during the year for:
   Interest on deposits............................................ $ 13,389,809  $ 17,485,200  $ 16,257,600
                                                                    ============  ============  ============
   Interest on borrowed funds...................................... $  2,653,747  $  1,360,600  $  1,037,800
                                                                    ============  ============  ============
   Income taxes.................................................... $  1,854,014  $  1,744,718  $    776,824
                                                                    ============  ============  ============
Supplemental Disclosures of Noncash Investing Activities:
 Real estate acquired through foreclosure.......................... $    461,690  $    385,674  $    129,308
                                                                    ============  ============  ============
 Reduction of Employee Stock Ownership Plan loan................... $         --  $         --  $    151,211
                                                                    ============  ============  ============
</TABLE>



         See Accompanying Notes to Consolidated Financial Statements.

                                                                             35

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY

Note 1. Significant Accounting Policies
Through KFS Bank, F.S.B. (the "Bank"), Kankakee Bancorp, Inc. (the "Company")
provides a full range of banking services to individual and corporate customers
through its 15 locations throughout central Illinois. The Bank is subject to
competition from other financial institutions and nonfinancial institutions
providing financial products. Additionally, the Company and the Bank are
subject to the regulations of certain regulatory agencies and undergo periodic
examinations by those regulatory agencies.

The significant accounting and reporting policies of the Company and its
    subsidiary follow:

Basis of Consolidation and Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, the Bank and the Bank's wholly-owned subsidiary,
KFS Service Corporation. Kankakee Bancorp Capital Trust I ("Capital Trust I"),
a statutory business trust organized under the Delaware Business Trust Act, was
formed in March 2002. Kankakee Bancorp owns all of the Common Securities of
Capital Trust I. Kankakee Bancorp and Capital Trust I, as part of a pooled
trust preferred offering, issued $10 million variable rate Cumulative Trust
Preferred Securities issued by Wilmington Trust Company and guaranteed by
Kankakee Bancorp.

Significant intercompany accounts and transactions have been eliminated in
consolidation. Based on the Company's approach to decision making, it has
decided that its business is comprised of a single business segment.

The consolidated financial statements of the Company have been prepared in
conformity with accounting principles generally accepted in the United States
of America and conform to predominate practice within the banking industry.

In preparing the consolidated financial statements, Company management is
required to make estimates and assumptions which significantly affect the
amounts reported in the consolidated financial statements. Significant
estimates which are particularly susceptible to change in a short period of
time include the determination of the market value of investment and mortgage
backed securities, the allowance for losses on loans and valuation of real
estate and other properties acquired in connection with foreclosures or in
satisfaction of amounts due from borrowers on loans. Actual results could
differ from those estimates.

Comprehensive Income
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.

Securities
Securities classified as held-to-maturity are those securities the Company has
both the positive intent and ability to hold to maturity regardless of changes
in market conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed by the interest method over their
contractual lives.

Securities classified as available-for-sale are those securities that the
Company intends to hold for an indefinite period of time, but not necessarily
to maturity. Any decision to sell a security classified as available-for-sale
would be based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations and other similar factors.
Securities available-for-sale are carried at fair value. The difference between
fair value and cost, adjusted for amortization of premium and accretion of
discounts, results in an unrealized gain or loss. Unrealized gains or losses
are reported as



                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

36

<PAGE>

accumulated other comprehensive income (loss), net of the related deferred tax
effect. Gains or losses on the sale of securities are determined on the basis
of the specific security sold and are included in earnings. Premiums and
discounts are recognized in interest income using the interest method over
their contractual lives.

Loans
Loans originated or purchased are identified as either held for sale or
portfolio at origination or purchase. Loans held for portfolio are originated
or purchased with the intent to hold them to maturity for the purpose of
earning interest income. Since the Bank has the ability to hold such loans as
intended, they are recorded at cost. Loans held for sale are recorded at the
lower of aggregate cost or market until they are sold. Any transfers between
portfolios, which are rare, are recorded at the lower of cost or market.

Interest is credited to income as earned using the simple interest method
applied to the daily balances of the principal outstanding.

A loan is considered to be impaired when, based on current information and
events, it is probable the Bank will not be able to collect all amounts due.
The portion of the allowance for losses on loans applicable to impaired loans
has been computed based on the present value of the estimated future cash flows
of interest and principal discounted at the loan's effective interest rate or
on the fair value of the collateral for collateral dependent loans. The entire
change in present value of expected cash flows of impaired loans or of
collateral value is reported as a provision for losses on loans in the same
manner in which impairment initially was recognized or as a reduction in the
amount of a provision for losses on loans that otherwise would be reported.

The accrual of interest income on loans is discontinued when, in the opinion of
management, there is reasonable doubt as to the borrower's ability to meet
payments of interest or principal when they become due. Interest income on
these loans is recognized to the extent interest payments are received and the
principal is considered fully collectible.

Loan origination fees and certain direct origination costs are being amortized
as an adjustment of the yield over the contractual life of the related loan,
adjusted for prepayments, using the interest method.

Allowance for Losses on Loans
The allowance for losses on loans ("allowance") is established as losses are
estimated to have occurred through a provision for losses on loans charged to
earnings. Loan losses are charged against the allowance when management
believes that the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.

The allowance is evaluated on a regular basis by management and is based upon
management's periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated values of
any underlying collateral and prevailing economic conditions. This evaluation
is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.

While management uses the best information available to make its evaluation,
future adjustments to the allowance may be necessary if there are significant
changes in economic conditions. In addition, various regulatory agencies
periodically review the allowance. These agencies may require the Bank to make
additions to the allowance based on their judgments of collectibility based on
information available to them at the time of their examination.

Real Estate Held for Sale
Real estate acquired through foreclosure or deed in lieu of foreclosure
represents specific assets to which the Company has acquired legal title in
satisfaction of indebtedness. Such real estate is recorded at the property's
fair value at the date of foreclosure (cost). Initial valuation adjustments, if



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                             37

<PAGE>

any, are charged against the allowance for losses on loans. Property is
evaluated regularly to ensure the recorded amount is supported by its current
fair value. Subsequent declines in estimated fair value are charged to expense
when incurred. Revenues and expenses related to holding and operating these
properties are included in operations.

Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets.

Other Intangible Assets
Other intangible assets consist of core deposit intangibles from the purchase
of branch locations. This amount is amortized into other expense on a
straight-line basis using periods of 8 to 15 years. On a periodic basis, the
Company reviews the intangible assets for events or circumstances that may
indicate a change in recoverability of the underlying basis.

Goodwill
Goodwill resulted from the acquisition of Coal City National Bank in 1998. This
amount was originally amortized into expense on a straight-line basis assuming
a life of twenty years. As more fully explained in Note 2, the Company adopted
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets,"
and ceased amortization of the goodwill. The Company performed an initial
impairment assessment as of January 1, 2002 and an annual impairment assessment
as of September 30, 2002.

Deferred Income Taxes
Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Deferred tax assets are also recognized for operating
loss and tax credit carryforwards. Valuation allowances are established when
necessary to reduce deferred tax assets to an amount expected to be realized.
Income tax expense is the tax payable or refundable for the period plus or
minus the change during the period in deferred tax assets and liabilities.

