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                                TABLE OF CONTENTS
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President's Message                                                1
Selected Consolidated Financial Information                        2
Management's Discussion and Analysis of 
   Financial Condition and Results of Operations                   5
Report of Independent Auditors                                     21
Consolidated Financial Statements                                  22
Stockholder Information                                            49




<PAGE>

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                               PRESIDENT'S MESSAGE
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                                                                  March 16, 1999

To Our Fellow Stockholders:

         On behalf of your  Directors,  Officers and  Employees of PS Financial,
Inc., and its wholly owned  subsidiary,  Preferred  Savings Bank FSB, it is with
pleasure that I present to our  stockholders our third annual report as a public
corporation.

         PS Financial,  Inc. enjoyed a successful 1998 fiscal year with earnings
of $1.5 million.  One of our goals for fiscal 1998 was to increase our return on
equity.  We are  pleased to report that our return on equity for 1998 was 6.69%,
as compared to 2.97% for the fiscal year ending  December 31, 1997. In addition,
our return on average  assets for 1998 was 1.66 %, near the top of industry peer
group standards, while our efficiency ratio was 39.25%.

         Since the conversion,  the Company has been focusing on ways to enhance
shareholder value,  including the payment of cash dividends and the continuation
of a stock  repurchase  program.  In 1998, PS Financial,  Inc.  continued to pay
quarterly  dividends.  The first three dividends of $0.12 per share were paid in
February, May and August and a dividend of $0.13 per share was paid in November.
The company  completed two share  repurchases in 1998, and was in the process of
an additional  share  repurchase as of December 31, 1998. In all,  230,320 share
were repurchased during 1998. In view of the price level of the Company's common
stock and the  strong  capital  position  of the  bank,  subject  to  regulatory
limitations,  the Board of Directors believes the stock repurchase program to be
in the best  interests of the Company as we continue to work on  leveraging  our
capital.

         The Company is pleased to report the positive direction our institution
has  taken  over  the  past  year  in  nearly  every  phase  of  our  operation.
Specifically,  our loan  portfolio  grew  from  $37.2  million  in 1997 to $56.8
million in 1998. During the same time,  deposit growth reflected a $14.2 million
increase.

         As a way to increase  the amount and  variability  of the  products and
services  our Company  can offer,  PS  Financial  Inc.  has  retained a new data
processor beginning in February of l999. One of the exciting new changes we will
be  instituting in the first half of 1999 is the  introduction  of our first ATM
machine.

         The  next  fiscal  year   continues  to  offer  many   challenges   and
opportunities for PS Financial,  Inc. Customer service remains our top priority.
We can still  effectively  compete  against our larger  regional  competitors by
enhancing  existing customer  relationships and building new ones.  Furthermore,
the size of the Bank and  knowledge of the market area allow us to react quickly
to changing customer needs. The Company continues in a positive direction due to
the dedication and competency of the directors, officers and staff, whom we wish
to thank.

         Our plans for the future include  continued  enhancement of stockholder
value.  The Management and Directors of PS Financial,  Inc. remain  committed to
ensure  that  your  investment  in  the  Company  will  continue  to be a  sound
investment.
                                                     Sincerely,


                                                     Kimberly P Rooney
                                                     President

                                       1
<PAGE>



                   SELECTED CONSOLIDATED FINANCIAL INFORMATION

         Set forth below are selected  consolidated  financial and other data of
the Company.  The financial  data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and Notes of the Company
presented elsewhere in this Annual Report.

<TABLE>
<CAPTION>

                                                                    December 31,
                                           --------------------------------------------------------------
                                              1998         1997          1996           1995        1994
                                           ---------- ------------- ------------- -------------- --------
                                                                   (In Thousands)
<S>                                        <C>         <C>          <C>            <C>          <C>    
Selected Financial Condition Data:
Total assets                                 $102,784    $87,922      $75,133        $53,520      $51,619
Cash and cash equivalents                       4,237      6,290        8,758          3,754        1,429
Loans receivable, net (1):                     56,822     37,167       35,943         34,525       32,890
Mortgage-backed securities:
   Held to maturity                                --         --           --             --        1,792
   Available for sale                          11,354      8,095        4,702          4,220        1,694
Securities:
   Held to maturity                                --         --           --             --          201
   Available for sale                          27,596     33,459       24,080          9,739        7,326
Deposits                                       55,429     41,275       42,203         41,047       40,057
FHLB Advances                                  23,764     13,750           --             --           --
Total stockholders' equity                     21,026     23,109       32,147         11,724       10,512

</TABLE>

                                                                               2
<PAGE>

<TABLE>
<CAPTION>


                                                                    December 31,
                                           ---------------------------------------------------------------
                                                1998        1997          1996           1995        1994
                                           ---------- ------------- ------------- -------------- --------
                                                                   (In Thousands)
<S>                                           <C>        <C>          <C>            <C>          <C>  
Selected Operations Data:
Total interest income                           $6,757     $6,062       $4,664         $4,268       $3,854
Total interest expense                           3,101      2,084        1,781          1,632        1,310
                                                 -----      -----        -----          -----        -----
   Net interest income                           3,656      3,978        2,883          2,636        2,544
Provision for loan losses(1)                        80         --           50             --           42
                                                    --         --           --             --           --
Net interest income after provision
 for loan losses                                 3,576      3,978        2,833          2,636        2,502
Fees and service charges                            94         77           69             58           76
Gain (loss) on sales of securities                  43         --         (38)             --        (365)
                                                    --         --         ----             --        -----
Total non-interest income                          137         77           31             58        (289)
Total non-interest expense                       1,489      2,186        1,233          1,009          838
                                                 -----      -----        -----          -----          ---
Income before taxes                              2,224      1,869        1,631          1,685        1,375
Income tax provision                               724        947          629            630          617
                                                   ---        ---          ---            ---          ---
Net income                                      $1,500       $922       $1,002         $1,055         $758
                                                ======       ====       ======         ======         ====

Diluted earnings per share                       $0.82      $0.46        $0.06(2)        NA            NA
                                                 =====      =====        =====
<FN>


(1)  The allowance for loan losses at December 31, 1998,  1997,  1996,  1995 and
     1994 was $258,000, $186,000, $186,000, $136,000 and $136,000, respectively.
(2)  From date of initial public offering, November 26, 1996.
</FN>
</TABLE>
                                                                               3
<PAGE>
<TABLE>
<CAPTION>

                                                                                        December 31,
                                                                         -------------------------------------------
                                                                          1998     1997     1996     1995     1994
                                                                          ----     ----     ----     ----     ----
<S>                                                                     <C>      <C>      <C>      <C>       <C>  
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)            1.66%    1.12%    1.71%    1.99%     1.46%
Return on equity (ratio of net income to average total equity)            6.69     2.97     6.55     9.42      7.53
Interest rate spread information:
Average during period                                                     2.95     3.23     3.89     4.26      4.38
End of period                                                             2.74     2.92      3.3     3.71      4.26
Net interest margin (1)                                                   4.14     5.01     5.03     5.13      5.03
Efficiency Ratio (2)                                                     39.25    53.92     42.3    37.45     37.15
Ratio of operating expense to average total assets                        1.65     2.67      2.1     1.91      1.61
Ratio of average interest-earning assets to average interest-bearing    135.19   167.82   136.86   127.21    125.08
     liabilities

Quality Ratios:
Non-performing assets to total assets at end of period                    0.94     1.71     0.37     1.45      0.65
Allowance for loan losses to non-performing loans                        26.71    20.84    65.96    17.55     40.72
Allowance for loan losses to total loans                                  0.45     0.50     0.51     0.39      0.41

Capital Ratios:
Equity to total assets at end of period                                  20.45    26.28    42.79    21.91     20.36
Average equity to average assets                                         24.84    37.94    26.06    21.18     19.32

Regulatory Capital Ratios: (3)
Total capital                                                               --       --       --    59.05     54.32
Tier 1 capital                                                              --       --       --    58.37     52.79
Leverage ratio                                                              --       --       --    22.19     20.29
Tangible capital                                                         15.40    25.86    32.77       --        --
Core capital                                                             15.40    25.86    32.77       --        --
Risk-based capital                                                       31.40    65.39    92.91       --        --

</TABLE>

(1)  Net interest income divided by average interest earning assets.
(2)  The efficiency  ratio  represents  noninterest  expense as a percent of net
     interest income and noninterest income before provision for loan losses.
(3)  OTS  regulatory  capital  ratios  are shown for the years that the Bank was
     under OTS regulation.  Bank capital ratios are shown for the years the Bank
     was a state-chartered savings bank.

















                                                                               4

<PAGE>

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

General

         PS Financial,  Inc.  (the  "Company")  is a Delaware  corporation.  The
Company is a savings  and loan  holding  company  which has as its wholly  owned
subsidiary,  Preferred Savings Bank.  Financial and other information  presented
herein after  November 26, 1996, the date of the Company's  public  offering and
the date the  Company  became  the  holding  company  of the  Bank,  relates  to
consolidated  information  of the  Company  and the  Bank.  Financial  and other
information prior to November 26, 1996, relates only to the Bank.

         The Company is a financial intermediary engaged primarily in attracting
deposits from the general  public and using such  deposits to originate  one- to
four-  family  residential  mortgage  and,  to a  significantly  lesser  extent,
multi-family,  commercial real estate, construction and consumer loans primarily
in its market area. The Company's revenues are derived principally from interest
on loans and,  to a lesser  extent,  from  interest  earned on  investments  and
mortgage-backed  and  related  securities.  The  operations  of the  Company are
influenced  significantly  by general  economic  conditions  and by  policies of
financial institution  regulatory agencies,  including the OTS and the FDIC. The
Company's cost of funds is influenced by interest rates on competing investments
and general market interest rates. Lending activities are affected by the demand
for financing of real estate and other types of loans, which in turn is affected
by the interest rates at which such financings may be offered.

         The  Company's  net  interest  income is dependent  primarily  upon the
difference or spread between the average yield earned on loans  receivable,  net
and investments  and the average rate paid on deposits,  as well as the relative
amounts  of  such  assets  and   liabilities.   The  Bank,   like  other  thrift
institutions,  is  subject  to  interest  rate  risk  to  the  degree  that  its
interest-bearing  liabilities  mature or reprice  at  different  times,  or on a
different basis, than its interest-earning assets.

Comparison of Financial Condition at December 31, 1998 and December 31, 1997

         Total assets at December 31, 1998 were $102.8 million compared to $87.9
million at  December  31,  1997,  an increase of $14.9  million,  or 17.0%.  The
increase was primarily the result of an increase in the loan  portfolio of $19.6
million,  funded by increases in FHLB  advances of $10.0 million and deposits of
$14.1 million,  partially  offset by the payment of the special dividend of $7.5
million in January 1998.  Securities  available-for-sale  decreased $5.9 million
from $33.5  million at December 31, 1997 to $27.6  million at December 31, 1998.
Interest-bearing  deposits  decreased $2.0 million from $5.8 million at December
31, 1997 to $3.8 million at December 31, 1998.

         In order to increase  the size of the loan  portfolio,  the Company has
utilized  the  services of an area  mortgage  broker who receives a fee for each
mortgage  originated for the Company.  The broker serves the same market area as
the  Company,  and the loans  share the same  characteristics  of the  Company's
existing loans.  During 1998, the Company originated $17.9 million loans through
this  broker.  Because  all of these  loans  carry  fixed  interest  rates,  the
Company's  interest  rate risk has increased as a result of the  purchases.  See
"Quantitative and Qualitative Disclosures About Market Risk".

                                       5
<PAGE>


         Total  liabilities at December 31, 1998 were $81.8 million  compared to
$64.8  million at December 31,  1997,  an increase of $17.0  million,  or 26.2%.
Total  deposits  increased by $14.1  million from $41.3  million at December 31,
1997 to $55.4  million at December 31, 1998 due to an increase in time  deposits
as a result of an increase in  marketing.  The decrease of $7.3 million in other
liabilities  was due  mainly to the  payment  of the  $4.00  per  share  special
dividend  which  totaled  $7.5  million.  In order  to  provide  for  additional
liquidity to fund the payment of the special  dividend in January,  1998 and the
increase in the loan  portfolio,  the Company  increased  FHLB advances to $23.8
million at December 31, 1998 from $13.8 million at December 31, 1997.

         Total equity at December 31, 1998 was $21.0  million  compared to $23.1
million at December 31, 1997, a decrease of $2.1 million, or 9.1% as a result of
the repurchase of 230,320 shares of treasury stock at an aggregate price of $2.9
million and regular dividends of $877,000, or $0.49 per share.

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 securities,  and the costs of
the Company's interest-bearing  liabilities,  primarily deposits and borrowings.
Results  of  operations  are  also  dependent  upon the  level of the  Company's
noninterest  income,  including fee income and service charges,  and affected by
the level of its noninterest expenses,  including its general and administrative
expenses. 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.

