SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-KSB

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [FEE REQUIRED]

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                  FOR THE TRANSITION PERIOD FROM _______ TO _______

         COMMISSION FILE NUMBER 0-22800

                             NORTH BANCSHARES, INC.
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

                    DELAWARE                              36-3915073
         (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)

  100 W. NORTH AVENUE, CHICAGO, ILLINOIS                     60610
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)              (ZIP CODE)

ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 664-4320

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (TITLE OF CLASS)

         Check whether the Issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past twelve  months (or for
such shorter period that the Issuer was required to file such reports),  and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]

         The Issuer had $9.0 million in gross income for the year ended December
31, 1997.

         As of March 2, 1998, there were issued and outstanding 1,300,286 shares
of the Issuer's  Common Stock.  The  aggregate  market value of the voting stock
held by  non-affiliates  of the Issuer,  computed by reference to the average of
the closing bid and asked price of such stock on the Nasdaq  National  Market as
of March 2, 1998 was approximately $16,508,162.  (The exclusion from such amount
of the  market  value of the shares  owned by any person  shall not be deemed an
admission by the Issuer that such person is an affiliate of the Issuer.)

                       DOCUMENTS INCORPORATED BY REFERENCE

PART II of Form 10-KSB--Portions of Annual Report to Stockholders for the fiscal
year ended December 31, 1997

PART III of Form  10-KSB--Portions  of Proxy Statement for the Annual Meeting of
Stockholders for the fiscal year ended December 31, 1997.


<PAGE>


                                      INDEX


PART I                                                               PAGE

         Item 1.           Business                                    2

         Item 2.           Properties                                 36

         Item 3.           Legal Proceedings                          36

         Item 4.  Submission of Matters
                  to a Vote of Security Holders                       36

PART II

         Item 5.  Market for Registrant's
                  Common Equity and Related
                  Stockholders Matters                                36

         Item 6.  Management's Discussion and
                  Analysis or Plan of Operation                       36

         Item 7.  Financial Statements                                37

         Item 8.  Changes in and Disagreements with
                  Accountants on Accounting and
                  Financial Disclosures                               37

         Item 9.  Directors, Executive Officers, Promoters
                  and Control Person; Compliance with
                  Section 16 (a) of the Exchange Act                  37

         Item 10. Executive Compensation                              38

         Item 11. Security Ownership of Certain
                  Beneficial Owners and Management                    38


         Item 12. Certain Relationships and
                  Related Transaction                                 38

         Item 13. Exhibits and Reports on Form 8-K                    39


SIGNATURES                                                            41


                                        1


<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         North  Bancshares,  Inc.  (the  "Company" or "North  Bancshares")  is a
Delaware  corporation  which was organized in 1993 by North Federal Savings Bank
("North  Federal" or the "Bank") for the purpose of becoming the Bank's  holding
company.  The Company owns all of the capital stock of the Bank which was issued
on December 21, 1993 in connection  with its  conversion  from the mutual to the
stock form of  organization  (the  "Conversion").  The Company issued  1,437,501
shares of  Common  Stock at a price of $10.00  per share in the  Conversion.  On
December 29, 1997,  the Company's  Common Stock was split  three-for-two  in the
form of a 50% stock  dividend.  There  were  1,429,812  shares  of common  stock
outstanding at December 31, 1997. The Bank was originally  organized in 1886 and
converted to a federal mutual savings bank in 1986. The Bank amended its charter
in December  1993 in  connection  with the  Conversion to become a federal stock
savings bank. All references to the Company,  unless otherwise indicated,  at or
before December 21, 1993 refer to the Bank. The Company's Common Stock is quoted
on the Nasdaq National Market under the symbol "NBSI".

         The  Company  and the Bank are  subject  to  comprehensive  regulation,
examination and supervision by the Office of Thrift  Supervision,  Department of
the Treasury ("OTS") and by the Federal Deposit Insurance  Corporation ("FDIC").
The Bank is a member  of the  Federal  Home Loan Bank  ("FHLB")  System  and its
deposits are backed by the full faith and credit of the United States Government
and are  insured by the  Savings  Association  Insurance  Fund  ("SAIF")  to the
maximum extent permitted by the FDIC.

         The Company serves the Chicago metropolitan area through its two retail
banking offices located in Chicago and Wilmette, Illinois. At December 31, 1997,
the Company had total assets of $123.1 million,  deposits of $75.0 million,  and
stockholders' equity of $16.4 million.

         The  Company has been,  and  intends to continue to be, an  independent
community-oriented   financial  institution  offering  a  variety  of  financial
services  to meet the needs of the  communities  which it  serves.  The  Company
attracts retail deposits from the general public or borrows funds from available
sources and invests those funds primarily in first  mortgages on  owner-occupied
one- to four-family residences,  small apartment buildings,  and mortgage-backed
and  investment  securities.  The Company also  originates  or  participates  in
nonowner-occupied  one- to  four-family,  multi-family,  consumer and commercial
loans.

         The  Company's  revenues  are  derived  principally  from  interest  on
mortgage  loans,  investments,   mortgage-backed  securities,   consumer  loans,
commercial loans and income from service charges.  The Company's  operations are
affected by general  economic  conditions,  competition in the Company's  market
area,  the  monetary  and fiscal  policies  of the  federal  government  and the
policies of the various regulatory authorities,  including the OTS and the Board
of  Governors of the Federal  Reserve  System  ("Federal  Reserve  Board").  Its
results of

                                        2

<PAGE>



operations  are largely  dependent  upon its net interest  income,  which is the
difference  between  the  interest it  receives  on its loan  portfolio  and its
investment securities portfolio and the interest it pays on its deposit accounts
and borrowings.

         The executive offices of the Company and the Bank are located at
100 W. North Avenue, Chicago, Illinois 60610-1399.  The telephone number at
that address is (312) 664-4320.  The Bank maintains a Web page at
http://www.northfederal.com.


FORWARD-LOOKING STATEMENTS

         When used in this Form  10-KSB,  in future  filings by the Company with
the SEC,  in the  Company's  press  releases  or  other  public  or  shareholder
communications,  and in oral  statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected to",
"will continue", "is anticipated",  "estimate", "project" or similar expressions
are intended to identify "forward-looking  statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties - including,  changes in economic  conditions in
the  Company's  market  area,  changes  in  policies  by  regulatory   agencies,
fluctuations  in interest rates,  demand for loans in the Company's  market area
and  competition,  that could cause  actual  results to differ  materially  from
historical  earnings and those presently  anticipated or projected.  The Company
wishes  to  caution   readers   not  to  place   undue   reliance  on  any  such
forward-looking  statements,  which speak only as of the date made.  The Company
wishes  to advise  readers  that the  factors  listed  above  could  affect  the
Company's financial performance and could cause the Company's actual results for
future periods to differ  materially  from any opinions or statements  expressed
with respect to future periods in any current statements.

         The  Company  does not  undertake  -- and  specifically  disclaims  any
obligation -- to publicly  release the result of any revisions which may be made
to any  forward-looking  statements to reflect events or circumstances after the
date  of  such  statements  or to  reflect  the  occurrence  of  anticipated  or
unanticipated events.



