SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997

Commission File Number: 0-18609
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CFSB BANCORP, INC.
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(Exact name of registrant as specified in its charter)

DELAWARE 38-2920051
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

112 EAST ALLEGAN STREET, LANSING, MICHIGAN 48933
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (517) 371-2911
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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
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(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 .
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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 10, 1998, 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 ($29.44 per share), was approximately $199,172,490 (for
purposes of this calculation, directors and executive officers are treated as
affiliates).

As of March 10, 1998, there were issued and outstanding 7,518,972 shares of the
registrant's common stock, of which 753,602 shares were held by affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997 (the "Annual Report") (Parts I and II)

2. Portions of Proxy Statement for the 1998 Annual Meeting of Stockholders
(the "Proxy Statement") (Part III)

CFSB BANCORP, INC.

INDEX TO FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1997

PART I

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

PART II

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

PART III

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

PART IV

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

SIGNATURES

EXHIBITS

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

PART I
ITEM 1. BUSINESS
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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, 1997, 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, 1997, the Corporation had total assets of $852.9 million and
stockholders' equity of $67.5 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.

Community First conducts its operations through its main office located in
Lansing, Michigan and through 16 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.

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 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, 1997, 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, 1997, $627.7 million, or 80.99%, 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 $498.5 million
were loans originated by the Bank. Substantially all loans originated by the
Bank are on properties located in its primary market area. Of the purchased
loans which are serviced by other institutions, $40.4 million, $83.7 million and
$5.1 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. At December
31, 1997, 63.77% of the Bank's total loans receivable consisted of loans that
provided for periodic interest rate adjustments or had terms to repricing, call
provisions or balloon payment provisions of seven years or less.

As noted above, in an effort to maintain a closer match between the interest
rate sensitivity of its assets and liabilities, the Bank has been active in the
origination of loans on income-producing properties (consisting of commercial
and multi-family real estate loans) in its primary market area and in the
origination of consumer loans. Although income-producing property loans and
consumer loans provide for higher interest rates and shorter terms, these loans
have higher credit risks than one-to four-family residential loans. While the
Bank has been relatively successful in its origination of income-producing
property loans, and the real estate market in the greater Lansing area has
remained fairly stable, numerous financial institutions throughout the United
States have incurred significant losses due to delinquencies and foreclosures
resulting from a decline in the value of properties securing income-producing
property loans. At December 31, 1997, the Bank had income-producing property
loans of $77.2 million and consumer loans of

$64.5 million. This compares to $84.0 million in income-producing property loans
and $54.6 million in consumer loans, at December 31, 1996. The decline in the
Bank's income-producing property loans is attributable to strong competition
from insurance companies offering lower interest rates for fixed-rate financing.
Consumer loan growth is a direct result of home equity loan promotions and
expanding the Bank's consumer lending to include indirect automobile lending
through local automobile dealerships. Any decline in the economy or real estate
market in the greater Lansing area could have a negative effect on the Bank's
loan portfolio and on the Corporation's net interest income and net income. At
December 31, 1997, the Bank's loans contractually delinquent 90 days or more and
real estate owned totaled $1.1 million, or .12%, 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 $1.0 million and less than 20 employees.
The Bank believes it can satisfy the financial needs of small business owners by
assisting with both their credit and deposit needs. Also in 1994, a formal
credit department was formed and an active call program was initiated. During
1997, the commercial business loan department originated 68 loans for a total of
$4.0 million. Additional funds of $2.5 million were available for disbursement
at year-end 1997 on the Bank's commercial business loan portfolio. As of
December 31, 1997, commercial business loans totaled $5.1 million compared to
$4.6 million at December 31, 1996.

In March 1997, the Bank initiated a 24-hour consumer loan-by-phone program.
A consumer can telephone the Bank and electronically make a loan application for
consumer loan products such as auto, home equity, redicredit, marine or debt
consolidations. The Bank has averaged 100 calls to loan-by-phone a month with an
approximate 20% approval rate.

The Bank has implemented a preapproval mortgage loan program called Buyer's
Edge. This program allows a potential homeowner to identify, prior to finding a
home, the amount of financing the Bank will approve. A certificate is issued by
the Bank which is valid for three months for a purchase of a home, and five
months for construction of a home. The customer can then comfortably look for a
new home or construct a home knowing the financing has already been approved. In
1997, the Bank closed 184 loans amounting to $23.5 million under the Buyer's
Edge Program.

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.

At December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)

First mortgage loans:
One- to four-family
residential............. $585,267 75.51% $553,691 74.63% $469,820 74.46% $401,394 75.38% $267,481 69.13%
Income-producing property 44,580 5.75 52,584 7.09 57,952 9.19 55,178 10.36 49,435 12.78
FHA-insured and
VA-partially
guaranteed............ 7,607 0.98 6,404 0.86 7,458 1.18 3,629 .68 4,240 1.10
Construction and
development loans:
One- to four-family
residential........... 34,821 4.49 38,072 5.13 30,754 4.87 20,485 3.85 15,129 3.91
Income-producing
property.............. 32,649 4.21 31,428 4.24 17,060 2.70 11,677 2.19 14,292 3.69
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total first mortgage
loans................ 704,924 90.94 682,179 91.95 583,044 92.40 492,363 92.46 350,577 90.61

Second mortgage loans...... 549 0.07 510 0.07 571 .09 661 .12 750 .19

Commercial business loans.. 5,087 0.66 4,644 0.63 3,195 .51 706 .13 446 .12

Consumer loans:
Home equity.............. 42,281 5.46 36,275 4.89 28,126 4.46 26,048 4.89 22,569 5.83
Educational.............. 1,348 0.18 1,871 0.25 2,329 .37 2,967 .56 2,633 .68
Marine and recreational
vehicles................ 2,224 0.29 2,192 0.30 2,373 .38 2,420 .45 2,307 .60
Land contract............ 149 0.02 254 0.03 349 .05 409 .08 808 .21
Auto..................... 10,219 1.32 7,925 1.07 6,542 1.04 2,330 .44 1,842 .47
Savings.................. 578 0.07 452 0.06 338 .05 351 .07 458 .12
Mobile home.............. 1,099 0.14 1,519 0.20 1,735 .27 2,144 .40 2,087 .54
Other.................... 6,585 0.85 4,090 0.55 2,379 .38 2,090 .40 2,455 .63
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans.. 64,483 8.33 54,578 7.35 44,171 7.00 38,759 7.29 35,159 9.08
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable 775,043 100.00% 741,911 100.00% 630,981 100.00% 532,489 100.00% 386,932 100.00%
====== ====== ====== ====== ======
Less:
Undistributed portion of
loans
in process............. (14,408) (18,147) (15,054) (8,578) (7,201)
Deferred origination fees (1,099) (1,485) (1,280) (1,196) (1,226)
Allowance for loan losses (4,730) (4,564) (4,363) (4,124) (3,847)
-------- -------- -------- -------- --------
Total loans
receivable, net...... 754,806 717,715 610,284 518,591 374,658

