DAMEN FINANCIAL CORP, 10-Q, 1998-08-14

DAMEN FINANCIAL CORP
10-Q, 1998-08-14
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-Q

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

For the quarterly period ended June 30, 1998

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

For the transition period from _________ to _________

Commission File Number 0-26574

DAMEN FINANCIAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)

Delaware 36-4029638
- ---------------------------- ---------------
(State or other jurisdiction I.R.S. Employer
of incorporation or Identification
organization) Number

200 West Higgins Road, Schaumburg, Illinois 60195
- ------------------------------------------- ----------
(Address of Principal executive offices) (Zip Code)

Registrant telephone number, including area code: (847) 882-5320
--------------

Check whether the issuer (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
----- -----

As of August 10, 1998 there were 2,967,154 shares of the Registrant's
common stock issued and outstanding.

Transitional Small Business Disclosure Format(check one): Yes No X
----- -----
<PAGE>

DAMEN FINANCIAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements

Consolidated Statements of Financial Condition at
June 30, 1998 (Unaudited) and September 30, 1997 4

Consolidated Statements of Earnings for the three
and nine months ended June 30, 1998 and 1997 (unaudited) 5

Consolidated Statement of Changes in
Stockholders' Equity for the nine months
ended June 30, 1998 (unaudited) 6

Consolidated Statements of Cash Flows for the nine
months ended June 30, 1998 and 1997 (unaudited) 7

Notes to Unaudited Consolidated Financial Statements 8-9

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14

Part II. OTHER INFORMATION 15

Signatures 16

Index to Exhibits 17

Earnings Per Share Analysis (Exhibit 11) 18

Financial Data Schedule (Exhibit 27) 19

-2-

<PAGE>

PART I - FINANCIAL INFORMATION

-3-

<PAGE>

DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Financial Condition

<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------- -------------
(unaudited)
Assets
- ------
<S> <C> <C>
Cash and amounts due from depository institutions ........ $ 559,610 500,455
Interest-bearing deposits ................................ 268,636 1,590,529
------------ -----------
Total cash and cash equivalents ....................... 828,246 2,090,984
Investment securities (fair value: $1,767,700 at
June 30, 1998 and $1,845,400 at September 30, 1997) .... 1,767,679 1,845,383
Investment securities, available for sale, at fair value . 43,444,652 35,874,298
Mortgage-backed securities (fair value: $19,448,200 at
June 30, 1998 and $27,548,700 at September 30, 1997) ... 19,535,414 27,869,570
Mortgage-backed securities, available for sale,
at fair value .......................................... 51,644,861 56,740,190
Loans receivable (net of allowance for loan
losses: $410,000 at June 30, 1998 and $332,000
at September 30, 1997) ................................. 106,663,928 97,244,031
Foreclosed real estate ................................... -- 79,000
Stock in Federal Home Loan Bank of Chicago
and Federal Reserve Bank of Chicago .................... 3,620,650 3,698,500
Accrued interest receivable .............................. 1,647,191 1,551,284
Office properties and equipment - net .................... 3,435,475 3,473,326
Prepaid expenses and other assets ........................ 597,167 642,654
------------ -----------
Total assets .......................................... 233,185,263 231,109,220
============ ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
- -----------
Deposits ................................................. 122,454,440 125,746,001
Borrowed money ........................................... 59,500,000 56,500,000
Advance payments by borrowers for taxes and insurance .... 1,802,686 722,141
Other liabilities ........................................ 2,024,427 2,202,115
------------ -----------
Total liabilities ..................................... 185,781,553 185,170,257
------------ -----------
Stockholders' Equity
- --------------------
Preferred stock, $.01 par value; authorized
100,000 shares; none outstanding ....................... -- --
Common stock, $.01 par value; authorized
4,500,000 shares; 3,981,434 shares issued and
3,123,154 shares outstanding at June 30, 1998
and 3,967,500 shares issued and 3,109,220 shares
outstanding at September 30, 1997 ...................... 39,814 39,675
Additional paid-in capital ............................... 38,809,643 38,452,948
Retained earnings, substantially restricted .............. 22,775,229 22,100,190
Unrealized gain on securities available for sale,
net of income taxes .................................... 1,376,960 1,382,560
Treasury stock, at cost (858,280 shares at June 30, 1998
and September 30, 1997) ................................ (12,117,799) (12,117,799)
Common stock acquired by Employee Stock Ownership Plan ... (2,392,100) (2,550,800)
Common stock awarded by Recognition and Retention Plan ... (1,088,037) (1,367,811)
------------ -----------
Total stockholders' equity ............................ 47,403,710 45,938,963
------------ -----------
Total liabilities and stockholders' equity ............ $233,185,263 231,109,220
============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.

