Exhibit 13



1998 ANNUAL REPORT





[LOGO]










                      HEMLOCK FEDERAL FINANCIAL CORPORATION




<PAGE>




TABLE OF CONTENTS








        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................................ 20
        Stockholder Information.......................................... 48
        Corporate Information............................................ 49






<PAGE>




FROM YOUR CHAIRMAN & PRESIDENT


Dear Shareholder:

        1998 was a highly productive year in which we made considerable progress
in enhancing  shareholder value. Net income for the year ended December 31, 1998
increased  to $1.6  million,  as  compared to $944,000  for the  previous  year.
Stockholder's  equity decreased from $30.4 million to $27.2 million, a result of
the repurchase of 365,437 shares of Hemlock  Financial common stock during 1998.
In addition,  the Board of Directors  authorized the payment of a $.30 per share
dividend during 1998, an increase of over 50% from the prior year.

        In December of 1998,  we opened our fourth full service  facility in the
high-growth  suburb of Lemont,  Illinois.  The successful  grand opening of this
branch  contributed to an aggregate  increase in deposits of $12.2  million,  or
9.3%.

        The favorable  interest rate environment during the past year enabled us
to increase our loan portfolio by 33.9%,  with loan volume of $48.0 million,  as
compared to $19.3 million in the previous year.

        Other operational goals met in 1998 included the marketing of a new home
equity line of credit product,  the initiation of a cross-selling  program,  the
implementation  of a telephone  banking  service,  and the  conversion  to a new
PC-based transaction processing system.

        Despite this considerable list of accomplishments,  we have experience a
decrease  in our stock  price over the  course of this past year.  This has been
particularly frustrating since we believe it is attributable to general weakness
in  the  overall  financial  services  sector,  and  not  to  the  financial  or
operational  performance  of the Company.  However,  the Board of Directors will
continue its steady course to enhance shareholder value over the long term.

        Our  goals  for 1999  include  continued  deposit  growth,  particularly
through our Lemont  facility.  While we do not anticipate a continuation  of the
record level of refinance activity of 1998, we plan to increase  originations of
our home equity line, as well as multi-family  lending. We are also on target to
achieve Year 2000  compliance on all processing  systems,  and we intend to keep
our customer base informed of our progress in this area.

        The Board of Directors and  Management of Hemlock  Federal  believe that
considerable  opportunities exist within our market area as a result of consumer
disenchantment with the increasingly impersonal approach taken by the megabanks.
Hemlock Federal  maintains a reputation for superior customer service as well as
a strong  commitment  to the  communities  in  which  we  serve.  We  intend  to
capitalize on this strength  through  marketing  efforts aimed at increasing our
market  share and  further  expanding  our  relationships  within  our  existing
customer base.


                                        1

<PAGE>



        In 1999,  Hemlock Federal will celebrate its 95th year of service to the
community. The traditional principles upon which we were founded - commitment to
community,  prudent  financial  management,  personal service and fulfilling the
dream  of home  ownership  - have  stood  the  test of time.  On  behalf  of the
Directors,  Managers,  and Employees of Hemlock Federal,  we would like to thank
you for your  support  and  confidence.  Together  we will  work  diligently  at
remaining a strong  presence in the  communities  we serve and for the long-term
profitability of Hemlock Federal Financial Corporation.




                                                   Maureen G. Partynski
                                                   Chairman and CEO




                                                   Michael R. Stevens
                                                   President


                                              2

<PAGE>

<TABLE>
<CAPTION>



                   SELECTED CONSOLIDATED FINANCIAL INFORMATION


                                                                 At December 31,
                                           -----------------------------------------------------------
                                              1998        1997        1996        1995        1994
                                           ----------- ----------- ----------- ----------- -----------

Selected Financial Condition Data:

<S>                                           <C>         <C>         <C>         <C>         <C>     
Total assets..............................    $204,424    $176,683    $146,405    $145,626    $143,877
Cash and cash equivalents.................       6,036      14,883      17,410      13,301      16,827
Loans receivable, net(1)..................     101,977      76,159      53,536      45,232      37,659
Mortgage-backed securities:
  Held-to-maturity........................      52,516      31,683      29,537      43,106      66,040
  Available-for-sale......................      28,703      29,983      34,041      25,620       8,244
Investment securities:
  Held-to-maturity........................       6,101      14,735         ---       1,500       3,500
  Available-for-sale......................       1,810       3,617       7,827      13,125       7,934
FHLB stock................................       1,850         987         901         849         837
Deposits..................................     143,149     130,958     131,243     130,741     130,771
Total borrowings..........................      31,000      11,000       1,300       1,500       1,500
Stockholders' Equity......................      27,206      30,427      12,115      11,877      10,379

</TABLE>

<TABLE>
<CAPTION>


                                                         Year Ended
                                                        December 31,
                                      ----------------------------------------------
                                        1998      1997      1996      1995      1994
                                      --------- --------- --------- --------- ------
                                                   (Dollars in Thousands)
Selected Operations Data:

<S>                                     <C>       <C>       <C>        <C>      <C>   
Total interest income................   $12,750   $11,293   $10,137    $9,934   $8,501
Total interest expense...............     6,842     5,723     5,643     5,416    4,672
                                        -------   -------   -------    ------   ------
  Net interest income................     5,908     5,570     4,494     4,518    3,829
Provision for loan losses............        21        30       150       133      150
                                        -------   -------   -------    ------   ------
Net interest income after provision 
  for loan losses....................     5,887     5,540     4,344     4,385    3,679
Fees and service charges.............       573       417       379       352      308
Gain (loss) on sales of mortgage-backed
  securities and investment securities       19        (3)     (124)     (161)     (89)
Other non-interest income............       117       125       132       146      164
                                        -------   -------   -------    ------   ------
Total non-interest income............       709       539       387       337      383
Total non-interest expense...........     4,085     4,509     4,487     3,211    3,180
                                        -------   -------   -------    ------   ------
Income before taxes..................     2,511     1,570       244     1,511      882
Income tax provision ................       957       626        82       559      343
                                        -------   -------   -------    ------   ------
Net income...........................   $ 1,554   $   944   $   162    $  952   $  539
                                        =======   =======   =======    ======   ======

<FN>

(1)  The allowance for loan losses at December 31, 1998,  1997,  1996, 1995, and
     1994  was   $775,000,   $775,000,   $745,000,   $600,000,   and   $469,000,
     respectively.
</FN>
</TABLE>


                                                     3

<PAGE>


<TABLE>
<CAPTION>



                                                                     Year Ended December 31,
                                                    -----------------------------------------------------
                                                         1998       1997       1996      1995       1994
                                                    -----------------------------------------------------
Selected Financial Ratios and Other Data:
<S>                                                       <C>       <C>        <C>       <C>        <C>  
Performance Ratios:
  Return on assets (ratio of net income to average
       total assets)..........................            0.80%     0.58%      0.11%     0.66%      0.37%
  Return on equity (ratio of net income to average 
      equity).................................            5.33      3.52       1.38      8.73       5.27
  Interest rate spread information:
     Average during period.....................           2.58      2.85       2.93      3.01       2.49
    End of period..............................           2.58      2.92       3.07      3.11       2.93
    Net interest margin(2).....................           3.17      3.53       3.20      3.25       2.69
  Ratio of operating expense to average total assets      2.12      2.76       3.07      2.23       2.18
  Ratio of average interest-earning assets to average
        interest-bearing liabilities...........         116.16    118.59     106.67    106.31     106.27
Quality Ratios:
  Non-performing assets to total assets at 
       end of period                                      0.06      0.15       0.05      0.40       0.43
  Allowance for loan losses to non-performing loans     623.40    302.73     116.51    103.63      76.01
  Allowance for loan losses to gross loans receivable     0.78      1.01       1.37      1.31       1.23

Capital Ratios:(2)
  Stockholders' equity to total assets at 
      end of period                                      13.31     17.22       7.86      8.16       7.22
  Average stockholders' equity to average assets         15.09     16.45       7.93      7.59       7.01

Other data:
   Number of full service offices..............             4          3         3         3          3
<FN>

(1) Ratios are exclusive of SFAS 115 valuation.  (2) Net interest income divided
by average interest-earning assets.
</FN>
</TABLE>



                                        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 $204.4 million and $176.7 million
at December 31, 1998 and December 31, 1997, respectively.  The increase in total
assets is primarily  attributable  to an increase in loans  receivable  of $25.8
million due  primarily to an increase in  refinancing  activity in the Company's
market area and an increase in securities held-to-maturity of $12.2 million. The
increase was partially offset by a decrease in cash and cash equivalents of $8.8
million.

