<PAGE>

                     SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


                   FOR THE FISCAL YEAR ENDED December 31, 1996

                         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. [ ]

      As of March 14, 1997, 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 ($21.25 per share), was approximately  $90,122,334 (for
purposes of this  calculation,  directors and executive  officers are treated as
affiliates).

      As of March 14, 1997,  there were issued and outstanding  4,695,086 shares
of the  registrant's  common  stock,  of  which  454,035  shares  were  held  by
affiliates.


                      DOCUMENT INCORPORATED BY REFERENCE

Portions of Proxy  Statement for the 1997 Annual  Meeting of  Stockholders  (the
"Proxy Statement"). (Part III)

<PAGE>




                              CFSB BANCORP, INC.

                              INDEX TO FORM 10-K
                      FISCAL YEAR ENDED DECEMBER 31, 1996

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 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


<PAGE>



                                    PART I
ITEM 1.  BUSINESS

GENERAL

      CFSB Bancorp, Inc. CFSB Bancorp, Inc. (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, 1996, 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 subsidiary. The holding company structure permits the
Corporation to expand the financial services currently offered through Community
First and its  subsidiary.  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,  1996,  the  Corporation  had total  assets of $829.8  million and
stockholders' equity of $62.5 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.  See  "Item 1.
Business -- Regulation of the Bank" and " -- Recent Development."

      Community First conducts its operations through its main office located in
Lansing,  Michigan  and through 18 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.

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 the southwest  corner of 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,  1996,  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, 1996, $598.2 million,  or 80.62%, 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 $474.9 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, $39.1 million, $77.3 million and
$6.9 million  represented  loans on  properties  located in Michigan,  Texas and
Florida,   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 recent years, in order to reduce the Bank's  vulnerability  to volatile
interest rate changes, the Bank has implemented 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
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.  When the spread  between fixed and  adjustable  mortgage  interest
rates was relatively wide in the first half of 1995,  mortgage loan originations
reflected  customer  preferences  in the Bank's market area for  adjustable-rate
loans  which are  retained in the Bank's  portfolio.  In the first half of 1996,
however,  the spread  between fixed and  adjustable  mortgage rates narrowed and
there was a  proportionately  higher  concentration of fixed-rate  mortgage loan
applications  and  subsequent  closings.  Consequently,  there has been a higher
level  of  loan  sales  in  1996.  During  1996,  the  Bank  purchased  from  an
unaffiliated  financial institution $31.7 million of loans consisting of one- to
four-family residential, fixed- and adjustable-rate, medium-term mortgage loans.
The Bank  purchases  residential  loans to  supplement  and  complement  its own
mortgage loan production; purchases are also dependent upon product availability
and the Bank's liquidity  position.  In addition,  during 1996,  adjustable-rate
loans  originated and purchased which primarily  reprice after three,  five, and
seven  years were  retained  in the Bank's  portfolio.  These  originations  and
purchases  were funded  principally  with a  combination  of proceeds  from loan
repayments,   net  deposit   inflows,   short-term   adjustable-rate   advances,
maturities,  calls  and  sales of  investment  securities,  and  mortgage-backed
security repayments and sales. At December 31, 1996, 64.62% of the Bank's total

                                      2

<PAGE>



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, 1996, the Bank's income-producing property loans
of  $84.0  million  and  consumer  loans  of $54.6  million,  respectively,  had
increased from $75.0 million and $44.2 million,  the respective loan balances at
December 31, 1995. The growth in the Bank's  income-producing  property loans is
attributable  to the generally lower interest rate  environment  during 1996 and
economic expansion in the Bank's primary market area.  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, 1996, the
Bank's  loans  contractually  delinquent  90 days or more and real estate  owned
totaled $2.0 million, or 0.24%, of total assets.

      In 1994, the Bank formed a small business commercial loan department.  The
business loan  department  was  developed to serve 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 $5.0 million and less than 100 employees.
The Bank believes it can satisfy the financial needs of small business owners by
assisting  with both their  credit and  deposit  needs.  Also in 1994,  a formal
credit  department was formed and an active call program was  initiated.  During
1996, the commercial business loan department originated 42 loans for a total of
$3.7 million.  Additional  funds of $1.3 million were available for disbursement
at  year-end  1996 on the  Bank's  commercial  business  loan  portfolio.  As of
December 31, 1996,  commercial  business loans totaled $4.6 million  compared to
$3.2 million at December 31, 1995.

      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.

                                      3

<PAGE>
<TABLE>
<CAPTION>



                                                                                 At December 31,
                                    ------------------------------------------------------------------------------------------------
                                           1996                 1995                1994                1993               1992
                                    -------------------  -------------------  -----------------  -----------------  ----------------
                                      Amount  Percent      Amount  Percent     Amount  Percent    Amount  Percent    Amount  Percent
                                      ------  -------      ------  -------     ------  -------    ------  -------    ------  -------
                                                                            (Dollars in Thousands)

<S>                                 <C>        <C>       <C>        <C>      <C>        <C>     <C>        <C>      <C>       <C>
First mortgage loans:
  One- to four-family residential.  $553,691   74.63%    $469,820   74.46%   $401,394   75.38%   $267,481   69.13%  $188,619  61.04%
  Income-producing property...        52,584    7.09       57,952    9.19      55,178   10.36      49,435   12.78     50,941  16.49
  FHA-insured and VA-partially
     guaranteed...............         6,404    0.86        7,458    1.18       3,629     .68       4,240    1.10      6,536   2.12
  Construction and development loans:
    One- to four-family residential.  38,072    5.13       30,754    4.87      20,485    3.85      15,129    3.91     11,667   3.77
    Income-producing property.        31,428    4.24       17,060    2.70      11,677    2.19      14,292    3.69     13,982   4.52
                                    --------   -----     --------   -----    --------   -----    --------   -----   --------  -----

     Total first mortgage loans.     682,179   91.95      583,044   92.40     492,363   92.46     350,577   90.61    271,745  87.94

Second mortgage loans.........           510    0.07          571     .09         661     .12         750     .19      1,034    .34

Commercial business loans.....         4,644    0.63        3,195     .51         706     .13         446     .12        278    .09

Consumer loans:
  Home equity.................        36,275    4.89       28,126    4.46      26,048    4.89      22,569    5.83     23,933   7.75
  Educational.................         1,871    0.25        2,329     .37       2,967     .56       2,633     .68      2,931    .95
  Marine and recreational vehicles.    2,192    0.30        2,373     .38       2,420     .45       2,307     .60      1,983    .64
  Land contract...............           254    0.03          349     .05         409     .08         808     .21      1,331    .43
  Auto........................         7,925    1.07        6,542    1.04       2,330     .44       1,842     .47      1,246    .40
  Savings.....................           452    0.06          338     .05         351     .07         458     .12        696    .23
  Mobile home.................         1,519    0.20        1,735     .27       2,144     .40       2,087     .54      1,338    .43
  Other.......................         4,090    0.55        2,379     .38       2,090     .40       2,455     .63      2,481    .80
                                    --------   -----      -------   -----    --------   -----     -------   -----    -------  -----

     Total consumer loans.....        54,578    7.35       44,171    7.00      38,759    7.29      35,159    9.08     35,939  11.63
                                    --------   -----      -------   -----    --------   -----     -------   -----     ------  -----

     Total loans receivable...       741,911  100.00%     630,981  100.00%    532,489  100.00%    386,932  100.00%   308,996 100.00%
                                              ======               ======              ======              ======            ======

Less:
  Undistributed portion of loans
    in process................       (18,147)             (15,054)             (8,578)             (7,201)            (5,655)
  Deferred origination fees...        (1,485)              (1,280)             (1,196)             (1,226)            (1,937)
  Unearned income and discount
    on loans..................            --                   --                  --                  --                (79)
  Allowance for loan losses...        (4,564)              (4,363)             (4,124)             (3,847)            (3,837)
                                     -------               ------              ------             -------             ------
     Total loans receivable, net.    717,715              610,284             518,591             374,658            297,488

Mortgage-backed securities, net       27,221               35,156              66,151             107,712            113,925
                                     -------              -------             -------             -------            -------

     Total loans receivable and
       mortgage-backed
       securities, net........      $744,936             $645,440            $584,742            $482,370           $411,413
                                    ========             ========            ========            ========           ========
</TABLE>

                                          4

<PAGE>
<TABLE>
<CAPTION>



                                                                              At December 31,
                                   -------------------------------------------------------------------------------------------------
                                           1996                  1995               1994                1993              1992
                                   -------------------------------------------------------------------------------------------------
                                     Amount   Percent     Amount   Percent    Amount  Percent     Amount  Percent    Amount  Percent
                                   --------   -------    --------  -------   -------  -------   --------  -------    ------  -------
                                                                           (Dollars in Thousands)
<S>                                <C>         <C>       <C>        <C>      <C>      <C>        <C>        <C>      <C>      <C>
Fixed-rate loans:
  One-to four-family residential...$192,972    26.01%    $201,971   32.01%   $211,445  39.71%    $163,518   42.26%   $89,776  29.05%
  Income-producing property........  32,848     4.43       34,693    5.50      30,247   5.68       30,936    8.00     34,751  11.25
  FHA-insured and VA-partially
    guaranteed.....................   2,797     0.37        3,560     .56       3,629    .68        4,240    1.10      6,536   2.12
  Construction and development:
    One- to four-family residential   3,494     0.47          805     .13       2,691    .51        8,726    2.25      2,515    .81
    Income-producing property......   4,878     0.66        7,591    1.20       5,557   1.04        7,395    1.91      8,575   2.77
                                   --------    -----     --------   -----    --------  -----    ---------   -----   --------  -----
    Total first mortgage loans....  236,989    31.94      248,620   39.40     253,569  47.62      214,815   55.52    142,153  46.00

 Second mortgage loans............      399     0.06          456     .07         609    .11          750     .19      1,034    .34
 Commercial business loans........      836     0.11          585     .09         290    .05          145     .04         71    .02
 Other loans......................   24,274     3.27       20,097    3.18      16,687   3.14       14,959    3.86     12,230   3.96
                                   --------    -----     --------   -----     -------  -----    ---------   -----   --------  -----
    Total fixed-rate loans........  262,498    35.38      269,758   42.74     271,155  50.92      230,669   59.61    155,488  50.32
                                   --------    -----     --------   -----     -------  -----    ---------   -----   --------  -----

Adjustable-rate loans:
 First mortgage loans:
  One- to four-family residential.. 360,719    48.62      267,849   42.45     189,949  35.67      103,963   26.87     98,843  31.99
  Income-producing property........  19,736     2.66       23,259    3.69      24,931   4.68       18,499    4.78     16,190   5.24
  FHA-insured and VA-partially
    guaranteed.....................   3,607     0.49        3,898     .62          --     --           --      --         --     --
  Construction and development:
    One- to four-family residential. 34,578     4.66       29,949    4.74      17,794   3.34        6,403    1.66      9,152   2.96
    Income-producing property....... 26,550     3.58        9,469    1.50       6,120   1.15        6,897    1.78      5,407   1.75
                                   --------    -----     --------   -----    --------  -----     --------   -----   --------  -----
    Total first mortgage loans..... 445,190    60.01      334,424   53.00     238,794  44.84      135,762   35.09    129,592  41.94

 Second mortgage loans.............     111     0.01          115     .02          52    .01
 Commercial business loans.........   3,808     0.52        2,610     .42         416    .08          301     .08        207    .07
 Other loans.......................  30,304     4.08       24,074    3.82      22,072   4.15       20,200    5.22     23,709   7.67
                                   --------    -----     --------   -----    --------  -----     --------   -----    -------  -----
    Total adjustable-rate loans.... 479,413    64.62      361,223   57.26     261,334  49.08      156,263   40.39    153,508  49.68
                                   --------    -----     --------   -----    --------  -----     --------   -----    -------  -----
    Total loans receivable.... ...  741,911   100.00%     630,981  100.00%    532,489 100.00%     386,932  100.00%   308,996 100.00%
                                              ======               ======             ======               ======            ======

Less:
  Undistributed portion of loans
   in process...................... (18,147)              (15,054)             (8,578)             (7,201)
  Deferred origination fees........  (1,485)               (1,280)             (1,196)             (1,226)            (1,937)
  Unearned income and discount
    on loans.......................      --                    --                  --                  --                (79)
  Allowance for loan losses........  (4,564)               (4,363)             (4,124)             (3,847)            (3,837)
                                    -------               -------             -------             -------            -------
     Total loans receivable, net... 717,715               610,284             518,591             374,658            297,488

Mortgage-backed securities:
  Fixed rate mortgage-backed
 securities........................                        22,159              51,099              88,856             88,935
  Adjustable rate mortgage-backed
    securities.....................                        12,997              15,052              18,856             24,990
                                    -------                ------              ------             -------             ------
      Total mortgage-backed
        securities, net............  27,221                35,156              66,151             107,712            113,925
                                    -------                ------              ------             -------            -------
     Total loans receivable and
       mortgage-backed securities,
       net.........................$744,936              $645,440            $584,742            $482,370           $411,413
                                   ========              ========            ========            ========           ========
</TABLE>

                                          5

<PAGE>



      The following  table sets forth the  contractual  maturities of the Bank's
loan and mortgage-backed  securities  portfolios at December 31, 1996. 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                                     Total Loans
                                            FHA-       -----------------                                       and
                     One-to    Income-  Insured and   One- to     Income-      Second             Mortgage-  Mortgage-
                  Four-Family Producing VA-Partially Four-Family Producing  Mortgage and  Total    Backed     Backed
                  Residential Property   Guaranteed  Residential Property   Other Loans   Loans  Securities  Securities
                  ----------- --------   ----------  ----------- --------   -----------   -----  ----------  ----------
                                                              (In Thousands)

<S>                  <C>      <C>         <C>         <C>        <C>         <C>         <C>       <C>        <C>
Maturing During
 Year(s) Ended
  December 31,
1997................ $21,928  $17,132     $  94       $4,375     $14,767     $24,527     $82,823   $1,021     $83,844
1998................  23,370    8,576       100          603       8,289      12,566      53,504    1,102      54,606
1999................  23,692    1,955       109          399       3,805       9,084      39,044    1,191      40,235
2000-2001...........  44,165    3,800       245          885       1,177       6,438      56,710    2,649      59,359
2002-2006...........  96,710    7,466       710        2,832       1,987       5,633     115,338    6,425     121,763
2007-2011...........  91,398    6,366       992        4,004       1,389       1,402     105,551    6,592     112,143
2012 and following.. 252,428    7,289     4,154       24,974          14          82     288,941    8,241     297,182
                     -------   ------     -----       ------       -----       -----     -------    -----     -------
                    $553,691  $52,584    $6,404      $38,072     $31,428     $59,732    $741,911  $27,221     769,132
                    ========  =======    ======      =======     =======     =======    ========  =======     -------
Less:
  Undistributed portion of loans in process.............................................................     $(18,147)
  Deferred origination fees.............................................................................       (1,485)
  Allowance for loan losses.............................................................................       (4,564)
    Total loans receivable, net.........................................................................     $744,936
</TABLE>



    At December 31, 1996,  the total loans and  mortgage-backed  securities  due
after December 31, 1997,  which had fixed interest rates were $242.5 million and
$15.4  million,   respectively,   while  the  total  loans  and  mortgage-backed
securities due after such date, which had adjustable  interest rates were $416.6
million and $10.8 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, 1996,
$560.1 million, or 75.49%, of the Bank's total loan portfolio consisted of loans
secured by one- to  four-family  residences.  The  Bank's  loan  portfolio  also
includes  $38.1 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, 1996,  approximately  80.62% 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. From January
1989 through early 1993, it had generally been the Bank's  intention to sell all
newly  originated  30-year and  20-year  fixed-rate  loans and  certain  15-year
fixed-rate  loans  in the  secondary  market  as soon as  possible  after  their
origination.  Newly originated loans held for sale are held at the lower of cost
or market value, as evaluated on a monthly basis, until their sale. Beginning in
the first  quarter of 1993,  however,  the Bank  decided to retain in  portfolio
fixed-rate  mortgage loans with maturities of 15 years or less, and in July 1993
the Bank decided to retain in portfolio substantially all fixed-rate residential
mortgage loan production.  FHLB advances were primarily used to fund the 30-year
fixed-rate  residential  mortgage  originations  and to assist in  managing  the
interest  rate  risk  associated  with  holding  these   longer-term   financial
instruments.  Beginning in the second quarter of 1994, the Bank once again began
selling  long-term,  fixed-rate,  residential  mortgage loan originations in the
secondary  market as a result of the Bank being unable to obtain FHLB borrowings
at acceptable  interest rate spreads.  Although the Bank's practices during 1995
continued to include selling longer-term  fixed-rate mortgage loan originations,
low levels of sales occurred as customer demand was for  adjustable-rate  rather
than fixed-rate mortgage loans. In 1996, the spread between fixed and adjustable
mortgage rates narrowed and there was a proportionately  higher concentration of
fixed-rate mortgage loan originations. Consequently, there was a higher level of
sales in 1996.

    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.  Loans which converted to a fixed-rate were sold
to the FHLMC until early 1993, at which time the Bank commenced  retaining these
loans in portfolio. Since early 1993, loans converted to a fixed-rate with terms
of 30 years were funded with FHLB  advances to assist in managing  the  interest
rate risk associated with holding these longer-term financial instruments.  With
the rise in  interest  rates in 1994,  the Bank was unable to obtain  borrowings
from the FHLB to fund its long-term,  fixed-rate,  residential mortgage loans at
spreads  acceptable to the Bank.  Therefore,  beginning in the second quarter of
1994 and continuing to the present time, the Bank started  selling  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 $398.9 million,  or 53.77%,  of the Bank's total loan portfolio at
December 31, 1996.

    Since  mid-1987,  during  periods of increasing  or higher  market  interest
rates,  the  Bank  has  been  more  successful  in  originating  adjustable-rate
mortgages by offering  favorable rates and origination fees in comparison to the
rates  and  fees  charged  on  fixed-rate  mortgage  loans.  In  1994,  the Bank
introduced a five-year  adjustable-rate  mortgage into the market.  This product
was added as it became apparent customers of the Bank wanted the

                                      7

<PAGE>



flexibility  of  an   adjustable-rate   mortgage  with  a  longer  term  between
adjustments.  Consistently, during 1994, as interest rates increased, the demand
for adjustable-rate mortgage loans also rose. During 1995, market interest rates
were  comparatively  lower and a flatter yield curve existed as evidenced by the
narrow spread between 30-year  fixed-rate and three-year  Treasury rates.  These
two factors  suggest  fixed-rate  mortgage  loans  rather  than  adjustable-rate
mortgage  loans  may have  been  more  attractive  to many  borrowers,  however,
customer preference in the Bank's local market favored adjustable-rate  mortgage
loans  throughout most of 1995. The relatively flat yield curve during the first
quarter  of  1996  resulted  in a  shift  toward  more  customers  exhibiting  a
preference for fixed-rate mortgage loans, most of which were originated for sale
in the secondary market. As the slope of the yield curve began to steepen in the
subsequent  quarters,  customer  preferences  in the Bank's  local  market again
favored  adjustable-rate  mortgage loans. During 1996, the Bank originated $23.4
million in fixed rate  mortgage  loans,  $17.4 million of which were sold in the
secondary   mortgage   market,   and  $141.2  million  in  adjustable  rate  and
shorter-term fixed-rate (15 years or less) mortgage loans, of which $6.9 million
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.
Beginning in early 1993, the Bank began retaining 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 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.  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

                                      8

<PAGE>



properties  constituted  approximately  $52.6 million,  or 7.09%,  of the Bank's
total loans at December 31, 1996. 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 $8.7 million,  although the majority of the Bank's  commercial and
multi-family  real estate  loans have been  originated  in amounts  ranging from
$250,000 to $2.5 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
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 $4.1 million at December 31, 1996, and
secured by a motel,  represents the Bank's largest single commercial real estate
loan to one  borrower.  At December 31, 1996,  the Bank's 10 largest  commercial
real estate loans, with balances  outstanding  ranging from $2.0 million to $4.1
million, totaled $28.6 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 $69.5
million or 9.37% of the Bank's total loan  portfolio  at December  31, 1996.  Of
that  total,  $38.1  million  were for the  construction  of one-to  four-family
residential properties.  Construction loans have been made in amounts up to $8.7
million. At December 31, 1996, the Bank had $9.1 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

                                      9

<PAGE>



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, 1996,  the
Bank had no construction loans outstanding which were  non-performing and $7,000
of construction loans classified as real estate owned.

    CONSUMER  LOANS.  The Bank has offered  consumer  loans  since  1983.  As of
December 31, 1996,  total consumer loans were $54.6  million,  or 7.35%,  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.

    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 staff loan committee is authorized to approve residential  mortgage loans of
up to $214,600.  Loans between $214,600 and $500,000 require the approval of the
Bank's  Director of Lending  Operations or Residential  Lending  Manager and the
approval of the Bank's  President or Chief Lending  Officer.  Loans in excess of
$500,000 or multiple loans to

                                      10

<PAGE>



the same borrower in an aggregate amount exceeding  $500,000 must be approved by
the Bank's Senior 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. Since the second quarter of 1994, the Bank has sold all
longer-term, fixed-rate, residential mortgage loan originations in the secondary
market upon  origination or conversion  from an  adjustable-rate  mortgage loan.
Although the Bank's  practices during 1995 and 1996 continued to include selling
longer-term fixed-rate mortgage loan originations,  low levels of sales occurred
in 1995 as  customer  demand  was for  adjustable-rate  rather  than  fixed-rate
mortgage  loans.  In 1996,  however,  the spread  between  fixed and  adjustable
mortgage rates narrowed and there was a proportionately  higher concentration of
fixed-rate mortgage loan originations. Consequently, there was a higher level of
loan sales in 1996.

    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%.

    Effective January 1, 1996, the Bank adopted the provisions of SFAS 122. This
statement  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 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
includes  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.

    The ongoing impact of SFAS 122 will depend upon demand in the Bank's lending
market for  fixed-rate  residential  mortgage  loans  salable  in the  secondary
mortgage market. The Bank capitalized  $234,000 of originated mortgage servicing
rights during 1996, of which $43,000 has been amortized. No valuation allowances
for capitalized  originated mortgage servicing rights were considered  necessary
as of December 31, 1996.  The balance at December 31, 1996, of loans sold during
the year was $30.1 million.

    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
1996, the Bank, to supplement  and complement its own mortgage loan  production,
purchased  from an  unaffiliated  financial  institution  $31.7 million of loans
consisting   principally   of  one-  to  four-family   residential,   fixed  and
adjustable-rate, medium term mortgages.


                                      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
                                             ---------------------------------
                                                1996         1995        1994
                                               ------       ------      ------
                                                      (In Thousands)
<S>                                          <C>           <C>         <C>
Originations:
 Fixed-rate loans:
  First mortgage loans:
   One- to four-family residential.........  $36,990       $18,507     $23,115
   Income-producing property...............      758          337          188
   FHA-insured and VA-partially
      guaranteed...........................      217          141          362
   Construction and development:
     One- to four-family residential.......    8,456          856       14,339
     Income-producing property.............      --           314        1,822
  Commercial business loans................      634          568          --
  Other loans..............................   18,706       12,788       10,413
                                              ------       ------       ------
    Total fixed-rate loans.................   65,761       33,511       50,239
                                              ------       ------       ------

 Adjustable-rate loans:
  First mortgage loans:
   One- to four-family residential.........   68,063       40,183       40,056
   Income-producing property...............      610        4,380        4,166
   Construction and development:
     One- to four-family residential.......   50,889       47,784       42,096
     Income-producing property.............   18,630        9,052        2,742
  Second mortgage loans....................       --           60           --
  Commercial business loans................    3,049        2,566          252
  Other loans..............................   19,600       14,015       12,304
                                              ------       ------       ------
    Total adjustable-rate loans............  160,841      118,040      101,616
                                             -------      -------      -------
    Total loans originated.................  226,602      151,551      151,855
                                             -------      -------      -------

Purchases:
 Loans:
  Fixed-rate...............................    2,905        4,860       31,937
  Adjustable-rate..........................   28,829       38,732       42,977
                                              ------       ------       ------
    Total purchased........................   31,734       43,592       74,914
                                              ------       ------       ------

Sales:
 Fixed-rate:
  Mortgage loans...........................   31,246       13,515        3,138
  Student loans............................      739        1,293        1,102
  Mortgage-backed securities...............       --       19,587           --
                                              ------       ------       ------
    Total sales............................   31,985       34,395        4,240
                                              ------       ------       ------

Principal repayments:
  Loans....................................  115,079       84,278       76,077
  Mortgage-backed securities...............    7,935       11,408       41,561
                                              ------       ------       ------
    Total principal repayments.............  123,014       95,686      117,638
                                             -------       ------      -------

Transfers to real estate owned.............     (342)        (265)        (895)
Transfers from real estate owned...........       --        2,700           --
Decrease due to other items, net...........   (3,499)      (6,799)      (1,624)
                                              ------       ------       ------
Net increases..............................  $99,496      $60,698     $102,372
                                             =======      =======     ========
</TABLE>

                                      12

<PAGE>



      LOAN SERVICING AND LOAN FEES. As of December 31, 1996, Community First was
servicing  approximately  $156.6 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  .28%. 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.

      In accordance with Statement of Financial  Accounting Standards No. 91, 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
the issuance of a loan  commitment.  The period between the applicant  locking a
rate and the Bank's issuance of a commitment may be up to 21 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 through
the  purchase of  mandatory  commitments  at the time a loan rate is locked or a
loan commitment is made.  Funding  generally occurs at or shortly after the time
the interest rate is locked.  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, 1996, the Bank's
outstanding mortgage commitments totaled approximately $19.3 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.
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 directly to
income or against the appropriate allowance account.


                                      13

<PAGE>



      As of December 31, 1996, 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,
1996,  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, 1996. The table represents the total remaining
principal  balances of the related loans 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  100    $4,423     19     $ 922      16     $ 892
Income-producing property....     --        --      1         5       1       359
FHA-insured and VA-partially
  guaranteed.................      6       277      1        74       3       183
Construction and development:
 One- to four-family residential   3       218      1       142      --        --
 Income-producing property..      --        --     --        --      --        --
 Land development............      1       400     --        --      --        --
Commercial...................      1        10     --        --       3       195
Other........................     52       400     11        95      13       158
                               -----    ------   ----     -----   -----     -----
  Total......................    163    $5,728     33    $1,238      36    $1,787
                               =====    ======   ====    ======   =====    ======

   Percentage of total assets             0.69%            0.15%             0.21%
                                        ======            =====             =====

</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.  At December 31,
1996, the Bank had no loans which were "troubled debt restructurings" as defined
in Statement of Financial Accounting Standards No. 15.
<TABLE>
<CAPTION>

                                                   At December 31,
                                     ------------------------------------------
                                      1996     1995     1994     1993      1992
                                     ------   ------   ------   ------    -----
                                                (Dollars in Thousands)
<S>                                <C>      <C>      <C>      <C>       <C>

Non-accruing loans:
 One- to four-family residential
   mortgages...................... $  892   $    68  $   108  $   571   $   937
 Income-producing property........    359        --       --        1       322
 FHA-insured and VA-partially
   guaranteed.....................    183       253      192      140       357
 Construction and development.....     --        --       --      182        --
 Commercial.......................    195        --       --       --        --
 Other............................    158        28       93      160       472
                                   ------   -------  -------  -------   -------
   Total.......................... $1,787   $   349  $   393  $ 1,054   $ 2,088
                                   ======   =======  =======  =======   =======

   Percentage of total assets.....   0.21%     0.05%    0.05%    0.16%     0.33%
                                   ======   =======  =======  =======   =======

Real estate owned:
 One- to four-family residential
   mortgages...................... $  205   $   238  $   139  $ 1,046   $ 1,100
 Income-producing property........     --        --    1,700    2,380     2,579
 Construction and development.....      7         7      981    1,060     1,427
                                   ------   -------  -------  -------   -------
   Total.......................... $  212   $   245  $ 2,820  $ 4,486   $ 5,106
                                   ======   =======  =======  =======   =======

   Percentage of total assets.....   0.03%     0.03%    0.39%    0.67%     0.80%
                                   ======   =======  =======  =======   =======

   Total non-accruing loans and real
     estate owned................. $1,999   $   594  $ 3,213  $ 5,540   $ 7,194
                                   ======   =======  =======  =======   =======

Percentage of total assets........   0.24%     0.08%    0.44%    0.83%     1.13%
                                   ====== =========  =======  =======   =======

</TABLE>


      Loans on which  the  accrual  of  interest  was  discontinued  or  reduced
amounted to  $1,757,000  at December 31, 1996.  For the year ended  December 31,
1996,  $46,000 of additional  interest  income would have been recorded if these
non-accruing  loans  were  current in  accordance  with  their  original  terms.
Approximately  $118,000 of interest income relating to these loans was collected
and included in interest income for the year ended December 31, 1996.