LENDING ACTIVITIES

         General.  The Bank's loan portfolio consists primarily of conventional,
first mortgage loans secured by one- to four-family residences,  and to a lesser
extent, multi-family residences. At December 31, 1997, the Bank's gross mortgage
loans outstanding  totaled $79.3 million,  of which $71.8 million, or 90.5% were
one- to  four-family  residential  mortgage  loans.  Of the one- to  four-family
mortgage loans  outstanding at that date,  70.7% were fixed-rate loans (63.9% of
total  gross  loans  receivable),   including  balloon  loans,  and  29.3%  were
adjustable-rate  loans  (26.6% of total  gross loans  receivable).  At that same
date,  multi-family  residential  mortgage loans totaled $6.5 million,  of which
$5.9 million were fixed-rate balloon loans.


                                        3

<PAGE>



         At December 31, 1997,  the balance of the Bank's loans included of $1.1
million in consumer and commercial loans,  which represented 1.37% of the Bank's
gross loan portfolio.

         The Bank also invests in  mortgage-backed  securities.  At December 31,
1997,  mortgage-backed  securities totaled $5.8 million or 4.7% of total assets.
At such date,  all of the  mortgage-backed  securities  portfolio was insured or
guaranteed by the Government  National Mortgage  Association  ("GNMA"),  Federal
National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC"). At December 31, 1997, all of the mortgage-backed
securities were classified as held-to-maturity.

         All loans must be  approved by a committee  comprised  of officers  and
directors of the Bank. Requests for loans greater than $800,000 are reviewed and
considered for approval by the Board of Directors on a case by case basis.

         The aggregate  amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower,  including related entities,
is generally the greater of 15% of  unimpaired  capital and surplus or $500,000.
See "Regulation - Federal  Regulation of Savings  Associations." At December 31,
1997,  the maximum amount which the Bank could have lent under this limit to any
one borrower and the borrower's related entities was approximately $2.5 million.
At  December  31,  1997,  the Bank had no loans or  groups  of loans to  related
borrowers with outstanding balances in excess of this amount. The Bank's largest
lending relationship at December 31, 1997 was a $912,000 participation in a $2.0
million  loan,  on a  multi-unit  apartment  building,  with a  local  financial
institution.  The Bank's next three largest  lending  relationships  to a single
borrower  or a  group  of  related  borrowers  totaled  $851,000,  $806,000  and
$708,000,  respectively.  Each of these is a loan or group of loans  secured  by
either a first mortgage on real estate or a first lien on real property. Each of
these loans was current as of December 31, 1997.

                                        4

<PAGE>
<TABLE>
<CAPTION>

         Loan  Portfolio  Composition.  The table  below sets forth  information
concerning  the  composition of the Bank's loan and  mortgage-backed  securities
portfolios in dollar amounts and in percentages  (before deductions for loans in
process,  deferred fees and discounts and allowances for losses) as of the dates
indicated.

                                                                          AT DECEMBER 31,

                                           1993                     1994                    1995                      1996
                                 ---------------------      --------------------    --------------------       ---------------------
                                  AMOUNT       PERCENT      AMOUNT       PERCENT    AMOUNT      PERCENT         AMOUNT      PERCENT

                                                                       (DOLLARS IN THOUSANDS)

<S>                              <C>          <C>        <C>            <C>        <C>         <C>           <C>           <C>

REAL ESTATE LOANS:
 One- to four-family..........    $26,714       88.11%    $42,402         92.80%    $51,217      90.63%       $67,542        91.73%
 Multi-family.................      3,366       11.10       3,126          6.84       5,012       8.87          5,057         6.87
                                  -------       ------    -------         ------     ------      ------      --------        ------
    Total real estate loans...     30,080       99.21      45,528         99.64      56,229      99.50         72,599        98.60
                                  -------       ------    -------         ------    -------      ------       -------        ------

CONSUMER LOANS:
 Deposit account..............        104        0.35          93          0.20         136       0.24            110         0.15
 Automobile...................        ---         ---         ---           ---         ---        ---              6         0.01
 Home equity and home
 improvement..................        134        0.44          73          0.16         148       0.26            123         0.17
                                  -------       ------    -------         ------    -------      ------       -------        ------
    Total consumer loans              238        0.79         166          0.36         284       0.50            239         0.33
                                  -------       ------    -------         ------    -------      ------       -------        ------


 COMMERCIAL LOANS.............        ---         ---         ---           ---         ---        ---            790         1.07
                                  -------       ------    -------         ------    -------      ------       -------        ------
    Total loans receivable....     30,318      100.00%     45,694        100.00%     56,513     100.00%        73,628       100.00%
                                  =======       ======    =======         ======    =======      ======       =======        ======
 LESS:
 Deferred fees and discounts..        500                     246                       152                        42
 Allowance for loan losses....        106                     160                       200                       208
                                  -------                 -------                   -------                   -------
   Total loans receivable, net    $29,712                 $45,288                   $56,161                   $73,378
                                  =======                 =======                   =======                   =======

MORTGAGE-BACKED
SECURITIES:
 FNMA.........................      1,973        9.21       1,553          9.11       1,396       8.52          1,092         14.67
 GNMA.........................        910        4.25         707          4.15         651       3.98            229          3.08
 FHLMC........................     18,546       86.54      14,794         86.74      14,324      87.50          6,123         82.25
                                  -------      ------     -------        ------     -------     ------       --------        ------
    Total mortgage-backed
     securities...............     21,429      100.00%      17,054       100.00%      16,371    100.00%          7,444       100.00%
                                               ======                    ======                 ======                       =======

Net premiums and discounts....       (50)                     (39)                      (25)                        21
                                  -------                 --------                   -------                  --------

Net mortgage-backed               $21,379                  $17,015                   $16,346                   $ 7,465
                                  =======                  =======                   =======                   =======
 securities...................


<CAPTION>

                                            AT DECEMBER 31,

                                                1997
                                     ----------------------------
                                     AMOUNT               PERCENT


<S>                               <C>               <C>
REAL ESTATE LOANS:
 One- to four-family..........     $71,770(1)             90.49%
 Multi-family.................       6,459(2)              8.14
                                   -------                -----
    Total real estate loans...     78,229                 98.63
                                   -------               ------

CONSUMER LOANS:
 Deposit account..............        127                  0.16
 Automobile...................          1                  0.00
 Home equity and home                 154                  0.19
                                  --------                -----
 improvement..................
    Total consumer loans              282                  0.35
                                  --------              -------


 COMMERCIAL LOANS.............        806                  1.02
                                  --------              -------
    Total loans receivable....     79,317               100.00%
                                  --------              =======
 LESS:
 Deferred fees and discounts..         78
 Allowance for loan losses....        208
                                 --------
   Total loans receivable, net    $79,031
                                 ========

MORTGAGE-BACKED
SECURITIES:
 FNMA.........................        934                 16.06
 GNMA.........................        182                  3.13
 FHLMC........................      4,699                 80.81
                                 --------                ------
    Total mortgage-backed           5,815                100.00%
     securities...............                           ======

Net premiums and discounts....         26
                                 --------

Net mortgage-backed               $ 5,841
 securities...................   ========

<FN>
(1)      This amount includes a total of $8.3 million of 5, 7 and 10 year balloon loans.
(2)      This amount includes a total of $5.9 million of 5, 7 and 10 year balloon loans.
</FN>
</TABLE>


                                        5


<PAGE>
<TABLE>
<CAPTION>

         The following  table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rates at the dates indicated.