Mortgage-backed
securities, net........... 21,598 27,221 35,156 66,151 107,712
-------- -------- -------- -------- --------
Total loans
receivable and
mortgage- backed
securities, net...... $776,404 $744,936 $645,440 $584,742 $482,370
======== ======== ======== ======== ========

Fixed-rate loans:
One- to four-family
residential............. $205,478 26.51% $192,972 26.01% $201,971 32.01% $211,445 39.71% $163,518 42.26%
Income-producing property 28,222 3.64 32,848 4.43 34,693 5.50 30,247 5.68 30,936 8.00
FHA-insured and
VA-partially
guaranteed............. 3,802 0.49 2,797 0.37 3,560 .56 3,629 .68 4,240 1.10
Construction and
development:
One- to four-family
residential........... 7,652 0.98 3,494 0.47 805 .13 2,691 .51 8,726 2.25
Income-producing
property.............. 4,553 0.59 4,878 0.66 7,591 1.20 5,557 1.04 7,395 1.91
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total first mortgage
loans................. 249,707 32.21 236,989 31.94 248,620 39.40 253,569 47.62 214,815 55.52

Second mortgage loans..... 311 0.04 399 0.06 456 .07 609 .11 750 .19
Commercial business loans. 927 0.12 836 0.11 585 .09 290 .05 145 .04
Other loans............... 29,926 3.86 24,274 3.27 20,097 3.18 16,687 3.14 14,959 3.86
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate loans. 280,871 36.23 262,498 35.38 269,758 42.74 271,155 50.92 230,669 59.61
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Adjustable-rate loans:
First mortgage loans:
One- to four-family
residential............. 379,789 49.00 360,719 48.62 267,849 42.45 189,949 35.67 103,963 26.87
Income-producing property 16,358 2.11 19,736 2.66 23,259 3.69 24,931 4.68 18,499 4.78
FHA-insured and
VA-partially guaranteed. 3,805 0.49 3,607 0.49 3,898 .62 -- -- -- --
Construction and
development:
One- to four-family
residential........... 27,169 3.51 34,578 4.66 29,949 4.74 17,794 3.34 6,403 1.66
Income-producing
property.............. 28,096 3.63 26,550 3.58 9,469 1.50 6,120 1.15 6,897 1.78
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total first mortgage
loans................. 455,217 58.74 445,190 60.01 334,424 53.00 238,794 44.84 135,762 35.09

Second mortgage loans..... 238 0.03 111 0.01 115 .02 52 .01 -- --
Commercial business loans. 4,160 0.54 3,808 0.52 2,610 .42 416 .08 301 .08
Other loans............... 34,557 4.46 30,304 4.08 24,074 3.82 22,072 4.15 20,200 5.22
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate
loans................. 494,172 63.77 479,413 64.62 361,223 57.26 261,334 49.08 156,263 40.39
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable. 775,043 100.00% 741,911 100.00% 630,981 100.00% 532,489 100.00% 386,932 100.00%
====== ====== ====== ====== ======
Less:
Undistributed portion of
loans in process........ (14,408) (18,147) (15,054) (8,578) (7,201)
Deferred origination fees (1,099) (1,485) (1,280) (1,196) (1,226)
Allowance for loan losses (4,730) (4,564) (4,363) (4,124) (3,847)
-------- -------- -------- -------- --------
Total loans
receivable, net...... 754,806 717,715 610,284 518,591 374,658

Mortgage-backed securities:
Fixed-rate
mortgage-backed
securities.............. 12,011 16,138 22,159 51,099 88,856
Adjustable-rate
mortgage-backed
securities............. 9,587 11,083 12,997 15,052 18,856
-------- -------- -------- -------- --------
Total mortgage-backed
securities, net.... 21,598 27,221 35,156 66,151 107,712
-------- -------- -------- -------- --------
Total loans
receivable and
mortgage-
backed securities,
net................ $776,404 $744,936 $645,440 $584,742 $482,370
======== ======== ======== ======== ========

The following table sets forth the contractual maturities of the Bank's loan
and mortgage-backed securities portfolios at December 31, 1997. 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.

First Mortgage Loans
-------------------------------------------------------------------------------------------------------
Contruction
FHA- and development Total
Insured ----------------------- Second Loans and
Maturing During One-to Income- and VA- One- to Income- Mortgage Mortgage- Mortgage-
Year(s) Ended Four-Family Producing Partially Four-Family Producing and Other Total Backed Backed
December 31, Residential Property Guaranteed Residential Property Loans Loans Securities Securities
- -------------------------- ----------- --------- ---------- ----------- --------- --------- -------- ---------- ----------
(In Thousands)

1998...................... $ 25,816 $15,000 $ 140 $ 6,152 $17,377 $ 33,153 $ 97,638 $ 844 $ 98,482
1999...................... 24,817 6,455 151 794 8,127 15,011 55,355 914 56,269
2000...................... 23,584 2,797 164 529 1,663 8,936 37,673 990 38,663
2001-2002................. 44,336 3,490 344 1,178 2,234 6,524 58,106 2,189 60,295
2003-2007................. 105,900 6,711 1,070 3,434 1,885 5,502 124,502 4,929 129,431
2008-2012................. 85,410 6,401 1,525 4,262 1,164 911 99,673 5,152 104,825
2013 and following........ 275,404 3,726 4,213 18,472 199 82 302,096 6,580 308,676
-------- ------- ------- ------- ------- -------- -------- ------- --------
$585,267 $ 44,580 $ 7,607 $34,821 $32,649 $ 70,119 $775,043 $21,598 $796,641
======== ======== ======= ======= ======= ======== ======== ======= ========
Less:
Undistributed portion of
loans in process.................................................................................................... $(14,408)
Deferred origination fees............................................................................................ (1,099)
Allowance for loan losses............................................................................................ (4,730)
--------
Total loans receivable,
net............................................................................................................... $776,404
========

At December 31, 1997, the total loans and mortgage-backed securities due
after December 31, 1998, which had fixed interest rates were $238.5 million and
$11.4 million, respectively, while the total loans and mortgage-backed
securities due after such date, which had adjustable interest rates were $438.9
million and $9.4 million, respectively.

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, 1997,
$592.9 million, or 76.49%, of the Bank's total loan portfolio consisted of loans
secured by one-to four-family residences. The Bank's loan portfolio also
includes $34.8 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, 1997, approximately 80.99% of the Bank's total loan
portfolio consisted of loans secured by residential real estate.