Comparison  of  Operating  Results  for the Years  Ended  December  31, 1998 and
December 31, 1997

         General.  Net  income  for the year ended  December  31,  1998 was $1.5
million, an increase of $579,000,  or 62.9%, from net income of $921,000 for the
year ended December 31, 1997. The increase was primarily a result of the absence
of additional  ESOP expense of $981,000 due to the  declaration of the $4.00 per
share  special  dividend  which  resulted  in a paydown of the ESOP debt and the
release of additional  shares to participants in 1997. Also  contributing to the
increase  in net  income  was an  increase  of  $43,000  in  gains  on  sale  of
securities.  This was  partially  offset  by an  increase  in  compensation  and
benefits of $303,000  due to a full year of RRP  expenses  and a decrease in net
interest  income of $322,000  due to a  reduction  in average  interest  earning
assets resulting from the payment of the special dividend.

         Interest  Income.  Interest income for the year ended December 31, 1998
was $6.8 million  compared to $6.1 million for the year ended December 31, 1997,
an increase  of  $700,000,  or 11.5%.  The  increase in interest  income was the
result of an  increase in the average  balance of  interest-earning  assets from
$79.5 million for the year ended December 31, 1997 to $88.8 million for the year
ended December 31, 1998. The increase in the average balance of interest-earning

                                       6

<PAGE>


assets was largely a result of an $11.4  million  increase in the average  loans
receivable partially offset by a $5.5 million decrease in the average balance of
securities.  The average yield on  interest-earning  assets decreased from 7.63%
for the year ended  December  31, 1997 to 7.61% for the year ended  December 31,
1998.  This was largely a result of a decrease  in the yield on  mortgage  loans
from  8.99% for the year  ended  December  31,  1997 to 8.54% for the year ended
December 31, 1998 due to a general  decline in loan rates, as well as a decrease
in the yield on securities and mortgage-backed securities of 66 basis points.

         Interest Expense. Interest expense for the year ended December 31, 1998
was $3.1 million  compared to $2.1 million for the year ended December 31, 1997,
an increase of $1.0 million,  or 47.6%.  The increase in interest  expense was a
result of an increase in average interest-bearing liabilities from $47.4 million
for the year  ended  December  31,  1997 to  $65.4  million  for the year  ended
December  31, 1998  combined  with an increase in the average cost of funds from
4.40% for the year ended  December 31, 1997 to 4.74% for the year ended December
31, 1998.  The increase in the average cost of funds was primarily the result of
the  increased  use of FHLB advances at higher rates than the bank deposit rates
and an increase in the ratio of time deposits to total deposits.

         Net Interest  Income.  Net interest  income for the year ended December
31, 1998 was $3.7 million  compared to $4.0 million for the year ended  December
31, 1997, a decrease of $300,000 million, or 7.5%. Although the Company's use of
borrowings  to increase  its  financial  leverage  contributes  to net  interest
income, because its cost of borrowings was significantly higher than the cost of
the Company's other liabilities, the utilization of borrowings had the effect of
reducing the Company's net interest spread.  The decrease in net interest income
was a result of a decrease  in the ratio of average  interest-earning  assets to
average  interest-bearing  liabilities  from 167.82% for the year ended December
31, 1997 to 135.19% for the year ended December 31, 1998.

         Provision for Loan Losses.  The Company  recorded an $80,000  provision
for loan losses for the year ended  December  31, 1998  compared to no provision
for the year ended  December 31, 1997, due to the increase in the loan portfolio
in 1998.  At December 31,  1998,  the  Company's  allowance  for losses  totaled
$258,000,  or .45% of total loans and 25.10% of total non-performing  loans. The
amount  of the  provision  and  allowance  for  estimated  losses  on  loans  is
influenced by current  economic  conditions,  actual loss  experience,  industry
trends  and  other  factors,  such as  adverse  economic  conditions,  including
declining real estate values, in the Company's market area. In addition, various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review the Company's allowance for estimated losses on loans. Such
agencies  may require the Company to provide  additions to the  allowance  based
upon judgments  which differ from those of  management.  The loan loss provision
for the year ended December 31, 1998 is indicative of management's assessment of
the adequacy of the  allowance  for loan losses,  given the trends in historical
loss experience of the portfolio and current economic conditions, as well as the
fact that the  majority  of loans are  single-family  residential  loans and the
loan-to-values  are generally less than 80%.  Although  management uses the best
information available and maintains the Company's allowance for loan losses at a
level it believes  adequate to provide for  losses,  future  adjustments  to the
allowance  may be necessary  due to economic,  operating,  regulatory  and other
conditions that may be beyond the Company's control.

                                        7
<PAGE>

         Noninterest Income.  Noninterest income for the year ended December 31,
1998 was $137,000  compared to $77,000 for the year ended  December 31, 1997, an
increase of $60,000,  or 77.9%.  The increase was primarily a result of gains on
sales of securities of $43,000 for the year ended  December 31, 1998 compared to
nominal losses for the year ended December 31, 1997. This was partially aided by
an increase in service fees collected of $17,000.

         Noninterest Expense.  Noninterest expense was $1.5 million for the year
ended December 31, 1998 compared to $2.2 million for the year ended December 31,
1997, a decrease of $700,000,  or 31.8%.  The decrease was primarily a result of
the  absence  of  the  additional  ESOP  expense  incurred  in  1997  due to the
declaration of the $4.00 per share special  dividend in that year. Under Federal
Employee Retirement Income Safety Act, the ESOP was required to use the dividend
received for the benefit of participants therein.  Accordingly, the ESOP trustee
elected to use the dividend  proceeds to pay down the ESOP debt which caused the
mandatory  release of additional shares to participants with a value at December
31, 1997 of $981,000.  The decrease was partially offset by an increase in other
compensation and benefits, due to the full year of RRP expense, of $303,000.

         Income Tax Expense. The provision for income taxes totaled $724,000 for
the year  ended  December  31,  1998  compared  to  $947,000  for the year ended
December 31, 1997.  The decrease was a result of an increase in interest  income
from municipal securities, which are tax exempt for federal tax purposes.

Comparison  of  Operating  Results  for the Years  Ended  December  31, 1997 and
December 31, 1996

         General.  Net income for the year ended December 31, 1997 was $921,000,
a decrease of  $79,000,  or 7.9%,  from net income of $101  million for the year
ended December 31, 1996. The decrease was primarily a result of additional  ESOP
expense  of  $981,000  due to the  declaration  of the $4.00  per share  special
dividend  which  resulted  in a  paydown  of the ESOP  debt and the  release  of
additional  shares to  participants.  Also  contributing  to the  decline in net
income was an increase in other  compensation  and benefits of $105,000,  due to
the  ratification of the RRP at the annual meeting,  an increase in professional
fees and other operating expenses of $120,000 which can be associated with being
a public  company.  This was  partially  offset by an increase  in net  interest
income of $1.1 million and a decrease in federal deposit  insurance  premiums of
$63,000.

         Interest  Income.  Interest income for the year ended December 31, 1996
was $4.7 million  compared to $4.3 million for the year ended December 31, 1995,
an increase of $396,000, or 9.2%. The increase in interest income was the result
of an  increase  in the average  balance of  interest-earning  assets from $51.3
million for the year ended December 31, 1995 to $57.3 million for the year ended
December  31,  1996.  The  increase in the average  balance of  interest-earning
assets was largely a result of a $1.5 million increase in loans receivable and a
$2.6 million increase in the average balance of securities. The average yield on

                                        8
<PAGE>

interest-earning  assets  decreased  from 8.31% for the year ended  December 31,
1995 to 8.14% for the year ended December 31, 1996. This was largely a result of
a decrease in the yield on securities from 7.05% for the year ended December 31,
1995 to 6.54% for the year ended December 31, 1996 due to securities with higher
interest rates being called during 1996 combined with a decrease in the yield on
other earning assets of 99 basis points.

         Interest Expense. Interest expense for the year ended December 31, 1997
was $2.1 million  compared to $1.8 million for the year ended December 31, 1996,
an increase of $304,000, or 16.9%. The increase in interest expense was a result
of an increase in average  interest-bearing  liabilities  from $41.9 million for
the year ended  December 31, 1996 to $47.4  million for the year ended  December
31, 1997  combined  with an increase in the average cost of funds from 4.25% for
the year ended  December 31, 1996 to 4.40% for the year ended December 31, 1997.
The  increase  in the cost of funds was a result of the use of FHLB  advances at
higher rates than the bank deposit rates.

         Net Interest  Income.  Net interest  income for the year ended December
31, 1997 was $4.0 million  compared to $2.9 million for the year ended  December
31, 1996, an increase of $1.1 million,  or 37.9%.  Although the Company's use of
borrowings to increase its financial leverage contributed to the increase in net
interest  income,  because  the spread  between  the  Company's  borrowings  was
significantly lower than the spread between the Company's other liabilities, the
utilization  of borrowings had the effect of reducing the Company's net interest
spread.  The increase in net interest  income was a result of an increase in the
ratio of average interest-earning assets to average interest-bearing liabilities
from 136.86% for the year ended  December 31, 1996 to 167.82% for the year ended
December 31, 1997.

         Provision for Loan Losses.  The Company  recorded no provision for loan
losses for the year ended December 31, 1997 compared to a $50,000  provision for
the year ended December 31, 1996. At December 31, 1997, the Company's  allowance
for  losses  totaled  $186,000,  or .50% of  total  loans  and  20.84%  of total
non-performing  loans.  The amount of the  provision and allowance for estimated
losses on loans is  influenced  by  current  economic  conditions,  actual  loss
experience,  industry  trends  and  other  factors,  such  as  adverse  economic
conditions,  including  declining  real estate values,  in the Company's  market
area. In addition,  various  regulatory  agencies,  as an integral part of their
examination  process,  periodically review the Company's allowance for estimated
losses on loans.  Such agencies may require the Company to provide  additions to
the allowance  based upon judgments  which differ from those of management.  The
loan loss  provision  for the year ended  December  31,  1997 is  indicative  of
management's  assessment of the adequacy of the allowance for loan losses, given
the trends in historical loss  experience of the portfolio and current  economic
conditions,  as well as the fact that the  majority  of loans are  single-family
residential loans and the  loan-to-values  are generally less than 80%. Although
management  uses the best  information  available  and  maintains  the Company's
allowance for loan losses at a level it believes adequate to provide for losses,
future adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Company's control.

                                       9
<PAGE>

         Noninterest Income.  Noninterest income for the year ended December 31,
1997 was $77,000  compared to $32,000 for the year ended  December 31, 1996,  an
increase of $45,000, or 140.6%. The increase was primarily a result of losses on
sales of securities of $38,000 for the year ended  December 31, 1996 compared to
nominal losses for the year ended December 31, 1997. This was partially aided by
an increase in service fees collected of $8,000.

         Noninterest Expense.  Noninterest expense was $2.2 million for the year
ended December 31, 1997 compared to $1.2 million for the year ended December 31,
1996, an increase of $953,000,  or 79.4%. The increase was primarily a result of
an increase in the ESOP  expense due to the  declaration  of the $4.00 per share
special dividend.  Under Federal Employee Retirement Income Safety Act, the ESOP
was  required  to use the  dividend  received  for the  benefit of  participants
therein.  Accordingly,  the ESOP trustee elected to use the dividend proceeds to
pay down the ESOP debt which caused the mandatory  release of additional  shares
to participants with a value at December 31, 1997 of $981,000. Also contributing
to the decline in net income was an increase in other compensation and benefits,
due to the  ratification of the RRP at the annual meeting,  of $105,000,  and an
increase in professional fees and other operating expenses associated with being
a public company of $120,000.  This increase was partially  offset by a decrease
in federal deposit insurance  premiums of $63,000 and the absence of the special
Savings Association Insurance Fund ("SAIF") assessment of $245,000 paid in 1996.
However,  the Company  expects that  noninterest  expense  will  decrease in the
future due to the limited ability to declare additional large dividends.

         Income Tax Expense. The provision for income taxes totaled $947,000 for
the year  ended  December  31,  1997  compared  to  $629,000  for the year ended
December  31, 1996.  The  increase was a result of an increase in income  before
income taxes of $237,000 combined with an increase in the valuation allowance of
$128,000.

Analysis of Net Interest Income

         Net interest income  represents the difference  between interest earned
on interest-earning  assets and interest paid on  interest-bearing  liabilities.
Net  interest  income  depends  on the  volumes of  interest-earning  assets and
interest-bearing liabilities and the interest rates earned or paid on them.