      Certain other income-producing property 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 $168,000  loan  secured by an apartment  building and a loan  totaling
$393,000 secured by an office building.  These loans were current as of December
31, 1996.

     In May  1993,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment  of a Loan (SFAS  114).  SFAS 114,  as  amended  in  October  1994 by
Statement of Financial Accounting Standards No. 118, Accounting by Creditors for
Impairment of
                                      15

<PAGE>



a Loan - Income Recognition and Disclosures (SFAS 118),  requires impaired loans
to be  measured  based  on the  present  value of  expected  future  cash  flows
discounted at the loan's effective  interest rate or, as a practical  expedient,
at the loan's  observable  market price,  or the fair value of the collateral if
the loan is  collateral  dependent.  This  statement  also  applies to all loans
restructured in troubled debt restructuring involving a modification of terms as
well as clarifies that a creditor  should  evaluate the  collectibility  of both
contractual interest and contractual principal of all receivables when assessing
the need for a loss  accrual.  The Bank adopted the  provisions  of SFAS 114, as
amended by SFAS 118, on a prospective  basis as of January 1, 1995.  Neither the
initial  adoption nor the ongoing  effect of SFAS 114 has had, or is expected to
have, a material  impact on the financial  condition or results of operations of
the Bank.

      Impaired loans as defined by SFAS 114 totaled  $554,000 and $0 at December
31, 1996 and 1995, respectively,  and include 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 114 does not
apply. The  Corporation's  respective  average  investment in impaired loans was
$559,000 and $0 during 1996 and 1995,  respectively.  Interest income recognized
on impaired loans during 1996 and 1995,  totaled  $27,000 and $0,  respectively.
Impaired  loans had specific  allocations  of the  allowance  for loan losses in
accordance with SFAS 114 approximating  $150,000 and $0 at December 31, 1996 and
1995, respectively.

      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, 1996, the Bank
classified  $2.0  million  of  non-accruing  loans  and  real  estate  owned  as
Substandard. Included in the $7.5 million of loans classified as Special Mention
were  $7.0  million  of loans  30-89  days  delinquent.  The Bank had no  assets
classified as Doubtful and no assets classified as Loss as of December 31, 1996.

      ALLOWANCE FOR 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.


                                      16

<PAGE>



      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.


                                      17

<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, 1992...............  $3,837   $ 237     $4,074
Provision for loan losses................    240      330        570
Charges against the allowance:
  One- to four-family residential........   (249)    (100)      (349)
  FHA-insured and VA partially guaranteed    (70)      --        (70)
  Income-producing property..............     --     (436)      (436)
  Consumer...............................    (28)      --        (28)
Recoveries:
  One- to four-family residential........      1       67         68
  FHA-insured and VA partially guaranteed     24       --         24
  Income-producing property..............     --       69         69
  Consumer...............................     92       --         92
                                           -----    -----     ------

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
                                           -----    -----     ------
BALANCE, DECEMBER 31, 1996...............  $4,564   $ 212     $4,776
                                           ======   =====     ======
</TABLE>

      The  ratio  of  net  loan   charge-offs   (recoveries)  to  average  loans
outstanding  during the respective  periods were (.05)% for 1992, .07% for 1993,
(.01)% for 1994, .00% for 1995 and .01% for 1996.

                                      18

<PAGE>



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


                                                                                At December 31,
                                           --------------------------------------------------------------------------------------
                                                               1996                                       1995
                                           -----------------------------------------   ------------------------------------------
                                                       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)............. $593,163   79.80%   $1,252       .21%    $502,374    79.39%    $ 1,401       .28%
  FHA-insured and VA-partially
    guaranteed...............................    6,404     .86        47       .73        7,458     1.18         319      4.28
  Income-producing property (including
    construction and development loans)......   84,012   11.30     2,100      2.50       75,012    11.85%      1,875      2.50%
                                               -------  ------   -------    ------     --------   ------     -------     -----
    Total first mortgage loans...............  683,579   91.96     3,399       .50      584,844    92.42       3,595       .61
Second mortgage loans........................      510     .07         5       .98         571       .09          4        .70
Commercial business loans....................    4,644     .62       325      7.00       3,195       .51         96       3.00
Other loans..................................   54,578    7.35       835      1.53      44,171      6.98%       668       1.51%
                                               ------- -------   -------     -----     -------    ------     ------      -----
    Total.................................... $743,311  100.00%  $ 4,564       .61%    $632,781   100.00%    $4,363        .69%
                                              ========  ======   =======     =====     ========   ======     ======      =====

                                                                                     At December 31,
                                             ---------------------------------------------------------------------------------------
                                                               1994                                            1993
                                             --------------------------------------------  -----------------------------------------
                                                        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)
First mortgage loans:
  One- to four-family residential (including
    construction and development loans and
    loans sold with recourse)(1).............$424,079    79.32%       $1,296        .31%     $285,610     73.25%      $943      .33%
  FHA-insured and VA-partially
    guaranteed...............................   3,629      .68           421      11.60         4,240      1.09        582    13.73
  Income-producing property (including
    construction and development loans)......  66,855    12.50         1,775       2.65        63,727     16.34      1,670     2.62
                                             --------   ------        -----       -----       -------   -------     ------- -------
    Total first mortgage loans............... 494,563    92.50         3,492        .71       353,577     90.68      3,195      .90
Second mortgage loans........................     661      .12             5        .76           750       .19          7      .93
Commercial business loans....................     706      .13            21       2.97           446       .12         14     3.14
Other loans..................................  38,759     7.25           606       1.56        35,159      9.01        631     1.79
                                             -------    ------        ------      -----      -------    -------    -------  -------
    Total....................................$534,689   100.00%       $4,124        .77%     $389,932    100.00%   $ 3,847      .99%
                                             ========   ======        ======      =====      ========    ======    =======  =======

                                             ------------------------------------------
                                                                 1992
                                             ------------------------------------------
                                                        Percent              Allowance
                                                        of Total  Allocation     as %
                                              Balance    Loan         of      of Loan
                                              of Loans  Balance   Allowance   Balance
                                              --------  -------   ---------   -------

First mortgage loans:
  One- to four-family residential (including
    construction and development loans and
    loans sold with recourse)(1).............  $205,086   65.36%      $723       .35%
  FHA-insured and VA-partially
    guaranteed...............................     6,536    2.08        918     14.05
  Income-producing property (including
    construction and development loans)......    64,923   20.69      1,498      2.31
                                                -------  ------     ------   ------
    Total first mortgage loans...............   276,545   88.13      3,139      1.14
Second mortgage loans........................     1,034     .33        .11      1.06
Commercial business loans....................       278     .09          9      3.24
Other loans..................................    35,939   11.45        678      1.89
                                                -------  ------     ------    ------
    Total....................................  $313,796  100.00%    $3,837      1.22%
                                               ========  ======     ======    ======
</TABLE>

     (1) Loans sold with  recourse  totaled $1.4  million,  $1.8  million,  $2.2
million,  $3.0 million and $4.8 million at December 31, 1996,  1995,  1994, 1993
and 1992, respectively.
                                      19

<PAGE>



INVESTMENT ACTIVITIES

      Community  First is  required  under  federal  regulations  to  maintain a
minimum  amount of liquid  assets which can be invested in specified  short-term
securities and is also permitted to make certain other investments. See "Item 1.
Business --  Regulation of the Bank." It has generally  been  Community  First's
policy to maintain a liquidity  portfolio in excess of 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, 1996,  Community First had an
investment portfolio of $31.1 million consisting of U.S.
government, federal agency obligations and corporate notes and bonds.

      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.  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  totaled $0 and $107,000 at December 31, 1996 and 1995,
respectively.  Amortization of the loss as interest  expense totaled $107,000 in
1996 and $109,000 in 1995.

      During the years ended  December 31, 1996,  1995 and 1994, the cost of the
Bank's  interest rate exchange  agreements was $107,000,  $109,000 and $568,000,
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 115")  addresses the
accounting and reporting for equity securities having readily  determinable fair
values and for all investments in debt securities.  SFAS 115 requires investment
and mortgage-backed securities to be classified as follows:

      o     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.

      o     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.

      o     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, 1995, investment and mortgage-backed  securities available
for sale included  unrealized  net gains of $109,000  reported net of $37,000 of
federal income tax expense.  Throughout the latter part of 1996, 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, 1996, the Bank reported $58.3 million in

                                      20

<PAGE>



investment and mortgage-backed securities available for sale at fair value, with
unrealized net gains of $325,000  reported net of $110,000 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, 1996.

      In November 1995, the FASB issued A Guide to  Implementation  of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities (Guide).
The Guide  permitted  an  institution  to reassess  the  appropriateness  of the
classifications of all securities held at the time and account for any resulting
reclassifications  at fair  value in  accordance  with  Statement  of  Financial
Accounting  Standards No. 115,  Accounting  for Certain  Investments in Debt and
Equity Securities (SFAS 115). The Bank, in order to allow further flexibility in
future asset/liability management decisions relating to securities, reclassified
$18.1  million  of  corporate  notes  and  U.S.   Treasury   securities  from  a
held-to-maturity  classification to an  available-for-sale  classification  with
unrealized pretax losses of $103,000 on these securities  recorded as a negative
adjustment to stockholders' equity.

      As  of  September  30,  1996,  based  upon  liquidity  and  interest  rate
considerations, management determined it could no longer assert its intention to
hold all  mortgage-backed  securities  until  maturity.  Therefore,  the  entire
mortgage-backed securities portfolio totalling $28.6 million was reclassified to
an  available-for-sale  classification with unrealized pre-tax gains of $190,000
being recorded as a favorable  adjustment to stockholders'  equity. As a result,
the Bank  intends to  classify  any  investment  or  mortgage-backed  securities
currently held or purchased in the subsequent two years as available for sale.

                                      21

<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, 1996, the Bank did not
have any investment  securities  available for sale with maturities greater than
five years.
<TABLE>
<CAPTION>


                                                                 At December 31, 1996
                      -------------------------------------------------------------------------------------------------
                          One Year or Less         One to Five Years         Five to Ten Years     More than Ten Years
                      -----------------------   -----------------------   ----------------------- ---------------------
                                     Weighted                  Weighted                 Weighted              Weighted
                      Amortized      Average      Amortized    Average      Amortized   Average    Amortized  Average
                         Cost         Rate          Cost        Rate          Cost       Rate        Cost       Rate
                      ---------     ---------     ----------  ---------    ----------  ---------  ----------  ---------
                                                                  (Dollars in Thousands)

<S>                   <C>             <C>           <C>         <C>          <C>         <C>         <C>        <C>
United States
 government and
agency obligations... $20,097         5.47%         $   --       -- %        $   --       -- %       $   --      -- %
Federal agency
obligations..........      --           --           7,000      6.83             --       --             --      --
Corporate bonds......   4,000         6.38              --       --              --       --             --      --
                       ------                       ------                    -----                  ------
                      $24,097         5.62%         $7,000      6.83%        $   --       --         $   --      --
                      =======                       ======                    =====                  ======


                                 At December 31, 1996
                      ----------------------------------------
                              Total Investment Securities
                      ----------------------------------------
                       Average                         Weighted
                        Life       Amortized   Market  Average
                       in Years       Cost     Value     Rate
                      --------    ----------  -------  -------
                                 (Dollars in Thousands)

<S>                     <C>         <C>       <C>       <C>
United States
 government and
agency obligations...   0.81        $20,097   $20,071   5.47%
Federal agency
obligations..........   4.31          7,000     7,015   6.83
Corporate bonds......   0.50          4,000     4,007   6.38
                                     ------    ------
                        1.56%       $31,097   $31,093   5.89%
                                    =======   =======
</TABLE>
     The Bank's $4.0 million of corporate  bonds  available for sale at December
31, 1996, are of investment grade,  rated from A1 by Moody's Rating Service.

     At December 31, 1996, the Bank did not have any investment  securities held
to maturity.
<PAGE>

      During 1994, the Bank purchased  investment  securities available for sale
in the amount of $7.7 million.  These securities had a weighted average yield of
6.33%.  The  available-for-sale  investment  securities  purchased  consisted of
corporate notes and treasuries with maturities of 12 to 23 months.  In addition,
the Bank purchased investment  securities held to maturity in the amount of $0.2
million.   These   securities  had  a  weighted  average  yield  of  3.25%.  The
held-to-maturity investment securities purchased consisted of deposit notes with
a maturity of six months.  Investment  securities held to maturity in the amount
of $0.4 million  matured in 1994.  Also in 1994,  the Bank sold $20.0 million of
available-for-sale  investment  securities and recognized gross gains of $13,000
and gross  losses of $46,000.  During  1995,  the Bank  purchased a $5.1 million
available-for-sale  corporate  note with a maturity  of 50 months and a weighted
average yield of 7.08%.  Investment  securities available for sale in the amount
of $13.9 million were sold during 1995,  resulting in gross gains of $30,000 and
gross  losses of $33,000.  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.

      The following table sets forth certain  information  about the Bank's held
to maturity investment securities and related fair values.
<TABLE>
<CAPTION>

                                                              At December 31,
                            ----------------------------------------------------------------
                                      1996                     1995                 1994
                            ----------------------   -------------------   -----------------
                            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:
  From one to five years...   $   --     $   --      $   --      $   --    $15,372   $14,283
  Greater than five years..       --         --          --          --      5,037     5,019
                              ------     ------      ------      ------     ------    ------
                                  --         --          --          --     20,409    19,302

Corporate bonds
  From one to five years...       --         --          --          --     11,018    10,899
  More than five years
 to ten years..............       --         --          --          --      1,490     1,471
                              ------     ------      ------      ------     ------   -------
                                  --         --          --          --     12,508    12,370
                              ------     ------      ------      ------     ------    ------
                              $   --     $   --      $   --      $   --    $32,917   $31,672
                              ======     ======      ======      ======    =======   =======

Weighted average interest
 rate......................     --  %                  --   %                 5.66%
                              ======                =======                =======

Federal Home Loan Bank
  of Indianapolis stock....  $10,632                 $8,537                 $8,163
                             =======                =======                =======

</TABLE>



                                      23

<PAGE>



      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,
                          ------------------------------------------------------------
                                 1996                1995                1994
                          -----------------  ------------------  ---------------------
                          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 $20,097  $20,071   $15,139    $15,102  $ 4,863   $ 4,853
  From one to five years       --       --     15,253     15,225   15,391    14,801
                            ------  -------    ------    -------   ------    ------
                            20,097   20,071    30,392     30,327   20,254    19,654

Federal agency obligations:
  Maturing from one to
  five years............     7,000    7,015       --         --       --        --

Corporate bonds (a)
  Maturing within one year   4,000    4,007    12,686     12,682   20,036    19,771
  From one to five years       --       --     11,921     12,100   16,991    16,371
                            ------  -------    ------    -------   ------    ------
                             4,000    4,007    24,607     24,782   37,027    36,142


                           $31,097  $31,093   $54,999    $55,109  $57,281   $55,796
                           =======  =======   =======    =======  =======   =======

Weighted average interest
 rate....................     5.89%              5.37%               5.38%
                            ======             ======             =======
</TABLE>

(a)   At December 31, 1996, the Corporation had no available-for-sale  corporate
      notes of one issuer  which were in excess of ten percent of  stockholders'
      equity.


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.  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.  In 1993 and  early  1994,  medium-term,  fixed-rate  FHLB
borrowings were principally used to fund fixed-rate  mortgage loan  originations
retained in the Bank's  portfolio  and to assist in managing the  interest  rate
risk associated with holding these  longer-term  financial  instruments.  During
most of  1994,  short-term  adjustable-rate  borrowings  were  used to fund  the
origination  of  primarily  three-year  adjustable-rate  mortgage  loans and the
purchase of principally  adjustable-rate mortgage loans which reprice after five
and seven years and medium-term  fixed-rate loans.  Available liquidity from net
deposit  inflows and the proceeds from investment and  mortgage-backed  security
repayments and maturities were used by the Bank during 1995 to repay  short-term
adjustable-rate  FHLB  advances  combined  with holding in portfolio  three-year
adjustable-rate   mortgage  loan   originations   and  medium-term   fixed-  and
adjustable-rate  mortgage  loan  purchases.  Borrowings  were  also  used  on  a
longer-term basis for general business purposes. 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.


                                      24

<PAGE>



      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, 1996, such accounts totaled
$229.4 million, or 41.43%, 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.  During  1993 and early 1994,  upon  maturity  of their  certificates  of
deposit,  many  customers  chose to reinvest the proceeds into savings and money
market  accounts  possessing  shorter  terms and enhanced  liquidity.  As market
interest  rates,  however,  climbed to a two-year high,  some customers chose to
withdraw these short-term,  liquid funds held in the Bank to seek higher returns
in non-bank  financial  products.  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 4.9 percent from $527.8 million at
December 31, 1995,  to $553.6  million at December 31, 1996.  The $25.8  million
increase resulted from transaction account,  savings account, and certificate of
deposit growth of $6.2 million,  $13.8 million, and $5.8 million,  respectively.
During  1995,  the Bank  introduced  Really Free  Checking and five other highly
competitive  checking  account  programs.  To  support  these  checking  account
programs, the Bank conducted a comprehensive  marketing campaign. As a result, a
record number of new checking  accounts  were opened during 1995.  The continued
promotion  of Really Free  Checking in 1996 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 seven and eleven-month  certificates,  also attracting new customers.
In addition, in late 1996, the Bank introduced and heavily promoted a high yield
money  market  savings   product.   Although  the  majority  of  the  growth  in
certificates of deposit and 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,  1996,  the
Bank had a total of $100,000 in brokered deposits, or .02% of total deposits.


                                      25

<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,
                        --------------------------------------------------------------------------------------
                                   1996                          1995                        1994
                        --------------------------   ----------------------------   --------------------------
                               Percent of  Increase          Percent of  Increase          Percent of Increase
                        Amount  Portfolio (Decrease)  Amount  Portfolio (Decrease)  Amount  Portfolio (Decrease)
                        ------  --------- ----------  ------  --------- ----------  ------  --------- ---------
                                                          (Dollars in Thousands)

<S>                    <C>        <C>      <C>       <C>        <C>      <C>       <C>       <C>       <C>
Regular savings....... $65,214    11.78%   $(2,376)  $67,590    12.80%   $(4,104)  $71,694   14.29%    $(6,440)
Money market savings... 16,136     2.91     16,136        --       --         --        --      --          --
Consumer checking...... 86,723    15.67      7,092    79,631    15.09     11,269    68,362   13.63       4,570
Commercial checking....  9,324     1.68      1,666     7,658     1.45     (1,553)    9,211    1.83        (476)
Money market checking.. 51,963     9.39     (2,561)   54,524    10.33     (9,884)   64,408   12.84      (4,197)
                        ------ --------     ------    ------   ------     ------    ------  ------      ------
                       229,360    41.43     19,957   209,403    39.67     (4,272)  213,675   42.59      (6,543)

Certificates of
 deposit:
  0.00 - 4.99%......... 37,823     6.83     13,333    24,490     4.64    (100,297) 124,787   24.87      (46,900)
  5.00 - 5.99%.........157,753    28.50      9,970   147,783    28.00      72,103   75,680   15.08       28,063
  6.00 - 6.99%.........126,097    22.78     (2,469)  128,566    24.36      86,363   42,203    8.41       17,260
  7.00 - 7.99%.........  1,153      .21    (14,849)   16,002     3.03      (7,704)  23,706    4.73       (4,872)
  8.00 - 8.99%.........    826      .15       (197)    1,023      .19     (11,599)  12,622    2.52       (8,466)
  9.00 - 9.99%.........    562      .10         13       549      .11      (5,781)   6,330    1.26       (5,692)
 10.00 - 10.99%........     --       --         --        --       --      (2,687)   2,687     .54        2,622
                        ------ --------     ------    ------  -------      ------   ------  ------       ------
                       324,214    58.57      5,801   318,413    60.33      30,398  288,015   57.41      (17,985)
                       ------- --------     ------   -------  -------      ------  -------  ------      --------
Totals............... $553,574 100.00%     $25,758  $527,816   100.00%    $26,126 $501,690  100.00%    $(24,528)
                       ======= ======      =======  =======   ======      ======  =======  ======      ========

</TABLE>



                                       26

<PAGE>



      The following  table sets forth certain  information  regarding the Bank's
deposit flows for the periods indicated:
<TABLE>
<CAPTION>


                                                     Year Ended December 31,
                                            ------------------------------------
                                               1996          1995          1994
                                               ----          ----          ----
                                                   (Dollars in Thousand )

<S>                                         <C>          <C>           <C>
Beginning balance.......................... $  527,816   $  501,690    $  526,218
Deposits, net of interest credited.........  1,889,523    1,392,217     1,331,298
Withdrawals................................ (1,879,791)  (1,381,961)   (1,369,664)
Interest credited..........................     16,026       15,870        13,838
                                              --------     --------      --------

Ending balance............................. $  553,574   $  527,816    $  501,690
                                              ========     ========      ========

Net increase (decrease).................... $   25,758   $   26,126    $  (24,528)
                                              ========     ========      ========

Percentage increase (decrease).............       4.88%        5.21%        (4.66)%
                                              ========      =======      ========
</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,
                  -----------------------------------------------------------------------------------
                               1996                        1995                        1994
                  ----------------------------  --------------------------  --------------------------
                      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....   $217,316     $319,491       $207,635      $310,253      $220,125      $291,989

Average rate paid..       2.50%        5.76%          2.79%         5.80%         2.68%         5.09%

</TABLE>


  The following table indicates the amount,  at December 31, 1996, 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..............        $  6,900
               Over three months through six months         7,200
               Over six months through twelve months        8,500
               Over twelve months................          10,200
                                                         --------
                                                         $ 32,800
</TABLE>


                                      27

<PAGE>



      The following table presents,  by various  interest rate  categories,  the
amounts of certificate of deposit accounts at December 31, 1996, 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, 1997........... $29,589   $74,996  $25,379   $ 426    $   5   $130,395      40.22%
December 31, 1997.......   1,613    31,835   54,938     216       25     88,627      27.33
June 30, 1998...........   3,009    13,915   12,017     440       87     29,468       9.09
December 31, 1998.......     767    11,297   10,033     162       74     22,333       6.89
December 31, 1999.......   1,564    15,484   12,788     209      369     30,414       9.38
December 31, 2000.......     105     3,734    9,685     501       --     14,025       4.33
Thereafter..............   1,176     6,492    1,257      25        2      8,952       2.76
                          ------    ------   ------   -----    -----    -------      -----
                         $37,823  $157,753 $126,097  $1,979    $ 562    $324,214    100.00%
                         =======  ======== ========  ======    =====    ========    ======
</TABLE>


      At December 31, 1996, accounts having balances of $100,000 or more totaled
$60.8 million representing 10.98% 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, 1996,  the Bank  administered  4,173 IRAs and 5 Tax Qualified
Retirement Plans totaling $50.8 million, or 9.17%, 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 grew from $160.6 million at December 31, 1995,
to $202.6 million at year-end 1996. Of the outstanding FHLB advances at December
31,  1996,  $150.9  million  carried a  weighted  average  fixed-rate  of 6.08%.
Adjustable-rate  advances at December 31, 1996,  totaled $51.7  million,  all of
which reprice based upon three-month LIBOR.

      FHLB  advances  were  obtained,  as  needed  in 1995,  to meet the  Bank's
operating  needs  which  included  the  funding  of  three-year  adjustable-rate
mortgage  loan   originations  and  the  purchase  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 focused
its efforts on increasing its deposit base by attracting  new customers  through
various promotional activities.  Beginning in February 1995 and after a decrease
in short-term rates by the Federal Reserve Bank,  customers  started to perceive
the Bank's offered rates on  certificate of deposits as attractive.  As a result
of  changing  customer  preferences  and a  competitive  campaign to attract new
customers,  certificates  of deposit  increased  $30.4  million  during 1995. As
incremental deposits were gathered during the year and funds were available, the
Bank repaid its short-term overnight adjustable-rate FHLB advances. Repayment of
short-term  adjustable-rate  FHLB advances has had the effect of minimizing  the
volatility of the Bank's overall cost of funds. As additional  funds were needed
throughout the latter part of 1995,  fixed-rate  medium-term  FHLB advances were
obtained.

                                      28

<PAGE>





      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
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.

      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.

      The following tables set forth certain information regarding borrowings at
the dates and during the periods indicated.
<TABLE>
<CAPTION>

                                                       At December 31,
                                             ------------------------------
                                             1996         1995         1994
                                             ----         ----         ----
<S>                                          <C>          <C>         <C>
Weighted average rate paid on:
  FHLB advances............................  5.97%        6.02%       6.19%

</TABLE>
<TABLE>
<CAPTION>

                                                 Year Ended December 31,
                                             ------------------------------
                                             1996         1995         1994
                                             ----         ----         ----
                                                  (Dollars in Thousands)
<S>                                        <C>          <C>          <C>
Maximum amount of borrowings
 outstanding at any month end:
  FHLB advances........................... $203,330     $165,787     $161,143

Approximate average borrowing
 outstanding with respect to:
  FHLB advances............................$176,943     $150,998     $115,106

Approximate weighted average rate paid on:
  FHLB advances............................    6.02%        6.21%        5.41%

</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,  1996,
Community First's investment in its subsidiary was $287,000.

      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 $17,000 at December 31,  1996.  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 $15,000 and $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

                                      29

<PAGE>



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  provides 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 are
separate and distinct from the Bank's offices, and Bank customers are alerted to
the fact  that the  third  party is not  affiliated  with the  Bank,  and is 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 will conduct business as Community First Insurance and
Investment  Services and will offer customers and  non-customers the opportunity
to invest in  non-FDIC-insurance  products such as bonds, mutual funds,  stocks,
annuities, and life insurance.

      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."

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,
                                             ------------------------------
                                             1996         1995         1994
                                             ----         ----         ----

<S>                                          <C>          <C>          <C>
Interest rate spread.......................  2.63%        2.52%        2.69%

Net yield on earning assets................  2.98         2.85         2.98

Return on average equity (net income
  as a percentage of average
  stockholders' equity)....................  8.55        11.47        10.18

Return on average assets (net income
  as a percentage of average  assets)......  0.69         0.92         0.80

Dividend payout ratio...................... 41.28        28.38        30.14
</TABLE>
<TABLE>
<CAPTION>

                                                     At December 31,
                                             ------------------------------
                                             1996         1995         1994
                                             ----         ----         ----
<S>                                          <C>          <C>          <C>
Equity to assets ratio (average
stockholders' equity as a percentage
  of average total assets).................  8.06%        8.00%        7.87%
</TABLE>


      Additional  performance  ratios are set forth in the "Five Year Summary of
Selected Consolidated  Financial Data," incorporated herein by reference to Part
II, Item 6 of this Form 10-K. Any significant changes in the current

                                      30

<PAGE>



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 Part II, Item 7 of this Form 10-K.

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. As of December 31,
1996,  Community  First had 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.

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

                                      31

<PAGE>



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,  1996,  the Bank's ratio of Tier 1 capital to total assets
was 7.18%,  its ratio of Tier 1 capital to  risk-weighted  assets was 12.27% and
its ratio of total capital to risk-weighted assets was 13.21%.

      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.

      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 already meets  substantially all the standards adopted in
the interagency  guidelines,  and therefore does not believe that implementation
of these regulatory standards will materially affect the operations of the Bank.

      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

                                      32

<PAGE>



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, 1996,  with  investments in FHLB stock of
$10.6 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,
1996, the Bank had $202.6 million in advances from its FHLB.

      LIQUIDITY  REQUIREMENTS.  Although not required by  regulation,  Community
First  maintains  average daily  balances of liquid  assets (cash,  certain time
deposits,  bankers'  acceptances,  highly rated  corporate  debt and  commercial
paper,   securities  of  certain  mutual  funds,  and  specified  United  States
government,  state or federal agency  obligations) equal to a monthly average of
not less than a  specified  percentage  (currently  5%) of its net  withdrawable
savings  deposits plus short-term  borrowings.  The Bank also maintains  average
daily balances of short-term liquid assets at a specified percentage  (currently
1%) of the total of its net withdrawable savings accounts and borrowings payable
in one year or less. The average daily liquidity and short-term liquidity ratios
of the Bank at  December  31,  1996,  were  8.60%  and  4.01%,  respectively.  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.

      For   the   past   several   semi-annual   periods,    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.


                                      33

<PAGE>



     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.

      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:

      o     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;

      o     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);

      o     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);

      o     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

                                      34

<PAGE>




      o      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 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,  1996,  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 Home  Owners'  Loan Act  ("HOLA")
provides that the loans-to-  one-borrower  limits  applicable to national  banks
apply to savings  associations in the same manner and to the same extent.  Under
these rules, with certain limited exceptions,  loans and extensions of credit to
a  person  outstanding  at  one  time  generally  shall  not  exceed  15% of the
unimpaired capital and surplus of the savings association.  Loans and extensions
of credit  fully  secured by  readily  marketable  collateral  may  comprise  an
additional 10% of unimpaired capital and surplus.  HOLA additionally  authorizes
savings  associations  to make loans to one  borrower,  for any  purpose,  in an
amount  not to exceed  $500,000  or, in an amount  not to exceed  the  lesser of
$30,000,000  or 30% of unimpaired  capital and surplus,  to develop  residential
housing,  provided: (i) the purchase price of each single-family dwelling in the
development  does not  exceed  $500,000;  (ii)  the  savings  association  is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable  loan-to-value  requirements,  and; (iv) the aggregate amount of
loans made under this authority  does not exceed 150% of unimpaired  capital and
surplus.

