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1997 ANNUAL REPORT

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                      HEMLOCK FEDERAL FINANCIAL CORPORATION










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TABLE OF CONTENTS

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 Chairman's Message........................................   1
 Selected Consolidated Financial Information...............   3
 Management's Discussion and Analysis of Financial
   Condition and Results of Operations.....................   5
 Consolidated Financial Statements.........................  11
 Stockholder Information...................................  48
 Corporate Information.....................................  48









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FROM YOUR CHAIRMAN & PRESIDENT

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                                 April 10, 1998

         We would  like to  welcome  you as a  stockholder  of  Hemlock  Federal
Financial Corporation. On March 31, 1997, we completed the conversion of Hemlock
Federal from a mutual to stock institution,  successfully  raising $20.1 million
in capital.  This additional  capital was the primary factor in our asset growth
of 21% from $146.4  million at December  31, 1996 to $176.7  million at December
31, 1997.  Stockholders'  equity rose from $12.1 million to $30.4  million.  Net
income for the year  ended  December  31,  1997 was  $944,000,  as  compared  to
$162,000 for the previous year.

         Upon  completion of the  Conversion,  we promptly began  implementing a
strategic plan with the goal of maximizing stockholder value over the long term.
Our  first  step,  which  began  in the  third  quarter  of  1997,  was to begin
construction of a new branch facility in Lemont, Illinois, a Southwest suburb of
Chicago. This facility, which we expect to open in mid 1998, will complement our
existing branch locations in Oak Forest, Oak Lawn and the Back of the Yards area
of Chicago.  The new branch will initially cause operating expenses to increase.
However, we believe that the future growth prospects for Lemont, particularly in
the area of loan  originations,  provide us with the  opportunity to effectively
leverage our capital and increase profitability over the long term.

         Our next step in enhancing  stockholder value involves  increasing loan
production and loans held in portfolio.  Loan originations in 1997 increased 34%
over 1996 totals to $18.5  million.  We are looking  forward to the  possibility
that  1998 loan  volume  will  exceed  1997  levels.  While  the  interest  rate
environment has undoubtedly been conducive to loan originations,  we believe our
strategy of  expanding  the staff of  commissioned  loan  officers,  effectively
marketing  multi-family and jumbo loans, while maintaining the superior level of
service and personal contact customers have come to expect from Hemlock Federal,
has been the key to our success. In 1998 we will introduce a home equity line of
credit product designed to match the needs of our loan and deposit customers. We
will also implement a formalized  cross-sales  program,  along with relationship
banking products and services as a means of further increasing profitability.

         Despite the $22.6 million  increase in loans held in portfolio over the
past year, loan quality remains high, with a ratio of  non-performing  assets to
total assets of .15%, as of December 31, 1997, as compared to .05% at the end of
1996.  We believe that  reserves for losses in the loan  portfolio  remain fully
adequate,  with our  allowance  for loan  losses at 1.01% of total loans at year
end.

         In addition to the above strategies,  the Board of Directors authorized
dividend  payments  totaling  $.12  per  share in 1997.  We have  also  received
permission from the Office of Thrift  Supervision to repurchase shares, up to 5%
of our outstanding shares, which will begin in the first quarter of 1998.

                                       1
<PAGE>



         Our stock price has steadily  increased since our initial offering.  On
December  31, 1997,  our stock price closed at $17.125,  compared to our initial
offering  price of  $10.00.  While  we do not  believe  continued  gains of this
magnitude are  realistically  sustainable,  we believe the strategies we have in
place will continue to enhance stockholder value.

         Hemlock  Federal was established in 1904 to help residents of the south
side of Chicago  achieve  the  American  Dream.  We have  built on our  original
mission to provide personalized banking with a high level of service and support
for our customers and our communities.

         On  behalf  of the  Directors,  Management  and  employees  of  Hemlock
Federal,  we thank you for your confidence and support.  Together,  we will work
diligently  for  the  long  term  profitability  of  Hemlock  Federal  Financial
Corporation.


                                              Maureen G. Partynski
                                               Chairman and
                                               Chief Executive Officer



                                              Michael R. Stevens
                                               President

                                       2
<PAGE>

                   SELECTED CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>

                                                                                 At December 31,
                                                        ------------------------------------------------------------
                                                          1997         1996         1995         1994         1993
                                                          ----         ----         ----         ----         ----
Selected Financial Condition Data:
<S>                                                     <C>          <C>          <C>          <C>          <C>
Total assets....................................        $176,683     $146,405     $145,626     $143,877     $146,679
Cash and cash equivalents.......................          14,883       17,410       13,301       16,827       18,131
Loans receivable, net(3)........................          76,159       53,536       45,232       37,659       37,041
Mortgage-backed securities(2):
  Held-to-maturity..............................          31,683       29,537       43,106       66,040       81,439
  Available-for-sale............................          29,983       34,041       25,620        8,244           --
Investment securities:(2)
  Held-to-maturity..............................          14,735           --        1,500        3,500        6,003
  Available-for-sale............................           3,617        7,827       13,125        7,934           --
FHLB stock......................................             987          901          849          837          991
Deposits........................................         130,958      131,243      130,741      130,771      132,583
Total borrowings................................          11,000        1,300        1,500        1,500        3,000
Stockholders' Equity............................          30,427       12,115       11,877       10,379        9,855
</TABLE>


<TABLE>
<CAPTION>
                                                                 Year Ended
                                                                 December 31,
                                          --------------------------------------------------------
                                            1997         1996        1995        1994       1993
                                            ----         ----        ----        ----       ----
Selected Operations Data:
<S>                                       <C>         <C>         <C>         <C>         <C>
Total interest income .................   $ 11,293    $ 10,137    $  9,934    $  8,501    $  8,815
Total interest expense ................      5,723       5,643       5,416       4,672       4,948
                                          --------    --------    --------    --------    --------
  Net interest income .................      5,570       4,494       4,518       3,829       3,867
Provision for loan losses .............         30         150         133         150         149
                                          --------    --------    --------    --------    --------
Net interest income after provision for
loan losses ...........................      5,540       4,344       4,385       3,679       3,718
Fees and service charges ..............        417         379         352         308         345
Gain (loss) on sales of mortgage-backed
  securities and investment securities          (3)       (124)       (161)        (89)        270
Other non-interest income .............        125         132         146         164         112
                                          --------    --------    --------    --------    --------
Total non-interest income .............        539         387         337         383         727
Total non-interest expense ............      4,509       4,487       3,211       3,180       3,313
                                          --------    --------    --------    --------    --------
Income (loss) before taxes and
cumulative effect .....................      1,570         244       1,511         882       1,132
Income tax provision ..................        626          82         559         343         411
Cumulative effect .....................         --          --          --          --         256
                                          --------    --------    --------    --------    --------
Net income ............................   $    944    $    162    $    952    $    539    $    977
                                          ========    ========    ========    ========    ========
</TABLE>

------------
(1)  The allowance for loan losses at December 31, 1997,  1996,  1995, 1994, and
     1993,   was  $775,000,   $745,000,   $600,000,   $469,000,   and  $234,000,
     respectively.

(2)  The Bank adopted Statement of Financial  Accounting  Standards ("SFAS") No.
     115,  "Accounting for Certain  Investments in Debt and Equity  Securities,"
     effective  as of January 1, 1994.  Prior to the  adoption  of SFAS No. 115,
     investment  securities and  mortgage-backed  securities  held for sale were
     carried at the lower of  amortized  cost or market  value,  as adjusted for
     amortization  of premiums and  accretion of  discounts  over the  remaining
     terms of the securities from the dates of purchase.

                                       3

<PAGE>

<TABLE>
<CAPTION>

                                                                 Year ended December 31,
                                                    ----------------------------------------------
                                                      1997      1996     1995     1994      1993
                                                      ----      ----     ----     ----      ----
<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) .................         .58%      .11%     0.66%     0.37%     0.68%
   Return on equity (ratio of net income
    to average equity)(3) ....................        3.52      1.38      8.73      5.27     10.40
   Interest rate spread information:
   Average during period .....................        2.85      2.93      3.01      2.49      2.54
   End of period .............................        2.92      3.07      3.11      2.93      3.58
   Net interest margin(1) ....................        3.53      3.20      3.25      2.69      2.74
 Ratio of operating expense to average
   total assets ..............................        2.76      3.07      2.23      2.18      2.30
 Ratio of average interest-earning assets
   to average interest-bearing liabilities ...      118.59    106.67    106.31    106.27    105.58
 Quality Ratios:
   Non-performing assets to total assets at
    end of period ............................        0.15      0.05      0.40      0.43      0.80
   Allowance for loan losses to non-performing
    loans ....................................      302.73    116.51    103.63     76.01     30.91
   Allowance for loan losses to gross loans
    receivable ...............................        1.01      1.37      1.31      1.23      0.62
Capital Ratios:(2)
   Stockholders' equity to total assets at
    end of period ............................       17.22      7.86      8.16      7.22      6.72
   Average stockholders' equity to
    average assets ...........................       16.45      7.93      7.59      7.01      6.51
Other data:
   Number of full service offices ............           3         3         3         3         3
</TABLE>

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

(1)  Net interest income divided by average interest-earning assets.

(2)  Ratios are exclusive of SFAS 115 valuation.

                                       4

<PAGE>



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

General

         Hemlock  Federal  Financial  Corporation  (the "Company") is a Delaware
Corporation.  The Company is a savings and loan holding company which has as its
wholly  owned  subsidiary,  Hemlock  Federal  Bank  for  Savings  (the  "Bank").
Financial and other information  presented herein after March 31, 1997,  relates
to  consolidated  information  of the Company and the Bank.  Financial and other
information  prior to March 31, 1997,  relates only to Hemlock  Federal Bank for
Savings. The Company is a financial intermediary engaged primarily in attracting
deposits   from  the  general   public  and  using  such   deposits  to  acquire
mortgage-backed  and  other  securities  and  to  originate  one-to-four  family
residential  mortgage  and,  to a  significantly  lesser  extent,  multi-family,
consumer and other loans  primarily in its market area.  The Company's  revenues
are  derived  principally  from  interest  earned on  mortgage-backed  and other
securities and loans. The operations of the Company are influenced significantly
by  general  economic  conditions  and  by  policies  of  financial  institution
regulatory agencies,  including the OTS and 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 securities  and loans
receivable,  net and the average rate paid on deposits,  as well as the relative
amounts of such assets and liabilities. The Company, like other savings and loan
holding  companies,  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.

Financial Condition

         Consolidated  total assets aggregated $176.7 million and $146.4 million
at December 31, 1997 and December 31, 1996, respectively.  The increase in total
assets is primarily attributable to the proceeds raised in the Company's initial
public offering.  The net proceeds were invested in securities  held-to-maturity
and  mortgage  loans as of  December  31,  1997,  resulting  in an  increase  in
securities held-to-maturity of $16.9 million and an increase in loans receivable
of $22.7  million.  This was  partially  offset by a  decrease  in cash and cash
equivalents  of $2.5 million and a decrease in securities  available for sale of
$7.9 million.