Earnings Per Share
Basic earnings per share are computed by dividing net income for the year by
the average number of shares outstanding.

Diluted earnings per share are determined by dividing net income for the year
by the average number of shares of common stock and dilutive potential common
shares outstanding. Dilutive potential common shares assume exercise of stock
options and use of proceeds to purchase treasury stock at the average market
price for the period.

The following reflects earnings per share calculations for basic and diluted
    methods:

<TABLE>
<CAPTION>
                                                        December 31,
                                              --------------------------------
                                                 2002       2001       2000
                                              ---------- ---------- ----------
  <S>                                         <C>        <C>        <C>
  Net income available to common stockholders $2,232,741 $3,260,982 $2,583,562
                                              ========== ========== ==========
  Basic potential common shares:
     Weighted average shares outstanding.....  1,193,555  1,215,084  1,256,713
                                              ---------- ---------- ----------
  Basic average shares outstanding...........  1,193,555  1,215,084  1,256,713
  Diluted potential common shares:
     Stock option equivalents................      4,370     24,880     39,518
                                              ---------- ---------- ----------
  Diluted average shares outstanding.........  1,197,925  1,239,964  1,296,231
                                              ========== ========== ==========
  Basic earnings per share................... $     1.87 $     2.68 $     2.05
                                              ========== ========== ==========
  Diluted earnings per share................. $     1.86 $     2.62 $     1.99
                                              ========== ========== ==========
</TABLE>



                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

38

<PAGE>

Cash and Cash Equivalents
For reporting cash flows, cash and cash equivalents represent highly liquid
investments with maturities of 90 days or less at the time of purchase and
includes cash on hand, due from bank accounts (including cash items in process
of clearing), money market funds and federal funds sold.

Trust Assets
Assets of the trust department, other than trust cash on deposit at the Bank,
are not included in these financial statements because they are not assets of
the Bank.

Stock-Based Employee Compensation
The Company has one stock-based employee compensation plan which has been in
existence for all periods presented, and which is more fully described in Note
12. As permitted under accounting principles generally accepted in the United
States of America, grants of options under the plan are accounted for under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. Because options granted
under the plan had an exercise price equal to market value of the underlying
common stock on the date of the grant, no stock-based employee compensation
cost is included in determining net income. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.

<TABLE>
<CAPTION>
                                                                2002        2001        2000
                                                             ----------  ----------  ----------
<S>                                                          <C>         <C>         <C>
Net income, as reported..................................... $2,232,741  $3,260,982  $2,583,562
Deduct total stock-based compensation expense determined
  under the fair value method for all awards, net of related
  tax effects...............................................     (5,844)     (8,925)     (7,593)
                                                             ----------  ----------  ----------
Pro forma net income........................................ $2,226,897  $3,252,057  $2,575,969
                                                             ==========  ==========  ==========
Earnings per share:
   Basic:
       As reported.......................................... $     1.87  $     2.68  $     2.05
       Pro forma............................................       1.87        2.68        2.05
   Diluted:
       As reported.......................................... $     1.86  $     2.62  $     1.99
       Pro forma............................................       1.86        2.62        1.99
</TABLE>

The fair value of the stock options granted in 2002, 2001 and 2000 has been
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions. The Black-Scholes option pricing model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions. In addition, such models require the use of subjective
assumptions, including expected stock price volatility. In management's
opinion, such valuation models may not necessarily provide the best single
measure of option value.

<TABLE>
<CAPTION>
                                               2002   2001   2000
                                              -----  -----  -----
              <S>                             <C>    <C>    <C>
              Number of options granted...... 2,500  2,500  2,500
              Risk-free interest rate........  1.44%  3.09%  5.13%
              Expected life, in years........  1.00   5.00   5.00
              Expected volatility............    25%    23%    22%
              Expected dividend yield........  1.62%  1.82%  2.34%
              Estimated fair value per option $3.54  $5.41  $4.60
</TABLE>

Emerging Accounting Standards
Accounting for Asset Retirement Obligations  In June 2001, Statement on
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations, was issued to address financial reporting and obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement applies to all entities and to legal
obligations


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                             39

<PAGE>

associated with the retirement of long-lived assets that result from the
acquisition, construction, development or normal operations of a long-lived
asset, except for certain obligations of lessees. Statement No. 143 is
effective for financial statements issued for fiscal years beginning after
June 15, 2002. The Company does not expect the adoption of Statement No. 143 to
have a material impact on the consolidated financial statements.

Acquisitions of Certain Financial Institutions--an Amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9  In October 2002, Statement on
Financial Accounting Standards No. 147, Acquisitions of Certain Financial
Institutions--an Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9, was issued. FASB Statement No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9,
Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method, provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both Statement 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of
Statement 72 to recognize (and subsequently amortize) any excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer
applies to acquisitions within the scope of this Statement. In addition, this
Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the
same undiscounted cash flow recoverability test and impairment loss recognition
and measurement provisions that Statement 144 requires for other long-lived
assets that are held and used. Paragraph 5 of this Statement, which relates to
the application of the purchase method of accounting, is effective for
acquisitions for which the date of acquisition is on or after October 1, 2002.
The provisions in paragraph 6 related to accounting for the impairment or
disposal of certain long-term customer-relationship intangible assets are
effective on October 1, 2002. Transition provisions for previously recognized
unidentifiable intangible assets in paragraphs 8-14 are effective on October 1,
2002, with earlier application permitted. The Company does not anticipate this
statement having a significant impact upon the operations of the Company or the
Bank.

Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others--an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34  The
Financial Accounting Standards Board has issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others--an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. Implementation of these
provisions of the Interpretation is not expected to have a material impact on
the Bank's financial statements.

Note 2. Adoption of Statement 142
On January 1, 2002, the Company implemented Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." Under the provisions
of SFAS 142, goodwill is no longer subject to amortization over its estimated
useful life, but instead will be subject to at least annual assessments for
impairment by applying a fair value based test. SFAS 142 also requires that an
acquired intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the asset can be sold, transferred, licensed, rented or exchanged, regardless
of the acquirer's intent to do so. The Company determined that no transitional
impairment loss was required at January 1, 2002.



                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

40

<PAGE>

Goodwill and intangible asset disclosures are as follows (in thousands):

<TABLE>
<CAPTION>
                                               As of December 31, 2002
                                             ---------------------------
                                             Gross Carrying Accumulated
                                                 Amount     Amortization
                                             -------------- ------------
        <S>                                  <C>            <C>
        Amortized intangible assets.........   $2,707,764    $1,526,552
        Aggregate amortization expense:
        For the year ended December 31, 2002   $  184,068
        Estimated amortization expense:*
           For the year ended:
               2003.........................   $  142,322
               2004-2008....................   $  122,272
               2009.........................   $  122,275
        Goodwill............................   $3,065,821
</TABLE>
--------
  *Excludes amortization of the intangible asset, with annual amortization of
   approximately $48,000 for the years ended 2003 to 2006, related to the
   branch contracted for sale in 2002 as discussed in Note 16.