      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 to be
maintained on the first $4.4 million of transaction accounts,  reserves equal to
3% must be maintained  on  transaction  accounts  between $4.4 million and $49.3
million of transaction accounts, and a reserve of 10% must be maintained against
transaction accounts above $49.3 million. These reserve requirements are subject
to adjustment

                                      35

<PAGE>



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, 1996, 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 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.

      Legislation  has been recently  introduced  into the U.S.  Congress  which
would  subject  all  unitary  holding  companies  to the  same  restrictions  on
activities  as are  currently  applied to multiple  holding  companies.  If such
legislation  is enacted in its current form,  the ability of the  Corporation to
engage in certain activities that are currently permitted to the Corporation may
be  restricted.  The  Corporation,  however,  does not  believe  that it will be
required to discontinue  any current  activity.  In addition,  such  legislation
would preclude companies that are

                                      36

<PAGE>



engaged in activities not permitted to multiple holding companies from acquiring
control of the Corporation. No prediction can be made at this time as to whether
such  legislation  will be enacted or whether it will be enacted in its  current
form.

      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 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.  ss.  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
                                      37

<PAGE>



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  ss.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.

      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 Code in the same general  manner as other  corporations.  Prior to recent
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. For purposes of the bad debt reserve deduction, loans
were separated into  "qualifying real property loans," which generally are loans
secured by interests in certain real property,  and nonqualifying  loans,  which
are all other loans. The bad debt reserve deduction with

                                      38

<PAGE>



respect to nonqualifying loans was based on actual loss experience, however, the
amount  of the bad debt  reserve  deduction  with  respect  to  qualifying  real
property  loans  could be based upon  actual loss  experience  (the  "experience
method") or a percentage of taxable  income  determined  without  regard to such
deduction (the "percentage of taxable income method"). The percentage of taxable
income 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.
Institutions  in groups  with less than $500  million  in assets  will  still be
permitted to make deductible bad debt additions to reserves,  but only using the
experience method.

      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  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 reserve 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 amount was 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,  Community  First is  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 1996.  Community First is also subject to an  "Intangibles  Tax" of
$.10 on each $1,000 of savings deposits for 1996.

      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, 1996,  the Bank,  including its  subsidiaries,  had 187
full-time  employees  and  79  part-time   employees.   The  employees  are  not
represented by a collective  bargaining unit. The Bank believes its relationship
with its employees to be good.


                                      39

<PAGE>



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   61          President and Chief Executive Officer of the Corporation and the Bank
John W. Abbott     49          Executive Vice President, Chief Operating Officer, and Secretary of the
                                Corporation and the Bank
Carl C. Farrar     47          Senior Vice President -- Chief Lending Officer of the Bank
Jane M. Judge      35          Vice President -- Director of Human Resources of the Bank
Jack G. Nimphie    47          Senior Vice President -- Director of Operations of the Bank
Sally A. Peters    44          Vice President -- Director of Marketing of the Bank
Holly L. Schreiber 31          Vice President and Treasurer of the Corporation and Vice President
                               -- Chief Financial Officer and Treasurer of the Bank
C. Wayne Weaver    43          Senior Vice President -- Director of Retail Banking of the Bank
</TABLE>

----------------
(1)   At December 31, 1996

      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  chair of the
Lansing  Community  College  Foundation,  a Board  member of the Rotary  Club of
Lansing,  and a member 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.

      CARL C.  FARRAR  joined  Community  First in  March  1994 as  Senior  Vice
President -- Chief  Lending  Officer.  Mr. Farrar began his career in banking in
1965 and from 1991 until joining  Community  First in March 1994, he worked as a
Vice  President in Corporate  Lending at  Huntington  National Bank in Columbus,
Ohio.  From 1988 to 1991,  Mr. Farrar  served as Senior Vice  President -- Chief
Lending Officer at Central Trust Company in Columbus, Ohio.

      JANE M. JUDGE  joined  Community  First in May 1995 as Vice  President  --
Director  of Human  Resources.  Ms.  Judge  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.

      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.
                                      40

<PAGE>




     HOLLY L. SCHREIBER joined Community First in July 1993 as Vice President --
Chief Financial  Officer.  In October 1996, Ms.  Schreiber also began serving as
the Treasurer of both the Bank and the  Corporation.  Ms.  Schreiber is a C.P.A.
and prior to July 1993, she served as an audit manager for KPMG Peat Marwick LLP
in Detroit, 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, 1996.
<TABLE>
<CAPTION>

                                                                Net Book
                                    Year        Approximate     Value at
                                  Facility      Office Area   December 31,
                                   Opened      (Square Feet)    1996 (1)
                                   ------      -------------    --------
<S>                                 <C>          <C>          <C>
Community First Main Office:
112 East Allegan Street
Lansing, Michigan (4)...............1922         46,368       $4,333,732

Branch Offices:
101 East Lawrence Street
Charlotte, Michigan.................1981          1,700          214,321

6333 West St. Joseph Street
Delta Township, Michigan............1986          1,200          404,665

250 East Saginaw Street
East Lansing, Michigan..............1977          2,100          429,665

401 South Bridge Street
Grand Ledge, Michigan...............1966          1,700          369,989

4440 West Saginaw Street
Lansing, Michigan...................1977          2,100          467,669

6510 South Cedar Street
Lansing, Michigan (2)...............1974          3,000          567,777

606 West Columbia Street
Mason, Michigan.....................1971          1,700          163,958

2119 Hamilton Road
Okemos, Michigan (9)................1961          2,500          234,528

</TABLE>

                                      41

<PAGE>

<TABLE>
<CAPTION>


                                                                Net Book
                                    Year        Approximate     Value at
                                  Facility      Office Area   December 31,
                                   Opened      (Square Feet)    1996 (1)
                                   ------      -------------    --------

<S>                                 <C>           <C>            <C>
301 North Clinton Avenue
St. Johns, Michigan.................1978          2,700          403,674

225 West Grand River Avenue
Williamston, Michigan...............1978          1,500           95,361

121 West Allegan Street
Lansing, Michigan (3)...............1922         16,800          422,623

5620 Pennsylvania Avenue
Lansing, Michigan...................1970          1,250          126,347

100 North Dexter Street
Ionia, Michigan.....................1975          1,248          121,458

709 S. U.S. 27
St. Johns, Michigan.................1981          1,454          246,572

2285 W. Grand River
Okemos, Michigan (9)................1976          1,200          164,854

2801 E. Grand River
Lansing, Michigan...................1978          1,454          182,229

5610 W. Saginaw Street
Lansing, Michigan (5)...............1991          4,158          464,027

13007 S. U.S. 27
DeWitt, Michigan....................1994          2,420        1,181,131

515 E. Grand River Avenue, Suite E
East Lansing, Michigan (6)..........1996          2,500          110,603

4815 Okemos Road
Okemos, Michigan (7)................              2,635           45,000

Ledges Commerce Park, Unit 2A
Grand Ledge, Michigan (8)...........                             198,635
</TABLE>

(1)   Represents the book value of land, building, fixtures, equipment and
      furniture at the premises and owned or leased by the Bank.
(2)   Building has a second floor with an additional 2,200 square feet rented as
      office space.
(3)   This office was closed effective May 1, 1992, and is currently held for
      future expansion and offers for interim rental are considered.
(4)   This location has attached  buildings  with an additional  2,444 square
      feet rented as retail space. (5) Branch office was closed effective
      December 1, 1996, and was held for sale as of December 31, 1996.

                                            (footnotes continued on next page)

                                      42

<PAGE>




(6) Branch  office was opened  April 29,  1996.  Property is leased and net book
    value at December 31, 1996,  represents building  improvements and furniture
    and equipment.
(7) Net book value at December 31, 1996,  represents an earnest  deposit made on
    the purchase of a branch office at said location.  The Bank has committed to
    purchase this property for $900,000. The transaction is expected to close in
    March 1997.
(8) Net book value at December 31, 1996,  represents  the purchase price of land
    which is held for future development of a branch office.
(9) These two locations  will be sold in 1997. The offices will be relocated and
    consolidated  into the purchased  location at 4815 Okemos Road  described in
    (7) above.

      The net book value of the Bank's  investment  in  premises  and  equipment
totaled $11.0 million at December 31, 1996. 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 1996.


                                      43

<PAGE>



                                    PART II

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

COMMON STOCK

      The  Corporation's  common stock is traded on the NASDAQ  National  Market
System.  The  trading  symbol is CFSB.  As of  February  28,  1997,  there  were
approximately  1,205 stockholders of record which does not include  stockholders
holding their stock in street name or nominee's name.

QUARTERLY STOCK PRICE AND DIVIDEND INFORMATION

      The  following  table  summarizes  quarterly  stock  prices and  dividends
declared for:
<TABLE>
<CAPTION>

                                          1996                                1995
                               -------------------------------------------------------------------
                                                     DIVIDENDS                            Dividends
                             HIGH     LOW     CLOSE  DECLARED    High     Low      Close  Declared
                             ----     ---     -----  --------    ----     ---      -----  --------
<S>                       <C>       <C>      <C>       <C>     <C>      <C>       <C>       <C>
Quarter:
  First                   $21 7/8   $18 1/8  $19 1/2   $0.10   $17      $13 3/8   $16 5/8   $0.09
  Second                   20        17 3/4   18 7/8    0.11    17 3/8   16 1/8    16 1/2    0.09
  Third                    19 1/2    17 3/4   18        0.12    20 1/2   16 1/8    18 5/8    0.10
  Fourth                   20 3/4    18       19 1/2    0.12    19 1/2   17 3/4    19 1/2    0.10
                           -----------------------------------------------------------------------
Year                      $21 7/8   $17 3/4  $19 1/2   $0.45   $20 1/2  $13 3/8   $19 1/2   $0.38
</TABLE>

      On August 20, 1996,  the  Corporation's  Board of Directors  declared a 10
percent stock dividend  payable on September 12, 1996, to stockholders of record
on August 30, 1996. In addition,  on September 19, 1995, the Corporation's Board
of Directors  declared a 10 percent stock dividend  payable on October 13, 1995,
to stockholders of record on September 30, 1995. As a result,  per share amounts
have been restated for all periods to reflect the stock dividends.

     For information  regarding  restrictions on the payments of dividends,  see
"Item 1. Business -- Regulation - - Dividend Restrictions" in this report.

                                      44

<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA

FIVE YEAR SUMMARY OF CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>

At and For the Years Ended December 31,     1996     1995      1994     1993    1992
                                            ----     ----      ----     ----    ----
SUMMARY OF FINANCIAL CONDITION:
                                              (Dollars in Thousands, Except Per Share Data)

<S>                                      <C>       <C>       <C>      <C>       <C>
Total assets                             $829,800  $761,418  $727,243 $669,910  $633,872
Interest-earning deposits                  15,270    22,654    10,524   11,639    25,289
Investment securities, net                 31,093    55,109    88,712  142,736   162,407
Mortgage-backed securities, net            27,221    35,156    66,151  107,712   113,925
Loans receivable, net                     717,715   610,284   518,591  374,658   297,488
Deposits                                  553,574   527,816   501,690  526,218   560,428
FHLB advances                             202,639   160,649   160,351   77,830    13,334
Stockholders' equity                       62,470    62,743    55,607   54,835    49,277
SUMMARY OF OPERATIONS:
Interest income                          $ 57,402  $ 53,621  $ 47,080 $ 44,644  $ 51,715
Interest expense                           34,498    33,188    26,978   25,771    33,036
                                         --------  --------  -------- --------  --------
Net interest income before provision
  for loan losses                          22,904    20,433    20,102   18,873    18,679
Provision for loan losses                     240       240       240      240       240
                                        --------- --------- --------- --------  --------
Net interest income after provision
  for loan losses                          22,664    20,193    19,862   18,633    18,439
Other income                                4,242     3,966     2,349    5,678     5,274
General and administrative expenses        15,669    14,427    14,473   14,672    15,335
FDIC special assessment                     3,355       --         --       --        --
                                        --------- --------- --------- -------- ---------
Income before federal income tax
expense and cumulative effect of
  accounting change                         7,882     9,732     7,738    9,639     8,378
Federal income tax expense                  2,435     2,929     2,149    2,947     3,090
                                        --------- --------- --------- -------- ---------
Income before cumulative effect of
  accounting change                         5,447     6,803     5,589    6,692     5,288
Cumulative effect of change in
 accounting for postretirement
 benefits                                     --         --        --     (436)       --
                                        --------- --------- --------- --------- --------
Net income                              $   5,447 $   6,803 $   5,589 $   6,256 $  5,288
                                        ========= ========= ========= ========= ========

PER SHARE DATA: (1)
Primary earnings:
  Before cumulative effect of
  accounting change                      $   1.09  $   1.35  $   1.09  $   1.31 $   1.05
  Net income                                 1.09      1.35      1.09      1.22     1.05
Fully diluted earnings:
  Before cumulative effect
    of accounting change                     1.09      1.35      1.09      1.30     1.04
  Net income                                 1.09      1.35      1.09     1.21      1.04
Stockholders' equity                        13.27     12.80     11.40    11.12     10.01

RATIOS AND OTHER DATA:
Interest rate spread                         2.63%     2.52%     2.69%    2.71%     2.56%
Net yield on average earning assets          2.98      2.85      2.98     3.04      2.92
Return on average assets                     0.69      0.92      0.80     0.96      0.81
Return on average stockholders' equity       8.55     11.47     10.18    12.02     11.27
Average earning assets to average
  interest-bearing liabilities             107.78    107.23    107.41   107.92    106.87
Efficiency ratio                            58.13     60.73     64.51    66.33     70.18
General and administrative expenses
  to average assets                          1.98      1.95      2.08     2.25      2.35
Stockholders' equity to total assets         7.53      8.24      7.65     8.19      7.77
Nonaccruing loans and real estate owned
  to total assets                            0.24      0.08      0.44     0.83      1.13
Dividend payout ratio                       41.28     28.38     30.14    21.43     19.02
Number of full-service offices                 18        18        18       18        19
</TABLE>

(1)   The  financial  information  for per share  amounts  has been  restated to
      reflect the ten percent stock dividend  declared  August 20, 1996, as well
      as  previous  stock  dividends  paid in 1995  and 1994  and  stock  splits
      distributed in 1993 and 1992.

                                      45

<PAGE>




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

      The following sections are designed to provide a more thorough  discussion
of the Corporation's financial condition and results of operations as well as to
provide additional information on the Corporation's  asset/liability  management
strategies, sources of liquidity, and capital resources. Management's discussion
and  analysis  should be read in  conjunction  with the  consolidated  financial
statements and supplemental data contained elsewhere in this report.

GENERAL

      CFSB  Bancorp,  Inc.  (Corporation)  is the holding  company for Community
First Bank (Bank).  Substantially all of the Corporation's  assets are currently
held in, and operations  conducted through its sole subsidiary,  Community First
Bank. 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 the southwest corner of Ionia County.  The
Bank's  business  consists  primarily of  attracting  deposits  from the general
public and using such  deposits,  together  with  Federal  Home Loan Bank (FHLB)
advances,  to originate  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's revenues are derived principally from interest income
on mortgage and other loans, mortgage-backed securities,  investment securities,
and to a lesser extent,  from fees and commissions.  The operations of the Bank,
and the financial services industry generally,  are significantly  influenced by
general  economic  conditions  and  related  monetary  and  fiscal  policies  of
financial institution  regulatory agencies.  Deposit flows and cost of funds are
impacted  by  interest  rates  on  competing  investments  and  market  rates of
interest.  Lending  activities  are affected by the demand for financing of real
estate and other types of loans, which in turn is affected by the interest rates
at which such financing is offered.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995

      Net income for the year ended  December 31,  1996,  was $5.4  million,  or
$1.09 per fully  diluted  share,  compared to $6.8  million,  or $1.35 per fully
diluted  share,  for  1995,  a net  decrease  of  $1.4  million.  Earnings  were
significantly  impacted  by a  non-recurring,  pre-tax  charge  of $3.4  million
resulting from federal legislation to recapitalize the Federal Deposit Insurance
Corporation's  (FDIC) Savings Association  Insurance Fund (SAIF). As a result of
this charge,  1996  after-tax  earnings were reduced $2.2 million,  or $0.44 per
fully diluted share.

      Pre-tax  core  earnings  for  1996,  which  exclude  the  special  deposit
insurance  assessment  and net gains on asset  sales,  increased 22 percent over
1995 pre-tax core earnings.  Principally  accounting for the increase in pre-tax
core earnings  between years was  significant  growth in the  Corporation's  net
interest  margin and improved  fee income  partially  offset by  increased  1996
general and administrative  expenses and a non-recurring gain recognized in 1995
on the sale of real estate owned.


                                      46

<PAGE>



      The following table reconciles net income to pre-tax core earnings:
<TABLE>
<CAPTION>

                                              1996           1995
                                              ----           ----
                                                (In Thousands)

<S>                                       <C>           <C>
Net income                                $  5,447      $ 6,803
Federal income tax expense                   2,435        2,929
Net gains on loan and security sales          (192)         (56)
Gain on sale of real estate owned               --         (587)
FDIC special assessment                      3,355           --
                                          --------     --------
Pre-tax core earnings                      $11,045      $ 9,089
                                           =======      =======
</TABLE>

      Net income for 1996 represents a return on average assets of 0.69 percent,
a decrease  from 0.92  percent  for 1995 and a return on  average  stockholders'
equity of 8.55 percent  compared to 11.47  percent for 1995.  The  Corporation's
efficiency  ratio,  or recurring  operating  expenses over  recurring  operating
revenues,  was 58.1 percent for the year ended December 31, 1996, an improvement
from 60.7 percent for the year ended December 31, 1995.

NET INTEREST INCOME

      The  most  significant  component  of the  Corporation's  earnings  is net
interest  income,  which is the  difference  between  interest  earned on loans,
mortgage-backed securities,  investment securities and other earning assets, and
interest  paid on deposits  and FHLB  advances.  This  amount,  when  divided by
average  earning  assets,  is  referred  to as the net yield on average  earning
assets. Net interest income and net yield on average earning assets are directly
impacted  by  changes  in  volume  and   composition   of  earning   assets  and
interest-bearing   liabilities,   market  rates  of   interest,   the  level  of
nonperforming assets, demand for loans, and other market forces.


                                      47

<PAGE>



ANALYSIS OF NET INTEREST INCOME

      The following  table sets forth,  for the periods  indicated,  information
regarding:  (i) the total dollar amount of interest  income from average earning
assets  and the  resultant  average  yields;  (ii) the  total  dollar  amount of
interest  expense  on average  interest-bearing  liabilities  and the  resultant
average cost; (iii) net interest income;  (iv) interest rate spread; and (v) net
yield on average  earning  assets.  Average  balances are based on daily average
balances.
<TABLE>
<CAPTION>

Years Ended December 31,          1996                        1995                         1994
                                INTEREST                    Interest                     Interest
                       AVERAGE   EARNED   YIELD/   Average   Earned/   Yield/   Average   Earned/   Yield/
                       BALANCE    PAID    RATE     Balance    Paid     Rate     Balance    Paid     Rate
                       -------    ----    ----     -------    ----     ----     -------    ----     ----
                                              (Dollars in Thousands)

<S>                   <C>        <C>      <C>     <C>       <C>        <C>     <C>        <C>       <C>
EARNING ASSETS:
Loans receivable(1)   $674,437   $51,612  7.65%   $566,249  $44,449    7.85%   $458,896   $35,495   7.73%
Mortgage-backed
  securities            30,714     2,342  7.62      60,789    4,188    6.89      81,465     4,449   5.46
Investment securities   38,848     2,189  5.63      71,191    3,862    5.43     117,237     6,424   5.48
Interest-earning
  deposits with FHLB
  and other depository
  institutions          14,598       465  3.18       9,122      374    4.10       8,762       302   3.45
Other                   10,680       794  7.44       9,918      748    7.55       7,356       410   5.58
                       -------   -------  ----     -------   ------    ----     -------    ------   ----
  Total earning assets 769,277    57,402  7.46     717,269   53,621    7.48     673,716    47,080   6.99
                       =======   =======  ====     =======   ======    ====     =======    ======   ====
INTEREST-BEARING LIABILITIES:
Savings, checking,
  and money
  market accounts(2)   217,316     5,435  2.50     207,635    5,802    2.79     220,125     5,896   2.68
Certificates of
  deposits(2)          319,491    18,403  5.76     310,253   18,008    5.80     291,989    14,860   5.09
FHLB advances          176,943    10,660  6.02     150,998    9,378    6.21     115,106     6,222   5.41
   Total interest-
     bearing
     liabilities       713,750    34,498  4.83     668,886   33,188    4.96     627,220    26,978   4.30
                       =======    ======  ====     =======   ======    ====     =======    ======   ====
Excess earning assets $ 55,527                    $ 48,383                     $ 46,496
                      ========                    ========                     ========
Net interest income              $22,904                    $20,433                       $20,102
                                 =======                    =======                       =======
Interest rate spread (3)                  2.63%                        2.52%                        2.69%
                                          ====                         ====                         ====
Net yield on average
  earning assets (4)                      2.98%                        2.85%                        2.98%
                                          ====                         ====                         ====
Average earning assets
  to average interest-
  bearing liabilities   107.78%                     107.23%                     107.41%
                        ======                      ======                      ======
</TABLE>

(1)The average  balance  for loans  receivable  includes  average  balances  for
   nonaccrual loans. The amortization of loan fees, net of capitalized costs, is
   included  as an  adjustment  to yield but does not  significantly  affect the
   yield calculation.

(2)Interest  expense  includes the cost of the Bank's  interest  rate  exchange
agreements.

(3)Represents the weighted average yield on earning assets for the year less the
   weighted average cost of interest-bearing liabilities for the year.

(4)Net interest income divided by average outstanding balances of earning
   assets.



                                      48

<PAGE>



   The  following   table  presents   information   concerning   yields  on  the
Corporation's  earning  assets and costs of the  Corporation's  interest-bearing
liabilities,  the interest rate spread,  and the net yield on earning  assets at
the dates and for the  periods  indicated.  Yields and costs for the period were
computed using daily average balances.
<TABLE>
<CAPTION>

Year Ended December 31,          1996              1995                1994
                                 ----              ----                ----
                           FOR THE  END OF   For the  End of   For the    End of
                            YEAR     YEAR     Year     Year     Year       Year
                            ----     ----     ----     ----     ----       ----

<S>                         <C>     <C>      <C>      <C>       <C>       <C>
WEIGHTED AVERAGE YIELD:
Loans receivable (1)        7.65%   7.60%    7.85%    7.75%     7.73%     7.69%
Mortgage-backed securitie   7.62    7.82     6.89     7.86      5.46      6.84
Investment securities       5.63    5.89     5.43     5.37      5.48      5.48
Interest-earning deposits
  with FHLB and other
  depository institutions   3.18    4.93     4.10     4.92      3.45      4.76
Other                       7.44    7.55     7.55     7.61      5.58      6.73
                            ----    ----     ----     ----      ----      ----
Total earning assets        7.46    7.47     7.48     7.49      6.99      7.27
                            ====    ====     ====     ====      ====      ====

WEIGHTED AVERAGE COST:
Savings, checking, and
  money market accounts(2)  2.50    2.65     2.79     2.76      2.68      2.88
Certificates of deposit(2)  5.76    5.73     5.80     5.97      5.09      5.35
FHLB advances               6.02    5.97     6.21     6.02      5.41      6.19
                            ----    ----     ----     ----      ----      ----
   Total interest-bearing
     liabilities            4.83    4.86     4.96     5.00      4.30      4.76
                            ====    ====     ====     ====      ====      ====
Interest rate spread(3)     2.63%   2.61%    2.52%    2.49%     2.69%     2.51%
                            ====    ====     ====     ====      ====      ====
Net yield on earning
  assets(4)                 2.98%   2.95%    2.85%    2.81%     2.98%    2.77%
                            ====    ====     ====     ====      ====     ====
</TABLE>

(1)The  amortization  of loan fees, net of capitalized  costs, is included as an
   adjustment to yield but does not significantly affect the yield calculation.
(2)Includes the effect of the applicable interest rate exchange agreements.
(3)Represents  the weighted  average  yield on earning  assets less the weighted
   average cost of interest-bearing liabilities.
(4)Net yield on earning  assets for the period  represents  net interest  income
   divided by average earning assets.  Net yield on earning assets at the period
   represents net interest  income  computed using the end of period balance and
   rate, divided by earning assets at the end of the period.

      Net interest  income  before  provision  for loan losses was $22.9 million
during  1996, a $2.5  million  increase  from $20.4  million  during  1995.  Net
interest  income was  positively  affected  by lower  deposit  rates in 1996 and
strong growth in earning assets.  The Corporation's net yield on average earning
assets was 2.98 percent for 1996, an  improvement  from 2.85 percent for 1995. A
shift in the  composition of average  earning assets from lower  yielding,  more
liquid assets toward higher earning,  longer term assets also  contributed to an
improved net interest  margin.  Average loans  receivable were $674.4 million in
1996 representing growth of 19.1 percent over average loans receivable of $566.2
million  in  1995.  The  increased  level  of loans  outstanding  resulted  from
originations of adjustable-rate  mortgage loans and purchases of adjustable- and
fixed-rate,   medium-term   mortgage   loans  all  of  which  are  held  in  the
Corporation's  portfolio.   Because  the  Corporation  is  liability  sensitive,
pressure  may be felt on the  Corporation's  net interest  margin if  short-term
market interest rates rise.

      The future trend of the Corporation's net interest margin and net interest
income may  further be  impacted  by the level of  mortgage  loan  originations,
purchases,  repayments,  refinancings,  and sales and a resulting  change in the
composition of the Corporation's earning assets. The relatively flat yield curve
during the first  quarter of 1996  resulted  in a shift  toward  more  customers
exhibiting a preference for fixed-rate mortgage loans, most of which were

                                      49

<PAGE>



originated  for sale in the  secondary  market.  As the slope of the yield curve
began  to  steepen  in the  subsequent  quarters,  customer  preferences  in the
Corporation's  local  market  again  favored  adjustable-rate   mortgage  loans.
Additional factors affecting the Corporation's net interest income will continue
to be the volatility of interest  rates,  slope of the yield curve,  asset size,
maturity/repricing activity, and competition.

RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

      The  following  table  presents  the dollar  amount of changes in interest
income  and  interest  expense  for  major  components  of  earning  assets  and
interest-bearing   liabilities,   distinguishing   between  changes  related  to
outstanding  balances and changes due to interest  rates.  For each  category of
earning  assets and  interest-bearing  liabilities,  information  is provided on
changes  attributable to: (i) changes in rate (i.e.,  changes in rate multiplied
by prior volume); and (ii) changes in volume (i.e., changes in volume multiplied
by prior rate).  For purposes of this table,  changes  attributable to both rate
and volume which cannot be segregated have been allocated proportionately to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>

Year Ended December 31,             1996 vs. 1995                1995 vs. 1994
-----------------------             -------------                -------------
                             Increase (Decrease) Due to     Increase (Decrease) Due to
                             Volume     Rate     Total      Volume     Rate     Total
                             ------     ----     -----      ------     ----     -----
                                                    (In Thousands)

<S>                          <C>      <C>       <C>        <C>      <C>      <C>
INTEREST INCOME:
Loans receivable             $ 8,319  $(1,156)  $ 7,163    $ 8,397  $  557   $ 8,954
Mortgage-backed securities    (2,251)     405    (1,846)    (1,275)  1,014      (261)
Investment securities         (1,811)     138    (1,673)    (2,503)    (58)   (2,561)
Interest-earning deposits
  with FHLB and other
  depository institutions        188      (97)       91         13      59        72
Other                             57      (11)       46        168     170       338
                             -------  -------   -------    ------- -------   -------
      Total interest income    4,502     (721)    3,781      4,800   1,742     6,542
                             =======  =======   =======    ======= ======    =======

INTEREST EXPENSE:
Savings, checking, and money
  market accounts                259     (626)     (367)     (336)     242       (94)
Certificates of deposit          522     (127)      395       975    2,174     3,149
FHLB advances                  1,575     (293)    1,282     2,141    1,015     3,156
                             -------  -------   -------   -------  -------   -------
      Total interest expense   2,356   (1,046)    1,310     2,780    3,431     6,211
                             =======  =======   =======   =======  =======   =======
Net interest income          $ 2,146  $   325   $ 2,471   $ 2,020  $(1,689)  $   331
                             =======  =======   =======   =======  =======   =======
</TABLE>

PROVISION FOR LOAN LOSSES

      The allowance for loan losses,  established  through provisions for losses
charged to expense,  is increased by recoveries of loans previously  charged off
and reduced by charge-offs of loans.  The provision for loan losses was $240,000
during both 1996 and 1995.