                                                                              AT DECEMBER 31,
                                                 -------------------------------------------------------------------------
                                                          1995                      1996                      1997
                                                  ----------------------     --------------------    ---------------------
                                                   AMOUNT       PERCENT       AMOUNT       PERCENT     AMOUNT     PERCENT

                                                                    (DOLLARS IN THOUSANDS)

<S>                                             <C>            <C>          <C>             <C>       <C>          <C>

FIXED-RATE LOANS:
 Real estate:
  One- to four-family.......................      $40,179         71.10%     $49,480         67.2     $50,707(1)     63.93%
  Multi-family..............................        5,012          8.87        5,057         6.87       6,459(2)      8.14
                                                  -------        ------       ------        --------   ------       ------
   Total fixed-rate real estate loans.......       45,191         79.97       54,537        74.07      57,166        72.07
  Consumer..................................          284          0.50          239         0.33         282         0.35
  Commercial................................          ---           ---          790         1.07         806         1.02
                                                  -------        ------       ------        --------   ------       ------
   Total fixed-rate loans...................       45,475         80.47       55,566         75.47     58,254        73.44
                                                  -------        ------       -------       --------   ------       ------

ADJUSTABLE-RATE LOANS:
 Real estate:
  One- to four-family.......................       11,038         19.53       18,062         24.53     21,063        26.56
                                                  -------        ------      -------        -------   -------       -------

    Total loans.............................       56,513        100.00%      73,628        100.00%    79,317       100.00%
                                                                 ======                     ======                  =======

LESS:
 Deferred fees and discounts................          152                         42                       78
 Allowance for loan losses..................          200                        208                      208
                                                 --------                   --------                   ------
  Total loans, net..........................      $56,161                    $73,378                  $79,031
                                                  =======                    =======                  =======

<FN>
(1)      This amount includes a total of $8.3 million of 5, 7 and 10 year balloon loans.
(2)      This amount includes a total of $5.9 million of 5, 7 and 10 year balloon loans.
</FN>
</TABLE>

                                        6


<PAGE>
<TABLE>
<CAPTION>

         The following schedule illustrates the interest rate sensitivity of the
Bank's loan  portfolio  at December  31, 1997.  Loans which have  adjustable  or
renegotiable interest rates are shown as maturing in the period during which the
contract is due rather than when interest rates are next subject to change.  The
schedule does not reflect the effects of possible  prepayments or enforcement of
due-on-sale clauses. The total amount of loans due after December 31, 1997 which
have a pre-determined  interest rate is $58.3 million, while the amount of loans
due after such date with floating rates is $21.1 million.




                                           Real Estate
                             ----------------------------------------
                             One- to four-family        Multi-family               Consumer           Commercial              Total
                             -------------------        ------------      -----------------    -----------------   ----------------
                                        Weighted            Weighted               Weighted             Weighted           Weighted
                                         Average             Average                Average              Average            Average
                              Amount       Rate        Amount     Rate     Amount      Rate     Amount      Rate    Amount     Rate
                             -------      -----       -------    -----     ------    ------    -------      -----   ------    -----

                                                              (Dollars in Thousands)

<S>                          <C>           <C>        <C>         <C>       <C>      <C>       <C>      <C>        <C>      <C>

 Due During Periods Ending
       December 31,

1998(1)....................   $    72    6.67%       $ 127    10.50%       $ 12        7.36%     $ 806    10.00%     1,017    9.80%
1999.......................       945    6.85          108     8.25          64        7.66        ---     0.00      1,117    7.03
2000.......................     1,110    7.95        1,686     8.35          10        4.79        ---     0.00      2,806    8.18
2001 and 2002..............     5,639    7.57        2,863     8.10         121        7.23        ---     0.00      8,623    7.74
2003 to 2007...............     7,656    7.98        1,675     9.17          23        9.00        ---     0.00      9,354    8.20
2008 to 2012...............     7,006    7.65          ---     0.00          52        8.89        ---     0.00      7,058    7.66
2013 and following.........    49,342    7.67          ---     0.00         ---         ---        ---     0.00     49,342    7.67
                               ------    ----     --------     ----      ------     -------     ------     ----     ------    ----
                              $71,770    7.69%      $6,459     8.49%       $282       8.14%       $806    10.00%   $79,317    7.78%
                              =======    =====      ======     =====       ====      =====        ====    ======   =======   =====

<FN>
(1) Includes demand loans, loans having no stated maturity, and past due loans.
</FN>
</TABLE>

                                        7


<PAGE>


ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING

         The  cornerstone of the Bank's lending program has been the origination
of  permanent  loans,  to be held in its  portfolio,  secured  by  mortgages  on
owner-occupied  and  non-owner-  occupied,   one-  to  four-family   residences.
Typically, such homes are single family detached houses, condominiums, townhomes
and two- to  four-family  dwellings.  At December 31, 1997,  $71.8  million,  or
90.5%, of the Banks gross loan portfolio consisted of permanent loans secured by
one- to four-family residences. More than 95% of these loans were located in the
Bank's  market  area.  The Bank  emphasizes  the  origination  of a  variety  of
residential  loans,  including  conventional  10, 15, 20 and 30 year  fixed-rate
loans, one, three and five year adjustable-rate mortgage loans ("ARMs") and 5, 7
and 10 year fixed rate balloon loans.

         During 1997, the Bank emphasized loans on non-owner  occupied,  one- to
four-family  properties due to the higher yields offered by such loans,  as well
as customer demand. The Bank offers a broad range of lending products to respond
to  customer  preferences,   market  dynamics  and  changes  in  asset/liability
management objectives.

         The Bank offers one- to  four-family  residential  ARMs which are fully
amortizing  loans with  contractual  maturities of up to 30 years.  The interest
rates on all of the ARMs originated by the Bank are subject to adjustment at one
year intervals after the initial loan period.  The Bank's ARM products generally
carry  interest  rates which are reset to a stated  margin  over an  independent
index.  Increases  or  decreases  in the  interest  rate of the Bank's  ARMs are
generally  limited to 2.0% at any adjustment  date and 6.0% over the life of the
loan.  The  Bank's  ARMs are not  convertible  into  fixed-rate  loans,  are not
assumable,  do not contain  prepayment  penalties  and do not  produce  negative
amortization.  At December 31, 1997,  the total  balance of one- to  four-family
ARMs was $21.1 million, or 26.6% of the Bank's gross loan portfolio.