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

The Bank presently offers one-year, three-year and five-year adjustable-
rate residential loans with interest rates that adjust based upon the index of
the weekly average yield on United States Treasury securities adjusted to a
constant maturity of one year. In addition, the Bank offers three-year
adjustable-rate residential loans with interest rates that adjust based upon the
index of the weekly average yield on United States Treasury securities adjusted
to a constant maturity of three years. The Bank offers introductory interest
rates on adjustable-rate loans which are lower than the fully-indexed rate on
these loans. The interest rates on these mortgages generally include a cap of
2% per adjustment and 6% over the life of the loan. The Bank also provides a
conversion feature which allows borrowers to convert from an adjustable-rate to
a fixed-rate prior to the 60th payment. In recent years, the Bank has generally
sold longer-term, fixed-rate, residential mortgage loans in the secondary market
upon conversion from an adjustable-rate mortgage loan. Adjustable-rate
residential mortgage loans totaled $410.8 million, or 53.0%, of the Bank's total
loan portfolio at December 31, 1997.

In 1997, there was a decline in long-term rates during the first quarter
and a large amount of refinancing occurred. In the second and third quarter,
new home sales picked up and as interest rates stabilized, adjustable-rate
products were attractive. During the fourth quarter, the long-term rates began
to drop again; and refinancing into 30-year, fixed-rate mortgages was prevalent.
During 1997, the Bank originated $25.8 million in fixed-rate mortgage loans,
$18.4 million of which were sold in the secondary mortgage market, and $116.5
million in adjustable-rate and medium-term fixed-rate (15 years or less)
mortgage loans, of which none were sold in the secondary mortgage market.

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

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

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

previously approved by the Bank. It is the Bank's policy to obtain title
insurance on all mortgage loans. Borrowers also must obtain hazard (including
fire) insurance prior to closing. Determination as to whether a property is
located in a flood zone is additionally required on new mortgage loan
originations. Borrowers are required to advance funds on a monthly basis
together with each payment of principal and interest through a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes and hazard insurance premiums as they become due. If a loan carries a
loan-to-value ratio of 75% or less, the borrower has the option of not having
real estate taxes and hazard insurance premiums placed in escrow as long as
proof of payment for these items is submitted to the Bank prior to their due
dates. These underwriting criteria are also applied to loans purchased giving
the Bank the right to reject any loans failing to meet underwriting standards.
The Bank began using automated loan underwriting utilizing Federal Home Loan
Mortgage Corporation Loan Prospector software in November 1996. The system was
fully implemented in January 1997 and is used to underwrite all residential loan
originations. Approximately 70% of mortgage applications are approved using
this software with the remaining 30% referred to traditional underwriting
methods. By using the automated underwriting procedures, the Bank is able to
approve loans faster and decrease the time to loan closing. Despite the
benefits of adjustable-rate mortgage loans to the Bank's asset/liability
management program, they do pose potential additional risks, primarily because
as interest rates rise, the underlying payment requirements of the borrower
rise, thereby increasing the potential for default.

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

INCOME-PRODUCING PROPERTY LOANS (COMMERCIAL AND MULTI-FAMILY REAL ESTATE
LOANS). Income-producing property loans originated by the Bank are loans
secured by commercial and multi-family (five or more units) real estate
generally located in the Bank's primary market area. Permanent loans on income-
producing properties constituted approximately $44.6 million, or 5.7%, of the
Bank's total loans at December 31, 1997. 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 $4.8 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 $3.8 million at December 31, 1997,
and secured by a motel, represents the Bank's largest single commercial real
estate loan to one borrower. At December 31, 1997, the Bank's 10 largest
commercial real estate loans, with balances outstanding ranging from $1.5
million to $3.8 million, totaled $33.0 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 $67.5
million, or 8.70%, of the Bank's total loan portfolio at December 31, 1997. Of
that total, $34.8 million were for the construction of one-to four-family
residential properties. Construction loans have been made in amounts up to $7.7
million. At December 31, 1997, the Bank had $10.2 million outstanding
commitments in construction and land development loans.

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

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

Construction loans generally afford the Bank the opportunity to increase
the yield and interest rate sensitivity of its loan portfolio. These higher
yields correspond to the higher risks associated with construction lending. The
Bank's risk of loss on a construction loan is largely dependent upon the
accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of completion. If the
estimate of the completed cost proves to be inaccurate, the Bank may be
confronted, at or prior to the maturity of the loan, with a property having a
value which is insufficient to assure full repayment of the loan. At December
31, 1997, the Bank had no construction loans outstanding which were non-
performing and $141,000 of construction loans classified as real estate owned.

CONSUMER LOANS. The Bank has offered consumer loans since 1983. As of
December 31, 1997, total consumer loans were $64.5 million, or 8.3%, 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 Director of Lending Operations or the Residential Lending Manager is
authorized to approve residential mortgage loans of up to $227,150. Loans
between $227,150 and $500,000 require the approval of the Bank's President or
Chief Lending Officer. Loans in excess of $500,000 or multiple loans to the
same borrower in an aggregate amount exceeding $500,000 must be approved by the
Bank's 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. During 1997, the Bank continued to sell
long-term, fixed-rate mortgage loan originations. Additionally, because of the
lower fixed rates available, the Bank began to experience conversions of
existing adjustable-rate mortgages to fixed-rate product. As the conversion
from an adjustable to a long-term, fixed-rate product (over 15 years) occurred,
the Bank sold the loans on the secondary market. This resulted in a reduction
in the loan portfolio with an increase in fixed-rate sales. The Bank retained
servicing rights on these residential loans sold.

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

Effective January 1, 1996, the Bank adopted the provisions of SFAS No. 122,
as superseded by SFAS No. 125. This statement, as superseded, requires the Bank
to recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. Prior to adoption of SFAS No. 122,
the Bank had no assets capitalized for originated or purchased servicing rights.
The fair value of capitalized originated mortgage servicing rights is determined
based on the estimated discounted net cash flows to be received. In applying
this valuation method, the Bank uses assumptions market participants would use
in estimating future net servicing income, which 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 No. 125 will depend upon demand in the Bank's
lending market for fixed-rate residential mortgage loans salable in the
secondary mortgage market. The balance of loans serviced for others at December
31, 1997 with capitalized originated mortgage servicing rights approximated
$73.3 million. The Bank capitalized $346,000 of originated mortgage servicing
rights during 1997, of which $25,000 has been amortized. Capitalized originated
mortgage servicing rights at December 31, 1997 approximated $402,000. No
valuation allowances for capitalized originated mortgage servicing rights were
considered necessary as of December 31, 1997.

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
1997, the Bank, to supplement and complement its own mortgage loan production,
purchased from an unaffiliated financial institution $27.4 million of loans
consisting principally of one-to four-family residential, fixed-and adjustable-
rate, medium-term mortgages. These loans are purchased without recourse with
servicing retained by the seller.