Had the provisions of SFAS 142 been applied in 2001 and 2000, the Company's net
income and earnings per share would have been as follows:

<TABLE>
<CAPTION>
                                                       December 31,
                                             --------------------------------
                                                2002       2001       2000
                                             ---------- ---------- ----------
   <S>                                       <C>        <C>        <C>
   Reported net income...................... $2,232,741 $3,260,982 $2,583,562
      Add goodwill amortization, net of tax.         --    125,849    127,690
                                             ---------- ---------- ----------
      Adjusted net income................... $2,232,741 $3,386,831 $2,711,252
                                             ========== ========== ==========
   Basic earnings per share:
      Reported net income................... $     1.87 $     2.68 $     2.05
      Goodwill amortization, net of tax.....         --       0.11       0.11
                                             ---------- ---------- ----------
      Adjusted net income................... $     1.87 $     2.79 $     2.16
                                             ========== ========== ==========
   Diluted earnings per share:
      Reported net income................... $     1.86 $     2.62 $     1.99
      Goodwill amortization, net of tax.....         --       0.11       0.10
                                             ---------- ---------- ----------
      Adjusted net income................... $     1.86 $     2.73 $     2.09
                                             ========== ========== ==========
</TABLE>

Note 3. Securities
Amortized costs and fair values of securities are summarized as follows:

<TABLE>
<CAPTION>
                                                    Available-for-Sale
                                       ---------------------------------------------
                                                     Gross      Gross
                                        Amortized  Unrealized Unrealized
                                          Cost       Gains      Losses   Fair Value
                                       ----------- ---------- ---------- -----------
<S>                                    <C>         <C>        <C>        <C>
December 31, 2002
U. S. government and agency securities $42,498,673 $1,495,482  $    --   $43,994,155
Mutual fund shares....................     478,907         --   13,927       464,980
                                       ----------- ----------  -------   -----------
   Total investment securities........  42,977,580  1,495,482   13,927    44,459,135
Mortgage-backed securities............  37,189,134    995,736    5,411    38,179,459
                                       ----------- ----------  -------   -----------
   Total.............................. $80,166,714 $2,491,218  $19,338   $82,638,594
                                       =========== ==========  =======   ===========

December 31, 2001
U. S. government and agency securities $33,572,272 $  813,694  $63,825   $34,322,141
Mutual fund shares....................     457,275         --   24,224       433,051
                                       ----------- ----------  -------   -----------
   Total investment securities........  34,029,547    813,694   88,049    34,755,192
Mortgage-backed securities............  11,444,344    202,437   11,189    11,635,592
                                       ----------- ----------  -------   -----------
   Total.............................. $45,473,891 $1,016,131  $99,238   $46,390,784
                                       =========== ==========  =======   ===========
</TABLE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                             41

<PAGE>

<TABLE>
<CAPTION>
                                             Held-to-Maturity
                                -------------------------------------------
                                             Gross      Gross
                                Amortized  Unrealized Unrealized
                                  Cost       Gains      Losses   Fair Value
                                ---------- ---------- ---------- ----------
     <S>                        <C>        <C>        <C>        <C>
     December 31, 2002
     Municipal bonds........... $1,066,664  $12,957     $2,642   $1,076,979
     Mortgage-backed securities     25,525       --         --       25,525
                                ----------  -------     ------   ----------
        Total.................. $1,092,189  $12,957     $2,642   $1,102,504
                                ==========  =======     ======   ==========
     December 31, 2001
     Municipal bonds........... $1,464,804  $22,141     $2,999   $1,483,946
     Mortgage-backed securities     37,627      376         --       38,003
                                ----------  -------     ------   ----------
        Total.................. $1,502,431  $22,517     $2,999   $1,521,949
                                ==========  =======     ======   ==========
</TABLE>

The amortized cost and fair value of securities classified as held-to-maturity
and available-for-sale at December 31, 2002, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to prepay obligations without prepayment
penalties, and certain securities require principal repayments prior to
maturity. Therefore, these securities and mutual fund shares are not included
in the maturity categories in the following maturity summary.

<TABLE>
<CAPTION>
                                    Held-to-Maturity      Available-for-Sale
                                  --------------------- -----------------------
                                  Amortized              Amortized
                                    Cost     Fair Value    Cost     Fair Value
                                  ---------- ---------- ----------- -----------
 <S>                              <C>        <C>        <C>         <C>
 Due within 1 year............... $  120,000 $  120,000 $10,005,568 $10,190,720
 Due after 1 year through 5 years    871,115    881,789  32,493,105  33,803,435
 Due after 5 through 10 years....     20,731     20,372          --          --
 Due after 10 years..............     54,818     54,818          --          --
 Mortgage-backed securities......     25,525     25,525  37,189,134  38,179,459
 Mutual fund shares..............         --         --     478,907     464,980
                                  ---------- ---------- ----------- -----------
    Total........................ $1,092,189 $1,102,504 $80,166,714 $82,638,594
                                  ========== ========== =========== ===========
</TABLE>

The Bank, as a member of the Federal Home Loan Bank of Chicago (the "FHLB"), is
required to maintain an investment in capital stock of the FHLB in an amount
equal to 1% of its outstanding home loans. No ready market exists for the FHLB
stock, and it has no quoted market value. For disclosure purposes, such stock
is assumed to have a market value which is equal to cost.

U. S. government and agency securities with a carrying value of approximately
$32,375,000 and $30,508,000 at December 31, 2002 and 2001, respectively, were
pledged in connection with certain deposit accounts and for other purposes as
required or permitted by law.

Realized gains and losses were as follows:

<TABLE>
<CAPTION>
                                      Year Ended December 31,
                                      -----------------------
                                      2002     2001     2000
                                      ----   --------   ----
                      <S>             <C>    <C>        <C>
                      Realized gains. $--    $441,120   $--
                      Realized losses  --     (40,000)   --
                                      ---    --------   ---
                         Net gain.... $--    $401,120   $--
                                      ===    ========   ===
</TABLE>

The tax expense applicable to these net realized gains and losses amounted to
$0, $136,381, and $0, respectively.



                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

42

<PAGE>

Note 4. Loans
Loans consisted of the following:

<TABLE>
<CAPTION>
                                                      December 31,
                                                -------------------------
                                                    2002         2001
                                                ------------ ------------
       <S>                                      <C>          <C>
       Real estate mortgage loans:
          One-to-four family................... $228,495,051 $246,607,410
          Multifamily..........................   13,671,816   11,982,786
          Commercial...........................   56,588,938   48,543,332
          Construction and development.........   21,285,868   22,555,019
       Consumer loans:
          Mobile home loans....................    1,131,977    1,408,214
          Home equity loans....................   22,560,137   18,407,160
          Credit card loans....................    1,128,274    1,212,847
          Motor vehicle loans..................    5,350,807    7,005,889
          Personal loans.......................    7,984,726    9,704,747
          Loans secured by savings accounts....      811,877      830,612
       Commercial loans........................   33,301,468   31,254,811
                                                ------------ ------------
       Gross loans.............................  392,310,939  399,512,827
       Less:
          Unearned discounts...................          809          835
          Deferred loan fees, net..............      504,436      468,877
          Undisbursed portion of loan proceeds.    1,042,751    2,671,053
          Allowance for losses on loans........    6,524,306    2,582,234
                                                ------------ ------------
                                                $384,238,637 $393,789,828
                                                ============ ============
</TABLE>

The Company's lending activities have been concentrated primarily in the market
areas immediately surrounding the branch locations. The largest portion of the
Company's loans are originated for the purpose of enabling borrowers to
purchase residential real estate property secured by first liens on such
property and generally maintain loan-to-value ratios of no greater than 80%.