         Total  liabilities at December 31, 1997 were $146.3 million compared to
$134.3 million at December 31, 1996. Total deposits decreased by $285,000,  from
$131.2  million at December 31, 1996 to $131.0 million at December 31, 1997, due
principally  to the purchase of common stock in the initial  public  offering by
Bank depositors. In addition, FHLB advances increased by $9.5 million, from $1.5
million at December 31, 1996 to $11.0 million at December 31, 1997.

                                       5

<PAGE>


         Stockholders' equity at December 31, 1997 was $30.4 million compared to
$12.1 million at December 31, 1996, an increase of $18.3 million,  due primarily
to net proceeds of the initial  public  offering that was completed on March 31,
1997.

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 securities and loans,  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  administrative
expenses.  Net  interest  income  depends  upon the volume of  interest-earnings
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, 1997 AND 1996

General

         Consolidated net income of the Company for the year ending December 31,
1997 was  $944,000,  as compared to $162,000  for the year ending  December  31,
1996.  The $782,000  increase in net income was  primarily  attributable  to the
reinvestment of proceeds from the stock offering,  as well as the $514,000 after
tax one time payment to  recapitalize  the Savings  Association  Insurance Fund,
which occurred in 1996.  These items were partially offset by the $650,000 after
tax accrual to establish the Hemlock Federal Charitable  Foundation,  which took
place in March, 1997.

Net Interest Income

         Net interest income after  provisions for loan losses increased by $1.1
million,  to $5.6 million for the year ending  December 31, 1997, as compared to
$4.5 million for the year ending  1996.  The net  interest  margin  increased to
3.53%  for the year  ended  December  31,  1997 from  3.20%  for the year  ended
December  31,  1996,  primarily  as a result  of the  increase  in the  ratio of
interest earning assets to interest-bearing  liabilities to 118.59% for the year
ended December 31, 1997 from 106.67% for the year ended December 31, 1996.  This
was partially offset by a decrease in the net interest spread from 2.93% for the
year ended December 31, 1996 to 2.85% for the year ended December 31, 1997.

Interest Income

         Interest  income for the year ended December 31, 1997 was $11.3 million
compared to $10.1 million for the year ended  December 31, 1996. The increase in
interest  income was  primarily a result of an increase of $17.3  million in the
average balance of interest-earning  assets as a result of the Company investing
net proceeds from the initial public offering, which occurred in March 1997.

                                       6
<PAGE>


The average balance of loans receivable  increased $10.0 million and the average
balance of securities  increased  $8.8 million.  This was partially  offset by a
decrease in the average yield on interest-earning assets from 7.21% for the year
ended December 31, 1996 to 7.15% for the year ended December 31, 1997. The yield
on loans and  mortgage-backed  securities  decreased  as a result  of  declining
market rates.

Interest Expense

         Interest  expense for the year ended December 31, 1997 was $5.7 million
compared to $5.6 million for the year ended  December 31, 1996. The increase was
primarily  the  result of a $1.4  million  increase  in the  average  balance of
interest-bearing  liabilities resulting from increased advances from the Federal
Home Loan Bank of Chicago.

Provision for Loan Losses

         The  Company  recorded a  provision  for loan losses of $30,000 for the
year ended December 31, 1997,  increasing the total allowance for loan losses to
$775,000 as of December  31,  1997.  The  allowance  was equal to 1.01% of total
loans and 302.73% of  non-performing  loans as of December 31, 1997. The Company
had non-performing  assets totaling $256,000 as of December 31, 1997. 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  the  examination  process,  periodically  review  the
Company's allowance for estimated losses on loans. While management believes the
existing level of reserves is adequate,  future adjustments to the allowance may
be necessary due to economic,  operating,  regulatory, and other conditions that
may be beyond the Company's control.

Non-Interest Income

         Non-interest  income increased  $152,000 to $539,000 for the year ended
December 31, 1997. The increase was primarily attributable to a loss on the sale
of securities of $124,000 in the year ended  December 31, 1996, as compared to a
loss of $3,000 for the year ended  December  31,  1997.  In  addition,  fees and
service  charges  increased  $38,000  for the  year  ended  December  31,  1997,
resulting from an increase in fees associated with lending.

Non-Interest Expense

         Non-interest expense was $4.5 million for both the years ended December
31,  1997,  and 1996.  Non-interest  expense  for 1997  included a $1.0  million
accrual to establish the Hemlock Federal  Charitable  Foundation,  as well as an
increase in compensation expense of $183,000,  due primarily to costs associated
with the ESOP and RRP benefit  plans.  This increase was offset by a decrease of
$231,000 in federal  insurance  premiums  for the year ended  December 31, 1997.
Non-interest  expense  for  1996  also  included  the  payment  of  $840,000  to
recapitalize the Savings Association Insurance Fund.

                                       7

<PAGE>


Provision for Income Taxes

         The  Company's  federal  and state  income tax expense  increased  from
$82,000 for the year ended  December  31,  1996 to  $626,000  for the year ended
December  31, 1997.  The  $544,000  increase in income tax was the result of the
increase in net income before income taxes of $1.3 million.


                         COMPARISON OF OPERATING RESULTS
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

General

         Net income for the year ended  December 31, 1996 was $161,000  compared
to net income of $952,000  for the year ended  December  31, 1995, a decrease of
$791,000,  or 83.1%.  The  decrease was  primarily a result of an $840,000  FDIC
special  assessment on SAIF insured  deposits  effective  September 30, 1996. In
addition,  the Bank  realized a $223,000  gain on sale of real  estate  owned in
1995; there was no such gain in 1996.

Interest Income

         Interest  income for the year ended December 31, 1996 was $10.1 million
compared to $9.9 million for the year ended  December  31, 1995,  an increase of
$202,000,  or 2.0%. The  contributing  factor in the increase in interest income
was the 6 basis point increase in the yield on average  interest-earning  assets
from  7.15% for the year  ended  December  31,  1995 to 7.21% for the year ended
December 31, 1996.  The average yield on  mortgage-backed  securities  increased
from  6.80% for the year  ended  December  31,  1995 to 7.02% for the year ended
December 31, 1996 due to the upward  repricing  of  adjustable  rate  securities
coupled with the reduced  amortization  of premiums as a result of a slowdown in
prepayments from the prior year as anticipated by management. Although the yield
on average loans receivable decreased from 8.21% for the year ended December 31,
1995 to 8.05% for the year ended December 31, 1996, the average balance of loans
receivable  increased  by $9.4  million  due to the shift  from  lower  yielding
securities and  mortgage-backed  securities to higher yielding loans receivable.
The  increase  in the  average  balance  of loans  receivable  was the result of
management's  concerted  effort  through the addition of lending  personnel  and
increased emphasis on loan marketing.

Interest Expense

         Interest  expense for the year ended December 31, 1996 was $5.6 million
compared to $5.4 million for the year ended  December  31, 1995,  an increase of
$227,000,  or 4.2%. The increase in interest  expense reflects a higher interest
rate environment, as the average cost of interest-bearing  liabilities increased
by 14 basis points from 4.14% for the year ended  December 31, 1995 to 4.28% for
the year ended  December 31, 1996. The increase in the average cost of funds was
also  attributable  to a shift of deposits from money market  accounts to higher
yielding  certificates  of deposit.  The average cost of certificates of deposit
increased  from 5.23% for the year ended

                                       8
<PAGE>


December 31, 1995 to 5.45% for the year ended  December  31, 1996.  In addition,
the average balance of interest-bearing  liabilities increased $1.1 million from
$130.7  million for the year ended  December 31, 1995 to $131.8  million for the
year ended December 31, 1996 as a result of market demand.

Net Interest Income

         Net  interest  income of $4.5  million for the year ended  December 31,
1996  represented  no  increase  from the  amount  reported  for the year  ended
December  31, 1995.  There was a decrease in the net interest  spread from 3.01%
for the year ended  December  31, 1995 to 2.93% for the year ended  December 31,
1996.  The decrease in the net interest  rate spread was a result of the average
cost of  interest-bearing  deposits  increasing  at a more  rapid  rate than the
average yield on interest-earning assets.

Provision for Loan Losses

         The Bank's  provision  for loan losses for the year ended  December 31,
1996 was $150,000 compared to $134,000 for the year ended December 31, 1995. The
allowance for loan losses represented 1.4% and 1.3% of gross loans receivable at
December  31,  1996 and 1995,  respectively.  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
Bank's market area. In addition,  various  regulatory  agencies,  as an integral
part of their examination process,  periodically review the Bank's allowance for
estimated  losses  on loans.  Such  agencies  may  require  the Bank to  provide
additions  to the  allowance  based upon  judgments  which  differ from those of
management.   Although  management  uses  the  best  information  available  and
maintains  the Bank's  allowance  for 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
Bank's control.

Noninterest Income

         Noninterest  income for the year ended  December 31, 1996, was $387,000
compared  to  $337,000  for the year ended  December  31,  1995,  an increase of
$50,000, or 14.8%. The increase was the result of a decrease in the loss on sale
of securities of $37,000  combined with the $27,000 increase in fees and service
charges.  This was  partially  offset by a decrease  of $18,000 in other  income
primarily  related to FHA and VA loans on which the applications  were taken for
other lenders.

Noninterest Expense

         Noninterest  expense was $4.5  million for the year ended  December 31,
1996 compared to $3.2 million for the year ended  December 31, 1995, an increase
of $1.3  million,  or 40.6%.  The  increase  was  primarily  due to an  $840,000
one-time  special  assessment on SAIF insured  deposits  resulting  from federal
legislation  enacted on September 30, 1996.  The Bank also  recognized a gain

                                       9
<PAGE>


on the sale of other real estate  owned of $223,000 in 1995  compared to zero in
1996 and  experienced an increase in occupancy  expense of $82,000 due primarily
to increased real estate tax assessments in 1996.

Income Taxes

         The provision for income taxes was $83,000 for the year ended  December
31, 1996 compared to $559,000 for the year ended December 31, 1995. The decrease
was primarily due to a decrease in pretax income of $1.3 million.