        Total  liabilities at December 31, 1998 were $177.2 million  compared to
$146.3  million at  December  31,  1997,  an increase  of $30.9  million.  Total
deposits increased by $12.1 million, from $131.0 million at December 31, 1997 to
$143.1  million at December 31, 1998, due  principally to a general  increase in
deposits  in the  Company's  existing  branches  as  well as the  opening  of an
additional branch office in December, 1998. In addition, FHLB advances increased
by $20.0  million,  from $11.0  million at December 31, 1997 to $31.0 million at
December  31,  1998.  The  increase in deposits  and  advances  was used to fund
increases in both loans receivable and securities held-to-maturity.

                                        5

<PAGE>



        Stockholders'  equity at December 31, 1998 was $27.2 million compared to
$30.4  million at December 31, 1997, a decrease of $3.2  million.  This decrease
was due  primarily to the  repurchase of 365,437  shares of the Company's  stock
during 1998.

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, 1998 AND 1997

General

        Consolidated  net income of the Company for the year ending December 31,
1998 was $1.6 million,  as compared to $944,000 for the year ending December 31,
1997.  The $610,000  increase in net income was  primarily  attributable  to the
$613,000   after-tax  accrual  to  establish  the  Hemlock  Federal   Charitable
Foundation, recorded in March, 1997.

Net Interest Income

        Net  interest  income  after  provisions  for loan losses  increased  by
$347,000 to $5.9 million for the year ending  December 31, 1998,  as compared to
$5.5  million for the year ending  December 31,  1997.  The net interest  margin
decreased to 3.17% for the year ended  December 31, 1998 from 3.53% for the year
ended  December  31,  1997,  primarily as a result of a decrease in the yield of
interest  earning  assets for the year ended  December 31, 1998, as reflected in
the  decrease in the interest  rate spread to 2.58% for the year ended  December
31, 1998 from 2.85% for the year ended December 31, 1997.

Interest Income

        Interest  income for the year ended  December 31, 1998 was $12.7 million
compared to $11.3 million for the year ended  December 31, 1997. The increase in
interest  income was  primarily a result of an increase of $28.1  million in the
average balance of interest-earning  assets as a result of the increases in both
loans receivable and securities held-to-maturity for the year ended December 31,
1998. The average  balance of loans  receivable  increased $28.1 million and the
average balance of securities increased $2.1 million.  This was partially offset
by a decrease in the average yield on  interest-earning  assets to 6.85% for the
year ended December 31, 1998 from 7.15% for the year

                                        6

<PAGE>



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, 1998 was $6.8 million
compared to $5.7 million for the year ended  December 31, 1997. The increase was
primarily  the result of a $27.0  million  increase  in the  average  balance of
interest-bearing  liabilities  resulting from  increased  deposits as well as an
increase in advances from the Federal Home Loan Bank of Chicago.

Provisions for Loan Losses

        The Company recorded a provision for loan losses of $21,000 for the year
ended  December 31, 1998,  which offset  chargeoffs  of $21,000  during the same
period.  The total  allowance  for loan losses was  $775,000 as of December  31,
1998.  The  allowance  was  equal  to  0.78%  of  total  loans  and  623.40%  of
non-performing  loans as of December  31, 1998.  The Company had  non-performing
assets  totaling  $124,000 as of December 31, 1998.  The amount of the provision
and allowance for 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 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  $170,000 to $709,000 for the year ended
December  31,  1998.  The  increase  was  primarily  attributable  to a $156,000
increase in fees and charges  resulting from an increase in fees associated with
lending.

Non-Interest Expense

        Non-interest  expense was $4.1  million for the year ended  December 31,
1998,  and $4.5  million for the year ended  December  31,  1997.  The  $400,000
decrease was due to the $1.0 million  accrual to establish  the Hemlock  Federal
Charitable  Foundation  in 1997.  This was offset by an  increase of $373,000 in
compensation  expense in 1998 due to the  establishment  of the  Recognition and
Retention Plan as well as the hiring of additional personnel for the new branch.

Provision for Income Taxes

        The  Company's  federal  and state  income tax  expense  increased  from
$626,000  for the year ended  December  31, 1997 to $957,000  for the year ended
December  31, 1998.  The  $331,000  increase in income tax was the result of the
increase in net income before income taxes of $941,000.

                                        7

<PAGE>



                       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 to 2.85% for the
year ended December 31, 1997 from 2.93% for the year ended December 31, 1996.

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. 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 to 7.15% for the year
ended  December 31, 1997 from 7.21% for the year ended  December  31, 1996.  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.


                                        8

<PAGE>



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.
Noninterest   expense  for  1996  also  included  the  payment  of  $840,000  to
recapitalize the Savings Association Insurance Fund.

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.



                                        9

<PAGE>



Quantitative and Qualitative Disclosures About Market Risk

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

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                           --------------------------------------------------------------------------------------------
                                         1998                              1997                          1996
                           ------------------------------  ------------------------------ -----------------------------
                            Average     Interest              Average    Interest           Average    Interest
                           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)........   $88,595   $6,535      7.38%     $60,541     $4,829    7.98%   $50,555     $4,069    8.05%
Mortgage-backed securities.    70,005    4,538      6.48       63,597      4,295    6.75     65,739      4,617    7.02
Securities(2)..............    14,465      919      6.35       18,759      1,210    6.45      9,992        599    5.99
Interest-bearing deposits..    11,286      632      5.60       14,082        884    6.28     13,428        782    5.82
Other earning assets(3)....     1,768      126      7.12          986         75    7.61        915         70    7.65
                              -------   ------               --------     ------             ------    -------
   Total earning assets(1).   186,118   12,750      6.85      157,965     11,293    7.11    140,629     10,137    7.21
Non-interest earning assets     6,833                           5,151                         5,354
                             --------                        --------                        ------
   Total assets............  $192,951                        $163,196                      $195,983
                             ========                        ========                      ========

Interest-Earning Liabilities:
Savings deposits...........    46,460    1,333      2.87       45,741      1,467    3.21     46,369      1,445    3.12
Demand and NOW.............    15,663      319      2.04       14,211        337    2.37     13,330        323    2.42
MMDA.......................     5,712      180      3.15        5,024        159    3.16      5,516        174    3.15
Certificates of Deposit....    67,467    3,659      5.42       64,765      3,541    5.47     65,125      3,552    5.45
Borrowings.................    24,923    1,351      5.42        3,462        219    6.32      1,500        149    9.93
                             --------   ------                 ------     ------             ------     ------
   Total interest-bearing                                                                           
      liabilities..........   160,225    6,842      4.27      133,203      5,723    4.30    131,840      5,643    4.28
                                        ------                            ------                        ------

Non-interest-bearing            
      liabilities..........     3,592                           3,091                         2,531
                              -------                          ------                        ------
   Total liabilities.......   163,817                         136,312                       134,371

Equity.....................    29,134                          26,834                        11,612
                             --------                         -------                       -------
   Total liabilities and     
      equity...............  $192,951                        $163,146                      $145,983
                             ========                        ========                      ========

Net interest/spread........            $5,908      2.58%                  $5,570    2.85%               $4,494    2.93%
                                       ======     =====                   ======    ====                ======    ====
Margin.....................                        3.17%                            3.53%                         3.20%
                                                  =====                             ====                          ====
Assets to liabilities...     116.16%                         118.59%                        106.67%
                             ======                          ======                         ======
<FN>

(1)  Calculated net of deferred loan fees, loan discounts,  loans in process and
     loss reserves.
(2)  Calculated based on amortized cost.
(3)  Includes FHLMC, FHLB stock and equity securities, at cost.
</FN>
</TABLE>