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:

Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(In Thousands)

Originations:
Fixed-rate loans:
First mortgage loans:
One-to four-family residential............ $ 38,595 $ 36,990 $ 18,507
Income-producing property................. 729 758 337
FHA-insured and VA-partially
guaranteed............................. 329 217 141
Construction and development:
One-to four-family residential.......... 9,728 8,456 856
Income-producing property............... -- -- 314
Commercial business loans.................. 847 634 568
Other loans................................ 23,664 18,706 12,788
-------- -------- --------
Total fixed-rate loans................... 73,892 65,761 33,511
-------- -------- --------

Adjustable-rate loans:
First mortgage loans:
One-to four-family residential............ 50,859 68,063 40,183
Income-producing property................. 424 610 4,380
Construction and development:
One-to four-family residential.......... 45,628 50,889 47,784
Income-producing property............... 10,734 18,630 9,052
Second mortgage loans...................... 100 -- 60
Commercial business loans.................. 3,102 3,049 2,566
Other loans................................ 21,307 19,600 14,015
-------- -------- --------
Total adjustable-rate loans.............. 132,154 160,841 118,040
-------- -------- --------
Total loans originated................... 206,046 226,602 151,551
-------- -------- --------

Purchases:
Loans:
Fixed-rate................................. 9,559 2,905 4,860
Adjustable-rate............................ 18,288 28,829 38,732
-------- -------- --------
Total purchased.......................... 27,847 31,734 43,592
-------- -------- --------

Sales:
Fixed-rate:
Mortgage loans............................. 46,194 31,246 13,515
Student loans.............................. 634 739 1,293
Mortgage-backed securities................. -- -- 19,587
-------- -------- --------
Total sales.............................. 46,828 31,985 34,395
-------- -------- --------

Principal repayments:
Loans...................................... 153,259 115,079 84,278
Mortgage-backed securities................. 5,571 7,935 11,408
-------- -------- --------
Total principal repayments............... 158,830 123,014 95,686
-------- -------- --------

Transfers to real estate owned............... (672) (342) (265)
Transfers from real estate owned............. -- -- 2,700
Increase (decrease) due to other items, net.. 3,906 (3,499) (6,799)
-------- -------- --------
Net increases................................ $ 31,469 $ 99,496 $ 60,698
======== ======== ========

LOAN SERVICING AND LOAN FEES. As of December 31, 1997, Community First was
servicing approximately $180.2 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 .27%. In addition to interest earned on loans
and income from servicing of loans, the Bank receives fees in connection with
loan commitments and originations, loan modifications, late payments, changes of
property ownership and for miscellaneous services related to its loans. Income
from these activities varies from period to period with the volume and type of
loans originated, sold and purchased, which in turn is dependent on prevailing
mortgage interest rates and their effect on the demand for loans in the markets
served by the Bank.

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

LOAN COMMITMENTS. Applicants for adjustable-rate one-to four-family
residential loans may lock in an interest rate for 50 days at any time prior to
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, 1997, the
Bank's outstanding mortgage commitments totaled approximately $26.9 million.

NON-PERFORMING LOANS. Residential and commercial mortgage loans are
reviewed on a regular basis and are placed on nonaccrual status when either
principal or interest is more than 90 days past due. Consumer loans are
generally charged off when or before the loan becomes 120 days delinquent. The
Asset Control and Recovery Department reviews with the Chief Lending Officer all
consumer loans presented for chargeoff. On a quarterly basis, the Chief Lending
Officer submits a list of loan chargeoffs to the Executive Loan Committee for
review. 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.

As of December 31, 1997, 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,
1997, 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, 1997. Total remaining principal balances of the related
loans are shown rather than the actual payment amounts which are overdue:

30-59 Days 60-89 Days 90 Days or Greater
------------------- --------------- -------------------
Number Amount Number Amount Number Amount
------ ----------- ------ ------- -------- ---------
(Dollars in Thousands)

One-to four-family residential... 162 $7,051 29 $1,453 13 $ 697
Income-producing property........ -- -- -- -- -- --
FHA-insured and VA-partially
guaranteed..................... 5 256 1 109 2 109
Construction and development:
One-to four-family residential.. 1 199 -- -- -- --
Income-producing property....... -- -- -- -- -- --
Land development................ -- -- -- -- -- --
Commercial....................... 1 13 -- -- -- --
Other............................ 70 805 19 267 22 93
--- ------ ---- ------ ---- -----
Total.......................... 239 $8,324 49 $1,829 37 $ 899
=== ====== ==== ====== ==== =====

Percentage of total assets.... 0.98% 0.21% 0.10%
====== ====== =====

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,
------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------ ------- -------
(Dollars in Thousands)

Non-accruing loans:
One-to four-family residential
mortgages.......................... $ 697 $ 892 $ 68 $ 108 $ 571
Income-producing property............ -- 359 -- -- 1
FHA-insured and VA-partially
guaranteed......................... 109 183 253 192 140
Construction and development......... -- -- -- -- 182
Commercial........................... -- 195 -- -- --
Other................................ 93 158 28 93 160
------ ------ ----- ------ ------
Total.............................. $ 899 $1,787 $ 349 $ 393 $1,054
====== ====== ===== ====== ======

Percentage of total assets......... 0.10% 0.21% 0.05% 0.05% 0.16%
====== ====== ===== ====== ======

Real estate owned:....................
One-to four-family residential
mortgages.......................... $ 11 $ 205 $ 238 $ 139 $1,046
Income-producing property............ -- -- -- 1,700 2,380
Construction and development......... 141 7 7 981 1,060
------ ------ ----- ------ ------
Total.............................. $ 152 $ 212 $ 245 $2,820 $4,486
====== ====== ===== ====== ======

Percentage of total assets......... 0.02% 0.03% 0.03% 0.39% 0.67%
====== ====== ===== ====== ======

Total non-accruing loans and real
estate owned..................... $1,051 $1,999 $ 594 $3,213 $5,540
====== ====== ===== ====== ======

Percentage of total assets............ 0.12% 0.24% 0.08% 0.44% 0.83%
====== ====== ===== ====== ======

Loans on which the accrual of interest was discontinued or reduced amounted
to $883,000 at December 31, 1997. For the year ended December 31, 1997, $32,000
of additional interest income would have been recorded if these non-accruing
loans were current in accordance with their original terms. Approximately
$46,000 of interest income relating to these loans was collected and included in
interest income for the year ended December 31, 1997.

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 $161,000 loan secured by an apartment building, a loan totaling
$383,000 secured by an office building and a loan totaling $347,000 secured by a
townhouse complex. These loans were current as of December 31, 1997.