                                       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,
                                ----------------------------------------------------------------------------------------
                                              1997                         1996                         1995
                                ---------------------------  --------------------------   ------------------------------
                                  Average   Interest           Average   Interest           Average   Inteerest
                                Outstanding  Earned/  Yield/ Outstanding  Earned/  Yield/ Outstanding  Earned/    Yield/
                                  Balance     Paid     Rate    Balance     Paid     Rate    Balance     Paid       Rate
                                  -------     ----     ----    -------     ----     ----    -------     ----       ----
<S>                               <C>        <C>      <C>      <C>        <C>       <C>     <C>         <C>        <C>
 Loans receivable(1)...........   $60,541    $4,829   7.98%    $50,555    $4,069    8.05%   $41,189     $3,383     8.21%
 Mortgage-backed securities....    63,597     4,295   6.75      65,739     4,617    7.02     72,126      4,904     6.80
 Securities(2).................    18,759     1,210   6.45       9,992       599    5.99     14,780        898     6.08
 Interest-bearing deposits.....    14,082       884   6.28      13,428       782    5.82     10,028        687     6.85
 Other earning assets(3).......       986        75   7.61         915        70    7.65        872         63     7.22
                                 --------    ------           --------    ------            -------      -----
  Total earning assets(1)......   157,965    11,293   7.15     140,629    10,137    7.21    138,991      9,935     7.15
 Non-interest earning assets...     5,151                        5,354                        4,697
                                    -----                        -----                        -----
 Total assets..................  $163,196                     $195,983                     $143,688
                                 ========                     ========                     ========
Interest-Earning Liabilities:
 Savings deposits..............    45,741     1,467   3.21      46,369     1,445    3.12    $46,425      1,441     3.10
 Demand and NOW................    14,211       337   2.37      13,330       323    2.42     13,237        321     2.43
 MMDA..........................     5,024       159   3.16       5,516       174    3.15      6,297        198     3.14
 Certificates of Deposit.......    64,765     3,541   5.47      65,125     3,552    5.45     63,283      3,308     5.23
 Borrowings....................     3,462       219   6.32       1,500       149    9.93      1,500        148     9.87
                                 --------    ------           --------     -----            -------      -----
   Total interest-bearing
     liabilities...............   133,203     5,723   4.30     131,840     5,643    4.28    130,742      5,416     4.14
                                             ------                        -----                         -----
Non-interest-bearing
  liabilities..................     3,091                        2,531                        2,040
                                    -----                        -----                        -----
   Total liabilities...........   136,312                      134,371                      132,782
Equity.........................    26,834                       11,612                       10,906
                                   ------                       ------                       ------
   Total liabilities and
     equity....................  $163,146                     $145,983                     $143,688
                                 ========                     ========                     ========
Net interest/spread............              $5,570   2.85%               $4,494    2.93%               $4,519     3.01%
                                             ======   ====                ======    ====                ======     ====
Margin.........................                       3.53%                         3.20%                          3.25%
                                                      ====                          ====                           ====
Assets to liabilities.......       118.59%                      106.67%                      106.31%
                                   ======                       ======                       ======
</TABLE>

(1)  Calculated net of deferred loan fees, loan discounts,  loans in process and
     loss reserves.

(2)  Calculated based on amortized cost.

(3)  Includes FHLMC and FHLB stock at cost.


                                       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,
                                                            ------------------------------------
                                                            1997    1996    1995    1994    1993
                                                            ----    ----    ----    ----    ----
Weighted average yield on:
<S>                                                         <C>     <C>     <C>     <C>     <C>
 Loans receivable(1) .................................      7.63%   7.81%   8.06%   8.20%   9.78%
 Mortgage-backed securities(2) .......................      6.99    7.28    8.22    6.42    7.77
 Securities(2) .......................................      5.22    7.60    5.10    6.71    9.71
 Other interest-earning assets .......................      5.77    6.16    4.26    5.38    5.16
   Combined weighted average yield on interest-earning
       assets ........................................      7.27    7.36    7.45    6.78    8.21
Weighted average rate paid on:
 Passbook Savings ....................................      2.94    3.14    3.15    3.14    5.12
 NOW .................................................      2.22    2.52    3.14    3.14    5.13
 MMDA ................................................      3.20    3.20    2.52    2.52    4.58
 Certificate accounts ................................      5.62    5.47    5.57    4.65    6.49
 Borrowings ..........................................      5.86    9.72    9.72    9.72    9.59
 Other interest-bearing liabilities ..................        --      --      --      --      --
    Combined weighted average rate paid on
interest-bearing liabilities .........................      4.35    4.29    4.34    3.85    5.92
Spread ...............................................      2.92%   3.07%   3.11%   2.93%   2.29%
</TABLE>


(1)  Excluding amortization of deferred loan fees.

(2)  Excluding premium amortization and discount accretion.

                                       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,
                                                                   1996 vs. 1997                            1995 vs. 1996
                                                      ------------------------------------      ------------------------------------
                                                              Increase                                 Increase
                                                             (Decrease)                               (Decrease)
                                                               Due to               Total               Due to              Total
                                                      ----------------------      Increase      --------------------       Increase
                                                       Volume         Rate       (Decrease)      Volume        Rate       (Decrease)
                                                       ------         ----       ----------      ------        ----       ----------
Interest-earning assets:
<S>                                                   <C>           <C>           <C>           <C>           <C>           <C>
 Loans receivable ..............................      $   797       $   (37)      $   760       $   335       $   (16)      $   319
 Mortgage-backed securities ....................         (148)         (174)         (322)         (663)        1,059           396
 Securities ....................................          562            49           611           326           172           498
                                                      -------       -------       -------       -------       -------       -------
Interest-bearing deposits ......................           39            63           102           (79)          300           221
Other earning assets ...........................            5            --             5            (2)            2            --
   Total interest-earning assets ...............      $ 1,255       $   (99)      $ 1,156       $   (83)      $ 1,517       $ 1,434
                                                      -------       -------       -------       -------       -------       -------
Interest-bearing liabilities:
 Passbook savings ..............................          (20)           42            22           (73)          142            69
 NOW ...........................................           21            (7)           14             5            29            34
 MMDA ..........................................          (16)            1           (15)          (43)           31           (12)
 Certificate of Deposit ........................          (20)            9           (11)           73           669           742
 Borrowings ....................................          139           (69)           70           (91)            2           (89)
                                                      -------       -------       -------       -------       -------       -------
   Total interest-bearing liabilities ..........          104           (24)           80          (129)          873           744
                                                      -------       -------       -------       -------       -------       -------
Net interest/spread ............................      $ 1,151       $   (75)      $ 1,076       $    46       $   644       $   690
                                                      =======       =======       =======       =======       =======       =======
</TABLE>

                                       13

<PAGE>



Asset/Liability Management

         In an attempt  to manage its  exposure  to changes in  interest  rates,
management  monitors the Company's  interest  rate risk.  The Board of Directors
reviews  at least  quarterly  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 anticipates  reviewing 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,  the  Company,  depending on the
relationship  between long- and short-term interest rates, market conditions and
consumer  preference,  at times  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 has taken a variety of steps to manage its  interest  rate
risk  level.   First,   the  Company   maintains  a  significant   portfolio  of
mortgage-backed  securities having adjustable rates and/or short or intermediate
terms to  maturity.  At  December  31,  1997,  $43,130  million  or 24.4% of the
Company's  assets consisted of  mortgage-backed  and related  securities  having
adjustable or floating interest rates or anticipated average lives of five years
or less.  Second,  the Company focuses its lending activities on the origination
of adjustable rate mortgage loans  ("ARMs"),  seven year balloon loans and fixed
rate  loans with  terms to  maturity  of 15 years or less.  Third,  the  Company
maintains a portfolio of  securities  and liquid  assets with  weighted  average
lives of four years or less. At December 31, 1997, the Company had $18.4 million
of  securities  with  a  remaining  average  life  of  four  years.  Finally,  a
substantial proportion of the Company's liabilities consists of NOW and passbook
savings  accounts which are believed by management to be somewhat less sensitive
to interest rate changes than certificate accounts.

Net Portfolio Value

         Management  utilizes  the  net  portfolio  value  ("NPV")  analysis  to
quantify interest rate risk. 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.  Under  OTS  regulations,  an
institution's  "normal" level of interest rate risk in the event of an immediate
and  sustained  200 basis point  change in  interest  rates is a decrease in the
institution's  NPV in an amount not  exceeding  2% of the  present  value of its
assets.  Pursuant to this  regulation,  thrift  institutions  with  greater than
"normal"  interest rate exposure must take a deduction  from their total capital
available  to meet  their  risk-based  capital  requirement.  The amount of that
deduction is one-half of the  difference  between (a) the  institution's  actual
calculated  exposure to the 200 basis point  interest  rate increase or decrease
(whichever  results  in the  greater  pro  forma  decrease  in NPV)  and (b) its
"normal"  level of  exposure  which is 2% of the  present  value of its  assets.
Savings institutions, however, with less than $300 million in assets and a total
capital ratio in excess of 12%, will be


                                       14
<PAGE>


exempt from this requirement  unless the OTS determines  otherwise.  The OTS has
postponed the  implementation  of the rule until further notice.  Based upon its
asset size and capital level at December 31, 1997, the Bank would qualify for an
exemption from this rule;  however,  management believes that the Bank would not
be required to make a deduction from capital if it were subject to this rule.

         The  following  table sets forth,  at December 31, 1997, 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)  as compared to
tolerance limits under the Bank's current policy.


Change in Interest  Estimated     Ratio of NPV      Estimated     Increase
     Rates             NPV            to            (Decrease)      in NPV
 (Basis Points)      Amount       Total Assets        Amount       Percent
 --------------      ------       ------------        ------       -------
                          (Dollars in Thousands)
    +400            $19,037           11.68%         $(7,061)        (27)%
    +300             21,926           12.90           (4,674)        (18)
    +200             23,633           13.99           (2,467)         (9)
    +100             25,267           14.75             (833)         (3)
      --             26,100           15.10               --
    B100             25,986           14.98             (114)          0
    B200             26,010           14.92              (90)          0
    B300             26,390           15.04              290          41
    B400             27,260           15.38             1160          54

         Certain  assumptions  utilized in assessing  the interest  rate risk of
thrift  institutions  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  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 and 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.  Hemlock Federal
generally  manages the pricing of its  deposits to be  competitive  and increase
core deposit relationships.

         Federal  regulations require Hemlock Federal to maintain minimum levels
of liquid  assets.  The required  percentage  has varied from time to time based
upon  economic  conditions  and  savings

                                       15
<PAGE>


flows and is currently 5% 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.
Hemlock Federal has  historically  maintained its liquidity ratio for regulatory
purposes at levels in excess of those  required.  At December 31, 1997,  Hemlock
Federal's liquidity ratio for regulatory purposes was 18.86%.

         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 $2.5
million and  $574,000  for the years ended  December  31, 1997 and  December 31,
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
from  maturation  and  sales  of  securities  and  paydowns  on  mortgage-backed
securities.  Net cash from financing  activities consisted primarily of activity
in proceeds from the issuance of stock and proceeds from borrowings.

         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, 1997,
cash and short-term  investments  totaled $14.9  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, 1997, the Bank had outstanding commitments to originate
loans of $652,000,  of which $352,000 had fixed interest rates.  These loans are
to be secured by  properties  located in its market area.  The Bank  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, 1997 totaled $48.8 million. Management believes that a
significant portion of such deposits will remain with the Bank.

         Liquidity  management is both a daily and long-term  responsibility  of
management.  Hemlock Federal 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 Hemlock Federal requires funds
beyond its ability to generate  them  internally,  it has  additional  borrowing
capacity with the FHLB of Chicago.