                                       10

<PAGE>



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

<TABLE>
<CAPTION>


                                                              At December 31,
                                          ----------------------------------------------------
                                              1998       1997       1996       1995      1994
                                          ----------------------------------------------------
<S>              <C>                           <C>        <C>        <C>       <C>        <C>  
Weighted average yield on:
 Loans receivable(1)................           7.27%      7.63%      7.81%     8.06%      8.20%
 Mortgage-backed securities(2)......           6.32       6.99       7.28      8.22       6.42
 Securities(2)......................           6.35       5.22       7.60      5.10       6.71
 Other interest-earning assets......           4.81       5.77       6.16      4.26       5.38
   Combined weighted average yield
        on interest-earning assets..           6.75       7.27       7.36      7.45       6.78

Weighted average rate paid on:
 Passbook Savings ..................           2.94       2.94       3.14      3.15       3.14
 NOW................................           2.02       2.22       2.52      3.14       3.14
 MMDA...............................           3.20       3.20       3.20      2.52       2.52
 Certificate accounts...............           4.76       5.62       5.47      5.57       4.65
 Borrowings.........................           4.91       5.86       9.72      9.72       9.72
    Combined weighted average rate
        paid on interest-bearing 
        liabilities.................           4.17       4.35       4.29      4.34       3.85

Spread..............................           2.58%      2.92%      3.07%     3.11%      2.93%

<FN>

(1)  Excluding amortization of deferred loan fees.
(2)  Excluding premium amortization and discount accretion.
</FN>
</TABLE>

                                       11

<PAGE>



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

<TABLE>
<CAPTION>

                                        Year Ended December 31,       Year Ended December 31,
                                               1997 vs. 1998                 1996 vs. 1997
                                    ------------------------------- ----------------------------
                                          Increase                        Increase
                                         (Decrease)                      (Decrease)         
                                           Due to          Total           Due to        Total   
                                    ------------------    Increase   ----------------  Increase
                                      Volume     Rate    (Decrease)   Volume    Rate  (Decrease)
                                    ---------  --------  ----------  --------  ------ ----------
<S>                                    <C>     <C>        <C>          <C>       <C>        <C> 
Interest-earning assets:
 Loans receivable...................   $2,093  $ (387)    $  1,706   $  797    $   (37)   $  760
 Mortgage-backed securities.........      420    (177)         243     (148)      (174)     (322)
 Securities........................      (273)    (18)        (291)     562         49       611
Interest-bearing deposits...........     (163)    (89)        (252)      39         63       102
Other earning assets................       56      (5)          51        5        ---         5
                                       ------  ------     --------   ------    -------    ------
   Total interest-earning assets....    2,133    (676)       1,457    1,255        (99)    1,156

Interest-bearing liabilities:
 Passbook savings...................       23    (157)        (134)     (20)        42        22
 NOW................................       32     (50)         (18)      21         (7)       14
 MMDA...............................       22      (1)          21      (16)         1       (15)
 Certificate of Deposit.............      147     (29)         118      (20)         9       (11)
 Borrowings.........................    1,168     (36)       1,132      139        (69)       70
                                       ------  ------     --------   ------    -------    ------

   Total interest-bearing liabilities   1,392    (273)       1,119      104        (24)       80
                                       ------  ------     --------   ------    -------    ------

Net interest/spread.................   $  741  $ (404)    $    338   $1,151    $   (75)   $1,076
                                       ======  ======     ========   ======     ======    ======

</TABLE>


                                              12

<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, 1998, $60.5 million or 29.6% 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 three
years or less. At December 31, 1998,  the Company had $7.9 million of securities
with a remaining  average life of three years or less.  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 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,  1998,  the Bank would  qualify for an  exemption  from this rule;  however,
management

                                       13

<PAGE>



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, 1998, an analysis of the
Bank's interest rate risk as measured by the estimated  changes in NPV resulting
from  instantaneous  and  sustained  parallel  shifts in the yield curve (+/-400
basis points,  measured in 100 basis point  increments) as compared to tolerance
limits under the Bank's current policy.


                                                               
                                                                           
    Change in              Net Portfolio Value         NPV as % of PV of Assets
Interest Rates    ------------------------------------ ------------------------
 (Basis Points)    $ Amount       $ Change   % Change   NPV Ratio      Change
----------------  ----------     ---------- ---------- -----------    ---------
                                (Dollars in Thousands)

     +400            $18,194   $(10,183)      (36)%        9.60%       (410)bp
     +300             21,362     (7,015)      (25)%       11.00%       (271)bp
     +200             24,395     (3,982)      (14)%       12.25%       (145)bp
     +100             26,870     (1,507)       (5)%       13.21%        (50)bp
      ---             28,377                              13.71%
     -100             28,735        358         1 %       13.71%        --- bp
     -200             28,617        240         1 %       13.51%        (20)bp
     -300             28,962        585         2 %       13.48%        (23)bp
     -400             29,027        650         2 %       13.33%        (38)bp

        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  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

                                       14

<PAGE>



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, 1998,
Hemlock Federal's liquidity ratio for regulatory purposes was 10.45%.

        The Company's cash flows are comprised of three primary classifications:
cash  flows  from  operating  activities,  investing  activities  and  financing
activities.  Cash flows provided by operating  activities  were $1.8 million and
$2.5  million  for the years ended  December  31, 1998 and  December  31,  1997,
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 in 1997, proceeds from borrowings in 1997
and 1998, and proceeds from deposits in 1998.

        The Company's  most liquid assets are cash and  short-term  investments.
The levels of these assets are dependent on the Company's operating,  financing,
lending and investing  activities during any given period. At December 31, 1998,
cash and  short-term  investments  totaled $6.0  million.  The Company has other
sources of liquidity if a need for additional funds arises, including securities
maturing  within  one year and the  repayment  of loans.  The  Company  may also
utilize the sale of  securities  available-for-sale  and Federal  Home Loan Bank
advances as a source of funds.

        At December 31, 1998, the Bank had outstanding  commitments to originate
loans of $2.1  million of which $1.9  million 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, 1998 totaled $57.8 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, 1998, Hemlock Federal was in compliance with
all applicable capital  requirements on a fully phased-in basis. See "Regulation
- Regulatory  Capital  Requirements"  and Note 10 of the Notes to the  Financial
Statements.



                                       15

<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,  1998,  the Bank  continued  to exceed all  regulatory
capital  requirements  with tangible and core capital of $22.7 million and $22.7
million, or 11.24% and 11.24% of adjusted total assets, respectively, which were
approximately $19.6 million and $14.6 million above the minimum  requirements of
4.0% and 1.5%,  respectively,  of the  adjusted  total  assets in effect on that
date. On December 31, 1998 the Bank had risk-based capital of $23.4 million,  or
30.0% of  risk-weighted  assets of $78.2 million.  This amount was $17.2 million
above the 8.0% requirement in effect on that date. Under regulatory  guidelines,
the Bank was considered well-capitalized at December 31, 1998.

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

        Statement of Financial  Accounting  Standards No. 131,  Disclosure about
Segments of a Business  Enterprise ("SFAS 131"),  establishes  standards for the
way that public  enterprises  report  information  about  operating  segments in
interim financial statements issued to the public. It also establishes standards
for  disclosures  regarding  products and services,  geographic  areas and major
customers.  SFAS 131 defines  operating  segments as components of an enterprise
about which  separate  financial  information is available and that is evaluated
regularly  by the chief  operating  decision  maker in deciding  how to allocate
resources  and is  assessing  performance.  The  Company  operates  in only  one
business segment.

