<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                   FORM 10-K405
                                        
                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                                        
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

For the fiscal year ended December 31, 1998
                                       OR
                                        

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the transition period from ______________ to _______________

                       Commission File Number:  0-18609
                                                ---------
                                        
                               CFSB BANCORP, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)
                                        
                Delaware                               38-2920051
---------------------------------------------      --------------------
(State or other jurisdiction of incorporation       (I.R.S. Employer
or organization)                                    Identification No.) 

112 East Allegan Street, Lansing, Michigan                48933
--------------------------------------------           ------------
(Address of principal executive offices)                (Zip Code)

      Registrant's telephone number, including area code: (517) 371-2911
                                                         ----------------
       Securities registered pursuant to Section 12(b) of the Act: None 

         Securities registered pursuant to Section 12(g) of the Act: 

                    Common Stock, par value $0.01 per share
                    ---------------------------------------
                               (Title of Class)
                                        
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  YES    X       NO _______.
                                        --------              

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

As of March 15, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the last price at
which the stock was sold ($27.25 per share), was approximately $198,275,387 (for
purposes of this calculation, directors and executive officers are treated as
affiliates).

As of March 15,  1999, there were issued and outstanding 8,246,901 shares of the
registrant's common stock, of which 970,740 shares were held by affiliates.

                      DOCUMENTS INCORPORATED BY REFERENCE
  1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
     December 31, 1998 (the "Annual Report")  (Parts I and II)

  2. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders
     (the "Proxy Statement")  (Part III)
<PAGE>
 
                              CFSB BANCORP, INC.

                              Index to Form 10-K
                      Fiscal Year Ended December 31, 1998
Part I

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

Part II

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

Part III

     Item 10   Directors and Executive Officers of the Registrant
     Item 11   Executive Compensation
     Item 12   Security Ownership of Certain Beneficial Owners
               and Management
     Item 13   Certain Relationships and Related Transactions

Part IV

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

SIGNATURES

EXHIBITS

Included or incorporated by reference in this Form 10-K are certain forward-
looking statements within the meaning of  Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended.  Such forward-looking statements are based upon the beliefs of the
Registrant's management as well as on assumptions made by and information
currently available to the Registrant at the time such statements were made.
Readers are cautioned that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities and competitive,
regulatory factors and impact of the Year 2000, could affect CFSB Bancorp,
Inc.'s financial performance and could cause actual results for future periods
to differ materially from those anticipated.  Investors are cautioned that all
forward-looking statements involve risks and uncertainty.
<PAGE>
 
                                     PART I
Item 1.  Business
-----------------

General

     CFSB Bancorp, Inc.  CFSB Bancorp, Inc. ("CFSB" or the "Corporation") was
incorporated under the laws of the State of Delaware on November 28, 1989.  The
historical information in this report, and the financial statements filed as
exhibits, principally address the financial condition and results of operations
of the Corporation's savings institution subsidiary, Community First Bank
("Community First" or the "Bank"), through December 31, 1998, with disclosure as
appropriate to reflect the consolidated financial condition and results of
operations of the Corporation.

     The Corporation is classified as a unitary savings and loan holding company
subject to regulation by the Office of Thrift Supervision ("OTS") of the
Department of the Treasury.  The Corporation's principal business is the
business of Community First and its subsidiaries.  The holding company structure
permits the Corporation to expand the financial services currently offered
through Community First and its subsidiaries.  As a holding company, the
Corporation has greater flexibility than Community First to diversify its
business activities, through existing or newly formed subsidiaries, or through
acquisition or merger.  So long as the Corporation remains a unitary savings and
loan holding company and Community First satisfies the Qualified Thrift Lender
Test, the Corporation may diversify its activities in such a manner as to
include any activities allowed by regulation to a unitary savings and loan
holding company.  See "Item 1.  Business -- Regulation of the Corporation."

     The Corporation's main office is located at 112 East Allegan Street,
Lansing, Michigan, 48933, and the telephone number is (517) 371-2911.  At
December 31, 1998, the Corporation had total assets of $880.3 million and
stockholders' equity of $69.3 million.

     Community First Bank. Community First is a Michigan chartered stock savings
bank which commenced operations in 1890 as Capitol Investment Building and Loan
Association, a Michigan-chartered mutual savings and loan association, and in
1923 became Capitol Savings & Loan Association.  The Bank changed its name to
Capitol Federal Savings & Loan Association upon its conversion from a state to a
federal charter in January 1982.  In April 1986, the Bank became a federal
mutual savings bank known as Capitol Federal Savings Bank.  In June 1990, the
Bank became a federal stock savings bank, and in December 1991 the Bank merged
with Union Federal Savings ("Union Federal") and adopted the name, Community
First Bank, A Federal Savings Bank.  On December 9, 1996 the Bank converted to a
Michigan chartered state savings bank under its current name, Community First
Bank.

     As a Michigan chartered savings bank, Community First is subject to
extensive regulation and examination by the Financial Institutions Bureau of the
Michigan Department of Consumer and Industry Services (the "Financial
Institutions Bureau") and the Federal Deposit Insurance Corporation ("FDIC"), as
the administrator of the Savings Association Insurance Fund ("SAIF") which
insures Community First's deposits up to applicable limits.

     Community First conducts its operations through its main office located in
Lansing, Michigan and through 15 branch offices serving the Greater Lansing
area.  The Bank is principally engaged in the business of accepting deposits
from the general public and using such deposits, together with Federal Home Loan
Bank ("FHLB") advances, to make loans for the purchase and construction of
residential properties.  To a lesser extent, the Bank also makes income-
producing property loans, commercial business loans, home equity loans, and
various types of consumer loans.  The Bank also invests in government, federal
agency and corporate obligations and mortgage-backed securities.

     As a federally insured savings bank, the Bank's deposit accounts are
insured by the FDIC to a maximum of $100,000.  The Bank is a member of the FHLB
of Indianapolis, which is one of the 12 regional banks constituting the FHLB
System.  The Bank is subject to comprehensive examination, supervision and
regulation by the Financial Institutions Bureau and the FDIC.  This regulation
is intended primarily for the protection of depositors.

                                       1
<PAGE>
 
     The executive offices of the Bank are located at 112 East Allegan Street,
Lansing, Michigan 48933, and the telephone number is (517) 371-2911.

Recent Developments

     On February 24, 1999, CFSB entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Old Kent Financial Corporation ("Old Kent"),
pursuant to which CFSB is expected to merge with and into Old Kent (the
"Merger").  As a result of the Merger, each outstanding share of CFSB's common
stock, ("CFSB Common Stock"), will be converted into the right to receive 0.6222
shares of common stock of Old Kent.  The Merger is conditioned upon, among other
things, approval by holders of a majority of CFSB Common Stock and the receipt
of certain regulatory and governmental approvals.  It is intended that the
Merger will be treated as a pooling-of-interests for accounting and financial
reporting purposes.  The Merger is to be voted on by CFSB stockholders at a
special meeting of stockholders expected to be held in late Spring or Summer of
1999, and is expected to be consummated in the third quarter of Calendar 1999.

     Concurrently with their execution and delivery of the Merger Agreement,
CFSB and Old Kent entered into a stock option agreement (the "Stock Option
Agreement") pursuant to which CFSB granted Old Kent the right, upon the terms
and subject to the conditions set forth in the Stock Option Agreement, to
purchase up to 1,645,364 shares (or 19.99%) of CFSB Common Stock, subject to
certain adjustments.

Market Area

     The Bank is a community-oriented financial institution offering a variety
of financial services to meet the needs of the communities it serves.  The
Bank's primary market area is the greater Lansing, Michigan area, which is
composed of the tri-county area of Clinton, Eaton and Ingham Counties, the
western townships of Shiawassee County and Ionia County.  Lansing is the capital
of Michigan and the fifth largest city in Michigan.  The greater Lansing area is
a diversified market with a strong service sector, and, to a lesser extent,
trade and manufacturing sectors.  Since 1984 growth in employment in the greater
Lansing area has occurred primarily in the service sector, and such trends are
expected to continue.  The largest employers in the Bank's market area are the
State of Michigan, General Motors and Michigan State University.  Based on total
deposits at December 31, 1998, Community First was the largest financial
institution headquartered in the greater Lansing area and historically, has been
among the three largest financial institutions serving the greater Lansing area.

Lending Activities

     General.  The principal lending activity of the Bank is the origination of
conventional residential mortgage loans (i.e., loans that are neither insured
nor partially guaranteed by government agencies) for the purpose of financing,
refinancing or constructing one-to four-family residential properties and
income-producing properties, which includes multi-family (over four-family) and
commercial properties.  As of December 31, 1998, $658.2 million, or 81.8%, of
the Bank's loan portfolio (before the deduction of undistributed funds, unearned
fees, unearned income and discounts, and loan loss allowance) consisted of loans
secured by one-to four-family residential properties, of which $497.9 million
were loans originated by the Bank.  Substantially all loans originated by the
Bank are on properties located in its primary market area. Of the purchased
loans which are serviced by other institutions, $40.0 million, $104.2 million
and $16.2 million represented loans on properties located in Michigan, Texas and
other states, respectively.  The Bank also originates second mortgage loans,
commercial business loans, consumer loans (including home equity loans,
educational loans, automobile loans, loans secured by savings accounts and
personal loans) and land contracts.  Substantially all of the Corporation's
income-producing property and consumer loans are based in Michigan.

     In order to reduce the Bank's vulnerability to volatile interest rate
changes, the Bank implements a number of measures designed to make the yield on
its loan portfolio more interest rate sensitive. These measures include: (i)
emphasizing the origination and purchase of adjustable-rate mortgage loans and
loans with call or balloon payment 

                                       2
<PAGE>
 
provisions, (ii) originating construction and consumer loans, which typically
have shorter terms to maturity or repricing than fixed-rate residential mortgage
loans, (iii) maintaining liquidity levels adequate to allow flexibility in
reacting to the interest rate environment, and (iv) selling upon origination
certain long-term, fixed-rate, residential mortgages in the secondary mortgage
market. The level of loan sales is partially a function of the interest rate
environment. At December 31, 1998, 49.05% of the Bank's total loans receivable
consisted of loans that provided for periodic interest rate adjustments or had
terms to repricing, call provisions or balloon payment provisions of seven years
or less.

     As noted above, in an effort to maintain a closer match between the
interest rate sensitivity of its assets and liabilities, the Bank has been
active in the origination of loans on income-producing properties (consisting of
commercial and multi-family real estate loans) in its primary market area and in
the origination of consumer loans.  Although income-producing property loans and
consumer loans provide for higher interest rates and shorter terms, these loans
have higher credit risks than one-to four-family residential loans.  While the
Bank has been relatively successful in its origination of income-producing
property loans, and the real estate market in the greater Lansing area has
remained fairly stable, numerous financial institutions throughout the United
States have incurred significant losses due to delinquencies and foreclosures
resulting from a decline in the value of properties securing income-producing
property loans.  At December 31, 1998, the Bank had income-producing property
loans of $69.3 million and consumer loans of $68.3 million.  This compares to
$77.2 million in income-producing property loans and $64.5 million in consumer
loans, at December 31, 1997.  The decline in the Bank's income-producing
property loans is primarily due to strong competition from insurance companies
and other financial institutions offering lower interest rates for fixed-rate
financing. Consumer loan growth is a direct result of home equity loan
promotions and expanding the Bank's consumer lending to include indirect
automobile lending through local automobile dealerships.  Any decline in the
economy or real estate market in the greater Lansing area could have a negative
effect on the Bank's loan portfolio and on the Corporation's net interest income
and net income.  At December 31, 1998, the Bank's loans contractually delinquent
90 days or more and real estate owned totaled $1.68 million, or 0.19%, of total
assets.

     Since 1994, the Bank has increased its emphasis on originating small
business commercial loans.  The business loan department serves the financial
needs of small businesses in the Bank's tri-county market area.  Small
businesses are defined by the Bank as companies with sales under $1.0 million
and less than 20 employees.  The Bank believes it can satisfy the financial
needs of small business owners by assisting with both their credit and deposit
needs.  Also since 1994, the Bank has had a formal credit department and an
active call program.  During 1998, the commercial business loan department
originated a total of $9.4 million in loans.  Additional funds of $3.6 million
were available for disbursement at year-end 1998 on the Bank's commercial
business loan portfolio.  As of December 31, 1998, commercial business loans
totaled $8.2 million compared to $5.1 million at December 31, 1997.

     In March 1997, the Bank initiated a 24-hour consumer loan-by-phone program.
A consumer can telephone the Bank and electronically make a loan application for
consumer loan products such as auto, home equity, marine or debt consolidations.
In August 1998, the Bank began taking loan applications for consumer and
mortgage loans via the Bank's internet website.  Loans granted are limited to
Michigan residents.  To date, loan activity via the Bank's website has been
minimal.

     Several years ago, the Bank implemented a preapproval mortgage loan program
called Buyer's Edge.  This program allows a potential homeowner to identify,
prior to finding a home, the amount of financing the Bank will approve.  A
certificate is issued by the Bank which is valid for three months for a purchase
of a home, and five months for construction of a home.  The customer can then
comfortably look for a new home or construct a home knowing the financing has
already been approved.  In 1998, the Bank closed 118 loans amounting to $15.9
million under the Buyer's Edge Program.

                                       3
<PAGE>
 
     Loan Portfolio Composition. The first of the following two tables sets
forth information concerning the composition of the Bank's loan portfolio
(separately including mortgage-backed securities) in dollar amounts and
percentages by category and presents a reconciliation of total loans receivable
before net items. The second table sets forth information concerning the Bank's
loan portfolio (separately including mortgage-backed securities) in dollar
amounts and percentages by fixed and adjustable-rates at the dates indicated.

<TABLE>
<CAPTION> 
                                                                               At December 31,
                                ----------------------------------------------------------------------------------------
                                       1998                   1997                  1996                   1995         
                                --------------------   -------------------    ------------------    --------------------
                                Amount      Percent    Amount      Percent    Amount      Percent    Amount      Percent
                                --------    -------    --------    -------    --------    -------    --------    -------
                                                                 (Dollars in Thousands)
<S>                             <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>    
First mortgage loans:                                                                                                   
 One- to four-family                                                                                                    
  residential................   $609,447      75.74%   $585,267      75.51%   $553,691      74.63%   $469,820    74.46%  
 Income-producing property...     38,318       4.76      44,580       5.75      52,584       7.09      57,952     9.19   
 FHA-insured and                                                                                                         
  VA-partially guaranteed....     10,876       1.35       7,607       0.98       6,404       0.86       7,458     1.18   
 Construction and                                                                                                        
  development loans:                                                                                                     
  One- to four-family                                                                                                    
   residential...............     37,927       4.71      34,821       4.49      38,072       5.13      30,754     4.87   
  Income-producing property..     30,965       3.85      32,649       4.21      31,428       4.24      17,060     2.70   
                                --------     ------    --------     ------    --------     ------    --------   ------   
                                                                                                                         
   Total first mortgage loans    727,533      90.41     704,924      90.94     682,179      91.95     583,044    92.40   
                                                                                                                         
Second mortgage loans........        642       0.08         549       0.07         510       0.07         571      .09   
                                                                                                                         
Commercial business loans....      8,218       1.02       5,087       0.66       4,644       0.63       3,195      .51   
                                                                                                                         
Consumer loans:                                                                                                          
 Home equity.................     42,195       5.24      42,281       5.46      36,275       4.89      28,126     4.46   
 Educational.................      1,164       0.15       1,348       0.18       1,871       0.25       2,329      .37   
 Marine and recreational                                                                                                 
  vehicles...................      2,112       0.26       2,224       0.29       2,192       0.30       2,373      .38   
 Land contract...............        119       0.02         149       0.02         254       0.03         349      .05   
 Auto........................     10,626       1.32      10,219       1.32       7,925       1.07       6,542     1.04   
 Savings.....................        329       0.04         578       0.07         452       0.06         338      .05   
 Mobile home.................        801       0.10       1,099       0.14       1,519       0.20       1,735      .27   
 Other.......................     10,977       1.36       6,585       0.85       4,090       0.55       2,379      .38   
                                --------     ------    --------     ------    --------     ------    --------   ------   
   Total consumer loans......     68,323       8.49      64,483       8.33      54,578       7.35      44,171     7.00   
                                --------     ------    --------     ------    --------     ------    --------   ------   
   Total loans receivable....    804,716     100.00%    775,043     100.00%    741,911     100.00%    630,981   100.00%  
                                             ======                 ======                 ======               ======   
                                                                                                                        
Less:                                                                                                                   
 Undistributed portion of                                                                                               
  loans  in process..........    (12,812)               (14,408)               (18,147)               (15,054)          
 Deferred origination fees...       (489)                (1,099)                (1,485)                (1,280)          
 Allowance for loan losses...     (5,004)                (4,730)                (4,564)                (4,363)          
                                --------               --------               --------               --------           
   Total loans receivable,                                                                                              
    net......................    786,411                754,806                717,715                610,284           
                                                                                                                        
Mortgage-backed securities,                                                                                             
 net.........................     16,007                 21,598                 27,221                 35,156           
                                --------               --------               --------               --------           
                                                                                                                        