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

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

Impaired loans as defined by SFAS No. 114 totaled $0 and $554,000 at
December 31, 1997 and 1996, respectively, and in 1996 included one income-
producing property loan and three commercial business loans. These loans are
included in nonaccrual loans at December 31, 1996. The Corporation's nonaccrual
loans include residential mortgage and consumer installment loans, for which
SFAS No. 114 does not apply. The Corporation's respective average investment in
impaired loans was $112,000 and $559,000 during 1997 and 1996, respectively.
Interest income recognized on impaired loans during 1997 and 1996, totaled
$1,000 and $27,000, respectively. Impaired loans had specific allocations of
the allowance for loan losses in accordance with SFAS No. 114 approximating $0
and $150,000 at December 31, 1997 and 1996, 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,
1997, the Bank classified $1.1 million of non-accruing loans and real estate
owned as Substandard. Included in the $11.0 million of loans classified as
Special Mention were $10.2 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, 1997.

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

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

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

The following table provides a summary of the allowance for losses on loans
and real estate:

Allowance for Losses on
--------------------------
Real
Loans Estate Total
-------- ------- -------
(In Thousands)

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
Provision for loan losses.................. 360 45 405
Charges against the allowance:
One-to four-family residential........... (3) (225) (228)
FHA-insured and VA partially guaranteed.. -- (7) (7)
Land..................................... -- (7) (7)
Income-producing property................ (134) (8) (142)
Consumer................................. (110) -- (110)
Recoveries:
One-to four-family residential........... 4 130 134
FHA-insured and VA partially guaranteed.. 1 3 4
Land..................................... -- 5 5
Income-producing property................ 18 5 23
Consumer................................. 30 -- 30
------ ----- ------
BALANCE, DECEMBER 31, 1997................. $4,730 $ 153 $4,883
====== ===== ======

The ratio of net loan charge-offs (recoveries) to average loans outstanding
during the respective periods were .07% for 1993, (.01)% for 1994, .00% for
1995, .01% for 1996 and .03% for 1997.

The following table represents the allocation of the allowance for loan
losses at the dates indicated:

At December 31,
---------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------- ----------------------------------------------
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)............ $621,506 80.08% $ 1,775 .29% $593,163 79.80% $ 1,252 .21%
FHA-insured and
VA-partially
guaranteed............... 7,214 .93 49 .68 6,404 .86 47 .73
Income-producing property
(including
construction and
development loans)...... 77,229 9.95 1,468 1.90 84,012 11.30 2,100 2.50
-------- ------ ------- ------ -------- -------- ------- ------
Total first mortgage
loans................... 705,949 90.96 3,292 .47 683,579 91.96 3,399 .50
Second mortgage loans...... 549 .07 6 1.09 510 .07 5 .98
Commercial business loans.. 5,087 .66 138 2.71 4,644 .62 325 7.00
Other loans................ 64,483 8.31 1,294 2.01 54,578 7.35 835 1.53
-------- ------ ------- ------ -------- -------- ------- ------
Total.................... $776,068 100.00% $ 4,730 .61% $743,311 100.00% $ 4,564 .61%
======== ====== ======= ====== ======== ======== ======= ======

At December 31,
---------------------------------------------
1995
---------------------------------------------
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)............ $502,374 79.39% $1,401 .28%
FHA-insured and
VA-partially
guaranteed............... 7,458 1.18 319 4.28
Income-producing property
(including
construction and
development loans)...... 75,012 11.85 1,875 2.50
-------- ------- ---------- -------
Total first mortgage
loans................... 584,844 92.42 3,595 .61
Second mortgage loans...... 571 .09 4 .70
Commercial business loans.. 3,195 .51 96 3.00
Other loans................ 44,171 6.98 668 1.51
-------- ------- ---------- -------
Total.................... $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%
======== ====== ====== ===== ======== ====== ====== =====
- --------------------------

(1) Loans sold with recourse totaled $1.0 million, $1.4 million, $1.8 million,
$2.2 million and $3.0 million at December 31, 1997, 1996, 1995, 1994 and
1993, respectively.

INVESTMENT ACTIVITIES

As a state chartered thrift, Community First is not subject to any
regulatory liquidity requirements. It has generally been Community First's
policy to maintain a liquidity portfolio in excess of OTS 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, 1997, Community
First had an investment portfolio of $26.0 million consisting of U.S. government
and federal agency obligations.

In July 1989, the Bank retained SS&H Financial Advisors, of Bingham Farms,
Michigan, to act as its investment advisor and to execute all related
transactions. In June 1988, the Bank's Board of Directors adopted an investment
policy which is annually reviewed by the Board. Pursuant to this policy, which
is binding upon the investment advisor, two of the four members of the Bank's
Investment Committee must approve all investment transactions. 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, 1997, 1996 and 1995, the cost of the
Bank's interest rate exchange agreements was $0, $107,000 and $109,000,
respectively, and is included as interest expense on deposits.

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

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

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

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

At December 31, 1996, investment and mortgage-backed securities available
for sale included unrealized net losses of $325,000 reported net of $110,000 of
federal income tax benefit. Throughout 1997, 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,
1997, the Bank reported $47.7 million in investment and mortgage-backed
securities available for sale at fair value, with unrealized net gains of
$474,000 reported net of $161,000 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, 1997.

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 No. 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 totaling $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.

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, 1997, the Bank did
not have any investment securities available for sale with maturities greater
than five years.

At December 31, 1997
-----------------------------------------------------------------------------------------------
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)

United States government
and agency obligations........ $24,000 5.99% $ -- --% $ -- --% $ -- --%
Federal agency obligations..... -- -- 2,000 6.41 -- -- -- --
------- ------ ---- ----
$24,000 5.99 $2,000 6.41 $ -- -- $ -- --
======= ====== ==== ====

At December 31, 1997
---------------------------------------------
Total Investment Securities
---------------------------------------------

Average Weighted
Life Amortized Market Average
in Years Cost Value Rate
-------- --------- -------- --------

United States government
and agency obligations........ 0.37 $24,000 $24,053 5.99%
Federal agency obligations..... 3.28 2,000 2,027 6.41
---- ------- ------- ----
0.60 $26,000 $26,080 6.02
==== ======= ======= ====

At December 31, 1997, the Bank did not have any investment securities held
to maturity.

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. During 1997, the Bank purchased $24.0 million of available-for-sale
investment securities. These securities had a weighted average yield of 5.99%.
The available-for-sale investment securities purchased consisted of U.S.
Treasury securities with maturities of 12 to 16 months. Investment securities
available for sale in the amount of $20.0 million were sold during 1997,
resulting in gross gains of $20,000 and gross losses of $51,000.