The Company's opinion as to the ultimate collectibility of these loans is
subject to estimates regarding the future cash flows from operations and the
value of property, real and personal, pledged as collateral. These estimates
are affected by changing economic conditions and the economic prospects of the
borrowers.

The Company utilizes their data processing system to identify loan payments not
made by their contractual due date and calculate the number of days each loan
exceeds the contractual due dates. The accrual of interest on any loan is
discontinued when, in the opinion of management, there is reasonable doubt as
to the collectibility of interest or principal.

Information about impaired loans and non-accrual loans as of and for the years
ended December 31, 2002, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                               December 31,
                                                      ------------------------------
                                                         2002      2001      2000
                                                      ---------- -------- ----------
<S>                                                   <C>        <C>      <C>
Impaired loans with a valuation allowance............ $4,820,000 $     -- $       --
Impaired loans without a valuation allowance.........    350,000       --         --
                                                      ---------- -------- ----------
   Total impaired loans.............................. $5,170,000 $     -- $       --
                                                      ========== ======== ==========
Related valuation allowance.......................... $3,162,000 $     -- $       --
Non-accrual loans, excluding impaired loans.......... $1,664,000 $730,000 $  600,000
Loans past due ninety days or more and still accruing $3,439,000 $391,000 $1,890,000
Average monthly balance of impaired loans
  (based on month-end balances)...................... $3,026,800 $     -- $       --
Interest income recognized on impaired loans......... $   69,954 $     -- $       --
Interest income recognized on a cash basis
  on impaired loans.................................. $   69,954 $     -- $       --
</TABLE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                             43

<PAGE>

Loans serviced by the Company for others approximated $104,764,000, $70,772,000
and $63,138,000 at December 31, 2002, 2001 and 2000. Loans serviced for others
are not included in the accompanying consolidated balance sheets. Servicing
loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing. Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from borrowers,
such as late payment fees and is net of amortization of capitalized mortgage
servicing rights. At December 31, 2002 and 2001, the Company had capitalized
mortgage servicing rights of $556,332 and $426,330, respectively.

At December 31, 2002, one-to-four family real estate mortgage loans of
approximately $234,157,000 were pledged to secure advances from the Federal
Home Loan Bank of Chicago.

5. Allowance for Losses on Loans
Changes in the allowance for losses on loans were as follows:

<TABLE>
<CAPTION>
                                           Year Ended December 31,
                                     ----------------------------------
                                        2002        2001        2000
                                     ----------  ----------  ----------
       <S>                           <C>         <C>         <C>
       Balance at beginning of year. $2,582,234  $2,156,420  $2,171,040
       Provision for losses on loans  3,990,033     502,500      50,000
       Charge-offs..................    (80,994)   (102,912)   (134,718)
       Recoveries...................     33,033      26,226      70,098
                                     ----------  ----------  ----------
       Balance at end of year....... $6,524,306  $2,582,234  $2,156,420
                                     ==========  ==========  ==========
</TABLE>

Note 6. Office Properties and Equipment
Office properties and equipment consisted of:

<TABLE>
<CAPTION>
                                                         December 31,
                                                    -----------------------
                                                       2002        2001
                                                    ----------- -----------
    <S>                                             <C>         <C>
    Office properties:
       Land........................................ $ 1,870,798 $ 1,763,733
       Building....................................   8,223,437   7,225,507
       Leasehold improvements......................     462,691     444,902
    Parking facilities:
       Land........................................     340,862     340,862
       Improvements................................     194,937     189,572
    Land acquired for future use...................   1,548,224     997,359
    Furniture and equipment........................   7,639,482   6,485,688
                                                    ----------- -----------
                                                     20,280,431  17,447,623
    Less: Accumulated depreciation and amortization   9,902,700   9,050,450
                                                    ----------- -----------
                                                    $10,377,731 $ 8,397,173
                                                    =========== ===========
</TABLE>

Depreciation and amortization expense amounted to $893,838, $901,558 and
$921,595 for the years ended December 31, 2002, 2001 and 2000, respectively.

The Company leases space inside three grocery stores, which are the locations
of the Bank's Braidwood and Bradley offices, and one of its Coal City offices.
The leases on the Braidwood and Coal City locations expire in 2005 with options
to renew for two additional periods of five years. The lease on the Bradley
location expires in 2013, but the lease terms provide for early termination in
either 2003 or 2008, providing certain advance notice requirements are met. The
Company has provided advance notice to the lessor of the Bradley location, and
the lease will terminate in the fourth quarter of 2003. The Bank's Bradley
office will relocate to a new building to be built on nearby leased property.
The new lease expires in 2012 with an option to renew for an additional
ten-year period



                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

44

<PAGE>

The total minimum rental commitment including all option periods, at December
31, 2002, under the leases mentioned above is as follows:

<TABLE>
<CAPTION>
                                              Amount
                          Year of Operation ----------
                          <S>               <C>
                             2003.......... $  183,404
                             2004..........    145,212
                             2005..........    147,938
                             2006..........    151,754
                             2007..........    151,754
                             Thereafter....  2,090,973
                                            ----------
                                            $2,871,035
                                            ==========
</TABLE>

The total rental expense included in the income statement for the years ended
December 31, 2002, 2001 and 2000 was $132,539, $84,067 and $81,449,
respectively.

Note 7. Deposits
As of December 31, 2002, certificates of deposit had scheduled maturity dates
as follows:

<TABLE>
<CAPTION>
                                             Amount
                         Year of Maturity ------------
                         <S>              <C>
                            2003......... $180,525,033
                            2004.........   23,935,940
                            2005.........   40,847,818
                            2006.........    5,731,853
                            2007.........    4,965,487
                            Thereafter...       45,000
                                          ------------
                                          $256,051,131
                                          ============
</TABLE>

The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $40,907,051 and $34,949,941 at December 31, 2002 and 2001,
respectively.

Note 8. Borrowings
Borrowings consist of:

<TABLE>
<CAPTION>
                                                         December 31,
                                                    -----------------------
                                                       2002        2001
                                                    ----------- -----------
     <S>                                            <C>         <C>
     Securities sold under agreements to repurchase $27,600,000 $        --
     Federal Home Loan Bank advances...............  32,100,000  30,000,000
                                                    ----------- -----------
     Total......................................... $59,700,000 $30,000,000
                                                    =========== ===========
</TABLE>

Mortgage-backed securities available-for-sale with a carrying value of
approximately $30,798,000 were pledged to collateralize the repurchase
agreements as of December 31, 2002. The advances from the FHLB are
collateralized by one-to-four family residential mortgages.