        Statement  of  Financial  Accounting  Standards  (Statement)  No. 133 on
derivatives will, in 2000,  require all derivatives to be recorded at fair value
in the balance sheet,  with changes in fair value charged or credited to income.
If derivatives are documented and effective as hedges, the

                                       16

<PAGE>



change in the  derivative  fair value  will be offset by an equal  change in the
fair   value  of  the  hedged   item.   Under  the  new   standard,   securities
held-to-maturity  can no longer be hedged,  except for  changes in the  issuer's
creditworthiness.  Therefore, upon adoption of Statement No. 133, companies will
have another  one-time  window of  opportunity  to  reclassify  held-to-maturity
securities to either trading or  available-for-sale,  provided  certain criteria
are met. This Statement may be adopted early at the start of a calendar quarter.
Since  the  Company  has  no  significant   derivative  instruments  or  hedging
activities,  adoption of  Statement  No. 133 is not  expected to have a material
impact on the Company's financial statements.

        Statement  No. 134 on mortgage  banking will,  in 1999,  allow  mortgage
loans that are securitized to be classified as trading; available-for-sale;  or,
in certain circumstances, held-to- maturity. Currently, these must be classified
as trading.  Since the Company has not securitized mortgage loans, Statement No.
134 is not expected to affect the Company.

        The  Financial  Accounting  Standards  Board  continues to study several
issues,  including  recording  all  financial  instruments  at  fair  value  and
abolishing  pooling-of-interests  accounting.  Also,  it is likely that APB 25's
measurement  for stock  option  plans will be limited  to  employees  and not to
non-employees  such as directors,  thereby  causing  compensation  expense to be
required for 1999 awards of stock options to outside directors.

Year 2000

        General.  The Year 2000 ("Y2K")  issue  confronting  the Company and its
suppliers,  customers,  customers'  suppliers,  and  competitors  centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs  and systems  originally  were  programmed  with  six-digit  dates that
provided only two digits to identify the calendar  year in the date field.  With
the impending new  millennium,  these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.

        Financial  institution  regulators  recently have increased  their focus
upon  Y2K   compliance   issues  and  have  issued   guidance   concerning   the
responsibilities  of senior  management  and  directors.  The Federal  Financial
Institutions  Examination Council has issued several  interagency  statements on
Y2K  project   management   awareness.   These  statements   require   financial
institutions  to,  among other  things,  examine the Y2K  implications  of their
reliance  on vendors and with  respect to the data  exchange  and the  potential
impact of the Y2K issue on their  customers,  suppliers,  and  borrowers.  These
statements  also  require each  federally  regulated  institution  to survey its
exposure,  measure its risk,  and  prepare a plan to address  the Y2K issue.  In
addition,  the  federal  banking  regulators  have issued  safety and  soundness
guidelines to be followed by insured depository institutions,  such as the Bank,
to assure  resolution of any Y2K  problems.  The federal  banking  agencies have
assessed that Y2K testing and  certification is a key safety and soundness issue
in conjunction with regulatory exams and, thus, that an institution's failure to
address  appropriately  the  Y2K  issue  could  result  in  supervisory  action,
including  reduction of the  institution's  supervisory  ratings,  the denial of
applications for approval of mergers or acquisitions, or the imposition of civil
money penalties.


                                       17

<PAGE>



        Risks.  Like most  financial  service  providers,  the  Company  and its
operations may be significantly  affected by the Y2K issue due to its dependence
on technology and date-sensitive  data. Computer software and hardware and other
equipment,  both within and  outside the  Company's  direct  control,  and third
parties  with  whom  the  Company  electronically  or  operationally  interfaces
(including  without limitation its customers and third party vendors) are likely
to be  affected.  If computer  systems  are not  modified in order to be able to
identify  the  year  2000,  many  computer  applications  could  fail or  create
erroneous  results.  As a result,  many  calculations  which  rely on date field
information,  such  as  interest,  payment  on  due  dates,  and  all  operating
functions,  could  generate  results which are  significantly  misstated and the
Company  could  experience  an  inability  to  process   transactions,   prepare
statements,  or engage in similar normal business  activities.  Likewise,  under
certain  circumstances,  a failure to  adequately  address  the Y2K issue  could
adversely affect the viability of the Company's  suppliers and creditors and the
creditworthiness of its borrowers.  Thus, if not adequately  addressed,  the Y2K
issue could result in a significant  adverse impact on the Company's  operations
and, in turn, its financial condition and results of operations.

        State of Readiness. The Company has established a formal plan to address
the Y2K issue consisting of the following phases:

        Awareness  Phase.  The  Company  formally  established  a Y2K  plan  and
        established  a  project  team for  management  of the Y2K  project.  The
        project team created a plan of action that includes  milestones,  budget
        estimates,  strategies, and methodologies to track and report the status
        of the project.  Members of the project team also  attended  conferences
        and information sharing sessions to gain more insight into the Y2K issue
        and potential  strategies for addressing it. This phase is substantially
        complete.

        Renovation Phase. The Company's  corporate  inventory  revealed that Y2K
        upgrades  were  available  for  all   vendor-supplied   mission-critical
        systems, and all these Y2K-ready versions have been delivered and placed
        into production and have entered the validation process.

        Validation  Phase.  The validation phase is designed to test the ability
        of hardware and software to accurately process  date-sensitive data. The
        Company  has  substantially  completed  the  validation  testing of each
        mission-critical  system.  The project team completed various tests, and
        during the validation testing process,  no significant Y2K problems have
        been  identified  relating to any modified or upgraded  mission-critical
        system.

        Company  Resources  Invested.  The  Company's  Y2K project team has been
        assigned  the task of ensuring  that all systems  across the Company are
        identified, analyzed for Y2K compliance, corrected if necessary, tested,
        and have the changes  into  service by March 31,  1999.  The Y2K project
        team members  represent all functional  areas of the Company,  including
        data processing,  loan administration,  accounting,  item processing and
        operations,  compliance,  human resources,  and marketing. The Company's
        Board of  Directors  oversees  the Y2K plan and  provides  guidance  and
        resources to, and receives quarterly updates from, the Y2K team.


                                       18

<PAGE>



        The Company is  expensing  all costs  associated  with  required  system
        changes as those  costs are  incurred,  and such costs are being  funded
        through  operating  cash  flows.  The total  cost of the Y2K  conversion
        project since  commencement for the Company is estimated to be less than
        $30,000.  The Company  does not expect  significant  increases in future
        data processing costs related to Y2K compliance.

        Contingency  Plans.  During the  assessment  phase,  the  Company  began
        developing back-up or contingency plans for each of its mission-critical
        systems.  Virtually  all of the Company's  mission-critical  systems are
        dependent  upon third  party  vendors or service  providers.  Therefore,
        contingency plans include selecting a new vendor or service provider and
        converting to their system. In the event a current vendor's system fails
        during  the  validation  phase and it is  determined  that the vendor si
        unable or unwilling to correct the failure,  the Company will convert to
        a new system for a  pre-selected  list of prospective  vendors.  In each
        case, realistic trigger dates have been established to allow for orderly
        and successful conversions.  For some systems, contingency plans consist
        of using  spreadsheet  software or  reverting  to manual  systems  until
        system problems can be corrected.

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 the 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>


                         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, 1998
and  1997,  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, 1998. 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, 1998 and 1997, and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1998,  in  conformity  with  generally  accepted
accounting principles.




                          Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 22, 1999







                                       20

<PAGE>

<TABLE>
<CAPTION>

                            HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
------------------------------------------------------------------------------------------------------------
                               CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                         December 31, 1998 and 1997
                                           (Dollars in thousands)
------------------------------------------------------------------------------------------------------------


                                                                      1998          1997
                                                                ------------   ------------
ASSETS
<S>                                                                <C>           <C>      
Cash and due from banks                                            $    2,929    $   2,714
Interest-bearing deposits in financial institutions                     3,107       12,169
                                                                   ----------    ---------
    Cash and cash equivalents                                           6,036       14,883

Securities available-for-sale                                          30,513       34,703
Securities held-to-maturity (fair value:  1998 - $59,527;
  1997 - $47,418)                                                      58,617       46,418
Loans receivable, net                                                 101,977       76,159
Federal Home Loan Bank stock, at cost                                   1,850          987
Accrued interest receivable                                               932          904
Premises and equipment, net                                             3,567        2,099
Prepaid expenses and other assets                                         932          530
                                                                   ----------    ---------

    Total assets                                                   $  204,424    $ 176,683
                                                                   ==========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits                                                           $  143,149    $ 130,958
Advances from Federal Home Loan Bank                                   31,000       11,000
Advance payments by borrowers for taxes
  and insurance                                                         1,075          804
Accrued interest payable and other liabilities                          1,994        3,494
                                                                   ----------    ---------
    Total liabilities                                                 177,218      146,256

Stockholders' equity
    Common stock, $.01 par value; 2,500,000 shares
      authorized; 2,076,325 shares issued                                  21           21
    Additional paid-in capital                                         20,208       20,105
    Unearned ESOP shares                                               (1,329)      (1,495)
    Unearned stock awards                                              (1,120)      (1,382)
    Treasury stock, 370,437 shares                                     (4,863)           -
    Retained earnings, substantially restricted                        13,207       12,203
    Accumulated other comprehensive income                              1,082          975
                                                                   ----------    ---------
        Total equity                                                   27,206       30,427
                                                                   ----------    ---------

           Total liabilities and stockholders' equity              $  204,424    $ 176,683
                                                                   ==========    =========
</TABLE>

See   accompanying   notes  to  consolidated   financial statements.