                                       10

<PAGE>


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

                                                                   Year Ended December 31,
                              -----------------------------------------------------------------------------------------------
                                        1998                    1997                    1996                     1995
                              ----------------------- ----------------------- ----------------------- -----------------------
                               Average                Average                  Average                Average
                                 Out-  Interest         Out-  Interest          Out-   Interest         Out-    Interest
                              standing Earned/ Yield/ standing Earned/ Yield/ standing Earned/ Yield/ standing  Earned/ Yield/
                               Balance  Paid   Rate   Balance   Paid   Rate    Balance  Paid    Rate  Balance    Paid    Rate
                               -------  ----   ----   -------   ----   ----    -------  ----   ----   -------    ----    ----
                                                                         (Dollars in Thousands)
<S>                <C>        <C>      <C>     <C>    <C>     <C>     <C>    <C>      <C>     <C>    <C>      <C>       <C>  
Interest-Earning Assets:
  Loans Receivable (1)         $47,509  $4,055  8.54%  $36,066 $3,244  8.99%  $35,608  $3,331  9.35%  $34,131  $3,156    9.25%
  Securities (2)                26,399   1,739  6.59    31,926  2,046  6.41    11,947     781  6.54     9,250     652    7.05
  Equity securities              1,668     150  8.98       ---    ---  ---        ---     ---   ---       ---     ---     ---
  Mortgage-Backed Securities     8,726     603  6.90     7,930    567  7.15     4,460     275  6.17     3,549     186    5.24
  Other                          4,469     210  4.70     3,548    205  5.78     5,295     277  5.23     4,407     274    6.22
                                 -----     ---           -----    ---           -----     ---           -----     ---
    Total interest-earning
      assets                   $88,771   6,757  7.61%  $79,470  6,062  7.63%  $57,310   4,664  8.14%  $51,337   4,268    8.31%
                               =======   =====         =======  =====         =======   =====         =======   =====

Interest-Earning
Liabilities:
  Passbook savings             $20,412     589  2.88   $21,117    638  3.02   $21,559     690  3.20   $21,512     649    3.02
  Certificate accounts          24,793   1,339  5.40    20,565  1,103  5.36    20,317   1,091  5.36    18,843     983    5.22
  FHLB Advances                 20,154   1,173  5.82     5,673    343  6.05       ---     ---   ---       ---     ---     ---
                                ------   -----           -----    ---                                     ---     ---
    Total interest-bearing
      liabilities              $65,359   3,101  4.74   $47,355  2,084  4.40   $41,876   1,781  4.25   $40,355   1,632    4.05
                               =======   =====  ----   =======  =====  ----   =======   =====  ----   =======   =====    ----

Net interest income                     $3,656                 $3,978                  $2,883                  $2,636
                                        ======                 ======                  ======                  ======
Net interest rate spread                        2.87                   3.23                    3.89                      4.26
                                                ====                   ====                    ====                      ====
Net earning assets             $23,412                 $32,115                $15,434                 $10,982
                               =======                 =======                =======                 =======
Net yield on average
interest-  earning assets                       4.12%                  5.01%                   5.03%                     5.13%
                                                ====                   ====                    ====                      ====
Average interest-earning
assets to average                       135.82%                167.82%                136.86%                  127.21%  
interest-bearing liabilities            ======                 ======                 ======                   ======
<FN>

(1)  Calculated net of deferred loan fees, loan  discounts,  loan in process and
     loss reserves.
(2)  Calculated based on amortized cost.
</FN>
</TABLE>

                                                                              11
<PAGE>


         The  following  table  presents the weighted  average  yields earned on
loans,  securities and other  interest-earning  assets, and the weighted average
rates paid on savings  deposits and the  resultant  interest rate spreads at the
date indicated. Weighted average balances are based on monthly balances.
<TABLE>
<CAPTION>

                                                                                       At December 31,
                                                                                -------------------------
                                                                                 1998      1997     1996
                                                                                 ----      ----     ----
<S>                                                                              <C>       <C>      <C>  
Weighted average yield on:
   Loans receivable                                                              7.99%     8.49%    8.57%
   Mortgage-backed securities                                                    6.06      6.87     6.84
   Securities                                                                    6.90      7.01     6.05
   Other interest-earning assets                                                 4.73      5.55     6.53
      Combined weighted average yield on interest-earning assets                 7.33      7.24     7.41

Weighted average rate paid on:
   Passbook savings deposits                                                     2.50      3.01     3.01
   Certificate accounts                                                          5.32      5.50     5.31
    FHLB Advances                                                                5.48      6.05      ---
      Combined weighted average rate paid on interest-bearing liabilities        4.61      4.71     4.11

Spread                                                                           2.72      2.53     3.30
<FN>

(1) Excluding amortization of deferred loan fees.
</FN>
</TABLE>
                                                                              12


<PAGE>


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


                                                     Year Ended December 31,      Year Ended December 31,
                                                          1997 vs. 1998                1996 vs. 1997
                                                  ----------------------------  ---------------------------
                                                      Increase                      Increase     
                                                     (Decrease)                    (Decrease)    
                                                       Due to          Total         Due to         Total   
                                                  ----------------   Increase   -----------------  Increase 
                                                   Volume   Rate    (Decrease)    Volume    Rate  (Decrease)
                                                  ----------------  ----------  ----------------- ---------- 
                                                                     (Dollars in Thousands)
<S>                                             <C>     <C>        <C>          <C>     <C>       <C>  
Interest-earning assets:
   Loans receivable                              $  984    ($173)    $  811         $42     ($129)    ($87)
   Securities                                        55      (19)        36       1,281       (16)    1,265
   Mortgage-backed securities                      (363)      56       (307)         242         50      292
   Equity securities                                150        0        150           0          0        0
   Other                                             47      (42)         5        (99)         27     (72)
                                                 ------    -----     ------        ----         --     ----

      Total interest-earning assets                $873    ($178)    $  695      $1,466      ($68)   $1,398
                                                 ======    =====     ======      ======      =====   ======

Interest-bearing liabilities:
   Passbook savings deposits                       ($21)    ($28)      ($49)       ($14)      ($38)    ($52)
   Certificate accounts                             228        8        236          13        (1)       12
   FHLB Advances                                    843      (13)       830         343          0      343
                                                 ------    -----     ------         ---          -      ---

      Total interest-bearing liabilities         $1,050     ($33)     1,017        $342      ($39)      303
                                                 ======    =====     ------        ====      =====      ---

Net interest income                                        ($322)                          $1,095
                                                           =====                          ======


</TABLE>
                                                                              13
<PAGE>


Quantitative and Qualitative Disclosures About Market Risk

         In an attempt  to manage its  exposure  to changes in  interest  rates,
management  monitors the Company's  interest  rate risk.  The Board of Directors
meets at least quarterly to review the Company's interest rate risk position and
profitability.  The Board of  Directors  also reviews the  Company's  portfolio,
formulates  investment  strategies and oversees the timing and implementation of
transactions  to  assure  attainment  of the  Company's  objectives  in the most
effective  manner.  In  addition,  the Board  reviews on a  quarterly  basis the
Company's asset/liability  position,  including simulations of the effect on the
Company's capital of various interest rate scenarios.

         In managing its  asset/liability  mix, PS  Financial,  depending on the
relationship  between long- and short-term interest rates, market conditions and
consumer preference,  often places more emphasis on managing net interest margin
than on  better  matching  the  interest  rate  sensitivity  of its  assets  and
liabilities  in an effort to enhance net interest  income.  Management  believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.

         The  Company's  interest rate risk  increased  during the twelve months
ended December 31, 1998 due to the large increase in fixed rate loans, funded by
fixed rate time  deposits and FHLB  advances.  However,  management  has taken a
number of steps to limit to some  extent  its  interest  rate risk.  First,  the
Company focuses its fixed rate loan  originations on loans with maturities of 15
years or less.  At December 31, 1998,  $39.6  million or 89.7% of the  Company's
one- to four family  residential  loan  portfolio  consisted of fixed rate loans
having  original  terms to  maturity  of 15 years or less.  Second,  the Company
offers  balloon  loans  of 10  years  or  less in an  attempt  to  decrease  its
asset/liability  mismatch.  Third, the Company has maintained a  mortgage-backed
securities  portfolio with  adjustable-rates.  At December 31, 1998,  adjustable
rate  mortgage-backed  securities totaled $9.1 million which represented 9.0% of
interest-earning  assets.  Fourth,  the Company has  attempted  to reinvest  the
proceeds  of most of its  borrowings  into  assets  with  maturities  which  are
anticipated  to be similar to those of its  borrowings.  Finally,  a substantial
proportion of the Company's  liabilities  consists of passbook  savings accounts
which are believed by management to be somewhat less  sensitive to interest rate
changes than certificate accounts.

         Generally,  the  investment  policy of the  Company is to invest  funds
among various  categories of investments and maturities based upon the Company's
need for liquidity, to achieve the proper balance between its desire to minimize
risk and maximize  yield, to provide  collateral for borrowings,  and to fulfill
the Company's asset/liability management policies. Investments generally include
interest-bearing  deposits in other federally  insured  financial  institutions,
FHLB stock, U.S. Government securities and municipal securities.

         PS Financial's  cost of funds responds to changes in interest rates due
to the relatively short-term nature of its deposit portfolio.  Consequently, the

                                       14
<PAGE>

results  of  operations  are  heavily  influenced  by the  levels of  short-term
interest  rates.  PS  Financial  offers a range  of  maturities  on its  deposit
products at competitive rates and monitors the maturities on an ongoing basis.

         An approach used by  management  to quantify  interest rate risk is net
portfolio  value ("NPV")  analysis.  In essence,  this approach  calculates  the
difference  between the present value of  liabilities,  expected cash flows from
assets and cash flows from off balance sheet contracts. The following tables set
forth,  at December 31, 1997 and 1998,  an analysis of the Bank's  interest rate
risk as measured by the estimated  changes in NPV resulting  from  instantaneous
and sustained parallel shifts in the yield curve (+/-400 basis points,  measured
in 100 basis point increments).

                            December 31, 1998
----------------------------------------------------------------------
                                                   Estimated Increase 
 Change in Interest  Estimated    Ratio of NPV     (Decrease) in NPV 
        Rates           NPV            to        ---------------------
   (Basis Points)      Amount     Total Assets     Amount     Percent
------------------- ------------ --------------  ----------  ---------
        +400           $9,915           11%       ($9,837)       (50)%
        +300           12,327           13         (7,425)       (38)
        +200           14,828           15         (4,924)       (25)
        +100           17,313           17         (2,439)       (12)
         ---           19,752           19            ---        ---
        -100           22,419           21          2,667         14
        -200           25,427           23          5,675         29
        -300           28,833           25          9,082         32
        -400           32,488           27         12,737         64



                            December 31, 1997
----------------------------------------------------------------------
                                                   Estimated Increase 
 Change in Interest  Estimated    Ratio of NPV     (Decrease) in NPV 
        Rates           NPV            to        ---------------------
   (Basis Points)      Amount     Total Assets     Amount     Percent
------------------- ------------ --------------  ----------  ---------

       +400            $14,271          18%       ($8,611)       (38)%
       +300             16,443          21         (6,439)       (28)
       +200             18,792          24         (4,090)       (18)
       +100             21,087          27         (1,795)        (8)
        ---             22,882          29            ---        ---
       -100             24,658          31          1,776          8
       -200             26,318          34          3,436         15
       -300             28,216          36          5,334         23
       -400             30,508          39          7,626         33


         Certain  assumptions  utilized  in  assessing  interest  rate risk were
employed in preparing the preceding table.  These assumptions relate to interest
rates,  loan  prepayment  rates,  deposit decay rates,  and the market values of
certain assets under the various  interest rate  scenarios.  It was also assumed

                                       15
<PAGE>

that delinquency  rates will not change as a result of changes in interest rates
although there can be no assurance that this will be the case.  Even if interest
rates  change in the  designated  amounts,  there can be no  assurance  that the
Bank's assets and liabilities  would perform as set forth above. In addition,  a
change in U.S. Treasury rates in the designated amounts  accompanied by a change
in the shape of the  Treasury  yield curve would cause  significantly  different
changes to the NPV than indicated above.

Liquidity and Capital Resources

         The  Company's  primary  sources of funds are  deposits,  proceeds from
principal and interest payments on loans and mortgage-backed  securities.  While
maturities and scheduled  amortization  of loans and securities are  predictable
sources of funds,  deposit flows and mortgage prepayments are greatly influenced
by general  interest rates,  economic  conditions and  competition.  The Company
generally  manages the pricing of its  deposits to be  competitive  and increase
core deposit relationships.

         Federal  regulations  require  the Bank to maintain  minimum  levels of
liquid assets.  The required  percentage has varied from time to time based upon
economic  conditions  and savings flows and is currently 4% of net  withdrawable
savings deposits and borrowings  payable on demand or in one year or less during
the preceding  calendar month.  Liquid assets for purposes of this ratio include
cash, certain time deposits,  U.S.  Government,  government agency and corporate
securities and other obligations  generally having remaining  maturities of less
than five years.  The Bank has  historically  maintained its liquidity ratio for
regulatory purposes at levels in excess of those required. At December 31, 1998,
the Bank's liquidity ratio for regulatory purposes was 36.2%.