      The  Corporation  maintains  the  allowance  for  loan  losses  at a level
determined to be adequate by management based on a review of the loan portfolio.
While  management  uses  available  information  to determine  the allowance for
losses on loans,  future  additions to the allowance  may be necessary  based on
changes in economic conditions and borrower circumstances.  In addition, various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review  the  Corporation's  allowance  for  losses on loans.  Such
agencies may require the Corporation to record  additions to the allowance based
on their  judgments  about  information  available  to them at the time of their
examination.

      For more  information on the  Corporation's  allowance for loan losses and
activity therein, reference is made to "Asset Quality."


                                      50

<PAGE>



OTHER INCOME

      Other income, a significant component of the Corporation's  earnings,  was
$4.2  million  for the year ended  December  31,  1996,  an increase of $276,000
compared to $4.0 million for the year ended December 31, 1995.  During 1995, the
Corporation introduced several highly competitive checking account programs, and
as a result,  the  Corporation has since opened a record number of new accounts.
Growth in other income  resulted  principally  from  $769,000  more deposit fees
assessed on a higher level of transaction  account activity.  Although offset in
part by  lower-of-cost  or market  adjustments on loans intended for sale in the
secondary  market,  increased  gains on loan  sales,  including  the  impact  of
adopting  Statement of Financial  Accounting  Standards No. 122,  Accounting for
Mortgage  Servicing  Rights,  an amendment of FASB  Statement No. 65 (SFAS 122),
also contributed to the higher level of other income. Partially offsetting these
increases in other income were decreased  servicing  income resulting from lower
balances of loans serviced for other parties and the amortization of capitalized
mortgage servicing costs. In addition, a $587,000 non-recurring gain on the sale
of real estate  owned was  recognized  in 1995. A gain on the  redemption  of an
equity security and  non-recurring  distributions on equity  investments in 1996
were  substantially  offset by net losses on the sales of investment  securities
during the year.

      Effective January 1, 1996, the Corporation  adopted the provisions of SFAS
122. This statement  requires the  Corporation  to recognize as separate  assets
rights to service mortgage loans for others,  however those servicing rights are
acquired.  Prior  to  adoption  of  SFAS  122,  the  Corporation  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  Corporation  uses  assumptions  market  participants  would use in
estimating future net servicing income,  which includes 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.

      The   ongoing   impact  of  SFAS  122  will  depend  upon  demand  in  the
Corporation's  lending market for fixed-rate  residential mortgage loans salable
in the  secondary  mortgage  market.  The  Corporation  capitalized  $234,000 of
originated  mortgage  servicing  rights  during 1996,  of which $43,000 has been
amortized. No valuation allowances for capitalized originated mortgage servicing
rights  were  considered  necessary  as of  December  31,  1996.  The balance at
December 31, 1996, of loans sold during the year was $30.1 million.

GENERAL AND ADMINISTRATIVE EXPENSES

      The Bank is  required  to pay  assessments  based on a  percentage  of its
insured  deposits to the FDIC for  insurance of its deposits by the FDIC through
the SAIF.  Under the Federal Deposit  Insurance Act, the FDIC is required to set
semi-annual  assessments for  SAIF-insured  institutions at a level necessary to
maintain the  designated  reserve ratio of the SAIF at 1.25 percent of estimated
insured  deposits or at a higher  percentage of estimated  insured deposits that
the FDIC determines to be justified for that year by circumstances  indicating a
significant  risk of  substantial  future  losses  to the  SAIF.  The FDIC  also
administers the Bank Insurance Fund (BIF), which has the same designated reserve
ratio as the SAIF.  The BIF achieved the  designated  reserve ratio during 1995,
and in late  1995,  the FDIC  amended  the  risk-based  assessment  schedule  to
significantly  lower the deposit  insurance  assessment rate for most commercial
banks and other  depository  institutions  with deposits insured by the BIF. The
new BIF assessment  schedule resulted in a substantial  disparity in the deposit
insurance premiums paid by BIF and SAIF members and placed SAIF-insured  savings
associations  such as the  Bank at a  competitive  disadvantage  to  BIF-insured
institutions.

      The Deposit Insurance Fund Act of 1996 (DIFA) was enacted on September 30,
1996,  and this  legislation  addressed the  inadequate  funding of the SAIF. In
order to recapitalize the SAIF, DIFA imposed a one-time assessment on all thrift
institutions.   The  Bank's  pre-tax   assessment  was  $3.4  million  and  this
non-recurring charge

                                      51

<PAGE>



was recognized in the third quarter of 1996. DIFA also addressed the funding for
the Financing  Corporation  (FICO) bonds.  Thrifts will pay 6.4 basis points per
$100 of domestic  deposits  from January 1, 1997,  to December  31,  1999.  From
January  1,  2000,  until the FICO  bonds are  retired  in 2019,  the  estimated
assessment  to retire the FICO bonds is expected to be 2.5 basis points per $100
of domestic  deposits.  Based upon this  legislation,  the Bank's  assessment is
expected to decline 70 percent, or $800,000, in 1997.

      DIFA  proposed the BIF and SAIF be merged on January 1, 1999,  provided no
insured depository  institution is a savings association on that date. DIFA also
directed  the Treasury  Department  to present  recommendations  to Congress for
establishment of a common depository institution charter by March 31, 1997.

      Excluding  the  FDIC  special  assessment  of $3.4  million,  general  and
administrative expenses were $15.7 million for 1996, up $1.3 million compared to
$14.4 million for 1995.  Compensation  and fringe benefits expense rose $204,000
between  periods  as a result  of  upward  merit-based  salary  adjustments,  an
increased  provision  for  the  management   incentive  program,  and  increased
employment  taxes on a higher  compensation  base partly offset by the effect of
fewer  full-time  equivalent  employees.  Furniture and  equipment  depreciation
increased  $374,000,  or  48  percent,  over  1995  primarily  as  a  result  of
accelerating the depreciation on computer  equipment to more closely reflect the
estimated  remaining lives of this equipment.  Postage expense rose in 1996 as a
result of an increased number of accounts and more frequent statement renderings
for savings  accounts.  Also, the increased  telephone expense reflects customer
usage of the 800  numbers  for the  Integrated  Voice  Response  System  and the
Customer Service Center. During 1996, the Corporation opened a new branch office
adjacent to Michigan State  University's  campus and introduced its MoneyCard to
its current ATM customer base.  This card serves as both an ATM card and a debit
card allowing  customers to make direct withdrawals from their checking accounts
when making purchases at merchants accepting MasterCard. Costs incurred with the
promotion of the branch and the introduction of the MoneyCard are expected to be
recovered through the generation of additional fee income in future periods. The
1996  introduction  of the  Moneycard  resulted  in debit  card  embossment  and
servicing  charges not incurred  during 1995.  Marketing  expense also increased
over 1995 as the result of the continued promotion of the Corporation's checking
account  products.  In  addition,  the expanded  account  base  resulted in more
operating losses than in the prior year.

FEDERAL INCOME TAX EXPENSE

      Federal  income tax expense was $2.4  million for the year ended  December
31, 1996, compared to $2.9 million for 1995. The substantial  reduction reflects
the  expected  tax benefit on the FDIC  special  assessment.  The  Corporation's
federal  income  tax  expense  is, for the most part,  recorded  at the  federal
statutory  rate  of 34  percent  less a pro  rata  portion  of  the  anticipated
low-income  housing  tax  credits  expected  to  be  available  based  upon  the
Corporation's limited partnership investments.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995, COMPARED TO THE YEAR
 ENDED DECEMBER 31,1994

      Net income for the year ended  December 31,  1995,  was $6.8  million,  or
$1.35 per fully  diluted  share,  compared to $5.6  million,  or $1.09 per fully
diluted share,  for 1994, a net increase of $1.2 million.  Partially  accounting
for this increase in net income was substantially improved fee income and growth
in the Corporation's  1995 net interest margin.  Although the Corporation's cost
of funds rose at a more rapid rate than the yields on its earning  assets during
1995 as compared to 1994, the impact on the  Corporation's  net interest  margin
was more than  offset  by  growth  in  earning  assets.  In  addition,  the 1995
provision  for  real  estate  owned  was  comparably  lower  and  a  significant
non-recurring  gain on the sale of real estate owned was  recognized  during the
year. The comparability of net earnings was also significantly influenced by the
Corporation's  effective  tax  rate of 30.1  percent  in 1995  compared  to 27.8
percent a year earlier.  The increase in the effective tax rate is the result of
accounting  for changes in the  Corporation's  tax reserves  under  Statement of
Financial  Accounting  Standards No. 109, Accounting for Income Taxes (SFAS 109)
partly offset by the use in 1995 of low-income  housing tax credits.  Net income
for 1995

                                      52

<PAGE>



represents a return on average  assets of 0.92  percent,  an increase  from 0.80
percent for 1994 and a return on average  stockholders'  equity of 11.47 percent
compared to 10.18  percent for 1994.  The  Corporation's  efficiency  ratio,  or
recurring operating expenses over recurring operating revenues, was 60.7 percent
for the year ended December 31, 1995, an  improvement  from 64.5 percent for the
year ended December 31, 1994.

      Core earnings,  or pre-tax earnings less  non-recurring  items,  were $9.1
million in 1995  compared to $7.7 million in 1994,  an increase of 17.6 percent.
The following table reconciles net income to pre-tax core earnings:
<TABLE>
<CAPTION>

                                               1995       1994
                                               ----       ----
                                               (In Thousands)

<S>                                         <C>         <C>
Net income                                  $6,803      $5,589
Federal income tax expense                   2,929       2,149
Net gains on loan and security sales           (56)         (9)
Gain on sale of real estate owned             (587)         --
                                            ------    --------
Pre-tax core earnings                       $9,089      $7,729
                                            ======      ======
</TABLE>

NET INTEREST INCOME

      Net interest  income  before  provision  for loan losses was $20.4 million
during  1995,  an  increase  of  $331,000,   from  $20.1  million  during  1994.
Principally as a result of the flatter yield curve,  the  Corporation's  funding
costs rose more rapidly than its yield on earning assets;  and accordingly,  net
interest  income  was  adversely  affected.  The  impact  of the  interest  rate
environment  was somewhat  mitigated by strong growth in earning  assets in both
1995 and 1994. A shift in the  composition of average  earning assets from lower
yielding  more liquid  assets  toward  higher-earning,  longer-term  assets also
lessened the effects of the interest  rate  environment,  thus  stabilizing  net
interest   income.   Average  loans  receivable  were  $566.2  million  in  1995
representing  growth of 23.4  percent over average  loans  receivable  of $458.9
million  in  1994.  The  increased  level  of loans  outstanding  resulted  from
originations of adjustable-rate  mortgage loans and purchases of adjustable- and
fixed-rate,   medium-term   mortgage   loans  all  of  which  are  held  in  the
Corporation's  portfolio.  Also favorably  affecting net interest income between
years  was the  termination,  at a loss of  $229,000,  in  November  1994 of the
Corporation's one remaining  interest rate exchange  agreement with an aggregate
notional  amount of $15.0  million  and a maturity  date of December  23,  1996.
Amortization of the loss as interest  expense totaled $109,000 for 1995 compared
to the $568,000 cost of the interest rate exchange  agreement in 1994, a decline
of $459,000.  The  Corporation's  net yield on average  earning  assets was 2.85
percent for 1995, a decline from 2.98 percent for 1994. The net yield on average
earning assets decreased to 2.81 percent as of December 31, 1995.

PROVISION FOR LOAN LOSSES

      The provision for loan losses was $240,000  during both 1995 and 1994. The
Corporation  maintains the allowance for loan losses at a level determined to be
adequate  by  management  based  on a  review  of the  loan  portfolio.  Factors
considered  in this review  include the  historical  loss  experience,  recovery
levels  of  loans  previously  charged  off,  the  financial  condition  of  the
borrowers,  the perceived  risk exposure  among loan types,  delinquency  rates,
present and projected economic conditions as well as other relevant factors.

      While the allowance for loan losses  increased to $4.4 million at December
31, 1995,  compared to $4.1 million at December 31, 1994, and the  Corporation's
level of  nonperforming  assets as a  percentage  of total  assets  improved  by
declining  from 0.44 percent at December  31, 1994,  to 0.08 percent at December
31, 1995,  the  allowance  for loan losses as a percentage  of total loans as of
December 31, 1995, declined to 0.69 percent compared to 0.77 percent at December
31, 1994. The ratio of net loan  charge-offs  (recoveries)  to the average loans
outstanding  during the years ended December 31, 1995 and 1994, was 0.00 percent
and (0.01) percent, respectively.


                                      53

<PAGE>



OTHER INCOME

      Other  income  totaled  $4.0  million in 1995  compared to $2.3 million in
1994, a substantial increase of $1.7 million.  During the first quarter of 1995,
the  Corporation   introduced   Really  Free  Checking  and  five  other  highly
competitive checking account programs, and as a result, the Corporation opened a
record number of new checking  accounts  during the year.  The growing  customer
base produced a correspondingly higher level of transaction account activity and
generated  $579,000  of  incremental  fee  income in 1995 as  compared  to 1994.
Although the  Corporation's  practices during 1995 included selling  longer-term
fixed-rate mortgage loan originations,  low levels of sales occurred as customer
demand was for primarily  adjustable-rate rather than fixed-rate mortgage loans.
As a result of the low level of sales,  reductions in the portfolio of loans the
Corporation  services for other  parties  occurred and  adversely  impacted loan
servicing income. The comparison of other income between years was also impacted
by fewer  commissions  on  security  sales  from the  Corporation's  third-party
provider of alternative  investment services and an increase in the level of net
non-recurring losses on sales of mortgage-backed securities, the impact of which
was more than  offset by a reduced  provision  for real estate  owned  losses of
$445,000 and the recognition of a $587,000  non-recurring  gain on the favorable
disposition of real estate owned.

GENERAL AND ADMINISTRATIVE EXPENSES

      General and administrative  expenses were $14.4 million for the year ended
December  31,  1995,  a slight  decrease  from $14.5  million for the year ended
December 31,  1994.  During 1994,  the  Corporation  converted to a new computer
system with enhanced  software and hardware  capabilities.  Depreciation  of the
Corporation's  computer  hardware  contributed  to $151,000 of increased  office
occupancy and equipment expense during 1995. In addition,  compensation  expense
rose as a result of inflation  and bringing the  Corporation's  data  processing
operations in house concurrent with the computer conversion. Primarily resulting
from a change in procedures and forms in connection with the conversion,  office
supplies and printing expense also rose between years. These additional expenses
were more than offset by reduced data processing  expense which mostly consisted
of  $525,000  paid  to an  outside  servicer  through  mid-1994  to  manage  the
Corporation's   data  processing   operations  under  a  facilities   management
agreement.  Other efficiencies and cost reductions were achieved in the areas of
real estate taxes, deposit insurance,  corporate insurance, Michigan intangibles
tax, and single business tax expense.  In addition,  the use in 1995 of $103,000
more  of  dividends   received  on   unallocated   ESOP  shares  to  reduce  the
Corporation's   ESOP  contribution  than  in  1994  had  a  positive  impact  on
compensation  and fringe benefits  expense.  There was also a lower level of net
operating  losses  during  1995  which  were   substantially   offset  by  fewer
environmental  recoveries and higher check  processing  fees. Also affecting the
comparability  of the two  periods  were the  receipt of rental  income from the
Corporation's  third-party  provider of alternative  investment services in 1994
but not in 1995 and  $206,000 of  non-recurring  costs  incurred  during 1994 in
connection  with the computer  conversion.  Marketing  expense also increased by
$210,000 over 1994  principally as the result of the  introduction and continued
promotion  throughout  the  year  of  the  Corporation's  new  checking  account
products.

FEDERAL INCOME TAX EXPENSE

      Federal  income tax expense was $2.9  million for the year ended  December
31, 1995,  compared to $2.1 million for 1994. The increase in federal income tax
expense  resulted  from a higher  level of  pre-tax  earnings  combined  with an
increase in the  Corporation's  effective tax rate from 27.8 percent for 1994 to
30.1 percent for 1995. SFAS 109 generally  requires the Corporation to establish
a  deferred  tax asset  related  to its  provision  for losses on loans and real
estate and a deferred tax  liability for the excess of its tax bad debt reserves
over the amount of such  reserves as of December  31, 1987 (base  year).  To the
extent  the   Corporation's   loan  and   mortgage-backed   security   portfolio
subsequently  declined  below  the  base-year  level,  additional  deferred  tax
liability   was   recognized.   To  the  extent  the   Corporation's   loan  and
mortgage-backed  security  portfolio  increased,  this additional  liability was
reduced.  The Corporation's  adjusted  base-year tax bad debt reserves increased
during  1995 to the level of the  Corporation's  actual  base-year  tax bad debt
reserves.  Accordingly,  further  reductions in the  Corporation's  deferred tax
liability will not result from future growth, if any, in the Corporation's  loan
and mortgage-backed securities portfolio. The

                                      54

<PAGE>



Corporation's  federal income tax expense was favorably  impacted in 1995 by the
use of $228,000 of low-income housing federal income tax credits.

ASSET QUALITY

      In May 1993,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment  of a Loan (SFAS  114).  SFAS 114,  as  amended  in  October  1994 by
Statement of Financial Accounting Standards No. 118, Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures (SFAS 118),  requires
impaired loans to be measured based on the present value of expected future cash
flows  discounted  at the  loan's  effective  interest  rate or, as a  practical
expedient,  at the  loan's  observable  market  price,  or the fair value of the
collateral if the loan is collateral  dependent.  This statement also applies to
all loans restructured in troubled debt restructurings  involving a modification
of terms as well as clarifies that a creditor should evaluate the collectibility
of both contractual  interest and contractual  principal of all receivables when
assessing the need for a loss accrual. The Corporation adopted the provisions of
SFAS 114, as amended by SFAS 118, on a prospective  basis as of January 1, 1995.
Neither the initial  adoption nor the ongoing  effect of SFAS 114 has had, or is
expected to have,  a material  impact on the  financial  condition or results of
operations of the Corporation.

      Impaired loans as defined by SFAS 114 totaled  $554,000 and $0 at December
31, 1996 and 1995,  respectively and include 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 114 does not
apply. The  Corporation's  respective  average  investment in impaired loans was
$559,000 and $0 during 1996 and 1995,  respectively.  Interest income recognized
on impaired loans during 1996 and 1995,  totaled  $27,000 and $0,  respectively.
Impaired  loans had specific  allocations  of the  allowance  for loan losses in
accordance with SFAS 114 approximating  $150,000 and $0 at December 31, 1996 and
1995, respectively.


                                      55

<PAGE>



      The  following  table  presents the  Corporation's  nonperforming  assets.
Management  normally  considers loans to be  nonperforming  when payments are 90
days or more past due, when credit terms are  renegotiated  below market levels,
or  when  an  analysis  of an  individual  loan  indicates  repossession  of the
collateral  may be necessary to satisfy the loan.  As of December 31, 1996,  the
Corporation had no loans which were "troubled debt restructurings" as defined in
Statement of Financial  Accounting  Standards No. 15,  Accounting by Debtors and
Creditors for Troubled Debt Restructurings.
<TABLE>
<CAPTION>

December 31,                                       1996           1995
------------                                       ----           ----
                                                  (Dollars in Thousands)

<S>                                              <C>      <C>
Nonaccruing loans:
  One- to four-family residential mortgages      $  892   $   68
  Income-producing property                         359       --
  FHA-partially insured and VA-partially
   guaranteed                                       183      253
  Commercial                                        195       --
  Consumer installment                              158       28
                                                -------   ------
      Total                                      $1,787    $ 349
                                                 ======    =====
      Percentage of total assets                   0.21%    0.05%
                                                =======   ======
Real estate owned:(1)
  One-to four-family residential mortgages       $  205    $ 238
  Construction and development                        7        7
                                               --------   ------
      Total                                      $  212    $ 245
                                                 ======    =====
      Percentage of total assets                   0.03%    0.03%
                                                =======   ======
      Total nonaccruing loans and real estate
       owned                                     $1,999    $ 594
                                                 ======    =====
      Percentage of total assets                   0.24%    0.08%
                                                 ======    =====
</TABLE>

(1) Real estate owned  includes  properties in redemption  and acquired  through
foreclosure.

      The following is a summary of the Corporation's loan and real estate owned
loss experience from December 31, 1993,  through December 31, 1996. The ratio of
net loan charge-offs  (recoveries) to the average loans  outstanding  during the
years ended  December  31,  1996 and 1995,  was 0.01  percent and 0.00  percent,
respectively.
<TABLE>
<CAPTION>

                                       Loans        Real Estate     Total
                                       -----        -----------     -----

<S>                                 <C>            <C>          <C>
Balance at December 31, 1993        $3,846,733     $ 167,087    $4,013,820
  Provision for losses                 240,000       565,000       805,000
  Charges against the allowance       (153,263)     (711,937)     (865,200)
  Recoveries                           190,448        55,823       246,271
                                    ----------     ---------    ----------
Balance at December 31, 1994         4,123,918        75,973     4,199,891
  Provision for losses                 240,000       120,000       360,000
  Charges against the allowance        (55,107)      (34,614)      (89,721)
  Recoveries                            54,328        62,218       116,546
                                    ----------     ---------    ----------
Balance at December 31, 1995         4,363,139       223,577     4,586,716
  Provision for losses                 240,000        60,000       300,000
  Charges against the allowance        (76,528)     (187,214)     (263,742)
  Recoveries                            36,983       115,796       152,779
                                    ----------     ---------    ----------
Balance at December 31, 1996        $4,563,594     $ 212,159    $4,775,753
                                    ==========     =========    ==========
</TABLE>

      While the $4.6  million  allowance  for loan losses at December  31, 1996,
grew from $4.4 million at December 31, 1995,  the allowance for loan losses as a
percentage  of total loans as of December  31,  1996,  declined to 0.62  percent
compared  to 0.69  percent  at  December  31,  1995.  Nonperforming  assets as a
percentage of total assets was 0.08 percent at December 31, 1995,  and increased
slightly to 0.24 percent at December 31, 1996.

                                      56

<PAGE>




      Management believes the current provisions and related allowances for loan
and real estate owned losses are adequate to meet current and  potential  credit
risks in the current loan and real estate owned  portfolios,  although there can
be no  assurances  the related  allowances  may not have to be  increased in the
future.

ASSET/LIABILITY MANAGEMENT

      The operating results of the Corporation are dependent, to a large extent,
upon its net  interest  income,  which is the  difference  between its  interest
income from interest-earning assets, such as loans,  mortgage-backed  securities
and investment securities, and interest expense on interest-bearing liabilities,
such as deposits and FHLB advances.

      The  Corporation's  current  asset/liability  management  objective  is to
provide an  acceptable  balance  between  interest rate risk,  credit risk,  and
maintenance of yield.  The principal  operating  strategy of the Corporation has
been to manage the repricing of its interest-sensitive assets and liabilities to
reduce the  sensitivity  of the  Corporation's  earnings  to changes in interest
rates. The Corporation  generally  implemented this strategy by: (i) originating
and retaining  adjustable-rate  mortgages;  (ii)  originating  construction  and
consumer loans which  typically have shorter terms to maturity or repricing than
long-term,  fixed-rate residential mortgages; (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  Corporation  has used  interest  rate  exchange  agreements to manage
interest rate exposure on its interest-bearing  liabilities.  In November, 1994,
the Corporation  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  totaled $0 and $107,000 at December 31,
1996  and  1995,  respectively.  Amortization  of the loss as  interest  expense
totaled $107,000,  $109,000, and $13,000 in 1996, 1995, and 1994,  respectively.
During the years  ended  December  31,  1996,  1995,  and 1994,  the cost of the
Corporation's  interest rate exchange  agreements  was $107,000,  $109,000,  and
$568,000, respectively, and is included as interest expense on deposits.

      The  following  table  sets forth the  interest  rate  sensitivity  of the
Corporation's   interest-earning  assets  and  interest-bearing  liabilities  at
December 31,  1996.  One  indicator  used to measure  interest  rate risk is the
one-year gap which  represents the difference  between  interest-earning  assets
which mature or reprice within one year and  interest-bearing  liabilities which
mature or reprice within one year. The Corporation's one-year gap was a negative
9.3 percent at December 31, 1996, compared to a negative 7.1 percent at December
31,  1995,  and the  Corporation's  three-to-five-year  gap was a  negative  1.9
percent at December 31, 1996, compared to a negative 0.6 percent at December 31,
1995. The change in the  Corporation's  negative gap position between periods is
primarily the result of using available  liquidity from shorter-term net deposit
inflows,   the  proceeds  from  maturities  and  repayments  of  investment  and
mortgage-backed   securities,   and  short-term  FHLB  borrowings  to  fund  the
origination  of  three-year   adjustable-rate  mortgages  and  the  purchase  of
medium-term  fixed- and  adjustable-rate  mortgage loans.  Fixed-rate  loans and
mortgage-backed  securities are shown on the basis of  contractual  amortization
adjusted for  prepayments  at rates  estimated by  available  industry  sources.
Adjustable-rate   loans  and  investment  and  mortgage-backed   securities  are
determined  to  reprice  at the  earlier  of  maturity,  call  date or the  next
contractual  repricing  date.  The  allocation of savings,  checking,  and money
market  account   balances  between  the  various   maturity/repricing   periods
approximates the Corporation's  current withdrawal  experience.  The assumptions
used  should  not be  regarded  as  indicative  of the  actual  prepayments  and
withdrawals which may be experienced by the Corporation.

      The data presented in the table  represents a static measure of assets and
liabilities  maturing over various time periods.  The table does not necessarily
indicate the impact of general interest rate movements on the  Corporation's net
yield,  because the repricing of certain categories of assets and liabilities is
subject to competitive and other pressures beyond the Corporation's  control. As
a result,  certain  assets and  liabilities  indicated  as maturing or otherwise
repricing  within a stated  period may, in fact,  mature or reprice at different
times or at different volumes.

                                      57

<PAGE>


<TABLE>
<CAPTION>

Maturity/Rate Sensitivity       0-6      7-12       1-3       3-5      Over 5
At December 31, 1996          Months    Months     Years     Years     Years     Total
--------------------          ------    ------     -----     -----     -----     -----
                                                    (Dollars in Thousands)
<S>                        <C>        <C>        <C>        <C>       <C>       <C>
ASSETS:
  First mortgage loans     $116,917   $ 82,094   $230,733   $103,471  $129,298  $662,513
  Second mortgage and
   other loans               38,353      4,971      8,176      4,497     3,769    59,766
  Mortgage-backed securities 13,909      2,100      6,261      4,622        --    26,892
  Investment securities      10,011     19,086        --       2,000        --    31,097
  Other                      15,270         --        --         --         --    15,270
                           --------   --------   --------   --------  --------  --------
    Interest-earning assets 194,460    108,251    245,170    114,590   133,067   795,538
                           --------   --------   --------   --------  --------  --------
  Non-interest earning
   assets                                                                         34,262
                           --------   --------   --------   --------  --------  --------
    Total assets                                                                $829,800
                                                                                ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
  Savings                     6,514      5,867     10,043      8,126    34,664    65,214
  Money market savings       16,136                                               16,136
  Checking                   14,714     11,692     24,188      6,474    14,371    71,439
  Money market checking      16,887      5,257      2,984     26,835        --    51,963
  Certificates of deposit   137,044     84,082     80,111     21,940     1,037   324,214
  Advances from Federal                                                                0
    Home Loan Bank           57,983     20,438     98,548     21,882     3,788   202,639
                            -------    -------    -------    -------   -------  --------
    Interest-bearing
     liabilities            249,278    127,336    215,874     85,257    53,860   731,605
                            -------    -------    -------     ------    ------  --------
  Stockholders' equity
    and non-interest
    bearing liabilities                                                           98,195
                            -------    -------    -------     ------    ------  --------
    Total liabilities and
      stockholders' equity                                                      $829,800
                            =======    =======    =======     ======    ======  ========
RATE SENSITIVITY GAP AND RATIOS:
  Gap for period (interest-
    earning assets less
    interest-bearing
    liabilities)           $(54,818)  $(19,085)  $ 29,296   $ 29,333  $ 79,207  $ 63,933
                           --------   --------   --------   --------  --------  --------
  Cumulative gap           $(54,818)  $(73,903)  $(44,607)  $(15,274) $ 63,933        --
                           ========   ========   ========   ========  ========  ========
  Gap as a percentage of
    interest-earning assets   -6.89%     -2.40%      3.68%      3.69%     9.96%     8.04%
                           --------   --------   --------   --------  --------  --------
  Cumulative gap as a
    percentage of interest-
    earning assets            -6.89%     -9.29%     -5.61%     -1.92%      8.04%      --
                           ========   ========   ========   ========  ========= ========
  Cumulative gap at
    December 31, 1995         -3.26%     -7.05%      2.34%     -0.63%      7.98%      --
                           ========   ========   ========   ========  ========= ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES

      Total assets rose to $829.8  million at December 31, 1996,  an increase of
$68.4 million, or 9.0 percent, from $761.4 million at December 31, 1995.