                                       21
<PAGE>

<TABLE>
<CAPTION>

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

<S>                                                    <C>          <C>        <C>
                                                             1998        1997         1996
                                                             ----        ----         ----
Interest income
   Loans                                                  $   6,535    $   4,829   $  4,068
   Mortgage-backed and other securities                       4,519        4,295      4,617
   Securities                                                   976        1,210        599
   Other interest-earning assets                                720          959        853
                                                          ---------    ---------   --------
      Total interest income                                  12,750       11,293     10,137

Interest expense
   Deposits                                                   5,491        5,504      5,494
   Other borrowings                                           1,351          219        149
                                                          ---------    ---------   --------
      Total interest expense                                  6,842        5,723      5,643
                                                          ---------    ---------   --------


Net interest income                                           5,908        5,570      4,494

Provision for loan losses                                        21           30        150
                                                          ---------    ---------   --------


Net interest income after provision for loan losses           5,887        5,540      4,344

Noninterest income
   Fees and service charges                                     573          417        379
   Rental income                                                 40           40         43
   Gain (loss) on sale of securities                             19           (3)      (124)
   Miscellaneous income                                          77           85         89
                                                          ---------    ---------   --------
      Total noninterest income                                  709          539        387

Noninterest expense
   Compensation and employee benefits                         2,237        1,864      1,681
   Occupancy and equipment expenses                             625          625        720
   Data processing                                              240          235        226
   Federal insurance premiums                                    81           71        302
   SAIF special assessment                                        -            -        840
   Advertising and promotion                                    148           80        129
   Contributions                                                  7        1,007         40
   Other                                                        747          627        549
                                                          ---------    ---------   --------
      Total noninterest expense                               4,085        4,509      4,487
                                                          ---------    ---------   --------


Income before provision for income taxes                      2,511        1,570        244

Provision for income taxes                                      957          626         82
                                                          ---------    ---------   --------


Net income                                                $   1,554    $     944   $    162
                                                          =========    =========   ========

Earnings per share
   Basic and diluted                                        $   .88     $    .40
                                                            =======     ========

</TABLE>

                                       22

<PAGE>

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                  (Continued)
                         CONSOLIDATED  STATEMENTS  OF CHANGES  IN  STOCKHOLDERS' EQUITY 
                                 Years ended  December 31, 1998,  1997, and 1996  
                                (Dollars  in  thousands,  except  per share data)
------------------------------------------------------------------------------------------------------------------------------------


                                                                                               Accumulated
                                              Additional Unearned Unearned                        Other        Total        Compre-
                                       Common  Paid-in    ESOP     Stock    Treasury Retained Comprehensive Stockholders'   hensive
                                       Stock   Capital   Shares    Awards     Stock  Earnings    Income       Equity         Income
                                     -------- --------- --------- --------- -------- ---------- ---------- -------------- ----------
<S>                                   <C>       <C>    <C>       <C>       <C>       <C>         <C>       <C>           <C>
Balance at January 1, 1996             $   -     $   -  $     -   $    -    $     -   $11,346     $  531    $  11,877
                                             
Comprehensive income:                        
   Net income                              -         -        -        -          -       162          -          162       $   162
                                             
   Change in unrealized gain on 
     securities available-for-sale,
     net of reclassification and
     tax effects                           -         -        -        -          -         -         76           76            76 
                                      ------   -------  -------   ------    -------    ------    -------     --------       -------
      Total comprehensive
        income                                                                                                              $   238
                                                                                                                            =======

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
                             
Cash dividends ($.12 per share)           -         -        -         -          -      (249)         -         (249)
                                            
Comprehensive income:                       
   Net income                             -         -        -         -          -       944          -          944       $   944
                                            
   Change in unrealized gain on
     securities available-for-sale,
     net of reclassification and
     tax effects                          -         -        -         -          -         -         368         368           368 
                                      -----    ------   ------    ------    -------    ------    --------     -------        ------
      Total comprehensive               
        income                                                                                                               $1,312
                                                                                                                             ======
</TABLE>
                         

                                       23

<PAGE>
<TABLE>
<CAPTION>


------------------------------------------------------------------------------------------------------------------------------------
                         CONSOLIDATED  STATEMENTS  OF CHANGES  IN  STOCKHOLDERS' EQUITY 
                                 Years ended  December 31, 1998,  1997, and 1996  
                                (Dollars  in  thousands,  except  per share data)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Accumulated
                                              Additional Unearned   Unearned                        Other        Total       Compre-
                                      Common   Paid-in     ESOP      Stock     Treasury Retained Comprehensive Stockholders' hensive
                                       Stock   Capital    Shares     Awards      Stock  Earnings    Income       Equity      Income
                                     -------- ---------- ---------- ---------- -------- -------- ------------- ------------- -------
                    
<S>                     <C>           <C>      <C>       <C>        <C>          <C>     <C>         <C>       <C>      <C>
Balance at December 31, 1997          $   21   $20,105   $(1,495)   $ (1,382)    $    -  $12,203     $ 975     $30,427
                                                                                                    
ESOP shares earned                         -       103       166           -          -        -         -         269
                                                                                                    
Stock awards earned                        -         -         -         262          -        -         -         262
                                                                                                    
Cash dividends ($.30 per share)            -         -         -           -          -     (550)        -        (550)
                                                                                                    
Purchase of treasury stock                 -         -         -           -     (4,863)       -         -      (4,863)
                                                                                                    
Comprehensive income:                                                                               
   Net income                              -         -         -           -          -    1,554         -       1,554    $  1,554
                                                                                                    
   Change in unrealized gain on                                                                     
     securities available-for-sale,                                                                 
     net of reclassification and                                                                    
     tax effects                           -         -         -           -          -        -       107         107         107
                                       -----   -------     -----     -------      -----    -----     -----     -------    --------
      Total comprehensive                                                                                                 $  1,661
        income                                                                                                            ========
                                                                                                    
                                                                                                    
                                                                                                    
Balance at December 31, 1998          $   21   $20,208   $(1,329)    $(1,120)   $(4,863) $13,207    $1,082     $27,206    
                                      ======   =======   =======     =======    =======  =======    ======     =======
                                                                                                    
</TABLE>

See   accompanying   notes  to  consolidated   financial statements.