-4-

<PAGE>
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Earnings

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- -----------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans ................................ $2,099,866 1,929,330 6,213,353 5,664,971
Mortgage-backed securities ........... 1,281,042 1,505,616 4,092,261 4,580,693
Tax-exempt securities ................ 328,353 322,718 1,001,257 1,075,212
Interest and dividends on
other investments .................. 377,154 264,356 1,027,455 902,477
Dividends on FHLB and FRB stock ...... 58,775 61,210 182,857 170,856
---------- --------- ---------- ----------
Total interest income ............ 4,145,190 4,083,230 12,517,183 12,394,209
---------- --------- ---------- ----------
Interest expense:
Deposits ............................. 1,581,535 1,526,802 4,836,492 4,560,965
Borrowings ........................... 904,787 934,425 2,731,071 2,744,165
---------- --------- ---------- ----------
Total interest expense ........... 2,486,322 2,461,227 7,567,563 7,305,130
---------- --------- ---------- ----------
Net interest income before
provision for loan losses ...... 1,658,868 1,622,003 4,949,620 5,089,079
Provision for loan losses .............. 41,751 30,000 80,921 36,618
---------- --------- ---------- ----------
Net interest income after
provision for loan losses ...... 1,617,117 1,592,003 4,868,699 5,052,461
---------- --------- ---------- ----------
Non-interest income:
Loan fees and service charges ........ 53,360 5,947 132,958 36,327
Gain (loss) on sale of:
Mortgage-backed securities,
available for sale ............... -- -- -- (17,365)
Investment securities,
available for sale ............... 109,922 -- 384,557 157,083
Other income ......................... 56,734 17,597 132,598 54,435
---------- --------- ---------- ----------
Total non-interest income ........ 220,016 23,544 650,113 230,480
---------- --------- ---------- ----------
Non-interest expense:
Compensation, employee benefits, and
related expenses ................... 711,672 659,260 2,066,578 2,023,332
Advertising and promotion ............ 75,393 175,134 258,099 394,993
Occupancy and equipment expense ...... 184,719 206,325 540,177 601,996
Data processing ...................... 54,052 28,683 119,674 91,399
Insurance expense .................... 19,460 17,313 55,986 51,939
Federal insurance premiums ........... 19,727 19,382 58,563 95,824
Legal, audit, and examination services 122,290 64,599 332,528 216,636
Other operating expenses ............. 94,172 88,801 270,962 268,138
---------- --------- ---------- ----------
Total non-interest expense ....... 1,281,485 1,259,497 3,702,567 3,744,257
---------- --------- ---------- ----------
Net income before income taxes ......... 555,648 356,050 1,816,245 1,538,684
Provision for federal and state
income taxes ......................... 93,320 64,546 337,182 296,547
---------- --------- ---------- ----------
Net income ....................... $ 462,328 291,504 1,479,063 1,242,137
========== ========= ========== ==========
Earnings per share--basic .............. $.16 .10 .51 .37
---- ---- ---- ----
Earnings per share--diluted ............ .15 .10 .49 .37
---- ---- ---- ----

Dividends declared per common share .... $.12 .06 .28 .18
---- ---- ---- ----
</TABLE>

See accompanying notes to consolidated financial statements.

-5-
<PAGE>

DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders' Equity

Nine Months Ended June 30, 1998

(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain on Common Common
Additional Securities Stock Stock
Common Paid-In Retained Available Treasury Acquired Awarded
Stock Capital Earnings For Sale Stock by ESOP by RRP Total
------- ---------- ---------- ---------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 ...... $39,675 38,452,948 22,100,190 1,382,560 (12,117,799) (2,550,800) (1,367,811) 45,938,963

Additions (deductions) for the
period ended June 30, 1998:

Net income ..................... 1,479,063 1,479,063

Adjustment of securities
to fair value,
net of tax effect ............ (5,600) (5,600)

Tax benefit related to
employee stock plans ......... 83,730 83,730

Exercise of stock
options (13,934 shares) ...... 139 161,844 161,983

Amortization of award
of RRP stock ................. 279,774 279,774

Contribution to fund ESOP loan . 111,121 158,700 269,821

Dividends declared on
common stock ................. (804,024) (804,024)
------- ---------- ---------- --------- ----------- ---------- ---------- ----------
Balance at June 30, 1998 ........... $39,814 38,809,643 22,775,229 1,376,960 (12,117,799) (2,392,100) (1,088,037) 47,403,710
======= ========== ========== ========= =========== ========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

-6-

<PAGE>

DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------------------------
1998 1997
------------ -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 1,479,063 1,242,137
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation ............................................. 178,797 149,516
Amortization of cost of stock benefit plans .............. 549,595 521,932
Provision for loan losses ................................ 80,921 36,618
Decrease in deferred loan income ......................... (259,565) (233,591)
(Increase) decrease in prepaid and deferred federal
and state income taxes ................................. 241,321 (107,018)
(Gain) loss on sale of mortgage-backed securities,
available for sale ..................................... -- 17,365
Gain on sale of investment securities, available for sale (384,557) (157,083)
(Increase) decrease in accrued interest receivable ....... (95,907) 254,932
Increase (decrease) in accrued interest payable .......... 41,900 (19,000)
(Increase) decrease in other assets ...................... (45,626) 33,066
Decrease in other liabilities ............................ (317,311) (698,800)
------------ -----------
Net cash provided by operating activities ..................... 1,468,631 1,040,074
------------ -----------
Cash flows from investing activities:
Purchase of investment securities, available for sale .... (15,344,351) (3,826,592)
Purchase of investment securities ........................ (49,324) (172,481)
Purchase of mortgage-backed securities, available for sale (7,039,146) (8,173,518)
Proceeds from sales of investment securities,
available for sale ..................................... 2,141,049 9,472,341
Proceeds from sales of mortgage-backed securities,
available for sale ..................................... -- 1,816,256
Proceeds from maturities of investment securities,
available for sale ..................................... 5,999,505 4,194,823
Proceeds from maturities of investment securities ........ 127,028 98,709
Proceeds from maturities of mortgage-backed securities,
available for sale ..................................... 12,142,475 5,550,749
Proceeds from maturities of mortgage-backed securities ... 8,334,156 4,545,871
Proceeds from redemption of Federal Home Loan Bank stock . 305,000 55,500
Purchase of Federal Home Loan Bank and
Federal Reserve Bank stock ............................. (227,150) (643,500)
Disbursements for loans originated and purchased ......... (24,908,455) (17,222,091)
Loan repayments .......................................... 15,746,202 13,313,988
Property and equipment expenditures ...................... (140,946) (144,883)
------------ -----------
Net cash provided by (for) investing activities ............... (2,913,957) 8,865,172
------------ -----------
Cash flows from financing activities:
Proceeds from exercise of stock options .................. 161,983 --
Deposit receipts ......................................... 55,974,121 57,039,136
Deposit withdrawals ...................................... (62,579,853) (59,012,786)
Interest credited to deposit accounts .................... 3,314,171 3,325,991
Proceeds from borrowed money ............................. 41,200,000 139,700,000
Repayment of borrowed money .............................. (38,200,000) (140,800,000)
Increase in advance payments by borrowers
for taxes and insurance ................................ 1,080,545 1,078,385
Purchase of treasury stock ............................... -- (8,103,611)
Dividends paid on common stock ........................... (768,379) (815,132)
------------ -----------
Net cash provided by (for) financing activities ............... 182,588 (7,588,017)
------------ -----------
Increase (decrease) in cash and cash equivalents .............. (1,262,738) 2,317,229
Cash and cash equivalents at beginning of period .............. 2,090,984 1,181,231
------------ -----------
Cash and cash equivalents at end of period .................... $ 828,246 3,498,460
============ ===========
Cash paid during the period for:
Interest ................................................. $ 7,525,663 7,324,130
Income taxes ............................................. 242,388 350,142
============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.