   Total loans receivable                                                                                               
    and mortgage-                                                                                                       
    backed securities, net...   $802,418               $776,404               $744,936               $645,440           
                                ========               ========               ========               ========           
</TABLE>
<TABLE> 
<CAPTION> 
                                    --------------------
                                           1994                             
                                    -------------------                          
                                    Amount      Percent                     
                                    --------    -------                     
                                  (Dollars in Thousands)
<S>                                 <C>         <C>                         

First mortgage loans:                                                       
 One- to four-family                                                        
  residential................       $401,394      75.38%                    
 Income-producing property...         55,178      10.36                     
 FHA-insured and                                                            
  VA-partially guaranteed....          3,629        .68                     
 Construction and                                                           
  development loans:                                                        
  One- to four-family                                                       
   residential...............         20,485       3.85                     
  Income-producing property..         11,677       2.19                     
                                    --------     ------                     
                                                                            
   Total first mortgage loans        492,363      92.46                     
                                                                            
Second mortgage loans........            661        .12                     
                                                                            
Commercial business loans....            706        .13                     
                                                                            
Consumer loans:                                                             
 Home equity.................         26,048       4.89                     
 Educational.................          2,967        .56                     
 Marine and recreational                                                    
  vehicles...................          2,420        .45                     
 Land contract...............            409        .08                     
 Auto........................          2,330        .44                     
 Savings.....................            351        .07                     
 Mobile home.................          2,144        .40                     
 Other.......................          2,090        .40                     
                                    --------     ------                     
   Total consumer loans......         38,759       7.29                     
                                    --------     ------                     
   Total loans receivable....        532,489     100.00%                    
                                                 ======                     
                                                                            
Less:                                                                       
 Undistributed portion of                                                   
  loans  in process..........         (8,578)                               
 Deferred origination fees...         (1,196)                               
 Allowance for loan losses...         (4,124)                               
                                    --------                                
   Total loans receivable,                                                  
    net......................        518,591                                
                                                                            
Mortgage-backed securities,                                                 
 net.........................         66,151                                
                                    --------                                
                                                                            
   Total loans receivable                                                   
    and mortgage-                                                           
    backed securities, net...       $584,742                                
                                    ========
</TABLE> 

                                       4
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                At December 31,
                                ------------------------------------------------------------------------------------------
                                        1998                   1997                   1996                   1995
                                --------------------   ---------------------   --------------------   -------------------
                                 Amount      Percent     Amount      Percent     Amount     Percent     Amount    Percent
                                ---------   ---------   ---------   ---------   ---------   --------   --------   --------
                                                                             (Dollars in Thousands)
<S>                             <C>         <C>         <C>         <C>         <C>         <C>        <C>        <C>
Fixed-rate loans:
  One- to four-family
   residential...............   $297,545       36.98%   $205,478       26.51%   $192,972      26.01%   $201,971     32.01%
  Income-producing property..     29,026        3.61      28,222        3.64      32,848       4.43      34,693      5.50
  FHA-insured and
   VA-partially guaranteed...      8,179        1.01       3,802        0.49       2,797       0.37       3,560       .56
  Construction and
   development:
    One- to four-family
     residential.............     30,978        3.85       7,652        0.98       3,494       0.47         805       .13
    Income-producing property      5,593        0.70       4,553        0.59       4,878       0.66       7,591      1.20
                                --------    --------    --------    --------    --------     ------    --------    ------
    Total first mortgage
     loans...................    371,321       46.15     249,707       32.21     236,989      31.94     248,620     39.40

 Second mortgage loans.......        642        0.08         311        0.04         399       0.06         456       .07
 Commercial business loans...      3,024        0.37         927        0.12         836       0.11         585       .09
 Other loans.................     35,020        4.35      29,926        3.86      24,274       3.27      20,097      3.18
                                --------    --------    --------    --------    --------     ------    --------    ------
    Total fixed-rate loans...    410,007       50.95     280,871       36.23     262,498      35.38     269,758     42.74
                                --------    --------    --------    --------    --------     ------    --------    ------

Adjustable-rate loans:
 First mortgage loans:
  One- to four-family
   residential...............    311,902       38.76     379,789       49.00     360,719      48.62     267,849     42.45
  Income-producing property..      9,292        1.15      16,358        2.11      19,736       2.66      23,259      3.69
  FHA-insured and
   VA-partially guaranteed...      2,697        0.34       3,805        0.49       3,607       0.49       3,898       .62
  Construction and
   development:
    One- to four-family
     residential.............      6,949        0.86      27,169        3.51      34,578       4.66      29,949      4.74
    Income-producing property     25,372        3.15      28,096        3.63      26,550       3.58       9,469      1.50
                                --------    --------    --------    --------    --------     ------    --------    ------
    Total first mortgage
     loans...................    356,212       44.26     455,217       58.74     445,190      60.01     334,424     53.00

 Second mortgage loans.......         --          --         238        0.03         111       0.01         115       .02
 Commercial business loans...      5,194        0.65       4,160        0.54       3,808       0.52       2,610       .42
 Other loans.................     33,303        4.14      34,557        4.46      30,304       4.08      24,074      3.82
                                --------    --------    --------    --------    --------     ------    --------    ------
    Total adjustable-rate
     loans...................    394,709       49.05     494,172       63.77     479,413      64.62     361,223     57.26
                                --------    --------    --------    --------    --------     ------    --------    ------
    Total loans receivable...    804,716      100.00%    775,043      100.00%    741,911     100.00%    630,981    100.00%
                                            ========                ========                  ======                ======
Less:
  Undistributed portion of
   loans in process..........    (12,812)                (14,408)                (18,147)               (15,054)
  Deferred origination fees..       (489)                 (1,099)                 (1,485)                (1,280)
  Allowance for loan losses..     (5,004)                 (4,730)                 (4,564)                (4,363)
                                --------                --------                --------               --------
     Total loans receivable,
      net....................    786,411                 754,806                 717,715                610,284

Mortgage-backed securities:
  Fixed-rate mortgage-backed
   securities................      8,642                  12,011                  16,138                 22,159
  Adjustable-rate
   mortgage-backed
   securities................      7,365                   9,587                  11,083                 12,997
                                --------                --------                --------               --------
      Total mortgage-backed
       securities, net.......     16,007                  21,598                  27,221                 35,156
                                --------                --------                --------               --------
     Total loans receivable
      and mortgage-
       backed securities, net   $802,418                $776,404                $744,936               $645,440
                                ========                ========                ========               ========
</TABLE>

<TABLE>
<CAPTION>
                                  --------------------
                                        1994
                                  --------------------
                                    Amount    Percent
                                   --------   --------
                                 (Dollars in Thousands)
<S>                                <C>        <C>
Fixed-rate loans:
  One- to four-family
   residential...............      $211,445     39.71%
  Income-producing property..        30,247      5.68
  FHA-insured and
   VA-partially guaranteed...         3,629       .68
  Construction and
   development:
    One- to four-family
     residential.............         2,691       .51
    Income-producing property         5,557      1.04
                                   --------    ------
    Total first mortgage
     loans...................       253,569     47.62

 Second mortgage loans.......           609       .11
 Commercial business loans...           290       .05
 Other loans.................        16,687      3.14
                                   --------    ------
    Total fixed-rate loans...       271,155     50.92
                                   --------    ------

Adjustable-rate loans:
 First mortgage loans:
  One- to four-family
   residential...............       189,949     35.67
  Income-producing property..        24,931      4.68
  FHA-insured and
   VA-partially guaranteed...            --        --
  Construction and
   development:
    One- to four-family
     residential.............        17,794      3.34
    Income-producing property         6,120      1.15
                                   --------    ------
    Total first mortgage
     loans...................       238,794     44.84

 Second mortgage loans.......            52       .01
 Commercial business loans...           416       .08
 Other loans.................        22,072      4.15
                                   --------    ------
    Total adjustable-rate
     loans...................       261,334     49.08
                                   --------    ------
    Total loans receivable...       532,489    100.00%
                                               ======
Less:
  Undistributed portion of
   loans in process..........        (8,578)
  Deferred origination fees..        (1,196)
  Allowance for loan losses..        (4,124)
                                   --------
     Total loans receivable,
      net....................       518,591

Mortgage-backed securities:
  Fixed-rate mortgage-backed
   securities................        51,099
  Adjustable-rate
   mortgage-backed
   securities................        15,052
                                   --------
      Total mortgage-backed
       securities, net.......        66,151
                                   --------
     Total loans receivable
      and mortgage-
       backed securities, net      $584,742
                                   ========
</TABLE>

                                       5
<PAGE>
 
  The following table sets forth the contractual maturities of the Bank's loan
and mortgage-backed securities portfolios at December 31, 1998.  The table does
not reflect the effects of prepayments or enforcement of due-on-sale clauses.
Loans with balloon or call provisions were assumed to contractually mature on
the call date or the date the balloon provision called for repayment.

<TABLE>
<CAPTION>
                                                       First Mortgage Loans
                                -------------------------------------------------------------------
                                                                               Construction
                                                                              and development
                                                                          ------------------------
                                                               FHA-                                            
                                   One-to       Income-    Insured and      One- to       Income-      Second     
                                Four-Family    Producing   VA-Partially   Four-Family    Producing   Mortgage and   Total
                                Residential    Property     Guaranteed    Residential    Property    Other Loans    Loans
                                ------------   ---------   ------------   ------------   --------- -------------   -------
                                                                          (In Thousands)
<S>                             <C>            <C>         <C>            <C>            <C>          <C>           <C>
Maturing During                                                                                                 
 Year(s) Ended                                                                                                  
  December 31,                                                                                                  
-----------------                                                                                               
1999.........................      $ 29,703      $ 9,882        $   326        $ 4,754     $18,322    $ 40,100     $103,087
2000.........................        26,592        5,001            349            839       5,264      14,431       52,476
2001.........................        26,176        4,965            370            477       2,033       8,460       42,481
2002-2003....................        51,573        5,050            790          1,057       2,315       5,965       66,750
2004-2008....................       132,014        4,948          2,481          3,145       1,845       7,044      151,477
2009-2013....................       102,388        4,790          3,436          4,266       1,149       1,040      117,069
2014 and following...........       241,001        3,682          3,124         23,389          37         143      271,376
                                   --------      -------        -------        -------     -------    --------     --------
                                   $609,447      $38,318        $10,876        $37,927     $30,965     $77,183     $804,716
                                  =========      =======        =======        =======     =======     =======     ========
Less:
 Undistributed portion of
  loans in process......................................................................................................

 Deferred origination fees..............................................................................................
 Allowance for loan losses..............................................................................................

   Total loans receivable
    and mortgage-backed
    securities, net.....................................................................................................


</TABLE>

<TABLE>
<CAPTION>
                                                 Total Loans
                                                    and
                                    Mortgage-    Mortgage-
                                      Backed       Backed
                                    Securities   Securities
                                    ----------   ----------
                                       (In Thousands)
<S>                                 <C>          <C> 
Maturing During                                      
 Year(s) Ended
  December 31,
-----------------
1999.........................
2000.........................         $    724     $103,811
2001.........................              783       53,259
2002-2003....................              836       43,317
2004-2008....................            1,566       68,316
2009-2013....................            4,201      155,678
2014 and following...........            4,016      121,085
                                         3,881      275,257
                                      --------     --------
                                      $ 16,007      820,723
Less:                                  ========
 Undistributed portion of
  loans in process...........                      $(12,812)
 Deferred origination fees...                          (489)
 Allowance for loan losses...                        (5,004)
                                                   --------
   Total loans receivable                      
    and mortgage-backed                        
    securities, net..........                      $802,418
                                                   ========
</TABLE>

   At December 31, 1998, the total loans and mortgage-backed securities due
after December 31, 1999, which had fixed interest rates were $376.2 million and
$8.1 million, respectively, while the total loans and mortgage-backed securities
due after such date which had adjustable interest rates were $325.4 million and
$7.2 million, respectively.

                                       6
<PAGE>
 
   Residential Real Estate Loans.  The Bank's primary lending activity is the
origination of mortgage loans secured by one-to four-family, owner-occupied
residential properties located in the Bank's primary market area, the majority
of which are owner-occupied, single-family residences.  At December 31, 1998,
$620.3 million, or 77.09%, of the Bank's total loan portfolio consisted of loans
secured by one-to four-family residences.  The Bank's loan portfolio also
includes $37.9 million of loans made for the development of unimproved real
estate located in the Bank's primary market area, to be used for residential
housing.  At December 31, 1998, approximately 81.80% of the Bank's total loan
portfolio consisted of loans secured by residential real estate.

   The Bank's residential mortgage loan originations historically were for
fixed-rate mortgage loans with terms of 15 to 30 years.  The Bank has emphasized
the origination of adjustable-rate mortgage loans since 1983.  All loans require
monthly payments sufficient to fully amortize principal over the life of the
loan.  The Bank generally charges a higher interest rate on such loans if the
property is not owner-occupied.  Residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms, and
borrowers may refinance or prepay loans at their option.  Substantially all
fixed-rate mortgage loans are underwritten according to Federal Home Loan
Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA") guidelines, so the loans qualify for sale in the secondary market.

   The Bank presently offers one-year, three-year and five-year adjustable-rate
residential loans with interest rates that adjust based upon the index of the
weekly average yield on United States Treasury securities adjusted to a constant
maturity of one year.  In addition, the Bank offers three-year adjustable-rate
residential loans with interest rates that adjust based upon the index of the
weekly average yield on United States Treasury securities adjusted to a constant
maturity of three years.  The Bank offers introductory interest rates on
adjustable-rate loans which are lower than the fully-indexed rate on these
loans.  The interest rates on these mortgages generally include a cap of 2% per
adjustment and 6% over the life of the loan.  The Bank also provides a
conversion feature which allows borrowers to convert from an adjustable-rate to
a fixed-rate prior to the 60th payment.  In recent years, the Bank has generally
sold longer-term, fixed-rate, residential mortgage loans in the secondary market
upon conversion from an adjustable-rate mortgage loan.  Adjustable-rate
residential mortgage loans totaled $321.5 million, or 40.0%, of the Bank's total
loan portfolio at December 31, 1998.

   In 1998, long-term rates remained at relatively low levels, and a large
amount of refinancing occurred.  During the fourth quarter, the long-term rates
began to drop again; and refinancing into 30-year, fixed-rate mortgages was
prevalent.  During 1998, the Bank originated $111.2 million in fixed-rate
mortgage loans, $63.2 million of which were sold in the secondary mortgage
market, and $135.1 million in adjustable-rate and medium-term fixed-rate (15
years or less) mortgage loans, of which none were sold in the secondary mortgage
market.

   The Bank also offers 7 year and 5 year loans which are convertible to 23 and
25 year amortized loans, respectively. The interest rates are based on the FHLMC
30 year rates at the end of the respective 7th and 5th years.  Historically, the
Bank sold substantially all 7 year and 5 year loans on the secondary market.
For the past several years, the Bank has retained in portfolio newly originated
7 year and 5 year loans.

   The Bank's lending policies generally limit the maximum loan-to-value ratio
on residential mortgage loans to 95% of the lesser of the appraised value of the
property or the purchase price, with the condition private mortgage insurance is
required on loans with loan-to-value ratios in excess of 80%.  For certain
adjustable-rate loans, loan-to-value ratios up to and including 85% are
permitted without requiring private mortgage insurance.  The majority of the
Bank's residential loan portfolio has loan-to-value ratios of 80% or less.

   In underwriting residential real estate loans, the Bank evaluates both the
borrower's ability to make monthly payments and the value of the property
securing the loan.  Potential borrowers are qualified for adjustable-rate
mortgage loans based on the fully indexed rate of the loans.  Upon receipt of a
completed loan application from a prospective borrower, credit reports are
ordered and income, employment and financial information is verified.  An
appraisal of the real estate intended to secure the proposed loan is undertaken
by a Bank appraiser or an independent appraiser previously approved by the Bank.
It is the Bank's policy to obtain title insurance on all mortgage loans.
Borrowers also 

                                       7
<PAGE>
 
must obtain hazard (including fire) insurance prior to closing. Determination as
to whether a property is located in a flood zone is additionally required on new
mortgage loan originations. Borrowers are required to advance funds on a monthly
basis together with each payment of principal and interest through a mortgage
escrow account from which the Bank makes disbursements for items such as real
estate taxes and hazard insurance premiums as they become due. If a loan carries
a loan-to-value ratio of 75% or less, the borrower has the option of not having
real estate taxes and hazard insurance premiums placed in escrow as long as
proof of payment for these items is submitted to the Bank prior to their due
dates. These underwriting criteria are also applied to loans purchased giving
the Bank the right to reject any loans failing to meet underwriting standards.
The Bank uses automated loan underwriting utilizing Federal Home Loan Mortgage
Corporation Loan Prospector software. Approximately 70% of mortgage applications
are approved using this software with the remaining 30% referred to traditional
underwriting methods. By using the automated underwriting procedures, the Bank
is able to approve loans faster and decrease the time to loan closing. Despite
the benefits of adjustable-rate mortgage loans to the Bank's asset/liability
management program, they do pose potential additional risks, primarily because
as interest rates rise, the underlying payment requirements of the borrower
rise, thereby increasing the potential for default.