         The Bank evaluates  both the  borrower's  ability to make principal and
interest payments and the value of the property that will secure the loan. North
Federal  will  verify a  borrower's  employment  history  and the  source of the
downpayment. The Bank is a qualified FHLMC seller/servicer.

         The Bank  originates  residential  mortgage  loans  with  loan-to-value
ratios up to 90%. On mortgage loans exceeding an 80% loan-to-value  ratio at the
time of origination,  North Federal requires  private  mortgage  insurance in an
amount  intended to reduce the Bank's  exposure to 80% of the  appraised  value.
Property  securing  real  estate  loans made by North  Federal is  appraised  by
independent appraisers.  The Bank requires evidence of marketable title and lien
position on all loans secured by real  property and requires  hazard or fire and
extended  coverage and vandalism and malicious  mischief  casualty  insurance in
amounts  at least  equal to the  principal  amount  of the loan or the  value of
improvements  on the  property,  depending  on the type of loan.  The Bank  also
requires flood insurance to protect the property  securing its interest,  should
it be determined that the property is located in a flood zone.

         The  Bank  also  offers  loans  secured  by  nonowner-occupied  one- to
four-family  residences  and has a limited amount of these types of loans in its
portfolio.  The risk  associated with these types of loans is similar to that of
owner-occupied  one- to four-family  loans because these loans are  underwritten
using similar  criteria as loans secured by  owner-occupied  one- to four-family
residences,  but are  provided at higher rates of interest  than  owner-occupied
loans.  The Bank  placed more  emphasis on these types of loans  during 1997 and
expects to continue to do so in 1998. The Bank originated  thirty-three of these
loans totaling $7.3 million during 1997.

                                        8


<PAGE>


         Residential  mortgage  loan  originations  are derived from a number of
sources, including mortgage brokers,  advertising, real estate broker referrals,
existing  borrowers  and  depositors,   builders  and  walk-in  customers.  Loan
applications are accepted at both of the Bank's offices.

MULTI-FAMILY REAL ESTATE LENDING

         In order to enhance the yield on its assets,  North Federal  originates
permanent loans secured by multi-family  real estate.  At December 31, 1997, the
Bank had  multi-family  real estate loans totaling $6.5 million,  or 8.1% of the
Bank's gross loan portfolio.  The largest multi-family loan at December 31, 1997
was $1.0 million and  represented  a 50%  participation  with a local  financial
institution.  At December 31,  1997,  the Bank had no  multi-family  real estate
loans which were over 30 days delinquent.

         Permanent  multi-family  real estate loans currently  originated by the
Bank have a maximum maturity of 10 years,  with most having  maturities  ranging
from 5 to 10 years.  Most of the loans amortize over a 25 year period.  Rates on
permanent  loans are fixed,  based on  competitive  factors.  Multi-family  real
estate  loans are  generally  written in  amounts of up to 75% of the  appraised
value of the  property,  and  borrowers  are  personally  liable  for all of the
indebtedness.

         Appraisals on properties  securing  multi-family loans are performed by
independent  appraisers designated by the Bank at the time the loan is made. All
appraisals on multi-family  loans are reviewed by the Bank's loan committee.  In
addition, the Bank's current underwriting procedures require verification of the
borrower's   credit   history,   income  and   financial   statements,   banking
relationships, references and income projections for the property.

         Multi-family  loans generally present a higher level of risk than loans
secured by one- to four-family  residences.  This greater risk is due to several
factors,  including the  concentration of principal in a limited number of loans
and borrowers,  the effects of general  economic  conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans.  Furthermore,  the  repayment of loans  secured by  multi-family  real
estate is typically dependent upon the successful  operation of the related real
estate  project.  If the cash flow from the project is reduced (for example,  if
leases are not  obtained  or renewed,  or a  bankruptcy  court  modifies a lease
term), the borrower's ability to repay the loan may be impaired.

CONSUMER LENDING

         The Bank  originates  a variety of different  types of consumer  loans,
including home equity loans,  rehabilitation  loans, which are loans that exceed
the parameters of a home  improvement  loan due to the extent of the remodeling,
direct  automobile  loans,  deposit  account loans and home  improvement  loans.
Although  North  Federal has attempted to place  increased  emphasis on consumer
loans,  particularly  home  equity and  rehabilitation  loans,  because of their
attractive  yields,  shorter terms to maturity,  and community need, at December
31, 1997, only $282,000 or .35% of the Bank's gross loan portfolio, consisted of
consumer loans.

         The  Bank's  home  equity  loans are  underwritten  such that the total
commitment  amount,  when combined with the balance of the first  mortgage lien,
may not exceed  80% of the  appraised  value of the  property.  These  loans are
written  with fixed  terms and carry fixed rates of  interest.  At December  31,
1997,  the Bank had $92,000 of home  equity  loans  outstanding,  or .12% of the
Bank's gross loan portfolio.


                                        9


<PAGE>


         The Bank's home equity line of credit loans,  which were  introduced in
the third  quarter  of 1997,  are  underwritten  such that the total  commitment
amount,  when combined with the first  mortgage  lien, may not exceed 80% of the
appraised value of the property. These loans are written with a maximum maturity
of five  years  and an  interest  rate that will  adjust to the prime  rate.  At
December 31, 1997, the Bank has $55,000 of outstanding  line of credit loans and
$157,000 in unused credit line commitments. The Bank marketed these loans to its
current  customer base during 1997 and anticipates  expanding that effort during
1998.

         The  underwriting  standards  employed by the Bank for  consumer  loans
include a determination  of the  applicant's  payment history on other debts and
the ability to meet  existing  obligations  and payments on the  proposed  loan.
Although  creditworthiness  of the  applicant is of primary  consideration,  the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.  While  consumer  loans other than
home equity loans  generally  involve a higher level of credit risk than one- to
four-family  residential  loans,  consumer  loans are  typically  made at higher
interest  rates  or for  shorter  terms.  The  shorter  term of  consumer  loans
increases the interest rate sensitivity of the lending institution's portfolio.

         Consumer  loans may entail  greater risk than do  residential  mortgage
loans,  particularly  in the case of consumer loans which are secured by rapidly
depreciable  assets,  such  as  automobiles.  In  such  cases,  any  repossessed
collateral for a defaulted  consumer loan may not provide an adequate  source of
repayment of the outstanding loan balance as a result of the greater  likelihood
of damage,  loss or  depreciation.  In addition,  consumer loan  collections are
dependent on the borrower's  continuing financial  stability,  and thus are more
likely to be  affected  by  adverse  personal  circumstances.  Furthermore,  the
application  of  various  federal  and  state  laws,  including  bankruptcy  and
insolvency  laws, may limit the amount which can be recovered on such loans. The
Bank had no delinquent  consumer loans at December 31, 1997,  although there can
be no assurance that delinquencies will not increase in the future.