-7-

<PAGE>

Damen Financial Corporation
and Subsidiaries

Notes to Consolidated Financial Statements
- ------------------------------------------

1. Statement of Information Furnished

The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and Article 10 of Regulation
S-X, and in the opinion of management contains all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the financial
position as of June 30, 1998, the results of operations for the three and nine
months ended June 30, 1998 and 1997 and cash flows for the nine months ended
June 30, 1998 and 1997. These results have been determined on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The attached consolidated statements are those of Damen Financial
Corporation (the "Holding Company") and its consolidated subsidiaries Damen
National Bank (the"Bank") and Dasch Inc. The results of operations for the three
and nine month periods ended June 30, 1998 are not necessarily indicative of the
results to be expected for the full year.

2. Mutual to Stock Conversion

In April 1995, the Bank's Board of Directors approved a Plan of Conversion
(the "Conversion"), providing for the Bank's conversion from a federally
chartered mutual bank for savings to a federally chartered stock bank for
savings with the concurrent formation of a holding company. The Holding Company
issued 3,967,500 shares of $.01 par value common stock at $10.00 per share, for
an aggregate purchase price of $39,675,000. The Conversion and sale of 3,967,500
shares of common stock of the Holding Company was completed on September 29,
1995. Net proceeds to the Company, after conversion expenses, totaled
approximately $38,320,000.

3. Earnings Per Share

Earnings per share for the three and nine month periods ended June 30, 1998
and 1997 were determined by dividing net income for the periods by the weighted
average number of both basic and diluted shares of common stock and common stock
equivalents outstanding (see Exhibit 11 attached). Stock options are regarded as
common stock equivalents and are therefore considered in diluted earnings per
share calculations. Common stock equivalents are computed using the treasury
stock method. ESOP shares not committed to be released to participants are not
considered outstanding for purposes of computing earnings per share amounts.
Earnings per share data for the three and nine month periods ended June 30, 1997
have been restated for comparative purposes to reflect the implementation of
Statement of Financial Accounting Standards No. 128.

-8-

<PAGE>

4. Impact of New Accounting Standards

Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In December 1996, the FASB issued Statement of
Financial Accounting Standards No. 127 ("SFAS 127"), "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125". The statement delays for
one year the implementation of SFAS 125, as it relates to (1) secured borrowings
and collateral, and (2) for the transfers of financial assets that are part of
repurchase agreements, dollar-rolls, securities lending and similar
transactions. The Company has adopted portions of SFAS 125 (those not deferred
by SFAS 127) effective January 1, 1997. Adoption of these portions did not have
a significant effect on the Company's financial condition or results of
operations. Based on its review of SFAS 125, management does not believe that
adoption of the portions of SFAS 125 which have been deferred by SFAS 127 will
have a material effect on the Company.

Reporting Comprehensive Income. In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). This statement establishes standards for reporting and the display of
comprehensive income and its components (revenues, expenses, gains, losses) in a
full set of general-purpose financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Management does not believe that
adoption of SFAS No. 130 will have a material impact on the Company's
consolidated financial condition or results of operations.

Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") which becomes effective for fiscal years beginning after December 15,
1997. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments and requires enterprises
to report selected information about operating segments in interim financial
reports. Management does not believe that adoption of SFAS No. 131 will have a
material impact on the Company's consolidated financial condition or results of
operations.

Employers' Disclosures about Pension and Other Employee Benefits. In
February 1998, the FASB issued Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS No. 132"). SFAS No. 132 alters current disclosure requirements regarding
pensions and other postretirement benefits in the financial statements of
employers who sponsor such benefit plans. The revised disclosure requirements
are designed to provide additional information to assist readers in evaluating
future costs related to such plans. Additionally, the revised disclosures are
designed to provide changes in the components of pension and benefit costs in
addition to the year end components of those factors in the resulting asset or
liability related to such plans. The statement is effective for fiscal years
beginning after December 15, 1997 with earlier application available. Management
does not believe that adoption of SFAS No. 132 will have a material impact on
the Company's consolidated financial condition or results of operations.

The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.

-9-

<PAGE>

Management's Discussion and Analysis of Financial
Condition and Results of Operations

FINANCIAL CONDITION

June 30, 1998 compared to September 30, 1997.

Total assets increased $2.1 million to $233.2 million as of June 30, 1998 from
$231.1 million as of September 30, 1997. Interest-bearing deposits decreased
$1.3 million to $269,000 as of June 30, 1998 as compared to $1.6 million at
September 30, 1997. Investment securities available-for-sale increased $7.6
million to $43.5 million at June 30, 1998 from $35.9 million at September 30,
1997 due primarily to purchases of $15.3 million exceeding sales and maturities
of $7.7 million. Purchases were primarily callable government agency notes.
Mortgage-backed securities held to maturity decreased $8.3 million to $19.6
million at June 30, 1998 from $27.9 million at September 30, 1997 due primarily
to repayments. Mortgage-backed securities available-for-sale decreased $5.1
million to $51.6 million at June 30, 1998 from $56.7 million at September 30,
1997 due primarily to purchases of $7.0 million exceeded by repayments of $12.1
million. Loans receivable increased $9.5 million to $106.7 million at June 30,
1998 from $97.2 million at September 30, 1997 due primarily to new residential
loan originations of $23.5 million and residential construction loan purchases
of $1.4 million exceeding repayments of $15.8 million. Originations increased
due to relatively attractive interest rates available.