                                       24

<PAGE>

<TABLE>
<CAPTION>

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

                                                            -----------------------------------
                                                                1998        1997        1996
                                                            -----------  ----------  ----------
<S>                                                         <C>          <C>         <C>         
Cash flows from operating activities
   Net income                                               $    1,554   $      944  $      162  
   Adjustments to reconcile net income to net cash          
     provided by operating activities                       
      Depreciation                                                 123          117         141
      Amortization of premiums and discounts on             
        securities, net                                            375          268         181
      Net (gain) loss on sale of securities                        (19)           3         124
      Provision for loan losses                                     21           30         150
      Change in deferred income taxes                               59         (320)        (10)
      ESOP compensation expense                                    269          255           -
      Stock awards expense                                         262           51           -
      Net change in accrued interest receivable                    (28)        (116)        318
      Net change in accrued interest payable                
        and other liabilities                                     (247)         960         (39)
      Increase in net deferred loan costs                         (122)        (101)        (86)
      Net change in other assets                                  (402)         361        (367)
                                                            ----------   ----------  ----------
         Net cash provided by operating activities               1,845        2,452         574
                                                            
Cash flows from investing activities                        
   Purchase of securities available-for-sale                   (11,197)     (12,051)    (30,474)
   Proceeds from sales of securities available-for-sale          3,162          596       7,621
   Principal payments on mortgage-backed                    
     securities and collateralized mortgage obligations         32,017       21,030      22,136
   Purchase of  securities held-to-maturity                    (56,629)     (39,258)       (325)
   Proceeds from maturities and calls of securities             24,459       21,050      12,605
   Purchase of FHLB stock                                         (863)         (86)        (51)
   Purchase of loans                                                 -      (12,865)          -
   Net increase in loans                                       (25,717)      (9,687)     (8,368)
   Property and equipment expenditures                          (1,591)      (1,173)       (140)
                                                            ----------   ----------  ----------
      Net cash (used in) provided by investing activities      (36,359)     (32,444)      3,004
                                                            
Cash flows from financing activities                        
   Net change in deposits                                       12,191         (285)        502
   Increase in advance payments by                          
     borrowers for taxes and insurance                             271          123          29
   Borrowings of FHLB advances                                  20,000        9,500           -
   Issuance of stock                                                 -       18,376           -
   Purchase of treasury stock                                   (6,245)           -           -
   Dividends paid                                                 (550)        (249)          -
                                                            ----------   ----------  ----------
      Net cash provided by financing activities                 25,667       27,465         531
                                                            ----------   ----------  ----------
                                                        
See   accompanying   notes  to  consolidated   financial statements.
</TABLE>

                                       25

<PAGE>

<TABLE>
<CAPTION>

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

                                                            1998        1997        1996
                                                        -----------  ----------- ----------
 
<S>                                                     <C>          <C>         <C>       
Net change in cash and cash equivalents                 $   (8,847)  $   (2,527) $    4,109

Cash and cash equivalents at beginning of year              14,883       17,410      13,301
                                                        ----------   ----------  ----------

Cash and cash equivalents at end of year                $    6,036   $   14,883  $   17,410
                                                        ==========   ==========  ==========

Supplemental disclosures of cash flow information
   Cash paid during the year for
      Interest                                          $    6,751   $    5,683  $    5,631
      Income taxes                                             865          690         316

</TABLE>

                                       26

<PAGE>

--------------------------------------------------------------------------------
              HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997, and 1996
    (Table amounts in thousands of dollars, except share and per share data)
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:  The accompanying consolidated financial statements
include the accounts of 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
including their

                                       27

<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 either a reduction of debt
or dividends paid to the ESOP which are allocated to participants.

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.

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

                                       29

<PAGE>


NOTE 2 - SECURITIES

Securities consist of the following at:
<TABLE>
<CAPTION>

                                                           December 31, 1998
                                        -------------------------------------------------------
                                                           Gross         Gross
                                            Amortized   Unrealized    Unrealized       Fair
                                              Cost         Gains       (Losses)        Value
                                        -------------  -----------  -------------  ------------
<S>                                       <C>            <C>          <C>           <C>        
Securities available-for-sale
   U.S. government agencies               $      1,804   $        7   $        (1)  $     1,810
   FHLMC stock                                      24        1,571             -         1,595
   FHLMC certificates                            3,318          116             -         3,434
   FNMA certificates                             4,015          104            (1)        4,118
   Collateralized mortgage obligations          19,050          160           (80)       19,130
   Equity securities                               527            -          (101)          426
                                          ------------   ----------   -----------   -----------
                                          
                                          $     28,738   $    1,958   $      (183)  $    30,513
                                          ============   ==========   ===========   ===========
                                          
Securities held-to-maturity               
   U.S. government agencies               $      6,101   $        2   $         -   $     6,103
   GNMA certificates                            19,186          316             -        19,502
   FHLMC certificates                            8,007          289             -         8,296
   FNMA certificates                            13,607          236           (11)       13,832
   Collateralized mortgage obligations          11,716           92           (14)       11,794
                                          ------------   ----------   -----------   -----------
                                          
                                          $     58,617   $      935   $       (25)  $    59,527
                                          ============   ==========   ===========   ===========
                                          
</TABLE>                              


<TABLE>
<CAPTION>

                                                           December 31, 1997
                                        -------------------------------------------------------
                                                           Gross         Gross
                                            Amortized   Unrealized    Unrealized       Fair
                                              Cost         Gains       (Losses)        Value
                                        -------------  ------------  ------------  ------------
<S>                                      <C>            <C>          <C>           <C>        
Securities available-for-sale
   U.S. 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>                                  
  
                                       30
                                      
<PAGE>


NOTE 2 - SECURITIES (Continued)

The amortized cost and estimated market value of debt securities at December 31,
1998 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.
<TABLE>
<CAPTION>

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

<S>                                         <C>         <C>            <C>         <C>      
    Due in one year or less                 $   1,166   $   1,166      $   1,309   $   1,310
    Due after one year through five years       2,669       2,670            495         500
    Due after five years through ten years      2,266       2,267              -           -
                                            ---------   ---------      ---------   ---------
                                                6,101       6,103          1,804       1,810

    FHLMC stock                                     -           -             24       1,595
    Mortgage-backed securities and
      collateralized mortgage obligations      52,516      53,424         26,383      26,682
    Equity securities                               -           -            527         426
                                            ---------   ---------      ---------   ---------

                                            $  58,617   $  59,527      $  28,738   $  30,513
                                            =========   =========      =========   =========
</TABLE>

At December  31, 1998 and 1997,  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, 1998
                  -------------------------------------------------------
                           1998            1997           1996
                  -------------------------------------------------------

    Proceeds          $   3,162      $     596       $  7,621
    Gross gains             115              -              -
    Gross losses             96              3            124


                                       31

<PAGE>


NOTE 3 - LOANS RECEIVABLE

Loans receivable consist of the following at:

                                                            December 31,
                                                  ------------------------------
                                                       1998            1997
                                                  --------------  --------------
First mortgage loans

    Principal balances:
        Secured by one-to-four-family residences   $     87,041    $     68,283
        Secured by multi-family                          12,070           4,951
        Secured by commercial real estate                   191             209
                                                   ------------    ------------
                                                         99,302          73,443
    Less:
        Loans in process                                    313             125
        Net deferred loan origination costs                (409)           (287)
                                                   ------------    ------------
           Total first mortgage loans                    99,398          73,605

Consumer and other loans Principal balances:
        Home equity loans                                 2,844           2,740
        Loans on deposits                                   129             116
        Automobile loans                                    381             473
                                                   ------------    ------------
           Total consumer and other loans                 3,354           3,329
    Less allowance for loan losses                          775             775
                                                   ------------    ------------

                                                   $    101,977    $     76,159
                                                   ============    ============

There were no impaired loans at December 31, 1998 or December 31, 1997.

Nonaccrual and renegotiated loans totaled approximately $124,000 and $256,000 at
December 31, 1998 and 1997,  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 $1,078,000, $1,527,000, and
$1,931,000 at December 31, 1998, 1997, and 1996, 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, 1998,  approximately 86% 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,
                                     ----------------------------------------
                                          1998         1997          1996
                                     ----------   -----------   -------------

    Balance at beginning of year      $     775    $      745    $     600
    Provision charged to income              21            30          150
    Charge-offs                             (21)            -           (5)
                                      ---------    ----------    ---------

                                      $     775    $      775    $     745
                                      =========    ==========    =========


NOTE 4 - PREMISES AND EQUIPMENT

Premises and equipment consists of the following at:

                                                      December 31,
                                           --------------------------------
                                                  1998           1997
                                           --------------   ---------------
    Land                                     $      1,033    $     1,045
    Building and landscaping                        2,700          1,461
    Leasehold improvements                            102            102
    Furniture, fixtures, and equipment                748            477
                                             ------------    -----------
        Total cost                                  4,583          3,085

    Accumulated depreciation                       (1,016)          (986)
                                             ------------    -----------

                                             $      3,567    $     2,099
                                             ============    ===========

                                       33

<PAGE>


NOTE 5 - DEPOSITS

Savings and certificate of deposit  accounts with balances greater than $100,000
totaled  $8,579,000 and $5,459,000 at December 31, 1998 and 1997,  respectively.
Deposits greater than $100,000 are not insured.