   Although interest rates charged by the Bank on mortgage loans are primarily
determined by competitive loan rates offered in its market area, interest rates
charged on fixed-rate mortgage loans fluctuate daily and are based on interest
rates offered by FHLMC and FNMA.  Mortgage loan rates reflect factors such as
general interest rate levels, the supply of money available to the savings
industry and the demand for such loans.  These factors are in turn affected by
general economic conditions, the monetary policies of the Federal government,
including the Federal Reserve Board, the general supply of money in the economy,
tax policies and governmental budget matters.

   Income-Producing Property Loans (Commercial and Multi-family Real Estate
Loans).  Income-producing property loans originated by the Bank are loans
secured by commercial and multi-family (five or more units) real estate
generally located in the Bank's primary market area.  Permanent loans on income-
producing properties constituted approximately $38.3 million, or 4.76%, of the
Bank's total loans at December 31, 1998. The Bank originates both construction
loans and permanent loans on commercial and multi-family properties.  The Bank
generally does not purchase commercial and multi-family real estate loans.
Permanent commercial and multi-family real estate loans are generally made in
amounts up to 75% of the lesser of the appraised value or the purchase price of
the property.  Commercial and multi-family real estate loans have been made in
amounts up to $7.7 million, although the majority of the Bank's commercial and
multi-family real estate loans have been originated in amounts ranging from
$200,000 to $4.0 million.

   The Bank's commercial real estate loans are secured by office buildings,
motels, medical facilities, retail centers, warehouses, apartment buildings,
condominiums, a country club, and other commercial buildings, principally all of
which are located in the Bank's primary market area.  Adjustable-rate commercial
and multi-family real estate loans generally provide for interest rate
adjustments based upon the New York prime lending rate or every one to five
years at a rate indexed to the weekly average yield on United States Treasury
securities, adjusted to a constant maturity of one year or three years.
Additionally, the Bank's commercial and multi-family real estate loans generally
include balloon provisions or call options, which allow the Bank to call a loan
after one to ten years, with principal amortization generally of 20 to 25 years,
with a maximum 30-year period.  These balloon provisions and call options
provide the Bank with flexibility to adjust the rates on loans to reflect then
current market conditions, allowing the Bank to better control interest rate
risk.  Although adjustable-rate loans assist in managing interest rate risk,
they do increase the potential for default primarily because as interest rates
rise, the underlying payment requirements of the borrower increase.

   Loans secured by commercial and multi-family properties are generally larger
and involve greater risks than residential mortgage loans.  Because payments on
loans secured by commercial and multi-family residential properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to a greater extent to adverse conditions in the real
estate market or the economy.  The Bank seeks to minimize these risks in a
variety of ways, including limiting the size of its commercial and multi-family
real estate loans.  In addition, the Bank requires a positive net operating or
rental income to debt service ratio for loans secured by commercial and 

                                       8
<PAGE>
 
multi-family real estate. The Bank generally restricts these lending activities
to properties located in its primary market area. When considered appropriate,
the Bank requires borrowers to provide their personal guarantees on commercial
and multi-family real estate loans.

   A loan with an outstanding balance of $7.7 million at December 31, 1998, and
secured by an apartment complex, represents the Bank's largest single commercial
real estate loan to one borrower.  At December 31, 1998, the Bank's ten largest
commercial real estate loans, with balances outstanding ranging from $1.4
million to $7.7 million, totaled $30.2 million.

   Construction and Land Development Loans.  The Bank originates loans to
finance the construction of properties in its primary market area, including
one-to four-family dwellings, housing developments, multi-family apartments and
condominiums and commercial real estate.  It also originates loans for the
acquisition and development of unimproved property to be used for residential
and commercial purposes.  Construction and land development loans totaled $68.9
million, or 8.56%, of the Bank's total loan portfolio at December 31, 1998.  Of
that total, $37.9 million were for the construction of one-to four-family
residential properties.  Construction loans have been made in amounts up to $7.7
million.  At December 31, 1998, the Bank had $25.8 million outstanding
commitments in construction and land development loans.

   Construction loans generally have construction terms of up to 12 months.
Loan proceeds are disbursed in increments as construction progresses and as
inspections warrant.  Inspections are carried out under the direction of the
Bank's Chief Lending Officer, although qualified architects are retained to
perform inspections on larger projects.  The Bank also finances the construction
of individual owner-occupied residences.  Construction loans are either
converted to permanent loans at the completion of construction or are paid off
upon receiving permanent financing from another financial institution.
Construction loans on residential properties are generally made in amounts up to
80% of the appraised value of the completed property, and construction loans on
commercial properties are generally made in amounts up to 75% of the appraised
value of the completed property.

   The Bank's underwriting criteria are designed to evaluate and minimize the
risks of each construction loan.  Among other things, the Bank considers the
reputation of the borrower and the contractor, the amount of the borrower's
equity in the project, independent valuations and reviews of cost estimates,
pre-construction sale and leasing information, and cash flow projections of the
borrower.  Personal guarantees of the principals of each borrower are also
usually obtained.  Generally, all construction loans made by the Bank are within
its primary market area.

   Construction loans generally afford the Bank the opportunity to increase the
yield and interest rate sensitivity of its loan portfolio.  These higher yields
correspond to the higher risks associated with construction lending.  The Bank's
risk of loss on a construction loan is largely dependent upon the accuracy of
the initial estimate of the property's value at completion of construction and
the estimated cost (including interest) of completion.  If the estimate of the
completed cost proves to be inaccurate, the Bank may be confronted, at or prior
to the maturity of the loan, with a property having a value which is
insufficient to assure full repayment of the loan.  At December 31, 1998, the
Bank had no construction loans outstanding which were non-performing and
$379,000 of construction loans classified as real estate owned.

   Consumer Loans.   As of December 31, 1998, total consumer loans were $68.3
million, or 8.5%, of the Bank's total loan portfolio.  Consumer loans originated
by the Bank include home equity loans, educational loans, automobile loans, land
contracts, personal loans (secured and unsecured), marine and recreational
vehicle loans, mobile home loans, and loans secured by savings accounts.

   The Bank believes the shorter terms and the normally higher interest rates
available on various types of consumer loans have been helpful in maintaining a
profitable spread between the Bank's average loan yield and its cost of funds.
Consumer loans do, however, pose additional risks of collectibility when
compared to traditional types of loans granted by thrift institutions such as
residential mortgage loans.  The Bank has sought to reduce this risk by
primarily granting secured consumer loans.

                                       9
<PAGE>
 
   Loan Solicitation and Processing.  Loan originations are derived from a
number of sources including "walk-in" customers at the Bank's offices, the
Bank's marketing efforts, the Bank's present customers, referrals from real
estate professionals, and building contractors.  Loan applications are reviewed
in accordance with the underwriting standards approved by the Bank's Board of
Directors which generally conform to FHLMC and FNMA standards.

   Upon receipt of a loan application, a credit report is ordered to verify
specific information relating to the loan applicant's employment, income and
credit standing.  In the case of a real estate loan, an appraisal of the real
estate intended to secure the proposed loan is undertaken by the Bank's in-house
appraiser or by independent appraisers approved by the Bank.  In the case of
commercial and multi-family properties only independent appraisers are used.
The loan application file is then reviewed, depending upon the dollar amount of
the loan, by either (i) the Bank's loan underwriters, (ii) the Chief Lending
Officer or the Bank's Senior Loan Committee approved by the Board of Directors,
or (iii) the Bank's Executive Loan Committee, consisting of the President and
other Directors of the Bank.

   The Bank's Manager of Consumer Lending is authorized to approve unsecured and
secured consumer loans of up to $50,000 and $60,000, respectively.  Other
consumer lending staff and branch managers are authorized to approve secured
consumer loans of up to $35,000, depending on individual lending authorities.
The Director of Lending Operations or the Residential Lending Manager is
authorized to approve residential mortgage loans of up to $240,000.  Loans
between $240,000 and $500,000 require the approval of the Bank's President,
Executive Vice President or Chief Lending Officer.  Loans in excess of $500,000
or multiple loans to the same borrower in an aggregate amount exceeding $500,000
must be approved by the Bank's Executive Loan Committee.

   Loan Originations, Purchases and Sales.  The Bank retains in its portfolio
substantially all adjustable-rate loans.  All residential loans are originated
on documentation permitting their sale in the secondary market.  The Bank
previously originated such loans with a forward commitment for their sale and
held these loans in portfolio at the lower of cost or market, as valued on an
aggregate basis, until their sale.  During 1998, the Bank continued to sell
long-term, fixed-rate mortgage loan originations.  Additionally, because of the
lower fixed rates available, the Bank continued to experience conversions of
existing adjustable-rate mortgages to fixed-rate product.  As the conversion
from an adjustable to a long-term, fixed-rate product (over 15 years) occurred,
the Bank sold the loans on the secondary market.  This resulted in a reduction
in the loan portfolio with an increase in fixed-rate sales.  The Bank retained
servicing rights on these residential loans sold.

   Effective January 1, 1997, the Bank adopted the provisions of SFAS No. 125,
which proscribes the accounting for transfers and servicing of financial assets
and extinguishments of liabilities.  The Bank has engaged, from time to time, in
the sale of participation interests in residential, commercial and multi-family
real estate loans in the secondary mortgage market.  Such participation
interests are sold in an effort to reduce the Bank's amount loaned to one
borrower.  The Bank's decision on whether to sell loans or participation
interests, and on which loans to sell, are generally based upon the size of the
project and amount loaned for a commercial or multi-family real estate loan, the
Bank's need for funds, and market opportunities that permit loan sales on terms
favorable to the Bank.  The Bank also sells loans or loan participations in
private sales to savings institutions.  In recent years such sales have been
without recourse.  The Bank generally retains the servicing on the loans sold,
for which it receives a servicing fee of .25%.  Since December 31, 1996, the
Bank has sold one participation interest of $1.0 million.

   Effective January 1, 1996, the Bank adopted the provisions of SFAS No. 122,
as superseded by SFAS No. 125. This statement, as superseded, requires the Bank
to recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired.  Prior to adoption of SFAS No. 122,
the Bank had no assets capitalized for originated or purchased servicing rights.
The fair value of capitalized originated mortgage servicing rights is determined
based on the estimated discounted net cash flows to be received.  In applying
this valuation method, the Bank uses assumptions market participants would use
in estimating future net servicing income, which may include estimates of the
cost of servicing per loan, the discount rate, float value, an inflation rate,
ancillary income per loan, prepayment speeds, and default rates.  Originated
mortgage servicing rights are amortized in proportion to and over the period of
estimated net loan servicing income.  These capitalized mortgage servicing
rights are periodically reviewed for impairment based on the fair value of those
rights.

                                       10
<PAGE>
 
   The ongoing impact of SFAS No. 125 will depend upon demand in the Bank's
lending market for fixed-rate residential mortgage loans salable in the
secondary mortgage market.  The balance of loans serviced for others at December
31, 1998 with capitalized originated mortgage servicing rights approximated
$174.9 million.  The Bank capitalized $984,000 of originated mortgage servicing
rights during 1998, of which $93,800 has been amortized. Capitalized originated
mortgage servicing rights at December 31, 1998 approximated $1,047,000.   No
valuation allowances for capitalized originated mortgage servicing rights were
considered necessary as of December 31, 1998.

   In addition to originating loans, the Bank also purchases loans and mortgage-
backed securities in the secondary market.  The Bank's purchases in the
secondary market are made on the same criteria and must satisfy the same
underwriting procedures as loans directly originated by the Bank.  The Bank's
secondary market purchases are dependent upon the demand for mortgage credit in
the Bank's market area and the inflow of funds from traditional sources.  During
1998, the Bank, to supplement and complement its own mortgage loan production,
purchased from unaffiliated financial institutions $71.2 million of loans
consisting principally of one-to four-family residential, fixed- and adjustable-
rate, medium-term mortgages.  These loans are purchased without recourse with
servicing retained by the seller.

                                       11
<PAGE>
 
   The following table sets forth information concerning the loan origination,
purchase, sale and repayment activity of the Bank's portfolio of loans and
mortgage-backed securities:
<TABLE>
<CAPTION>
 
                                                        Year Ended December 31,
                                                 --------------------------------------
                                                      1998          1997        1996
                                                 --------------   ---------   ---------
Originations:                                                (In Thousands)
<S>                                              <C>              <C>         <C>
 Fixed-rate loans:
  First mortgage loans:
   One-to four-family residential.............        $153,991    $ 38,595    $ 36,990
   Income-producing property..................           1,491         729         758
   FHA-insured and VA-partially
      guaranteed..............................              --         329         217
   Construction and development:
     One-to four-family residential...........          45,884       9,728       8,456
     Income-producing property................           1,368          --          --
  Second mortgage loans.......................             331          --          --
  Commercial business loans...................           2,810         847         634
  Other loans.................................          36,189      23,664      18,706
                                                      --------    --------    --------
    Total fixed-rate loans....................         242,064      73,892      65,761
                                                      --------    --------    --------
 
 Adjustable-rate loans:
  First mortgage loans:
   One-to four-family residential.............          30,939      50,859      68,063
   Income-producing property..................             568         424         610
   Construction and development:
     One-to four-family residential...........          15,466      45,628      50,889
     Income-producing property................           9,464      10,734      18,630
  Second mortgage loans.......................             100         100          --
  Commercial business loans...................           6,584       3,102       3,049
  Other loans.................................          22,065      21,307      19,600
                                                      --------    --------    --------
    Total adjustable-rate loans...............          85,186     132,154     160,841
                                                      --------    --------    --------
    Total loans originated....................         327,250     206,046     226,602
                                                      --------    --------    --------
 
Purchases:
 Loans:
  Fixed-rate..................................          34,913       9,559       2,905
  Adjustable-rate.............................          36,241      18,288      28,829
 Mortgage-backed securities:
   Fixed-rate.................................             511          --          --
                                                      --------    --------    --------
    Total purchased...........................          71,665      27,847      31,734
                                                      --------    --------    --------
 
Sales:
 Fixed-rate:
  Mortgage loans..............................         131,259      46,194      31,246
  Student loans...............................             512         634         739
                                                      --------    --------    --------
    Total sales...............................         131,771      46,828      31,985
                                                      --------    --------    --------
 
Principal repayments:
  Loans.......................................         235,774     153,259     115,079
  Mortgage-backed securities..................           5,956       5,571       7,935
                                                      --------    --------    --------
    Total principal repayments................         241,730     158,830     123,014
                                                      --------    --------    --------
 
Transfers to real estate owned................          (1,187)       (672)       (342)
Increase (decrease) due to other items, net...           1,787       3,906      (3,499)
                                                      --------    --------    --------
Net increases.................................        $ 26,014    $ 31,469    $ 99,496
                                                      ========    ========    ========
</TABLE>

                                       12
<PAGE>
 
          Loan Servicing and Loan Fees.  As of December 31, 1998, Community
First was servicing approximately $241.7 million of loans for others.  The Bank
generally receives a servicing fee ranging from .25% to .50% for these loans,
with average servicing fees of approximately .26%.  In addition to interest
earned on loans and income from servicing of loans, the Bank receives fees in
connection with loan commitments and originations, loan modifications, late
payments, changes of property ownership and for miscellaneous services related
to its loans.  Income from these activities varies from period to period with
the volume and type of loans originated, sold and purchased, which in turn is
dependent on prevailing mortgage interest rates and their effect on the demand
for loans in the markets served by the Bank.

          To the extent loans are originated or acquired for the portfolio, the
Bank limits immediate recognition of loan origination or acquisition fees as
revenues and recognizes such income, net of certain loan origination or
acquisition costs, over the estimated lives of such loans as an adjustment to
yield.

          Loan Commitments.  Applicants for adjustable-rate one-to four-family
residential loans may lock in an interest rate for 50 days at any time prior to
five days before closing.  The period between the application and the Bank's
issuance of a commitment may be up to 15 days.  The period of time between
issuance of a commitment to a borrower by the Bank through closing of a loan
generally ranges from 30 to 45 days.  When selling loans to the secondary
market, the Bank protects itself from rising interest rates by obtaining
mandatory commitments at the time a loan rate is locked.  Funding generally
occurs at or shortly after the time the loan is closed.  The Bank does not use
financial futures or options to protect against rising interest rates.
Historically, less than 5% of the Bank's commitments expire before being funded.
At December 31, 1998, the Bank's outstanding mortgage commitments totaled
approximately $84.1 million.

          Non-Performing Loans.  Residential and commercial mortgage loans are
reviewed on a regular basis and are placed on nonaccrual status when either
principal or interest is more than 90 days past due.  Consumer loans are
generally charged off when or before the loan becomes 120 days delinquent.  The
Asset Control and Recovery Department reviews with the Chief Lending Officer all
consumer loans presented for chargeoff.  Interest accrued and unpaid at the time
a loan is placed on nonaccrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.

          When a loan becomes 15 days delinquent, the Bank institutes internal
collection procedures and will contact the customer directly.  As to residential
and commercial real estate loans, if a borrower has not made payment within 15
days of the due date, a past due notice is mailed and a late charge of 5% is
generally assessed as permitted by the Bank's mortgage documentation.  The Bank
seeks to determine the reason for the delinquency and attempts to effect a cure
for the delinquency on any loan which becomes more than 60 days past due.  The
Bank will then regularly review the loan status, the condition of the property
and circumstances of the borrower.  Based upon the results of its review, the
Bank may negotiate and accept a repayment program with the borrower, accept a
voluntary deed in lieu of foreclosure or, when deemed necessary, initiate
foreclosure proceedings.  The decision on whether to initiate foreclosure
proceedings is based upon the amount of the loan outstanding in relation to the
original indebtedness, the extent of the delinquency and the borrower's ability
and willingness to cooperate in curing the default or delinquency.

          Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold.  At the time title is received and in certain cases prior to title
transfer, the Bank will transfer the former loan to real estate owned.  When
such property is acquired, it is recorded at the lower of the unpaid principal
balance of the related loan or its estimated fair market value less estimated
costs to sell.  Any subsequent write-down of the property is charged against the
appropriate allowance account.

                                       13
<PAGE>
 
          As of December 31, 1998, there were no loans which are not included in
the tables below or described thereafter where known information about the
possible credit problems of borrowers caused management to have serious doubts
as to the ability of the borrower to comply with present loan repayment terms
and which may result in classification of such loans in the future.  As of
December 31, 1998, there were no concentrations of loans in any type of industry
which exceeded 10% of the Bank's total loans that are not included as a loan
category in the table below.

          Real estate loans originated by the Bank and delinquent loans are
generally collateralized by real estate in the Bank's primary market area.

          The following table sets forth information concerning the Bank's
delinquent loans at December 31, 1998.  Total remaining principal balances of
the related loans are shown rather than the actual payment amounts which are
overdue:

<TABLE>
<CAPTION>
 
                                         30-59 Days           60-89 Days      90 Days or Greater
                                    --------------------   ----------------   -------------------
                                    Number     Amount      Number   Amount     Number     Amount
                                    ------   -----------   ------   -------   --------   --------
                                                       (Dollars in Thousands)
<S>                                 <C>      <C>           <C>      <C>       <C>        <C>
 
One-to four-family residential...      101       $6,632        18   $1,014           9      $256
Income-producing property........        1          263        --       --          --        --
FHA-insured and VA-partially
  guaranteed.....................        2           82         1       68           2       132
Construction and development:
 Income-producing property.......        2          199        --       --          --        --
Commercial.......................        1           35        --       --          --        --
Other............................       88        1,198        39      465          18       223
                                    ------   ----------    ------   ------    --------   -------
  Total..........................      195       $8,409        58   $1,547          29      $611
                                    ======   ==========    ======   ======    ========   ======= 
 
   Percentage of total assets....                   .96%               .18%                  .07%
                                             ==========             ======               =======
 
</TABLE>

                                       14
<PAGE>
 
          The following table sets forth information concerning the amounts of
the Bank's non-accruing loans and real estate owned by category.
<TABLE>
<CAPTION>
 
                                                         At December 31,
                                          ----------------------------------------------
                                           1998      1997      1996      1995     1994
                                          -------   -------   -------   ------   -------
                                                      (Dollars in Thousands)
<S>                                       <C>       <C>       <C>       <C>      <C>
Non-accruing loans:
 One-to four-family residential
   mortgages...........................   $  256    $  697    $  892    $  68    $  108
 Income-producing property.............       --        --       359       --        --
 FHA-insured and VA-partially
   guaranteed..........................      132       109       183      253       192
 Construction and development..........       --        --        --       --        --
 Commercial............................       --        --       195       --        --
 Other.................................      223        93       158       28        93
                                          ------    ------    ------    -----    ------
   Total...............................   $  611    $  899    $1,787    $ 349    $  393
                                          ======    ======    ======    =====    ======
 
   Percentage of total assets..........      .07%     0.10%     0.21%    0.05%     0.05%
                                          ======    ======    ======    =====    ======
 
Real estate owned:.....................
 One-to four-family residential
   mortgages...........................   $  686    $   11    $  205    $ 238    $  139
 Income-producing property.............       --        --        --       --     1,700
 Construction and development..........      379       141         7        7       981
                                          ------    ------    ------    -----    ------
   Total...............................   $1,065    $  152    $  212    $ 245    $2,820
                                          ======    ======    ======    =====    ======
 
   Percentage of total assets..........      .12%     0.02%     0.03%    0.03%     0.39%
                                          ======    ======    ======    =====    ======
 
   Total non-accruing loans and real
     estate owned......................   $1,676    $1,051    $1,999    $ 594    $3,213
                                          ======    ======    ======    =====    ======
 
Percentage of total assets.............      .19%     0.12%     0.24%    0.08%     0.44%
                                          ======    ======    ======    =====    ======
 
</TABLE>

          Loans on which the accrual of interest was discontinued or reduced
amounted to $611,000 at December 31, 1998.  For the year ended December 31,
1998, $25,000 of additional interest income would have been recorded if these
non-accruing loans were current in accordance with their original terms.
Approximately $27,000 of interest income relating to these loans was collected
and included in interest income for the year ended December 31, 1998.

          Certain other income-producing property and commercial loans in the
Bank's loan portfolio are being closely monitored but are not included in non-
performing loans above.  These loans cause management some concern as to the
ability of such borrowers to comply with the present loan repayment terms and
which may result in their being classified as non-accruing at some point in the
future.  These other loans include a $153,000 loan secured by an apartment
building, and two commercial loans totaling $550,000 secured by business assets,
an equity guarantee in the owner's home and a separate personal guarantee.
These loans were less than 30 days past due as of December 31, 1998.

          The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan (SFAS No. 114), as amended by Statement of Financial Accounting
Standards No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures (SFAS No. 118).  The Bank adopted the provisions of
SFAS No. 114, as amended by SFAS No. 118, on 

                                       15
<PAGE>
 
a prospective basis as of January 1, 1995. Neither the initial adoption nor the
ongoing effect of SFAS No. 114 has had, or is expected to have, a material
impact on the financial condition or results of operations of the Bank.

          The Bank had no impaired loans as defined by SFAS No. 114 at December
31, 1998 and 1997, respectively, and in 1996 had one income-producing property
loan and three commercial business loans.  These loans are included in
nonaccrual loans at December 31, 1996.  The Corporation's nonaccrual loans
include residential mortgage and consumer installment loans, for which SFAS No.
114 does not apply.  The Corporation's respective average investment in impaired
loans was $265,000 and $112,000 during 1998 and 1997, respectively.  Interest
income recognized on impaired loans during 1998 and 1997, totaled $25,000 and
$1,000, respectively.  Impaired loans had no specific allocations of the
allowance for loan losses.

          Classification of Assets.  Under federal regulations, the Bank is
required to classify its own assets as to quality on a regular basis.  In
addition, in connection with examinations of the Bank, FDIC and Michigan
Financial Institutions Bureau examiners have authority to identify problem
assets and, if appropriate, classify them.  Assets are subject to evaluation
under a classification system with three categories: (i) Substandard, (ii)
Doubtful and (iii) Loss.  An asset could fall within more than one category and
a portion of the asset could remain unclassified.

          An asset is classified Substandard if it is determined to involve a
distinct possibility the Bank could sustain some loss if deficiencies associated
with the loan, such as inadequate documentation, were not corrected.  An asset
is classified as Doubtful if full collection is highly questionable or
improbable.  An asset is classified as Loss if it is considered uncollectible,
even if a partial recovery could be expected in the future.  At December 31,
1998, the Bank classified $1.7 million of non-accruing loans and real estate
owned as Substandard.  The Bank had no assets classified as Doubtful and no
assets classified as Loss as of December 31, 1998.

          Allowance for Loan Losses.  The Bank's management establishes
allowances for loan losses.  On a quarterly basis, management evaluates the loan
portfolio and determines the amount that must be added to the allowance account.
These allowances are charged against income in the year they are established.
Additionally, accrual of interest on problem loans is discontinued when a loan
becomes ninety days past due as to principal or interest or when, in the opinion
of management, full collection of principal and interest is unlikely.  At the
time a loan is placed on nonaccrual status, interest previously accrued but not
collected is charged against current income.  Income on such loans is then
recognized only to the extent cash is received and where future collections of
principal are probable.  A nonaccrual loan may be restored to accrual status
when interest and principal payments are current and the loan appears otherwise
collectible.

          When establishing the appropriate levels for the provision and the
allowance for loan losses, management considers a variety of factors, in
addition to the fact an inherent risk of loss always exists in the lending
process.  Consideration is given to the current and future impact of economic
conditions, the diversification of the loan portfolio, historical loss
experience, the review of loans by the loan review personnel, the individual
borrower's financial and managerial strengths, and the adequacy of underlying
collateral.  Consideration is also given to examinations performed by regulatory
authorities.

          Each quarter, the Bank determines the adequacy of the allowance for
loan losses based on factors such as the size and risk exposure of each
portfolio, current economic conditions, past loss experience, delinquency rates
and current collateral values, and other relevant factors.  While available
information is used in evaluating the adequacy of the allowance for loan losses,
future additions to the allowance may be necessary if economic conditions
change.  In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for losses on
loans and real estate owned.  Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information available
to them at the time of their examination.

                                       16
<PAGE>
 
      The following table provides a summary of the allowance for losses on
loans and real estate:
<TABLE>
<CAPTION>
 
                                                Allowance for Losses on
                                              ---------------------------
                                                         Real
                                               Loans    Estate     Total
                                              -------   -------   -------
                                                    (In Thousands)
<S>                                           <C>       <C>       <C>
Balance, December 31, 1993.................   $3,847     $ 167    $4,014
Provision for losses.......................      240       565       805
Charges against the allowance:
 One-to four-family residential............      (21)     (122)     (143)
 FHA-insured and VA partially guaranteed...      (62)       --       (62)
 Income-producing property.................      (23)     (590)     (613)
 Consumer..................................      (47)       --       (47)
Recoveries:
 One-to four-family residential............       80        55       135
 FHA-insured and VA partially guaranteed...       36        --        36
 Income-producing property.................       --         1         1
 Consumer..................................       74        --        74
                                              ------     -----    ------
 
Balance, December 31, 1994.................   $4,124     $  76    $4,200
Provision for losses.......................      240       120       360
Charges against the allowance:
 One-to four-family residential............      (10)      (26)      (36)
 FHA-insured and VA partially guaranteed...       --        (2)       (2)
 Income-producing property.................       --        (7)       (7)
 Consumer..................................      (45)       --       (45)
Recoveries:
 One-to four-family residential............       11        11        22
 FHA-insured and VA partially guaranteed...       --         1         1
 Income-producing property.................       --        51        51
 Consumer..................................       43        --        43
                                              ------     -----    ------
 
Balance, December 31, 1995.................   $4,363     $ 224    $4,587
Provision for losses.......................      240        60       300
Charges against the allowance:
 One-to four-family residential............       (9)      (77)      (86)
 FHA-insured and VA partially guaranteed...      (10)     (110)     (120)
 Consumer..................................      (57)       --       (57)
Recoveries:
 One-to four-family residential............        2         4         6
 FHA-insured and VA partially guaranteed...        7       102       109
 Income-producing property.................       --         9         9
 Consumer..................................       28        --        28
                                              ------     -----    ------
</TABLE> 
 

                                       17
<PAGE>
 
<TABLE> 
<CAPTION>  
                                                Allowance for Losses on
                                               -------------------------
                                                        Real
                                               Loans    Estate     Total
                                               -----    ------     -----
<S>                                           <C>       <C>       <C>  
                                                     (In Thousands)
 
Balance, December 31, 1996.................   $4,564     $ 212    $4,776
Provision for loan losses..................      360        45       405
Charges against the allowance:
 One-to four-family residential............       (3)     (225)     (228)
 FHA-insured and VA partially guaranteed...       --        (7)       (7)
 Land......................................       --        (7)       (7)
 Income-producing property.................     (134)       (8)     (142)
 Consumer..................................     (110)       --      (110)
Recoveries:
 One-to four-family residential............        4       130       134
 FHA-insured and VA partially guaranteed...        1         3         4
 Land......................................       --         5         5
 Income-producing property.................       18         5        23
 Consumer..................................       30        --        30
                                              ------     -----    ------
 
Balance, December 31, 1997.................   $4,730     $ 153    $4,883
Provision for losses.......................      390        --       390
Charges against the allowance:
 One-to four-family residential............       (2)      (68)      (70)
 FHA-insured and VA partially guaranteed...      (10)       --       (10)
 Income-producing property.................       --        --        --
 Consumer..................................     (155)       --      (155)
Recoveries:
 One-to four-family residential............       --        --        --
 FHA-insured and VA partially guaranteed...       --        --        --
 Income-producing property.................        3        --         3
 Consumer..................................       48        --        48
                                              ------     -----    ------
Balance, December 31, 1998.................   $5,004     $  85    $5,089
                                              ======     =====    ======
</TABLE> 

          The ratio of net loan charge-offs (recoveries) to average loans
outstanding during the respective periods were (.01)% for 1994, .00% for 1995,
 .01% for 1996, .03% for 1997 and .02% for 1998.

                                       18
<PAGE>
 
       The following table represents the allocation of the allowance for loan
losses at the dates indicated:

<TABLE>
<CAPTION>
 
                                                                      At December 31,    
                                -------------------------------------------------------------------------------------------
                                                    1998                                           1997               
                                ---------------------------------------------  ---------------------------------------------       
                                           Percent                 Allowance               Percent                 Allowance  
                                           of Total   Allocation      as %                 of Total   Allocation      as %    
                                Balance      Loan         of        of Loan     Balance      Loan         of        of Loan   
                                of Loans   Balance    Allowance     Balance     of Loans   Balance    Allowance     Balance   
                                --------   --------   ----------   ----------   --------   --------   ----------   ---------- 
                                                                   (Dollars in Thousands)              
<S>                             <C>        <C>        <C>          <C>          <C>        <C>        <C>          <C>         
First mortgage loans:                                                                                                         
 One-to four-family                                                                                                           
  residential (including                                                                                                      
  construction and                                                                                                            
   development loans and                                                                                                      
  loans sold with                                                                                                             
   recourse)(1)..............   $648,042     80.47%       $1,691         .26%   $621,506     80.08%       $1,775         .29% 
 FHA-insured and VA-partially                                                                                                 
  guaranteed.................     10,876      1.35           253        2.33       7,214       .93            49         .68  
 Income-producing property                                                                                                    
  (including                                                                                                                  
  construction and                                                                                                            
   development loans)........     69,283      8.60           916        1.32      77,229      9.95         1,468        1.90  
                                --------    ------        ------        ----    --------    ------        ------       -----  
  Total first mortgage loans.    728,201     90.42         2,860         .39     705,949     90.96         3,292         .47  
Second mortgage loans........        642       .08            13        2.02         549       .07             6        1.09  
Commercial business loans....      8,218      1.02           658        8.01       5,087       .66           138        2.71  
Other loans..................     68,323      8.48         1,473        2.16      64,483      8.31         1,294        2.01  
                                --------    ------        ------        ----    --------    ------        ------       -----  
  Total......................   $805,384    100.00%       $5,004         .62%   $776,068    100.00%       $4,730         .61% 
                                ========    ======        ======        ====    ========    ======        ======       =====  

<CAPTION>  

                                                 At December 31,
                                  --------------------------------------------
                                                      1996 
                                  --------------------------------------------
                                             Percent                 Allowance           
                                             of Total   Allocation     as % 
                                  Balance      Loan         of       of Loan
                                  of Loans   Balance    Allowance    Balance
                                  --------   --------   ----------   ---------
                                             (Dollars in Thousands)              
<S>                             <C>           <C>        <C>          <C>    
First mortgage loans:                                                       
 One-to four-family                                                         
  residential (including                                                    
  construction and                                                          
   development loans and                                                    
  loans sold with                                                           
   recourse)(1)..............     $593,163     79.80%       $1,252       .21%
 FHA-insured and VA-partially                                               
  guaranteed.................        6,404       .86            47       .73
 Income-producing property                                                  
  (including                                                                
  construction and                                                          
   development loans)........       84,012     11.30         2,100      2.50
                                  --------   -------    ----------   -------
  Total first mortgage loans.      683,579     91.96         3,399       .50
Second mortgage loans........          510       .07             5       .98
Commercial business loans....        4,644       .62           325      7.00 
Other loans..................       54,578      7.35           835      1.53 
                                  --------   -------    ----------   -------                                          
  Total......................     $743,311    100.00%       $4,564       .61% 
                                  ========   =======    ==========   =======                                          

</TABLE> 
<TABLE> 
<CAPTION> 

                                                                        At December 31, 
                                --------------------------------------------------------------------------------------------
                                                  1995                                            1994 
                                --------------------------------------------   ---------------------------------------------
                                            Percent                Allowance                Percent                Allowance
                                           of Total   Allocation    as %                   of Total   Allocation     as %
                                Balance      Loan        of        of Loan      Balance      Loan        of        of Loan
                                of Loans   Balance    Allowance    Balance      of Loans   Balance    Allowance    Balance
                                --------   -------    ----------   ---------    --------   -------    ----------   ---------
                                                                   (Dollars in Thousands)
<S>                             <C>        <C>        <C>          <C>          <C>        <C>        <C>          <C>         
First mortgage loans:
 One-to four-family
  residential (including
  construction and
   development loans and
  loans sold with
   recourse)(1)..............   $502,374     79.39%       $1,401         .28%   $424,079     79.32%       $1,296         .31%
 FHA-insured and VA-partially
  guaranteed.................      7,458      1.18           319        4.28       3,629       .68           421       11.60
 Income-producing property
  (including
  construction and
   development loans)........     75,012     11.85         1,875        2.50      66,855     12.50         1,775        2.65
                                --------    ------        ------        ----    --------    ------        ------       -----
  Total first mortgage loans.    584,844     92.42         3,595         .61     494,563     92.50         3,492         .71
Second mortgage loans........        571       .09             4         .70         661       .12             5         .76
Commercial business loans....      3,195       .51            96        3.00         706       .13            21        2.97
Other loans..................     44,171      6.98           668        1.51      38,759      7.25           606        1.56
                                --------    ------        ------        ----    --------    ------        ------       -----
  Total......................   $632,781    100.00%       $4,363         .69%   $534,689    100.00%       $4,124         .77%
                                ========    ======        ======        ====    ========    ======        ======       =====
--------------------------
</TABLE>
(1)  Loans sold with recourse totaled $0.7 million, $1.0 million, $1.4 million,
     $1.8 million and $2.2 million at December 31, 1998, 1997, 1996, 1995 and
     1994, respectively.