         Hemlock Federal is subject to various regulatory  capital  requirements
imposed by the OTS. At December 31, 1997, Hemlock Federal was in compliance with
all applicable capital  requirements on a fully phased-in basis. See "Regulation
- Regulatory  Capital  Requirements"  and Note 11 of the Notes to the  Financial
Statements.

                                       16

<PAGE>



Regulatory Capital

         Federally  insured  savings  institutions  are  required  to maintain a
minimum  level  of  regulatory  capital.  OTS  regulations  established  capital
requirements,  including a tangible  capital  requirement,  a leverage  (or core
capital) requirement and a risk-based capital requirement  applicable to savings
institutions.  These capital  requirements must be generally as stringent as the
comparable  capital  requirements for national banks. The OTS is also authorized
to  impose  capital  requirements  in excess of these  standards  on  individual
institutions on a case-by-case basis.

         At December  31,  1997,  the Bank  continued  to exceed all  regulatory
capital  requirements  with tangible and core capital of $20.7 million and $20.7
million, or 12.3% and 12.3% of adjusted total assets,  respectively,  which were
approximately $18.2 million and $15.7 million above the minimum  requirements of
3.0% and 1.5%,  respectively,  of the  adjusted  total  assets in effect on that
date. On December 31, 1997 the Bank had risk-based capital of $21.5 million,  or
34.9% of  risk-weighted  assets of $61.6 million.  This amount was $16.5 million
above the 8.0% requirement in effect on that date. Under regulatory  guidelines,
the Bank was considered well-capitalized at December 31, 1997.

Impact of Inflation

         The 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
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,  change in  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. In the
current  interest  rate  environment,  liquidity  and maturity  structure of the
Company's  assets and  liabilities are critical to the maintenance of acceptable
performance levels.

Impact of New Accounting Standards

         In 1996, the Financial  Accounting  Standards Board (the "FASB") issued
Statement  of  Financial   Accounting   Standards  No.  125  ("SFAS  No.  125"),
"Accounting  for Transfers and  Extinguishments  of  Liabilities."  SFAS No. 125
provides  accounting  and  reporting  standards  for  transfers and servicing of
financial  assets and  extinguishments  of liabilities.  SFAS No. 125 requires a
consistent  application  of a  financial-components  approach  that  focuses  on
control.  Under that approach,  after a transfer of financial  assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred,  and derecognizes  liabilities when extinguished.  SFAS No. 125 is
effective for some  transactions  in 1997 and other in 1998.  The effect of SFAS
No. 125 on the results of operation and the  financial  condition of the Company
is not expected to be material.

         On March 3, 1997,  the Financial  Accounting  Standards  Board ("FASB")
issued  Statement  128,  "Earnings  Per Share," which is effective for financial
statements   beginning  with  year  end  1997.

                                       17
<PAGE>


Statement  128  simplifies  the  calculation  of earnings  per share  ("EPS") by
replacing  primary EPS with basic EPS. It also  requires  dual  presentation  of
basic EPS and diluted EPS for entities with complex  capital  structures.  Basic
EPS includes no dilution and is computed by dividing income  available to common
stockholders by the  weighted-average  common shares outstanding for the period.
Diluted EPS reflects the potential  dilution of  securities  that could share in
earnings, such as stock options, warrants or other common stock equivalents. The
Company  expects  Statement  128 to have little impact on its earnings per share
calculations in future years,  other than changing  terminology from primary EPS
to basic EPS.

         The Statement of Financial  Accounting  Standards  No. 130,  "Reporting
Comprehensive   Income,"  was  issued  by  the  FASB  in  1997.  This  statement
established  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 its
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 or financial condition of the Company.

         The Statement of Financial Accounting  Standards No. 131,  "Disclosures
about Segments of an Enterprise and Related  Information," was issued in 1997 by
the FASB. The Statement  established  standards for the way that public business
enterprises  report  information  about operating  segments in annual  financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic  areas, and major  customers.  Statement 131 is effective for periods
beginning  after  December  15,  1997.  Management  does  not  believe  that the
provisions of this Statement are applicable to the Company,  since substantially
all of the Company's operations are banking activities.

Year 2000

         The Company has  conducted a review of its  computer  systems to review
the systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer  programs being written using two digits rather than four to define the
applicable  year. For example,  programs that have  time-sensitive  software may
recognize  a date using "00" as the year 1900  rather  than the year 2000.  This
could result in a major system failure or miscalculations. The Company presently
believes that, with  modifications to existing software and by converting to new
software,  the Year 2000 problem will not pose significant  operational problems
for the Company's  computer  systems as so modified and converted.  However,  if
such modifications and conversions are not complete in a timely manner, the Year
2000 problem may have a material impact on the operations of the Company.

                                       18
<PAGE>

Safe Harbor Statement

         This report contains  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 affect 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,
legislative/regulatory  changes,  monetary  and  fiscal  policies  of  the  U.S.
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.

                                       19
<PAGE>


                      HEMLOCK FEDERAL FINANCIAL CORPORATION
                             STOCKHOLDER INFORMATION

ANNUAL MEETING

         The Annual  Meeting of  Stockholders  will be held at 10:30  a.m.,  Oak
Forest,  Illinois  time on May 6,  1998 at the main  office of  Hemlock  Federal
Financial Corporation, 5700 West 159th Street, Oak Forest, Illinois 60452.

STOCK LISTING

         Hemlock  Federal  Financial  Corporation  common stock is traded on the
National  Association  of Securities  Dealers,  Inc.  National  Market under the
symbol "HMLK."

PRICE RANGE OF COMMON STOCK

         The per share price range of the common  stock for each  quarter  since
the  common   stock   began   trading  on  March  31,   1997  was  as   follows:


  FISCAL 1997                         HIGH           LOW            DIVIDENDS
  -----------                         ----           ---            ---------
Second Quarter.................     $13.875        $12.500            $.00
Third Quarter..................     $15.625        $13.875            $.06
Fourth Quarter.................     $17.500        $15.375            $.06


The stock price  information  set forth in the table  above was  provided by the
National Association of Securities Dealers, Inc. Automated Quotation System. The
average of the bid and asked prices of Hemlock Federal  Financial  Corporation's
common stock on April 3, 1998 was $12.563.

     At April 3, 1998, there were 2,006,849 shares of Hemlock Federal  Financial
Corporation  common stock  outstanding  (including  unallocated ESOP shares) and
there were ____ holders of record.

                                       20

<PAGE>


              HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
                              Oak Forest, Illinois


                       CONSOLIDATED FINANCIAL STATEMENTS
                       December 31, 1997, 1996, and 1995




                                    CONTENTS


REPORT OF INDEPENDENT AUDITORS......................................   21

FINANCIAL STATEMENTS

  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION....................   22

  CONSOLIDATED STATEMENTS OF INCOME.................................   23

  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY........   24

  CONSOLIDATED STATEMENTS OF CASH FLOWS.............................   25

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................   27


                                       20

<PAGE>



                         REPORT OF INDEPENDENT AUDITORS



Board of Directors
Hemlock Federal Financial
  Corporation
Oak Forest, Illinois


We have audited the accompanying  consolidated statements of financial condition
of Hemlock Federal Financial Corporation and Subsidiary, as of December 31, 1997
and  1996,  and the  related  consolidated  statements  of  income,  changes  in
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1997. These financial  statements are the  responsibility  of
the  Corporation's  management.  Our  responsibility is to express an opinion on
these 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 Hemlock  Federal
Financial  Corporation  and Subsidiary as of December 31, 1997 and 1996, and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting principles.




                                            Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 23, 1998

                                       21
<PAGE>



              HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           December 31, 1997 and 1996
                             (Dollars in thousands)
--------------------------------------------------------------------------------

                                                              1997         1996
                                                              ----         ----
ASSETS
Cash and due from banks ................................  $   2,714    $   1,771
Interest-bearing deposits in
  financial institutions ...............................     12,169       15,639
                                                          ---------    ---------
     Cash and cash equivalents .........................     14,883       17,410

Securities available-for-sale ..........................     34,703       42,619
Securities held-to-maturity (fair
  value: 1997 - $47,418; 1996 - $30,322) ...............     46,418       29,537
Loans receivable, net ..................................     76,159       53,536
Federal Home Loan Bank stock, at cost ..................        987          901
Accrued interest receivable ............................        904          788
Premises and equipment, net ............................      2,099        1,043
Prepaid expenses and other assets ......................        530          571
                                                          ---------    ---------
     Total assets ......................................  $ 176,683    $ 146,405
                                                          =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits ...............................................  $ 130,958    $ 131,243
Advance from Federal Home Loan Bank ....................     11,000        1,500
Advance payments by borrowers for taxes
  and insurance ........................................        804          681
Accrued interest payable and other liabilities .........      3,494          866
                                                          ---------    ---------
     Total liabilities .................................    146,256      134,290

Stockholders' equity
   Common stock, $.01 par value; 2,500,000 shares
     authorized; 2,076,325 shares issued ...............         21           --
   Additional paid-in capital ..........................     20,105           --
   Unearned ESOP shares ................................     (1,495)          --
   Unearned stock awards ...............................     (1,382)          --
   Retained earnings, substantially restricted .........     12,203       11,508
   Net unrealized gain on securities
     available-for-sale, net of income taxes ...........        975          607
                                                          ---------    ---------
       Total equity ....................................     30,427       12,115
                                                          ---------    ---------
         Total liabilities and stockholders' equity ....  $ 176,683    $ 146,405
                                                          =========    =========


          See accompanying notes to consolidated financial statements

                                       22

<PAGE>



                        CONSOLIDATED STATEMENTS OF INCOME
                  Years ended December 31, 1997, 1996, and 1995
                             (Dollars in thousands)
--------------------------------------------------------------------------------

                                                 1997         1996        1995
                                                 ----         ----        ----
Interest income
    Loans ..................................   $  4,829    $  4,068    $  3,383
    Mortgage-backed and other
      securities ...........................      4,295       4,617       4,904
    Securities .............................      1,210         599         897
    Other interest-earning assets ..........        959         853         750
                                               --------    --------    --------
       Total interest income ...............     11,293      10,137       9,934
Interest expense
    Deposits ...............................      5,504       5,494       5,268
    Other borrowings .......................        219         149         148
                                               --------    --------    --------
       Total interest expense ..............      5,723       5,643       5,416
                                               --------    --------    --------
Net interest income ........................      5,570       4,494       4,518
Provision for loan losses ..................         30         150         133
                                               --------    --------    --------
Net interest income after provision
   for loan losses .........................      5,540       4,344       4,385
Noninterest income
    Fees and service charges ...............        417         379         352
    Rental income ..........................         40          43          39
    Loss on sale of securities .............         (3)       (124)       (161)
    Miscellaneous income ...................         85          89         107
                                               --------    --------    --------
       Total noninterest income ............        539         387         337
Noninterest expense
    Compensation and employee benefits .....      1,864       1,681       1,635
    Occupancy and equipment expenses .......        625         720         637
    Data processing ........................        235         226         201
    Federal insurance premiums .............         71         302         298
    SAIF special assessment ................         --         840          --
    Gain on sale of real estate owned ......         --          --        (223)
    Advertising and promotion ..............         80         129         124
    Contributions ..........................      1,007          40          25
    Other ..................................        627         549         514
                                               --------    --------    --------
       Total noninterest expense ...........      4,509       4,487       3,211
                                               --------    --------    --------
Income before provision for
   income taxes ............................      1,570         244       1,511
Provision for income taxes .................        626          82         559
                                               --------    --------    --------
Net income .................................   $    944    $    162    $    952
                                               ========    ========    ========
Earnings per share
    Basic and diluted ......................   $    .40
                                               ========