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

                      1999                                    $   57,811
                      2000                                         9,546
                      2001                                         2,810
                      2002                                         1,264
                      2003 and thereafter                            422
                                                              ----------

                                                              $   71,853


NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK

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


          Description                                   1998         1997
          -----------                              -----------   ----------

Maturing  February 2008 through  October 2008,  
  with rates ranging from 4.10% to 5.37% with
  an average rate of 4.82%                          $   22,000    $       -

Open line of credit with a rate of 5.13%                 9,000            -

Maturing October 1998 with a rate of 5.86%                   -       11,000
                                                    ----------    ---------

                                                    $   31,000    $  11,000
                                                    ==========    =========

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,
                           ------------------------------------
                              1998         1997          1996
                           ---------   ------------   ---------
    Current
        Federal            $     787    $      842    $     107
        State                    111           104          (15)
    Deferred                      59          (320)         (10)
                           ---------    ----------    ---------

                           $     957    $      626    $      82
                           =========    ==========    =========

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

                                            For the Year Ended
                                                December 31,
                             -------------------------------------------------
                                   1998             1997             1996
                             ---------------   -------------  ----------------
Provision for federal
  income taxes computed
  at statutory rate of 34%   $   854   34.0%   $  534  34.0%   $  83     34.0%

State income taxes,  net
  of federal tax effect and
  other                          103    4.1        92   5.9       (1)     (.2)
                             -------  -----    ------  ----    -----   ------

                             $   957   38.1%   $  626  39.9%   $  82     33.8%
                             =======  =====    ======  ====    =====   ======

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

                                                            December 31,
                                                      ------------------------
                                                         1998           1997
                                                      ----------   -----------
Contributions                                         $      362    $     372
Loans, principally due to allowance for loan losses          196          175
Other                                                         37            -
                                                      ----------    ---------
    Total deferred tax assets                                595          547

Unrealized gain on securities available-for-sale            (693)        (623)
Depreciation                                                 (62)         (44)
Federal Home Loan Bank stock dividends                       (42)         (42)
Deferred loan fees                                          (144)         (60)
Other                                                        (43)         (38)
                                                      ----------    ---------
    Total deferred tax liabilities                          (984)        (807)
                                                      ----------    ---------

       Net deferred tax liabilities                   $     (389)   $    (260)
                                                      ==========    =========

                                       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, 1998 and 1997  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 1998 and April 1, 1997 to December 31, 1997 is presented below.

                                                            1998        1997
                                                        ------------------------
Basic earnings per share
    Net income                                          $    1,554    $      944
    Less:  net income of Bank prior to conversion                -           171
                                                        ----------    ----------

        Net income available to common stockholders     $    1,554    $      773
                                                        ==========    ==========

    Weighted average common shares outstanding           1,764,550     1,918,524
                                                        ==========    ==========

        Basic earnings per share                           $   .88      $    .40
                                                           =======      ========

Earnings Per Share Assuming Dilution
    Net income available to common stockholders         $    1,554    $      773
                                                        ==========    ==========

   Weighted average common shares outstanding            1,764,550     1,918,524
   Add dilutive effect of assumed exercises:
      Incentive stock options                                5,584             -
      Stock awards                                           1,446             -
                                                        ----------    ----------
   Weighted average common and dilutive
     potential common shares outstanding                 1,771,580             -
                                                        ==========    ==========

      Diluted Earnings Per Share                           $   .88      $    .40
                                                           =======      ========

The Corporation's outstanding stock options and stock awards were not considered
in the 1997  computations  of diluted  earnings per share because the effects of
assumed exercise would have been antidilutive.

                                       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 and $108,000 were
approved   and  funded  for  the  years  ended   December  31,  1997  and  1996,
respectively. There were no contributions for the year ended December 31, 1998.

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.  A  contribution  of
$82,000 was funded for the year ended December 31, 1996.  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  1998 and 1997,  16,610  shares of stock  with an  average  fair value of
$16.19 and  $15.05  per share,  respectively,  were  committed  to be  released,
resulting in ESOP compensation  expense of $269,000 and $255,000,  respectively.
Shares held by the ESOP at December 31, 1998 and 1997 are as follows:

                                                      1998       1997
                                                   --------   ---------

     Allocated shares                                33,221      16,610
     Unallocated shares                             132,885     149,496
                                                   --------   ---------

        Total ESOP shares                           166,106     166,106
                                                   ========   =========

        Fair value of unallocated shares           $  2,324   $   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:
<TABLE>
<CAPTION>

                                         ----------- ----------   -----------  ------------
                                                      Weighted-                  Weighted-
                                                       Average                    Average
                                            1998      Exercise        1997       Exercise
                                           Shares       Price        Shares        Price
                                         ----------- ----------   -----------  ------------

<S>                                         <C>       <C>       <C>             <C>     
    Outstanding at beginning of year        182,716   $   17.24            -      $      -
    Granted                                       -           -      182,716         17.24
    Exercised                                     -           -            -             -
    Forfeited                                     -           -            -             -
                                         ----------    --------   ----------      --------

        Outstanding at end of year          182,716   $   17.24      182,716      $  17.24
                                         ==========   =========   ==========      ========

    Options exercisable at end of year       36,544                      -
    Weighted-average fair value of
      options granted during year         $      -                $   5.63
    Average remaining option term         8.8 years               9.8 years
</TABLE>

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 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.

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

        Net income as reported               $ 1,554           $   944
        Pro forma net income                   1,428               753
        Earnings per share as reported
           Basic and diluted                     .88               .40
        Pro forma earnings per share
           Basic and diluted                     .81               .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 $262,000 and $51,000 for
the years ended December 31, 1998 and 1997,  respectively.  During 1998, 453,490
shares of stock of the Corporation  were reacquired of which 83,053 were used to
fund the MRP.


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
----                              ----------------      -----------------     ---------------
1998                              Amount     Ratio      Amount      Ratio     Amount    Ratio
----                              ------     -----      ------      -----     ------    -----
<S>                               <C>         <C>       <C>          <C>       <C>       <C>  
Total capital (to risk-weighted
 assets)                          $23,441     30.0%     $6,257       8.0%      $7,821    10.0%

Tier 1 (core) capital (to 
risk-weighted assets)              22,666     29.0       3,128       4.0        4,693     6.0

Tier 1 (core) capital (to 
adjusted total assets)             22,666     11.2       8,069       4.0       10,086     5.0

Tangible capital (to 
tangible assets)                   22,666     11.2       3,026       1.5          N/A     N/A

----
1997
----

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       6,694       4.0        8,365     5.0

Tangible capital (to tangible
assets)                            20,698     12.3       2,510       1.5          N/A     N/A

</TABLE>

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

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.

                                       40

<PAGE>


NOTE 11 - OTHER COMPREHENSIVE INCOME

Other comprehensive income components and related taxes were as follows:

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

 Unrealized holding gains and losses on
   securities available-for-sale                $   196    $   600   $     1
 Less reclassification adjustments for gains
   and losses recognized in income                  (19)         3       124
                                                -------    -------   -------
 Net unrealized gains and losses                    177        603       125
 Tax effect                                          70        235        49
                                                -------    -------   -------

 Other comprehensive income                     $   107    $   368   $    76
                                                =======    =======   =======


NOTE 12 - 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 the  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,
                                       -----------------------
                                          1998         1997
                                       ----------   ----------
Financial instruments whose 
contract amounts represent
  credit risk

    Commitments to extend credit, 
     including loans in process         $   2,077   $     652

At  December  31,  1998 and 1997,  fixed  rate  commitments  to  extend  credit,
including loans in process, consisted of $1,939,000 and $352,000,  respectively.
The fixed rate commitments at December 31, 1998 are due to expire within 1 to 60
days of issuance and have rates ranging from 6.5% to 7.625%.