The weighted average maturity date was approximately 30 months and 54 months,
respectively, and the weighted average interest rates were approximately 4.12%
and 4.47%, respectively.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                             45

<PAGE>

Future payments at December 31, 2002, for all borrowings were as follows:

<TABLE>
<CAPTION>
                                          Amount
                             Year Ended -----------
                             <S>        <C>
                             2003...... $12,400,000
                             2004......  17,400,000
                             2005......  12,400,000
                             2006......   8,200,000
                             2007......     300,000
                             Thereafter   9,000,000
                                        -----------
                             Total..... $59,700,000
                                        ===========
</TABLE>

Note 9. Trust Preferred Debentures
In April 2002, Kankakee Bancorp, Inc. issued $10,000,000 in cumulative trust
preferred securities through a newly formed special-purpose trust, Kankakee
Bancorp Capital Trust I, L.P. The proceeds of the offering were invested by
Kankakee Bancorp Capital Trust I in junior subordinated deferrable interest
debentures of the Company. The Trust is a wholly-owned consolidated subsidiary
of the Company, and its sole assets are the junior subordinated deferrable
interest debentures. Distributions are cumulative and are payable quarterly at
a variable rate of 3.70% over the LIBOR rate (an effective rate of 5.32% at
December 31, 2002) per annum of the stated liquidation amount of $1,000 per
preferred security. Interest expense on the trust preferred securities was
$451,834 for the year ended December 31, 2002. The obligations of the trust are
fully and unconditionally guaranteed, on a subordinated basis, by the Company.
The trust preferred securities are mandatorily redeemable upon the maturity of
the debentures on April 7, 2032, or to the extent of any earlier redemption of
any debentures by the Company, and are callable beginning April 7, 2007.
Issuance costs of $310,000 related to the trust preferred securities were
deferred and are being amortized over the period until mandatory redemption of
the securities in April 2032.

Note 10. Income Taxes
Under provisions of the Internal Revenue Code and similar sections of the
Illinois income tax law that apply to tax years beginning before December 31,
1995, qualifying thrifts were allowed to claim bad debt deductions based on the
greater of (1) a specified percentage of taxable income, as defined, or (2)
actual loss experience. If, in the future, any of the accumulated bad debt
deductions are used for any purpose other than to absorb bad debt losses, gross
taxable income may result and income taxes may be payable.

As of December 31, 2002, the Company had state net operating loss carryforwards
of approximately $2,740,000 for income tax purposes. The difference between
book and tax net operating income results from interest income from certain
investments which is exempt from income tax for state income tax purposes. The
net operating loss carryforwards expire through 2007.

Income taxes consisted of:

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                           ----------------------------------
                                               2002        2001       2000
                                           -----------  ---------- ----------
  <S>                                      <C>          <C>        <C>
  Current................................. $ 2,283,546  $1,616,492 $1,351,788
  Deferred................................  (1,400,000)     23,858    (41,838)
                                           -----------  ---------- ----------
                                           $   883,546  $1,640,350 $1,309,950
                                           ===========  ========== ==========
</TABLE>



                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

46

<PAGE>

The Company's income tax expense differed from the maximum statutory federal
rate of 35% as follows:

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                            ----------------------------------
                                               2002        2001        2000
                                            ----------  ----------  ----------
<S>                                         <C>         <C>         <C>
Expected income taxes...................... $1,090,700  $1,715,466  $1,362,729
Income tax effect of:
   State income tax (carryforward), net of
     federal benefit.......................   (180,115)   (149,305)   (174,254)
   Income taxed at lower rate..............    (31,163)    (49,013)    (38,935)
   Bank owned life insurance...............   (122,233)         --          --
   Tax exempt interest, net................   (105,617)   (106,178)    (58,402)
   Utilization of (addition to) state net
     operating loss carryforwards..........    180,115     149,305     174,254
   Other...................................     51,859      80,075      44,558
                                            ----------  ----------  ----------
                                            $  883,546  $1,640,350  $1,309,950
                                            ==========  ==========  ==========
</TABLE>

Significant components of the deferred tax liabilities and assets were as
follows:

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                  ------------------------
                                                                      2002         2001
                                                                  -----------  -----------
<S>                                                               <C>          <C>
Deferred tax assets:
   Allowance for losses on loans................................. $ 2,218,264  $   877,959
   State net operating loss carryforwards........................     129,855      309,970
   Accrued benefits..............................................     139,855      136,680
   OREO..........................................................     107,497      141,342
   Premises and equipment........................................      84,939       62,949
   Other.........................................................     209,882        5,765
                                                                  -----------  -----------
       Total deferred tax assets.................................   2,890,292    1,534,665
   Valuation allowance for deferred tax assets...................     129,855      309,970
                                                                  -----------  -----------
       Total deferred tax assets, net of valuation allowance.....   2,760,437    1,224,695
                                                                  -----------  -----------
Deferred tax liabilities:
   Unrealized gain in assets available-for-sale..................    (840,532)    (311,815)
   Loan fees deferred for income tax purposes....................     (26,719)     (38,292)
   Stock dividend on FHLB stock..................................    (198,207)    (148,884)
   Loan costs deferred for book purposes.........................    (349,556)    (346,168)
   Mortgage servicing rights.....................................    (189,153)    (146,108)
   Intangible assets.............................................     (94,828)     (12,982)
   Prepaid expense...............................................     (79,751)    (109,635)
   Other.........................................................     (10,786)     (11,189)
                                                                  -----------  -----------
       Total deferred tax liabilities............................  (1,789,532)  (1,125,073)
                                                                  -----------  -----------
Net deferred tax assets.......................................... $   970,905  $    99,622
                                                                  ===========  ===========
</TABLE>

Retained earnings at December 31, 2002 and 2001 included approximately
$8,998,000 of the tax reserve which accumulated prior to 1988, for which no
deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for tax purposes only. Reduction of
amounts so allocated for purposes other than tax bad debt losses or adjustments
arising from carryback of net operating losses would create income for tax
purposes only, which would be subject to the then-current corporate income tax
rate. The unrecorded deferred income tax liability on the above amounts was
approximately $3,059,000 as of December 31, 2002 and 2001.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                             47

<PAGE>

Note 11. Stockholders' Equity and Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tangible and Core capital (as defined by the regulations) to tangible
assets (as defined) and Total and Tier I capital (as defined) to risk-weighted
assets (as defined). Management believes, as of December 31, 2002, that the
Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2002, the most recent notification from the Office of Thrift
Supervision (the "OTS"), categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.