      The  Corporation's  regulatory  liquidity ratios at December 31, 1996, and
December  31,  1995,  were 8.6  percent  and  12.7  percent,  respectively.  The
Corporationanticipates  it will have sufficient  funds available to meet current
commitments  either through  operations,  deposit growth, or borrowings from the
FHLB. At December 31, 1996, the Corporation had total outstanding  mortgage loan
commitments  of $19.3  million of which $13.4  million were for  adjustable-rate
loans  and  $5.9  million  were  for  fixed-rate  loans.  The  interest  rate on
fixed-rate loans generally is not determined until the approximate closing date.
Loans  in  process  at  year-end   1996  totaled  $18.1  million  and  primarily
represented  undrawn funds on adjustable- and fixed-rate  construction  loans of
$16.8 million and $1.3  million,  respectively.  In addition at year end,  there
were $798,000 of commitments to make consumer and commercial business loans. The
Corporation also had commitments to extend  adjustable-rate home equity lines of
credit  in the  amount  of $32.9  million  at  December  31,  1996.  There  were
additionally  $2.1  million of loans in  process  or undrawn  lines of credit on
installment  and  commercial  business  loans  as  of  December  31,  1996.  The
Corporation  had  no  firm  commitments  to  purchase  mortgage  loans  and  had
commitments  to sell $1.3 million of fixed-rate,  residential  mortgage loans at
December  31,  1996.   Approximately   $2.6  million  of  one-  to   four-family
residential,  fixed-rate  mortgage loans was held for sale at December 31, 1996,
with a weighted average interest rate of 7.3 percent.

                                      58

<PAGE>




LENDING

      Loans  receivable  increased  $107.4 million,  or 17.6 percent,  to $717.7
million at December 31, 1996, from $610.3 million at December 31, 1995.

      The  Corporation  originated  $226.6  million  of  loans  during  1996,  a
substantial  increase from $151.6  million  during 1995.  The  volatility of the
interest rate environment  during 1996 resulted in significant  loan demand.  As
rates moved lower during 1996, customers sought to refinance their mortgages and
as market rates edged upward,  customers  sought to secure  mortgage  loans with
favorable  interest  rates.  As a result of more  refinancings  and in  general,
greater  origination  activity,  principal  repayments on loans were higher. The
Corporation received principal repayments on loans of $118.0 million during 1996
compared to $84.2 million  during 1995.  The  following  schedule sets forth the
Corporation's loan originations for 1996 and 1995.
<TABLE>
<CAPTION>

                                                   1996       1995
                                                   ----       ----
                                                (Dollars in Thousands)
<S>                                             <C>       <C>
FIXED-RATE:
  One- to four-family residential               $ 36,990  $ 18,507
  Income-producing                                   758       337
  FHA-insured and VA-partially guaranteed            217       141
  Construction and development:
    One- to four-family residential                8,456       856
    Income-producing                                  --       314
  Commercial                                         634       568
  Consumer                                        18,706    12,788
                                                --------  --------
                                                  65,761    33,511
ADJUSTABLE-RATE:
  One- to four-family residential                 68,063    40,183
  Income-producing                                   610     4,380
  Construction and development:
    One- to four-family residential               50,889    47,784
    Income-producing                              18,630     9,052
  Commercial                                       3,049     2,566
  Second mortgage                                     --        60
  Consumer                                        19,600    14,015
                                                --------  --------
                                                 160,841   118,040
                                                --------  --------
  Total originations                            $226,602  $151,551
                                                ========  ========
</TABLE>

      During the years ended  December 31, 1996 and 1995, the  Corporation  sold
primarily   fixed-rate  loans  aggregating  $32.0  million  and  $14.8  million,
respectively.  The level of loan sales is  partially a function of the  interest
rate environment. When the spread between fixed and adjustable mortgage interest
rates was relatively wide in the first half of 1995,  mortgage loan originations
reflected   customer   preferences   in  the   Corporation's   market  area  for
adjustable-rate loans which are retained in the Corporation's  portfolio. In the
first half of 1996,  however,  the spread between fixed and adjustable  mortgage
rates  narrowed  and  there  was  a  proportionately   higher  concentration  of
fixed-rate  mortgage loan  applications and subsequent  closings.  Consequently,
there has been a higher level of sales in 1996.

      During  the  years  ended  December  31,  1996 and 1995,  the  Corporation
purchased from an  unaffiliated  financial  institution  $31.7 million and $42.0
million,  respectively of loans  consisting of one- to four-family  residential,
fixed-  and   adjustable-rate,   medium-term  mortgage  loans.  The  Corporation
purchases  residential  loans to supplement and complement its own mortgage loan
production;  purchases  are also  dependent  upon product  availability  and the
Corporation's liquidity position.


                                      59

<PAGE>



INVESTMENT AND MORTGAGE-BACKED SECURITIES

      In November 1995, the FASB issued A Guide to  Implementation  of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities (Guide).
The Guide  permitted  an  institution  to reassess  the  appropriateness  of the
classifications of all securities held at the time and account for any resulting
reclassifications  at fair  value in  accordance  with  Statement  of  Financial
Accounting  Standards No. 115,  Accounting  for Certain  Investments in Debt and
Equity  Securities  (SFAS  115).  The  Corporation,  in order  to allow  further
flexibility  in  future   asset/liability   management   decisions  relating  to
securities,  reclassified  $18.1  million of corporate  notes and U.S.  Treasury
securities  from  a  held-to-maturity  classification  to an  available-for-sale
classification  with unrealized  pre-tax losses of $103,000 on these  securities
recorded as a negative adjustment to stockholders' equity.

      At December 31, 1995, investment and mortgage-backed  securities available
for sale included  unrealized  net gains of $109,000  reported net of $37,000 of
federal income tax expense.  Throughout the latter part of 1996, 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, 1996, investment and mortgage-backed  securities available
for sale included  unrealized net gains of $325,000  reported net of $110,000 of
federal income tax expense as a separate component of stockholders'  equity. The
Corporation  had no  investment  or  mortgage-backed  securities  classified  as
trading securities as of December 31, 1996.

      Included  in  the  composition  of the  Corporation's  earning  assets  at
December 31, 1996,  were $27.2 million of  mortgage-backed  securities,  an $8.0
million,  or 22.6 percent  decline  from the $35.2  million held at December 31,
1995. The  relatively low interest rate  environment of early 1996 led to a more
predominant   refinance   market  and  resulted  in  acceleration  of  principal
repayments on the mortgage  loans  underlying  these  securities.  While average
outstanding  balances of mortgage-backed  securities were twice as high in 1995,
principal repayments and maturities of $8.2 million in 1996 outpaced the rate of
repayments during 1995. The level of repayments for 1995 was $12.3 million.  The
Corporation  did not purchase any  mortgage-backed  securities  during the years
ended  December  31,  1996  or  1995.  During  1996,  there  were  no  sales  of
mortgage-backed securities, but during 1995, $19.6 million of available-for-sale
mortgage-backed securities were sold. Gross gains and gross losses of $9,000 and
$51,000, respectively were recognized on those sales. The approximate fair value
of the  mortgage-backed  securities  portfolio was $27.2 million at December 31,
1996,  with  gross  unrealized  gains  and  losses  of  $541,000  and  $213,000,
respectively.

      As  of  September  30,  1996,  based  upon  liquidity  and  interest  rate
considerations, management determined it could no longer assert its intention to
hold all  mortgage-backed  securities  until  maturity.  Therefore,  the  entire
mortgage-backed securities portfolio totalling $28.6 million was reclassified to
an  available-for-sale  classification with unrealized pre-tax gains of $190,000
being recorded as a favorable  adjustment to stockholders'  equity. As a result,
the Corporation intends to classify any investment or mortgage-backed securities
currently held or purchased in the subsequent two years as available for sale.

      At December 31, 1996, the level of the Corporation's investment securities
portfolio  declined $24.0  million,  or 43.6 percent to $31.1 million from $55.1
million at December 31, 1995.  The decrease in  investment  securities  resulted
principally  from the maturity of $16.1 million of investment  securities,  call
options  being  exercised  on  $4.3  million  of  available-for-sale  investment
securities,  and  sales  of  $23.1  million  of  available-for-sale   investment
securities.  Proceeds from the maturities,  calls, and sales were, in part, used
to  purchase  $7.0  million of  available-for-sale  medium-term  federal  agency
securities and $13.1 million of  available-for-sale  medium-term  U.S.  Treasury
securities.  Gross gains and gross losses of $43,000 and $107,000,  respectively
were recognized on the sales of these investment  securities.  The proceeds from
the maturities,  calls, and sales also contributed to funding loan  originations
and loan  purchases of $226.6 million and $31.7  million,  respectively.  During
1995, $13.9 million of available-for-sale investment securities were sold. Gross
gains and gross losses of $30,000 and $33,000,  respectively  were recognized on
those  sales.  Proceeds  from the sales were,  in part,  used to purchase a $5.0
million available-for-sale corporate note containing a lengthened maturity but a
higher yield compared to the securities sold.

                                      60

<PAGE>



The approximate fair value of the Corporation's  investment securities was $31.1
million at December 31, 1996, with gross  unrealized gains and losses of $44,000
and $47,000, respectively.

DEPOSITS

      Total  deposits grew 4.9 percent from $527.8 million at December 31, 1995,
to $553.6 million at December 31, 1996. The $25.8 million increase resulted from
transaction account,  savings account, and certificate of deposit growth of $6.2
million,  $13.8  million,  and $5.8  million,  respectively.  During  1995,  the
Corporation  introduced  Really Free Checking and five other highly  competitive
checking  account  programs.  To support these checking  account  programs,  the
Corporation conducted a comprehensive  marketing campaign. As a result, a record
number of new checking accounts were opened during 1995. The continued promotion
of  Really  Free   Checking  in  1996  has  resulted  in  an  expansion  of  the
Corporation'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 Corporation  promoted the
competitive  rates  offered  on  seven  and  eleven-month   certificates,   also
attracting new customers.  In addition, in late 1996, the Corporation introduced
and heavily  promoted a high yield money market  savings  product.  Although the
majority of the growth in  certificates  of deposit and the money market savings
product 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.

BORROWINGS

      Since mid-1993,  borrowings from the FHLB have been an integral  component
of the Corporation'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 grew from $77.8 million at December 31,
1993, to $160.6  million at December 31, 1995, and to $202.6 million at December
31, 1996. Of the  outstanding  FHLB advances at year-end  1996,  $150.9  million
carried a weighted average fixed-rate of 6.08 percent.  Adjustable-rate advances
at December 31, 1996,  totaled  $51.7  million,  all of which reprice based upon
three-month  LIBOR. FHLB advances were obtained,  as needed in 1996, to meet the
Corporation'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 Corporation
emphasized  increasing  its deposit base by  attracting  new  customers  through
various promotional activities.

CAPITAL

      Total  stockholders'  equity  was $62.5  million  at  December  31,  1996,
relatively  unchanged from the 1995 year-end total of $62.7 million.  Book value
per share was  $13.27 at  December  31,  1996,  compared  to $12.80 per share at
December  31,  1995.   Although  1996  earnings   contributed  to  increases  in
stockholders'  equity, the effect was mostly offset by dividend declarations and
the repurchase of CFSB Bancorp,  Inc. common stock. Because total assets grew at
a proportionately  higher rate than stockholders'  equity during 1996, the ratio
of stockholders' equity to assets declined to 7.53 percent at December 31, 1996,
from to 8.24  percent at December 31, 1995.  Community  First Bank's  regulatory
capital ratios are well in excess of minimum capital  requirements  specified by
federal banking  regulations.  The Bank's tangible,  core and risk-based capital
ratios were 7.2  percent,  7.2  percent,  and 13.2 percent at December 31, 1996,
respectively.

      The Corporation's  Board of Directors declared cash dividends of $0.45 per
share in 1996, an increase of 18.4 percent over 1995 dividends declared of $0.38
per share.  The  Corporation's  cash dividend policy is continually  reviewed by
management  and the Board of Directors.  The  Corporation  currently  intends to
continue its policy of paying quarterly dividends,  however,  such payments will
depend  upon a number of factors,  including  capital  requirements,  regulatory
limitations,  the Corporation's  financial  condition and results of operations,
and the Bank's  ability to pay  dividends  to the  Corporation.  Presently,  the
Corporation has no significant source of income other than

                                      61

<PAGE>



dividends from the Bank.  Consequently,  the Corporation  depends upon dividends
from the Bank to  accumulate  earnings  for  payment  of cash  dividends  to its
stockholders.

      The  Corporation's  Board of Directors  also  declared a ten percent stock
dividend on August 20, 1996. The  additional  shares as a result of the dividend
were  distributed on September 12, 1996, to  stockholders of record as of August
30,  1996.   Although  the  stock   dividend   represents  a  component  of  the
Corporation's  established  dividend  practices and the  Corporation  intends to
issue similar dividends in the future,  such declarations will depend on several
factors similar to the cash dividend.

      During June 1996, the  Corporation's  Board of Directors  approved a stock
repurchase  program  pursuant to which the  Corporation  may  repurchase up to 5
percent or  approximately  246,000  shares of CFSB Bancorp,  Inc.  common stock.
Through the repurchase  program,  the Corporation  repurchased 222,920 shares of
CFSB  Bancorp,  Inc.  common  stock on the open market for $4.1  million,  or an
average purchase price of $18.34 per share. The program has a one-year term.

      In  October  1995,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 123,  Accounting for  Stock-Based  Compensation  (SFAS 123).  This
statement  encourages  all  entities  to  adopt a fair  value  based  method  of
accounting for their employee stock-based compensation plans. The statement also
allows an entity to continue to measure  compensation cost for those plans using
the  intrinsic  value  based  method  of  accounting  prescribed  by  Accounting
Principles  Board  Opinion  No. 25,  Accounting  for Stock  Issued to  Employees
(Opinion 25). Entities electing to remain with the accounting in Opinion 25 must
make pro forma  disclosures of net income and earnings per share, as if the fair
value  based  method of  accounting  defined in SFAS 123 had been  applied.  The
accounting and disclosure  requirements of SFAS 123 are generally  effective for
transactions  entered into in fiscal  years that begin after  December 15, 1995,
though  they may be adopted on  issuance.  Pro forma  disclosures  required  for
entities  that elect to continue to measure  compensation  cost using Opinion 25
must include the effects of all awards  granted in fiscal years that begin after
December 15, 1994. The Corporation  adopted the provisions of SFAS 123 effective
January 1, 1996,  and elected the pro forma  disclosure  method in its  year-end
1996 Consolidated Financial Statements and Notes thereto.

ACCOUNTING STANDARDS

      As  discussed  in  "Liquidity  and  Capital  Resources  --  Capital,"  the
Corporation  changed its method of disclosure for  stock-based  compensation  in
1996 to adopt the  provisions  of the FASB's  Statement of Financial  Accounting
Standards No. 123,  Accounting  for  Stock-Based  Compensation.  As discussed in
"Results of  Operations  for the Year Ended  December 31, 1996,  Compared to the
Year Ended December 31, 1995," the Corporation  changed its method of accounting
for  mortgage  servicing  rights in 1996 to adopt the  provisions  of the FASB's
Statement of Financial  Accounting  Standards No. 122,  Accounting  for Mortgage
Servicing  Rights, an amendment of FASB Statement No. 65. As discussed in "Asset
Quality," the Corporation changed its method of accounting for impaired loans in
1995 to adopt the  provisions  of the FASB's  Statement of Financial  Accounting
Standards  No.  114,  Accounting  by  Creditors  for  Impairment  of a Loan  and
Statement of Financial Accounting Standards No. 118, Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures.

      In June 1996, the FASB issued Statement of Financial  Accounting Standards
No.  125,  Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
Extinguishments  of  Liabilities  (SFAS  125).  This  statement  is based upon a
financial-components   approach   that  focuses  on  control  to  determine  the
accounting  for transfers of assets.  Sales and transfers of assets often divide
financial assets and liabilities into components, some of which are retained and
some which are not. After  transfer,  an entity  recognizes on its balance sheet
the  financial  and  servicing  assets it controls  and the  liabilities  it has
incurred,  and  removes  the  assets  when  control  has been  surrendered,  and
derecognizes  liabilities when the obligations have been satisfied.  Examples of
transactions  covered by this  standard  include,  but are not limited to, asset
securitizations,   repurchase  agreements,   wash  sales,  loan  participations,
transfers  of loans  with  recourse,  and  servicing  of loans.  This  statement
requires liabilities and derivatives incurred or obtained

                                      62

<PAGE>



by transferors as part of a transfer of financial  assets be initially  measured
at fair value, if practicable.  SFAS 125 is effective for transactions occurring
after December 31, 1996, and can not be adopted early or applied  retroactively.
The  Corporation  does not  expect  implementation  of this  standard  to have a
material impact on its financial condition or results of operation.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>

             INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                                               Page

CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------

<S>                                                             <C>
Independent Auditors' Report                                    64

Consolidated Statements of Financial Condition at
  December 31, 1996 and 1995                                    65

Consolidated Statements of Operations for the
  Years Ended December 31, 1996, 1995 and 1994                  66

Consolidated Statements of Stockholders' Equity for the
  Years Ended December 31, 1996, 1995 and 1994                  67

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1996, 1995 and 1994                              68

Notes to Consolidated Financial Statements                      70

SUPPLEMENTARY DATA

Quarterly Financial Information                                 99
</TABLE>



                                      63

<PAGE>



INDEPENDENT AUDITORS' REPORT


KPMG PEAT MARWICK LLP

The Board of Directors and Stockholders
CFSB Bancorp, Inc.:

We have  audited the  consolidated  statements  of  financial  condition of CFSB
Bancorp,  Inc., and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the years in the  three-year  period  ended  December  31,  1996.  These
consolidated  financial  statements are the  responsibility of the Corporation's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of CFSB Bancorp, Inc.,
and  subsidiary  as of  December  31,  1996 and 1995,  and the  results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles.

As  discussed in notes 1 and 5 to the  consolidated  financial  statements,  the
Corporation  changed its method of accounting for impairment of loans in 1995 to
adopt the provisions of the Financial  Accounting Standards Board's Statement of
Financial  Accounting  Standards No. 114, Accounting by Creditors for Impairment
of a Loan, and Statement of Financial  Accounting  Standards No. 118, Accounting
by Creditors for Impairment of a Loan--Income  Recognition and  Disclosures.  As
discussed  in  notes  1 and 5 to  the  consolidated  financial  statements,  the
Corporation  changed its method of accounting for mortgage  servicing  rights in
1996 to adopt the  provisions  of the  Financial  Accounting  Standards  Board's
Statement of Financial  Accounting  Standards No. 122,  Accounting  for Mortgage
Servicing Rights, an Amendment of FASB Statement No. 65.


/s/ KPMG Peat Marwick LLP


Lansing, Michigan
January 21, 1997


                                      64

<PAGE>

<TABLE>
<CAPTION>


CFSB BANCORP, INC., AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31,                                                1996          1995
------------                                                ----          ----

<S>                                                   <C>             <C>
ASSETS:
  Cash and amounts due from depository institutions   $  7,479,722    $7,070,041
  Interest-earning deposits with Federal Home Loan
    Bank and other depository institutions, at cost,
    which approximates market                           15,270,241    22,654,134
  Investment securities available for sale, at
    fair value                                          31,093,494    55,109,533
  Mortgage-backed securities available for sale,
    at fair value                                       27,220,567       607,895
  Mortgage-backed securities held to maturity, net
    (fair value $35,160,963 - 1995)                             --    34,548,012
  Loans receivable, net                                717,714,636   610,284,070
  Accrued interest receivable, net                       4,349,240     4,883,233
  Real estate, net                                              --        21,717
  Premises and equipment, net                           10,985,199    11,223,147
  Stock in Federal Home Loan Bank of Indianapolis,
    at cost                                             10,632,000     8,536,800
  Deferred federal income tax benefit                      317,270       326,258
  Other assets                                           4,737,177     6,152,932
                                                      ------------  ------------
      Total assets                                    $829,799,546  $761,417,772
                                                      ============  ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
  Deposits                                            $553,574,001  $527,816,178
  Advances from Federal Home Loan Bank                 202,639,323   160,649,376
  Advance payments by borrowers for taxes and
    insurance                                            1,356,507     1,281,043
  Accrued interest payable                               4,233,799     3,474,063
  Federal income taxes payable                             740,242       783,000
  Other liabilities                                      4,785,647     4,671,091
                                                      ------------  ------------
      Total liabilities                                767,329,519   698,674,751
                                                      ------------  ------------
STOCKHOLDERS' EQUITY:
  Serial preferred stock, $0.01 par value;
    authorized 2,000,000 shares, issued - none                  --            --
  Common stock, $0.01 par value; authorized
    10,000,000 shares; issued 4,849,611 shares in
    1996 and 4,518,478 shares in 1995                       48,496        45,185
  Additional paid-in capital                            41,422,898    34,389,162
  Retained income - substantially restricted            23,863,600    29,852,980
  Net unrealized gains on available-for-sale
    securities, net of tax of $110,548 - 1996 and
    $36,917 - 1995                                         214,594        71,661
  Employee Stock Ownership Plan                           (459,408)     (691,294)
  Treasury stock, at cost; 143,570 shares - 1996
    and 68,935 shares - 1995                            (2,620,153)     (924,673)
                                                      ------------  ------------
      Total stockholders' equity                        62,470,027    62,743,021
                                                      ------------  ------------
  Commitments and contingent liabilities
      Total liabilities and stockholders' equity      $829,799,546  $761,417,772
                                                      ============  ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                          65

<PAGE>




CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>


Years Ended December 31,                        1996         1995          1994
------------------------                      --------     --------      --------

<S>                                         <C>          <C>           <C>
INTEREST INCOME:
  Loans receivable                          $51,612,087  $44,448,774   $35,494,675
  Mortgage-backed securities                  2,341,727    4,187,867     4,448,900
  Investment securities                       2,188,967    3,862,157     6,423,718
  Other                                       1,259,274    1,122,512       712,388
                                            -----------  -----------   -----------
      Total interest income                  57,402,055   53,621,310    47,079,681
                                            -----------  -----------   -----------
INTEREST EXPENSE:
  Deposits, net                              23,837,494   23,810,254    20,755,632
  Federal Home Loan Bank advances            10,660,383    9,377,784     6,222,181
                                            -----------  -----------   -----------
      Total interest expense                 34,497,877   33,188,038    26,977,813
                                            -----------  -----------   -----------
      Net interest income before
        provision for loan losses            22,904,178   20,433,272    20,101,868
  Provision for loan losses                     240,000      240,000       240,000
                                            -----------  -----------   -----------
      Net interest income after
        provision for loan losses            22,664,178   20,193,272    19,861,868
                                            -----------  -----------   -----------
OTHER INCOME (LOSS):
  Service charges and other fees              3,449,537    2,688,164     2,073,219
  Loan servicing income                         399,446      476,292       553,609
  Losses on sales of investment
    securities available for sale, net          (64,188)      (2,975)      (32,688)
  Losses on sales of mortgage-backed
    securities available for sale, net               --      (42,056)           --
  Gains on sales of loans, net                  256,343      100,885        41,152
  Real estate operations, net                   (60,000)     467,478      (565,000)
  Other, net                                    260,529      278,138       279,079
                                            -----------  -----------   -----------
      Total other income                      4,241,667    3,965,926     2,349,371
                                            -----------  -----------   -----------
GENERAL AND ADMINISTRATIVE EXPENSES:
  Compensation, payroll taxes, and
    fringe benefits                           8,010,714    7,807,029     7,705,606
  Office occupancy and equipment              2,609,958    2,170,139     2,019,382
  Federal insurance premiums                  1,150,117    1,174,941     1,207,890
  FDIC special assessment                     3,355,000           --            --
  Marketing                                     792,083      626,657       417,078
  Data processing                               365,704      316,188       895,968
  Other, net                                  2,739,977    2,332,341     2,227,497
                                            -----------  -----------   -----------
      Total general and administrative
        expenses                             19,023,553   14,427,295    14,473,421
      Income before federal income
        tax expense                           7,882,292    9,731,903     7,737,818
Federal income tax expense                    2,435,000    2,929,000     2,149,000
                                            -----------  -----------   -----------
      NET INCOME                            $ 5,447,292  $ 6,802,903   $ 5,588,818
                                            ===========  ===========   ===========
EARNINGS PER SHARE:
  Primary                                   $      1.09  $      1.35   $      1.09
  Fully diluted                                    1.09         1.35          1.09
                                            ===========  ===========   ===========
DIVIDENDS PAID PER SHARE                    $      0.43  $      0.37   $      0.31
                                            ===========  ===========   ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                          66

<PAGE>




CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                Net Unrealized
                                                                     Gains
                                                                 (Losses) on
                                         Additional               Available-  Commitment               Total
                                 Common   Paid-In   Retained       for-Sale    for ESOP    Treasury  Stockholders'
                                 Stock    Capital    Income       Securities     Debt        Stock      Equity
                                 -----    -------    ------       ----------     ----        -----      ------

<S>                             <C>     <C>         <C>           <C>        <C>          <C>        <C>
Balance at December 31, 1993    $37,352 $17,610,623 $38,037,832   $793,001   $(1,155,066) $(488,753) $54,834,989
  Net income for the year 1994       --          --   5,588,818         --            --         --    5,588,818
  10% common stock dividend       3,730   6,990,722  (7,003,569)        --            --         --       (9,117)
  Treasury stock purchased           --          --          --         --            -- (1,100,607)  (1,100,607)
  Stock options exercised            --          --    (231,442)        --            --    347,072      115,630
  Repayment of ESOP debt             --          --          --         --       231,886         --      231,886
  Cash dividends on common stock -
    $0.33 per share                  --          --  (1,616,914)        --            --         --   (1,616,914)
  Tax benefit of ESOP dividends      --      27,928          --         --            --         --       27,928
  Tax benefit associated with
    exercise of stock options        --      49,411          --         --            --         --       49,411
  Change in market value of
    available-for-sale securities,
    net of tax of $1,295,449         --          --          -- (2,514,696)           --         --   (2,514,696)
                                 ------  ----------  ---------- -----------  ----------- ----------- ------------
Balance at December 31, 1994     41,082  24,678,684  34,774,725 (1,721,695)     (923,180)(1,242,288)  55,607,328
  Net income for the year 1995       --          --   6,802,903         --            --         --    6,802,903
  10% common stock dividend       4,103   9,638,552  (9,654,329)        --            --         --      (11,674)
  Stock options exercised            --          --    (203,543)        --            --    317,615      114,072
  Repayment of ESOP debt             --          --          --         --       231,886         --      231,886
  Cash dividends on common stock -
    $0.38 per share                  --          --  (1,866,776)        --            --         --   (1,866,776)
  Tax benefit of ESOP dividends      --      45,220          --         --            --         --       45,220
  Tax benefit associated with
    exercise of stock options        --      26,706          --         --            --         --       26,706
  Change in market value of
    available-for-sale securities,
    net of tax of $923,851           --         --           --  1,793,356            --         --    1,793,356
                                 ------  ----------   --------- ----------      -------- ----------  -----------
Balance at December 31, 1995     45,185  34,389,162  29,852,980     71,661      (691,294)  (924,673)  62,743,021
  Net income for the year 1996       --          --   5,447,292         --            --         --    5,447,292
  10% common stock dividend       3,311   6,971,456  (8,980,475)        --            --  1,995,912       (9,796)
  Treasury stock purchased           --          --          --         --            -- (4,089,237)  (4,089,237)
  Stock options exercised            --          --    (283,171)        --            --    397,845      114,674
  Repayment of ESOP debt             --          --          --         --       231,886         --      231,886
  Cash dividends on common stock -
    $0.45 per share                  --          --  (2,173,026)        --            --         --   (2,173,026)
  Tax benefit of ESOP dividends      --      28,730          --         --            --         --       28,730
  Tax benefit associated with
    exercise of stock options        --      33,550          --         --            --         --       33,550
  Change in market value of
    available-for-sale securities,
    net of tax of $73,631            --         --           --     142,933           --         --      142,933
                                 ------  ---------- ----------- -----------   ---------- -----------  -----------
Balance at December 31, 1996    $48,496 $41,422,898 $23,863,600 $   214,594   $( 459,408)$(2,620,153)$62,470,027
                                ======= =========== =========== ===========   ========== ===========  ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                          67

<PAGE>



CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

Years Ended December 31,                        1996          1995          1994
------------------------                    ----------    ----------     ---------