         The   Company's   cash   flows   are   comprised   of   three   primary
classifications:  cash flows from operating activities, investing activities and
financing  activities.  Cash flows  provided by operating  activities  were $1.8
million,  $1.9 million and $869,000 for the years ended December 31, 1998, 1997,
and 1996,  respectively.  Net cash from investing activities consisted primarily
of  disbursements  for loan  originations  and the purchase of  investments  and
mortgage-backed  securities,  offset by principal collections on loans, proceeds

                                       16
<PAGE>

from  maturation  and  sales  of  securities  and  paydowns  on  mortgage-backed
securities.  Net cash used in financing  activities  consisted  primarily of the
purchase of treasury  stock of $2.9 million and $3.2 million for the years ended
December 31, 1998 and 1997,  respectively,  proceeds from FHLB advances totaling
$10.0 million and $13.8 million for the years ended  December 31, 1998 and 1997,
as well as payment of the special  dividend  of $8.4  million for the year ended
December 31, 1998.  The net increase  (decrease) in deposits was $14.1  million,
($1.0) million and $1.2 million for the years ended December 31, 1998, 1997, and
1996, respectively.

         The Company's most liquid assets are cash and  short-term  investments.
The levels of these assets are dependent on the Company's operating,  financing,
lending and investing  activities during any given period. At December 31, 1998,
cash and  short-term  investments  totaled $4.2  million.  The Company has other
sources of liquidity if a need for additional funds arises, including securities
maturing  within  one year and the  repayment  of loans.  The  Company  may also
utilize the sale of  securities  available-for-sale  and Federal  Home Loan Bank
advances as a source of funds.

         At  December  31,  1998,  the Company had  outstanding  commitments  to
originate loans of $1.9 million,  all of which had fixed interest  rates.  These
loans are to be secured by  properties  located in its market area.  The Company
anticipates  that it will have  sufficient  funds  available to meet its current
loan  commitments.  Certificates of deposit which are scheduled to mature in one
year or less from December 31, 1998 totaled $26.8 million.  Management  believes
that a significant portion of such deposits will remain with the Company.

         Liquidity  management is both a daily and long-term  responsibility  of
management.  The Company  adjusts its  investments  in liquid  assets based upon
management's  assessment  of (i) expected  loan demand,  (ii)  expected  deposit
flows,  (iii) yields  available  on  interest-earning  deposits  and  investment
securities,  and (iv) the objectives of its asset/liability  management program.
Excess liquidity is invested  generally in  interest-earning  overnight deposits
and short-and  intermediate-term  U.S.  Government  and agency  obligations  and
mortgage-backed  securities of short duration. If the Bank requires funds beyond
its ability to generate them internally,  it has additional  borrowing  capacity
with the FHLB of Chicago.

         The Bank is subject to various regulatory capital  requirements imposed
by the OTS. At December 31, 1998, the Bank was in compliance with all applicable
capital  requirements on a fully phased-in basis. See Note 9 of the Notes to the
Consolidated Financial Statements.

         The Company's principal sources of funds are deposits, amortization and
prepayment  of loan  principal  and  mortgage-backed  securities,  maturities of
investment  securities  and  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  increase   core  deposit
relationships,  but has from time to time decided not to pay deposit  rates that
are as high as those of its competitors.

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.

                                       17
<PAGE>

Impact of New Accounting Standards

         Statement  of  Financial   Accounting  Standards  No.  130,  "Reporting
Comprehensive Income", was issued by the Financial Accounting Standards Board in
1997.  This  Statement  establishes  standards  for  reporting  and  display  of
comprehensive  income  and  its  components  in a full  set  of  general-purpose
financial  statements.  It does not address issues of recognition or measurement
for  comprehensive  income and is  components.  Statement  130 is effective  for
fiscal years  beginning  after  December 15, 1997.  Since the provisions of this
Statement are disclosure  oriented,  it will have no impact on the operations of
the Company.

         Comprehensive  income is now reported  for all  periods.  Comprehensive
income  includes  both  net  income  and  other  comprehensive   income.   Other
comprehensive  income  includes  the  change in  unrealized  gains and losses on
securities available for sale.

         In June 1997, the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting  Standards (SFAS) No. 131,  "Disclosure about
Segments of an Enterprise and Related  Information".  The statement  establishes
standards for the way that public business  enterprises report information about
operating segments and certain other information in annual financial  statements
and requires that those enterprises report selected  information about operating
segments in interim financial  reports issued to shareholders.  The statement is
effective for financial  statements  for periods  beginning  after  December 15,
1997.  The  Company  adopted  SFAS No.  131 on  January  1,  1998  and  required
disclosures  will be included  beginning  with the Company's 1998 Annual Report.
The Company operates as a single segment.

         In June 1998, the FASB issued SFAS No. 133,  "Accounting for Derivative
Instruments and Hedging  Activities".  SFAS No. 133  standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other  contracts.  Under  the  standard,  entities  are  required  to carry  all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e.  gains or losses) of a derivative
instrument  depends on whether it has been designated and qualifies as part of a
hedging  relationship  and,  if so, on the  reason  for  holding  it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposure to change in fair value, cash flows, or foreign currencies. If
the hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is  recognized in earnings in the period of change  together with the
offsetting  loss or gain on the  hedged  item  attributable  to the  risk  being
hedged. If the hedged exposure is a cash flow exposure, the effective portion of
the  gain  or loss on the  derivative  instrument  is  reported  initially  as a
component of other  comprehensive  income  (outside  earnings) and  subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amount  excluded  from  the  assessment  of hedge  effectiveness  as well as the
ineffective  portion of the gain or loss is reported  in  earnings  immediately.
Accounting for foreign  currency  hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is  recognized  in  earnings  in the  period  of  change.  This
Statement will have no effect on the Company.

                                       18
<PAGE>

Year 2000

         As the year 2000 approaches,  a significant  business issue has emerged
regarding how existing  application  software programs and operating systems can
accommodate the date value for the year 2000. Many existing software application
products,  including  software  application  products  used by the  Bank and its
suppliers and  customers,  were designed to  accommodate  only a two-digit  date
value, which represents the year. For example,  information relating to the year
1996 is stored in the system as "96".  As a result,  the year 1999  (i.e.  "99")
could be the  maximum  date  value that  these  systems  will be able to process
accurately.  In response to concerns about this issue,  regulatory agencies have
begun to monitor  holding  companies' and banks'  readiness for the year 2000 as
part of the regular  examination  process.  The Company presently  believes that
with  modification  to  existing  software,  conversion  to  new  software,  and
conversion  to a new third  party data  processor,  the year 2000 issue will not
pose  significant  operational  problems for the Company's  computer  systems or
business  operations.  Implementation of the Company's plan to test in-house and
out-sourced  software has been underway since the first quarter of 1998. Testing
of applications considered to be "mission critical" are scheduled for completion
by second  quarter of 1999.  Total  compliance  of all  systems is  expected  by
management  to be completed by the third quarter of 1999;  management  currently
estimates  that  such  compliance  will cost  $15,000.  The team for the plan is
responsible  for the  implementation  of the plan and  reports to the  Company's
Board of Directors  on a quarterly  basis until  December  1998 and on a monthly
basis thereafter until the plan is completed. However, if such modifications and
conversions are not made, or are not completed timely, the year 2000 issue could
have a material  adverse impact on the  operations of the Company.  In addition,
there can be no assurance  that  unforeseen  problems in the Company's  computer
systems,  or the systems of third parties on which the Company's computers rely,
will  not  have an  adverse  effect  on the  Company's  systems  or  operations.
Additionally,  failure  of the  Bank's  customers'  to  prepare  for  year  2000
compatibility  could  have a  significant  adverse  effect  on  such  customer's
operations and  profitability,  thus inhibiting their ability to repay loans and
adversely affecting the Bank's operations.  The Company does not have sufficient
information  accumulated  from  customers  of the Bank to enable the  Company to
assess the degree to which  customers'  operations are  susceptible to potential
problems relating to the year 2000 issue.

Safe Harbor Statement

         This report  contains  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.  The Company  intends such
forward-looking  statements  to be covered  by the safe  harbor  provisions  for
forward-looking  statements  contained in the Private  Securities  Reform Act of
1995,  and is  including  this  statement  for  purposes  of these  safe  harbor
provisions.  Forward-looking statements,  which are based on certain assumptions
and describe future plans,  strategies,  and  expectations  of the Company,  are
generally  identifiable  by use  of the  words  "believe",  "expect",  "intend",
"anticipate",  "estimate",  "project"  or  similar  expressions.  The  Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain.  Factors which could have a material adverse effect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions, the
legislative/regulatory  situation,  monetary  and  fiscal  policies  of the U.S.

                                       19

<PAGE>

Government,  including  policies of the U.S.  Treasury  and the Federal  Reserve
Board, the quality or composition of the loan or investment  portfolios,  demand
for loan products, deposit flows, competition,  demand for financial services in
the Company's  market area and accounting  principles,  policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such  statements.  Further
information  concerning  the  Company  and its  business,  including  additional
factors  that  could  materially  affect the  Company's  financial  results,  is
included in the Company's filings with the Securities and Exchange Commission.
         .


















                                       20

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS



Board of Directors
PS Financial, Inc.
Chicago, Illinois


We have audited the accompanying  consolidated statements of financial condition
of PS Financial,  Inc. and its  wholly-owned  subsidiary as of December 31, 1998
and  1997 and the  related  consolidated  statements  of  income,  stockholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1998. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of PS Financial,  Inc.
and its wholly-owned subsidiary at December 31, 1998 and 1997 and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.




                          Crowe, Chizek and Company LLP

Oak Brook, Illinois
January 29, 1999

                                       21

<PAGE>

<TABLE>
<CAPTION>


                               PS FINANCIAL, INC.
--------------------------------------------------------------------------------
          See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           December 31, 1998 and 1997
                 (In thousands, except share and per share data)
--------------------------------------------------------------------------------


                                                           1998          1997
                                                           ----          ----
<S>                                                    <C>           <C>      
ASSETS
Cash on hand and in banks                               $      448    $     441
Interest-bearing deposit accounts in other financial
  institutions                                               3,789        5,849
                                                        ----------    ---------
    Total cash and cash equivalents                          4,237        6,290
Interest-bearing term deposits in other financial
  institutions                                                 159          209
Securities available-for-sale                               27,596       33,459
Mortgage-backed securities available-for-sale               11,354        8,095
Loans receivable, net                                       56,822       37,167
Federal Home Loan Bank stock                                 1,319          700
Premises and equipment, net                                    426          458
Accrued interest receivable                                    803          801
Other assets                                                    68          743
                                                        ----------    ---------

    Total assets                                        $  102,784    $  87,922
                                                        ==========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
    Deposits                                            $   55,429    $  41,275
    Advances from borrowers for taxes and insurance            578          498
    Advances from the Federal Home Loan Bank                23,764       13,750
    Deferred income taxes                                      418          182
    Accrued interest payable and other liabilities           1,569        1,580
    Accrued dividends payable                                    -        7,528
                                                        ----------    ---------
        Total liabilities                                   81,758       64,813

Stockholders' equity
    Common stock $ 0.01 par value per share, 2,500,000
      shares authorized; 2,182,125 shares issued                22           22
    Additional paid-in capital                              21,638       21,602
    Unearned ESOP shares                                    (1,077)      (1,173)
    Unearned stock awards                                     (941)      (1,117)
    Retained earnings, substantially restricted              6,141        5,518
    Treasury stock, at cost, 338,737 shares in 1998 and
      108,417 shares in 1997                                (4,759)      (1,896)
    Accumulated other comprehensive income                       2          153
                                                        ----------    ---------
        Total stockholders' equity                          21,026       23,109
                                                        ----------    ---------

           Total liabilities and stockholders' equity   $  102,784    $  87,922
                                                        ==========    =========
</TABLE>

                                       22
<PAGE>
<TABLE>
<CAPTION>


                        CONSOLIDATED STATEMENTS OF INCOME
                  Years ended December 31, 1998, 1997, and 1996
                 (In thousands, except share and per share data)
--------------------------------------------------------------------------------

                                               1998       1997       1996
                                               ----       ----       ----
<S>                                          <C>       <C>        <C>      
Interest income
   Loans                                     $  4,055  $   3,244  $  3,331
   Securities                                   1,739      2,046       781
   Dividend income on equity investments          150          -         -
   Mortgage-backed securities                     603        568       275
   Other interest-earning assets                  210        204       277
                                             --------  ---------  --------
      Total interest income                     6,757      6,062     4,664

Interest expense
   Deposits                                     1,928      1,741     1,781
   Federal Home Loan Bank advances              1,173        343         -
                                             --------  ---------  --------
      Total interest expense                    3,101      2,084     1,781
                                             --------  ---------  --------