Total deposits decreased $3.3 million to $122.4 million at June 30, 1998 from
$125.7 million at September 30, 1997 due to savers seeking higher returns in
alternative investments. Federal Home Loan Bank advances increased $3.0 million
to $59.5 million at June 30, 1998 from $56.5 million at September 30, 1997. The
additional advances were used primarily to fund loan growth.

Stockholders' equity increased $1.5 million to $47.4 million at June 30, 1998
from $45.9 million at September 30, 1997 due primarily to net income of $1.5
million, proceeds of exercised stock options of $162,000 and reductions in stock
acquired by the RRP and ESOP plans of $550,000, partially offset by cash
dividends paid totaling $804,000. At June 30, 1998 book value per share was
$15.18, an increase of $.40 from $14.78 at September 30, 1997. The Company had
paid a cash dividend of $.06 per share each quarter starting with the quarter
ended September 30, 1996, and increased the dividend to $.10 per share for the
quarter ended December 31, 1997, and to $.12 per share for the quarter ended
March 31, 1998. At June 30, 1998, there were 3,123,154 shares of common stock
outstanding.

Results of Operations

The Company's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets such as loans and investments, and the costs of the
Company's interest-bearing liabilities, primarily deposits and borrowing. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively. Results of operations are also dependent upon the level of the
Company's non-interest income, including fee income and service charges, and
affected by the level of its non-interest expenses, including its general and
administrative expenses.

Comparison of Operating Results for the
Quarters Ended June 30, 1998 and 1997.

Net Income. The Company's net income for the three months ended June 30, 1998
was $462,000 as compared to $292,000 for the same period in 1997, an increase of
$170,000. This increase was due primarily to increases in net interest income of
$37,000, loan related fees of $47,000, rental income of $26,000 and an increase
in gains on the sale of investments available-for-sale of $110,000, partially
offset by an increase in the loan loss provision of $12,000, non-interest
expense of $22,000, and income taxes of $29,000.

Interest Income. Total interest income for the quarter ended June 30, 1998
increased $62,000 to $4.2 million from $4.1 million a year ago due to an
increase in average interest-earning assets of $4.6 million to $225.0 million
from $220.4 million, partially offset by a decrease in the yield on average
interest-earning assets to 7.37% from 7.41%.

-10-

<PAGE>

Interest Expense. The Company's interest expense increased $25,000 for the
quarter ended June 30, 1998 compared to a year ago due to an increase in average
interest-bearing liabilities to $183.3 million at June 30, 1998 from $178.4
million a year ago, partially offset by a decease in the average interest rate
to 5.43% from 5.52%. The increase in average interest bearing liabilities
resulted from an increase in the average balance of savings deposits of $6.2
million partially offset by a decrease in the average balance of borrowed money
of $1.3 million.

Provision for Loan Losses. The determination of the allowance for loan losses
involves material estimates that are susceptible to significant change in the
near term. The allowance for loan losses is maintained at a level deemed
adequate to provide for losses through charges to operating expense. The
allowance is based upon past loss experience and other factors which, in
management's judgement, deserve current recognition in estimating losses. Such
other factors considered by management include growth and composition of the
loan portfolio, the relationship of the allowance for losses to outstanding
loans, and economic conditions.

The Company's provision for loan losses was $42,000 for the quarter ended June
30, 1998 compared to $30,000 for the same quarter in the prior year.
Non-performing loans increased to $428,000 from $184,000 at March 31, 1998.

The Company will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provisions for loan losses in
light of its level of loans and as economic conditions dictate. There can be no
assurance that the Company will not make future provisions in an amount equal to
or greater than the amount provided during recent periods, or that future losses
will not exceed estimated amounts.

Non-Interest Income. The Company's non-interest income was $220,000 for the
quarter ended June 30, 1998 compared to $24,000 for the same quarter a year ago.
The increase of $196,000 was due primarily to an increase of $110,000 in net
realized gains on securities available for sale, an increase of $47,000 in loan
fees due to increased lending activity and increased prepayments, and an
increase in other non-interest income of $39,000 due primarily to increased
rental income from previously vacant office space.

Non-Interest Expense. The Company's non-interest expense increased $22,000 for
the quarter ended June 30, 1998 due primarily to an increase of $57,000 in
professional fees, an increase of $53,000 in compensation and benefits and an
increase in data processing expenses of $25,000, partially offset by a decrease
in advertising and promotion of $100,000 due to a decrease in loan and special
certificate promotions and a decrease in occupancy and equipment expense of
$21,000.

Provision for Income Taxes. Tax expense for the quarter ended June 30, 1998 was
$93,000 compared to $65,000 for the same quarter in 1997. The increase of
$28,000 was due primarily to an increase in pre-tax income partially offset by a
lower effective tax rate caused by an increase in low-income housing tax credits
and state income tax-exempt securities.

Comparison of Operation Results for the
Nine Months Ended June 30, 1998 and 1997.

Net Income. The Company's net income for the nine months ended June 30, 1998 was
$1.5 million as compared to $1.2 million for the same period in 1997, or an
increase of $237,000. An increase in net gains on the sale of investments
available-for-sale of $245,000, an increase of $97,000 in loan fees, an increase
of $54,000 in rental income, and a decrease of $42,000 in non-interest expense
was partially offset by a decrease in net interest income of $139,000, an
increase in the loan loss provision of $44,000, and an increase in income taxes
of $40,000.

Interest Income. Total interest income for the nine months ended June 30, 1998
increased $123,000 to $12.5 million from $12.4 million a year ago due primarily
to an increase in the yield on average interest-earning assets of .08% to 7.43%
from 7.35%, partially offset by a decrease in average interest-earning assets of
$146,000.

-11-

<PAGE>

Interest Expense. The Company's interest expense increased $263,000 to $7.6
million for the nine months ended June 30, 1998 from $7.3 million a year ago.
The increase was due to an increase in average interest-bearing liabilities of
$6.1 million to $183.5 million at June 30, 1998 from $177.4 million a year ago,
as well as an increase in the average rate to 5.50% from 5.49%. The increase in
average interest-bearing liabilities resulted from an increase in the average
balance of savings deposits of $6.6 million partially offset by a decrease in
the average balance of borrowed money of $500,000.