                                       19
<PAGE>
 
Investment Activities

     As a state chartered thrift, Community First is not subject to any
regulatory liquidity requirements.  It has generally been Community First's
policy to maintain a liquidity portfolio in excess of Federal regulatory
requirements.  Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives, management's judgment as to the
attractiveness of the yields then available in relation to other opportunities,
its expectations of the level of yield that will be available in the future and
management's projections as to the short-term demand for funds to be used in the
Bank's loan origination and other activities.  At December 31, 1998, Community
First had an investment portfolio of $22.0 million consisting of federal agency
obligations.

     In July 1989, the Bank retained SS&H Financial Advisors, of Bingham Farms,
Michigan, to act as its investment advisor and to execute all related
transactions.  In June 1988, the Bank's Board of Directors adopted an investment
policy which is annually reviewed by the Board.  Pursuant to this policy, which
is binding upon the investment advisor, two of the four members of the Bank's
Investment Committee must approve all investment transactions in excess of $2
million.  The policy also outlines the approved investment securities in which
the Bank may invest, within each investment category.

     As part of the Bank's asset/liability management program, the Bank had
previously entered into a series of interest rate exchange agreements in order
to lengthen the maturity of its liabilities by, in effect, converting variable-
rate liabilities to fixed-rate liabilities.  In November 1994, the Bank
terminated, at a loss of $229,000, its one remaining interest rate exchange
agreement with an aggregate notional amount of $15.0 million and a maturity date
of December 23, 1996. The deferred loss from the termination of the interest
rate exchange agreement was $0 at December 31, 1996.  Amortization of the loss
as interest expense totaled $107,000 in 1996.

     During the years ended December 31, 1998, 1997 and 1996, the cost of the
Bank's interest rate exchange agreements was $0, $0 and $107,000, respectively,
and is included as interest expense on deposits.

     Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS No. 115") addresses the
accounting and reporting for equity securities having readily determinable fair
values and for all investments in debt securities.  SFAS No. 115 requires
investment and mortgage-backed securities to be classified as follows:

     .    Debt securities the Bank has the positive intent and ability to hold
          to maturity are classified as held-to-maturity securities and reported
          at amortized cost.

     .    Debt and equity securities bought and held principally for the purpose
          of selling them in the near term are classified as trading securities
          and reported at fair value, with unrealized gains and losses included
          in earnings.

     .    Debt and equity securities not classified as either held-to-maturity
          securities or trading securities are classified as available-for-sale
          securities and reported at fair value, with unrealized gains and
          losses excluded from earnings and reported, net of tax, as a separate
          component of stockholders' equity.

     At December 31, 1997, investment and mortgage-backed securities available
for sale included unrealized net gains of $474,000 reported net of $161,000 of
federal income tax expense.  Throughout 1998, market interest rates generally
fell which favorably impacted the market value of the principally fixed-rate
investment and mortgage-backed securities available for sale.  At December 31,
1998, the Bank reported $38.0 million in investment and mortgage-backed
securities available for sale at fair value, with unrealized net gains of
$408,000 reported net of $139,000 of federal income tax expense as a separate
component of stockholders' equity.  The Bank had no investment or mortgage-
backed securities classified as held-to-maturity or trading securities as of
December 31, 1998.

                                       20
<PAGE>
 
     The table below sets forth certain information regarding the amortized
cost, weighted average rates and maturities of the Bank's investment securities
available for sale at the date indicated.  At December 31, 1998, the Bank did
not have any investment securities available for sale with maturities greater
than five years.
<TABLE>
<CAPTION>
 
                                                           At December 31, 1998
                                ---------------------------------------------------------------------               
                                  One Year or Less        One to Five Years       Five to Ten Years     
                                ---------------------   ---------------------   ---------------------   
                                            Weighted                Weighted                Weighted                
                                Amortized    Average    Amortized    Average    Amortized    Average                
                                  Cost        Rate        Cost        Rate        Cost        Rate                  
                                ---------   ---------   ---------   ---------   ---------   ---------               
                                                              (Dollars in Thousands)                               
<S>                             <C>         <C>         <C>         <C>         <C>         <C>                     

Federal agency obligations...   $   9,856       4.74%     $12,000       5.78%   $      --       -- %               
                                ---------               ---------               ---------                           
                                $   9,856       4.74      $12,000       5.78    $      --       --                        
                                =========               =========               =========                           
</TABLE> 

<TABLE> 
<CAPTION> 

                                                           At December 31, 1998
                                       ---------------------------------------------------------------------------
                                           More than Ten Years                Total Investment Securities  
                                       --------------------------    ---------------------------------------------
                                                         Weighted     Average                             Weighted    
                                        Amortized        Average       Life       Amortized     Market     Average        
                                           Cost            Rate      in Years        Cost        Value       Rate          
                                        ---------        --------    ---------    ---------     -------   --------       
                                                                  (Dollars in Thousands)
<S>                                     <C>              <C>         <C>          <C>           <C>        <C> 
Federal agency obligations...           $      --              --%      1.01       $ 21,856      $ 22,019    5.31%             
                                        ---------        --------                 ---------      --------                  
                                        $      --              --       1.01       $ 21,856      $ 22,019    5.31        
                                        =========        ========                 =========      ========                   
</TABLE> 


            At December 31, 1998, the Bank did not have any investment
securities held to maturity.

                                       21
<PAGE>
 
          During 1996, the Bank purchased $20.1 million of available-for-sale
investment securities.  These securities had a weighted average yield of 6.19%.
The available-for-sale investment securities purchased consisted of federal
agency obligations and U.S. Treasury securities with maturities of 11 to 61
months.  Investment securities available for sale in the amount of $23.1 million
were sold during 1996, resulting in gross gains of $43,000 and gross losses of
$107,000.  During 1997, the Bank purchased $24.0 million of available-for-sale
investment securities.  These securities had a weighted average yield of 5.99%.
The available-for-sale investment securities purchased consisted of U.S.
Treasury securities with maturities of 12 to 16 months.  Investment securities
available for sale in the amount of $20.0 million were sold during 1997,
resulting in gross gains of $20,000 and gross losses of $51,000.   During 1998,
the Bank purchased $19.8 million of available-for-sale investment securities.
These securities had a weighted average yield of 5.20%.  The available-for-sale
investment securities purchased consisted of federal agency securities with
maturities of six to 23 months.   There were no sales of investment securities
available for sale during 1998.

          At December 31, 1998, 1997 and 1996, the Bank held an investment in
shares of Federal Home Loan Bank Stock, with an amortized cost of $11,451,000,
$11,423,000 and $10,632,000 at those dates, respectively.

          The following table sets forth certain information about the Bank's
available-for-sale investment securities and related fair values.
<TABLE>
<CAPTION>
 
                                                                At December 31,
                                       ------------------------------------------------------------------
                                               1998                   1997                   1996
                                       ------------------     ------------------     -------------------
                                       Amortized     Fair     Amortized     Fair     Amortized     Fair
                                          Cost       Value       Cost       Value       Cost       Value
                                       ----------   -------   ----------   -------   ----------   -------
                                                             (Dollars In Thousands)
<S>                                    <C>          <C>       <C>          <C>       <C>          <C>
United States government
  and agency obligations:
  Maturing within one year..........     $    --    $    --     $24,000    $24,053     $20,097    $20,071
 
Federal agency obligations:
  Maturing within one year..........       9,856      9,849          --         --          --         --
  Maturing from one to five years...      12,000     12,170       2,000      2,027       7,000      7,015
 
Corporate bonds:
  Maturing within one year..........          --         --          --         --       4,000      4,007
                                         -------    -------   ---------    -------   ---------    -------
 
                                         $21,856    $22,019     $26,000    $26,080     $31,097    $31,093
                                         =======    =======   =========    =======   =========    =======
 
Weighted average interest rate......        5.31%                  6.02%                  5.89%
                                          =======              =========              =========
 
</TABLE>
Deposit Activity and Other Sources of Funds

          General.  Retail customer deposits are the major source of the Bank's
funds for lending and other investment purposes.  In addition to deposits,
Community First derives funds from loan and mortgage-backed securities principal
repayments, the sale of loans or participation interests therein and FHLB
borrowings and securities sold under agreement to repurchase.  Loan repayments
are a relatively stable source of funds while deposit inflows and outflows and
loan prepayments are significantly influenced by general interest rates and
money market conditions.  Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources.
FHLB advances were obtained, as needed in 1996, to meet the Bank's operating
needs which included the funding of three-year adjustable-rate mortgage loan
originations.  Recognizing there is additional interest rate risk associated
with funding medium-term assets with shorter-term liabilities in a rising or
volatile interest rate environment, the Bank emphasized increasing its deposit
base by attracting new customers through various promotional activities.  In
1997, loan growth

                                       22
<PAGE>
 
was funded by maturities of investment and mortgage-backed securities, deposit
growth (primarily in checking and savings accounts) and long-term, fixed-rate
FHLB advances.

          In 1998, loan growth occurred primarily in fixed-rate loan products.
This growth was funded primarily through an increase in checking and savings
accounts.  In addition, maturing FHLB advances were replaced with longer term
advances to moderate the impact of growth on interest rate risk.

          Deposits.  Deposits are attracted primarily from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments including checking accounts, money market accounts, savings
accounts, certificates of deposit, retirement savings plans and pension
investment accounts.  Deposit account terms vary according to the minimum
balance required, the time period funds must remain on deposit and the interest
rate, among other factors.  The Bank attempts to control its cost of funds by
emphasizing checking, savings and money market accounts.  At December 31, 1998,
such accounts totaled $266.0 million, or 45.3%, of the Bank's total deposits.

          While the deregulation of interest rates has allowed the Bank to be
more competitive in obtaining funds and given it more flexibility to meet the
threat of deposit outflows, it has also resulted in a higher and more volatile
cost of funds.  Since 1993 and early 1994, upon maturity of their certificates
of deposit, many customers have chosen to reinvest the proceeds into savings and
money market accounts possessing shorter terms and enhanced liquidity.  As
market interest rates declined during 1998 many customers continued this trend.
Non-bank competition similarly affected the level of certificates of deposit
maintained in the Bank and, generally consistent with an industry-wide trend,
the Bank experienced declines in certificates of deposit.  Total deposits grew
4.3% from $562.4 million at December 31, 1997, to $586.7 million at December 31,
1998.  The $24.3 million increase resulted principally and from transaction
account and savings account growth of $21.1 million and $6.8 million,
respectively partially offset by certificate of deposit decline of $3.6 million.
During 1995, the Bank introduced Really Free Checking and five other highly
competitive checking account programs.  To support these checking account
programs, the Bank has conducted comprehensive marketing campaigns during 1996,
1997 and 1998.  The continued promotion of Really Free Checking in 1996, 1997
and 1998 has resulted in an expansion of the Bank's deposit base through
attracting new customers and cross-selling other Bank products to existing
customers.  With a certificate of deposit campaign, coinciding with the checking
campaign, the Bank promoted the competitive rates offered on fourteen-month
certificates, also attracting new customers.  The Bank continued to promote
during 1998 a high yield money market savings product, which was originally
introduced during late 1996.  Although the majority of the growth in the money
market savings products was obtained from external sources, many accounts were
also opened by existing customers with transfers of funds from their checking,
savings and money market checking accounts.

          Bank management meets weekly to evaluate the internal cost of funds,
review a survey of rates offered by major competitors in the market, review the
Bank's cash flow requirements for lending and liquidity and execute rate changes
when deemed appropriate.  At the present time, the Bank's primary strategy for
attracting and retaining deposits is to emphasize competitive rates which are
generally comparable to those offered by other market leaders.  This pricing
strategy is complemented by the introduction of new deposit products designed to
differentiate the Bank from its competition, such as the offering of "Really
Free Checking."  The Bank does not actively solicit brokered deposits, but does
accept brokered deposits at rates appropriate for institutional investors, which
are less than the amount paid for retail deposits.  At December 31, 1998, the
Bank had no brokered deposits.

                                       23
<PAGE>
 
          The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by the Bank between the dates
indicated.
<TABLE>
<CAPTION>
 
 
                                                            At December 31,
                                ----------------------------------------------------------------------   
                                             1998                                   1997                   
                                ----------------------------------  ----------------------------------     
                                           Percent of    Increase               Percent of    Increase     
                                 Amount    Portfolio    (Decrease)    Amount    Portfolio    (Decrease)    
                                --------   ----------   ----------   --------   ----------   ----------    
                                                                           (Dollars in Thousands)          
<S>                             <C>        <C>          <C>          <C>        <C>          <C>           
                                                                                                           
Regular savings..............   $ 66,463       11.33%    $  3,394    $ 63,069       11.21%    $ (2,145)    
Money market savings.........     25,369        4.37        3,425      21,944        3.90        5,808     
Consumer checking............    113,385       19.33       20,045      93,340       16.60        6,617     
Commercial checking..........     10,631        1.81        1,015       9,616        1.71          292     
Money market checking........     50,122        8.54           23      50,099        8.91       (1,864)    
                                --------       -----     --------    --------      ------     --------     
                                 265,970       45.33       27,902     238,068       42.33        8,708     
                                                                                                           
Certificates of deposit:                                                                                   
  0.00 - 4.99%...............     53,366        9.10       32,608      20,758        3.69      (17,065)    
  5.00 - 5.99%...............    209,056       35.63       44,651     164,405       29.23        6,652     
  6.00 - 6.99%...............     57,072        9.73      (80,153)    137,225       24.40       11,128     
  7.00 - 7.99%...............        638        0.11         (111)        749         .13         (404)    
  8.00 - 8.99%...............        178        0.03         (478)        656         .12         (170)    
  9.00 - 9.99%...............        427        0.07         (124)        551         .10          (11)    
                                --------       -----     --------    --------      ------     --------     
                                 320,737       54.67       (3,607)    324,344       57.67          130     
                                --------       -----     --------    --------      ------     --------     
                                                                                                           
Totals.......................   $586,707      100.00%    $ 24,295    $562,412      100.00%    $  8,838     
                                ========      =======    ========    ========      ======     ========   

</TABLE> 


<TABLE> 
<CAPTION> 
                                        At December 31,
                                 -----------------------------------
                                              1996
                                 -----------------------------------
                                             Percent of    Increase
                                   Amount    Portfolio    (Decrease)
                                  --------   ----------   ----------
                                       (Dollars in Thousands)          
<S>                               <C>        <C>          <C>
Regular savings..............     $ 65,214       11.78%    $ (2,376)
Money market savings.........       16,136        2.91       16,136
Consumer checking............       86,723       15.67        7,092
Commercial checking..........        9,324        1.68        1,666
Money market checking........       51,963        9.39       (2,561)
                                  --------      ------     --------
                                   229,360       41.43       19,957
                                
Certificates of deposit:        
  0.00 - 4.99%...............       37,823        6.83       13,333
  5.00 - 5.99%...............      157,753       28.50        9,970
  6.00 - 6.99%...............      126,097       22.78       (2,469)
  7.00 - 7.99%...............        1,153         .21      (14,849)
  8.00 - 8.99%...............          826         .15         (197)
  9.00 - 9.99%...............          562         .10           13
                                  --------      ------     --------
                                   324,214       58.57        5,801
                                  --------      ------     --------
                                
Totals.......................     $553,574      100.00%    $ 25,758
                                  ========      ======     ========
</TABLE> 

                                       24
<PAGE>
 
     The following table sets forth certain information regarding the Bank's
deposit flows for the periods indicated:
<TABLE>
<CAPTION>
 
                                                 Year Ended December 31,
                                        ------------------------------------------
                                            1998           1997           1996
                                        ------------   ------------   ------------
                                                  (Dollars In Thousands)
<S>                                     <C>            <C>            <C>
 
Beginning balance....................   $   562,412    $   553,574    $   527,816
Deposits, net of interest credited...     1,899,964      2,068,592      1,889,523
Withdrawals..........................    (1,897,671)    (2,078,598)    (1,879,791)
Interest credited....................        22,002         18,844         16,026
                                        -----------    -----------    -----------
 
Ending balance.......................   $   586,707    $   562,412    $   553,574
                                        ===========    ===========    ===========
 
Net increase.........................   $    24,295    $     8,838    $    25,758
                                        ===========    ===========    ===========
 