Net interest income                             3,656      3,978     2,883

Provision for loan losses                          80          -        50
                                             --------  ---------  --------


Net interest income after provision for
  loan losses                                   3,576      3,978     2,833

Noninterest income
   Gain (loss) on sale of securities               43          -       (38)
   Other operating income                          94         77        69
                                             --------  ---------  --------
      Total noninterest income                    137         77        31

Noninterest expense
   Compensation and benefits                      994      1,672       550
   Occupancy and equipment expense                123        125       113
   Data processing services                        60         54        47
   Federal deposit insurance premiums              26         27        90
   SAIF special assessment                          -          -       245
   Professional fees                               88         97        29
   Other operating expense                        198        212       159
                                             --------  ---------  --------
      Total noninterest expense                 1,489      2,187     1,233
                                             --------  ---------  --------


Income before income tax expense                2,224      1,868     1,631

Income tax expense                                724        947       629
                                             --------  ---------  --------


Net income                                   $  1,500  $     921  $  1,002
                                             ========  =========  ========

Basic earnings per share                     $     .83 $     .47  $     .06
                                             ========= =========  =========
Diluted earnings per share                   $     .82 $     .46  $     .06
                                             ========= =========  =========

</TABLE>
                                       23

<PAGE>
<TABLE>
<CAPTION>


                                                            PS FINANCIAL, INC.
------------------------------------------------------------------------------------------------------------------------------------
                                            CONSOLIDATED  STATEMENTS OF  STOCKHOLDERS'  EQUITY
                                               Years ended December 31, 1998, 1997, and 1996
                                              (In thousands, except share and per share data)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Accumulated
                                         Additional  Unearned  Unearned                        Other        Total
                                Common    Paid-in      ESOP     Stock   Retained  Treasury Comprehensive Stockholders' Comprehensive
                                 Stock    Capital     Shares   Awards   Earnings    Stock     Income       Equity          Income
                              --------  -----------  -------- -------- ---------- --------- ------------ ------------- -------------
                                  
<S>                              <C>     <C>         <C>       <C>      <C>        <C>       <C>         <C>          <C>
Balance at January 1, 1996       $  -     $     -     $    -    $    -   $ 11,667   $    -    $    57     $  11,724
                                  
Comprehensive income              
   Net income                       -           -          -         -      1,002        -          -         1,002     $  1,002
   Change in fair value of        
     securities, net of    
     reclassification and
     tax effects                    -           -          -         -          -        -        (80)          (80)         (80)
                                                                                                                        --------
      Total comprehensive                
        income                                                                                                          $    922
                                                                                                                        ========
Issuance of common stock, net      
  of conversion costs of $639      22      21,160     (1,746)        -         -         -          -        19,436
                                   
ESOP shares released                -          10         55         -         -         -          -            65
                                  ---     -------     ------      ----    ------     -----      -----       -------
                                      
                                      
Balance at December 31, 1996       22      21,170     (1,691)        -    12,669         -        (23)       32,147
                                  
Comprehensive income         
   Net income                       -           -          -         -       921         -          -           921     $    921
   Change in fair value           
     of securities, net of        
     reclassification and         
     tax effects                    -           -          -         -         -         -        176           176          176
                                                                                                                        --------
                             
      Total comprehensive
        income                                                                                                          $  1,097
                                                                                                                        ========

Purchase of treasury stock          -           -          -         -         -    (3,173)         -        (3,173)
                                  
ESOP shares released                -         487        518         -         -         -           -        1,005
                                  
</TABLE>
                                       24
                                  
<PAGE>                       

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                             See accompanying notes to consolidated financial statements.
------------------------------------------------------------------------------------------------------------------------------------
                                                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                    Years ended December 31,1998, 1997, and 1996
                                                  (In thousands, except share and per share data)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Accumulated
                                   Additional   Unearned   Unearned                           Other         Total
                            Common   Paid-in      ESOP       Stock     Retained  Treasury Comprehensive Stockholders' Comprehensive
                             Stock   Capital     Shares     Awards     Earnings    Stock     Income         Equity        Income
------------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>    <C>        <C>         <C>          <C>       <C>            <C>       <C>          <C>

Stock awards issued         $   -   $    (55)  $      -    $ (1,222)   $      -   $  1,277    $      -    $       -

Stock awards earned             -          -          -         105           -          -           -          105

Dividends declared
   ($4.28 per share)            -          -          -           -      (8,072)         -           -       (8,072)
                             ----   --------   --------    --------    --------   --------    --------    ---------

Balance at
   December 31, 1997           22     21,602     (1,173)     (1,117)      5,518     (1,896)        153       23,109

Comprehensive income
   Net income                   -          -          -           -       1,500          -           -        1,500      $  1,500
   Change in fair value
     of securities, net of
     reclassification and
     tax effects                -          -          -           -           -          -        (151)        (151)         (151)
                                                                                                                         --------

      Total comprehensive
        income                                                                                                           $  1,349
                                                                                                                         ========

Purchase of treasury stock      -          -          -           -           -     (2,863)          -        (2,863)

ESOP shares released            -         36         96           -           -          -           -           132

Stock awards earned             -          -          -         176           -          -           -           176

Dividends declared
   ($.49 per share)             -          -          -           -        (877)         -           -          (877)
                             ----   --------   --------    --------    --------   --------    --------     ---------

Balance at
   December 31, 1998         $ 22   $ 21,638   $ (1,077)   $   (941)   $  6,141   $ (4,759)   $      2     $  21,026
                             ====   ========   ========    ========    ========   ========    ========     =========

</TABLE>

<PAGE>
                                       25
<TABLE>
<CAPTION>


---------------------------------------------------------------------------------------------
                                                (Continued)
---------------------------------------------------------------------------------------------
                                   CONSOLIDATED  STATEMENTS  OF CASH FLOWS 
                                 Years ended December 31, 1998, 1997, and 1996
                                               (In thousands)
---------------------------------------------------------------------------------------------

                                                                1998      1997        1996
                                                                ----      ----        ----
<S>                                                         <C>       <C>        <C>     
Cash flows from operating activities
   Net income                                                 $  1,500  $     921  $  1,002
   Adjustments to reconcile net income to net cash
     from operating activities
      Depreciation                                                  47         46        33
      Amortization of discounts and premiums on securities           4         34        22
      Provision for loan losses                                     80          -        50
      Net (gain) loss on sale of securities 
           available-for-sale                                      (43)         -        38
      ESOP compensation expense                                    132      1,005        65
      Stock awards expense                                         176        105         -
      Change in
         Deferred loan origination fees                            (70)       (50)      (55)
         Accrued interest receivable and other assets              673       (294)     (352)
         Other liabilities and deferred income taxes              (741)       176        66
                                                              --------  ---------  --------
           Net cash from operating activities                    1,758      1,943       869

Cash flows from investing activities
   Proceeds from sales of securities available-for-sale          4,716     14,990         -
   Proceeds from sale of mortgage-backed securities
     available-for-sale                                          1,083      1,671     1,283
   Purchase of Federal Home Loan Bank stock                       (619)      (338)      (21)
   Proceeds from repayments of securities                        2,787      1,186       673
   Proceeds from maturities of securities                       19,380     11,650     6,500
   Purchase of securities available-for-sale                   (17,293)   (35,339)  (21,011)
   Purchase of mortgage-backed securities available-for-sale    (7,215)    (6,180)   (2,458)
   Net decrease in interest-bearing term deposits in other
     financial institutions                                         50         39         -
   Net increase in loans                                       (19,665)    (1,173)   (1,414)
   Capital expenditures, net                                       (15)       (43)      (27)
                                                              --------  ---------  --------
      Net cash from investing activities                       (16,791)   (13,537)  (16,475)

Cash flows from financing activities
   Net increase (decrease) in deposits                          14,154       (928)    1,156
   Net increase in advances from borrowers for
     taxes and insurance                                            80         21        18
   Advances from the Federal Home Loan Bank                     10,014     13,750         -
   Purchase of treasury stock                                   (2,863)    (3,173)        -
   Dividends paid                                               (8,405)      (544)
   Net proceeds from stock issuance                                  -          -    19,436
                                                              --------  ---------  --------
      Net cash from financing activities                        12,980      9,126    20,610
                                                              --------  ---------  --------

</TABLE>

                                       26
<PAGE>

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------
              See   accompanying   notes  to  consolidated   financial statements.
-----------------------------------------------------------------------------------------
                       CONSOLIDATED  STATEMENTS  OF CASH FLOWS 
                    Years ended December 31, 1998, 1997, and 1996
                                   (In thousands)
-----------------------------------------------------------------------------------------

                                                             1998      1997        1996
                                                             ----      ----        ----

<S>                                                        <C>       <C>        <C>     
Net change in cash and cash equivalents                    $ (2,053) $  (2,468) $  5,004

Cash and cash equivalents, beginning of year                  6,290      8,758     3,754
                                                           --------  ---------  --------

Cash and cash equivalents, end of year                     $  4,237  $   6,290  $  8,758
                                                           ========  =========  ========

Supplemental disclosures of cash flow information
   Cash paid during the year for
      Interest                                             $  2,966  $   2,004  $  1,789
      Income taxes                                            1,045        707       631

Supplemental schedule of noncash investing activities
   Amount due to broker for purchase of securities            1,558        499         -
   Dividends declared                                             -      7,528         -

</TABLE>
                                       27

<PAGE>


                               PS FINANCIAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997, and 1996
         (Table amounts in thousands, except share and per share data)
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:  The accompanying consolidated financial statements
include the accounts of PS  Financial,  Inc.  (the  Company);  its  wholly-owned
subsidiary,  Preferred  Savings  Bank (the  Bank);  and the Bank's  wholly-owned
subsidiary,  Preferred Service  Corporation,  which engages in limited insurance
activities.  All significant  intercompany  balances and transactions  have been
eliminated.

Business:  The only  business of the Company is the  ownership of the Bank.  The
Bank is a  federally-chartered  stock savings bank. Through its main office, the
Bank offers a variety of financial  services to customers in Chicago,  Illinois.
Financial  services  consist  primarily of consumer loans secured by residential
real estate and savings, certificate of deposit, and checking accounts.

Securities:  Securities are classified as held-to-maturity  when the Company has
the  positive  intent  and  ability  to  hold  those   securities  to  maturity.
Accordingly,  they are stated at cost, adjusted for amortization of premiums and
accretion   of   discounts.    All   other    securities   are   classified   as
available-for-sale  since the  Company  may decide to sell those  securities  in
response to changes in market interest rates, liquidity needs, changes in yields
or alternative investments,  and for other reasons. These securities are carried
at market value with  unrealized  gains and losses  charged or credited,  net of
income  taxes,  to a valuation  allowance  included as a separate  component  of
equity.  Realized gains and losses on disposition  are based on the net proceeds
and the adjusted  carrying  amounts of the securities  sold,  using the specific
identification method.

Loans Receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses,  and net of deferred  loan  origination  fees and
discounts.

Allowance  for Loan  Losses:  Because  some loans may not be repaid in full,  an
allowance for loan losses is maintained. Increases to the allowance are recorded
by a provision for loan losses  charged to expense.  Estimating  the risk of the
loss and the amount of loss on any loan is necessarily subjective.  Accordingly,
the allowance is maintained  by  management  at a level  considered  adequate to
cover  possible  losses  that  are  currently  anticipated  based  on past  loss
experience,  general economic  conditions,  information  about specific borrower
situations  including their financial  position and collateral values, and other
factors and estimates  which are subject to change over time.  While  management
may  periodically  allocate  portions of the allowance for specific problem loan
situations,  including  impaired loans discussed  below,  the whole allowance is
available for any charge-offs  that occur.  Loans are charged off in whole or in
part when management's estimate of the undiscounted cash flows from the loan are
less than the  recorded  investment  in the loan,  although  collection  efforts
continue and future recoveries may occur.

                                       28
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impaired  loans are measured  based on the present  value of expected cash flows
discounted at the loan's effective  interest rate or, as a practical  expedient,
at the loan's  observable  market price or the fair value of  collateral  if the
loan is collateral dependent. Loans considered to be impaired are reduced to the
present value of expected  future cash flows or to the fair value of collateral,
by allocating a portion of the allowance for loan losses to such loans. If these
allocations  cause the  allowance  for loan  losses to  require  increase,  such
increase is reported as a provision for loan losses.

Smaller  balance  homogeneous  loans are defined as  residential  first mortgage
loans secured by one-to-four-family residences,  residential construction loans,
and share loans and are evaluated  collectively for impairment.  Commercial real
estate loans are evaluated  individually for impairment.  Normal loan evaluation
procedures, as described in the second preceding paragraph, are used to identify
loans which must be evaluated for impairment.  In general,  loans  classified as
doubtful or loss are considered  impaired while loans  classified as substandard
are individually evaluated for impairment. Depending on the relative size of the
credit relationship,  late or insufficient  payments of 30 to 90 days will cause
management to reevaluate the credit under its normal loan evaluation procedures.
While the factors which identify a credit for  consideration  for measurement of
impairment, or nonaccrual, are similar, the measurement considerations differ. A
loan is impaired when the economic  value  estimated to be received is less than
the  value  implied  in the  original  credit  agreement.  A loan is  placed  in
nonaccrual  when  payments  are more  than 90 days past due  unless  the loan is
adequately collateralized and in the process of collection.