          See accompanying notes to consolidated financial statements


                                       23

<PAGE>



           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  Years ended December 31, 1997, 1996, and 1995
                             (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                                 Unrealized
                                                                                                  Retained     Gains (Losses)
                                                                Additional  Unearned   Unearned   Earnings,    on Securities
                                                      Common      Paid-In     ESOP      Stock   Substantially   Available-
                                                       Stock      Capital    Shares     Awards    Restricted     for-Sale      Total
                                                       -----      -------    ------     ------    ----------     --------      -----
<S>                                                  <C>        <C>        <C>         <C>         <C>         <C>         <C>
Balance at January 1, 1995 .......................   $     --   $     --   $     --    $     --    $ 10,394    $    (15)   $ 10,379
Net income .......................................         --         --         --          --         952          --         952
Reclassification of securities from
  held-to-maturity to available-for-
  sale, net of tax of $55 (Note 2) ...............         --         --         --          --          --          86          86
Change  in unrealized loss on
  securities available-for-sale,
  net of income tax of $291 ......................         --         --         --          --          --         460         460
                                                     --------   --------   --------    --------    --------    --------    --------
Balance at December 31, 1995 .....................         --         --         --          --      11,346         531      11,877
Net income .......................................         --         --         --          --         162          --         162
Change in unrealized gain on
  securities available-for-sale,
  net of income tax of $49 .......................         --         --         --          --          --          76          76
                                                     --------   --------   --------    --------    --------    --------    --------
Balance at December 31, 1996 .....................         --         --         --          --      11,508         607      12,115
Issuance of stock and restricted
  stock awards in connection
  with conversion ................................         21     20,016     (1,661)     (1,433)         --          --      16,943
ESOP shares earned ...............................         --         89        166          --          --          --         255
Stock awards earned ..............................         --         --         --          51          --          --          51
Net income .......................................         --         --         --          --         944          --         944
Cash dividends ($.12 per share) ..................         --         --         --          --        (249)         --        (249)
Change in unrealized gain on
  securities available-for-sale,
  net of income tax of $235 ......................         --         --         --          --          --         368         368
                                                     --------   --------   --------    --------    --------    --------    --------
Balance at December 31, 1997 .....................   $     21   $ 20,105   $ (1,495)   $ (1,382)   $ 12,203    $    975    $ 30,427
                                                     ========   ========   ========    ========    ========    ========    ========
</TABLE>


           See accompanying notes to consolidated financial statements

                                       24

<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1997, 1996, and 1995
                             (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                             1997        1996        1995
                                                             ----        ----        ----
Cash flows from operating activities
<S>                                                       <C>         <C>         <C>
  Net income ..........................................   $    944    $    162    $    952
  Adjustments to reconcile net income to net cash
    provided by operating activities
     Depreciation .....................................        117         141         134
     Amortization of premiums and discounts on
       investment and mortgage-backed securities, net .        268         181         746
     Net loss on sale of securities ...................          3         124         161
     Provision for loan losses ........................         30         150         133
     FHLB stock dividends .............................         --          --         (13)
     Change in deferred income taxes ..................       (320)        (10)        112
     Gain on sale of REO ..............................         --          --        (223)
     ESOP compensation expense ........................        255          --          --
     Stock awards expense .............................         51          --          --
     (Increase) decrease in accrued interest receivable       (116)        318        (222)
     Increase (decrease) in accrued interest payable
       and other liabilities ..........................        960         (39)         18
     Increase in net deferred loan costs ..............       (101)        (86)        (66)
     (Increase) decrease in other assets ..............        361        (367)        233
                                                          --------    --------    --------
        Net cash provided by operating activities .....      2,452         574       1,965
Cash flows from investing activities
  Purchase of securities available-for-sale ...........    (12,051)    (30,474)    (39,683)
  Proceeds from sales of securities available-for-sale         596       7,621       4,914
  Proceeds from sales of securities held-to-maturity ..         --          --         575
  Principal payments on mortgage-backed
    securities and collateralized mortgage obligations      21,030      22,136      22,440
  Purchase of  securities held-to-maturity ............    (39,258)       (325)     (5,110)
  Proceeds from maturities and calls of securities ....     21,050      12,605      19,000
  Purchase of FHLB stock ..............................        (86)        (51)         --
  Purchase of loans ...................................    (12,865)         --          --
  Net increase in loans ...............................     (9,687)     (8,368)     (7,640)
  Property and equipment expenditures .................     (1,173)       (140)        (96)
  Proceeds from sale of real estate owned .............         --          --         223
                                                          --------    --------    --------
     Net cash provided by (used in) investing
       activities .....................................    (32,444)      3,004      (5,377)
Cash flows from financing activities
  Net increase (decrease) in deposits .................       (285)        502         (30)
  Increase (decrease) in advance payments by
    borrowers for taxes and insurance .................        123          29         (83)
  Borrowings of FHLB advances .........................      9,500          --          --
  Issuance of stock ...................................     18,376          --          --
  Dividends paid ......................................       (249)         --          --
                                                          --------    --------    --------
     Net cash provided by (used in) financing
       activities .....................................     27,465         531        (113)
                                                          --------    --------    --------
</TABLE>
                                                                     (Continued)

                                       25

<PAGE>


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1997, 1996, and 1995
                             (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                          1997        1996        1995
                                                          ----        ----        ----
<S>                                                     <C>         <C>        <C>
Net increase (decrease) in cash and cash equivalents    $ (2,527)   $  4,109   $ (3,525)
Cash and cash equivalents at beginning of year ......     17,410      13,301     16,826
                                                        --------    --------   --------
Cash and cash equivalents at end of year ............   $ 14,883    $ 17,410   $ 13,301
                                                        ========    ========   ========
Supplemental disclosures of cash flow information
  Cash paid during the year for
     Interest .......................................   $  5,683    $  5,631   $  5,396
     Income taxes ...................................        690         316        371
Supplemental schedule of noncash investing activities
  Transfer of debt securities to available-for-sale
    from held-to-maturity on December 31, 1995 ......         --          --      9,311
</TABLE>



          See accompanying notes to consolidated financial statements

                                       26
<PAGE>



              HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1997, 1996, and 1995
                     (Table amounts in thousands of dollars)
--------------------------------------------------------------------------------


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:  The accompanying consolidated financial statements
include the accounts of Hemlock Federal Financial  Corporation (the Corporation)
and its  wholly-owned  subsidiary,  Hemlock Federal Bank for Savings (the Bank).
All  significant  intercompany  transactions  and  balances  are  eliminated  in
consolidation.

Nature of Operations:  The only business of the  Corporation is the ownership of
the Bank. The Bank is a federally-chartered stock savings bank and member of the
Federal  Home Loan Bank  (FHLB)  system  which  maintains  insurance  on deposit
accounts  with the  Savings  Association  Insurance  Fund  (SAIF) of the Federal
Deposit  Insurance  Corporation.  The Bank is engaged in the  business of retail
banking,  with  operations  conducted  through its main office and two  branches
located in the Chicago metropolitan area.

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.

Securities:  Securities are classified as held-to-maturity  when the Corporation
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 Corporation 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 fair  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 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  losses  that are  currently  anticipated  based on past loss  experience,
general economic conditions, information about specific borrower situations

                                       27
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

The Corporation  measures  impaired loans 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 homogenous 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.

Recognition  of Income on Loans:  Interest on real  estate and certain  consumer
loans is accrued  over the term of the loans  based upon the  principal  balance
outstanding.  Where serious doubt exists as to the collectibility of a loan, the
accrual of interest is  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.

                                       28
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loan fees, net of direct loan origination costs, are deferred and amortized over
the contractual life of the loan as a yield adjustment.

Premises  and  Equipment:  Premises  and  equipment  are  stated  at  cost  less
accumulated  depreciation.  Depreciation  is  computed  using the  straight-line
method over the estimated useful lives of the respective premises and equipment.
Maintenance  and repairs are  charged to expense as  incurred  and  improvements
which extend the useful lives of assets are capitalized.

Income Taxes: The Corporation  records income tax expense based on the amount of
taxes due on its tax return, plus deferred taxes computed on the expected future
tax consequences of temporary  differences  between the carrying amounts and the
tax bases of assets and liabilities, using enacted tax rates.

Employee Stock Ownership Plan: The cost of shares issued to the ESOP but not yet
allocated to  participants is 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 cost of
shares committed to be released is recorded as an adjustment to paid-in capital.
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 Share:  Earnings  per share is computed  under the  provisions  of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which
was adopted  retroactively  by the  Corporation  at the  beginning of the fourth
quarter  of 1997.  Amounts  reported  as  earnings  per share for the year ended
December 31, 1997 reflect earnings since March 31, 1997 (date of the conversion)
available  to common  stockholders  divided by the  weighted  average  number of
common shares outstanding since March 31, 1997.

Statement of Cash Flows: Cash and cash equivalents include cash on hand, amounts
due from banks,  and daily federal funds sold. The Corporation  reports net cash
flows for customer loan transactions and deposit transactions.