At December 31, 1997, 1996 and 1995, the Bank's only held to maturity
investment securities were shares of Federal Home Loan Bank Stock, with an
amortized cost of $11,423,000, $10,632,000 and $8,537,000 at those dates,
respectively.

The following table sets forth certain information about the Bank's
available-for-sale investment securities and related fair values.

At December 31,
-------------------------------------------------------------
1997 1996 1995
------- ------- -------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ------- ---------- ------- ---------- -------
(Dollars In Thousands)

United States government
and agency obligations:
Maturing within one year......... $24,000 $24,053 $20,097 $20,071 $15,139 $15,102
From one to five years........... -- -- -- -- 15,253 15,225
------- ------- ------- ------- ------- -------
24,000 24,053 20,097 20,071 30,392 30,327
Federal agency obligations:
Maturing from one to five years.. 2,000 2,027 7,000 7,015 -- --

Corporate bonds:
Maturing within one year......... -- -- 4,000 4,007 12,686 12,682
From one to five years........... -- -- -- -- 11,921 12,100
------- ------- ------- ------- ------- -------
-- -- 4,000 4,007 24,607 24,782
------- ------- ------- ------- ------- -------

$26,000 $26,080 $31,097 $31,093 $54,999 $55,109
======= ======= ======= ======= ======= =======

Weighted average interest rate.... 6.02% 5.89% 5.37%
======= ======= =======

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. 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. In 1997, loan growth was funded by maturities of
investment and mortgage-backed securities, deposit growth (primarily in checking
and savings accounts) and long-term, fixed-rate FHLB advances.

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, 1997, such
accounts totaled $238.1 million, or 42.3%, of the Bank's total deposits.

While the deregulation of interest rates has allowed the Bank to be more
competitive in obtaining funds and given it more flexibility to meet the threat
of deposit outflows, it has also resulted in a higher and more volatile cost of
funds. 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 1.6% from $553.6 million at
December 31, 1996, to $562.4 million at December 31, 1997. The $8.8 million
increase resulted from transaction account, savings account, and certificate of
deposit growth of $5.0 million, $3.7 million, and $100,000, 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 continued comprehensive marketing campaigns during 1996 and
1997. The continued promotion of Really Free Checking in 1996 and 1997 has
resulted in an expansion of the Bank's deposit base through attracting new
customers and cross-selling other Bank products to existing customers. With a
certificate of deposit campaign, coinciding with the checking campaign, the Bank
promoted the competitive rates offered on fourteen-month certificates, also
attracting new customers. The Bank continued to promote during 1997 a high
yield money market savings product, which was originally introduced during late
1996. 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, 1997, the
Bank had a total of $100,000 in brokered deposits, or .02% of total deposits.

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.

At December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- -------------------------------- --------------------------------
Percent of Increase Percent of Increase Percent of Increase
Amount Portfolio (Decrease) Amount Portfolio (Decrease) Amount Portfolio (Decrease)
-------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
(Dollars in Thousands)

Regular savings........... $ 63,069 11.21% $ (2,145) $ 65,214 11.78% $ (2,376) $ 67,590 12.80% $ (4,104)
Money market savings...... 21,944 3.90 5,808 16,136 2.91 16,136 -- -- --
Consumer checking......... 93,340 16.60 6,617 86,723 15.67 7,092 79,631 15.09 11,269
Commercial checking....... 9,616 1.71 292 9,324 1.68 1,666 7,658 1.45 (1,553)
Money market checking..... 50,099 8.91 (1,864) 51,963 9.39 (2,561) 54,524 10.33 (9,884)
-------- ------ -------- -------- ------ -------- -------- ------ ---------
238,068 42.33 8,708 229,360 41.43 19,957 209,403 39.67 (4,272)

Certificates of deposit:
0.00 - 4.99%............ 20,758 3.69 (17,065) 37,823 6.83 13,333 24,490 4.64 (100,297)
5.00 - 5.99%............ 164,405 29.23 6,652 157,753 28.50 9,970 147,783 28.00 72,103
6.00 - 6.99%............ 137,225 24.40 11,128 126,097 22.78 (2,469) 128,566 24.36 86,363
7.00 - 7.99%............ 749 .13 (404) 1,153 .21 (14,849) 16,002 3.03 (7,704)
8.00 - 8.99%............ 656 .12 (170) 826 .15 (197) 1,023 .19 (11,599)
9.00 - 9.99%............ 551 .10 (11) 562 .10 13 549 .11 (5,781)
10.00 - 10.99%........... -- -- -- -- -- -- -- -- (2,687)
-------- ------ -------- -------- ------ -------- -------- ------ ---------
324,344 57.67 130 324,214 58.57 5,801 318,413 60.33 30,398
-------- ------ -------- -------- ------ -------- -------- ------ ---------

Totals.................... $562,412 100.00% $ 8,838 $553,574 100.00% $ 25,758 $527,816 100.00% $ 26,126
======== ====== ======== ======== ====== ======== ======== ====== =========

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

Year Ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars in Thousands)

Beginning balance................... $ 553,574 $ 527,816 $ 501,690
Deposits, net of interest credited.. 2,068,592 1,889,523 1,392,217
Withdrawals......................... (2,078,598) (1,879,791) (1,381,961)
Interest credited................... 18,844 16,026 15,870
----------- ----------- -----------

Ending balance...................... $ 562,412 $ 553,574 $ 527,816
=========== =========== ===========

Net increase........................ $ 8,838 $ 25,758 $ 26,126
=========== =========== ===========

Percentage increase................. 1.60% 4.88% 5.21%
=========== =========== ===========

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.

Year Ended December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ----------------------------
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)

Average balance.... $235,475 $322,998 $217,316 $319,491 $207,635 $310,253
======== ========= ============ ============ ============ ============

Average rate paid.. 2.52% 5.74% 2.50% 5.76% 2.79% 5.80%
======== ========= ============ ============ ============ ============

The following table indicates the amount, at December 31, 1997, of the
Bank's certificates of deposit of $100,000 or more by the time period remaining
until maturity.