<TABLE>
<CAPTION>
                                                                               To be Well
                                                                             Capitalized Under
                                                       For Capital           Prompt Corrective
                                           Actual     Adequacy Purposes      Action Provisions
                                       -------------  ----------------       ----------------
                                       Amount  Ratio  Amount         Ratio   Amount    Ratio
                                       ------- -----   -------       -----    -------  -----
                                                      (Dollars in thousands)
<S>                                    <C>     <C>    <C>            <C>     <C>       <C>
As of December 31, 2002
Tangible Capital to Tangible Assets
 KFS Bank, F.S.B...................... $35,726  6.73% $ 7,961        1.50%       N/A
Core Capital to Tangible Assets
 KFS Bank, F.S.B......................  35,726  6.73%  21,230        4.00%   $26,537    5.00%
Tier I Capital to Risk Weighted Assets
 KFS Bank, F.S.B......................  35,726 10.57%     N/A                 20,280    6.00%
Total Capital to Risk Weighted Assets
 KFS Bank, F.S.B......................  38,785 11.47%  27,040        8.00%    33,800   10.00%
As of December 31, 2001
Tangible Capital to Tangible Assets
 KFS Bank, F.S.B......................  33,522  6.94%   7,248        1.50%       N/A
Core Capital to Tangible Assets
 KFS Bank, F.S.B......................  33,522  6.94%  19,328        4.00%    24,160    5.00%
Tier I Capital to Risk Weighted Assets
 KFS Bank, F.S.B......................  33,522 10.32%     N/A                 19,497    6.00%
Total Capital to Risk Weighted Assets
 KFS Bank, F.S.B......................  36,080 11.10%  25,996        8.00%    32,496   10.00%
</TABLE>

A liquidation account in the amount of $17,720,139 was established for the
benefit of eligible deposit account holders who continue to maintain their
deposit accounts in the Bank after the December 30, 1992 conversion from a
mutual savings and loan association to a stock savings bank. In the unlikely
event of a complete liquidation of the Bank, each eligible deposit account
holder would be entitled to receive a liquidation distribution from the
liquidation account, in the proportionate amount of the then-current adjusted
balance for deposit accounts held, before any distribution may be made with
respect to the Bank's capital stock. The Bank may not declare or pay a cash
dividend to the Company on, or repurchase any of, its capital stock if the
effect thereof would cause the net worth of the Bank



                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

48

<PAGE>

to be reduced below the amount required for the liquidation account. Due to
various natural events, such as death, relocation and general attrition of
accounts, the balance in the liquidation account has been reduced to $1,466,071
as of December 31, 2002.

The OTS capital distribution regulations restrict the Bank's cash dividend
payments or other capital distributions. The OTS regulations generally provide
that an institution can make capital distributions during a calendar year up to
100% of its net income to date during the calendar year plus the amount that
would reduce by one-half the excess capital over fully phased-in capital
requirements at the beginning of the calendar year. Any additional capital
distributions would also require prior notice to the OTS. The Company is not
subject to these regulatory restrictions on the payment of dividends to its
stockholders; however, the ability of the Company to pay future dividends will
depend on dividends from the Bank.

Note 12. Officer, Director and Employee Plans
Money Purchase Pension Plan and Trust
The Bank sponsored a Money Purchase Pension Plan and Trust (the "Money Purchase
Plan") for the benefit of its employees meeting certain age and service
requirements. The Bank contributed to the Money Purchase Plan on behalf of each
Participant an amount equal to 7% of the Participant's compensation, as defined
by the Money Purchase Plan. Expense related to the Money Purchase Plan amounted
to approximately $309,000 and $254,000, for the years ended December 31, 2001
and 2000, respectively. On January 1, 2002, the Money Purchase Plan was merged
into the 401(k) Savings Plan, where it retained its identity as a separate part
of the 401(k) Plan. The Bank contributed $301,000 for the year ended December
31, 2002, representing 7% of each Participant's compensation as defined by the
plan.

401(k) Savings Plan
The Bank sponsors a qualified, tax-exempt pension plan qualifying under section
401(k) of the Internal Revenue Code (the "401(k) Plan"). Virtually all
employees are eligible to participate after meeting certain age and service
requirements. Eligible employees are permitted to contribute 1% to 10% of their
compensation to the 401(k) Plan. Expense related to the 401(k) Plan, including
plan administration, amounted to approximately $17,400, $15,300 and $19,600,
for the years ended December 31, 2002, 2001 and 2000, respectively.

Employee Stock Ownership Plan
The Kankakee Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP") covers
all full time employees who have completed twelve months of service and have
attained the minimum age of twenty-one. A participant is 100 percent vested
after seven years of credited service.

During 2002, the Company made a direct cash contribution totaling $120,000 to
the ESOP. The trust used the contribution to acquire Company stock in the open
market, and the acquired shares were allocated to the participants at the end
of the plan year. The contribution amount for 2003 and future years will be
determined annually by the Board of Directors.

Shares allocated to participants totaled 99,187, 99,920 and 106,081 at December
31, 2002, 2001 and 2000. There were no unallocated shares during this time
period.

Prior to 2001, the ESOP operated as a leveraged employee stock ownership plan.
The ESOP borrowed from the Company to purchase the shares of common stock. The
shares were held in trust and allocated to participants' accounts in the ESOP
as the loan obligation was repaid. The loan obligation was considered unearned
employee compensation and was recorded as a reduction of stockholders' equity,
while the loan was outstanding. The final loan payment was made in December
2000.

The Bank made discretionary cash contributions to the ESOP which, along with
dividend payments, were sufficient to service the principal payments plus
interest at 7 percent over the eight year loan term.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                             49

<PAGE>

Interest expense recognized by the ESOP was $7,939 for the year ended December
31, 2000. The Bank contributed $151,698 to the ESOP to fund principal and
interest payments for the year ended December 31, 2000.

The Board of Directors of the Company may direct payment of dividends with
respect to shares allocated to the participants to be paid in cash to the
participants. Dividends on unallocated shares were used to make payments on the
loan. All shares of stock owned by the ESOP are considered outstanding and
included in the weighted average shares outstanding for calculating earnings
per share.

Stock Option Plan
In 1992, the Company adopted an incentive stock option plan for the benefit of
directors, officers, and employees of the Company or the Bank (the "Stock
Option Plan"). The number of shares of common stock authorized under the Stock
Option Plan is 175,000. The option exercise price of an incentive stock option
must be at least equal to the fair market value per share of the common stock
on the date of grant. The Stock Option Plan also provides for the issuance of
nonqualified stock options, restricted stock and stock appreciation rights and
limited stock appreciation rights. Activity in the Stock Option Plan was as
follows:

<TABLE>
<CAPTION>
                                        2002               2001               2000
                                 ------------------ ------------------ ------------------
                                          Weighted-          Weighted-          Weighted-
                                           Average            Average            Average
                                          Exercise           Exercise           Exercise
                                  Shares    Price    Shares    Price    Shares    Price
Fixed Options                    -------  --------- -------  --------- -------  ---------
<S>                              <C>      <C>       <C>      <C>       <C>      <C>
Outstanding at beginning of year  35,385   $11.717   50,335   $10.350  115,610   $ 9.960
Granted.........................   2,500    37.150    2,500    26.390    2,500    20.500
Exercised....................... (33,135)   11.121  (17,450)    9.875  (66,025)    9.915
Forfeited.......................      --        --       --        --   (1,750)   15.500
                                 -------            -------            -------
Outstanding at end of year......   4,750    29.263   35,385    11.717   50,335    10.350
                                 =======            =======            =======
Options exercisable at year-end.   4,750             35,385             50,335
                                 =======            =======            =======
Weighted-average fair value of
  options granted during the
  year..........................              3.54               5.41               4.60
                                           =======            =======            =======
</TABLE>

Stockholders' Rights Plan
On May 14, 1999, the Company's Board of Directors adopted a Stockholders'
Rights Plan. The Plan provided for the distribution of one Right on June 15,
1999, for each share of the Company's outstanding common stock as of May 24,
1999. The Rights have no immediate economic value to stockholders because they
cannot be exercised unless and until a person, group or entity acquires 15% or
more of the Company's common stock or announces a tender offer. The Plan also
permits the Company's Board of Directors to redeem each Right for one cent
under various circumstances.