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, 1998 and 1997, the Corporation
had  deposit  accounts  with  balances  totaling  approximately  $5,262,000  and
$13,686,000,   respectively,   at  the  Federal   Home  Loan  Bank  of  Chicago.
Concentrations of loans are described in Note 3.

                                       41

<PAGE>


NOTE 13 - 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, 1998 and 1997, 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  $85,000,  $95,000,  and $89,000 for the years ended December
31,  1998,  1997,  and 1996,  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, 1998:

                      1999        $      78
                      2000               78
                      2001               78
                      2002               27
                                  ---------

                          Total   $     261
                                  =========


NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS

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

                                  December 31, 1998      December 31, 1997
                              -----------------------  -----------------------
                                Approximate            Approximate
                                 Carrying   Estimated   Carrying     Estimated
                                  Amount   Fair Value    Amount     Fair Value
                              ------------ ----------  ------------ ----------
Financial Assets
 Cash and cash equivalents       $   6,036  $   6,036   $  14,883   $ 14,883
 Securities                         89,130     90,040      81,121     82,121
 Loans receivable, net             101,977    102,422      76,159     77,293
 Federal Home Loan Bank stock        1,850      1,850         987        987
 Accrued interest receivable           932        932         904        904

                                       42

<PAGE>


NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

                                  December 31, 1998      December 31, 1997
                              -----------------------  -----------------------
                                Approximate            Approximate
                                 Carrying   Estimated   Carrying     Estimated
                                  Amount   Fair Value    Amount     Fair Value
                              ------------ ----------  ------------ ----------

Financial Liabilities
 Demand deposits                $ (23,497)  $ (23,497)  $ (20,041)  $(20,041)
 Savings deposits                 (47,799)    (47,799)    (44,891)   (44,891)
 Time deposits                    (71,853)    (72,327)    (66,026)   (66,306)
 Advance from Federal 
    Home Loan Bank                (31,000)    (31,000)    (11,000)   (11,013)
 Advance payments by 
   borrowers for
   taxes and insurance             (1,075)     (1,075)       (804)      (804)
 Accrued interest payable            (259)       (259)       (168)      (168)


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 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  advances was  determined by  calculating  the present value of future cash
flows using the current rate for advances with similar lengths to maturity.

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

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

                                       43

<PAGE>


NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

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,  1998 or 1997,  the fair  value  would  have been
achieved,  because the market value may differ  depending on the  circumstances.
The estimated  fair values at December 31, 1998 and 1997 should not  necessarily
be considered to apply at subsequent dates.


NOTE 15 - 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 and an
additional  $250,000 was paid in 1998.  The  remaining  $470,000  and  $720,000,
respectively, is included in other liabilities in the consolidated statements of
financial condition at December 31, 1998 and 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 16 - 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 for the year 1997 reflect the period April 1, 1997 through
December 31, 1997.


                   CONDENSED STATEMENTS OF FINANCIAL CONDITION
                           December 31, 1998 and 1997

                                                        1998          1997
                                                        ----          ----

ASSETS
Cash and cash equivalents                            $      572    $   5,448
Securities available-for-sale                               426            -
Securities held-to-maturity                               1,166        3,619
ESOP loan                                                 1,329        1,495
Investment in bank subsidiary                            23,809       21,673
Accrued interest receivable and other assets                392          364
                                                     ----------    ---------

                                                     $   27,694    $  32,599
                                                     ==========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities               $      488    $   2,172
Stockholders' equity
    Common stock                                             21           21
    Additional paid-in capital                           20,208       20,105
    Unearned ESOP shares                                 (1,329)      (1,495)
    Unearned stock awards                                (1,120)      (1,382)
    Treasury stock, 370,437 shares                       (4,863)           -
    Retained earnings                                    13,207       12,203
    Accumulated other comprehensive income                1,082          975
                                                     ----------    ---------

                                                     $   27,694    $  32,599
                                                     ==========    =========

                                       45

<PAGE>


NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)


                         CONDENSED STATEMENTS OF INCOME
      For the year ended December 31, 1998 and for the period April 1, 1997
                              to December 31, 1997

                                                       1998         1997
                                                   -----------  -----------
Income
    Securities                                      $      180    $     205
    ESOP loan                                              104           87
    Interest-bearing deposits with
      other financial institutions                         145          184
    Loss on sale of securities                             (44)           -
                                                    ----------    ---------
        Total income                                       385          476

Other expenses                                             132        1,074
                                                    ----------    ---------


Income (loss) before income taxes and
  equity in undistributed
  earnings of bank subsidiary                              253         (598)

Income tax expense (benefit)                                82         (202)
                                                    ----------    ---------


Income (loss) before equity in 
  undistributed earnings of
  bank subsidiary                                          171         (396)

Equity in undistributed earnings
  of bank subsidiary                                     1,383        1,169
                                                    ----------    ---------


Net income                                          $    1,554    $     773
                                                    ==========    =========


                                       46

<PAGE>


NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>


                       CONDENSED STATEMENTS OF CASH FLOWS
      For the year ended December 31, 1998 and for the period April 1, 1997
                              to December 31, 1997

<S>                                                              <C>           <C> 
                                                                      1998          1997
                                                                      ----          ----

Operating activities
    Net income                                                     $    1,554    $     773
    Adjustments to reconcile net income to net cash
      provided by operating activities
        Amortization of discounts and premiums on securities, net          (3)          (6)
        Equity in undistributed earnings of bank subsidiary            (1,383)      (1,169)
        Loss on sale of securities                                         44            -
        Change in
           Other assets                                                    11         (364)
           Other liabilities                                             (302)         739
                                                                   ----------    ---------
               Net cash used in operating activities                      (79)         (27)

Investing activities
    Purchase and securities available-for-sale                           (765)           -
    Purchase of securities held-to-maturity                            (1,834)      (7,485)
    Principal payments on securities                                        -          122
    Proceeds from maturities and calls of securities                    4,291        3,750
    Proceeds from sales of securities                                     195            -
    Purchase of bank subsidiary stock                                       -       (9,205)
    Capital contribution to subsidiary                                    (55)           -
                                                                   ----------    ---------
        Net cash provided by (used in) investing activities             1,832      (12,818)

Financing activities
    Net proceeds from sale of common stock                                  -       18,376
    Payment received on loan to ESOP                                      166          166
    Purchase of treasury stock                                         (6,245)           -
    Dividends paid                                                       (550)        (249)
                                                                   ----------    ---------
        Net cash provided by (used in) financing activities            (6,629)      18,293
                                                                   ----------    ---------

Net change in cash and cash equivalents                                (4,876)       5,448

Cash and cash equivalents at beginning of period                        5,448            -
                                                                   ----------    ---------

Cash and cash equivalents at end of period                         $      572    $   5,448
                                                                   ==========    =========
</TABLE>

                                       47

<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 April 28,  1999 at the main  office of the  Company
located at 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

    FISCAL 1998
First Quarter........................     $19.000     $17.000        $.07
Second Quarter.......................     $19.000     $17.375        $.07
Third Quarter........................     $18.000     $13.375        $.08
Fourth Quarter.......................     $14.750     $13.125        $.08

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 March 15, 1999 was $13.25.

At March 15,  1999 there were  1,793,941  shares of  Hemlock  Federal  Financial
Corporation  common stock  outstanding  (including  unallocated ESOP shares) and
there were 555 holders of record.



                                       48

<PAGE>



STOCKHOLDERS AND GENERAL INQUIRIES              TRANSFER AGENT

Rosanne M. Pastorek-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, 1998, as filed with the  Securities  and
Exchange  Commission,  may be obtained  without charge by contacting  Rosanne M.
Pastorek-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. Pastorek-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. Pastorek-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

15730 W. 127th St.
Lemont, Illinois 60439

                                       49

<PAGE>



Independent Auditors                          Special Counsel

Crowe, Chizek and Company LLP                 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 NASDAQ 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 10-K and three quarterly  reports on
Form 10-Q. 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.


















                                       50