COMMERCIAL LENDING

         In order to further enhance the yield on its assets,  the Bank issued a
commercial  line of credit to a  manufactured  housing  developer to finance the
period of time between the delivery of a unit to closing. This period is usually
between  60 to 90 days.  The  line of  credit  is  collateralized  by a  secured
interest in the individual units and any related sales  contracts.  In addition,
the line of credit is  personally  guaranteed  by the  developer.  Loan to value
ratios will range  between 50% to 60% at any given time.  At December  31, 1997,
the outstanding line of credit balance was $806,000.  The line of credit carries
a fixed rate of  interest  on a one-year  renewable  basis and was current as of
December 31, 1997. In January 1998, the Bank  increased the  authorized  line of
credit to $1.0 million.

         Commercial loans generally carry a higher rate of interest and are made
for  shorter  periods  of  time  than  fixed-rate  or  adjustable  rate  one- to
four-family  residential loans.  Commercial loans are usually larger and carry a
greater degree of risk, in part because the borrower's ability to repay the debt
may be largely dependent on the cash flow from the underlying business. The Bank
analyzes the financial condition of the property and the borrower in determining
whether to extend credit,  and generally  requires a personal guarantee from the
borrower. The Bank intends to expand its commercial lending activities,  subject
to customer demand and the existence of qualified borrowers.


                                       10


<PAGE>


MORTGAGE-BACKED SECURITIES

         The  Bank  purchases  mortgage-backed   securities  to  complement  its
mortgage  lending  activities,  when loan demand is low. At December  31,  1997,
mortgage-backed  securities  totaled $5.8  million,  or 4.7% of the Bank's total
assets. For information  regarding the amortized cost and market values of North
Federal's  mortgage-backed  securities  portfolio,  see  Note 3 of the  Notes to
Consolidated Financial Statements contained in the Annual Report to Stockholders
filed as Exhibit 13 hereto.

         In November 1995,  the Financial  Accounting  Standards  Board issued a
special report,  "A Guide to  Implementation  of Statement 115 on Accounting for
Certain  Investments in Debt and Equity  Securities," which afforded an entity a
one-time  opportunity to reassess the  appropriateness of the classifications of
all   securities   held  at  that  time  and  to  account   for  any   resulting
reclassification  at fair  value  in  accordance  with  Statement  of  Financial
Accounting Standards No. 115 ("SFAS 115"), Accounting for Certain Investments in
Debt  and  Equity   Securities.   The  Company   transferred   $6.8  million  of
mortgage-backed  securities  on  December  31,  1995  from  held-to-maturity  to
available-for-sale in accordance with the guide and sold those securities during
the first quarter of 1996 to fund new loan  originations.  At December 31, 1997,
mortgage-backed  securities  totaled  $5.8  million and were all  classified  as
held-to-maturity.  Of the $5.8  million,  $1.4  million  or 24.1% of the  Bank's
mortgage-backed securities carried adjustable rates of interest.

         Under the OTS' risk-based capital  requirements,  GNMA  mortgage-backed
securities have a zero percent  risk-weighting and FNMA, FHLMC and AA- or higher
rated mortgage-backed  securities have a 20% risk-weighting,  in contrast to the
50%  risk-weighting  carried  by  one-  to  four-family  performing  residential
mortgage  loans.  None of the  mortgage-backed  securities  held by the  Bank at
December 31, 1997 had a risk-weight for regulatory capital purposes above 20%.

         All of the  Bank's  mortgage-backed  securities  are  backed by federal
agencies.  Accordingly,  management  believes  that the  Bank's  mortgage-backed
securities are generally resistant to credit problems.

                                       11


<PAGE>
<TABLE>
<CAPTION>

         The following table sets forth the contractual maturities of the Bank's
mortgage-backed  securities  at December  31, 1997.  Mortgage-backed  securities
having  adjustable  interest  rates are shown as maturing  in the period  during
which the security is repricing.




                                                                 Due in                                               December 31,
                                -----------------------------------------------------------------------                   1997
                                6 Months     6 Months    1 to         3 to 5        5 to 10    10 to 20     Over 20     Balance
                                or Less      to 1 Year   3 Years      Years         Years      Years        Years     Outstanding
                                --------     ---------   -------      ------        -------    --------     -------   -----------

                                                                       (IN THOUSANDS)

<S>                            <C>            <C>         <C>         <C>           <C>        <C>         <C>         <C>

   Federal Home Loan
  Mortgage Corporation           $ 120          $1,629      ---         $403          $1,503     $982          $59       $4,696

    Federal National
  Mortgage Association             963             ---      ---          ---           ---        ---          ---          963

  Government National
  Mortgage Association            ---             ---       ---           65           ---        117          ---          182
                               -------         -------   -------      -------       -------     ------       -------    --------


          Total                 $1,083          $1,629      ---         $468        $1,503     $1,099          $59        $5,841
                                ======         =======    ======      =======       =======    =======       =======    ========

</TABLE>

                                       12


<PAGE>
<TABLE>
<CAPTION>

LOAN ORIGINATION AND REPAYMENT ACTIVITIES

         The  following  table  shows the  Bank's  loan  originations,  loan and
mortgage-backed  securities  purchases,  sales and principal  repayments for the
periods  indicated.  The Bank has not sold any loans in recent  years.  The Bank
maintains an approved seller/servicer status with FHLMC.


                                                                           YEAR ENDED DECEMBER 31,
                                                                      1995           1996           1997
                                                                   ---------------------------------------
                                                                            (IN THOUSANDS)

<S>                                                                <C>            <C>            <C>

Loans receivable (gross) at beginning of period..............        $45,694        $56,513        $73,628
                                                                     -------        -------        -------

ORIGINATIONS AND PURCHASES BY TYPE:

Fixed rate:
  Real estate - one- to four-family..........................         16,378         23,930         15,219
                - multi-family...............................          2,117          1,623          2,519
  Non-real estate - consumer and commercial..................            223          1,291            355
                                                                     -------         ------         ------
     Total loans originated..................................         18,718         26,844         18,093

Principal repayments.........................................          7,899          9,729         12,404
                                                                     -------        -------        -------
     Total loans at end of period............................        $56,513        $73,628        $79,317
                                                                     =======        =======        =======

Mortgage-backed securities (net) at beginning of
period.......................................................         17,015         16,346          7,465

  Purchases..................................................          1,960            ---            ---
  Repayments.................................................          2,747          2,190          1,628
  Sales......................................................            ---          6,600            ---
  Unrealized gain on mortgage-backed securities
    available-for-sale.......................................             93           (93)            ---
  Amortization of premiums and discounts.....................             25              2              4
                                                                     -------        -------        -------
     Mortgage-backed securities (net)                                $16,346        $ 7,465         $5,841
      at end of period.......................................        =======        =======         ======


</TABLE>

                                       13


<PAGE>


ASSET QUALITY

         When a borrower  fails to make a required  payment on a loan,  the Bank
attempts to cure the  delinquency  by contacting  the  borrower.  In the case of
residential  loans,  a late  notice is sent not later than 30 days after the due
date.  Additional  written  and verbal  contacts  may be made with the  borrower
between 30 and 90 days after the due date.  If the  delinquency  continues for a
period of 60 days,  the Bank usually sends a default letter to the borrower and,
after 90 days,  institutes  appropriate action to foreclose on the property.  If
foreclosed,  the property is sold at public  auction and may be purchased by the
Bank.  Delinquent  consumer loans are handled in a generally similar manner. The
Bank's  procedures for repossession and sale of consumer  collateral are subject
to various  requirements  under Illinois consumer  protection laws. The Bank has
historically  had few foreclosed  assets and, as set forth at "-  Non-Performing
Assets" below,  has had none during the past five years.  Accordingly,  the Bank
has not charged-off any loans during the past five years.