In general, the Rights Plan provides that if a person, group or entity acquires
a 15% or larger stake in the Company or announces a tender offer, and the
Company's Board chooses not to redeem the Rights, all holders of Rights, other
than the 15% stockholder or the tender offeror, will be able to purchase a
certain amount of the Company's common stock for half of its market price.

Note 13. Commitments and Contingencies
In the normal course of business, there are outstanding various contingent
liabilities such as claims and legal action, which are not reflected in the
consolidated financial statements. In the opinion of management, the ultimate
resolution of these matters is not expected to have a material effect on the
financial position or on the results of operations of the Company and its
subsidiary.



                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

50

<PAGE>

Note 14. Financial Instruments
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit, and financial guarantees. Those instruments involve, to varying
degrees, elements of credit and interest rate risk. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.

The Bank's exposure to credit loss, in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit, is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.

Financial instruments whose contract amount represent credit risk follows:

<TABLE>
<CAPTION>
                                                   December 31,
                                              -----------------------
                                                 2002        2001
                                              ----------- -----------
           <S>                                <C>         <C>
           Commitments to originate new loans $19,100,000 $34,672,000
           Commitments to extend credit......  31,106,000  23,792,000
           Standby letters of credit.........   1,228,000   1,712,000
</TABLE>

Such commitments are recorded in the financial statements when they are funded
or related fees
are incurred or received. These commitments are principally at variable
interest rates.

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.

Standby letters of credit written are conditional commitments issued by the
bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. In the event the customer does not perform in accordance with the
terms of the agreement with the third party, the Bank would be required to fund
the commitment. The maximum potential amount of future payments the Bank could
be required to make is represented by the contractual amount shown in the
summary above. If the commitment is funded, the Bank would be entitled to seek
recovery from the customer. At December 31, 2002 and 2001, no amounts have been
recorded as liabilities for the Bank's potential obligations under these
guarantees.

The Company and the Bank do not engage in the use of interest rate swaps,
futures, forwards, or option contracts.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                             51

<PAGE>

Note 15. Fair Value of Financial Instruments
The following table reflects a comparison of carrying amounts and the fair
values of the financial instruments:

<TABLE>
<CAPTION>
                                                    December 31
                                ---------------------------------------------------
                                          2002                      2001
                                ------------------------- -------------------------
                                  Carrying                  Carrying
                                   Amount     Fair Value     Amount     Fair Value
                                ------------ ------------ ------------ ------------
<S>                             <C>          <C>          <C>          <C>
Assets:
   Cash and cash equivalents... $ 47,425,956 $ 47,425,956 $ 26,662,714 $ 26,662,714
   Certificates of Deposit.....       50,000       50,000       50,000       50,000
   Investment and mortgage-
     backed securities.........   83,730,783   83,741,098   47,893,215   47,912,733
   Loans, gross................  390,762,943  395,142,336  396,372,062  397,542,235
   Loans held for sale.........      128,000      130,225      828,610      832,268
   FHLB stock..................    2,740,500    2,740,500    2,443,300    2,443,300
   Accrued interest receivable.    2,795,701    2,795,701    2,823,090    2,823,090
Liabilities:
   Deposits.................... $432,031,608 $436,033,508 $415,466,836 $420,301,232
   Borrowed funds..............   59,700,000   62,219,740   30,000,000   29,204,398
   Trust preferred debentures..   10,000,000   10,000,000           --           --
   Advance payments by
     borrowers for taxes and
     insurance.................    1,751,128    1,751,128    1,905,766    1,905,766
   Accrued interest payable--
     borrowed funds and trust
     preferred debentures......      254,361      254,361      115,582      115,582
</TABLE>

The fair values utilized in the table were derived using the information
described below for the group of instruments listed. It should be noted that
the fair values disclosed in this table do not represent market values of all
assets and liabilities of the Company and, thus, should not be interpreted to
represent a market or liquidation value for the Company.

The following methods and assumptions were used by the Bank in estimating the
fair value disclosures for financial instruments:

Cash and cash equivalents and certificates of deposit:  The carrying amounts
reported in the balance sheet for cash and short-term instruments approximate
those assets' fair values.

Investment and mortgage-backed securities:  Fair values for securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying amounts of accrued interest approximate their fair
values.

Nonmarketable equity securities and FHLB stock:  Those securities are carried
at cost, as fair values are not readily determinable.

Loans:  For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair
values for fixed-rate loans are estimated using discounted cash flow analyses
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amounts of accrued interest
approximate their fair value.

Loans held for sale:  Fair values are based on quoted market price.



                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

52

<PAGE>

Off-balance-sheet instruments:  Fair values for the Bank's off-balance-sheet
Instruments (guarantees and loan commitments) are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing. The fair value
for such commitments is nominal.

Deposits:  The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the balance sheet date. The carrying
amounts for variable-rate, fixed-term money market accounts approximate their
fair values at the balance sheet date. Fair values for fixed-rate certificates
of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits. The carrying amounts
of accrued interest payable, which is included in the deposit amount, and
advance payments by borrowers for taxes and insurance approximates their fair
value.

Borrowed funds:  Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing
debt. The Trust Preferred Debentures are privately held, therefore the carrying
amount approximates fair value.

Accrued interest payable:  The carrying amounts of accrued interest payable on
borrowings and trust preferred debentures approximate their fair value.

Note 16. Sale of Branch
On October 10, 2002, the Company signed an agreement to sell their Hoopeston
bank branch at a premium. At December 31, 2002, the branch had approximately
$6.6 million in loans and $19.9 million in deposits. The transaction, which was
completed on February 14, 2003, resulted in a net gain of approximately
$460,000, which will be included in the Company's 2003 operating results.

Note 17. Subsequent Event
On February 24, 2003, the Company purchased 174,270 shares of stock from
existing
stockholders for a total cost of $6,982,999. As a result, purchases of treasury
stock for the period of January 1, 2003 to February 24, 2003 totaled 193,270
shares at a total cost of $7,737,244.