Percentage increase..................          4.32%          1.60%          4.88%
                                        ===========    ===========    ===========
 
</TABLE>
     The following table sets forth the average balances (based on daily
balances) and interest rates for demand deposits and time deposits for the
periods indicated.
<TABLE>
<CAPTION>
 
 
                                                          Year Ended December 31,
                       ---------------------------------------------------------------------------------------------
                                 1998                             1997                             1996
                       -----------------------------   -----------------------------   -----------------------------
                         Savings,                        Savings,                        Savings,
                       Checking and    Certificates    Checking and    Certificates    Checking and    Certificates
                       Money Market         of         Money Market         of         Money Market         of
                         Accounts         Deposit        Accounts         Deposit        Accounts         Deposit
                       -------------   -------------   -------------   -------------   -------------   -------------
                                                          (Dollars in Thousands)
<S>                    <C>             <C>             <C>             <C>             <C>             <C>
 
Average balance.....       $254,009        $325,400        $235,475        $322,998        $217,316        $319,491
                           ========        ========    ============    ============    ============    ============
 
Average rate paid...           2.38%           5.75%           2.52%           5.74%           2.50%           5.76%
                           ========        ========    ============    ============    ============    ============
 
</TABLE>

  The following table indicates the amount, at December 31, 1998, of the Bank's
certificates of deposit of $100,000 or more by the time period remaining until
maturity.
<TABLE>
<CAPTION>
 
 
                                                        Certificates
            Maturity Period                              of Deposit
            ---------------                            --------------
                                                       (In Thousands)
            <S>                                        <C>
 
            Three months or less....................         $ 6,863
            Over three months through six months....           9,545
            Over six months through twelve months...          12,304
            Over twelve months......................           9,160
                                                             -------
                                                             $37,872
                                                             =======
</TABLE>

                                       25
<PAGE>
 
          The following table presents, by various interest rate categories, the
amounts of certificate of deposit accounts at December 31, 1998, maturing during
the periods reflected below:
<TABLE>
<CAPTION>
                                      0.00-       5.00-      6.00-     7.00-     9.00-               Percent
                                      4.99%       5.99%      6.99%     8.99%    10.99%   Total      of Total
                                   -------    --------    -------    ------    ------    --------   --------
                                             (Dollars in Thousands)
<S>                                <C>        <C>         <C>        <C>       <C>       <C>        <C>
Certificate accounts maturing
 in the period ending:
June 30, 1999...................   $30,083    $ 70,483    $28,666    $  187    $  424    $129,843      40.48%
December 31, 1999...............    16,076      77,700      9,306        48        --     103,130      32.15
June 30, 2000...................     4,509      27,563      7,165       384        --      39,621      12.35
December 31, 2000...............     1,211       6,885      2,833        --        --      10,929       3.41
December 31, 2001...............     1,402      11,915      1,417        18         3      14,755       4.60
December 31, 2002...............         9       3,645      4,889        10        --       8,553       2.67
Thereafter......................        76      10,865      2,796       169        --      13,906       4.34
                                   -------    --------    -------    ------    ------    --------     ------
                                   $53,366    $209,056    $57,072    $  816    $  427    $320,737     100.00%
                                   =======    ========    =======    ======    ======    ========     ======
</TABLE>

          At December 31, 1998, accounts having balances of $100,000 or more
totaled $77.7 million representing 13.2% of total deposits.

          Individual Retirement Accounts and Keogh/Corporate Qualified Plan
Funds.  The Bank seeks to attract Individual Retirement Accounts ("IRAs").  In
addition to the establishment of an IRA department, the Bank has a Retirement
Accounts Product Manager with previous experience in insurance, pension plan
design and personal sales.  The Bank has maintained its commitment to retirement
accounts by developing a professional IRA staff and an extensive record-keeping
system to supply necessary customer information as required under current IRA
provisions.  As of December 31, 1998, the Bank administered 3,726 IRAs and six
Tax Qualified Retirement Plans totaling $47.5 million, or 8.1%, of all deposits.

          Borrowings.  Deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes.  The
Bank does, however, rely upon advances from the FHLB of Indianapolis to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements.  Advances from the FHLB are typically secured by the Bank's stock
in the FHLB and substantially all of the Bank's residential mortgage loans.
Since mid-1993, borrowings from the FHLB have been an integral component of the
Bank's funding strategy.  Borrowings replaced maturing certificates of deposit
and other deposit withdrawals, funded asset growth, and were used to manage
interest rate risk.  FHLB advances declined from $212.7 million at December 31,
1997 to $211.8 million at year-end 1998.  Of the outstanding FHLB advances at
December 31, 1998, $209.3 million carried a weighted average fixed-rate of
5.76%.  Adjustable-rate advances at December 31, 1998 totaled $2.5 million, all
of which reprice based upon the FHLB overnight Basic Agency Discount Note rate
plus 30 basis points.

          Since 1995, FHLB advances have been obtained to meet the Bank's
operating needs which included the funding of adjustable-rate mortgage loan
originations and purchases of medium-term fixed- and adjustable-rate residential
mortgage loans.  Recognizing there is additional interest rate risk associated
with funding medium-term assets with shorter-term liabilities in a rising or
volatile interest rate environment, the Bank emphasized using more medium term
fixed-rate FHLB advances.

          The FHLB of Indianapolis functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, Community First is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States), provided certain standards
related to creditworthiness have been met.

                                       26
<PAGE>
 
          In 1998, the Bank introduced a commercial sweep account to provide
earnings on excess funds to commercial customers.  The sweep accounts are
collateralized by securities sold under agreement to repurchase and are not FDIC
insured.  Total securities sold under agreement to repurchase at December 31,
1998 was $1.8 million with a weighted average rate of 3.89%.

          The following tables set forth certain information regarding
borrowings at the dates and during the periods indicated.
<TABLE>
<CAPTION>
 
                                                              At December 31,
                                                     ---------------------------------
                                                       1998        1997        1996
                                                     ---------   ---------   ---------
                                                          (Dollars in Thousands)
<S>                                                  <C>         <C>         <C>
Amount of borrowings:
  FHLB advances...................................   $211,835    $212,693    $202,639
  Securities sold under agreement to repurchase...      1,772          --          --
Weighted average rate on:
 FHLB advances....................................       5.75%       6.09%       5.97%
  Securities sold under agreement to repurchase...       3.89          --          --
 
<CAPTION>  
                                                          Year Ended December 31,
                                                    ---------------------------------
                                                       1998        1997        1996
                                                     --------    --------    --------
                                                          (Dollars in Thousands)
<S>                                                  <C>         <C>         <C>
Maximum amount of borrowings
 outstanding at any month end:
 FHLB advances....................................   $214,012    $223,461    $203,330
  Securities sold under agreement to repurchase...      1,859          --          --
 
Approximate average borrowings
 outstanding with respect to:
 FHLB advances....................................   $197,973    $207,871    $176,943
  Securities sold under agreement to repurchase...        456          --          --
 
Approximate weighted average rate paid on:
 FHLB advances....................................       5.97%       6.12%       6.02%
  Securities sold under agreement to repurchase...       4.10          --          --
</TABLE>

Subsidiary Activities

          Community First is permitted to invest an amount equal to 5% of its
assets in service entities where such entities are authorized to engage in those
activities incidental to the conduct of the Bank.  As of December 31, 1998,
Community First's investment in this subsidiary was $456,000.

          In October 1982, the Bank formed a wholly-owned subsidiary, Capitol
Consolidated Financial Corporation ("CCFC"), for the purpose of engaging in real
estate development activities.  Subsequent to its organization CCFC was involved
in one real estate development project beginning in 1985 and concluding in 1986,
and also was engaged in limited securities investment activities in 1986.  CCFC
has engaged in no significant activities since May 1986, although in 1986 it did
purchase approximately $26,000 of stock in an insurance company, of which it
held $14,000 at December 31, 1998.  During 1993, the Bank entered into a lease
agreement with a third-provider of investment products.  The Bank, in 1995 and
1994, respectively, recognized $15,000 and $150,000 of rental income in
conjunction with this agreement.  In addition, CCFC entered into a brokerage
services agreement with the same third-party vendor whereby

                                       27
<PAGE>
 
$15,000, $53,000 and $29,000 of commissions were received and included in CCFC's
income in 1995, 1994 and 1993, respectively. Both the lease and the brokerage
services agreement were terminated in 1995. CCFC entered into a brokerage
services agreement with another third-party vendor in late 1995. Through the
Bank's branch offices, this third-party provided customers seeking alternative
non-FDIC insured investment services the opportunity to invest in bonds, mutual
funds, stocks, annuities, and other investment products. The offices occupied by
the third party were separate and distinct from the Bank's offices, and Bank
customers were alerted to the fact that the third party was not affiliated with
the Bank, and was not offering deposit or savings accounts insured by the SAIF
or the FDIC. In conjunction with the brokerage service agreement, CCFC received
$16,000 in commissions in 1996. The Bank also received $27,000 in rental income
in 1996 from the third-party. In early 1997, the brokerage services agreement
with the third-party vendor was terminated.

          In late 1995, CCFC purchased the Allegan Insurance Agency.  No
activity was conducted through this agency during 1995 or 1996.  In early 1997,
a licensed agent was hired to operate the Allegan Insurance Agency.  During
1997, the Allegan Insurance Agency conducted business as Community First
Insurance and Investment Services (CFIIS) and offered customers and non-
customers the opportunity to invest in non-FDIC-insurance products such as
bonds, mutual funds, stocks, annuities, and life insurance.  CFIIS received
$138,000 in commission income during 1997.  During the fourth quarter of 1998,
two additional licensed agents were hired.  CFIIS received $181,000 in
commission income during 1998.

          Also during 1997, CCFC invested $26,838 to become a member of Michigan
Bankers Title of Mid-Michigan, L.L.C., a Michigan limited liability company, for
the purpose of engaging in the title insurance agency business.  As agent for
Investors Title Insurance Company, a North Carolina insurance corporation
headquartered in Chapel Hill, North Carolina, the L.L.C. underwrites and issues
title insurance policies in the name and on behalf of the title insurer.  The
Michigan Bankers Title of Mid-Michigan, L.L.C. is comprised of fourteen owners;
subsidiaries of ten state banks, three national banks and one subsidiary of a
state savings bank.  CCFC received a dividend distribution of $29,820 in
December 1997, based upon the operation of the L.L.C. during 1997.  As a result
of activity during 1998, CCFC received dividend distributions of $82,005.

          On January 2, 1998, the Bank formed a wholly-owned subsidiary
Community First Mortgage Corporation ("CFMC").  The subsidiary was formed for
the purpose of performing secondary marketing activities.  At December 31, 1998,
CFMC held mortgage loans totaling $380.2 million.  Gains on sales of loans
through CFMC during 1998 were $288,000.

          SAIF-insured savings associations are required to give the FDIC 30
days' prior notice before establishing or acquiring a new subsidiary, or
commencing any new activity through an existing subsidiary.  The FDIC has the
authority to order termination of subsidiary activities determined to pose a
risk to the safety or soundness of the association.  In addition, savings
associations are required to phase-out the amount of their investments in and
extensions of credit to subsidiaries engaged in activities not permissible to
national banks from capital in determining regulatory capital compliance.
CCFC's investment activities are not permissible to national banks, but the Bank
does not anticipate that any resulting deduction from capital will materially
affect its capital for regulatory compliance purposes.  See "Item 1. Business --
Regulation of the Bank -- Regulatory Capital Requirements."

                                       28
<PAGE>
 
Key Operating Ratios

       Set forth below are certain key operating ratios for the Corporation at
the dates and for the periods indicated.
<TABLE>
<CAPTION>
 
                                            Year Ended December 31,
                                           --------------------------
                                            1998      1997      1996
                                           -------   -------   ------
<S>                                        <C>       <C>       <C>
 
Interest rate spread....................     2.76%     2.70%    2.63%
Net yield on earning assets.............     3.10      3.06     2.98
Return on average equity (net income
  as a percentage of average
  stockholders' equity).................    17.59     16.39     8.55
Return on average assets (net income
  as a percentage of average  assets)...     1.38      1.26     0.69
Dividend payout ratio...................    36.90     31.71    41.28
 
<CAPTION> 
                                                           At December 31,
                                                      --------------------------
                                                       1998      1997      1996
                                                      ------    ------    ------
<S>                                                   <C>       <C>       <C>   
Equity to assets ratio (average stockholders' 
equity as a percentage of average total assets)       7.86%      7.70%    8.06%
</TABLE> 

          Additional performance ratios are set forth in the "Five Year Summary
of Selected Consolidated Financial Data," incorporated herein by reference to
the Annual Report. Any significant changes in the current trend of the above
ratios are reviewed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," incorporated herein by reference to the
Annual Report.

Competition

          Community First encounters strong competition both in the attraction
of deposits and in the origination of real estate and other loans.  Its most
direct competition for deposits has historically come from commercial banks,
other savings institutions and credit unions in its market area.  Community
First has the largest market share of deposits for financial institutions with
corporate headquarters in the greater Lansing area, and the third largest market
share of financial institutions with branches or subsidiaries in that market.

          Legislation passed by the U.S. Congress since 1980 and an increasingly
sophisticated investing public have dramatically increased competition for
deposits between thrift institutions and other types of investments (such as
money market mutual funds, Treasury securities and municipal bonds) and
increased competition with commercial banks in regard to loans, checking
accounts and other types of financial services.  In addition, large
conglomerates and securities firms have entered the market for financial
services.

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

Segments of the Business
 
          In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131").  SFAS 131 establishes

                                       29
<PAGE>
 
standards for the way that public business enterprises report information about
operating segments in financial statements.  Operating segments are components
of an enterprise for which separate financial information is available, and is
evaluated regularly by management in deciding how to allocate resources and in
assessing performance.  SFAS 131 establishes standards for related disclosures
about products, services, geographic areas, and major customers.  The
Corporation operates as a single segment.

Regulation of the Bank

          General.  As a Michigan chartered state savings bank with deposits
insured by the SAIF, Community First is subject to extensive regulation by the
Financial Institutions Bureau and the FDIC.  The lending activities and other
investments of the Bank must comply with various federal and state regulatory
requirements.  The Financial Institutions Bureau periodically examines the Bank
for compliance with various regulatory requirements.  The FDIC also has the
authority to conduct special examinations of SAIF members.  The Bank must file
reports with the Financial Institutions Bureau and the FDIC describing its
activities and financial condition.  Community First is also subject to certain
reserve requirements promulgated by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board").  This supervision and regulation
is intended primarily for the protection of depositors.  As a savings and loan
holding company, the Corporation is subject to the OTS' regulation, examination,
supervision and reporting requirements.  Certain of these regulatory
requirements are referred to below or appear elsewhere herein.

          Capital Requirements.  Under FDIC regulations, state-chartered banks
that are not members of the Federal Reserve System ("state nonmember banks") are
required to maintain a minimum leverage capital requirement consisting of a
ratio of Tier 1 capital to total assets of 3% if the FDIC determines that the
institution is not anticipating or experiencing significant growth and has well-
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and in general a strong banking
organization, rated composite 1 under the Uniform Financial Institutions Rating
System (the CAMEL rating system) established by the Federal Financial
Institutions Examination Council.  For all but the most highly rated
institutions meeting the conditions set forth above, the minimum leverage
capital ratio is 3% plus an additional "cushion" amount of at least 100 to 200
basis points.  Tier 1 capital is the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
(other than certain purchased mortgage servicing rights and purchased credit
card relationships), minus identified losses and minus investments in securities
subsidiaries.

          In addition to the leverage ratio, state nonmember banks must maintain
a minimum ratio of qualifying total capital to risk-weighted assets of at least
8.0% of which at least four percentage points must be Tier 1 capital.
Qualifying total capital consists of Tier 1 capital plus Tier 2 or supplementary
capital items, which include allowances for loan losses in an amount of up to
1.25% of risk-weighted assets, perpetual preferred stock that does not qualify
as Tier 1 capital and long-term preferred stock with an original maturity of at
least 20 years and certain other capital instruments.  The includable amount of
Tier 2 capital cannot exceed the institution's Tier 1 capital.  Qualifying total
capital is further reduced by the amount of the bank's investments in banking
and finance subsidiaries that are not consolidated for regulatory capital
purposes, reciprocal cross-holdings of capital securities issued by other banks
and certain other deductions.  Under the FDIC risk-weighting system, all of a
bank's balance sheet assets and the credit equivalent amounts of certain off-
balance sheet items are assigned to one of four broad risk weight categories.
The aggregate dollar amount of each category is multiplied by the risk weight
assigned to that category.  The sum of these weighted values equals the bank's
risk-weighted assets.

          At December 31, 1998, the Bank's ratio of Tier 1 capital to total
assets was 7.6%, its ratio of Tier 1 capital to risk-weighted assets was 13.1%
and its ratio of total capital to risk-weighted assets was 14.1%.

          Dividend Limitations.  The Bank may not pay dividends on its capital
stock if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form.

                                       30
<PAGE>
 
          Earnings of the Bank appropriated to bad debt reserves and deducted
for Federal income tax purposes are not available for payment of cash dividends
or other distributions to stockholders without payment of taxes at the then
current tax rate by the Bank on the amount of earnings removed from the reserves
for such distributions.  See "Federal and State Taxation."  The Bank intends to
make full use of this favorable tax treatment and does not contemplate use of
any earnings in a manner which would create federal tax liabilities.