Interest  Income:  Interest on loans is accrued over the term of the loans based
upon the principal  outstanding.  Management reviews loans delinquent 90 days or
more to  determine  whether the interest  accrual  should be  discontinued.  The
carrying  values of impaired  loans are  periodically  adjusted to reflect  cash
payments,  revised  estimates of future cash flows, and increases in the present
value  of  expected  cash  flows  due to the  passage  of  time.  Cash  payments
representing  interest  income are  reported as such.  Other cash  payments  are
reported as reductions in carrying  value,  while  increases or decreases due to
changes  in  estimates  of future  payments  and due to the  passage of time are
reported as adjustments to the provision for loan losses.

Loan Fees and Related Costs:  Loan origination  fees, net of certain direct loan
origination  costs, are deferred and recognized over the contractual life of the
loan as a yield adjustment.

                                       29
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Premises  and  Equipment:  Premises  and  equipment  are  stated  at  cost  less
accumulated   depreciation.   Depreciation  is  computed  using  principally  an
accelerated  method over the estimated useful lives of the assets.  The cost and
accumulated  depreciation  of assets  retired  or sold are  eliminated  from the
financial statements, and the gain or loss on disposition is credited or charged
to operations when it is realized.

Income Taxes:  The Company and its subsidiaries  file a consolidated  income tax
return.  The  provision  for  income  taxes is based on an asset  and  liability
approach which requires the  recognition of deferred tax  liabilities and assets
for the expected future tax  consequences of temporary  differences  between the
carrying amounts and the tax bases of assets and liabilities.

Employee Stock Ownership Plan: The cost of shares issued to the ESOP but not yet
allocated to participants are presented in the  consolidated  balance sheet as a
reduction of stockholders' equity. Compensation expense is recorded based on the
market price of the shares as they are  committed to be released for  allocation
to participant  accounts.  The difference between the market price and the costs
of shares  committed  to be released is  recorded  as an  adjustment  to paid-in
capital.  Dividends  on  allocated  ESOP shares are  recorded as a reduction  of
retained  earnings;  dividends  on  unallocated  ESOP shares are  reflected as a
reduction of debt.

Shares are considered  outstanding  for earnings per share  calculations as they
are committed to be released; unallocated shares are not considered outstanding.

Earnings Per Common Share:  Amounts reported as basic earnings per share reflect
the  earnings  available  to common  stockholders  for the year  divided  by the
weighted average number of common shares  outstanding  during the year.  Diluted
earnings  per  share  shows the  dilutive  effect of  additional  common  shares
issuable under stock option and stock award plans.  In 1996,  earnings per share
was computed  using net earnings from November 26, 1996,  the date that the Bank
converted to stock ownership.

Use of Estimates in the Preparation of Financial Statements:  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  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
income and expenses  during the reporting  period.  Actual  results could differ
from those  estimates.  The  collectibility  of loans,  fair value of  financial
instruments, and status of contingencies are particularly subject to change.

                                       30
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Statement  of Cash  Flows:  For the  purpose  of this  statement,  cash and cash
equivalents are defined to include the Company's cash on hand,  demand balances,
and interest-bearing  deposits with other financial institutions and investments
in certificates of deposit with maturities of less than three months.

Comprehensive  Income:  Comprehensive  income  consists  of net income and other
comprehensive  income.  Other comprehensive income includes unrealized gains and
losses on securities  available-for-sale  which are also  recognized as separate
components  of  equity.   The  accounting   standard  that  requires   reporting
comprehensive  income first applies for 1998, with prior information restated to
be comparable.

Fair Value of Financial  Instruments:  Fair values of financial  instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate footnote. Fair value estimates involve uncertainties and
matters  of  significant   judgment  regarding  interest  rates,   credit  risk,
prepayments,  and other factors,  especially in the absence of broad markets for
particular  items.   Changes  in  assumptions  or  in  market  conditions  could
significantly affect the estimates.


NOTE 2 - SECURITIES

Securities are summarized as follows:
<TABLE>
<CAPTION>
                                                                  December 31, 1998
                                                      -----------------------------------------
                                                                   Gross     Gross
                                                      Amortized Unrealized Unrealized    Fair
                                                        Cost       Gains     Losses      Value
                                                      --------- ---------- ----------   -------
<S>                                                  <C>       <C>         <C>        <C>     
  Securities available-for-sale
    U.S. Treasury securities and obligations of U.S.
        government agencies                           $ 14,840  $    120    $    (9)   $ 14,951
      Municipal securities                               9,377        81        (91)      9,367
      Equity securities                                  3,407         7       (136)      3,278
                                                      --------  --------    -------    --------
                                                        27,624       208       (236)     27,596
                                                                                      
      Mortgage-backed securities available-for-sale                                   
         Federal Home Loan Mortgage Corporation          3,513        31          -       3,544
         Federal National Mortgage Association           4,756        12        (11)      4,757
         Government National Mortgage Association        3,054         8         (9)      3,053
                                                      --------  --------    -------    --------
                                                        11,323        51        (20)     11,354
                                                      --------  --------    -------    --------
                                                                                      
                                                      $ 38,947  $    259    $  (256)   $ 38,950
                                                      ========  ========    =======    ========
</TABLE>

                                       31
<PAGE>


NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>


                                                                 December 31, 1997
                                                     ---------------------------------------
                                                                  Gross     Gross
                                                     Amortized Unrealized Unrealized   Fair
                                                        Cost      Gains    Losses      Value
                                                     --------- ---------- ---------- -------
<S>                                                  <C>       <C>       <C>       <C>     
  Securities available-for-sale
    U.S. Treasury securities and obligations of U.S.
        government agencies                           $ 33,329  $    143  $   (13)  $ 33,459
                                                      --------  --------  -------   --------

   Mortgage-backed securities available-for-sale
      Federal Home Loan Mortgage Corporation             3,781        44        -      3,825
      Federal National Mortgage Association              3,640        64        -      3,704
      Government National Mortgage Association             557         9        -        566
                                                      --------  --------  -------   --------
                                                         7,978       117        -      8,095
                                                      --------  --------  -------   --------

                                                      $ 41,307  $    260  $   (13)  $ 41,554
                                                      ========  ========  =======   ========
</TABLE>


The Bank holds  $500,000 of U.S.  government  agency bonds which are  structured
notes issued by the Federal Home Loan Bank at December 31, 1998 and 1997.

Sales of securities are summarized as follows:

                                       For the Year Ended December 31,
                                   ---------------------------------------
                                        1998        1997         1996
                                   -----------  ----------  --------------

    Proceeds from sales             $   5,799    $  16,661   $   1,283
    Gross realized gains                   43           14           -
    Gross realized losses                   -          (14)        (38)

Contractual  maturities  of securities  available-for-sale  at December 31, 1998
were  as  follows.  Securities  not due at a  single  maturity  date,  primarily
mortgage-backed and equity securities, are shown separately.

                                                       December 31, 1998
                                                   ------------------------
                                                     Amortized       Fair
                                                       Cost          Value
                                                   ------------  ----------
    Securities available-for-sale
        Due after five years through ten years       $  16,997   $  16,689
        Due after ten years                              7,220       7,629
        Equity securities                                3,407       3,278
        Mortgage-backed securities                      11,323      11,354
                                                     ---------   ---------

                                                     $  38,947   $  38,950
                                                     =========   =========

                                       32
<PAGE>


NOTE 3 - LOANS RECEIVABLE

Loans receivable consist of the following at:

                                                             December 31,
                                                       ------------------------
                                                          1998         1997
                                                       ----------  ------------
    First mortgage loans
        Principal balances
           Secured by one-to-four-family residences     $  44,297   $  29,129
           Secured by other properties                      8,006       5,636
           Secured by commercial real estate                5,135       2,953
           Construction loans                                   -          67
                                                        ---------   ---------
                                                           57,438      37,785

        Less net deferred loan origination fees              (373)       (443)
                                                        ---------   ---------
           First mortgage loans, net                       57,065      37,342

    Share loans                                                15          11

    Less allowance for loan losses                           (258)       (186)
                                                        ---------   ---------

                                                        $  56,822   $  37,167
                                                        =========   =========

The  principal  balance of loans  greater than 90 days  delinquent on nonaccrual
status at December 31, 1998 and 1997 was  approximately  $777,000 and  $905,000,
respectively.  The  interest  income  that  would have been  recorded  under the
original  terms of such loans  approximated  $70,000  and  $40,000 for the years
ended December 31, 1998 and 1997, respectively.

The Bank did not have any impaired  loans for the years ended  December 31, 1998
and 1997.


NOTE 4 - ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses is summarized as follows:

                                                 For the Year Ended
                                                   December 31,
                                        -----------------------------------
                                            1998        1997         1996
                                        -----------  -----------  ---------

    Balance, beginning of year           $     186    $     186   $     136
    Provision for loan losses                   80            -          50
    Charge-offs                                (19)           -           -
    Recoveries                                  11            -           -
                                         ---------    ---------   ---------

        Balance, end of year             $     258    $     186   $     186
                                         =========    =========   =========

                                       33

<PAGE>


NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment consist of the following at:

                                                    December 31,
                                              ------------------------
                                                 1998         1997
                                              ----------  ------------
    Land                                       $      95   $      95
    Building and improvements                        530         520
    Furniture and equipment                          319         330
                                               ---------   ---------
        Total cost                                   944         945
    Accumulated depreciation                         518         487
                                               ---------   ---------

                                               $     426   $     458
                                               =========   =========


NOTE 6 - DEPOSITS

The aggregate amount of short-term jumbo  certificates of deposit with a minimum
denomination of $100,000 was  approximately  $3,261,000 at December 31, 1998 and
$1,327,000 at December 31, 1997.

At December 31, 1998,  scheduled  maturities of  certificates  of deposit are as
follows:

                      1999                                     $  26,808
                      2000                                         4,877
                      2001                                         1,900
                      2002                                           201
                      2003 and thereafter                            433
                                                               ---------

                                                               $  34,219

                                       34
<PAGE>


NOTE 7 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank of Chicago were as follows:

                                                               December 31,
                                                        ------------------------
          Description                                       1998         1997
 -------------------------------------------------      -----------  -----------

    Structured repayment; matures May 1998;
      6.19% interest rate                                 $       -   $   3,000

    Structured repayment; matures July 1999;
      6.04% interest rate                                     1,950       2,750

    Amortizing; matures July 2005;
      6.40% interest rate                                     2,261           -

    Amortizing; matures July 2005;
      5.76% interest rate                                     4,618           -

    Amortizing; matures August 2005;
      5.81% interest rate                                       935           -

    Fixed term;  matures  November 1999 through  
     December  2003;  range of rates 4.78% to 6.04%;
      average rate 5.13%                                     14,000           -

    Fixed term;  matures August 1998 through  
      December  1998;  range of interest rates 5.98%
      to 6.03%; average rate 6.06%                                -       8,000
                                                          ---------   ---------

                                                          $  23,764   $  13,750
                                                          =========   =========

The Company  maintains a collateral  pledge agreement  covering secured advances
whereby the  Company has agreed to at all times keep on hand,  free of all other
pledges,  liens,  and  encumbrances,  whole  first  mortgage  loans on  improved
residential  property not more than 90-days delinquent  aggregating no less than
167% of the  outstanding  secured  advances  from the Federal  Home Loan Bank of
Chicago.