         Delinquent Loans.  At December 31, 1997, the Bank had no loans
delinquent for 60days or more.


                                       14


<PAGE>
<TABLE>
<CAPTION>

         Non-Performing  Assets.  The table  below  sets forth the  amounts  and
categories  of  non-performing  assets in the Bank's loan  portfolio.  Loans are
placed on  non-accrual  status  when the  collection  of  principal  or interest
becomes doubtful.  For all periods presented,  the Bank has had no troubled debt
restructurings.  Foreclosed  assets are assets  acquired in settlement of loans.
There were no foreclosed assets at the dates presented.


                                                                       DECEMBER 31,
                                                      1993       1994         1995         1996     1997
                                                    -------    --------     --------     ------   ------
                                                                  (DOLLARS IN THOUSANDS)

<S>                                                  <C>         <C>         <C>        <C>       <C>

Nonaccrual loans:
  One- to four-family..........................         $39         $30          $24        $--        $--
  Consumer.....................................           8           2           --          1         --
                                                         --        ----          ---       ----      -----
     Total non-performing assets...............         $47         $32          $24        $ 1       $ --
                                                        ===         ===          ===        ===       ====

Total as a percentage of total assets..........       0.04%       0.03%        0.02%      0.00%      0.00%
                                                       ====        ====         ====       ====       ====

</TABLE>

         Other Loans of Concern.  As of December 31,  1997,  there were no loans
with respect to which known  information  about the possible  credit problems of
the  borrowers  or  the  cash  flows  of the  security  properties  have  caused
management  to have  concerns as to the ability of the  borrowers to comply with
present  loan  repayment  terms and which may result in the future  inclusion of
such items in the  non-performing  asset  categories.  Management has taken this
into  consideration  in determining  the adequacy of the allowance for losses on
loans as of December 31, 1997.

         Classified Assets.  Federal  regulations provide for the classification
of loans and other assets, such as debt and equity securities  considered by the
OTS to be of lesser  quality,  as  substandard,  doubtful  or loss.  An asset is
considered  substandard if it is inadequately protected by the current net worth
and  paying  capacity  of the  obligor  or of the  collateral  pledged,  if any.
Substandard assets include those characterized by the distinct  possibility that
the insured  institution  will  sustain  some loss if the  deficiencies  are not
corrected.  Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard,  with the added characteristic that the weaknesses
present  make  collection  or  liquidation  in full,  on the basis of  currently
existing facts,  conditions,  and values,  highly  questionable  and improbable.
Assets classified as loss are those considered  uncollectible and of such little
value that their  continuance as assets without the  establishment of a specific
loss reserve is not warranted.

         When  an  insured  institution  classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets. When an insured  institution  classifies
problem  assets as  "loss,"  it is  required  either  to  establish  a  specific
allowance for losses equal to 100% of that portion of the asset so classified or
to  charge  off  such  amount.   An   institution's   determination  as  to  the
classification  of its  assets  and the amount of its  valuation  allowances  is
subject to review by the OTS and the FDIC,  who may order the  establishment  of
additional general or specific loss allowances.

         In connection with the filing of its periodic  reports with the OTS and
in accordance  with its  classification  of assets  policy,  the Bank  regularly
reviews the problem  assets in its  portfolio  to  determine  whether any assets
require classification in accordance with applicable regulations.
There were no classified assets at December 31, 1997.

                                       15


<PAGE>


         Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan  portfolio and changes in the nature and volume of its loan
activity.  Such  evaluation,  which includes a review of all loans of which full
collectibility may not be reasonably assured, considers among other matters, the
estimated  fair  value  of  the  underlying  collateral,   economic  conditions,
historical  loan loss  experience and other factors that warrant  recognition in
providing for an adequate loan loss  allowance.  Allowances also are established
for loans  considered  to be impaired.  The  calculation  of reserve  levels for
impaired loans is based upon the discounted present value of expected cash flows
received  from the debtor or other  measures  of value such as market  prices or
collateral values. As the Company did not identify any loans considered impaired
in 1997, no additional  allowance was required.  Although management believes it
uses  the  best  information  available  to  make  such  determinations,  future
adjustments to reserves may be necessary,  and net income could be significantly
affected,  if circumstances  differ  substantially  from the assumptions used in
making  the  initial  determinations.  See Note  1(f) and Note 6 of the Notes to
Consolidated Financial Statements contained in the Annual Report to Stockholders
filed as Exhibit 13 hereto, and "Regulation." At December 31, 1997, the Bank had
an allowance  for loan losses of $208,000,  which was equal to .26% of net loans
receivable.


                                       16


<PAGE>
<TABLE>
<CAPTION>

         The following table sets forth an analysis of the Bank's  allowance for
loan losses.


                                                                          YEAR ENDED DECEMBER 31,
                                                                  -----------------------------------------
                                                                  1993     1994      1995     1996     1997
                                                                  ----     ----      ----     ----     ----
                                                                            (DOLLARS IN THOUSANDS)

<S>                                                              <C>      <C>       <C>      <C>       <C>

Balance at beginning of period..............................       $34     $106      $160     $200     $208

Charge-offs:
  One- to four-family.......................................       ---      ---       ---      ---      ---
  Consumer..................................................       ---      ---       ---      ---      ---

Recoveries..................................................       ---      ---       ---      ---      ---
                                                                   ---      ---       ---      ---      ---

Net charge-offs.............................................       ---      ---       ---      ---      ---
Additions charged to operations.............................        72       54        40        8      ---
                                                                   ---      ---       ---       --    -----
Balance at end of period....................................      $106     $160      $200     $208     $208
                                                                  ====     ====      ====     ====     ====

</TABLE>
<TABLE>
<CAPTION>

         When the Bank repossesses property it is thereafter classified
as real estate owned.  Any gains or losses (realized or reserved for)
thereafter are treated as real estate owned activity.  The Bank had no real
estate owned as of the dates presented.

         The  distribution of the Bank's  allowance for loan losses at the dates
indicated is summarized as follows:


                                                        AT DECEMBER 31,
                                    ---------------------------------------------------
                                       1993       1994      1995       1996        1997
                                    -------      -------   -------    ------    -------
                                                    (Dollars in Thousands)

<S>                                <C>           <C>       <C>        <C>       <C>

Unallocated.........................   $106         $160    $200         $208      $208
                                       ----         ----    ----         ----      ----
     Total..........................   $106         $160    $200         $208      $208
                                       ====         ====    ====         ====      ====

</TABLE>

INVESTMENT ACTIVITIES

         North Federal must maintain  minimum levels of investments that qualify
as liquid  assets  under OTS  regulations.  Liquidity  may  increase or decrease
depending upon the  availability of funds and comparative  yields on investments
in relation to the return on loans. Historically, the Bank has maintained liquid
assets at levels significantly above the minimum requirements imposed by the OTS
regulations  and above  levels  believed  adequate to meet the  requirements  of
normal operations,  including potential deposit outflows.  Cash flow projections
are  regularly  reviewed  and  updated  to assure  that  adequate  liquidity  is
maintained. See "Regulation - Liquidity."