<S>                                      <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                               $   5,447,292 $   6,802,903 $   5,588,818
Adjustments to reconcile net income to
  net cash provided by operating
  activities:
  Depreciation                               1,605,669     1,217,594     1,027,081
  Provision for loan losses                    240,000       240,000       240,000
  Provision for real estate losses              60,000       120,000       565,000
  Net amortization of premiums and
    accretion of discounts                     370,832     1,178,859     2,514,766
  Loan origination fees, net of costs
    deferred                                   409,760       431,996       397,166
  Amortization of loan fees                   (211,242)     (342,228)     (426,427)
  Amortization of mortgage servicing rights     43,470            --            --
  Loans originated for sale                (25,856,898)  (10,755,582)   (3,117,000)
  Proceeds from sales of loans
    originated for sale                     24,219,028    10,080,914     2,400,907
  Net gains on sales of loans and securities  (192,155)      (55,854)       (8,464)
  Net gains on sales of real estate owned           --      (587,478)           --
  Net (gains) losses on sales and disposal
    of premises and equipment                   83,101        (6,752)       (9,927)
  Net (gains) losses on sales of repossessed
    property                                      (430)       11,975        18,954
  Recoveries of losses                          36,983        54,328       190,448
  Decrease (increase) in accrued interest
    receivable                                 533,993      (399,843)      223,781
  Increase in accrued interest payable         759,736       722,010       317,760
  Increase (decrease) in federal income
    taxes payable                              273,902       506,999      (379,363)
  Increase (decrease) in other liabilities    (192,161)      458,314    (1,066,954)
  Decrease (increase) in other assets        1,498,361     3,339,724    (5,920,829)
                                          ------------   -----------   -----------
      Net cash provided by operating
        activities                           9,129,241    13,017,879     2,555,717
                                          ------------   -----------   -----------
</TABLE>

                                          68

<PAGE>


<TABLE>
<CAPTION>


Years Ended December 31,                                      1996            1995            1994
------------------------                                   ----------      ----------       -------

<S>                                                     <C>           <C>              <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of investment securities held to maturity             --            --          (200,000)
  Purchases of investment securities available for sale  (20,060,266)   (5,065,650)       (7,725,595)
  Proceeds from sales of investment securities
    available for sale                                    23,135,173    13,906,169        20,013,488
  Principal repayments and maturities of investment
    securities held to maturity                                   --    14,450,000           400,000
  Principal repayments and maturities of investment
    securities available for sale                         20,420,000    11,000,000        37,350,000
  Loan originations (net of undisbursed loans
    in process)                                         (200,744,785) (134,320,368)     (147,359,594)
  Loans purchased                                        (31,733,987)  (43,592,182)      (74,914,350)
  Proceeds from sales of loans                             7,853,490     4,822,738         1,878,809
  Principal repayments on loans                          118,041,259    84,170,348        75,883,951
  Proceeds from sales of mortgage-backed securities
    available for sale                                            --    19,545,420                --
  Principal repayments and maturities on mortgage-backed
    securities available for sale                          2,271,581     4,035,345         7,971,409
  Principal repayments and maturities on mortgage-backed
    securities held to maturity                            5,967,777     8,219,953        31,417,894
  Proceeds from sales, redemptions, and settlements of
    real estate owned, net                                   437,935       742,358         2,434,215
  Proceeds from sales of repossessed property                 54,010        50,251            10,950
  Capitalized additions to real estate owned,
    net of recoveries                                         59,702        11,884          (529,214)
  Purchases of premises and equipment                     (1,456,346)     (463,318)       (2,674,410)
  Proceeds from sales and disposals of premises
    and equipment                                              5,524        13,455            86,540
  Purchases of Federal Home Loan Bank stock               (2,095,200)     (374,000)       (3,489,000)
                                                       -------------  ------------      -------------
      Net cash used in investing activities              (77,844,133)  (22,847,597)      (59,444,907)
                                                       -------------  ------------      -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase (decrease) in deposits                      25,757,823   26,126,642       (24,528,089)
  Stock options exercised                                     114,674      114,072           115,630
  Purchases of Treasury stock                              (4,089,237)          --        (1,100,607)
  Net increase (decrease) in advance payments
    by borrowers for taxes and insurance                       75,464     (815,970)         (195,382)
  Federal Home Loan Bank advance repayments               (98,262,720)(147,218,103)      (77,819,874)
  Federal Home Loan Bank advances                         140,252,667  147,516,795       160,340,727
  Dividends paid on common stock                           (2,107,991)  (1,832,008)       (1,516,405)
                                                        -------------  -----------       -----------
      Net cash provided by financing activities            61,740,680   23,891,428        55,296,000
                                                        -------------  -----------       -----------
  Net increase(decrease)in cash and cash equivalents       (6,974,212)  14,061,710        (1,593,190)
  Cash and cash equivalents at beginning of period         29,724,175   15,662,465        17,255,655
                                                        -------------  -----------       -----------
Cash and cash equivalents at end of period                $22,749,963 $ 29,724,175      $ 15,662,465
                                                        =============  ===========       ===========
SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION:
  Cash paid for:
    Interest expense                                    $  33,738,141 $ 32,466,028      $ 26,660,053
    Federal income taxes                                    2,450,000    2,285,000         2,528,363
  Transfers of loans to real estate owned                     342,408      264,637           894,615
  Transfers of loans to repossessed property and
    accounts receivable                                        69,673       53,600            39,626
  Loans charged off                                            76,528       55,107           153,263
  Loans to facilitate the sale of real estate owned           279,700    2,724,120           259,600
  Transfers of securities to available-for-sale
   classification:
    Investment securities                                          --   18,081,023                --
    Mortgage-backed securities                             28,553,035           --                --
</TABLE>

See accompanying notes to consolidated financial statements.

                                          69

<PAGE>




CFSB BANCORP, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

      CFSB Bancorp, Inc. (the Corporation), is the holding company for Community
First Bank, a state chartered stock savings bank (the Bank).  Substantially  all
of the  Corporation's  assets are currently  held in, and  operations  conducted
through   its  sole   subsidiary,   Community   First   Bank.   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  Area,  which is composed of the  tri-county
area of Clinton, Eaton, and Ingham counties, the western townships of Shiawassee
County,  and the southwest corner of Ionia County.  The Bank's business consists
primarily  of  attracting  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's revenues are
derived   principally   from  interest  income  on  mortgage  and  other  loans,
mortgage-backed securities, investment securities, and, to a lesser extent, from
fees and  commissions.  The operations of the Bank,  and the financial  services
industry  generally,  are  significantly  influenced  by  general  and  economic
conditions  and related  monetary and fiscal  policies of financial  institution
regulatory  agencies.  Deposit  flows and cost of funds are impacted by interest
rates on competing  investments  and general  market rates of interest.  Lending
activities  are  affected by the demand for  financing  of real estate and other
types of loans,  which, in turn, is affected by the interest rates at which such
financing is offered.

      The   consolidated   financial   statements   include  the   accounts  and
transactions of CFSB Bancorp,  Inc., and its wholly owned subsidiary,  Community
First  Bank,  and the  Bank's  wholly  owned  subsidiary,  Capitol  Consolidated
Financial Corporation (Capitol Consolidated),  and Capitol Consolidated's wholly
owned  subsidiary,  Allegan  Insurance  Agency.  Intercompany  transactions  and
account balances are eliminated.

BASIS OF FINANCIAL STATEMENT PRESENTATION

      The  consolidated  financial  statements  are prepared in conformity  with
generally accepted accounting principles. In preparing the financial statements,
management  is  required  to make  estimates  and  assumptions  that  affect the
reported  amounts of assets and liabilities and disclosure of contingent  assets
and liabilities as of the date of the balance sheet and the reported  amounts of
income and  expenses  for the period.  Actual  results  could  differ from those
estimates.

INVESTMENT AND MORTGAGE-BACKED SECURITIES

      Investment and mortgage-backed securities held to maturity represent those
securities for which the Corporation has the positive intent and ability to hold
to maturity and are reported at cost,  adjusted for amortization of premiums and
accretion of discounts  using the  effective-interest  method over the period to
maturity.

      Investment  and  mortgage-backed  securities  available for sale represent
those  securities not classified as held to maturity.  Unrealized  holding gains
and losses, net of tax, on  available-for-sale  securities are reported as a net
amount in a separate component of stockholders' equity until realized. Gains and
losses    on   the   sale   of    securities    are    determined    using   the
specific-identification  method  and  are  recognized  on  a  trade-date  basis.
Premiums  and   discounts   are   recognized   in  interest   income  using  the
effective-interest method over the period to maturity.

     In November 1995, the Financial  Accounting Standards Board (FASB) issued A
Guide to Implementation  of Statement 115 on Accounting for Certain  Investments
in Debt and Equity Securities (Guide). The Guide permitted
                                      70

<PAGE>



an institution to reassess the  appropriateness  of the  classifications  of all
securities held at the time and account for any resulting  reclassifications  at
fair value in accordance  with Statement of Financial  Accounting  Standards No.
115,  Accounting for Certain  Investments in Debt and Equity  Securities.  As of
November 30, 1995,  the  Corporation,  in order to allow further  flexibility in
future asset liability management decisions relating to securities, reclassified
certain  corporate notes and U.S.  Treasury  securities from a  held-to-maturity
classification to an  available-for-sale  classification with unrealized pre-tax
losses on these  securities  recorded as a negative  adjustment to stockholders'
equity.

      In September 1996, based upon liquidity and interest rate  considerations,
the  Corporation  determined it could no longer assert its intention to hold all
mortgage-backed securities until maturity. Therefore, the entire mortgage-backed
securities  portfolio was transferred from a held-to-maturity  classification to
an  available-for-sale  classification.  As a result, the Corporation intends to
classify  any  investment  or  mortgage-backed   securities  currently  held  or
purchased in the subsequent two years as available for sale.

LOANS RECEIVABLE

      Loans  receivable for which the  Corporation has the intent and ability to
hold for the  foreseeable  future or until  maturity  or payoff are  reported at
their outstanding unpaid principal balances, net of any undistributed portion of
loans in process, deferred origination fees, and the allowance for loan losses.

LOAN ORIGINATION AND COMMITMENT FEES

      Fees received in connection  with loan  commitments  are deferred in other
liabilities until the loan is advanced, and are then recognized over the term of
the loan as an adjustment to the yield.  Fees on commitments  that expire unused
are recognized as fee income at expiration.

      Loan origination fees, net of certain loan origination costs, are deferred
and  recognized  over the lives of the  related  loans as an  adjustment  to the
yield.  When  loans  are  sold,  any  remaining  unamortized  deferred  fees are
generally recognized as an adjustment of gain (loss) on sale of loans.

      Loan origination and commitment fees charged on adjustable-rate  mortgages
are generally deemed to be adjustments to the first  adjustment  period yield of
the mortgage, to the extent the interest rate during the first adjustment period
on the mortgage is less than the index rate plus the contractual spread.

NONACCRUAL ASSETS

      Nonaccrual assets are comprised of loans for which the accrual of interest
has been discontinued,  loans for which the terms have been renegotiated to less
than market rates as a result of a serious weakening of the borrower's financial
condition,   and  real  estate,   which  has  been  acquired  primarily  through
foreclosure and is awaiting disposition.

      Loans are  generally  placed  on a  nonaccrual  basis  when  principal  or
interest is past due 90 days or more 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 that 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.


                                      71

<PAGE>



ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE

      Provisions  for losses on loans and real estate are charged to  operations
based upon  management's  evaluation of potential  losses in the  portfolio.  In
addition to providing  reserves on specific  assets where a decline in value has
been identified,  general  provisions for losses are established  based upon the
overall  portfolio  composition and general market  conditions.  In establishing
both specific and general valuation  allowances,  management  reviews individual
loans, recent loss experience,  current economic conditions, the overall balance
and composition of the portfolio,  and such other factors which, in management's
judgment, deserve recognition in estimating possible losses.

      Management  believes the  allowance for losses on loans and real estate is
adequate.  While  management uses available  information to recognize  losses on
loans and real estate,  future additions to the allowance may be necessary based
on changes in economic conditions and borrower circumstances.

      In  May of  1993,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 114,  Accounting by Creditors for Impairment of a Loan (SFAS 114).
SFAS 114,  as amended in  October  1994 by  Statement  of  Financial  Accounting
Standards  No. 118,  Accounting by Creditors  for  Impairment of a  Loan--Income
Recognition and Disclosures  (SFAS 118),  requires impaired loans to be measured
based on the present  value of expected  future  cash flows,  discounted  at the
loan's  effective  interest  rate  or as a  practical  expedient  at the  loan's
observable  market  price,  or the fair value of the  collateral  if the loan is
collateral  dependent.  This statement also applies to all loans restructured in
troubled  debt  restructurings  involving a  modification  of terms,  as well as
clarifies that a creditor should evaluate the collectibility of both contractual
interest and contractual  principal of all  receivables  when assessing the need
for a loss  accrual.  The  Corporation  adopted the  provisions  of SFAS 114, as
amended by SFAS 118, on a prospective  basis as of January 1, 1995.  Neither the
initial  adoption nor the ongoing  effect of SFAS 114 has had, or is expected to
have, a material  impact on the financial  condition or results of operations of
the Corporation.

REAL ESTATE

      Real  estate  acquired  through  foreclosure  is  carried  at the lower of
estimated  fair value less  costs to sell or cost  (estimated  fair value at the
time of foreclosure).  Such determination is made on an individual-asset  basis.
At the time of  acquisition,  any excess of carrying  amount over estimated fair
value is recorded as a reduction  in the  allowance  for loan  losses,  with the
estimated  costs to sell  recorded  through  the  establishment  of a  valuation
allowance.  Subsequent  declines in fair value less estimated  costs to sell are
recognized as increases in the valuation allowance.  If the estimated fair value
of the  asset  minus  the  estimated  costs to sell the  asset is more  than its
carrying  amount,  the  valuation  allowance  is  reduced,  but not below  zero.
Increases  or decreases in the  valuation  allowance  are charged or credited to
income.  Generally,  expenditures relating to the development and improvement of
real estate acquired through foreclosure are capitalized.

LOANS HELD FOR SALE

      Additional funds for lending are periodically provided by selling mortgage
loans.  Mortgage loans intended for sale in the secondary  market are carried at
the lower of cost or estimated  market value in the  aggregate.  These loans are
classified  as held  for  sale  and are  included  in  loans  receivable  in the
consolidated  statements  of  financial  condition.  Net  unrealized  losses are
recorded by charges to income.

LOAN SERVICING

      The  Corporation  services  for  investors  mortgage  loans  that  are not
included in the consolidated statements of financial condition.  Fees earned for
servicing  loans  owned by  investors  are  reported  as income when the related
mortgage  loan  payments  are  collected.  Loan  servicing  costs are charged to
expense as incurred.


                                      72

<PAGE>



      In May 1995, the FASB issued Statement of Financial  Accounting  Standards
No.  122,  Accounting  for  Mortgage  Servicing  Rights,  An  Amendment  of FASB
Statement No. 65 (SFAS 122).  Effective January 1, 1996, the Corporation adopted
the provisions of SFAS 122. This statement requires the Corporation to recognize
as separate  assets rights to service  mortgage loans for others,  however those
servicing rights are acquired.  SFAS 122 also requires the Corporation to assess
its capitalized mortgage servicing rights for impairment based on the fair value
of those rights, with impairment recognized through a valuation allowance. Prior
to  adoption  of  SFAS  122,  the  Corporation  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
Corporation uses assumptions market  participants would use in estimating future
net  servicing  income,  which  includes  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. For purposes of
measuring  impairment,  the risk characteristics used by the Corporation include
the underlying  loans' interest rates,  terms,  and types. The ongoing impact of
SFAS 122 will  depend  upon  demand  in the  Corporation's  lending  market  for
fixed-rate residential mortgage loans salable in the secondary mortgage market.

FEDERAL INCOME TAXES

      The Corporation and its subsidiary file a consolidated  federal income tax
return.  The  provision  for  federal  income  taxes is based  upon  income  for
financial statement purposes,  rather than amounts reported on the Corporation's
income tax return.

      Deferred  tax assets and  liabilities  are  recognized  for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized as income in the
period that includes the enactment date.

PREMISES AND EQUIPMENT

      Office  property  and  equipment  are  carried at cost,  less  accumulated
depreciation   and   amortization.   Depreciation  and  amortization  of  office
properties and equipment is charged to operations on a straight-line  basis over
the estimated useful lives of the related assets as follows: office buildings --
25 to 50 years; building improvements -- 7 to 25 years; and furniture, fixtures,
and equipment -- 3 to 8 years.

INTEREST RATE EXCHANGE AGREEMENTS

      Interest rate exchange  agreements,  designated as hedges  against  future
fluctuations  in  the  interest  rates  of  specifically  identified  assets  or
liabilities,  are not marked to market. Net interest income (expense)  resulting
from the  differential  between  exchanging  floating  and  fixed-rate  interest
payments  is recorded as an addition  to or  reduction  of the  interest  income
(expense) on the associated  asset or liability.  Gains and losses on terminated
interest rate exchange  agreements are amortized over the remaining terms of the
agreements.

INTEREST ON DEPOSITS

      Penalty  income  on  early   withdrawal  of  certificates  of  deposit  is
recognized as a reduction of interest expense on deposits.


                                      73

<PAGE>



EARNINGS PER SHARE

      Earnings  per share of common  stock  are  based on the  weighted  average
number of common  shares and common  share  equivalents  outstanding  during the
year.

STATEMENT OF CASH FLOWS

      For the purpose of  presentation  in the  consolidated  statement  of cash
flows,  cash and cash  equivalents  include cash and amounts due from depository
institutions and  interest-earning  deposits with the Federal Home Loan Bank and
other depository institutions.

STOCK-BASED COMPENSATION

      In  October  1995,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 123,  Accounting for  Stock-Based  Compensation  (SFAS 123).  This
statement  encourages  all  entities  to  adopt a fair  value  based  method  of
accounting for their employee stock-based compensation plans. The statement also
allows an entity to continue to measure  compensation cost for those plans using
the  intrinsic  value  based  method  of  accounting  prescribed  by  Accounting
Principles  Board  Opinion  No. 25,  Accounting  for Stock  Issued to  Employees
(Opinion 25). Entities electing to remain with the accounting in Opinion 25 must
make pro forma  disclosures of net income and earnings per share, as if the fair
value  based  method of  accounting  defined in SFAS 123 had been  applied.  The
accounting and disclosure  requirements of SFAS 123 are generally  effective for
transactions  entered into in fiscal  years that begin after  December 15, 1995,
though  they may be adopted on  issuance.  Pro forma  disclosures  required  for
entities  that elect to continue to measure  compensation  cost using Opinion 25
must include the effects of all awards  granted in fiscal years that begin after
December 15, 1994. The Corporation  adopted the provisions of SFAS 123 effective
January 1, 1996, and elected the pro forma  disclosure  method in these year-end
1996 Consolidated Financial Statements and Notes thereto.

STOCK DIVIDEND

      The Corporation's  board of directors declared a 10 percent stock dividend
on August 20,  1996.  The  additional  shares as a result of the  dividend  were
distributed  on September 12, 1996, to  stockholders  of record as of August 30,
1996. Common shares outstanding,  per common share amounts, and price per common
share have been restated for all periods  presented,  to give retroactive effect
to the stock dividend.

RECLASSIFICATIONS

      Certain prior years' financial statement amounts have been reclassified to
conform to the current year financial statement presentation.

(2)  RESTRICTIONS ON CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS

      The Bank is  required  to  maintain  certain  daily  reserve  balances  in
accordance  with  Federal  Reserve  Board  requirements.  The  reserve  balances
maintained in accordance with such  requirements  were $5,684,000 and $5,137,000
at December 31, 1996 and 1995, respectively.


                                      74

<PAGE>



(3)  INVESTMENT SECURITIES

      Investment securities available for sale consist of the following:
<TABLE>
<CAPTION>

                                                                  1996                        1995
                                                               -----------                 -----------
                                                     AMORTIZED         FAIR         Amortized        Fair
                                                        COST           VALUE           Cost          Value
                                                        ----           -----           ----          -----
<S>                                                <C>               <C>           <C>            <C>
United States government and agency obligations:
  Maturing within one year .....................   $20,096,712       $20,071,094   $15,138,350    $15,102,344
  Maturing from one to five years ..............          --                --      15,253,082     15,225,000
                                                   -----------       -----------   -----------    -----------
                                                    20,096,712        20,071,094    30,391,432     30,327,344
Federal agency obligations:
  Maturing from five to ten years ..............     7,000,000         7,015,200          --             --
Corporate bonds:
  Maturing within one year .....................     4,000,000         4,007,200    12,686,283     12,682,333
  Maturing from one to five years ..............          --                --      11,921,142     12,099,856
                                                   -----------       -----------   -----------    -----------
                                                     4,000,000         4,007,200    24,607,425     24,782,189
                                                   -----------       -----------   -----------    -----------
                                                   $31,096,712       $31,093,494   $54,998,857    $55,109,533
                                                   ===========       ===========   ===========    ===========
Weighted average interest rate .................          5.89%                           5.37%
                                                   ===========                     ===========

</TABLE>

      Unrealized  gains and losses on investment  securities  available for sale
are summarized as follows:
<TABLE>
<CAPTION>

December 31,                                                  1996                            1995
------------                                                  ----                            ----
                                                      GROSS           GROSS            Gross        Gross
                                                   UNREALIZED      UNREALIZED       Unrealized    Unrealized
                                                      GAINS           LOSSES           Gains       Losses
                                                      -----           ------           -----       ------
<S>                                                  <C>             <C>              <C>          <C>
United States government and
  agency obligations                                 $21,205         $46,823          $    --      $64,088
Federal agency obligations                            15,200             --                --          --
Corporate bonds                                        7,200             --            204,990      30,226
                                                    --------       ---------          --------     -------
                                                     $43,605         $46,823          $204,990     $94,314
                                                     =======         =======          ========     =======
</TABLE>

      Proceeds from sales of investment securities available for sale during the
years ended December 31, 1996,  1995, and 1994, were  $23,135,173,  $13,906,169,
and $20,013,488, respectively. Gross gains of $43,207, $29,872, and $13,440, and
gross losses of $107,395,  $32,847,  and $46,128,  were  realized on those sales
during 1996, 1995, and 1994, respectively.

      During the years ended December 31, 1996 and 1994,  call  provisions  were
exercised on $4,295,000 and $2,000,000,  respectively,  of investment securities
available for sale.  No gains or losses were  recognized  during the  respective
periods.  There  were no call  provisions  exercised  on  investment  securities
available for sale during 1995.

      During the year ended December 31, 1995, call provisions were exercised on
$14,450,000 of investment  securities held to maturity.  No gains or losses were
recognized during the respective period. There were no call provisions exercised
on investment securities held to maturity during 1996 and 1994.

      In accordance with the Guide, the  Corporation,  in order to allow further
flexibility  in  future  asset  liability   management   decisions  relating  to
securities,  in 1995  reclassified  $18,081,023  of  corporate  notes  and  U.S.
Treasury    securities   from   a   held-to-maturity    classification   to   an
available-for-sale classification,  with unrealized pretax losses of $103,210 on
these securities recorded as a negative adjustment to stockholders' equity.

                                      75

<PAGE>




      Expected  maturities  may differ  from the  contractual  maturities  above
because certain  borrowers have the right to call or prepay  obligations with or
without call or prepayment penalties.

      Accrued interest receivable related to investment securities  approximated
$293,000 and $1,162,000 at December 31, 1996 and 1995, respectively.

      At December  31,  1996,  the Bank had no  commitments  to purchase or sell
investment securities.

(4)  MORTGAGE-BACKED SECURITIES

      Mortgage-backed securities available for sale consist of the following:
<TABLE>
<CAPTION>

December 31,                                                 1996                    1995
------------                                                 ----                    ----
                                                     GROSS         GROSS       Gross        Gross
                                                  UNREALIZED     UNREALIZED  Unrealized   Unrealized
                                                     GAINS         LOSSES       Gains       Losses
                                                     -----         ------       -----       ------
<S>                                               <C>            <C>           <C>          <C>
Federal Home Loan Mortgage Corporation
  participation certificates                      $19,438,088    $19,845,510   $       --    $    --
Fannie Mae guaranteed mortgage
  pass-through certificates                         2,547,019      2,468,209           --         --
Government National Mortgage
  Association modified pass-
  through certificates                                 92,490         95,265           --         --
Conventional pass-through certificates              3,982,504      3,981,597           --         --
Collateralized mortgage obligations                   832,106        829,986       609,993    607,895
                                                  -----------    -----------   -----------   --------
                                                  $26,892,207    $27,220,567   $   609,993   $607,895
                                                  ===========    ===========   ===========   ========
Weighted average interest rate                           7.82%                        6.50%
</TABLE>

      Unrealized gains and losses on  mortgage-backed  securities  available for
sale are summarized as follows:
<TABLE>
<CAPTION>

December 31,                                  1996                    1995
------------                                  ----                    ----
                                        GROSS        GROSS       Gross       Gross
                                     UNREALIZED   UNREALIZED  Unrealized   Unrealized
                                        GAINS       LOSSES       Gains      Losses
                                        -----       ------       -----      ------
<S>                                  <C>          <C>       <C>          <C>
Federal Home Loan Mortgage
  Corporation participation
  certificates                       $538,105     $130,683   $      --   $     --
Fannie Mae guaranteed mortgage
  pass-through certificates               629       79,439          --         --
Government National Mortgage
  Association modified pass-
  through certificates                  2,775           --          --         --
Conventional pass-through certificates     --          907          --         --
Collateralized mortgage obligations        --        2,120          --      2,098
                                   -----------   ---------   ---------     ------
                                     $541,509     $213,149   $      --     $2,098
                                     ========     ========   =========     ======
</TABLE>

      Proceeds from the sales of mortgage-backed  securities  available for sale
during the year ended December 31, 1995, were $19,545,420. Gross gains of $8,889
and gross  losses of $50,945  were  realized on those 1995  sales.  There was no
sales of mortgage-backed securities during the years ended December 31, 1996 and
1994.

      As  of  September  30,  1996,  based  upon  liquidity  and  interest  rate
considerations,  the  Corporation  determined  it could  no  longer  assert  its
intention to hold all mortgage-backed securities until maturity.  Therefore, the
entire

                                      76

<PAGE>



mortgage-backed securities portfolio totaling $28,553,035 was reclassified to an
available-for-sale classification with unrealized pretax gains of $190,368 being
recorded as a favorable adjustment to stockholders' equity.

      Mortgage-backed  securities held to maturity at December 31, 1995, consist
of the following:
<TABLE>
<CAPTION>

                                                          Amortized        Fair
                                                            Cost           Value
                                                            ----           -----
<S>                                                     <C>            <C>
Federal Home Loan Mortgage Corporation
  participation certificates                            $24,252,454    $24,889,396
Fannie Mae guaranteed mortgage pass-through
  certificates                                            2,720,969      2,681,031
Government National Mortgage Association modified
  pass-through certificates                                 146,553        150,217
Conventional pass-through certificates                    5,099,482      5,100,570
Collateralized mortgage obligations                       2,328,554      2,339,749
                                                        -----------    -----------
                                                        $34,548,012    $35,160,963
                                                        ===========    ===========
Weighted average interest rate                                 7.89%
                                                               ====
</TABLE>

      Unrealized gains and losses on mortgage-backed securities held to maturity
at December 31, 1995, are summarized as follows:
<TABLE>
<CAPTION>

                                                            Gross          Gross
                                                         Unrealized     Unrealized
                                                            Gains         Losses
                                                            -----         ------
<S>                                                       <C>            <C>
Federal Home Loan Mortgage Corporation
  participation certificates                              $779,765       $142,823
Fannie Mae guaranteed mortgage pass-through
  certificates                                                 842         40,780
Government National Mortgage Association modified
  pass-through certificates                                  3,664             --
Conventional pass-through certificates                       1,088             --
Collateralized mortgage obligations                         11,237             42
                                                          --------       --------
                                                          $796,596       $183,645
                                                          ========       ========

</TABLE>

      Accrued   interest   receivable   on   mortgage-backed    securities   was
approximately $316,000 and $399,000 at December 31, 1996 and 1995, respectively.

      The amortized cost of mortgage-backed  securities at December 31, 1996 and
1995, included net unamortized premiums of $119,000 and $147,000, respectively.

      Variable-rate  mortgage-backed  securities  approximated  $11,286,000  and
$12,997,000,  with weighted  average rates of 6.95 percent and 7.08 percent,  at
December 31, 1996 and 1995, respectively.

      At  December  31,  1996,  the  Bank  had no  commitments  to  buy or  sell
mortgage-backed securities.