The Company's provision for loan losses was $81,000 for the nine months ended
June 30, 1998 compared to $37,000 for the same period in the prior year. This
year's provision was due primarily to an increase in mortgage loans, home equity
line of credit loans, and commercial loans.

Non-Interest Income. The Company's non-interest income increased $420,000 for
the nine months ended June 30, 1998 to $650,000 from $230,000 for the same
period one year ago. The increase was due primarily to an increase of $245,000
in net realized gains on the sale of investments available-for-sale, an increase
of $97,000 in loan fees, and an increase of $54,000 in rental income from
previously vacant office space.

Non-Interest Expense. The Company's non-interest expense decreased $42,000 for
the nine month's ended June 30, 1998 from the same period one year ago. The
decrease resulted primarily from decreases in advertising and promotion of
$137,000, occupancy and equipment expense of $62,000, and federal insurance
premiums of $37,000, partially offset by increases of $44,000 in compensation
and benefits, data processing expense of $29,000, and professional fees of
$116,000.

Provision for Income Taxes. Tax expense for the nine months ended June 30, 1998
increased $40,000 to $337,000 compared to $297,000 for the comparable period in
1997. The increased expense was due to an increase in pre-tax income.

-12-

<PAGE>

Liquidity and Capital Resources

The Company's principal sources of funds are deposits and borrowings,
amortization and prepayments of loan principal and mortgage-backed securities,
maturities of investment securities and income from operations. While scheduled
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan repayments are more influenced by interest rates, floors
and caps on loan rates, general economic conditions and competition. The Company
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships, where practicable.

The Company's most liquid assets are cash and cash equivalents, which consist of
interest bearing deposits and short term highly liquid investments with original
maturities of less than three months that are readily convertible to known
amounts of cash. The level of these assets is dependent on the Company's
operating, financing and investing activities during any given period. At June
30, 1998 and September 30, 1997, cash and cash equivalents totaled $828,000 and
$2.1 million respectively.

The primary financing activities of the Company are deposits and borrowings. For
the nine months ended June 30, 1998, deposits decreased $3.3 million and the
Bank's net (proceeds less repayments) financing activity with the FHLB increased
$3.0 million.

The Company anticipates that it will have sufficient funds available to meet
current commitments. At June 30, 1998 the Company has outstanding loan
commitments totaling $3.9 million, and unused lines of credit granted totaling
$1.3 million.

The Bank is subject to the capital regulations of the Office of the Comptroller
of the Currency ("OCC"). The OCC's regulations establish two capital standards
for national banks: a leverage requirement and a risk-based capital requirement.
In addition, the OCC may, on a case-by-case basis, establish individual minimum
capital requirements for a national bank that vary from the requirements which
would otherwise apply under OCC regulations. A national bank that fails to
satisfy the capital requirements established under the OCC's regulations will be
subject to such administrative action or sanctions as the OCC deems appropriate.

The leverage ratio adopted by the OCC requires a minimum ratio of "Tier 1
capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of common stockholders' equity
and retained income and certain non-cumulative perpetual preferred stock and
related income, except that no intangibles and certain purchased mortgage
servicing rights and purchased credit card relationships may be included in
capital.

The risk-based capital requirements established by the OCC's regulations require
national banks to maintain "total capital" equal to at least 8% of total
risk-weighted assets. For purposes of the risk-based capital requirement, "total
capital" means Tier 1 capital (as described above) plus "Tier 2 capital",
provided that the amount of Tier 2 capital may not exceed the amount of Tier 1
capital, less certain assets. The components of Tier 2 capital include certain
permanent and maturing capital instruments that do not qualify as core capital
and general valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets.

The OCC has revised its risk-based capital requirements to permit the OCC to
require higher levels of capital for an institution in light of its interest
rate risk. In addition, the OCC has proposed that a bank's interest rate risk
exposure would be quantified using either the measurement system set forth in
the proposal or the institution's internal model for measuring such exposure, if
such model is determined to be adequate by the institution's examiner.
Management of the Bank has not determined what effect, if any, the OCC's
proposed interest rate risk component would have on the Bank's capital
requirement if adopted as proposed.

At June 30, 1998, the Bank had Tier 1 capital of $41.1 million or 17.8% of
adjusted total assets and Tier 2 capital of $41.5 million or 45.8% of total
risk-weighted assets.

-13-

<PAGE>

Non-Performing Assets

The following table sets forth the amounts and categories of
non-performing assets in the Company's portfolio. Loans are reviewed monthly and
any loan whose collectibility is doubtful is placed on non-accrual status. Loans
are placed on non-accrual status when principal and interest is 90 days or more
past due, unless, in the judgement of management, the loan is well collaterized
and in the process of collection. Interest accrued and unpaid at the time a loan
is placed on non-accrual status is charged against interest income. Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan. Restructured loans include troubled debt restructuring (which involved
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than the market rate). At June 30, 1998, the Company had no
restructured loans or foreclosed assets.

June 30, September 30,
1998 1997
-------- -------------
(Dollars in Thousands)
Non-accruing loans:
One-to-four family............................. $ 350 $ 197
Multi-family................................... 53 --
Commercial real estate. ....................... -- --
Consumer....................................... 25 --
----- -----
Total........................................ 428 197
----- -----
Foreclosed assets:
Commercial and multi-family real estate........ -- 79
----- -----
Total non-performing assets...................... $ 428 $ 276
===== =====
Total as a percentage of total assets............ .18% .12%
===== =====

For the nine months ended June 30, 1998, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $25,700.

In addition to the non-performing assets set forth in the table above, as of
June 30, 1998, there were no loans with respect to which known information about
the possible credit problems of the borrowers or the cash flows of the security
properties have caused management to have concerns as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset categories.

Management has considered the Company's non-performing and "of concern" assets
in establishing its allowance for loan losses.