         Federally  chartered savings  institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities  of various  federal  agencies,  certain  certificates  of deposit of
insured banks and savings institutions, certain bankers acceptances,  repurchase
agreements  and  federal  funds.  Subject  to  various  restrictions,  federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally  chartered savings  institution is otherwise
authorized to make directly.

                                       17


<PAGE>


         Generally,  the investment  policy of the Bank is to invest funds among
various   categories  of  investments  and  maturities  based  upon  the  Bank's
asset/liability  and interest  rate risk  management  policies,  concern for the
highest investment quality, liquidity needs and performance objectives.

         At December 31, 1997,  the  Company's  interest-bearing  deposits  with
banks and dollar denominated money market accounts totaled $4.4 million, or 3.6%
of  total  assets.   Investment   securities,   consisting  of  U.S.  government
securities, federal agency obligations and FHLB stock, totaled $24.3 million, or
19.8% of total assets, and investment in federal funds sold totaled $6.0 million
or  4.9% of  total  assets.  It is the  Company's  general  policy  to  purchase
investment  securities  which are U.S.  Government  securities or federal agency
obligations.  At December  31, 1997,  the  weighted  average term to maturity or
repricing of the investment  portfolio,  excluding FHLB stock, equity securities
and mortgage-backed securities, was 3 months.



                                       18


<PAGE>
<TABLE>
<CAPTION>

         The  following  table  sets  forth  the  composition  of the  Company's
investment  portfolio,  excluding its mortgage-backed  securities,  at the dates
indicated.



                                                                                              AT DECEMBER 31,

                                                                       1995                   1996                    1997
                                                              -----------------------------------------------------------------
                                                               Carrying    % of       Carrying      % of       CARRYING    % of
                                                                VALUE      TOTAL       VALUE        TOTAL       VALUE     TOTAL

                                                                                          (DOLLARS IN THOUSANDS)

<S>                                                          <C>        <C>        <C>          <C>         <C>          <C>

Investment Securities:
  U.S. Treasury notes......................................... $ 6,530     22.52%    $ 2,237       8.73%        ---        0.00%
  U.S. Government agency securities...........................  21,008     72.43      21,844      85.22        22,630     90.69
  FHLB stock..................................................     624      2.15       1,205       4.70         1,705      6.83
  Other.......................................................     598      2.06         100       0.39           200      0.80
  Equity securities...........................................     244      0.84         245       0.96           420      1.68
                                                                ------   -------      -------    ------        ------     ------



    Total investment securities and FHLB stock................ $29,004    100.00%    $25,631     100.00%      $24,955     100.00%
                                                               =======    ======      =======    ======       =======     ======

Other Interest-Earning Assets:
  Interest-bearing deposits with banks........................ $ 2,634               $ 2,644                  $ 2,937
  Dollar denominated mutual funds.............................   1,127                   547                    1,477
  Federal funds sold .........................................   3,925                 4,800                    5,976
                                                               -------               -------                  -------
     Total.................................................... $ 7,686               $ 7,991                  $10,390
                                                               =======               =======                  =======

Average remaining life or term to repricing of investment
 securities and other interest-earning assets, excluding
 FHLB stock and equity securities.............................         9 mos.                 14 mos.               3 mos.

</TABLE>

                                       19


<PAGE>
<TABLE>
<CAPTION>


         The composition and contractual maturities of the investment portfolio,
excluding  mortgage-backed  securities,  equity  securities  and FHLB of Chicago
stock, are indicated in the following table.


                                                                     AT DECEMBER 31, 1997
                                                                                                             Total
                                               One Year           1 thru 5         Over 5                  Investment
                                                or Less            Years            Years                  Securities
                                               ---------          ---------       ----------         ---------      -----
                                               Amortized          Amortized        Amortized         Amortized       Fair
                                                 Cost               Cost             Cost               Cost        Value
                                               ---------          ---------       ----------         ---------      -----

                                                                    (DOLLARS IN THOUSANDS)

<S>                                          <C>                 <C>           <C>                  <C>            <C>

U.S. Government agency securities..........     $1,000             $4,000          $17,727            $22,727       $22,630
Other......................................      ---                  100              100                200           200
                                               -------            -------         --------            -------        ------

    Total investment securities............    $ 1,000             $4,100          $17,827            $22,927       $22,830
                                                ======             ======          =======            =======        =======
Weighted average yield(1)..................       4.98%              6.31%            7.14%              6.90%
                                                ======             ======          =======            ======

<FN>
(1)      The weighted average yield is based upon the interest rate
         in effect at December 31, 1997.
</FN>
</TABLE>


SOURCES OF FUNDS

         General. The Bank's primary sources of funds are deposits,  borrowings,
reverse  repurchase  agreements,  amortization and prepayment of loan principal,
maturities and sale of investment  securities,  short-term investments and funds
provided from operations.

         Deposits.  North Federal offers a variety of deposit  accounts having a
wide range of interest rates and terms.  The Bank's deposits consist of passbook
accounts, NOW and non-interest-bearing  checking accounts, money market accounts
and certificate accounts. The Bank relies primarily on advertising,  competitive
pricing  policies  and customer  service to attract and retain  these  deposits.
North Federal solicits deposits from its market area only.

         The flow of deposits is influenced  significantly  by general  economic
conditions,   changes  in  money  market  and  prevailing   interest  rates  and
competition.

         The variety of deposit  accounts  offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with  flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit  flows,  as customers have become more interest rate  conscious.  The
Bank manages the pricing of its deposits in keeping with its asset/liability and
interest  rate risk  management,  profitability  and growth  objectives  and has
traditionally  attempted to retain longer term deposits for  asset/liability and
interest  rate  risk  management  purposes.  Based on its  experience,  the Bank
believes that its passbook, NOW and  non-interest-bearing  checking accounts are
relatively  stable  sources of  deposits.  However,  the  ability of the Bank to
attract  and  maintain  certificates  of  deposit,  and the rates  paid on these
deposits,  has been and will  continue  to be  significantly  affected by market
conditions.


                                       20


<PAGE>
<TABLE>
<CAPTION>

         The following table sets forth the dollar amount of savings deposits in
the  various  types of  deposit  programs  offered  by the  Bank  for the  dates
indicated and the rates offered as of December 31, 1997.  See Note 7 of Notes to
Consolidated Financial Statements for weighted average nominal rates.