                                       29

<PAGE>


NOTE 2 - SECURITIES

Securities consist of the following at:

<TABLE>
<CAPTION>

                                                         December 31, 1997
                                          -------------------------------------------
                                                        Gross        Gross
                                          Amortized  Unrealized    Unrealized   Fair
                                            Cost       Gains       (Losses)     Value
                                            ----       -----       --------     -----
Securities available-for-sale
<S>                                       <C>        <C>         <C>         <C>
    U.S. government agencies ..........   $  3,647   $     --    $    (30)   $  3,617
    FHLMC stock .......................         26      1,077          --       1,103
    FHLMC certificates ................      5,164        183          --       5,347
    FNMA certificates .................      7,488        289          --       7,777
    Collateralized mortgage obligations     16,780        106         (27)     16,859
                                          --------   --------    --------    --------
                                          $ 33,105   $  1,655    $    (57)   $ 34,703
                                          ========   ========    ========    ========
Securities held-to-maturity
    U.S. government agencies ..........   $ 14,735   $      8    $    (25)   $ 14,718
    GNMA certificates .................      4,328        133          --       4,461
    FHLMC certificates ................      7,773        444          --       8,217
    FNMA certificates .................     11,977        368         (25)     12,320
    Collateralized mortgage obligations      7,605         97          --       7,702
                                          --------   --------    --------    --------
                                          $ 46,418   $  1,050    $    (50)   $ 47,418
                                          ========   ========    ========    ========
</TABLE>

<TABLE>
<CAPTION>

                                                         December 31, 1996
                                          -------------------------------------------
                                                        Gross        Gross
                                          Amortized  Unrealized    Unrealized   Fair
                                            Cost       Gains       (Losses)     Value
                                            ----       -----       --------     -----
Securities available-for-sale
<S>                                       <C>        <C>         <C>         <C>
    U.S. government agencies ..........   $  7,804   $     30    $     (7)   $  7,827
    FHLMC stock .......................         26        725          --         751
    FHLMC certificates ................      7,602        150         (10)      7,742
    FNMA certificates .................     12,731        115         (25)     12,821
    Collateralized mortgage obligations     13,461         45         (28)     13,478
                                          --------   --------    --------    --------
                                          $ 41,624   $  1,065    $    (70)   $ 42,619
                                          ========   ========    ========    ========
Securities held-to-maturity
    GNMA certificates .................   $  3,058   $    106    $     --    $  3,164
    FHLMC certificates ................     10,094        413          (9)     10,498
    FNMA certificates .................     13,916        253          (6)     14,163
    Collateralized mortgage obligations      2,469         30          (2)      2,497
                                          --------   --------    --------    --------
                                          $ 29,537   $    802    $    (17)   $ 30,322
                                          ========   ========    ========    ========
</TABLE>


                                       30
<PAGE>


NOTE 2 - SECURITIES (Continued)

On December 31, 1995, the  Corporation  reclassified a portion of its securities
held-to-maturity   to   available-for-sale   in  accordance  with  "A  Guide  to
Implementation  of Statement 115 on Accounting  for Certain  Investments in Debt
and Equity  Securities",  in order to improve the Bank's  flexibility in meeting
liquidity   needs.   The  amortized  cost  and  unrealized  gain  on  securities
transferred to available-for-sale were $9,311,000 and $141,000, respectively.

The amortized cost and estimated market value of debt securities at December 31,
1997 by  contractual  maturity are shown below.  Expected  maturities may differ
from  contractual  maturities  because  borrowers  may have the right to call or
prepay obligations with or without call or prepayment penalties.


                                      Held-to-Maturity      Available-for-Sale
                                     ------------------    ---------------------
                                     Amortized    Fair     Amortized      Fair
                                       Cost       Value      Cost         Value
                                       ----       -----      ----         -----

Due in one year or less ........     $   999     $   995     $    --     $    --
Due after one year
 through five years ............       6,852       6,838       2,664       2,625
Due after five years
 through ten years .............       6,884       6,885         983         992
                                     -------     -------     -------     -------
                                      14,735      14,718       3,647       3,617
FHLMC stock ....................          --          --          26       1,103
Mortgage-backed securities
 and collateralized
 mortgage obligations ..........      31,683      32,700      29,432      29,983
                                     -------     -------     -------     -------
                                     $46,418     $47,418     $33,105     $34,703
                                     =======     =======     =======     =======

At December  31, 1997 and 1996,  all of the  Corporation's  mortgage-backed  and
related  securities  were guaranteed or insured by  quasi-governmental  agencies
(e.g., GNMA, FNMA, FHLMC).

Sales of securities available-for-sale are summarized as follows:

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

Proceeds .......................          $  596          $7,621          $4,914
Gross losses ...................               3             124             157


On  February  13,  1995,  the  Corporation  sold six  securities  classified  as
held-to-maturity.  These sales were permissible under the provisions of SFAS No.
115 since the securities had been paid down to less than 15% of the original par
value.  Gross proceeds  totaled  $575,000,  with gross gains of $2,000 and gross
losses of $6,000.

                                       31
<PAGE>


NOTE 3 - LOANS RECEIVABLE

Loans receivable consist of the following at:


                                                              December 31,
                                                         -----------------------
                                                           1997          1996
                                                           ----          ----
First mortgage loans
 Principal balances:
  Secured by one-to-four-family residences .........     $ 68,283      $ 48,339
  Secured by multi-family ..........................        4,951         2,783
  Secured by commercial real estate ................          209           573
                                                         --------      --------
                                                           73,443        51,695
 Less:
  Loans in process .................................          125            --
  Net deferred loan origination costs ..............         (287)           (2)
                                                         --------      --------
       Total first mortgage loans ..................       73,605        51,697
Consumer and other loans Principal balances:
  Home equity loans ................................        2,740         2,114
  Loans on deposits ................................          116           169
  Automobile loans .................................          473           301
                                                         --------      --------
       Total consumer and other loans ..............        3,329         2,584
Less allowance for loan losses .....................          775           745
                                                         --------      --------
                                                         $ 76,159      $ 53,536
                                                         ========      ========


There were no impaired loans at December 31, 1997 or December 31, 1996.

Nonaccrual  and  renegotiated  loans  totaled  approximately  $256,000 and $0 at
December 31, 1997 and 1996,  respectively.  The approximate  amounts of interest
income that would have been recorded  under the original terms of such loans and
the interest income actually recognized were not material.

The Corporation is not committed to lend additional funds to debtors whose loans
have been modified.

Loans serviced for others consisted of approximately $1,527,000, $1,931,000, and
$2,539,000 at December 31, 1997, 1996, and 1995, respectively.  These loans were
sold to the Federal Home Loan Mortgage Corporation.

                                       32
<PAGE>


NOTE 3 - LOANS RECEIVABLE (Continued)

The Corporation's  lending  activities have been concentrated  primarily in Cook
County,  Illinois,  where its main office is located. The largest portion of the
Corporation's  loans are  originated  for the purpose of enabling  borrowers  to
purchase  residential  real  estate  property  secured  by  first  liens on such
property.  At December 31, 1997,  approximately 89% of the  Corporation's  loans
were secured by owner-occupied,  one-to-four-family  residential  property.  The
Corporation   requires   collateral  on  all  loans  and   generally   maintains
loan-to-value ratios of 80% or less.

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


                                                     For the Year Ended
                                                         December 31,
                                                 -------------------------------
                                                  1997        1996         1995
                                                  ----        ----         ----
Balance at beginning of year .............       $ 745       $ 600        $ 469
Provision charged to income ..............          30         150          133
Charge-offs ..............................          --          (5)          (2)
                                                 -----       -----        -----
                                                 $ 775       $ 745        $ 600
                                                 =====       =====        =====


NOTE 4 - PREMISES AND EQUIPMENT

Premises and equipment consists of the following at:

                                                              December 31,
                                                        ------------------------
                                                          1997            1996
                                                          ----            ----
Land ...........................................        $ 1,045         $    77
Building and landscaping .......................          1,461           1,465
Leasehold improvements .........................            102              --
Furniture, fixtures, and equipment .............            477             473
                                                        -------         -------
    Total cost .................................          3,085           2,015
Accumulated depreciation .......................           (986)           (972)
                                                        -------         -------
                                                        $ 2,099         $ 1,043
                                                        =======         =======

                                       33

<PAGE>


NOTE 5 - DEPOSITS

Savings and certificate of deposit  accounts with balances greater than $100,000
totaled  $5,459,000 and $6,421,000 at December 31, 1997 and 1996,  respectively.
Deposits greater than $100,000 are not insured.

At December 31, 1997,  scheduled  maturities of  certificates  of deposit are as
follows:

        1998 ............................  $ 48,752
        1999 ............................    11,362
        2000 ............................     3,543
        2001 ............................     1,550
        2002 and thereafter .............       819
                                           --------
                                           $ 66,026
                                           ========


NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK

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

                                              Interest
    Maturity Date                               Rate        1997            1996
    -------------                               ----        ----            ----
August 19, 1997 ...............                 9.72%     $    --        $ 1,500
October 23, 1998 ..............                 5.86       11,000             --
                                                          -------        -------
                                                          $11,000        $ 1,500
                                                          =======        =======

The  Corporation  maintains  a  collateral  pledge  agreement  covering  secured
advances  whereby the  Corporation 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.


                                       34

<PAGE>



NOTE 7 - INCOME TAXES

An analysis of the provision for income taxes consists of the following:

                                                For the Year Ended
                                                   December 31,
                                        ----------------------------------------
                                          1997           1996              1995
                                          ----           ----              ----
Current
  Federal ....................           $ 842            $ 107            $ 414
  State ......................             104              (15)              33
Deferred .....................            (320)             (10)             112
                                         -----            -----            -----
                                         $ 626            $  82            $ 559
                                         =====            =====            =====

The  provision  for income  taxes  differs from that  computed at the  statutory
corporate tax rate as follows:

                                               For the Year Ended
                                                  December 31,
                                 -----------------------------------------------
                                     1997            1996             1995
                                 ------------   -------------    ---------------
Provision for federal
  income taxes computed
  at statutory rate of 34% ...   $534    34.0%  $ 83     34.0%    $514     34.0%
State income taxes,  net
  of federal tax effect and
  other ......................     92     5.9     (1)     (.2)      45      3.0
                                 ----    ----    ----     ----     ----    ----
                                 $626    39.9%  $ 82     33.8%    $559     37.0%
                                 ====    ====    ====     ====     ====    ====


Deferred tax assets (liabilities) are comprised of the following:

                                                                December 31,
                                                            --------------------
                                                             1997           1996
                                                             ----           ----
Contributions ......................................        $ 372         $  --
Loans, principally due to allowance
  for loan losses ..................................          175           163
                                                            -----         -----
    Total deferred tax assets ......................          547           163
Unrealized gain on securities
  available-for-sale ...............................         (623)         (388)
Depreciation .......................................          (44)          (40)
Federal Home Loan Bank stock dividends .............          (42)          (42)
Deferred loan fees .................................          (60)          (19)
Contributions ......................................           --            (2)
Other ..............................................          (38)          (17)
                                                            -----         -----
    Total deferred tax liabilities .................         (807)         (508)
                                                            -----         -----
         Net deferred tax liabilities ..............        $(260)        $(345)
                                                            =====         =====

                                       35
<PAGE>


NOTE 7 - INCOME TAXES (Continued)

The Bank has  qualified  under  provisions  of the  Internal  Revenue Code which
permit it to deduct from taxable  income a provision for bad debts which differs
from the  provision  charged  to income on the  financial  statements.  Retained
earnings at December  31, 1997 and 1996  include  approximately  $3,114,000  for
which no deferred federal income tax liability has been recorded.


NOTE 8 - EARNINGS PER SHARE

A  reconciliation  of the  numerators  and  denominators  for earnings per share
computations  for the period  April 1, 1997 to December  31,  1997 is  presented
below.