                                       35
<PAGE>


NOTE 8 - EARNINGS PER SHARE

A  reconciliation  of the  numerators and  denominators  for earnings per common
share  computations  for the years ended  December 31, 1998,  1997,  and 1996 is
presented  below.  Earnings  per share for the year ended  December  31, 1996 is
based on net income since the date of conversion (November 26, 1996).
<TABLE>
<CAPTION>

                                                                 Year Ended December 31,
                                                         ------------------------------------
                                                            1998         1997         1996
                                                         ----------   ----------   ----------
<S>                                                     <C>          <C>          <C>       
Basic Earnings Per Share
   Net income ........................................   $    1,500   $      921   $    1,002
   Less net income of Bank prior to conversion .......          ---          ---          881
                                                         ----------   ----------   ----------
      Net income available to common stockholders ....   $    1,500   $      921   $      121
                                                         ==========   ==========   ==========
   Weighted average common shares outstanding ........    1,798,464    1,955,356    2,010,304
                                                         ==========   ==========   ==========
      Basic Earnings Per Share .......................   $      .83   $      .47   $      .06
                                                         ==========   ==========   ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                         ------------------------------------
                                                            1998         1997         1996
                                                         ----------   ----------   ----------
<S>                                                     <C>          <C>          <C>   
Earnings Per Share Assuming Dilution
    Net income available to common stockholders          $    1,500   $      921  $      121
                                                         ==========   ==========  ==========

   Weighted average common shares outstanding             1,798,464    1,955,356   2,010,304
   Add dilutive effect of assumed exercises:
      Incentive stock options                                21,647       25,684         ---
      Stock awards                                            1,125        1,994         ---
                                                         ----------   ----------  ----------
   Weighted average common and dilutive
     potential common shares outstanding                  1,821,236    1,983,034   2,010,304
                                                         ==========   ==========  ==========

      Diluted Earnings Per Share                         $      .82   $      .46  $      .06
                                                         ==========   ==========  ==========
</TABLE>


NOTE 9 - REGULATORY CAPITAL

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

                                       36
<PAGE>


NOTE 9 - REGULATORY CAPITAL (Continued)

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

At year-end, actual capital levels of the Bank and minimum required levels were:
<TABLE>
<CAPTION>

                                                                                       Minimum Required
                                                                                          to Be Well
                                                                  Minimum Required     Capitalized Under
                                                                     for Capital       Prompt Corrective
                                                    Actual        Adequacy Purposes    Action Regulations
                                                ---------------- ------------------- --------------------
1998                                            Amount    Ratio   Amount    Ratio      Amount    Ratio
----                                            ------    -----   ------    -----      ------    -----
<S>                                             <C>        <C>    <C>        <C>      <C>        <C>  
Total capital (to risk-weighted assets)         $15,437    31.4%  $3,930     8.0%     $ 4,913    10.0%
Tier 1 (core) capital (to risk-weighted assets)  15,179    30.9    1,965     4.0        2,948     6.0
Tier 1 (core) capital (to adjusted total assets) 15,179    15.4    3,945     4.0        4,930     5.0
Tangible capital (to adjusted total assets)      15,179    15.4    1,479     1.5          N/A     N/A

1997
----
Total capital (to risk-weighted assets)         $20,754    65.4%  $2,538     8.0%     $ 3,172    10.0%
Tier 1 (core) capital (to risk-weighted assets)  20,568    64.8    1,269     4.0        1,903     6.0
Tier 1 (core) capital (to adjusted total assets) 20,568    25.8    3,180     4.0        3,975     5.0
Tangible capital (to adjusted total assets)      20,568    25.8    1,193     1.5          N/A     N/A

</TABLE>

As of December 31, 1998, the most recent  notification from the Office of Thrift
Supervision  categorized  the  Bank as well  capitalized  under  the  regulatory
framework for prompt corrective action.  There are no conditions or events since
that notification that management believes have changed the Bank's category.

On May 21, 1996, the Board of Directors of the Bank adopted a Plan of Conversion
to convert from a federal  mutual  savings bank to a federal  stock savings bank
with the concurrent  formation of a holding  company.  On November 26, 1996, the
Company  sold  2,182,125  shares of common  stock at $10 per share and  received
proceeds  of   $19,436,249   net  of   conversion   expenses  and  ESOP  shares.
Approximately  50% of the gross proceeds were used by the Company to acquire all
of the capital stock of the Bank.

                                       37
<PAGE>


NOTE 9 - REGULATORY CAPITAL (Continued)

At the time of  conversion,  the Bank  established a  liquidation  account in an
amount  equal to its total net worth as of the  latest  statement  of  financial
condition  appearing  in the final  prospectus.  The balance as of that date was
$12,332,000.  The  liquidation  account  will be  maintained  for the benefit of
eligible  depositors  who continue to maintain  their accounts at the Bank after
the conversion.  The liquidation  account will be reduced annually to the extent
that eligible  depositors  have reduced their  qualifying  deposits.  Subsequent
increases  will  not  restore  an  eligible  account  holder's  interest  in the
liquidation  account.  In the event of a  complete  liquidation,  each  eligible
depositor  will be  entitled  to  receive a  distribution  from the  liquidation
account in an amount  proportionate to the current adjusted  qualifying balances
for accounts then held.  The  liquidation  account  balance is not available for
payment of dividends.


NOTE 10 - INCOME TAXES

The provision for income taxes consists of the following:

                                                 For the Year Ended
                                                   December 31,
                                         ------------------------------------
                                             1998        1997         1996
                                         -----------  -----------  ----------
    Current
        Federal                           $     450    $     940   $     536
        State                                    (5)          43          61
                                          ---------    ---------   ---------
                                                445          983         597
    Deferred                                    279         (164)         34
    Change in valuation allowance                 -          128          (2)
                                          ---------    ---------   ---------

        Income tax expenses               $     724    $     947   $     629
                                          =========    =========   =========

The net deferred tax liability included in other liabilities in the accompanying
consolidated statements of financial condition consists of the following at:

                                                         December 31,
                                                ----------------------------
                                                     1998          1997
                                                ------------  --------------
    Gross deferred tax liabilities
        Deferred loan fees                         $    (114)    $   (27)
        Accrual to cash                                 (153)       (227)
        Accumulated depreciation                         (57)        (58)
        FHLB stock dividend                              (14)        (14)
        ESOP expense                                     (42)          -
        Other                                            (40)          -
        Net unrealized gain on debt 
           securities available-for-sale                 (51)        (94)
                                                   ---------      ------
                                                        (471)       (420)

                                       38
<PAGE>


NOTE 10 - INCOME TAXES (Continued)

                                                             December 31,
                                                     ------------------------
                                                         1998          1997
                                                     -----------  -----------
    Gross deferred tax assets
        Loan loss reserve                              $      94   $      65
        Capital loss carryforward                             99         101
        Prepayment on ESOP                                     -         261
        Stock awards                                          39          40
        Unrealized net loss on equity 
              securities available-for-sale                   50           -
                                                       ---------   ---------
                                                             282         467
        Valuation allowance                                 (229)       (229)
                                                       ---------   ---------

           Net deferred tax liability                  $    (418)  $    (182)
                                                       =========   =========

The valuation  allowance relates to capital loss  carryforwards,  unrealized net
losses on equity securities, and other items that may not be recoverable.

The income tax  provision  differs from the amounts  determined  by applying the
statutory U.S. federal income tax rate as a result of the following items:

                                                              Year Ended
                                                           December 31, 1998
                                                         ---------------------
                                                           Amount    Percent
                                                         ---------- ----------
 Income tax computed at the statutory rate                $     756     34.0%
 Tax exempt income, net of disallowed interest expense          (30)    (1.3)
 Other                                                          (26)    (1.2)
                                                          ---------  -------
     Total federal income tax                                   700     31.5
 State income tax, net of federal tax benefit                    24      1.1
                                                          ---------  -------

                                                          $     724     32.6%
                                                          =========  =======

                                       39
<PAGE>


NOTE 10 - INCOME TAXES (Continued)

                                               Year Ended December 31,
                                   ---------------------------------------------
                                            1997                    1996
                                   ---------------------    --------------------
                                     Amount      Percent     Amount      Percent
                                   ----------  ---------    ----------  --------
Income tax computed at the
  statutory rate                    $     635      34.0%    $     555      34.0%
Deferred tax valuation allowance          128       6.9            (2)     (0.1)
ESOP                                      111       5.9           ---       ---
Other                                      45       2.4            36       2.2
                                    ---------   -------     ---------   -------
    Total federal income tax              919      49.2           589      36.1
State income tax, net of federal
  tax benefit                              28       1.5            40       2.5
                                    ---------   -------     ---------   -------

                                    $     947      50.7%    $     629      38.6%
                                    =========   =======     =========   =======

Under the  Internal  Revenue  Code,  the Bank may,  for tax  purposes,  deduct a
provision for bad debts in excess of such  provisions  recorded in the financial
statements.  Retained  earnings at  December  31,  1998  includes  approximately
$1,514,000,  consisting  of bad debt  deductions  accumulated  prior to 1988, on
which no provision for federal income taxes has been made. The related amount of
unrecognized deferred tax liability was approximately $587,000.


NOTE 11 - STOCK-BASED COMPENSATION PLANS

As part of the conversion transaction, the Company established an employee stock
ownership plan (ESOP) for the benefit of substantially  all employees.  The ESOP
borrowed  $1,745,700  from the Company  and used those funds to acquire  174,570
shares of the Company's stock at $10 per share.

Shares issued to the ESOP are allocated to ESOP participants  based on principal
and interest repayments made by the ESOP on the loan from the Company.  The loan
is secured by shares  purchased with the loan proceeds and will be repaid by the
ESOP with funds from the Company's  discretionary  contributions to the ESOP and
earnings  on ESOP  assets.  Principal  payments  are  scheduled  to occur over a
forty-year period.  However, in the event the Company's contributions exceed the
minimum debt service requirements, additional principal payments will be made.

                                       40
<PAGE>


NOTE 11 - STOCK-BASED COMPENSATION PLANS (Continued)

During 1997,  51,799 shares of stock,  including  50,941 shares resulting from a
special  dividend,  with a fair value of $19.39 per share were  committed  to be
released,  resulting in ESOP  compensation  expense of $1,004,607.  During 1998,
9,602 shares of stock with a fair value of $13.75 per share were committed to be
released, resulting in ESOP compensation expense of $132,070. Shares held by the
ESOP at December 31, 1998 and 1997 are as follows:

                                                    1998          1997
                                                    ----          ----

    Allocated shares                                 66,899       57,297
    Unallocated shares                              107,671      117,273
                                                 ----------    ---------

        Total ESOP shares                           174,570      174,570
                                                 ==========    =========

    Fair value of unallocated shares             $    1,077    $   2,258
                                                 ==========    =========

The Company has a stock option plan under the terms of which  470,000  shares of
the  Company's  common stock were  reserved  for  issuance.  The options  become
exercisable on a cumulative basis in equal  installments over a five-year period
from the date of grant. The options expire ten years from the date of grant.

A summary of the status of the  Company's  stock option plan and changes  during
the year are presented below:
<TABLE>
<CAPTION>

                                                        1998                     1997
                                           -------------------------  --------------------------
                                                           Weighted-                  Weighted-
                                                            Average                    Average
                                                           Exercise                   Exercise
                                              Shares         Price        Shares        Price
                                           ------------   ----------  ------------  ------------
<S>                                         <C>         <C>                        <C>    
   Outstanding at beginning of year            173,750     $ 11.02              -     $     -
   Granted                                           -                    181,750       11.02
   Exercised                                         -                          -
   Forfeited                                    (6,400)                    (8,000)
                                            ----------                 ----------
      Outstanding at end of year               167,350                    173,750
                                            ==========                 ==========
   Options exercisable at end of year           34,750                          -

   Weighted-average fair value of
     options granted during year                     -                 $     4.76

</TABLE>

                                       41
<PAGE>


NOTE 11 - STOCK-BASED COMPENSATION PLANS (Continued)

All of the outstanding options at December 31, 1998 relate to options granted in
1997 at an exercise  price of $14. In January  1998,  the Company paid a special
dividend which resulted in a change in equity structure.  This event allowed the
Company to modify the stock option  agreements  to adjust the exercise  price to
$11 which was an  adjustment  in direct  proportion  to the decrease in exercise
price as compared to market value as a result of the change in equity structure.
The 1997 amounts have been  restated to reflect this  modification.  The options
have a remaining  life of 8.5 years before  expiration and are not fully vested.
The  exercise  price  equaled  the  market  value on the date the  options  were
granted.

The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock option plan. Accordingly,  no compensation cost has been recognized at
the date of grant. Had compensation cost been determined based on the fair value
at the grant dates in 1997 for awards under the plan  consistent with the method
of SFAS No. 123,  "Accounting for Stock-Based  Compensation,"  the Company's net
income and earnings  per share would have been reduced to the pro forma  amounts
in the table below.  For purposes of pro forma  disclosure,  the estimated  fair
value of the options is amortized to expense over the options' vesting period.

                                                        1998        1997
                                                    ------------ -----------
        Net income as reported                      $   1,500    $    921
        Pro forma net income                            1,394         851
        Earnings per share as reported
           Basic                                           .83        .47
           Diluted                                         .82        .46
        Pro forma earnings per share
           Basic                                           .78        .44
           Diluted                                         .77        .43

The fair value of options  granted  in 1997 was  estimated  at the date of grant
using the  Black-Scholes  option pricing model using the following  assumptions:
expected  volatility factor of the expected market price of the Company's common
stock of 15.75%,  risk-free  interest rate of 6.74%,  expected  option term of 8
years, and a dividend yield of 0%.

The  Black-Scholes  option  pricing  valuation  model was  developed  for use in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because changes in the subjective input  assumptions can materially
affect the fair value estimate,  in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.