Impact of Inflation and Changing Prices

The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation on the
operations of the Company is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.

Recent Developments

On July 10, 1998, Damen Financial Corporation announced its intention to
repurchase up to 5% of its outstanding shares in the open market over the next
six month period.

On July 21, 1998, the Board of Directors approved a cash dividend of $.12 per
share to be payable August 17, 1998 to shareholders of record on July 31, 1998.

The Board of Directors has determined that the 1999 Annual Meeting of
Stockholders will be held on January 25, 1999 at 9:30 A.M.

-14-

<PAGE>

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS
-----------------
None.

Item 2. CHANGES IN SECURITIES
---------------------
None.

Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.

Item 5. OTHER INFORMATION
-----------------
Not applicable.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------

(a) Computation of earnings per share (Exhibit 11 filed herewith)
Financial Data Schedule (Exhibit 27 filed herewith)

(b) No reports on Form 8-K were filed during the quarter ended June
30, 1998.

-15-

<PAGE>

SIGNATURES

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

DAMEN FINANCIAL CORPORATION
---------------------------
Registrant

DATE: August 10, 1998

BY: /s/ Mary Beth Poronsky Stull
----------------------------
Mary Beth Poronsky Stull
President, Chief Executive Officer and Director
(Duly Authorized Representative)

BY: /s/ Gerald J. Gartner
----------------------------
Gerald J. Gartner
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

-16-

<PAGE>

INDEX TO EXHIBITS

Exhibit No.
-----------
3 Amended and Restated Bylaws

11 Statement regarding Computation of Earnings Per Share

27 Financial Data Schedule

-17-

AMENDED AND RESTATED

BYLAWS OF

DAMEN FINANCIAL CORPORATION

ARTICLE I

STOCKHOLDERS

Section 1. Annual Meeting.

An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix.

Section 2. Special Meetings.

Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").

Section 3. Notice of Meetings.

Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation).

When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date and time of the adjourned meeting shall be given in conformity herewith. At
any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.

Section 4. Quorum.

At any meeting of the stockholders, the holders of at least one-third
of all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the presence of a larger number may be required by law. Where
a separate vote by a class or classes is required, a majority of the shares of
such class or

<PAGE>

classes, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter.

If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date or time.

If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.

Section 5. Organization.

Such person as the Board of Directors may have designated or, in the
absence of such a person, the President of the Corporation or, in the
President's absence, such person as may be chosen by the holders of a majority
of the shares entitled to vote who are present, in person or by proxy, shall
call to order any meeting of the stockholders and act as chairman of the
meeting. In the absence of the Secretary of the Corporation, the secretary of
the meeting shall be such person as the chairman appoints.

Section 6. Conduct of Business.

(a) The chairman of any meeting of stockholders shall determine the
order of business and the procedure at the meeting, including such regulation of
the manner of voting and the conduct of discussion as seem to him or her in
order.

(b) At any annual meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered or mailed to and received
at the principal executive offices of the Corporation not less than 70 days
prior to the anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 20 days or delayed by more than 60 days from such anniversary date,
notice by the stockholder to be timely must be so delivered by the close of
business on the later of (i) the 70th day prior to such annual meeting or (ii)
the 10th day following the earlier of the day on which notice of the date of the
annual meeting is mailed or the day on which a public announcement of the date
of such meeting is first made. A stockholder's notice to the Secretary shall set
forth as to each matter such stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the Corporation's books,
of the stockholder who proposed such business, (iii) the class and number of
shares of the Corporation's capital stock that are beneficially owned by such
stockholder and (iv) any material interest of such stockholder in such business.
Notwithstanding anything in these By-laws

<PAGE>

to the contrary, no business shall be brought before or conducted at an annual
meeting except in accordance with the provisions of this Section 6(b). The
officer of the Corporation or other person presiding over the annual meeting
shall, if the facts so warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section 6(b) and, if he or she should so determine, he shall
so declare to the meeting and any such business so determined to be not properly
brought before the meeting shall not be transacted.

At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.

(c) Only persons who are nominated in accordance with the procedures
set forth in these By-laws shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders at which directors are to be elected
only (i) by or at the direction of the Board of Directors or (ii) by any
stockholder of the Corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
6(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal executive offices of the Corporation not
less than 70 days prior to the date of the meeting; provided, however, that in
the event that less than 80 days' notice of the date of the meeting is given to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the earlier of (i)
the day on which such notice of the date of the meeting is mailed or (ii) the
day on which a public announcement of the date of the meeting is first made.
Such stockholder's notice shall set forth (i) as to each person whom such
stockholder proposes to nominate for election or re-election as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (ii) as to
the stockholder giving the notice: (x) the name and address, as they appear on
the Corporation's books, of such stockholder and (y) the class and number of
shares of the Corporation's capital stock that are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the Corporation unless nominated in accordance
with the provisions of this Section 6(c). The officer of the Corporation or
other person presiding at the meeting shall, if the facts so warrant, determine
that a nomination was not made in accordance with such provisions and, if he or
she should so determine, he or she shall so declare to the meeting and the
defective nomination shall be disregarded.

Section 7. Proxies and Voting.

At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing (or as
otherwise permitted under applicable law) by the stockholder or his duly
authorized attorney-in-fact filed in accordance with the procedure established
for the meeting. Proxies solicited on behalf of the management shall be voted as
directed

<PAGE>

by the stockholder or in the absence of such direction, as determined by a
majority of the Board of Directors. No proxy shall be valid after eleven months
from the date of its execution except for a proxy coupled with an interest.

Each stockholder shall have one (1) vote for every share of stock
entitled to vote which is registered in his or her name on the record date for
the meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.

All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefore by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballot, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballot shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.

All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.

Section 8. Stock List.

The officer who has charge of the stock transfer books of the
Corporation shall prepare and make, in the time and manner required by
applicable law, a list of stockholders entitled to vote and shall make such list
available for such purposes, at such places, at such times and to such persons
as required by applicable law. The stock transfer books shall be the only
evidence as to the identity of the stockholders entitled to examine the stock
transfer books or to vote in person or by proxy at any meeting of stockholders.