Note 18. Condensed Parent Company Only Financial Statements

<TABLE>
<CAPTION>
                                                        December 31,
                                                 --------------------------
                                                     2002          2001
                                                 ------------  ------------
   <S>                                           <C>           <C>
   Statements of financial condition
   Assets:
      Cash and cash equivalents................. $  8,727,801  $  1,104,576
      Certificate of deposit....................       50,000        50,000
      Investment securities, available-for-sale.      464,980       433,051
      Equity in net assets of KFS Bank, F.S.B...   41,613,916    39,417,652
      Investment in Kankakee Capital Trust I....      310,000            --
      Other assets..............................      538,011       273,908
                                                 ------------  ------------
                                                 $ 51,704,708  $ 41,279,187
                                                 ============  ============
   Liabilities and stockholders' equity:
      Trust preferred debentures................ $ 10,000,000  $         --
      Other liabilities.........................      598,049        88,287
      Common stock..............................       17,500        17,500
      Additional paid-in capital................   15,039,598    15,226,853
      Retained income...........................   38,517,217    36,964,331
      Accumulated comprehensive income..........    1,631,348       605,078
      Treasury stock............................  (14,099,004)  (11,622,862)
                                                 ------------  ------------
                                                 $ 51,704,708  $ 41,279,187
                                                 ============  ============
</TABLE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                             53

<PAGE>

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                           -------------------------------------
                                                               2002         2001         2000
                                                           -----------  -----------  -----------
<S>                                                        <C>          <C>          <C>
Statements of income
Dividends from subsidiary................................. $ 1,874,497  $ 1,714,888  $ 1,300,989
Interest income...........................................     141,172       53,630      110,498
                                                           -----------  -----------  -----------
   Operating income.......................................   2,015,669    1,768,518    1,411,487
                                                           -----------  -----------  -----------
Equity in undistributed earnings of Kankakee
  Federal Savings Bank....................................   1,176,736    1,821,132    1,487,864
Other noninterest income..................................         253           --        6,388
                                                           -----------  -----------  -----------
   Total other income.....................................   1,176,989    1,821,132    1,494,252
Interest expense..........................................     451,834           --           --
Other expenses............................................     985,737      470,318      427,927
                                                           -----------  -----------  -----------
   Income before income tax benefit.......................   1,755,087    3,119,332    2,477,812
Income tax benefit........................................     477,654      141,650      105,750
                                                           -----------  -----------  -----------
   Net income............................................. $ 2,232,741  $ 3,260,982  $ 2,583,562
                                                           ===========  ===========  ===========

                                                                  Years Ended December 31,
                                                           -------------------------------------
                                                               2002         2001         2000
                                                           -----------  -----------  -----------
Statements of cash flows
Operating activities:
   Net income............................................. $ 2,232,741  $ 3,260,982  $ 2,583,562
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Equity in undistributed earnings of
         Kankakee Federal Savings Bank....................  (1,176,736)  (1,821,132)  (1,487,864)
       Other..............................................     (67,815)     (88,715)      22,999
                                                           -----------  -----------  -----------
          Net cash provided by operating
            activities....................................     988,190    1,351,135    1,118,697
                                                           -----------  -----------  -----------
Investing activities:
   Available-for-sale investment and mortgage backed
     securities:..........................................
       Purchase...........................................     (21,713)     (24,300)     (23,854)
                                                           -----------  -----------  -----------
          Net cash (used in) investing activities.........     (21,713)     (24,300)     (23,854)
                                                           -----------  -----------  -----------
Financing activities:
   Principal collected on ESOP loan.......................          --           --      151,211
   Purchase of treasury stock.............................  (3,202,133)  (1,543,360)  (1,023,572)
   Dividends paid to stockholders.........................    (679,855)    (582,611)    (607,027)
   Proceeds from issuance of trust preferred debentures     10,000,000           --           --
   Proceeds from exercise of stock options................     538,736      277,637      725,795
                                                           -----------  -----------  -----------
          Net cash provided by (used in) financing
            activities....................................   6,656,748   (1,848,334)    (753,593)
                                                           -----------  -----------  -----------
Increase (decrease) in cash and cash equivalents..........   7,623,225     (521,499)     341,250
Cash and cash equivalents:
   Beginning of period....................................   1,104,576    1,626,075    1,284,825
                                                           -----------  -----------  -----------
   End of period.......................................... $ 8,727,801  $ 1,104,576  $ 1,626,075
                                                           ===========  ===========  ===========
</TABLE>



                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

54

<PAGE>

Note 19. Quarterly Results of Operations (Unaudited)

<TABLE>
<CAPTION>
                                                     Year Ended December 31, 2002
                                            ----------------------------------------------
                                                          Three Months Ended
                                            December 31 September 30  June 30    March 31
                                            ----------- ------------ ---------- ----------
<S>                                         <C>         <C>          <C>        <C>
Interest income............................ $7,899,153  $ 8,118,907  $8,316,556 $7,779,772
Interest expense...........................  3,852,476    4,062,755   4,238,416  3,933,070
                                            ----------  -----------  ---------- ----------
   Net interest income.....................  4,046,677    4,056,152   4,078,140  3,846,702
Provision for losses on loans..............    234,413    3,143,700     463,952    147,968
                                            ----------  -----------  ---------- ----------
   Net interest income after provision for
     losses on loans.......................  3,812,264      912,452   3,614,188  3,698,734
Other income...............................  1,397,464    1,081,245   1,113,959    959,461
Other expense..............................  3,478,706    3,238,743   3,375,869  3,380,162
                                            ----------  -----------  ---------- ----------
   Income (loss) before income taxes.......  1,731,022   (1,245,046)  1,352,278  1,278,033
Income taxes...............................    541,100     (456,250)    413,850    384,846
                                            ----------  -----------  ---------- ----------
   Net income (loss)....................... $1,189,922  $  (788,796) $  938,428 $  893,187
                                            ==========  ===========  ========== ==========
Basic earnings (loss) per share............ $     1.02  $     (0.67) $     0.78 $     0.73
                                            ==========  ===========  ========== ==========
Diluted earnings (loss) per share.......... $     1.02  $     (0.67) $     0.77 $     0.72
                                            ==========  ===========  ========== ==========

                                                     Year Ended December 31, 2001
                                            ----------------------------------------------
                                            December 31 September 30  June 30    March 31
                                            ----------- ------------ ---------- ----------
Interest income............................ $8,093,804  $ 8,212,360  $8,257,817 $8,194,740
Interest expense...........................  4,359,799    4,666,657   4,852,741  4,849,456
                                            ----------  -----------  ---------- ----------
   Net interest income.....................  3,734,005    3,545,703   3,405,076  3,345,284
Provision for losses on loans..............    308,500      139,000      40,000     15,000
                                            ----------  -----------  ---------- ----------
   Net interest income after
     provision for losses on loans.........  3,425,505    3,406,703   3,365,076  3,330,284
Other income...............................    974,804    1,242,460     789,422    597,565
Other expense..............................  3,082,929    3,116,248   3,051,764  2,979,546
                                            ----------  -----------  ---------- ----------
   Income before income taxes..............  1,317,380    1,532,915   1,102,734    948,303
Income taxes...............................    441,200      512,700     369,150    317,300
                                            ----------  -----------  ---------- ----------
   Net income.............................. $  876,180  $ 1,020,215  $  733,584 $  631,003
                                            ==========  ===========  ========== ==========
Basic earnings per share................... $     0.72  $      0.84  $     0.61 $     0.51
                                            ==========  ===========  ========== ==========
Diluted earnings per share................. $     0.71  $      0.82  $     0.59 $     0.50
                                            ==========  ===========  ========== ==========
</TABLE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                             55