                                       42
<PAGE>


NOTE 11 - STOCK-BASED COMPENSATION PLANS (Continued)

In connection  with the  conversion to stock  ownership,  the Company  adopted a
Management   Recognition   and  Retention  Plan  (MRP).  In  1997,  the  Company
contributed  $1.3 million  allowing the MRP to acquire  87,285  shares of common
stock of the Company, at an average cost of $14.00 per share, with 64,006 shares
awarded to  directors  and key  employees.  These  shares  vest over a five-year
period.  The unamortized cost of shares not yet earned (vested) is reported as a
reduction of stockholders' equity. MRP compensation expense totaled $175,951 and
$104,543 for the years ended December 31, 1998 and 1997, respectively.



NOTE 12 - FINANCIAL INSTRUMENTS AND COMMITMENTS

The Bank is party to financial  instruments with  off-balance-sheet  risk in the
normal course of business to meet the financing  needs of its  customers.  These
financial  instruments include commitments to fund loans and previously approved
unused  lines of credit.  The  Bank's  exposure  to credit  loss in the event of
nonperformance  by the parties to these financial  instruments is represented by
the contractual amount of the instruments.  The Bank uses the same credit policy
for commitments as it uses for on-balance-sheet  items. At December 31, 1998 and
1997,  these  financial  instruments  consist of  commitments  to extend  credit
totaling  $1,949,000  and  $564,000,  respectively.  Fixed  rate  mortgage  loan
commitments  at  December  31, 1998 have rates  ranging  from 7.125% to 9.5% and
terms up to 30 days.

Since many  commitments  expire  without  being used,  the amount above does not
necessarily represent a future cash commitment.  Collateral may be obtained upon
exercise of a  commitment.  The amount of collateral is determined by management
and may include residential real estate.

Interest-bearing  deposit accounts in other financial  institutions  potentially
subject the Bank to  concentrations  of credit risk.  At December 31, 1998,  the
Bank had a deposit  account  at the  Federal  Home Loan Bank of  Chicago  with a
balance totaling approximately $3,272,000. At December 31, 1997, the balance was
approximately $5,849,000.

Other primary  financial  instruments  where  concentrations  of credit risk may
exist are securities  and loans.  Securities are discussed in Note 2. The Bank's
principal  loan  customers are located in Chicago and the  southwest  portion of
Cook  County  including  Cicero and  Berwyn.  Most loans are secured by specific
collateral, including residential and commercial real estate.

                                       43
<PAGE>


NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The   approximate   carrying  amount  and  estimated  fair  value  of  financial
instruments is as follows:

<TABLE>
<CAPTION>


                                                 December 31, 1998      December 31, 1997
                                              ---------------------  ----------------------
                                               Carrying      Fair     Carrying      Fair
                                                 Value       Value      Value       Value
                                              ---------- ----------  ---------- -----------
<S>                                          <C>         <C>         <C>        <C>      
   Financial assets
      Cash on hand and in banks               $    448    $    448    $    441   $     441
      Interest-bearing deposits in other
        financial institutions                   3,789       3,789       5,849       5,849
      Interest-bearing term deposits in other
        financial institutions                     159         159         209         209
      Securities available-for-sale             38,950      38,950      41,554      41,554
      Loans receivable, net                     56,822      57,368      37,167      37,756
      Federal Home Loan Bank stock               1,319       1,319         700         700
      Accrued interest receivable                  803         803         801         801

   Financial liabilities
      Non-interest-bearing deposits               (147)       (147)        (29)        (29)
      Money market and passbook savings        (21,063)    (21,063)    (20,369)    (20,369)
      Certificates of deposits                 (34,219)    (34,434)    (20,877)    (20,892)
      Advances from the Federal Home Loan Bank (23,764)    (23,798)    (13,750)    (13,741)
      Accrued interest payable                    (278)       (278)       (143)       (143)
</TABLE>

For purposes of the above,  the following  assumptions  were used. The estimated
fair value for cash,  interest-bearing  deposits  with  financial  institutions,
Federal  Home Loan Bank stock,  accrued  interest  receivable,  money market and
savings  deposits,  and accrued  interest  payable are considered to approximate
their   carrying    values.    The   estimated   fair   value   for   securities
available-for-sale   is  based  on  quoted  market  values  for  the  individual
securities or for equivalent  securities.  The estimated fair value for loans is
based on  estimates  of the rate the Bank  would  charge  for  similar  loans at
December 31, 1998 and 1997, applied for the time period until estimated payment.
The estimated fair values of certificates of deposit and FHLB advances are based
on estimates of the rates the Bank would pay on such  financial  instruments  at
December  31, 1998 and 1997,  applied for the time period until  maturity.  Loan
commitments are not included in the table above as their estimated fair value is
immaterial.

Other  assets and  liabilities  of the Bank that are not  defined  as  financial
instruments,  such as  property  and  equipment,  are not  included in the above
disclosures.

                                       44
<PAGE>


NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
  (Continued)

While  the  above  estimates  are  based on  management's  judgment  of the most
appropriate  factors,  there is no assurance that were the Bank to have disposed
of these items on December  31, 1998 and 1997,  the fair values  would have been
achieved,  because the market value may differ  depending on the  circumstances.
The estimated  fair values at December 31, 1998 and 1997 should not  necessarily
be considered to apply at subsequent dates.


NOTE 14 - OTHER COMPREHENSIVE INCOME

Other comprehensive income components and related taxes were as follows.

                                                   1998      1997      1996
                                                   ----      ----      ----
    Unrealized holding gains (losses) on
      securities available-for-sale               $ (287)   $  284   $  (91)
    Less reclassification adjustments for gains
      (losses) recorded in income                     43         -      (38)
                                                  ------    ------   ------
    Net unrealized gains and (losses)               (244)      284     (129)
    Tax effect                                        93      (108)      49
                                                  ------    ------   ------

Other comprehensive income (loss)                 $ (151)   $  176   $  (80)
                                                  ======    ======   ======

                                       45
<PAGE>


NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS

Presented below are the condensed statements of financial condition, income, and
cash flows for PS Financial, Inc.

                                CONDENSED STATEMENTS OF FINANCIAL CONDITION
                                         December 31, 1998 and 1997

                                                         1998         1997
                                                     ------------ -----------
ASSETS
Cash and cash equivalents                              $   1,331   $   4,194
Securities available-for-sale                              3,278       4,606
ESOP loan                                                    973       1,693
Investment in bank subsidiary                             15,260      20,713
Accrued interest receivable and other assets                 184         121
                                                       ---------   ---------

                                                       $  21,026   $  31,327
                                                       =========   =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities                 $       -   $   8,218
Stockholders' equity
    Common stock                                              22          22
    Additional paid-in capital                            21,638      21,602
    Unearned ESOP shares                                  (1,077)     (1,173)
    Unearned stock awards                                   (941)     (1,117)
    Treasury stock                                        (4,759)     (1,896)
    Retained earnings                                      6,141       5,518
    Accumulated other comprehensive income                     2         153
                                                       ---------   ---------

                                                       $  21,026   $  31,327
                                                       =========   =========

                                       46
<PAGE>


NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>

                                       CONDENSED STATEMENTS OF INCOME
                             For the years ended December 31, 1998 and 1997 and
                           for the period November 26, 1996 to December 31, 1996

                                                           1998        1997          1996
                                                       ----------- ------------- ---------
<S>                                                    <C>          <C>         <C>      
Income
    Securities                                          $     263    $     423   $      28
    ESOP loan                                                  80          117          12
    Interest-bearing deposits with other
      financial institutions                                    -            -          16
    Dividend income from subsidiary                         7,120        3,951           -
    Gain on sale of securities                                 33            -           -
                                                        ---------    ---------   ---------
        Total income                                        7,496        4,491          56

Other expenses                                                199          155          10
                                                        ---------    ---------   ---------


Income before income taxes and equity (excess) in
  undistributed earnings of bank subsidiary                 7,297        4,336          46

Income taxes                                                   16           96          19
                                                        ---------    ---------   ---------


Income before equity (excess) in undistributed
  earnings of bank subsidiary                               7,281        4,240          27

Equity (excess) in undistributed earnings of
  bank subsidiary                                          (5,781)      (3,319)         94
                                                        ---------    ---------   ---------


Net income                                              $   1,500    $     921   $     121
                                                        =========    =========   =========
</TABLE>


                                       47
<PAGE>



NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>

                                     CONDENSED  STATEMENTS OF CASH FLOWS
                            For the years ended December 31, 1998 and 1997 and
                           for the period November 26, 1996 to December 31, 1996

                                                              1998        1997      1996
                                                           ---------- ---------- ----------
<S>                                                       <C>         <C>        <C>      
Cash flows from operating activities
   Net income                                              $   1,500   $     921  $     121
   Adjustments to reconcile net income to net cash
    from operating activities
      Amortization of discounts and premiums on securities         2          (1)         -
      (Equity) excess in undistributed earnings of bank
        subsidiary                                             5,781       3,319        (94)
      Gain on sale of securities                                 (33)          -          -
      Change in
         Other assets                                             (9)         31       (148)
         Other liabilities                                      (690)          -          7
                                                           ---------   ---------  ---------
           Net cash from operating activities                  6,551       4,270       (114)

Cash flows from investing activities
   Purchase of bank subsidiary stock                               -           -    (11,144)
   Purchase of securities available-for-sale                  (4,299)     (1,690)    (5,996)
   Proceeds from sale of securities available-for-sale         5,172       1,000          -
   Proceeds from repayment of securities                          14          95          -
   Proceeds from maturities of securities                        330       2,000          -
   Capital contribution to subsidiary                            (83)          -          -
                                                           ---------   ---------  ---------
      Net cash from investing activities                       1,134       1,405    (17,140)

Cash flows from financing activities
   Net proceeds from sale of common stock                          -           -     19,436
   Purchase of treasury stock                                 (2,863)     (3,172)         -
   Payment received on loan to ESOP                              720           9         44
   Dividends paid                                             (8,405)       (544)         -
                                                           ---------   ---------  ---------
      Net cash from financing activities                     (10,548)     (3,707)    19,480
                                                           ---------   ---------  ---------

Net change in cash and cash equivalents                       (2,863)      1,968      2,226

Cash and cash equivalents at beginning of period               4,194       2,226          -
                                                           ---------   ---------  ---------

Cash and cash equivalents at end of period                 $   1,331   $   4,194  $   2,226
                                                           =========   =========  =========
</TABLE>


                                       48
<PAGE>





                               PS FINANCIAL, INC.
                             STOCKHOLDER INFORMATION

ANNUAL MEETING

The Annual Meeting of Stockholders will be held at 4:00 p.m., Chicago,  Illinois
time on April 28 1999 at the main  office  of PS  Financial,  Inc.,  4800  South
Pulaski Road, Chicago, Illinois 60632.

MARKET PRICE AND DIVIDEND INFORMATION

The following information relates to the dividends paid and closing price of the
Company's $.01 par value common stock,  which is traded on the  over-the-counter
market and is quoted on the NASDAQ National Market under the symbol "PSFI".

--------------------- ---------------------------- -----------------------------
                                 1998                         1997
--------------------- ---------------------------- -----------------------------
--------------------- -------- -------- ---------- -------- -------- -----------
       QUARTER ENDED    HIGH     LOW     DIVIDEND    HIGH      LOW    DIVIDEND
--------------------- -------- -------- ---------- -------- -------- -----------
--------------------- -------- -------- ---------- -------- -------- -----------
March 31               $23.00   $13.50     $4.12*   $14.25   $11.75    $ ---
June 30                $14.88   $12.75     $0.12    $14.88   $12.63    $0.08
September 30           $13.50   $10.75     $0.12    $18.00   $14.00    $0.08
December 31            $12.00   $8.50      $0.13    $23.00   $16.00    $0.12
--------------------- -------- -------- ---------- -------- -------- -----------

*    includes special dividend of $4.00 per share declared December 30, 1997 and
     paid on January 30, 1998.

At March 22, 1999 there were 1,756,384 shares of PS Financial, Inc. common stock
issued and outstanding  (including  unallocated  ESOP shares) and there were 159
holders of record.  The closing sale price for the Company's  stock on March 22,
1999 was $9.94 per share.


STOCKHOLDER AND GENERAL INQUIRIES                       TRANSFER AGENT
Kimberly P. Rooney, President                           First Bankers Trust Co.
PS Financial, Inc.                                      1201 Broadway
4800 South Pulaski Road                                 Quincy, Illinois 62301
Chicago, Illinois  60632
(773) 376-3800

ANNUAL AND OTHER REPORTS

A copy of PS  Financial,  Inc.'s Annual Report on Form 10-KSB for the year ended
December 31, 1998, as filed with the Securities and Exchange Commission,  may be
obtained without charge by contacting Jeffrey Przybyl,  Chief Financial Officer,
PS Financial, Inc., 4800 South Pulaski Road, Chicago, Illinois 60632-4195.

                                       49