          Under FDIC regulation, the Bank is prohibited from making any capital
distributions if after making the distribution, the Bank would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.

          Safety and Soundness Standards.  Under FDICIA, as amended by the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "CDRI
Act"), each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority.  On July 10, 1995, the federal
banking agencies, including the FDIC and the Federal Reserve Board, released
Interagency Guidelines Establishing Standards for Safety and Soundness and
published a final rule establishing deadlines for submission and review of
safety and soundness compliance plans.  The final rule and the guidelines went
into effect on August 9, 1995.  The guidelines require depository institutions
to maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution's
business.  The guidelines also establish certain basic standards for loan
documentation, credit underwriting, interest rate risk exposure, and asset
growth.  The guidelines further provide that depository institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions.  If the appropriate federal banking agency determines
that a depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines.  A depository institution must submit an
acceptable compliance plan to its primary federal regulator within 30 days of
receipt of a request for such a plan.  Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions.  Management
believes that the Bank meets substantially all the standards adopted in the
interagency guidelines.

          Additionally under FDICIA, as amended by the CDRI Act, the federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate.  On July 10,
1995, the federal banking agencies, including the FDIC and the Federal Reserve
Board, issued proposed guidelines relating to asset quality and earnings.  Under
the proposed guidelines, an FDIC insured depository institution should maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure earnings are sufficient to maintain
adequate capital and reserves.  Management believes the asset quality and
earnings standards, in the form proposed by the banking agencies, would not have
a material effect on the operations of the Bank.

          Federal Home Loan Bank System.  Community First is a member of the
FHLB System.  The FHLB System consists of 12 regional FHLBs subject to
supervision and regulation by the Federal Housing Finance Board ("FHFB"), as
successor in this respect to the Federal Home Loan Bank Board.  The Federal Home
Loan Banks provide a central credit facility primarily for member institutions.
As a member of the FHLB of Indianapolis, the Bank is required to acquire and
hold shares of capital stock in its FHLB in an amount at least equal to the
greater of 1% of the aggregate unpaid principal of its residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or 5% of outstanding advances (borrowings) from the FHLBs.  The Bank was
in compliance with this requirement at December 31, 1998, with investments in
FHLB stock of $11.5 million.

          The FHLBs serve as reserve or central banks for their member
institutions within their assigned regions.  They are funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
They make advances to members in accordance with policies and procedures
established by the FHFB and their Boards of Directors.  Long-term advances may
be made only for the purpose of providing funds for residential housing finance.
As of December 31, 1998, the Bank had $211.8 million in advances from its FHLB.

                                       31
<PAGE>
 
          Liquidity Requirements.  Although not required by regulation,
Community First maintains average daily balances of short-term liquid assets at
a specified percentage (currently 3%) of the total of its net withdrawable
savings accounts and borrowings payable in one year or less.  The short-term
liquidity ratio of the Bank at December 31, 1998 was 4.40%.  A substantial
sustained decline in savings deposits could adversely affect the Bank's
liquidity which could result in restricted operations and additional borrowings
from the FHLB.

          Deposit Insurance.  The Bank is required to pay assessments to the
FDIC based on a percent of its insured deposits for insurance of its deposits by
the SAIF.  Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions to maintain the designated
reserve ratio of the SAIF at 1.25% of estimated deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.

          Under the risk-based deposit insurance system adopted by the FDIC, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC which is determined
by the institution's capital level and supervisory evaluations.  Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria used under the prompt
corrective action regulations.  Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund.

          Before 1997, institutions with SAIF-assessable deposits, like the
Bank, have been required to pay higher deposit insurance premiums than
institutions with deposits insured by the BIF.  In order to recapitalize the
SAIF and address the premium disparity, the recently-enacted Deposit Insurance
Funds Act of 1996 authorized the FDIC to impose a one-time special assessment on
institutions with SAIF-assessable deposits based on the amount determined by the
FDIC to be necessary to increase the reserve levels of the SAIF to the
designated reserve ratio of 1.25% of insured deposits.  Institutions were
assessed at the rate of 65.7 basis points based on the amount of their SAIF-
assessable deposits as of March 31, 1995.  As a result of the special assessment
the Bank incurred an after-tax expense of $2,214,000 during the quarter ended
September 30, 1996.

          The FDIC has proposed a new assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-capitalized
institutions with the highest supervisory ratings would be reduced to zero and
institutions in the lowest risk assessment classification will be assessed at
the rate of 0.27% of insured deposits.  Until December 31, 1999, however, SAIF-
insured institutions, will be required to pay assessments to the FDIC at the
rate of 6.5 basis points to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts.  During this period, BIF
members will be assessed for these obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments.

          Restrictions on Certain Activities.  Under FDICIA, state-chartered
banks with deposits insured by the FDIC are generally prohibited from acquiring
or retaining any equity investment of a type or in an amount that is not
permissible for a national bank.  The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an equity
investment in a subsidiary in which the bank is a majority owner.  State-
chartered banks are also prohibited from engaging as principal in any type of
activity that is not permissible for a national bank and subsidiaries of state-
chartered, FDIC-insured state banks may not engage as principal in any type of
activity that is not permissible for a subsidiary of a national bank unless in
either case the FDIC determines that the activity would pose no significant risk
to the appropriate deposit insurance fund and the bank is, and continues to be,
in compliance with applicable capital standards.

                                       32
<PAGE>
 
          The FDIC has adopted regulations to clarify the foregoing restrictions
on activities of FDIC-insured state-chartered banks and their subsidiaries.
Under the regulations, the term activity refers to the authorized conduct of
business by an insured state bank and includes acquiring or retaining any
investment other than an equity investment.  A bank or subsidiary is considered
acting as principal when conducted other than as an agent for a customer, as
trustee, or in a brokerage, custodial, advisory or administrative capacity.  An
activity permissible for a national bank includes any activity expressly
authorized for national banks by statute or recognized as permissible in
regulations, official circulars or bulletins or in any order or written
interpretation issued by the Office of the Comptroller of the Currency ("OCC").
In its regulations, the FDIC indicates that it will not permit state banks to
directly engage in commercial ventures or directly or indirectly engage in any
insurance underwriting activity other than to the extent such activities are
permissible for a national bank or a national bank subsidiary or except for
certain other limited forms of insurance underwriting permitted under the
regulations.  Under the regulations, the FDIC permits state banks that meet
applicable minimum capital requirements to engage as principal in certain
activities that are not permissible to national banks including guaranteeing
obligations of others, activities which the Federal Reserve Board has found by
regulation or order to be closely related to banking and certain securities
activities conducted through subsidiaries.

          Prompt Corrective Regulatory Action.  FDICIA requires the federal
banking regulators to take prompt corrective action in the event an FDIC-insured
institution fails to meet certain minimum capital requirements.  Under FDICIA,
as implemented by regulations adopted by the FDIC, an institution is assigned to
one of the following five capital categories:

     .    well-capitalized -- total risk-based capital ratio of 10% or greater,
          Tier 1 risk-based capital ratio of 6% or greater, leverage ratio of 5%
          or greater, and no written FDIC directive or order requiring the
          maintenance of specific levels of capital;

     .    adequately capitalized -- total risk-based capital ratio of 8% or
          greater, Tier 1 risk-based capital ratio of 4% or greater, and
          leverage ratio of 4% or greater (or 3% or greater if the institution's
          composite rating under the FDIC's supervisory rating system is 1);

     .    undercapitalized -- total risk-based capital ratio of less than 8%, or
          Tier 1 risk-based capital ratio of less than 4%, or leverage ratio of
          less than 4% (or less than 3% if the institution's composite rating
          under the FDIC's supervisory rating system is 1);

     .    significantly undercapitalized -- total risk-based capital ratio of
          less than 6%, or Tier 1 risk-based capital ratio of less than 3% or
          leverage ratio of less than 3%; and

     .    critically undercapitalized -- ratio of tangible equity to total
          assets of 2% or less.

     Under FDICIA, an "undercapitalized institution" generally is: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses.  A
significantly undercapitalized institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, restrictions on asset growth and other activities, possible
replacement of directors and officers, and restrictions on capital distributions
by any bank holding company controlling the institution.  Any company
controlling the institution may also be required to divest the institution.  The
senior executive officers of such an institution may not receive bonuses or
increases in compensation without prior approval and the institution is
prohibited from making payments of principal or interest on its subordinated
debt, with certain exceptions.  If an institution's ratio of tangible capital to
total assets falls below a level established by the appropriate federal banking
regulator, which may not be less than 2% of total assets nor more than 65% of
the minimum tangible capital level otherwise required (the "critical capital
level"), the institution is subject to conservatorship or receivership within 90
days unless periodic determinations are made that forbearance from such

                                       33
<PAGE>
 
action would better protect the deposit insurance fund. Unless appropriate
findings and certifications are made by the appropriate federal bank regulatory
agencies, a critically undercapitalized institution must be placed in
receivership if it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became critically
undercapitalized. At December 31, 1998, the Bank was classified as "well
capitalized" under the FDIC's regulations.

     Uniform Lending Standards.  As required by FDICIA, the federal banking
agencies adopted regulations effective March 19, 1993 that require banks to
adopt and maintain written policies establishing appropriate limits and
standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate.  These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-value limits, that
are clear and measurable, loan administration procedures and documentation,
approval and reporting requirements.  A bank's real estate lending policy must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the banking
agencies.  The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the loan-to-value limits specified in the Guidelines
for the various types of real estate loans.  The Interagency Guidelines state,
however, that it may be appropriate in individual cases to originate or purchase
loans with loan-to-value ratios in excess of the supervisory loan-to-value
limits.  The Bank does not believe that the Interagency Guidelines materially
affect its lending activities.

     Limits on Loans to One Borrower.  The State of Michigan Savings Bank Act
No.  354 of the Public Acts of 1996 (the "Act") provides limits on loans and
extensions of credit to one borrower for stock savings banks chartered in the
State of Michigan.  The Act limits loans and extensions of credit to one
borrower to 15% of the capital and surplus of the Bank, except that upon two-
thirds vote of its Board of Directors, the limit may be increased not to exceed
25% of the capital and surplus of the Bank.

     Federal Reserve System.  Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves against their transaction accounts.  No reserves are required on the
first $4.9 million of transaction accounts.  Reserves equal to 3% must be
maintained on the next $41.6 million of transaction accounts and a reserve of
10% must be maintained against the remaining transaction accounts.  These
reserve requirements are subject to adjustment by the Federal Reserve Board.
Because required reserves must be maintained in the form of vault cash or in a
noninterest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets.  At December 31, 1998, Community First met its reserve requirements.

     Michigan State Law.  As a state-chartered savings bank, the Bank is subject
to the applicable provisions of Michigan law and the regulations of the
Financial Institutions Bureau adopted thereunder.  The Bank derives its lending
and investment powers from these laws, and is subject to periodic examination
and reporting requirements by and of the Financial Institutions Bureau.  In
addition, it is required to make periodic reports to the Financial Institutions
Bureau.

Regulation of the Corporation

     General.  The Corporation is registered as a savings and loan holding
company with the OTS and subject to OTS regulations, examinations, supervision
and reporting requirements.  As a subsidiary of a savings and loan holding
company, the Bank is subject to certain restrictions in its dealings with the
Corporation and affiliates thereof.

     Activities Restrictions.  The Board of Directors of the Corporation
presently operates the Corporation as a unitary savings and loan holding
company.  There are generally no restrictions on the activities of a unitary
savings and loan holding company.  However, if the Director of the OTS
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of an activity constitutes a serious risk to
the financial safety, soundness, or stability of its subsidiary savings
association, the Director of the OTS may impose such restrictions as

                                       34
<PAGE>
 
deemed necessary to address such risk and limiting (i) payment of dividends by
the savings association, (ii) transactions between the savings association and
its affiliates, and (iii) any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings association subsidiary of such a holding company fails
to meet the QTL Test, then such unitary holding company shall also presently
become subject to the activities restrictions applicable to multiple holding
companies and unless the savings association requalifies as a Qualified Thrift
Lender within one year thereafter, register as, and become subject to, the
restrictions applicable to a bank holding company.

     If the Corporation were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Corporation would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, the activities of the Corporation and any of its subsidiaries (other than
the Bank or other subsidiary savings institutions) would thereafter be subject
to further restrictions.  The Home Owners' Loan Act, as amended by FIRREA,
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings association shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, upon prior notice
to, and no objection by the OTS, other than (i) furnishing or performing
management services for a subsidiary savings association, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution, (iv) holding
or managing properties used or occupied by a subsidiary savings institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by the FSLIC by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies.  Those activities described in (vii) above
must also be approved by the Director of the OTS prior to being engaged in by a
multiple holding company.
 
     Transactions with Affiliates.  Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act.  An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association.  In a holding company context, the parent holding company of a
savings association (such as the Corporation) and any companies which are
controlled by such parent holding company are affiliates of the savings
association.  Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate.  The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions.  In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.

     Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders.  Under Section 22(h), loans to an
executive officer and to a greater than 10% stockholder of a savings association
(18% in the case of institutions located in an area with less than 30,000 in
population), and certain affiliated entities of either, may not exceed, together
with all other outstanding loans to such person and affiliated entities the
association's loan to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral).  Section 22(h) also prohibits loans, above amounts prescribed by
the appropriate federal banking agency, to directors, executive officers and
greater than 10% stockholders of a savings

                                       35
<PAGE>
 
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval is required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans
to directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons.

     Savings associations are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act on loans to executive officers and
the restrictions of 12 U.S.C. (S) 1972 on certain tying arrangements and
extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers.  Section 1972
prohibits (i) a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.

     Restrictions on Acquisitions.  Savings and loan holding companies are
generally prohibited from acquiring, without prior approval of the Director of
the OTS, (i) control of any other savings association or savings and loan
holding company or substantially all the assets thereof or (ii) more than 5% of
the voting shares of a savings association or holding company thereof which is
not a subsidiary.  Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings association, other than a subsidiary savings
association, or of any other savings and loan holding company.

     The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if:  (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).

     Federal associations may branch in any state or states of the United States
and its territories.  Except in supervisory cases or when interstate branching
is otherwise permitted by state law or other statutory provision, a federal
association may only establish an out-of-state branch under such OTS regulation
if (i) the federal association qualifies as a "domestic building and loan
association" under (S)7701(a)(19) of the Internal Revenue Code and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings and loan holding company or (b) a
violation of certain statutory restrictions on branching by savings association
subsidiaries of banking holding companies.  Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements.  The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.

                                       36
<PAGE>
 
     The Bank Holding Company Act of 1956 specifically authorizes the Federal
Reserve Board to approve an application by a bank holding company to acquire
control of any savings association.  Pursuant to rules promulgated by the
Federal Reserve Board, owning, controlling or operating a savings association is
a permissible activity for bank holding companies, if the savings association
engages only in deposit-taking activities and lending and other activities that
are permissible for bank holding companies.

     A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board.  The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.

Taxation

     General.  The Corporation and the Bank currently file a consolidated
federal income tax return on a calendar year basis.  Consolidated returns have
the effect of eliminating intercompany distributions, including dividends, from
the computation of consolidated taxable income for the taxable year in which the
distributions occur.

     Federal Income Taxation.  Thrift institutions are subject to the provisions
of the Internal Revenue Code of 1986, as amended ("Code") in the same general
manner as other corporations.  Prior to 1996 legislation, institutions such as
the Bank which met certain definitional tests and other conditions prescribed by
the Code benefitted from certain favorable provisions regarding their deductions
from taxable income for annual additions to their bad debt reserve.  The thrift
bad debt reserve method was repealed for taxable years beginning after December
31, 1995.  For taxable years beginning on or after January 1, 1996, savings
institutions will be treated the same as commercial banks.  Institutions such as
the Bank that are part of a consolidated group with $500 million or more in
assets will only be able to take a tax deduction when a loan is actually charged
off.

     The legislation also requires savings institutions to recapture the excess
of their tax bad debt reserves for the last taxable year beginning before
January 1, 1996, over their tax bad debt reserves for the last taxable year
beginning before January 1, 1988 ("base year"), adjusted downward for any
decline in outstanding loans from the base year.  This excess will be taken into
income over six years, generally for taxable years beginning in 1996, but
subject to potential deferral up to two years.  The Bank began to recapture its
excess reserve of approximately $3.7 million in 1998.

     The base year tax bad debt reserves are generally not subject to recapture,
but they are frozen, not forgiven.  Earnings that represent amounts appropriated
to an institution's bad debt reserves and claimed as a tax deduction are not
available for the payment of cash dividends or for distribution to shareholders
(including distributions made on dissolution or liquidation), unless such
amounts are included in taxable income, along with the amount deemed necessary
to pay the resulting federal income tax.

     The Corporation's federal income tax returns were audited through December
1992 by the IRS, without material adjustments.

     State Taxation.  Under Michigan law, the Corporation, the Bank and its
subsidiaries are  subject to a "Single Business Tax," a value-added tax for the
privilege of doing business in the state of Michigan.  The major components of
the tax base are: compensation, federal taxable income and depreciation, less
the cost of acquisition of tangible assets during the year.  The tax rate is
2.30% of the Michigan adjusted tax base for 1998 and 1997.  The Bank was also
subject to an "Intangibles Tax" of $0.05 in 1997 and $0.10 in 1996 on each
$1,000 of savings deposits.  The Intangibles Tax has been repealed for 1998 and
subsequent years.