Basic earnings per share
     Net income .................................................       $   944
     Less:  net income of Bank prior to conversion ..............          (171)
                                                                        -------
         Net income available to common stockholders ............       $   773
                                                                        =======
     Weighted average common shares outstanding .................         1,918
         Basic earnings per share ...............................       $   .40
                                                                        =======

The  Corporation's   outstanding  stock  options  were  not  considered  in  the
computations  of  diluted  earnings  per share  because  the  effects of assumed
exercise  would  have  been   antidilutive.   In  addition,   the  Corporation's
outstanding   performance-based  stock  awards  granted  during  1997  were  not
considered  in the  computations  of  diluted  earnings  per share  because  the
performance  conditions for such awards had not been attained as of December 31,
1997. In future years,  outstanding  stock options may be exercised  which would
increase the weighted  average common shares  outstanding and,  thereby,  dilute
earnings  per share.  In  addition,  if the average  common  stock price were to
exceed the  exercise  price of  outstanding  options in a future  year or if the
performance  conditions specified under the  performance-based  stock award plan
were to be met by the end of a future year, the assumed  exercise of the options
and/or the assumed  issuance  of the  performance  awards  would have a dilutive
effect on earnings per share for that future year. However,  previously reported
earnings  per share and diluted  earnings  per share are not restated to reflect
changes in the status of performance  conditions or changes in the  relationship
between exercise prices and average stock prices.


                                       36

<PAGE>


NOTE 9 - EMPLOYEE BENEFIT PLANS

An employee profit sharing plan was approved by the Board of Directors effective
January 1, 1985. The plan covers  employees having over one year of service (one
thousand  working hours) and who are at least 21 years of age.  Contributions to
the  profit  sharing  plan  are   determined   and  approved   annually  by  the
Corporation's  Board of  Directors.  Contributions  of  $42,000,  $108,000,  and
$132,000 were approved and funded for the years ended  December 31, 1997,  1996,
and 1995, respectively.

A money purchase plan was approved by the Board of Directors  effective  January
1, 1993. The plan covers employees having over one year of service (one thousand
working hours) and who are at least 21 years of age. The Corporation contributes
an amount  equal to ten  percent of  participants'  salaries.  Contributions  of
$82,000,  and $91,000 were funded for the years ended  December  31,  1996,  and
1995,  respectively.   During  1996,  the  Board  of  Directors  authorized  the
termination of the Corporation's money purchase plan.

As part of the conversion  transaction,  the Corporation established an employee
stock ownership plan (ESOP) for the benefit of substantially all employees.  The
ESOP borrowed  $1,661,060  from the  Corporation and used those funds to acquire
166,106 shares of the Corporation's stock at $10 per share.

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

During  1997,  16,610  shares of stock with an average  fair value of $15.35 per
share were committed to be released,  resulting in ESOP compensation  expense of
$255,000. Shares held by the ESOP at December 31, 1997 are as follows:

Allocated shares .................................                17
Unallocated shares ...............................               149
                                                              ------
   Total ESOP shares .............................               166
                                                              ======
   Fair value of unallocated shares ..............            $2,552
                                                              ======

                                       37
<PAGE>


NOTE 9 - EMPLOYEE BENEFIT PLANS (Continued)

The  Corporation has a stock option plan under the terms of which 207,633 shares
of the Corporation'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  Corporation's  stock  option  plan and  changes
during the year are presented below:


                                                                   Weighted-
                                                  December 31,       Average
                                                     1997           Exercise
                                                    Shares           Price
                                                    ------           -----
Outstanding at beginning of year ............            --          $   --
Granted .....................................       182,716           17.24
Exercised ...................................            --              --
Forfeited ...................................            --              --
                                                    -------          ------
     Outstanding at end of year .............       182,716          $17.24
                                                    =======          ======
Options exercisable at end of year ..........            --
Weighted-average fair value of options
  granted during year .......................     $    5.63
Average remaining option term ...............          9.8 years


The Corporation 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 for awards under the plan in 1997  consistent  with the
method  of  SFAS  No.  123,  "Accounting  for  Stock-Based  Compensation",   the
Corporation'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.

      Pro forma net income ...............  $ 742
      Pro forma earnings per share
          Basic and diluted ..............    .39

                                       38
<PAGE>


NOTE 9 - EMPLOYEE BENEFIT PLANS (Continued)

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.

Date of grant .....................................      10/22/97     12/9/97
Options granted ...................................       172,334      10,382
Estimated fair value stock of options granted: ....       $  5.64    $   5.44
   Assumptions used:
       Risk-free interest rate ....................          6.12%       5.95%
       Expected option life .......................      10 years    10 years
       Expected stock price volatility ............           .05         .05
       Expected dividend yield ....................          1.40%       1.40%

In connection with the conversion to stock ownership,  the Corporation adopted a
Management  Recognition  and  Retention  Plan (MRP).  In 1997,  the  Corporation
contributed  $1.4 million  allowing the MRP to acquire  83,053  shares of common
stock of the Corporation,  at an average cost of $17.25 per share, to be 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 $50,817 for the year
ended December 31, 1997.


NOTE 10 - REGULATORY MATTERS

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

                                       39
<PAGE>



NOTE 10 - REGULATORY MATTERS (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
                                                                                         for Capital       Under Prompt Corrective
                                                                     Actual            Adequacy Purposes      Action Regulations
                                                            ---------------------     -------------------  -----------------------
1997                                                         Amount         Ratio      Amount       Ratio     Amount       Ratio
----                                                         ------         -----      ------       -----     ------       -----
<S>                                                         <C>              <C>      <C>            <C>     <C>           <C>
Total capital (to risk-weighted assets) ..............      $21,468          34.9%    $ 4,928        8.0%    $ 6,159       10.0%
Tier 1 (core) capital (to risk-weighted
  assets) ............................................       20,698          33.6       2,464        4.0       3,696        6.0
Tier 1 (core) capital (to adjusted total
  assets) ............................................       20,698          12.3       5,019        3.0         N/A        N/A
Tangible capital (to adjusted total
  assets) ............................................       20,698          12.3       2,510        1.5         N/A        N/A
Tier 1 (leverage) capital (to average
  total assets) ......................................       20,698          12.6       4,920        3.0       8,200        5.0

1996
----
Total capital (to risk-weighted assets) ..............      $12,124          24.6%    $ 3,936        8.0%    $ 4,920       10.0%
Tier 1 (core) capital (to risk-weighted
  assets) ............................................       11,508          23.4       1,968        4.0       2,952        6.0
Tier 1 (core) capital (to adjusted total
  assets) ............................................       11,508           7.9       4,390        3.0         N/A        N/A
Tangible capital (to adjusted total
  assets) ............................................       11,508           7.9       2,195        1.5         N/A        N/A
Tier 1 (leverage) capital (to average
  total assets) ......................................       11,508           7.9       4,395        3.0       7,325        5.0
</TABLE>


At December 31,  1997,  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  institution's
category.

                                       40
<PAGE>


NOTE 10 - REGULATORY MATTERS (Continued)

Federal  regulations  require the Bank to comply with a Qualified  Thrift Lender
(QTL) test which  requires that 65% of assets be  maintained in  housing-related
finance  and other  specified  assets.  If the QTL test is not met,  limits  are
placed on growth,  branching,  new investments,  FHLB advances, and dividends or
the institution must convert to a commercial bank charter.  Management considers
the QTL test to have been met.


NOTE 11 - OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

The Corporation is party to financial instruments with off-balance-sheet risk in
the normal course of business of meeting the financing  needs of its  customers.
These  financial  instruments  include  commitments to fund loans and previously
approved unused lines of credit.  The  Corporation'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 Corporation uses
the same credit policy for commitments as it uses for on-balance-sheet items.
These financial instruments are summarized as follows:


                                                               Contract Amount
                                                                 December 31,
                                                             -------------------
                                                              1997         1996
                                                              ----         ----
Financial instruments whose contract
 amounts represent credit risk
   Commitments to extend credit, including
     loans in process ................................       $  652       $1,223


At December 31, 1997 and 1996, commitments to extend credit,  including loans in
process,  consisted  of  $352,000  and  $858,000,  respectively,  in fixed  rate
commitments. The commitments at December 31, 1997 are due to expire within 30 to
60 days of issuance and have rates ranging from 7.125% to 7.5%.

Financial   instruments   which   potentially   subject   the   Corporation   to
concentrations of credit risk include interest-bearing deposit accounts in other
financial institutions and loans. At December 31, 1997 and 1996, the Corporation
had deposit  accounts  with  balances  totaling  approximately  $13,686,000  and
$15,514,000,   respectively,   at  the  Federal   Home  Loan  Bank  of  Chicago.
Concentrations of loans are described in Note 3.

                                       41
<PAGE>


NOTE 12 - COMMITMENTS AND CONTINGENCIES

The  Corporation is, from time to time, a party to certain  lawsuits  arising in
the ordinary course of its business. The Corporation believes that none of these
lawsuits would, if adversely  determined,  have a material adverse effect on its
financial condition, results of operations, or capital.

At December 31, 1997 and 1996, the Corporation was obligated under noncancelable
operating  leases for office space.  Net rent expenses under  operating  leases,
including the proportionate  share of taxes,  insurance,  and maintenance costs,
were approximately  $95,000,  $89,000,  and $93,000 for the years ended December
31,  1997,  1996,  and 1995,  respectively.  The  lease for the Oak Lawn  branch
expires April 1, 2002. The lease for the Chicago branch expires on July 1, 2002.
Projected  minimum rental payments under the terms of the leases,  not including
taxes, insurance, and maintenance, are as follows at December 31, 1997:

            1998 ..................................    $   78
            1999 ..................................        78
            2000 ..................................        78
            2001 ..................................        78
            2002 and thereafter ...................        27
                                                       ------
                Total .............................    $  339
                                                       ======


NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The   approximate   carrying  amount  and  estimated  fair  value  of  financial
instruments consist of the following:

<TABLE>
<CAPTION>

                                                             December 31, 1997              December 31, 1996
                                                          -------------------------    --------------------------
                                                          Approximate                  Approximate
                                                           Carrying      Estimated      Carrying       Estimated
                                                            Amount       Fair Value       Amount       Fair Value
                                                            ------       ----------       ------       ----------
Financial Assets
<S>                                                       <C>           <C>           <C>           <C>
    Cash and cash equivalents.....................        $    14,883   $    14,883   $    17,410   $    17,410
    Securities....................................             81,121        82,121        72,156        72,941
    Loans receivable, net.........................             76,159        77,293        53,536        53,873
    Federal Home Loan Bank stock..................                987           987           901           901
    Accrued interest receivable...................                904           904           788           788
</TABLE>


                                       42

<PAGE>


NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

<TABLE>
<CAPTION>

                                                    December 31, 1997             December 31, 1996
                                                -------------------------    --------------------------
                                                 Approximate                  Approximate
                                                  Carrying      Estimated      Carrying       Estimated
                                                   Amount      Fair Value       Amount       Fair Value
                                                   ------      ----------       ------       ----------
Financial Liabilities
<S>                                             <C>            <C>           <C>           <C>
    Interest-bearing demand deposits..........  $  (20,041)    $  (20,041)   $  (19,175)   $  (19,175)
    Savings deposits..........................      (44,891)      (44,891)      (47,173)      (47,173)
    Time deposits.............................      (66,026)      (66,306)      (64,895)      (65,047)
    Advance from Federal Home Loan Bank.......      (11,000)      (11,013)       (1,500)       (1,515)
    Advance payments by borrowers for
      taxes and insurance.....................         (804)         (804)         (681)         (681)
    Accrued interest payable..................         (168)         (168)         (128)         (128)
</TABLE>


For purposes of the above, the following assumptions were used:

Cash  and  Cash  Equivalents:  The  estimated  fair  values  for  cash  and cash
equivalents are based on their carrying  values due to the short-term  nature of
these assets.