Certificates
Maturity Period of Deposit
--------------------------------------- -------------
(In Thousands)

Three months or less................... $ 3,628
Over three months through six months... 8,216
Over six months through twelve months.. 11,563
Over twelve months..................... 10,603
-------
$34,010
=======

The following table presents, by various interest rate categories, the
amounts of certificate of deposit accounts at December 31, 1997, maturing during
the periods reflected below:

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)

Certificate accounts maturing
in the period ending:
June 30, 1998.................. $16,470 $ 86,102 $ 12,650 $ 462 $ 69 $115,753 35.69%
December 31, 1998.............. 880 36,702 74,252 169 81 112,084 34.56
June 30, 1999.................. 1,488 16,740 25,721 179 398 44,526 13.73
December 31, 1999.............. 95 7,553 8,224 43 -- 15,915 4.91
December 31, 2000.............. 770 8,487 10,017 526 -- 19,800 6.10
December 31, 2001.............. 969 5,365 1,050 16 3 7,403 2.28
Thereafter..................... 86 3,456 5,311 10 -- 8,863 2.73
------- -------- -------- ------ ------ -------- ------
$20,758 $164,405 $137,225 $1,405 $ 551 $324,344 100.00%
======= ======== ======== ====== ====== ======== ======

At December 31, 1997, accounts having balances of $100,000 or more totaled
$66.0 million representing 11.7% 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, 1997, the Bank administered 5,260 IRAs and 7 Tax Qualified
Retirement Plans totaling $48.8 million, or 8.7%, 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 $202.6 million at December 31, 1996
to $212.7 million at year-end 1997. Of the outstanding FHLB advances at
December 31, 1997, $201.7 million carried a weighted average fixed-rate of
6.11%. Adjustable-rate advances at December 31, 1997 totaled $11.0 million, all
of which reprice based upon the FHLB overnight Basic Agency Discount Note rate
plus 30 basis points.

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

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

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

At December 31,
------------------------------
1997 1996 1995
-------- --------- ---------
(Dollars in Thousands)

Amount of borrowings:
FHLB advances............................. $212,693 $202,639 $160,649
Weighted average rate on:
FHLB advances.............................. 6.09% 5.97% 6.02%

Year Ended December 31,
------------------------------
1997 1996 1995
-------- --------- ---------
(Dollars in Thousands)

Maximum amount of borrowings
outstanding at any month end:
FHLB advances.............................. $223,461 $203,330 $165,787

Approximate average borrowings
outstanding with respect to:
FHLB advances.............................. $207,871 $176,943 $150,998

Approximate weighted average rate paid on:
FHLB advances.............................. 6.12% 6.02% 6.21%

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, 1997,
Community First's investment in its subsidiary was $342,000.

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 $16,000 at December 31, 1997. 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, $53,000 and
$29,000 of commissions were received and included in CCFC's income in 1995, 1994
and 1993, respectively. Both the lease and the brokerage services agreement
were terminated in 1995. CCFC entered into a brokerage services agreement with
another third-party vendor in late 1995. Through the Bank's branch offices,
this third-party 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 conducted business as Community First Insurance and
Investment Services and offered customers and non-customers the opportunity to
invest in non-FDIC-insurance products such as bonds, mutual funds, stocks,
annuities, and life insurance. CCFC received $138,000 in commission income
during 1997.

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

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.

Year Ended December 31,
------------------------------
1997 1996 1995
-------- --------- ---------

Interest rate spread................... 2.70% 2.63% 2.52%

Net yield on earning assets............ 3.06 2.98 2.85

Return on average equity (net income
as a percentage of average
stockholders' equity)................ 16.39 8.55 11.47

Return on average assets (net income
as a percentage of average assets).. 1.26 0.69 0.92

Dividend payout ratio.................. 31.71 41.28 28.38

Year Ended December 31,
------------------------------
1997 1996 1995
-------- --------- ---------

Equity to assets ratio (average stockholders'
equity as a percentage of average
total assets).................................. 7.70% 8.06% 8.00%

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

COMPETITION

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

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

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

REGULATION OF THE BANK

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

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

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

At December 31, 1997, the Bank's ratio of Tier 1 capital to total assets
was 7.63%, its ratio of Tier 1 capital to risk-weighted assets was 12.83% and
its ratio of total capital to risk-weighted assets was 13.77%.

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 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, 1997, with investments in FHLB stock of
$11.4 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, 1997, the Bank had $212.7 million in advances from its FHLB.

LIQUIDITY REQUIREMENTS. Although not required by regulation, Community
First maintains average daily balances of short-term liquid assets at a
specified percentage (currently 3%) of the total of its net withdrawable savings

accounts and borrowings payable in one year or less. The short-term liquidity
ratio of the Bank at December 31, 1997 was 7.32%. A substantial sustained
decline in savings deposits could adversely affect the Bank's liquidity which
could result in restricted operations and additional borrowings from the FHLB.

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

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

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

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

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

The FDIC has adopted regulations to clarify the foregoing restrictions on
activities of FDIC-insured state-chartered banks and their subsidiaries. Under
the regulations, the term activity refers to the authorized conduct of business
by an insured state bank and includes acquiring or retaining any investment
other than an equity investment.

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

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

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

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

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

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

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

Under FDICIA, an "undercapitalized institution" generally is: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. A
significantly undercapitalized institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, restrictions on asset growth and other activities, possible
replacement of directors and officers, and restrictions on capital distributions
by any bank holding company controlling the institution. Any company
controlling the institution may also be required to divest the institution. The
senior executive officers of such an institution may not receive bonuses or
increases in compensation without prior approval and the institution is
prohibited from making payments of principal or interest on its subordinated
debt, with certain exceptions. If an institution's ratio of tangible capital to
total assets falls below a level established by the appropriate federal banking
regulator, which may not be less than 2% of total assets nor more than 65% of
the minimum tangible capital level otherwise required (the "critical capital
level"), the institution is subject to conservatorship or receivership within 90
days unless periodic determinations are made that forbearance from such 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, 1997, 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 on the
first $4.7 million of transaction accounts. Reserves equal to 3% must be
maintained on the next $43.1 million of transaction accounts and a reserve of
10% must be maintained against the remaining transaction accounts. These
reserve requirements are subject to adjustment by the Federal Reserve Board.
Because required reserves must be maintained in the form of vault cash or in a
noninterest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. At December 31, 1997, 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 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. (S) 1972 on certain tying arrangements and
extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972
prohibits (i) a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.

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

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

Federal associations may branch in any state or states of the United States
and its territories. Except in supervisory cases or when interstate branching
is otherwise permitted by state law or other statutory provision, a federal

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

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

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

TAXATION

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

FEDERAL INCOME TAXATION. Thrift institutions are subject to the provisions
of the Internal Revenue Code of 1986, as amended ("Code") in the same general
manner as other corporations. Prior to 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 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 thrift bad debt reserve method was repealed for taxable years
beginning after December 31, 1995. For taxable years beginning on or after
January 1, 1996, savings institutions will be treated the same as commercial
banks. Institutions such as the Bank that are part of a consolidated group with
$500 million or more in assets will only be able to take a tax deduction when a
loan is actually charged off. 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 reserves and claimed as a tax deduction are not
available for the payment of cash dividends or for distribution to shareholders
(including distributions made on dissolution or liquidation), unless such
amounts are included in taxable income, along with the amount deemed necessary
to pay the resulting federal income tax.