                                      77

<PAGE>



(5)  LOANS RECEIVABLE

Loans receivable consist of the following:
<TABLE>
<CAPTION>

December 31,                                                   1996          1995
------------                                                 --------      ------

<S>                                                     <C>           <C>
First mortgage:
  One- to four-family residential                       $553,690,395  $469,819,906
  Income-producing property                               52,583,762    57,951,827
  FHA-insured and VA-partially guaranteed                  6,404,211     7,458,269
  Construction and development:
    One- to four-family residential                       38,072,036    30,753,942
    Income-producing property                             31,428,040    17,059,597
                                                        ------------  ------------
                                                         682,178,444   583,043,541
Second mortgage                                              510,458       570,848
Other loans:
  Land contract                                              254,068       348,763
  Auto                                                     7,925,413     6,542,273
  Commercial                                               4,644,308     3,195,292
  Educational                                              1,870,672     2,328,681
  Marine                                                   1,307,903     1,374,754
  Home equity                                             36,275,330    28,126,371
  Mobile home                                              1,518,817     1,735,048
  Other                                                    5,425,604     3,715,802
                                                        ------------  ------------
                                                          59,222,115    47,366,984
                                                        ------------  ------------
                                                         741,911,017   630,981,373
Less:
  Undistributed portion of loans in process              (18,147,704)  (15,054,150)
  Deferred origination fees                               (1,485,083)   (1,280,014)
  Allowance for losses on loans                           (4,563,594)   (4,363,139)
                                                        ------------  ------------
                                                        $717,714,636  $610,284,070
                                                        ============  ============
Weighted average interest rate                                  7.60%         7.75%
                                                                ====          ====
</TABLE>

      Accrued interest receivable on loans receivable,  net of the allowance for
uncollectible  interest,  approximated $3,703,000 and $3,268,000 at December 31,
1996 and 1995, respectively.

      The Corporation had  approximately  $1,787,000 and $349,000 of nonaccruing
loans as of December  31, 1996 and 1995,  respectively.  Interest  received  and
included as income on these loans for the years ended  December 31, 1996,  1995,
and 1994, was $118,000,  $26,000,  and $15,000,  respectively.  The  Corporation
would have recorded $46,000,  $39,000, and $27,000 of additional interest income
on these nonaccrual loans for the years ended December 31, 1996, 1995, and 1994,
respectively,  if these loans had been current in accordance with their original
terms and had been outstanding throughout the periods or since origination.

      Impaired loans as defined by SFAS 114 totaled  $554,000 and $0 at December
31, 1996 and 1995, respectively, and includes 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 114 does not
apply. The  Corporation's  respective  average  investment in impaired loans was
$559,000 and $0 during 1996 and 1995,  respectively.  Interest income recognized
on impaired loans during 1996 and 1995,  totaled  $27,000 and $0,  respectively.
Impaired  loans had specific  allocations  of the  allowance  for loan losses in
accordance with SFAS 114 approximating  $150,000 and $0 at December 31, 1996 and
1995, respectively.


                                      78

<PAGE>



      The  Corporation had no troubled debt  restructured  loans at December 31,
1996 and 1995.

      Included in one- to  four-family  residential,  first-mortgage  loans were
approximately  $395,300,000  and  $297,800,000 of  adjustable-rate  mortgages at
December 31, 1996 and 1995, respectively.

      Included in income-producing property loans were approximately $46,300,000
and  $32,700,000  of  adjustable-rate  mortgages  at December 31, 1996 and 1995,
respectively.

      The Corporation  serviced loans for others of approximately  $156,600,000,
$154,900,000,   and   $163,900,000  at  December  31,  1996,   1995,  and  1994,
respectively.

      Of the loans serviced for others,  approximately $30,100,000 represent the
December  31,  1996,   balance  of  loans  sold  during  1996.  The  Corporation
capitalized  approximately  $234,000 of  originated  mortgage  servicing  rights
during the year ended December 31, 1996, of which $43,000 has been amortized. No
valuation  allowances for capitalized  originated mortgage servicing rights were
considered necessary as of December 31, 1996.

      The Corporation  previously  sold certain one- to four-family  residential
loans with  recourse.  At December 31, 1996,  1995,  and 1994,  the  outstanding
balance of these loans was approximately $1,400,000, $1,800,000, and $2,200,000.
The  Corporation  has not  repurchased any of these loans during the three years
ended December 31, 1996.

      The Corporation had commitments to originate the following  mortgage loans
at December 31, 1996:
<TABLE>
<CAPTION>

                                                                       WEIGHTED
                                                      AMOUNT            AVERAGE
                                                      ------            -------
RATE
----

<S>                                                <C>                     <C>
One- to four-family residential:
  Fixed rate                                       $ 5,916,000             8.10%
  Adjustable rate                                   11,738,000             7.32
Ajustable-rate income-producing property             1,627,000             9.13
                                                   -----------             ----
                                                   $19,281,000             7.71%
                                                   ===========             ====
</TABLE>

      The Corporation  had commitments to sell one- to four-family  residential,
fixed-rate mortgage loans of $1,298,000 at December 31, 1996. As of December 31,
1996, the Corporation  had no commitments to buy mortgage loans,  and $2,558,000
of one- to  four-family  residential,  fixed-rate  mortgage  loans were held for
sale.   Loans  held  for  sale,  after   consideration  of  the   aforementioned
commitments,  were valued at the lower of cost or market,  as  determined  on an
aggregate basis.

(6)  CONCENTRATION OF CREDIT RISK

      The Corporation  considers its primary market area for lending and savings
activities to be greater  Lansing in  mid-Michigan.  The  Corporation's  one- to
four-family  residential real estate loans totaled $598,200,000 and $508,000,000
at December  31, 1996 and 1995,  respectively,  and  included  $474,900,000  and
$400,200,000  of  originated  loans,  respectively.  Substantially  all  of  the
originated loans were on properties located in Michigan.  Of the purchased loans
which are serviced by other  institutions,  at December  31, 1996,  $39,100,000,
$77,300,000 and $6,900,000  represented loans on properties located in Michigan,
Texas,  and  Florida,  respectively.  Substantially  all  of  the  Corporation's
income-producing property and consumer loans are based in Michigan. Although the
Corporation  has a diversified  loan  portfolio,  a  substantial  portion of its
debtors'  ability to honor their  contractual  obligations  is reliant  upon the
economic stability of the area. The greater Lansing area is a diversified market
with a strong service sector and, to a lesser  extent,  trade and  manufacturing
sectors. The three major employers in the

                                      79

<PAGE>



area are the State of Michigan,  General Motors,  and Michigan State University.
The  Corporation is not dependent  upon any single  industry or business for its
banking opportunities.

      Collateral  securing the  Corporation's  income-producing  loan  portfolio
consists of the following property types:
<TABLE>
<CAPTION>

December 31,                                                1996          1995
------------                                                ----          ----

<S>                                                     <C>          <C>
Apartments                                              $35,340,019  $29,221,437
Office buildings                                         22,242,915   23,191,802
Restaurants and motels                                    5,699,844    5,894,737
Retail centers                                            5,000,860    4,949,755
Residential land development                              7,490,957    5,222,112
Residential and condominiums                              3,552,506    2,105,091
Other                                                     4,684,701    4,426,490
                                                        -----------  -----------
                                                        $84,011,802  $75,011,424
                                                        ===========  ===========
</TABLE>

(7)  REAL ESTATE

      Real estate held by the Corporation is summarized as follows:
<TABLE>
<CAPTION>

December 31,                                                1996          1995
------------                                                ----          ----

<S>                                                       <C>          <C>
Real estate in judgment, subject to redemption            $ 189,990    $  88,552
Real estate acquired through foreclosure                     22,169      156,742
                                                          ---------    ---------
                                                            212,159      245,294
Less: Allowance for losses                                 (212,159)    (223,577)
                                                          ---------    ---------
                                                        $        --    $  21,717
                                                        ===========    =========
</TABLE>

      The  following is a summary of the results of real estate  operations  for
the years indicated:
<TABLE>
<CAPTION>

Years Ended December 31,                       1996         1995          1994
------------------------                       ----         ----          ----

<S>                                        <C>            <C>           <C>
Income from sales of real estate
  acquired through foreclosure, net        $       --     $ 587,478     $      --
Provision for losses on real estate           (60,000)     (120,000)     (565,000)
                                             --------     ---------     ---------
                                             $(60,000)    $ 467,478     $(565,000)
                                             ========     =========     =========
</TABLE>


                                          80

<PAGE>



(8)  ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE

      The  following is a summary of the  allowance for losses on loans and real
estate:
<TABLE>
<CAPTION>

                                                  Loans     Real Estate    Total
                                                  -----     -----------    -----

<S>                                            <C>           <C>        <C>
Balance at December 31, 1993                   $3,846,733    $ 167,087  $4,013,820
  Provision for losses                            240,000      565,000     805,000
  Losses charged against the allowance           (153,263)    (711,937)   (865,200)
  Recoveries of losses                            190,448       55,823     246,271
                                               ----------    ---------  ----------
Balance at December 31, 1994                    4,123,918       75,973   4,199,891
  Provision for losses                            240,000      120,000     360,000
  Losses charged against the allowance            (55,107)     (34,614)    (89,721)
  Recoveries of losses                             54,328       62,218     116,546
                                               ----------    ---------  ----------
Balance at December 31, 1995                    4,363,139      223,577   4,586,716
  Provision for losses                            240,000       60,000     300,000
  Losses charged against the allowance            (76,528)    (187,214)   (263,742)
  Recoveries of losses                             36,983      115,796     152,779
                                               ----------    ---------  ----------
Balances at December 31, 1996                  $4,563,594    $ 212,159  $4,775,753
                                               ==========    =========  ==========
</TABLE>

(9)  PREMISES AND EQUIPMENT

      Premises and equipment are carried at cost less  accumulated  depreciation
and are summarized by major classification as follows:
<TABLE>
<CAPTION>

December 31,                                                1996          1995
------------                                                ----          ----

<S>                                                    <C>           <C>
Land                                                   $  3,004,842  $  2,787,536
Office buildings and improvements                        11,901,210    11,344,438
Furniture, fixtures, and equipment                        9,205,565     8,930,400
                                                       ------------  ------------
                                                         24,111,617    23,062,374
Less: Accumulated depreciation                          (13,126,418)  (11,839,227)
                                                       ------------  ------------
                                                       $ 10,985,199  $ 11,223,147
                                                       ============  ============
</TABLE>

(10)  INVESTMENT IN FEDERAL HOME LOAN BANK STOCK

     The Bank is required to maintain an  investment in the stock of the Federal
Home Loan Bank of Indianapolis (FHLB) in an amount equal to at least 1.0 percent
of the unpaid principal balances of the Bank's  residential  mortgage loans, 0.3
percent of its total assets, or 5.0 percent of its outstanding advances from the
FHLB, whichever is greater.  Purchases and sales of stock are made directly with
the FHLB at par value.

                                      81

<PAGE>



(11)  DEPOSITS

      Deposits in the Corporation, represented by various types of programs, are
presented below:
<TABLE>
<CAPTION>

December 31,                            1996                      1995
------------                            ----                      ----
                               WEIGHTED                  Weighted
                                AVERAGE                   Average
                                 RATE         AMOUNT       Rate         Amount
                                 ----         ------       ----         ------

<S>                               <C>     <C>               <C>    <C>
Regular savings                   2.14%   $ 65,213,797      2.88%  $ 67,589,740
Money market savings              6.03      16,136,425        --             --
Consumer checking                 1.85      86,722,533      2.02     79,630,855
Commercial checking                 --       9,324,314        --      7,658,521
Money market checking (a)         4.07      51,962,675      4.07     54,523,653
                                  ----    ------------      ----   ------------
                                  2.65     229,359,744      2.76    209,402,769
Certificates of deposit(a)        5.73     324,214,257      5.97    318,413,409
                                  ----    ------------      ----   ------------
      Total deposits              4.46%   $553,574,001      4.69%  $527,816,178
                                  ====    ============      ====   ============
</TABLE>

(a)   At December 31, 1995,  the weighted  average  interest  rate  included the
      annualized  effect of the amortization of the deferred loss on termination
      of an interest rate exchange agreement.

      Accrued   interest  payable  on  deposits   approximated   $3,678,000  and
$3,020,000 at December 31, 1996 and 1995,  respectively.  Contractual maturities
of certificates of deposit are as follows:
<TABLE>
<CAPTION>

December 31,                            1996                      1995
------------                            ----                      ----
                               WEIGHTED                  Weighted
                                AVERAGE                   Average
                                 RATE         AMOUNT       Rate         Amount
                                 ----         ------       ----         ------

<S>                               <C>     <C>               <C>    <C>
1996                                --%   $         --      5.86%  $182,828,902
1997                              5.62     219,022,772      6.06     57,684,928
1998                              5.88      51,800,281      6.05     42,009,298
1999                              5.96      30,414,437      6.22     21,230,407
2000                              6.37      14,024,568      6.40     13,727,834
2001                              5.63       7,821,907      6.30        152,333
2002 and thereafter               5.97       1,130,292      6.20        779,707
                                  ----    ------------      ----   ------------
                                  5.73%   $324,214,257      5.97%  $318,413,409
                                  ====    ============      ====   ============

</TABLE>

      Included  in total  certificates  of deposit as of  December  31, 1996 and
1995,  are   approximately   $32,800,000  and  $32,100,000,   respectively,   in
certificates  of deposit of $100,000 or more in amount,  with  weighted  average
interest  rates of 5.85  percent  and 6.16  percent,  respectively.  Contractual
maturities of certificates of deposit of $100,000 or more in amount  outstanding
at December 31, 1996, are $6,900,000 within 3 months or less;  $7,200,000 within
3 months to 6 months;  $8,500,000 within 6 months to 12 months;  and $10,200,000
for over 12 months.

      At December 31, 1996 and 1995, the  Corporation  had $100,000 and $600,000
of brokered deposits,  respectively,  representing 0.02 percent and 0.11 percent
of total deposits, respectively.


                                      82

<PAGE>



     By regulation,  certain penalties are assessed depositors  exercising early
certificate withdrawal privileges.  These penalties are accounted for as offsets
to interest expense on deposits in the year they are incurred.  Listed below are
interest expense and penalties for the years indicated.
<TABLE>
<CAPTION>

Years Ended December 31,                       1996         1995          1994
------------------------                       ----         ----          ----

<S>                                       <C>           <C>           <C>
Interest on deposits (net of penalties):
  Savings                                 $ 1,592,132   $ 1,985,791   $ 1,861,653
  Checking                                  3,842,849     3,816,335     4,034,434
  Certificates of deposit                  18,402,513    18,008,128    14,859,545
                                          -----------   -----------   -----------
                                          $23,837,494   $23,810,254   $20,755,632
                                          ===========   ===========   ===========
Penalties                                 $   102,000   $   117,000   $    92,000
</TABLE>

      The  cost of the  Corporation's  interest  rate  exchange  agreements  was
$106,927,  $109,018 and $568,350 during the years ended December 31, 1996, 1995,
and 1994, respectively, and is included above as interest expense on deposits.

(12)  ADVANCES FROM FEDERAL HOME LOAN BANK

      FHLB  advances  at  December  31,  1996  and  1995,  are  secured  by  the
Corporation's  investment  in the  stock  of  the  Federal  Home  Loan  Bank  of
Indianapolis,  and  substantially  all of its first  mortgage  loans are under a
blanket collateral agreement. Maturities and weighted average interest rates are
as follows:
<TABLE>
<CAPTION>

December 31,                            1996                      1995
------------                            ----                      ----
                               WEIGHTED                  Weighted
Fixed-Rate                      AVERAGE                   Average
Advances Maturing In             RATE         AMOUNT       Rate         Amount
--------------------             ----         ------       ----         ------

<S>                              <C>      <C>              <C>      <C>
1996                               --%    $         --     6.62%    $22,110,053
1997                             6.12       26,746,389     6.12      26,746,389
1998                             6.01       61,357,552     6.00      56,357,552
1999                             6.17       37,190,257     5.72       8,190,257
2000                             5.66       13,586,995     5.66      13,586,995
2001                             6.60        8,295,559     5.61       2,095,559
2002 and thereafter              6.34        3,787,571     6.34       3,787,571
                                 ----     ------------     ----    ------------
      Total fixed-rate
        advances                 6.08      150,964,323     6.08     132,874,376
                                 ----     ------------     ----    ------------
Adjustable-Rate Advances
  Maturing In
1996                               --               --     6.00       3,975,000
1997                             5.64       51,675,000     5.69      23,800,000
1998                               --               --       --              --
1999                               --               --       --              --
2000                               --               --       --              --
2001                               --               --       --              --
2002 and thereafter                --               --       --              --
      Total adjustable-
        rate advances            5.64       51,675,000     5.74      27,775,000
                                 ----     ------------     ----    ------------
                                 5.97%    $202,639,323     6.02%   $160,649,376
                                 ====     ============     ====    ============
</TABLE>


                                          83

<PAGE>



      At December 31, 1996 and 1995,  the  portfolio of FHLB  advances  included
$1,650,000  and  $3,650,000  of  medium-term  borrowings,   respectively,  which
contractually,  the  Corporation  may,  at its  option  and  without  prepayment
penalty,  repay such advances on the first anniversary date of each borrowing or
semiannually thereafter until maturity.

      The Corporation had a $5,000,000 available, but unused line of credit from
the FHLB at December 31, 1996 and 1995.

(13)  FEDERAL INCOME TAXES

      Total  federal  income  tax  expense  for the  years  indicated  has  been
allocated as follows:
<TABLE>
<CAPTION>

Years Ended December 31,                       1996         1995          1994
------------------------                       ----         ----          ----

<S>                                        <C>           <C>          <C>
Current tax expense                        $2,500,000    $2,792,000   $ 2,276,000
Deferred tax expense (benefit)                (65,000)      137,000      (127,000)
                                           ----------    ----------   -----------
Income tax expense in the statement
  of operations                             2,435,000     2,929,000     2,149,000
Income tax expense (benefit) charged
  (credited) directly to
  stockholders' equity:
  Gains (losses) on securities
    available for sale                         74,000       924,000    (1,296,000)
  ESOP dividends                              (29,000)      (45,000)      (28,000)
  Exercise of stock options                   (34,000)      (27,000)      (49,000)
                                           ----------    ----------   -----------
                                           $2,446,000    $3,781,000   $   776,000
                                           ==========    ==========   ===========
</TABLE>

      The tax effects of temporary  differences  between the financial statement
carrying  amounts and the tax bases of assets and liabilities  that gave rise to
significant portions of the deferred tax asset as of December 31, 1996 and 1995,
are summarized as follows:
<TABLE>
<CAPTION>

December 31,                                                1996          1995
------------                                                ----          ----

<S>                                                   <C>            <C>
Deferred tax assets:
  Allowance for losses on loans and real estate       $ 1,657,000    $ 1,559,000
  Postretirement benefits                                 244,000        242,000
  Other                                                   812,000        746,000
                                                      -----------    -----------
      Deferred tax assets                               2,713,000      2,547,000
Deferred tax liabilities:
  Excess of tax bad debt reserves over base-year
    reserves                                           (1,255,000)    (1,255,000)
  Loan swap amortization                                       --       (124,000)
  Unrealized gains on available-for-sale securities      (111,000)       (37,000)
  Federal Home Loan Bank stock dividends                 (285,000)      (285,000)
  Deferred loan origination fees                         (506,000)      (313,000)
  Deferred loss on termination of interest rate
    exchange agreement                                         --        (36,000)
  Other                                                  (239,000)      (171,000)
      Deferred tax liabilities                         (2,396,000)    (2,221,000)
                                                      -----------    -----------
      Net deferred tax asset                          $   317,000    $   326,000
                                                      ===========    ===========
</TABLE>


                                          84

<PAGE>



      The  deferred  tax asset is subject to certain  asset  realization  tests.
Management believes that no valuation allowance is required at December 31, 1996
and 1995, or at the end of any interim  quarter  during these years,  due to the
combination  of potential  recovery of tax  previously  paid and the reversal of
certain  deductible  temporary  differences.  Federal income taxes of $7,300,000
were paid during the three years ended December 31, 1996.

      Federal  income tax expense  differs from the amounts  computed  using the
statutory federal income tax rate of 34 percent. The reasons for the differences
are summarized as follows:
<TABLE>
<CAPTION>

Years Ended December 31,                       1996         1995          1994
------------------------                       ----         ----          ----

<S>                                        <C>           <C>           <C>
Tax expense at federal statutory rate      $2,680,000    $3,309,000    $2,631,000
Increase (decrease) resulting from:
  Base-year tax bad debt reserves, net             --      (174,000)     (476,000)
  Low-income housing tax credits             (228,000)     (228,000)           --
Other, net                                    (17,000)       22,000        (6,000)
                                           ----------    ----------    ----------
                                           $2,435,000    $2,929,000    $2,149,000
                                           ==========    ==========    ==========
</TABLE>

      As a result of  legislation  enacted in 1996, the Bank is not permitted to
use the reserve method  previously  available to thrift  institutions to compute
its tax bad debt  deduction  for years  ending after  December  31, 1995.  It is
expected the excess of the Bank's  December 31, 1995, tax bad debt reserves over
its reserves as of December 31, 1987,  will be taken into taxable income ratably
over a six-year period  beginning in 1998, and a deferred tax liability has been
recognized related to this amount. No deferred tax liability has been recognized
for the Bank's  December 31, 1987,  tax bad debt reserves of  $8,500,000,  since
these reserves would only be taken into taxable income under  circumstances  the
Corporation is not likely to encounter.  Therefore, this temporary difference is
not expected to reverse in the foreseeable future.

(14)  STOCK OPTION PLANS

      In October 1990, the Corporation  adopted the 1990 Stock Option Plan (1990
Plan) for the benefit of directors,  selected officers, and other key employees.
The number of shares of common stock  reserved for issuance  under the 1990 Plan
was equal to 10 percent of the total number of common shares issued  pursuant to
the Bank's  conversion  to capital  stock form.  The 1990 Plan  provides for the
granting of options for up to 380,962 shares of the  Corporation's  common stock
at the fair market value at the time the options are granted. The 1990 Plan will
remain in effect until June 28, 2000.  Each stock option  granted under the 1990
Plan must be exercised within ten years of the date the option was granted.

      In April 1994, the Corporation adopted the 1994 Stock Option and Incentive
Plan (1994 Plan) to provide  select  employees and directors the  opportunity to
acquire shares. The number of shares of common stock reserved for issuance under
the 1994 Plan was equal to 10 percent of the  then-outstanding  shares. The 1994
Plan  provides  for the  granting  of options  for up to  496,221  shares of the
Corporation's  common stock at the fair market value at the time the options are
granted.  The 1994 Plan will remain in effect until April 19,  2004.  Each stock
option  granted  under the 1994 Plan must be  exercised  within ten years of the
date the  option  was  granted.  The 1994 Plan  provides  that the Stock  Option
Committee (Committee), appointed by the Corporation's board of directors, at its
discretion,  may award restricted  shares of the  Corporation's  common stock to
employees.  Shares of the Corporation's common stock issued pursuant to the 1994
Plan are  restricted for a period of no less than six months and no greater than
five years. The Committee determines the restrictions applicable to the award of
restricted  stock,  including,  but not limited to,  requirements  of continuous
service  for  a  specified  term  or  the  attainment  of  specific   corporate,
divisional,  or individual  performance  standards or goals.  As of December 31,
1996, no restricted stock has been awarded.

      Both plans also  provide  for the  granting of options  with tandem  stock
appreciation  rights.  Stock appreciation  rights entitle the grantee to receive
cash equal to the excess of the market value of the shares at the date

                                      85

<PAGE>



the right is  exercised  over the  exercised  price.  Upon  exercise  of a stock
appreciation  right,  the related option,  or portion thereof,  is canceled.  An
expense is accrued for the amount by which the market value of the stock exceeds
the option price for each stock appreciation  right outstanding.  As of December
31, 1996, no stock appreciation rights have been granted.

      Financial  Accounting  Standard No. 123, which became  effective for 1996,
requires pro forma  disclosures  for companies  that do not adopt its fair value
accounting  method  for  stock-based  employee  compensation.  Accordingly,  the
following pro forma  information  presents net income and earnings per share had
the  Standard's  fair value  method been used to measure  compensation  cost for
stock option plans.  Compensation cost actually recognized for stock options was
$0 for 1996 and 1995.
<TABLE>
<CAPTION>

                                                           1996            1995
                                                           ----            ----

<S>                                                    <C>             <C>
Net income as reported                                 $5,447,292      $6,802,903
Pro forma net income                                    5,349,009       6,716,873
Primary earnings per share as reported                       1.09            1.35
Pro forma primary earnings per share                         1.07            1.33
Fully diluted earnings per share as reported                 1.09            1.35
Pro forma fully diluted earnings per share                   1.07            1.33
</TABLE>

      In future  years,  the pro forma effect of not applying  this  standard is
expected to increase as additional options are granted.

      Options exerciseable at December 31, are as follows:
<TABLE>
<CAPTION>

                                               1996         1995          1994
                                               ----         ----          ----

<S>                                           <C>         <C>           <C>
Number of options                             200,678     225,643       220,646
Weighted-average exercise price                 $4.37       $4.20         $4.50
</TABLE>

      For options granted during the years indicated,  the weighted-average fair
values at grant date are as follows:

<TABLE>
<CAPTION>
                                                           1996            1995
                                                           ----            ----

<S>                                                       <C>             <C>
Options granted at market price:
  Exercise price                                          $19.13          $18.85
  Fair value                                                5.60            4.65
</TABLE>


                                          86

<PAGE>



      The fair value of options  granted during 1996 and 1995 is estimated using
the following weighted average information:
<TABLE>
<CAPTION>

                                                           1996            1995
                                                           ----            ----

<S>                                                     <C>             <C>
Risk-free interest rate                                    5.42%           5.57%
Expected life                                           10 YEARS        10 years
Expected volatility of stock price                        17.01%          19.36%
Expected dividends                                         2.00%           2.00%
</TABLE>

      At December 31, 1996, options outstanding were as follows:
<TABLE>
<CAPTION>

<S>                                                                 <C>
Number of options                                                          328,658
Range of exercise price                                             $3.80 - $19.21
Weighted-average exercise price                                              $9.95
Weighted-average remaining option life                                  5.77 years
For options now exerciseable:
  Number                                                                   200,678
  Weighted-average exercise price                                            $4.37
</TABLE>

      The  following  table  summarizes  outstanding  grants  and  stock  option
transactions for the three years ended December 31, 1996:
<TABLE>
<CAPTION>

                                                                           Average
                                                            Number of     Exercise
                                                             Shares         Price
                                                             ------         -----

<S>                                                         <C>            <C>
Options outstanding at December 31, 1993                    277,894        $ 4.18
Options exercised                                           (26,845)         4.31
Options forfeited                                            (3,490)         5.89
Options granted                                               9,317         13.63
                                                            -------        ------
Options outstanding at December 31, 1994                    256,876          4.48
Options exercised                                           (23,936)         4.76
Options forfeited                                            (1,129)         8.44
Options granted                                             114,510         18.85
                                                            -------        ------
Options outstanding at December 31, 1995                    346,321          9.20
Options exercised                                           (28,060)         4.09
Options forfeited                                              (397)        14.56
Options granted                                              10,794         19.13
                                                            -------        ------
Options outstanding at December 31, 1996                    328,658        $ 9.95
                                                            =======        ======
</TABLE>

      At December 31, 1996, 374,381 shares were available for future grants.

(15)  EMPLOYEE STOCK OWNERSHIP PLAN

      In conjunction  with the plan of conversion,  the  Corporation's  board of
directors  approved a  noncontributory  Employee Stock Ownership Plan (ESOP) for
substantially  all  employees.  The ESOP acquired  331,271 and 108,316 shares of
common stock in June 1990 and December  1991,  respectively,  for $1,260,000 and
$595,088,  respectively,  financed by loans payable to a nonaffiliated bank. The
loan agreements are secured by pledges of the  Corporation's  common stock owned
by the ESOP and purchased  with the proceeds from these loans.  The  Corporation
does not guarantee the debt.


                                      87

<PAGE>



      On April 25, 1994, the ESOP borrowed from the  Corporation  funds totaling
$1,097,095, which were used to repay debt outstanding to the nonaffiliated bank.
The repayment schedules for the new loans are the same as those contained in the
original loan agreements; however, the new agreements provide for the payment of
no interest on the unpaid  principal  balances.  As of December  31,  1996,  the
outstanding loan balances are reflected as a reduction in stockholders' equity.

      The  Corporation's  contribution to the ESOP was  approximately  $147,000,
$99,000,  and $229,000 for the years ended  December 31, 1996,  1995,  and 1994,
respectively.  These  amounts  were  charged  to  expense  in  the  accompanying
consolidated  statements  of  operations.  Dividends on shares not  allocated to
participants  and held by the ESOP are utilized to service the ESOP debt and are
tax-deductible  by the  Corporation to the extent they are utilized to repay the
outstanding  principal of the debt.  Contributions from dividends on shares held
by the ESOP  approximated  $85,000,  $133,000,  and  $30,000 for the years ended
December 31, 1996,  1995, and 1994,  respectively.  The interest  portion of the
loan payments  approximated $0, $0, and $27,000 for the years ended December 31,
1996,  1995,  and 1994,  respectively.  The  remainder of the loan  payments was
applied to reduce the outstanding principal balance of the ESOP debt.