Section 9. Consent of Stockholders in Lieu of Meeting.

Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly called annual
or special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.

Section 10. Inspectors of Election

The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more persons as inspectors of election, to act at
the meeting or any adjournment thereof and make a written report thereof, in
accordance with applicable law.

<PAGE>

ARTICLE II

BOARD OF DIRECTORS

Section 1. General Powers, Number and Term of Office.

The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The number of directors shall be
as provided for in the Certificate of Incorporation. The Board of Directors
shall annually elect a Chairman of the Board and a President from among its
members and shall designate, when present, either the Chairman of the Board or
the President to preside at its meetings.

The directors, other than those who may be elected by the holders of
any class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election, with each director to hold office until his or her
successor shall have been duly elected and qualified.

Section 2. Vacancies and Newly Created Directorships.

Subject to the rights of the holders of any class or series of
preferred stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause may be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected expires,
and until such director's successor shall have been duly elected and qualified.
No decrease in the number of authorized directors constituting the Board shall
shorten the term of any incumbent director.

<PAGE>

Section 3. Regular Meetings.

Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.

Section 4. Special Meetings.

Special meetings of the Board of Directors may be called by one-third
(1/3) of the directors then in office (rounded up to the nearest whole number)
or by the President and shall be held at such place, on such date, and at such
time as they or he or she shall fix. Notice of the place, date, and time of each
such special meeting shall be given to each director by whom it is not waived by
mailing written notice not less than five (5) days before the meeting or by
telephoning or by facsimile transmission of the same not less than twenty-four
(24) hours before the meeting. Unless otherwise indicated in the notice thereof,
any and all business may be transacted at a special meeting.

Section 5. Quorum.

At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.

Section 6. Participation in Meetings By Conference Telephone.

Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.

Section 7. Conduct of Business.

At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.

Section 8. Powers.

The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, including, without limiting the generality of the
foregoing, the unqualified power:

(1) To declare dividends from time to time in accordance with law;

<PAGE>

(2) To purchase or otherwise acquire any property, rights or privileges on such
terms as it shall determine;

(3) To authorize the creation, making and issuance, in such form as it may
determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;

(4) To remove any officer of the Corporation with or without cause, and from
time to time to devolve the powers and duties of any officer upon any other
person for the time being;

(5) To confer upon any officer of the Corporation the power to appoint, remove
and suspend subordinate officers, employees and agents;

(6) To adopt from time to time such stock, option, stock purchase, bonus or
other compensation plans for directors, officers, employees and agents of
the Corporation and its subsidiaries as it may determine;

(7) To adopt from time to time such insurance, retirement, and other benefit
plans for directors, officers, employees and agents of the Corporation and
its subsidiaries as it may determine; and,

(8) To adopt from time to time regulations, not inconsistent with these
By-laws, for the management of the Corporation's business and affairs.

Section 9. Compensation of Directors.

Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.

ARTICLE III

COMMITTEES

Section 1. Committees of the Board of Directors.

The Board of Directors, by a vote of a majority of the Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any committee
so designated may exercise the power and authority of the Board of Directors to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the Delaware General
Corporation Law if the resolution which designated the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and

<PAGE>

any alternate member in his or her place, the member or members of the committee
present at the meeting and not disqualified from voting, whether or not he or
she or they constitute a quorum, may by unanimous vote appoint another member of
the Board of Directors to act at the meeting in the place of the absent or
disqualified member.

Section 2. Conduct of Business.

Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.

Section 3. Nominating Committee.

The Board of Directors may appoint a Nominating Committee of the Board,
consisting of not less than three (3) members, one of which shall be the
President if, and only so long as, the President remains in office as a member
of the Board of Directors. The Nominating Committee shall have authority (a) to
review any nominations for election to the Board of Directors made by a
stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of
these By-laws in order to determine compliance with such By-law and (b) to
recommend to the Whole Board nominees for election to the Board of Directors to
replace those directors whose terms expire at the annual meeting of stockholders
next ensuing.

ARTICLE IV

OFFICERS

Section 1. Generally.

(a) The Board of Directors as soon as may be practicable after the
annual meeting of stockholders shall choose a President, a Secretary and a
Treasurer and from time to time may choose such other officers as it may deem
proper. The President shall be chosen from among the directors.
Any number of offices may be held by the same person.

(b) The term of office of all officers shall be until the next annual
election of officers and until their respective successors are chosen, but any
officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of directors then constituting the Board of
Directors.

(c) All officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV.

<PAGE>

Such officers shall also have such powers and duties as from time to time may be
conferred by the Board of Directors or by any committee thereof.

Section 2. President.

The President shall be the chief executive officer and, subject to the
control of the Board of Directors, shall have general power over the management
and oversight of the administration and operation of the Corporation's business
and general supervisory power and authority over its policies and affairs. The
President shall see that all orders and resolutions of the Board of Directors
and of any committee thereof are carried into effect.

Each meeting of the stockholders and of the Board of Directors shall be
presided over by the President or, in his or her absence, by such officer or
other person as is chosen at the meeting. In the Secretary's absence, the
Treasurer of the Corporation or such officer as has been designated by the Board
of Directors or, in the Secretary's absence, such officer or other person as is
chosen by the person presiding, shall act as secretary of each such meeting.

Section 3. Vice President.

The Vice President or Vice Presidents, if any, shall perform the
duties and exercise the powers usually incident to their respective offices
and/or such other duties and powers as may be properly assigned to them from
time to time by the Board of Directors, the Chairman of the Board or the
President. The Board of Directors may designate one or more Vice Presidents as
Executive Vice President or Senior Vice President.

Section 4. Secretary.

The Secretary or an Assistant Secretary shall issue notices of
meetings, shall keep their minutes, shall have charge of the seal and the
corporate books, shall perform such other duties and exercise such other powers
as are usually incident to such offices and/or such other duties and powers as
are properly assigned thereto by the Board of Directors, the Chairman of the
Board or the President.