Securities:  The fair values of investment  and  mortgage-backed  securities are
based on the quoted market value for the individual security or its equivalent.

Loans  Receivable:  The  estimated  fair value for loans has been  determined by
calculating the present value of future cash flows based on the current rate the
Bank would  charge for similar  loans with  similar  maturities,  applied for an
estimated time period until the loan is assumed to be repriced or repaid.

Deposits:  The  estimated  fair value for time  deposits has been  determined by
calculating  the present  value of future cash flows based on estimates of rates
the  Corporation  would pay on such deposits,  applied for the time period until
maturity.  The  estimated  fair  values of  interest-bearing  demand and savings
deposits  are  assumed  to  approximate  their  carrying  values  as  management
establishes  rates on these  deposits  at a level  that  approximates  the local
market area. Additionally, these deposits can be withdrawn on demand.

Advances  from Federal  Home Loan Bank:  The fair value of the Federal Home Loan
Bank advance was  determined  by  calculating  the present  value of future cash
flows using the current rate for an advance with a similar length to maturity.

Accrued Interest: The fair values of accrued interest receivable and payable are
assumed to equal their carrying values.

                                       43
<PAGE>


NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

Off-Balance-Sheet  Instruments:  Off-balance-sheet  items consist principally of
unfunded loan commitments. The fair value of these commitments is not material.

Other  assets and  liabilities  of the  Corporation  not  defined  as  financial
instruments,  such as  property  and  equipment,  are not  included in the above
disclosures.  Also not  included  are  nonfinancial  instruments  typically  not
recognized  in financial  statements  such as the value of core  deposits,  loan
servicing rights, customer goodwill, and similar items.

While  the  above  estimates  are  based on  management's  judgment  of the most
appropriate  factors,  there is no assurance that if the Corporation disposed of
these  items on  December  31,  1997 or 1996,  the fair  value  would  have been
achieved,  because the market value may differ  depending on the  circumstances.
The estimated  fair values at December 31, 1997 and 1996 should not  necessarily
be considered to apply at subsequent dates.


NOTE 14 - PLAN OF CONVERSION

On  September  10,  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 and the adoption
of a federal thrift charter.  On March 31, 1997, the Corporation  sold 2,076,325
shares of common stock at $10 per share and received proceeds of $18,376,279 net
of conversion expenses of $725,910 and ESOP shares. Approximately 50% of the net
proceeds were used by the Corporation to acquire all of the capital stock of the
Bank.

Simultaneous with the conversion,  the Board of Directors of the holding company
established  The Hemlock  Federal  Charitable  Foundation.  The  foundation is a
not-for-profit  entity.  In 1997, the Board approved a $1,000,000  unconditional
contribution  to the  Foundation,  of  which  $280,000  was  paid in  1997.  The
remaining  $720,000  is  included  in  other  liabilities  in  the  consolidated
statements of financial condition at December 31, 1997.

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  at that date was
$11,680,000.  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.

                                       44
<PAGE>


NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS

Presented below are the condensed statement of financial condition, statement of
income,  and statement of cash flows for Hemlock Federal Financial  Corporation.
The  Corporation  was formed on March 31, 1997.  Accordingly,  the statements of
income and cash flows  reflect the period  April 1, 1997  through  December  31,
1997.


                   CONDENSED STATEMENT OF FINANCIAL CONDITION
                                December 31, 1997

ASSETS
Cash and cash equivalents ....................................         $  5,448
Securities held-to-maturity ..................................            3,619
ESOP loan ....................................................            1,495
Investment in bank subsidiary ................................           21,673
Accrued interest receivable and other assets .................              364
                                                                       --------
                                                                       $ 32,599
                                                                       ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities .......................         $  2,172
Stockholders' equity
     Common stock ............................................               21
     Additional paid-in capital ..............................           20,105
     Unearned ESOP shares ....................................           (1,495)
     Unearned stock awards ...................................           (1,382)
     Retained earnings .......................................           12,203
     Net unrealized gain on subsidiary
       securities available-for-sale .........................              975
                                                                       --------
                                                                       $ 32,599
                                                                       ========

                                       45
<PAGE>


NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)


                          CONDENSED STATEMENT OF INCOME
                For the period April 1, 1997 to December 31, 1997

Income
     Securities .................................................       $   205
     ESOP loan ..................................................            87
     Interest-bearing deposits with other
       financial institutions ...................................           184
                                                                        -------
         Total income ...........................................           476
Other expenses ..................................................         1,074
                                                                        -------
Loss before income taxes and equity in undistributed
  earnings of bank subsidiary ...................................          (598)
Income tax benefit ..............................................          (202)
                                                                        -------
Loss before equity in undistributed earnings of
  bank subsidiary ...............................................          (396)
Equity in undistributed earnings of bank subsidiary .............         1,169
                                                                        -------
Net income ......................................................       $   773
                                                                        =======

                                       46

<PAGE>


NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)


                        CONDENSED STATEMENT OF CASH FLOWS
                For the period April 1, 1997 to December 31, 1997


Operating activities
     Net income ....................................................   $    773
     Adjustments to reconcile net income to net cash
       provided by operating activities
         Amortization of discounts and premiums on securities, net .         (6)
         Equity in undistributed earnings of bank subsidiary .......     (1,169)
         Change in
              Other assets .........................................       (364)
              Other liabilities ....................................        739
                                                                       --------
                  Net cash used in operating activities ............        (27)

Investing activities
     Purchase of securities held-to-maturity .......................     (7,485)
     Principal payments on securities ..............................        122
     Proceeds from maturities and calls of securities ..............      3,750
     Purchase of bank subsidiary stock .............................     (9,205)
                                                                       --------
         Net cash used in investing activities .....................    (12,818)

Financing activities
     Net proceeds from sale of common stock ........................     18,376
     Payment received on loan to ESOP ..............................        166
     Dividends paid ................................................       (249)
                                                                       --------
         Net cash provided by financing activities .................     18,293
                                                                       --------

Net change in cash and cash equivalents ............................      5,448

Cash and cash equivalents at beginning of period ...................         --
                                                                       --------

Cash and cash equivalents at end of period .........................   $  5,448
                                                                       ========


                                       47


<PAGE>

STOCKHOLDERS AND GENERAL INQUIRIES                   TRANSFER AGENT

Rosanne M. Belczak                                   Registrar and Transfer Co.
Hemlock Federal Financial Corporation                10 Commerce Drive
5700 West 159th Street                               Cranford, NJ  07016
Oak Forest, Illinois 60452                           1-(800) 368-5948
(708) 687-9400

ANNUAL AND OTHER REPORTS

         A copy of Hemlock Federal Financial Corporation's Annual Report on Form
10-KSB for the year ended  December 31, 1997, as filed with the  Securities  and
Exchange  Commission,  may be obtained  without charge by contacting  Rosanne M.
Belczak,  Hemlock Federal  Financial  Corporation,  5700 West 159th Street,  Oak
Forest, Illinois 60452.

                      HEMLOCK FEDERAL FINANCIAL CORPORATION
                              CORPORATE INFORMATION

Hemlock Federal Financial Corporation                Hemlock Federal Bank
Board of Directors                                   Officers

Maureen G. Partynski, Chairman                       Maureen G. Partynski
Michael R. Stevens                                    Chairman and CEO
Rosanne M. Belczak, Secretary                        Michael R. Stevens
Kenneth J. Bazarnik                                   President
Frank A. Bucz                                        Jean Thornton
Charles Gjondla                                       Vice-President, Controller
G. Gerald Schiera                                    Neil Christensen
                                                      Vice-President, Lending
                                                     Rosanne M. Belczak
                                                      Vice-President, Secretary

Hemlock Federal Bank for Savings Locations:

Main Office:
5700 W. 159th St.
Oak Forest, Illinois 60452   708-687-9400

8855 S. Ridgeland Ave.
Oak Lawn, Illinois 60453

4636 S. Damen Ave.
Chicago, Illinois 60609

Opening August, 1998:
15730 W. 127th St.
Lemont, Illinois 60439

                                       48

<PAGE>



Independent Auditors                             Special Counsel

Crowe Chizek & Co.                               Silver, Freedman & Taff, L.L.P.
One Mid America Plaza, Suite 700                 1100 New York Avenue, N.W.
Oak Brook Terrace, Illinois 60181                7th Floor
                                                 Washington, D.C.  20005

Stock Trading Information:

Hemlock Federal Financial  Corporation Common Stock is traded on the NASDQ stock
market under the trading symbol "HMLK."

Stockholder Services:

Stockholders  should direct inquiries  concerning  their stock,  change of name,
address or ownership;  report lost  certificates or consolidate  accounts to the
Company's transfer agent at 1-800-368-5948 or write:

         Registrar and Transfer
         P.O. Box 1010
         Cranford, New Jersey 07016

Investor Relations

         Hemlock  Federal  Financial  Corporation  files an annual report to the
Securities and Exchange  Commission on Form 10K and three  quarterly  reports on
Form 10Q. Copies of these forms are available by request.  Requests,  as well as
inquiries  from  stockholders,  analysts and others  seeking  information  about
Hemlock  Financial  Corporation  should  be  directed  to  Michael  R.  Stevens,
President, at 5700 W. 159th St., Oak Forest, Illinois 60452, phone 708-687-9400.

                                       49



<PAGE>

                                   SIGNATURES

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

                                           HEMLOCK FEDERAL FINANCIAL CORPORATION

Date: March 31, 1998                       By: /s/ Maureen G. Partynski
                                              -------------------------
                                              Maureen G. Partynski, Chairman of
                                               the Board and Chief Executive
                                               Officer
                                              (Duly Authorized Representative)


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following  persons in the  capacities and on
the dates indicated.


/s/ Michael R. Stevens                       /s/ Kenneth J. Bazarnik
------------------------------------         -----------------------------------
Michael R. Stevens, President, Chief         Kenneth J. Bazarnik, Director
Financial and Accounting Officer
and Director

Date: March 31, 1998                         Date: March 31, 1998


/s/ Rosanne Pastrek-Belczak                  /s/ Charles Gjondla
------------------------------------         -----------------------------------
Rosanne Pastrek-Belczak,                     Charles Gjondla, Director
Vice-President/Secretary and
Director

Date: March 31, 1998                         Date: March 31, 1998


/s/ Frank A. Bucz                            /s/ G. Gerald Schiera
------------------------------------         -----------------------------------
Frank A. Bucz, Auditor/Consultant            G. Gerald Schiera, Director
and Director

Date: March 31, 1998                         Date: March 31, 1998