(16)  PENSION PLAN AND OTHER RETIREMENT BENEFITS

EMPLOYEES' DEFERRED SAVINGS PLAN AND DEFERRED SAVINGS PLAN

      The Bank's  Employees'  Deferred  Savings Plan and  Deferred  Savings Plan
(401(k)  plans) cover  substantially  all of its employees who have attained the
age of 21, have  completed at least one year of service,  and are a full-time or
part-time  employee  who has worked at least 1,000 hours  during such plan year.
Eligible employees may contribute up to 18 percent of their annual compensation,
subject to certain maximums  established by the Internal  Revenue  Service.  The
Corporation will match up to 50 percent of the first 4 percent of the employees'
compensation  deferred  each year.  In 1994,  in addition to providing  matching
funds  under  the  401(k)   plans,   the  Bank   established   a   discretionary
profit-sharing  plan whereby  eligible  employees,  regardless of their level of
participation  in the 401(k)  plans,  received a  contribution  to their  401(k)
account in an amount equal to 2 percent of their compensation. The Corporation's
cost of these plans for the years ending December 31, 1996,  1995, and 1994, was
approximately $176,000, $132,000, and $137,000, respectively.

FINANCIAL INSTITUTIONS RETIREMENT FUND

      The former Union Federal Savings (Union) was a participant in the multiple
employer  Financial  Institutions  Retirement  Fund  (FIRF  or  the  Fund),  and
substantially  all of its officers and employees were covered by the plan.  FIRF
provides benefits based on basic compensation and years of service for employees
age 21 and over after one year of service. Union's contributions were determined
by FIRF and generally  represented the normal cost of the Fund. No contributions
to the Fund were required  during the years ended  December 31, 1996,  1995, and
1994.

      Union's  participation  in the FIRF was withdrawn  effective  February 29,
1992.  Employee  participants were given the election to either choose continued
participation  with the FIRF or to transfer the accrued  benefit into the Bank's
401(k)  plans.  Transfer of excess plan assets to the Bank's  401(k) plans began
during 1993 upon receipt of final regulatory approvals. Transfers of excess plan
assets  continued in 1994 and are periodically  allocated to remaining  eligible
participants as an employer contribution.

POSTRETIREMENT BENEFITS

      The Bank's  Employees'  Retirement  Health  Care and Life  Insurance  Plan
(Postretirement  Plan) is a contributory defined benefit  postretirement  health
care plan which covers substantially all employees of the Bank and their covered
dependents. Eligibility for benefits from the Postretirement Plan is age 60 with
at least 25 years of service with the Bank and active  employment at retirement.
Retirees' contributions to the Postretirement Plan vary based upon the retiree's
age and election of coverage.

                                      88

<PAGE>




      Components  of net  periodic  postretirement  benefit  cost for the  years
indicated are as follows:
<TABLE>
<CAPTION>

Years Ended December 31,                       1996         1995          1994
------------------------                       ----         ----          ----

<S>                                           <C>        <C>            <C>
Service cost                                  $21,209    $13,729        $18,032
Interest cost                                  47,523     49,682         50,489
Amortization and deferral                          --     (3,470)            --
                                              -------    -------        -------
Net periodic postretirement benefit cost      $68,732    $59,941        $68,521
                                              =======    =======        =======
</TABLE>

      The weighted  average  discount rate used in determining  the net periodic
postretirement  benefit cost for 1996,  1995,  and 1994 was 7.25  percent,  8.75
percent, and 7.25 percent,  respectively.  Additionally,  in determining the net
periodic  postretirement  benefit  cost  in 1996  was a  health  care  inflation
assumption of 11.06 percent,  grading down uniformly to 5.25 percent in 2005 and
all years  thereafter.  A health care  inflation  assumption  of 11.96  percent,
grading down  uniformly to 6.75  percent in 2005 and all years  thereafter,  was
used in 1995.  In 1994,  a health care  inflation  assumption  of 12.4  percent,
grading down  uniformly to 5.75  percent in 2005 and all years  thereafter,  was
used. The dental inflation  assumption was 5.00 percent,  5.75 percent, and 5.75
percent in 1996, 1995, and 1994, respectively.

      The   Postretirement   Plan's  funded  status,   reconciled  with  amounts
recognized in the consolidated statements of financial condition, is as follows:
<TABLE>
<CAPTION>

                                                           1996            1995
                                                           ----            ----
<S>                                                     <C>             <C>
Accumulated postretirement benefit obligation for:
  Retirees                                              $433,545        $415,233
  Other fully eligible plan participants                  41,710          43,057
  Other active plan participants                         264,113         229,367
                                                        --------        --------
      Total accumulated postretirement benefit
        obligation                                       739,368         687,657
Plan assets at fair value                                     --              --
                                                        --------        --------
Accumulated postretirement benefit obligation in
  excess of plan assets                                  739,368         687,657
Unrecognized net transition obligation                        --              --
                                                        --------        --------
Unrecognized net gains (losses) from experience
  different from that assumed                            (21,872)         23,298
Prior service cost not yet recognized in net periodic
  postretirement benefit cost                                 --              --
                                                        --------        --------
Accrued postretirement benefit cost                     $717,496        $710,955
                                                        ========        ========
</TABLE>

      The weighted  average  discount rate used in determining  the  accumulated
postretirement  benefit  obligation  at  December  31,  1996 and 1995,  was 7.50
percent and 7.25 percent, respectively.

      For  measurement  purposes at December 31, 1996, the health care inflation
rate is assumed to decline  uniformly  from 10.41 percent per year  presently to
5.50  percent per year in 2005 and all years  thereafter.  The dental  inflation
assumption is 5.00 percent per year in all future years.

      At December 31, 1995, for measurement purposes,  the health care inflation
rate is assumed to decline uniformly from 11.06 percent per year to 5.25 percent
per year in 2005 and all years  thereafter.  The dental inflation  assumption is
5.75 percent per year in all future years.

      The effect of a  one-percentage-point  increase  in the  health  care cost
trend rate  assumptions  on the service and interest  components of net periodic
postretirement  benefit  cost for  1996,  1995,  and  1994  and the  accumulated
postretirement  benefit  obligation  as of December 31, 1996 and 1995,  would be
minimal because of the  application of defined dollar caps on  employer-provided
benefits.

                                      89

<PAGE>




(17)  REGULATORY MATTERS

      The Bank is subject to regulatory  capital  requirements  administered  by
federal regulatory  agencies.  Capital adequacy guidelines and prompt corrective
action regulations involve  quantitative  measures of assets,  liabilities,  and
certain   off-balance-sheet   items  calculated   under  regulatory   accounting
practices.  Capital amounts and  classifications are also subject to qualitative
judgments by regulators about  components,  risk weightings,  and other factors,
and the regulators can lower  classifications in certain cases.  Failure to meet
various capital  requirements can initiate  regulatory  action that could have a
direct material effect on the consolidated financial statements.

      The prompt corrective  action  regulations  provide five  classifications,
including   well   capitalized,   adequately   capitalized,    undercapitalized,
significantly undercapitalized, and critically undercapitalized,  although these
terms are not used to  represent  overall  financial  condition.  If  adequately
capitalized,  regulatory  approval is required to accept brokered  deposits.  If
undercapitalized,  capital  distributions  are  limited,  as is asset growth and
expansion,   and  plans  for  capital  restoration  are  required.  The  minimum
requirements are:
<TABLE>
<CAPTION>

                                                                    Tier 1 Capital
                                                  Capital to Risk-    to Adjusted
                                                   Weighted Assets   Total Assets
                                                   ---------------   ------------
<S>                                               <C>          <C>          <C>
Well capitalized                                  10%          6%           5%
Adequately capitalized                             8%          4%           4%
Undercapitalized                                   6%          3%           3%
</TABLE>

      At year end,  actual  capital  levels (in millions)  and minimum  required
levels were:
<TABLE>
<CAPTION>

                                                                                        Minimum
                                                                                        Required
                                                                                       To Be Well
                                                                         Minimum    Capitalized Under
                                                                         Required         Prompt
                                                                       For Capital     Corrective
                                                                         Adequacy         Action
                                                          Actual         Purposes      Regulations
                                                          ------         --------      -----------
                                                     Amount   Ratio   Amount  Ratio  Amount   Ratio
                                                     ------   -----   ------  -----  ------   -----

<S>                                                   <C>     <C>     <C>      <C>    <C>     <C>
1996:
Total capital (to risk weighted assets)               $64.1   13.2%   $38.9    8.0%   $48.6   10.0%
Tier 1 (core) capital (to risk
  weighted assets)                                    $59.6   12.3%   $19.4    4.0%   $29.1    6.0%
Tier 1 (core) capital (to adjusted
  total assets)                                       $59.6    7.2%   $24.9    3.0%   $41.5    5.0%
Tangible capital (to adjusted
  total assets)                                       $59.6    7.2%   $12.4    1.5%     N/A     N/A
1995:
Total capital (to risk weighted assets)               $64.4   14.3%   $36.0    8.0%   $45.0   10.0%
Tier 1 (core) capital (to risk
  weighted assets)                                    $60.6   13.5%   $18.0    4.0%   $27.0    6.0%
Tier 1 (core) capital (to adjusted
  total assets)                                       $60.6    8.0%   $22.8    3.0%   $38.0    5.0%
Tangible capital (to adjusted
  total assets)                                       $60.6    8.0%   $11.4    1.5%     N/A     N/A
</TABLE>

      The  Bank  at  December  31,  1996  and  1995,  was  categorized  as  well
capitalized.


                                          90

<PAGE>



      The  following  is a  reconciliation  of  the  Corporation's  consolidated
stockholders' equity for financial reporting purposes to the Bank's consolidated
tangible,  core,  and  risk-based  capital  available  to  meet  its  regulatory
requirements:
<TABLE>
<CAPTION>

December 31,                                               1996            1995
------------                                               ----            ----

<S>                                                   <C>              <C>
Corporation's stockholders' equity as reported in
  the accompanying consolidated financial statements  $62,470,027      $62,743,021
Plus (less):
  Capitalization of parent company                     (2,683,442)      (2,066,669)
  Unrealized gains on available-for-sale
    securities, net of tax                               (214,594)         (71,661)
                                                      -----------      -----------
Tangible and core capital                              59,571,991       60,604,691
Plus supplementary capital:
  General loss reserves                                 4,563,594        4,586,716
  Less: Equity investments and investment in real
    property required to be deducted                           --         (753,874)
                                                      -----------      -----------
Risk-based capital                                    $64,135,585      $64,437,533
                                                      ===========      ===========
</TABLE>


      The Bank may not declare or pay cash dividends on, or purchase, any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable  regulatory capital  maintenance  requirements or if
such declaration and payment would otherwise violate regulatory requirements.

      The Deposit Insurance Fund Act of 1996 (DIFA) was enacted on September 30,
1996. DIFA addressed  inadequate  funding of the Savings  Association  Insurance
Fund  (SAIF),  which had resulted in a  significant  deposit  insurance  premium
disparity  between banks  insured by the Bank  Insurance  Fund and  SAIF-insured
thrifts,  which were  required to pay  substantially  higher  deposit  insurance
premiums.  As a result of the  legislation,  a one-time  special  assessment was
imposed.  The  Bank's  one-time  pre-tax  assessment  was  $3,355,000  and  this
nonrecurring  charge  was  recognized  in the third  quarter  of 1996.  The DIFA
provides for a reduction in deposit insurance premiums in subsequent periods and
other regulatory reforms.

(18)  EARNINGS PER SHARE

      Earnings  per share of common  stock  are  based on the  weighted  average
number of common  shares and common  share  equivalents  outstanding  during the
year. The effect of common stock equivalent  shares applicable to employees' and
directors'  stock options has been included in the  calculation  of earnings per
share for 1996,  1995, and 1994 because their impact was dilutive.  The weighted
average number of common and common equivalent shares used in the calculation of
primary and fully  diluted  earnings per share for 1995 and 1994 was restated to
give  retroactive  effect to the 10 percent stock dividend  declared  August 20,
1996.



                                      91

<PAGE>



      The following  table details the calculation of earnings per share on both
primary and fully diluted bases for the following years:
<TABLE>
<CAPTION>

Years Ended December 31,                       1996         1995          1994
------------------------                       ----         ----          ----

<S>                                         <C>         <C>            <C>
Primary:
Net earnings applicable to common stock
  and common stock equivalents              $5,447,292  $6,802,903     $5,588,818
                                            ==========  ==========     ==========
Average number of common shares
  outstanding                                4,856,838   4,885,448      4,887,637
Common stock equivalents of stock options      159,873     180,487        180,724
                                            ----------  ----------     ----------
                                             5,016,711   5,065,935      5,068,361
                                            ==========  ==========     ==========
Primary earnings per common share           $     1.09  $     1.35     $     1.09
                                            ==========  ==========     ==========
Fully diluted:
Net earnings applicable to common
  stock and common stock equivalents        $5,447,292  $6,802,903     $5,588,818
                                            ==========  ==========     ==========
Average number of common shares
  outstanding                                4,856,838   4,885,448      4,887,637
Common stock equivalents of stock
  options                                      160,665     183,812        180,733
                                            ----------  ----------     ----------
                                             5,017,503   5,069,260      5,068,370
                                            ==========  ==========     ==========
Fully diluted earnings per common share     $     1.09  $     1.35     $     1.09
                                            ==========  ==========     ==========
</TABLE>


(19)  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

      In the  normal  course of  business,  to meet the  financing  needs of its
customers and to reduce its own exposure to fluctuations in interest rates,  the
Corporation is a party to financial  instruments  with  off-balance-sheet  risk.
These financial  instruments include commitments to extend credit and letters of
credit.  Those instruments  involve, to varying degrees,  elements of credit and
interest  rate risk in  excess  of the  amount  recognized  in the  accompanying
consolidated statements of financial condition. The contract or notional amounts
of those  instruments  reflect the extent of involvement  the Corporation has in
particular classes of financial instruments.

      The  Corporation's  exposure to credit loss in the event of nonperformance
by the other party to the financial  instrument for commitments to extend credit
and  letters  of  credit  is  represented  by the  contractual  amount  of  that
instrument.  The Corporation uses the same credit policies in making commitments
as it does for on-balance-sheet instruments.

      Financial  instruments  whose contract  amounts  represent  credit risk at
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>

                                                           1996            1995
                                                           ----            ----

<S>                                                   <C>             <C>
Commitments to extend credit                          $73,220,000     $54,469,000
Letters of credit                                         283,000         486,000

</TABLE>

      There were no financial  instruments  whose notional  amounts exceeded the
amount of credit risk at December 31, 1996.


                                      92

<PAGE>



      Commitments  to extend credit are agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee.  Because many of the commitments are expected
to expire  without  being  drawn  upon,  the  total  commitment  amounts  do not
necessarily represent future cash requirements. The Corporation applies the same
credit  standards used in the lending process when extending  these  commitments
and evaluates each  customer's  creditworthiness  on a case-by-case  basis.  The
amount of  collateral  obtained,  if deemed  necessary by the  Corporation  upon
extension  of  credit,  is  based  on  management's  credit  evaluation  of  the
counterparty.  Collateral held varies,  but may include  residential real estate
and income-producing commercial properties.

      Letters  of  credit  written  are  conditional  commitments  issued by the
Corporation to guarantee the  performance  of a customer to a third party.  Most
guarantees extend for one year and expire in decreasing amounts through December
5, 1997.  The extent of  collateral  held on those  commitments  at December 31,
1996, is equal to or in excess of the committed amount.

      The  Corporation  has used  interest  rate  exchange  agreements to manage
interest  rate  exposure  on its  interest-bearing  liabilities.  Interest  rate
exchange transactions generally involve the exchange of fixed- and floating-rate
interest payment  obligations  without the exchange of the underlying  principal
amounts.  Entering into interest rate exchange  agreements  involves the risk of
dealing  with  counterparties  and  their  ability  to  meet  the  terms  of the
contracts.  The  counterparties to the agreements with the Corporation have been
primary dealers. Notional principal amounts often are used to express the volume
of these  transactions,  but the amounts  potentially subject to credit risk are
much smaller.

      On November 17, 1994, the Corporation  terminated,  at a loss of $229,000,
its remaining interest rate exchange agreement with an aggregate notional amount
of $15,000,000  and a maturity date of December 23, 1996. The deferred loss from
the termination of the interest rate exchange  agreement totaled $0 and $107,000
at  December  31,  1996  and  1995,  respectively.  Amortization  of the loss as
interest expense totaled $107,000 and $109,000 for 1996 and 1995, respectively.



                                      93

<PAGE>



(20)  CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY

      The  statements of financial  condition at December 31, 1996 and 1995, and
the  statements  of operations  and cash flows for the years ended  December 31,
1996, 1995, and 1994, of CFSB Bancorp, Inc., follow:

STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>

December 31,                                               1996            1995
------------                                               ----            ----

<S>                                                   <C>              <C>
ASSETS:
  Cash on deposit at subsidiary bank                  $ 1,122,093      $ 1,144,397
  Investment in subsidiary bank                        59,786,585       60,676,352
  Dividends receivable from subsidiary bank               829,050               --
  Other assets                                          1,825,052        1,955,021
                                                      -----------      -----------
      Total assets                                    $63,562,780      $63,775,770
                                                      ===========      ===========
LIABILITIES:
  Dividends payable to stockholders                   $   564,629      $   489,798
  Other liabilities                                       528,124          542,951
                                                      -----------      -----------
      Total liabilities                                 1,092,753        1,032,749
                                                      -----------      -----------
STOCKHOLDERS' EQUITY:
  Common stock                                             48,496           45,185
  Additional paid-in capital                           41,422,898       34,389,162
  Retained income                                      23,863,600       29,852,980
  Net unrealized gains on available-for-sale
    securities of subsidiary bank, net of tax             214,594           71,661
  Employee Stock Ownership Plan                          (459,408)        (691,294)
  Treasury stock                                       (2,620,153)        (924,673)
                                                      -----------      -----------
      Total stockholders' equity                       62,470,027       62,743,021
                                                      -----------      -----------
      Total liabilities and stockholders' equity      $63,562,780      $63,775,770
                                                      ===========      ===========

</TABLE>


                                          94

<PAGE>



STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

Years Ended December 31,                       1996         1995          1994
------------------------                       ----         ----          ----

<S>                                        <C>           <C>           <C>
INCOME:
  Dividends from subsidiary bank           $6,342,950    $3,022,000    $5,209,702
  Loss in equity investment                  (108,153)      (16,651)           --
                                           ----------    ----------    ----------
      Total operating income                6,234,797     3,005,349     5,209,702
EXPENSES:
  Compensation, payroll taxes, and
    fringe benefits                           312,954       333,072       248,880
  Other operating expenses                    208,621       222,142       282,869
                                           ----------    ----------    ----------
      Total operating expenses                521,575       555,214       531,749
                                           ----------    ----------    ----------
      Income before equity in
        undistributed net income of
        subsidiary bank                     5,713,222     2,450,135     4,677,953
  Equity in undistributed net income
    of subsidiary bank                       (265,930)    4,352,768       910,865
                                           ----------    ----------    ----------
      Net income                           $5,447,292    $6,802,903    $5,588,818
                                           ==========    ==========    ==========
</TABLE>

STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

Years Ended December 31,                       1996         1995          1994
------------------------                       ----         ----          ----

<S>                                        <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                               $ 5,447,292   $ 6,802,903   $ 5,588,818
  Adjustments to reconcile net income:
    Loss (equity) in undistributed net
      income of subsidiary bank                265,930    (4,352,768)     (910,865)
    Decrease (increase) in other assets        129,969      (634,019)     (952,700)
    Increase (decrease) in other
      liabilities                              217,059       257,947    (1,066,287)
                                           -----------   -----------   -----------
      Net cash provided by operating
        activities                           6,060,250     2,074,063     2,658,966
                                           -----------   -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from stock options exercised        114,674       114,072       115,630
  Purchases of Treasury stock               (4,089,237)           --    (1,100,607)
  Dividends paid on common stock            (2,107,991)   (1,832,008)   (1,516,405)
                                           -----------   -----------   -----------
      Net cash used by financing
        activities                          (6,082,554)   (1,717,936)   (2,501,382)
                                           -----------   -----------   -----------
  Net increase (decrease) in cash              (22,304)      356,127       157,584
  Cash at beginning of period                1,144,397       788,270       630,686
                                           -----------   -----------   -----------
  Cash at end of period                    $ 1,122,093   $ 1,144,397   $   788,270
                                           ===========   ===========   ===========
</TABLE>

(21)  FAIR VALUE OF FINANCIAL INSTRUMENTS

      Statement of Financial  Accounting  Standards No. 107,  Disclosures  About
Fair  Value  of  Financial  Instruments  (SFAS  107),  requires  disclosures  of
fair-value information about financial instruments, whether or not recognized in
the balance sheet,  for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using  present  value  or  other  valuation  techniques.  Those  techniques  are
significantly  affected by the assumptions used, including the discount rate and
estimates of future cash

                                      95

<PAGE>



flows. In that regard, the derived fair-value  estimates cannot be substantiated
by comparison to independent  markets and, in many cases,  could not be realized
in immediate settlement of the instrument.

      Fair-value  methods  and  assumptions  for  the  Corporation's   financial
instruments are as follows:

CASH AND CASH EQUIVALENTS

      The carrying amounts reported in the consolidated  statements of financial
condition for cash and interest-earning deposits with the Federal Home Loan Bank
and other  depository  institutions  reasonably  approximate  those assets' fair
values.

INVESTMENT AND MORTGAGE-BACKED SECURITIES

      Fair values for  investment  and  mortgage-backed  securities are based on
quoted market prices.

LOANS RECEIVABLE

      For adjustable-rate  loans that reprice frequently and with no significant
change in credit risk, fair values are generally based on carrying  values.  The
fair values for fixed-rate  one- to four-family  residential  mortgage loans are
based on  quoted  market  prices  of  similar  loans  sold in  conjunction  with
securitization  transactions,  adjusted for differences in loan characteristics.
The fair  values for  income-producing  property  loans and  consumer  loans are
estimated using  discounted  cash flow analyses,  using interest rates currently
being  offered for loans with  similar  terms and similar  credit  quality.  The
carrying amount of accrued interest receivable approximates its fair value.

DEPOSIT LIABILITIES

      The fair  value of  deposits  with no stated  maturity,  such as  savings,
checking, and money market accounts, is equal to the amount payable on demand as
of December  31,  1996 and 1995.  The fair value of  certificates  of deposit is
based on the discounted  value of contractual  cash flows.  The discount rate is
estimated using the rates  currently  offered by the Corporation for deposits of
similar  remaining  maturities.  The fair  value  of  accrued  interest  payable
approximates its carrying value.

      The fair-value estimates of deposit liabilities do not include the benefit
that  results  from the  low-cost  funding  provided by the deposit  liabilities
compared to the cost of borrowing funds in the market.

FEDERAL HOME LOAN BANK ADVANCES

      The fair value of the Corporation's  borrowings from the Federal Home Loan
Bank  are  estimated  using   discounted  cash  flow  analyses,   based  on  the
Corporation's current incremental borrowing rates for similar types of borrowing
arrangements.

OFF-BALANCE-SHEET INSTRUMENTS

      The fair value of commitments to extend credit is estimated using the fees
currently  charged to enter into  similar  agreements,  taking into  account the
remaining  terms  of the  agreements  and the  present  creditworthiness  of the
counterparties.  For fixed-rate loan commitments,  fair value also considers the
difference between current levels of interest rates and the committed rates.



                                      96

<PAGE>



      The estimated  fair value of the  Corporation's  financial  instruments at
December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>

                                        1996                       1995
                                        ----                       ----
                              CARRYING      ESTIMATED     Carrying      Estimated
                                VALUE      FAIR VALUE       Value      Fair Value
                                -----      ----------       -----      ----------

<S>                        <C>           <C>           <C>           <C>
FINANCIAL ASSETS
Cash and short-term
  interest-earning
  deposits                 $ 22,749,963  $ 22,700,000  $ 29,724,175  $ 29,700,000
Investment securities        31,093,494    31,100,000    55,109,533    55,100,000
Mortgage-backed securities   27,220,567    27,200,000    35,155,907    35,800,000
Loans receivable, net       717,714,636   717,900,000   610,284,070   616,500,000
Accrued interest receivable   4,349,240     4,300,000     4,883,233     4,900,000
FINANCIAL LIABILITIES
Savings, checking, and
  money market accounts     229,359,744   229,400,000   209,402,769   209,400,000
Certificates of deposit     324,214,257   325,300,000   318,413,409   320,500,000
Advances from Federal
  Home Loan Bank            202,639,323   202,600,000   160,649,376   162,000,000
Accrued interest payable      4,233,799     4,200,000     3,474,063     3,500,000
OFF-BALANCE-SHEET ITEMS
Commitments to extend credit         --            --            --            --
</TABLE>

LIMITATIONS

      Fair-value  estimates  are made at a  specific  point  in  time,  based on
relevant  market  information and  information  about the financial  instrument.
These  estimates  do not reflect any premium or discount  that could result from
offering for sale at one time the  Corporation's  entire holding of a particular
financial instrument.  Because no market exists for a significant portion of the
Corporation's financial instruments, fair-value estimates are based on judgments
regarding future expected loss experience,  current  economic  conditions,  risk
characteristics  of various  financial  instruments,  and other  factors.  These
estimates  are  subjective  in nature and involve  uncertainties  and matters of
significant judgment, and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.

      Fair-value  estimates  are  based on  existing  on- and  off-balance-sheet
financial  instruments  without  attempting to estimate the value of anticipated
future business and the value of assets and liabilities  that are not considered
financial instruments.  Accordingly,  the aggregate fair-value amounts presented
do not represent the underlying value of the Corporation.


                                      97

<PAGE>



(22)  QUARTERLY FINANCIAL INFORMATION

      The  following is a summary of  quarterly  financial  information  for the
years ended December 31, 1996 and 1995 (unaudited):
<TABLE>
<CAPTION>

                               March 31       June 30    September 30   December 31
                               --------       -------    ------------   -----------
                                      (In Thousands, Except Per-Share Data)

<S>                      <C>            <C>           <C>           <C>
1996:
  Interest income               $13,786       $14,065       $14,549       $15,002
  Net interest income             5,367         5,721         5,866         5,950
  Provision for loan
    losses                           60            60            60            60
  Income (loss) before
    federal income tax
    expense (benefit)             2,530         2,714          (530)        3,168
  Net income (loss)               1,715         1,851          (293)        2,174
  Earnings (loss) per
    share (1):
    Primary                        0.34          0.36         (0.06)         0.43
    Fully diluted                  0.34          0.36         (0.06)         0.43
  Stock price range (1)   $18.13-$21.88 $17.75-$20.00 $17.75-$19.50 $18.00-$20.75
1995:
  Interest income               $13,029       $13,221       $13,600       $13,711
  Net interest income             5,108         5,043         5,118         5,164
  Provision for loan losses          60            60            60            60
  Income before federal
    income tax expense            2,124         2,303         2,320         2,985
  Net income                      1,466         1,588         1,601         2,148
  Earnings per share (1):
    Primary                        0.29          0.31          0.32          0.43
    Fully diluted                  0.29          0.31          0.32          0.43
  Stock price range (1)   $13.38-$17.00 $16.13-$17.38 $16.13-$20.50 $17.75-$19.50
</TABLE>

(1)   Per-share  data for the first and second  quarters  of 1996 and all of the
      1995 quarters were restated to give  retroactive  effect to the 10 percent
      stock dividend declared August 20, 1996.

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.


                                      98

<PAGE>



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.

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, 1996
            and 1995
      2.    Consolidated Statements of Operations for the Years Ended December
            31, 1996, 1995 and 1994.
      3.    Consolidated Statements of Stockholders' Equity for the Years Ended
            December 31, 1996, 1995 and 1994.
      4.    Consolidated Statements of Cash Flows for the Years Ended December
            31, 1996, 1995 and 1994.
      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.

      (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 b
            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)

                                      99

<PAGE>




      21    Subsidiaries

      23    Consent of KPMG Peat Marwick LLP

      27    Financial Data Schedule


      (b)   Reports on Form 8-K - On December 30, 1996, the  Registrant  filed a
            -------------------
            Current  Report on Form 8-K  announcing  the  conversion of its bank
            subsidiary to a Michigan chartered state savings bank.

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

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

                                     100

<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 18, 1997.

                                                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 18, 1997.


/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/ Holly L. Schreiber
---------------------                           ----------------------
James L. Reutter                                Holly L. Schreiber
Chairman of the Board                           Vice President and Treasurer
(Director)                                      (Principal Financial and
                                                Accounting Officer)


/s/ Cecil Mackey                                /s/ David H. Brogan
---------------------                           ----------------------
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                        /s/ Donald F. Wall
------------------------                        ------------------------
Henry W. Wolcott, IV                            Donald F. Wall
(Director)                                      (Director)





<PAGE>



                               INDEX TO EXHIBITS

Exhibit                                                                   Page

   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 b
            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. Abbot
            (incorporated by reference to Exhibit 10.2 to Post-Effectiv
            Amendment No. 2 to the Corporation's registration
            statement on Form S-1 filed with the SEC on May 21, 1990)       --

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

   21       Subsidiaries

   23       Consent of KPMG Peat Marwick LLP

   27       Financial Data Schedule