                                       37
<PAGE>
 
     The Bank's state tax returns have been audited through December 1991 by the
Michigan Department of Treasury.

     For additional information regarding federal taxes, see Notes 1 and 13 of
the Notes to Consolidated Financial Statements in the Annual Report.

Personnel

     As of December 31, 1998, the Bank, including its subsidiaries, had 207
full-time employees and 72 part-time employees.  The employees are not
represented by a collective bargaining unit.  The Bank believes its relationship
with its employees to be good.

Executive Officers

     The following table sets forth information regarding the Corporation's
and/or the Bank's executive officers.
<TABLE>
<CAPTION>
 
Name                           Age(1)   Position
----                           ------   --------                   
<S>                            <C>      <C>
 
Robert H. Becker                63      President and Chief Executive Officer of the Corporation and the Bank
John W. Abbott                  51      Executive Vice President, Chief Operating Officer, and Secretary of the
                                        Corporation and the Bank
Jane M. Judge McMillian         37      Vice President -- Director of Human Resources of the Bank
Rick L. Laber                   41      Vice President, Chief Financial Officer, and Treasurer of the Corporation
                                        and the Bank
Jack G. Nimphie                 49      Senior Vice President -- Director of Operations of the Bank
Sally A. Peters                 46      Vice President -- Director of Marketing of the Bank
C. Wayne Weaver                 45      Senior Vice President -- Director of Retail Banking of the Bank
 
-------------------------
</TABLE>
(1)       At December 31, 1998


          The principal occupation of each executive officer of the Corporation
and/or the Bank is set forth below.
                                        
          Robert H. Becker joined Community First in November 1987 as the
President and Chief Executive Officer.  Mr. Becker also serves as the
Corporation's President and Chief Executive Officer.  Mr. Becker began his
banking career in 1957, and from 1976 to 1987, Mr. Becker served as President
and Chief Executive Officer of MetroBanc located in Grand Rapids, Michigan.  Mr.
Becker is a past Director of the Federal Home Loan Bank of Indianapolis and a
past Chairman of the Michigan League of Savings Institutions.  He is also past
Chairman and a director of the Lansing Community College Foundation, a member of
the Rotary Club of Lansing, and a Board member and Chairman of the Finance
Committee of the Capital Region Community Foundation.

          John W. Abbott joined Community First in February 1989 as the
Executive Vice President and Chief Operating Officer.  Mr. Abbott also serves as
the Corporation's Executive Vice President and Chief Operating Officer.  In
October 1993, Mr. Abbott also began serving as the Corporation's Secretary.
From 1985 until January 1989, Mr. Abbott was Vice President -- Finance of Union
Bancorp, Inc., located in Grand Rapids, Michigan, a subsidiary of NBD Bancorp,
Inc., and prior to August 1985 he was a C.P.A. with a national accounting firm.
He is currently a director of the Michigan League of Community Banks.

                                       38
<PAGE>
 
          Jane M. Judge McMillian joined Community First in May 1995 as Vice
President -- Director of Human Resources.  Ms. Judge McMillian holds a Masters
Degree in Labor and Industrial Relations and prior to May 1995 served as manager
of human resources for a clinical reference laboratory headquartered in
Southfield, Michigan.

          Rick L. Laber joined Community First in August 1997 as Vice President,
Chief Financial Officer and Treasurer.  Mr. Laber also serves as the
Corporation's Vice President, Chief Financial Officer and Treasurer.  From 1996
until July 1997, Mr. Laber was Vice President -- Branch Coordinator of Flagstar
Bank in Jackson, Michigan.  From 1992 to 1996, Mr. Laber was Senior Vice
President, Chief Financial Officer and Treasurer of Security Savings Bank
located in Jackson, Michigan.  Prior to August 1992, Mr. Laber was a C.P.A. with
a national accounting firm.

          Jack G. Nimphie joined Community First in 1971 as a management trainee
and became Senior Vice President -- Director of Retail Banking in 1986.  In
February 1989 he became Senior Vice President -- Director of Banking Operations,
and in December 1991 he became Senior Vice President -- Director of Operations
and Retail Banking.  In October 1996, Mr. Nimphie became Senior Vice President -
- Director of Operations of the Bank.

          Sally A. Peters joined Community First in February 1994 as Vice
President -- Director of Marketing.  Prior to February 1994, Ms. Peters, for
fifteen years, was responsible for marketing and communications at an insurance
company in Lansing, Michigan.

          C. Wayne Weaver joined Community First in 1975 as a management trainee
and became Senior Vice President -- Director of Corporate Planning in 1986.  In
December 1989 he became Senior Vice President -- Director of Retail Banking and
Investments, and in December 1991 he became Senior Vice President -- Director of
Finance.  In October 1993, Mr. Weaver became Treasurer of the Corporation and
Senior Vice President -- Director of Corporate Planning and Treasurer of the
Bank.  In October 1996, Mr. Weaver became Senior Vice President -- Director of
Retail Banking of the Bank.

Item 2.  Properties
-------------------

          Community First owns all of its offices, except as noted.  The
following table sets forth the location of the Bank's offices, as well as
certain additional information relating to those offices as of December 31,
1998.
<TABLE>
<CAPTION>
                                                                     Net Book
                                          Year      Approximate      Value at
                                        Facility    Office Area    December 31,
                                         Opened    (Square Feet)     1998 (1)
                                        --------   -------------   -------------
<S>                                     <C>        <C>             <C>
Community First Main Office:
112 East Allegan Street
Lansing, Michigan (2)................       1922         46,368      $3,901,770
 
Branch Offices:
101 East Lawrence Street
Charlotte, Michigan..................       1981          1,700         187,418
 
6333 West St. Joseph Street
Delta Township, Michigan.............       1986          1,200         358,367
 
250 East Saginaw Street
East Lansing, Michigan...............       1977          2,100         408,805
 
401 South Bridge Street
Grand Ledge, Michigan................       1966          1,700         320,781
</TABLE> 

                                       39
<PAGE>
 
<TABLE> 
<CAPTION> 

                                                      Net Book
                                          Year       Approximate       Value at
                                        Facility     Office Area      December 31,
                                         Opened     (Square Feet)       1998 (1)
                                        --------    -------------     -----------
<S>                                       <C>        <C>               <C>  
4440 West Saginaw Street
Lansing, Michigan....................       1977          2,100         421,954
 
6510 South Cedar Street
Lansing, Michigan (3)................       1974          3,000         506,433
 
606 West Columbia Street
Mason, Michigan......................       1971          1,700         335,697
 
301 North Clinton Avenue
St. Johns, Michigan..................       1978          2,700         384,681
 
225 West Grand River Avenue
Williamston, Michigan................       1978          1,500         306,638
 
121 West Allegan Street
Lansing, Michigan (4)................       1922         16,800
 
5620 Pennsylvania Avenue
Lansing, Michigan....................       1970          1,250         144,841
 
100 North Dexter Street
Ionia, Michigan......................       1975          1,248          88,859
 
709 S. U.S. 27
St. Johns, Michigan..................       1981          1,454         211,324
 
2801 E. Grand River
Lansing, Michigan....................       1978          1,454         165,346
 
13007 S. U.S. 27
DeWitt, Michigan.....................       1994          2,420       1,092,887
 
515 E. Grand River Avenue, Suite E
East Lansing, Michigan (5)...........       1996          2,500          59,361
 
4815 Okemos Road
Okemos, Michigan.....................       1997          2,635       1,048,804
 
Ledges Commerce Park, Unit 2A
Grand Ledge, Michigan (6)............       1996                        198,735
</TABLE>

_______________
(1) Represents the book value of land, building, fixtures, equipment and
    furniture at the premises and owned or leased by the Bank.
(2) This location has attached buildings with an additional 2,444 square feet
    rented as retail space.
(3) Building has a second floor with an additional 2,200 square feet rented as
    office space.
(4) This office was closed effective May 1, 1992, and sold June 30, 1998.
(5) Branch office was opened April 29, 1996. Property is leased and net book
    value at December 31, 1998 represents building improvements and furniture
    and equipment. This office was subsequently closed February 20, 1999.
(6) Net book value at December 31, 1998 represents the purchase price of land
    which is held for future development of a branch office.

                                       40
<PAGE>
 
          The net book value of the Bank's investment in premises and equipment
totaled $10.3 million at December 31, 1998.  For additional information
regarding the Bank's premises and equipment, see Note 9 of the Notes to
Consolidated Financial Statements in the Annual Report.


Item 3.  Legal Proceedings
--------------------------

          There are various claims and lawsuits in which the Bank is
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Bank holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Bank's business.  Management of the Corporation and the Bank does not consider
any of these legal proceedings material to the Corporation's or the Bank's
financial condition or results of operations.


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

          No matters were submitted to a vote of security holders during the
fourth quarter of 1998.


                                    PART II


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

          The information contained in this Section captioned "Market
Information" in the Annual Report is hereby incorporated by reference.


Item 6.  Selected Financial Data
--------------------------------

          The information contained in the section "Selected Consolidated
Financial and Other Data" in the Annual Report is hereby incorporated by
reference.


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

          The information contained in the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Annual Report
is hereby incorporated by reference.


Item 7a. Qualitative and Quantitative Disclosures About Mark Risk
------------------------------------------------------------------

          The information contained in the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Annual Report
is hereby incorporated by reference.


Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

          The financial statements contained in the Annual Report which are
listed in Item 14 herein are incorporated herein by reference.

                                       41
<PAGE>
 
Item 9.  Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------

          Not applicable.


                                   PART III
                                        
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------

          Information concerning the Directors of the Corporation and compliance
with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the
section captioned "Proposal 1 -- Election of Directors" in the Proxy Statement,
which is incorporated herein by reference.

          Information concerning the Executive Officers of the Corporation is
set forth under "Item 1.  Business --- Executive Officers" which is incorporated
herein by reference.


Item 11. Executive Compensation
--------------------------------

          The information required by this item is incorporated herein by
reference to the section captioned "Proposal 1 -- Election of Directors --
Executive Compensation" in the Proxy Statement.


Item 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

          The information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and Principal Holders
Thereof" and "Proposal 1 -- Election of Directors" in the Proxy Statement, and 
to "Item 1 -- Business -- Recent Developments" in this Form 10-K.


Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------

          The information required by this item is incorporated herein by
reference to the section captioned "Proposal 1 -- Election of Directors --
Transactions with Management" in the Proxy Statement.


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

          (a)(1) Financial Statements - The following financial statements are
                 --------------------                                         
incorporated by reference to Item 8 of this Annual Report on Form 10-K:

          1.  Consolidated Statements of Financial Condition at December 31,
              1998 and 1997 
          2.  Consolidated Statements of Operations for the Years Ended December
              31, 1998, 1997 and 1996
          3.  Consolidated Statements of Stockholders' Equity and Other
              Comprehensive Income for the Years Ended December 31, 1998, 1997
              and 1996
          4.  Consolidated Statements of Cash Flows for the Years Ended December
              31, 1998, 1997 and 1996
          5.  Notes to Consolidated Financial Statements
          6.  Independent Auditors' Report

          (a)(2) Financial Statement Schedules - All financial statement 
            -----------------------------                                    
schedules have been omitted as the required information is either inapplicable
or included in the Consolidated Financial Statements or related notes.

                                       42
<PAGE>
 
          (a)(3) Exhibits - The following exhibits are either filed as part of 
                 --------         
                 this report or are incorporated herein by reference:

          3.1    Certificate of Incorporation of CFSB Bancorp, Inc.
                 (incorporated by reference to Exhibit 3.1 to the Corporation's
                 registration statement on Form S-1 filed with the SEC on
                 January 9, 1990)

          3.2    Bylaws of CFSB Bancorp, Inc. (incorporated by reference to
                 Exhibit 3.2 to the Corporation's registration statement on Form
                 S-1 filed with the SEC on January 9, 1990)

          10.1   Stock Option Plan of CFSB Bancorp, Inc. (incorporated by
                 reference to Exhibit 10.3 to the Corporation's registration
                 statement on Form S-1 filed with the SEC on January 9, 1990)

          10.2   Employment Agreements between Community First, A Federal
                 Savings Bank and Robert H. Becker and John W. Abbott
                 (incorporated by reference to Exhibit 10.2 to Post-Effective
                 Amendment No. 2 to the Corporation's registration statement on
                 Form S-4 filed with the SEC on May 21, 1990)

          10.3   Merger Conversion Agreement with Union Federal Savings dated
                 June 12, 1991 (incorporated by reference to Exhibit 28.2 to the
                 Corporation's current report on Form 8-K filed with the SEC on
                 June 14, 1992)

          10.4   Agreement and Plan of Merger by and between CFSB Bancorp, Inc.
                 and Old Kent Financial Corporation, dated February 24, 1999
                 (incorporated by reference to Exhibit 2.1 to the Corporation's
                 Current Report on Form 8-K filed with the SEC on March 1, 1999)

          10.5   Stock Option Agreement by and between CFSB Bancorp, Inc. and
                 Old Kent Financial Corporation, dated February 24, 1999
                 (incorporated by reference to Exhibit 2.2 to the Corporation's
                 Current Report on Form 8-K filed with the SEC on March 1, 1999)

          10.6   1994 Stock Option and Incentive Plan

          10.7   Employment Agreement between Community First Bank and Rick L.
                 Laber

          10.8   1998 Management Incentive Compensation Plan

          13     1998 Annual Report to Stockholders

          21     Subsidiaries

          23     Consent of KPMG LLP

          27     Financial Data Schedule


          (b)    Reports on Form 8-K.  The Registrant did not file any Current 
                 -------------------        
                 Reports on Form 8-K during the last quarter of the fiscal year
                 ending December 31, 1998.

          (c)    Exhibits - All exhibits to this report are attached or 
                 --------     
                 incorporated by reference as stated above.

          (d)    Financial Statement Schedules - None.
                 -----------------------------        

                                       43
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 16, 1999.

                                        CFSB BANCORP, INC.



                                      By: /s/ Robert H. Becker
                                          -----------------------------
                                          Robert H. Becker
                                          President and Chief Executive Officer
                                          (Duly Authorized Representative)



     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 16, 1999.


/s/ Robert H. Becker                /s/ John W. Abbott
-----------------------------       -------------------------------
Robert H. Becker                    John W. Abbott
President and                       Executive Vice President, Chief
Chief Executive Officer             Operating Officer and Secretary
(Principal Executive Officer        (Duly Authorized Representative)
and a Director)


/s/ James L. Reutter                /s/ Rick L. Laber
-----------------------------       -------------------------------
James L. Reutter                    Rick L. Laber
Chairman of the Board               Vice President, Chief Financial Officer 
                                    and Treasurer
(Director)                          (Principal Financial and Accounting Officer)


/s/ Cecil Mackey
-----------------------------       -------------------------------
Cecil Mackey                        David H. Brogan
(Director)                          (Director)


/s/ J. Paul Thompson, Jr.           /s/ William C. Hollister
-----------------------------       -------------------------------
J. Paul Thompson, Jr.               William C. Hollister
(Director)                          (Director)


/s/ Henry W. Wolcott, IV
-----------------------------
Henry W. Wolcott, IV
(Director)

<PAGE>
 
                               INDEX TO EXHIBITS
                                        
Exhibit
-------

    3.1 *       Certificate of Incorporation of CFSB Bancorp, Inc.

    3.2 *       Bylaws of CFSB Bancorp, Inc.

    10.1 *      Stock Option Plan of CFSB Bancorp, Inc.

    10.2 **     Employment Agreements between Community First, A Federal Savings
                Bank and Robert H. Becker and John W. Abbott.

    10.3 ***    Merger Conversion Agreement with Union Federal Savings dated
                June 12, 1991.

    10.4 ****   Agreement and Plan of Merger by and between CFSB Bancorp, Inc.
                and Old Kent Financial Corporation, dated February 24, 1999

    10.5 *****  Stock Option Agreement by and between CFSB Bancorp, Inc. and Old
                Kent Financial Corporation, dated February 24, 1999

    10.6        1994 Stock Option and Incentive Plan

    10.7        Employment Agreement between Community First Bank and Rick L.
                Laber

    10.8        1998 Management Incentive Compensation Plan

    13          1998 Annual Report to Stockholders

    21          Subsidiaries

    23          Consent of KPMG LLP

    27          Financial Data Schedule
_____________
*      Incorporated by reference to the Corporation's registration statement on
       Form S-1 filed with the SEC on January 9, 1990.

**     Incorporated by reference to Exhibit 10.2 to Post-Effective Amendment No.
       2 to the Corporation's registration statement on Form S-1 filed with the
       SEC on May 21, 1990.

***    Incorporated by reference to Exhibit 28.2 to the Corporation's current
       report on Form 8-K filed with the SEC on June 14, 1992.

****   Incorporated by reference to Exhibit 2.1 to the Corporation's Current
       Report on Form 8-K filed with the SEC on March 1, 1999.

*****  Incorporated by reference to Exhibit 2.2 to the Corporation's Current
       Report on Form 8-K filed with the SEC on March 1, 1999.

                                       1