Section 5. Treasurer.

The Treasurer shall have charge of all monies and securities of the
Corporation, other than monies and securities of any division of the Corporation
which has a treasurer or financial officer appointed by the Board of Directors,
and shall keep regular books of account. The funds of the Corporation shall be
deposited in the name of the Corporation by the Treasurer with such banks or
trust companies or other entities as the Board of Directors from time to time
shall designate. The Treasurer shall sign or countersign such instruments as
require the Treasurer's signature, shall perform all such duties and have all
such powers as are usually incident to such office and/or such other duties and
powers as are properly assigned to the Treasurer by the Board of Directors, the
Chairman of the Board or the President, and may be required to give bond,
payable by the Corporation, for the faithful performance of the Treasurer's
duties in such sum and with such surety as may be required by the

<PAGE>

Board of Directors. The Treasurer shall perform the duties of the President in
the President's absence or during the President's disability to act.

Section 6. Assistant Secretaries and Other Officers.

The Board of Directors may appoint one or more assistant secretaries
and one or more assistants to the Treasurer, or one appointee to both such
positions, which officers shall have such powers and shall perform such duties
as are provided in these By-laws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.

Section 7. Action with Respect to Securities of Other Corporations

Unless otherwise directed by the Board of Directors, the President or
any officer of the Corporation authorized by the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other Corporation.

ARTICLE V

STOCK

Section 1. Certificates of Stock.

Each stockholder shall be entitled to a certificate signed by, or in
the name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.

Section 2. Transfers of Stock.

Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefore.

Section 3. Record Date.

In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date

<PAGE>

of any meeting of stockholders, nor more than sixty (60) days prior to the time
for such other action as hereinbefore described; provided, however, that if no
record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, and, for determining
stockholders entitled to receive payment of any dividend or other distribution
or allotment of rights or to exercise any rights of change, conversion or
exchange of stock or for any other purpose, the record date shall be at the
close of business on the day on which the Board of Directors adopts a resolution
relating thereto.

A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.

Section 4. Lost, Stolen or Destroyed Certificates.

In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.

Section 5. Regulations.

The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.

ARTICLE VI

NOTICES

Section 1. Notices.

Except as otherwise specifically provided herein or required by law,
all notices required to be given to any stockholder, director, officer, employee
or agent shall be in writing and may in every instance be effectively given by
hand delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed to such stockholder, director, officer, employee
or agent at his or her last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mail, by telegram or mailgram or by
facsimile machine or other electronic transmission, shall be the time of the
giving of the notice.

Section 2. Waivers.

A written waiver of any notice, signed by a stockholder, director,
officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed

<PAGE>

equivalent to the notice required to be given to such stockholder, director,
officer, employee or agent. Neither the business nor the purpose of any meeting
need be specified in such a waiver.

ARTICLE VII

MISCELLANEOUS

Section 1. Facsimile Signatures.

In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.

Section 2. Corporate Seal.

The Board of Directors may provide a suitable seal, containing the name
of the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Treasurer or by an Assistant Secretary or
Assistant Treasurer.

Section 3. Reliance upon Books, Reports and Records.

Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.

Section 4. Fiscal Year.

The fiscal year of the Corporation shall be as fixed by the Board of
Directors.

<PAGE>

Section 5. Time Periods.

In applying any provision of these By-laws which requires that an act
be done or not be done a specified number of days prior to an event or that an
act be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded
and the day of the event shall be included.

ARTICLE VIII

AMENDMENTS

The By-laws of the Corporation may be adopted, amended or repealed as
provided in Article SEVENTH of the Certificate of Incorporation of the
Corporation.

EXHIBIT 11

STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1998 June 30, 1998
------------------ -----------------
<S> <C> <C>
Net Income $ 462,328 1,479,063
========== =========

Weighted average shares outstanding ............ 3,123,154 3,119,129

Reduction for common shares not yet
released by Employee Stock Ownership Plan .... (244,500) (249,790)
---------- ---------
Total weighted average common shares
outstanding for basic computation ............ 2,878,654 2,869,339
========== =========

Basic earnings per share ....................... $ .16 .51
========== =========

Total weighted average common shares
outstanding for basic computation ............ 2,878,654 2,869,339

Common stock equivalents due to dilutive
effect of stock options ...................... 125,419 123,804
---------- ---------
Total weighted average common shares and
equivalents outstanding for diluted
computation .................................. 3,004,073 2,993,143
========== =========

Diluted earnings per share ..................... $ .15 .49
========== =========
</TABLE>

<ARTICLE> 9
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 559,610
<INT-BEARING-DEPOSITS> 268,636
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,089,513
<INVESTMENTS-CARRYING> 21,303,093
<INVESTMENTS-MARKET> 21,215,900
<LOANS> 106,663,928
<ALLOWANCE> (410,000)
<TOTAL-ASSETS> 233,185,263
<DEPOSITS> 122,454,440
<SHORT-TERM> 12,500,000
<LIABILITIES-OTHER> 2,024,427
<LONG-TERM> 47,000,000
0
0
<COMMON> 39,814
<OTHER-SE> 47,363,896
<TOTAL-LIABILITIES-AND-EQUITY> 233,185,263
<INTEREST-LOAN> 6,213,353
<INTEREST-INVEST> 6,303,830
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,517,183
<INTEREST-DEPOSIT> 4,836,492
<INTEREST-EXPENSE> 7,567,563
<INTEREST-INCOME-NET> 4,949,620
<LOAN-LOSSES> 80,921
<SECURITIES-GAINS> 384,557
<EXPENSE-OTHER> 3,702,567
<INCOME-PRETAX> 1,816,245
<INCOME-PRE-EXTRAORDINARY> 1,479,063
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,479,063
<EPS-PRIMARY> .51
<EPS-DILUTED> .49
<YIELD-ACTUAL> 2.94
<LOANS-NON> 428,230
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 332,000
<CHARGE-OFFS> 2,921
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 410,000
<ALLOWANCE-DOMESTIC> 410,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>