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

STATE TAXATION. Under Michigan law, 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 1997. Community First is also subject to an "Intangibles Tax" of
$.05 on each $1,000 of savings deposits for 1997. The Intangibles Tax has been
repealed beginning in 1998.

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, 1997, the Bank, including its subsidiaries, had 195
full-time employees and 68 part-time employees. The employees are not
represented by a collective bargaining unit. The Bank believes its relationship
with its employees to be good.

EXECUTIVE OFFICERS

The following table sets forth information regarding the Corporation's
and/or the Bank's executive officers.

Name Age(1) Position
- --------------------------- ------ -------------------------------------------------------------------------

Robert H. Becker 62 President and Chief Executive Officer of the Corporation and the Bank
John W. Abbott 50 Executive Vice President, Chief Operating Officer, and Secretary of the
Corporation and the Bank
Carl C. Farrar 48 Senior Vice President -- Chief Lending Officer of the Bank
Jane M. Judge McMillian 36 Vice President -- Director of Human Resources of the Bank
Rick L. Laber 40 Vice President, Chief Financial Officer, and Treasurer of the Corporation
and the Bank
Jack G. Nimphie 48 Senior Vice President -- Director of Operations of the Bank
Sally A. Peters 45 Vice President -- Director of Marketing of the Bank
C. Wayne Weaver 44 Senior Vice President -- Director of Retail Banking of the Bank

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

(1) At December 31, 1997

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

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

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

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

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

ITEM 2. PROPERTIES
- -------------------

Community First owns all of its offices, except as noted. The following
table sets forth the location of the Bank's offices, as well as certain
additional information relating to those offices as of December 31, 1997.

Net Book
Year Approximate Value at
Facility Office Area December 31,
Opened (Square Feet) 1997 (1)
-------- ------------- -------------

Community First Main Office:
112 East Allegan Street
Lansing, Michigan (2) 1922 46,368 $3,718,490

Branch Offices:
101 East Lawrence Street
Charlotte, Michigan 1981 1,700 191,109

6333 West St. Joseph Street
Delta Township, Michigan 1986 1,200 374,328

250 East Saginaw Street
East Lansing, Michigan 1977 2,100 418,161

401 South Bridge Street
Grand Ledge, Michigan 1966 1,700 321,228

4440 West Saginaw Street
Lansing, Michigan 1977 2,100 442,257

6510 South Cedar Street
Lansing, Michigan (3) 1974 3,000 525,738

606 West Columbia Street
Mason, Michigan 1971 1,700 326,326

2119 Hamilton Road
Okemos, Michigan (4) 1961 2,500

301 North Clinton Avenue
St. Johns, Michigan 1978 2,700 385,768

225 West Grand River Avenue
Williamston, Michigan 1978 1,500 248,454

121 West Allegan Street
Lansing, Michigan (5) 1922 16,800 417,905

5620 Pennsylvania Avenue
Lansing, Michigan 1970 1,250 117,482

Net Book
Year Approximate Value at
Facility Office Area December 31,
Opened (Square Feet) 1997 (1)
-------- ------------- -------------

100 North Dexter Street
Ionia, Michigan 1975 1,248 87,229

709 S. U.S. 27
St. Johns, Michigan 1981 1,454 220,871

2285 W. Grand River
Okemos, Michigan (4) 1976 1,200

2801 E. Grand River
Lansing, Michigan 1978 1,454 170,214

5610 W. Saginaw Street
Lansing, Michigan (6) 1991 4,158

13007 S. U.S. 27
DeWitt, Michigan 1994 2,420 1,127,795

515 E. Grand River Avenue, Suite E
East Lansing, Michigan (7) 1996 2,500 99,536

4815 Okemos Road
Okemos, Michigan (8) 1997 2,635 958,655

Ledges Commerce Park, Unit 2A
Grand Ledge, Michigan (9) 1996 198,635

_______________
(1) Represents the book value of land, building, fixtures, equipment and
furniture at the premises and owned or leased by the Bank.
(2) This location has attached buildings with an additional 2,444 square feet
rented as retail space.
(3) Building has a second floor with an additional 2,200 square feet rented as
office space.
(4) These two locations were sold in 1997. The offices were relocated and
consolidated into the purchased location at 4815 Okemos Road described in
(8) below; 2119 Hamilton Road, sold April 18, 1997; and 2285 W. Grand River
Avenue, sold July 11, 1997.
(5) This office was closed effective May 1, 1992, and is currently held for
future expansion and offers for interim rental are considered.
(6) Branch office was closed effective December 1, 1996, and was sold April 17,
1997.
(7) Branch office was opened April 29, 1996. Property is leased and net book
value at December 31, 1997 represents building improvements and furniture
and equipment.
(8) Net book value at December 31, 1997 represents the purchase price of branch
office at this location. Building was purchased March 21, 1997 and
occupied March 24, 1997.
(9) Net book value at December 31, 1997 represents the purchase price of land
which is held for future development of a branch office.

The net book value of the Bank's investment in premises and equipment
totaled $10.5 million at December 31, 1997. 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 1997.

PART II

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

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

ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------

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

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

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

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARK RISK
- ------------------------------------------------------------------

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------

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

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------

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

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

ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------

The information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities and Principal Holders Thereof" and
"Proposal 1 -- Election of Directors" in the Proxy Statement.

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, 1997
and 1996
2. Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995
3. Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
4. Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
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 by reference to
Exhibit 10.2 to Post-Effective Amendment No. 2 to the Corporation's
registration statement on Form S-4 filed with the SEC on May 21,
1990)

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

13 1997 Annual Report to Stockholders

21 Subsidiaries

23 Consent of KPMG Peat Marwick LLP

27 Financial Data Schedule

(b) Reports on Form 8-K. On November 21, 1997, the registrant filed a
-------------------
Current Report on Form 8-K regarding the registrant's Board of
Directors approval of a 3-for-2 common stock split on November 18,
1997.

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

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 17, 1998.

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 17, 1998.

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

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

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

/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)

INDEX TO EXHIBITS

Exhibit
-------

3.1 * Certificate of Incorporation of CFSB Bancorp, Inc.

3.2 * Bylaws of CFSB Bancorp, Inc.

10.1 * Stock Option Plan of CFSB Bancorp, Inc.

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

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

13 1997 Annual Report to Stockholders

21 Subsidiaries

23 Consent of KPMG Peat Marwick LLP

27 Financial Data Schedule

_____________
* Incorporated by reference to the Corporation's registration statement on
Form S-1 filed with the SEC on January 9, 1990.
** Incorporated by reference to Exhibit 10.2 to Post-Effective Amendment No. 2
to the Corporation's registration statement on Form S-1 filed with the SEC
on May 21, 1990.
*** Incorporated by reference to Exhibit 28.2 to the Corporation's current
report on Form 8-K filed with the SEC on June 14, 1992.