                                                                                          AT DECEMBER 31,
                                                       ----------------------------------------------------------------------------
                                                                   1995                        1996                        1997
                                                            ------------------------   --------------------    --------------------
                                                                            Percent               Percent                   Percent
                                                               Amount       of Total    Amount    of Total     Amount      of Total

                                                                                      (DOLLARS IN THOUSANDS)

<S>                                                       <C>              <C>       <C>         <C>         <C>          <C>

TRANSACTION AND SAVINGS DEPOSITS:

Passbook Accounts 2.75%...............................        $17,380        23.1%    $16,197      22.0%       $15,282        20.4%
NOW  Accounts  2.02%..................................          7,000         9.3       8,298       11.3         8,429        11.2

Non-Interest Bearing Accounts.........................            184         0.3         998        1.3         1,208         1.6

Money Market Accounts
 0.00% - 4.25%........................................          5,637         7.5       6,233        8.5         5,544         7.4
                                                                -----       -----     -------      -----       -------       -----

Total Non-Certificates................................         30,201        40.2      31,726       43.1        30,463        40.6
                                                              -------       -----     -------      -----       -------       -----

TOTAL CERTIFICATES:

 0.00 -  4.99%........................................          3,419         4.5       1,574        2.1           885         1.2
 5.00 -  5.99%........................................         18,764        25.0      25,304       34.4        30,775        41.0
 6.00 -  6.99%........................................         19,918        26.5      10,981       14.9         9,043        12.1
 7.00 -  7.99%........................................          2,341         3.1       3,779        5.1         3,764         5.0
 8.00 -  8.99%........................................            526         0.7         247        0.4           111         0.1
                                                                  ---        ----       -----      -----         -----         ---

Total Certificates....................................         44,968        59.8      41,885       56.9        44,578        59.4
                                                              -------       -----     -------     ------       -------       -----
Total Deposits........................................        $75,169       100.0%    $73,611     100.0%       $75,041      100.0%
                                                              =======       =====     =======     =====        =======      =====

</TABLE>


         The following table sets forth the savings flows at the Bank during the
periods indicated. Net increase refers to the amount of deposits during a period
less the amount of withdrawals during the period.

                                       21

<PAGE>
<TABLE>
<CAPTION>


                                                             YEAR ENDED DECEMBER 31,
                                                        ----------------------------------------------
                                                         1995               1996                1997
                                                        -------           --------            --------

                                                                     (DOLLARS IN THOUSANDS)

<S>                                                    <C>               <C>                 <C>

Opening balance............................             $70,178           $ 75,169            $ 73,611
Deposits...................................             100,836             91,640             108,398
Withdrawals................................              99,151             97,018             110,169
Interest credited..........................               3,306              3,820               3,201
                                                        -------           --------            --------
Ending balance.............................             $75,169           $ 73,611            $ 75,041
                                                        =======           ========            ========

Net increase (decrease)....................              $4,991          $(1,558)             $  1,430
                                                         ======      =============            ========


Percent increase (decrease)................               7.11%            (2.07)%               1.94%
                                                          ====             ======              ======

</TABLE>
<TABLE>
<CAPTION>

         The following table shows rate and maturity information for the
Bank's certificates of deposit as of December 31, 1997.



                                                      0.00-     5.00-       6.00-      7.00-       8.00% or                 Percent
                                                      4.99%     5.99%       6.99%      7.99%       Greater     Total       of Total
                                                     -------   -------     -------    -------      --------   --------     --------

                                                                               (DOLLARS IN THOUSANDS)

<S>                                                 <C>        <C>         <C>        <C>         <C>        <C>          <C>

Certificate accounts maturing
IN QUARTER ENDING           :

March 31, 1998..............................         $ 743     $7,728      $2,999     $ 105         $---       $11,575       25.96%
June 30, 1998...............................            55      8,047          84       ---          ---         8,186       18.36
September 30, 1998..........................             6      3,254          32        20          ---         3,312        7.43
December 31, 1998...........................            17      2,499          12       ---          ---         2,528        5.67
March 31, 1999..............................            43      5,285          38       124           23         5,513       12.37
June 30, 1999...............................            21      1,458         538       ---          ---         2,017        4.52
September 30, 1999..........................           ---        327         450        24          ---           801        1.80
December 31, 1999...........................           ---        527         246       705          ---         1,478        3.32
March 31, 2000..............................           ---        149         108     1,303          ---         1,560        3.50
June 30, 2000...............................           ---        165         475     1,446          ---         2,086        4.68
September 30, 2000..........................           ---         29         919       ---          ---           948        2.13
December 31, 2000...........................           ---         77         468       ---          ---           545        1.22
Thereafter..................................           ---      1,230       2,674        37           88         4,029        9.04
                                                    ------    -------     -------    ------       ------      --------      ------
   Total....................................          $885    $30,775      $9,043    $3,764        $ 111       $44,578      100.00%
                                                      ====  =========  ==========    ======        =====       =======      ======

   Percent of total.........................          1.99%     69.04%      20.29%     8.44%        0.25%       100.00%
                                                     =====      =====       =====      ====        =====        ======

</TABLE>

                                       22


<PAGE>
<TABLE>
<CAPTION>

         The following table indicates the amount of the Bank's  certificates of
deposit by time remaining until maturity as of December 31, 1997.


                                                                    MATURITY
                                                   ------------------------------------------------
                                                                  OVER         OVER
                                                   3 MONTHS      3 TO 6       6 TO 12        OVER
                                                    OR LESS      MONTHS        MONTHS      12 MONTHS        TOTAL
                                                  ---------     -------      --------      ---------      --------
                                                                        (IN THOUSANDS)

<S>                                              <C>          <C>            <C>          <C>            <C>

CERTIFICATES OF DEPOSIT OF LESS THAN
 $100,000...................................         $9,942      $6,517        $5,020       $16,962        $38,441

CERTIFICATES OF DEPOSIT OF $100,000 OR
 GREATER....................................          1,633       1,669           820         2,015          6,137
                                                     ------      ------       -------       -------        -------

TOTAL CERTIFICATES OF DEPOSIT...............        $11,575      $8,186        $5,840       $18,977        $44,578
                                                    =======      ======        ======       =======        =======

</TABLE>

SUBSIDIARY AND OTHER ACTIVITIES

         As a federally  chartered  savings bank,  North Federal is permitted by
OTS  regulations  to invest up to 2% of its assets in the stock of, or unsecured
loans  to,  service  corporation  subsidiaries.  North  Federal  may  invest  an
additional 1% of its assets in service  corporations where such additional funds
are used for inner-city or community development purposes.

         At December  31, 1997 North  Federal had one active  subsidiary,  North
Financial  Corporation,   which  provides  general  insurance  services  to  the
customers of the Bank.  The Bank's  investment in its  subsidiary  was $9,706 at
December  31,  1997.  For the year ended  December  31,  1997,  North  Financial
Corporation had a net loss of $1,462.


                                   REGULATION

GENERAL

         North Federal is a federally  chartered  savings bank,  the deposits of
which are  federally  insured  and  backed by the full  faith and  credit of the
United  States  Government.  Accordingly,  the Bank is subject to broad  federal
regulation and oversight  extending to all its operations.  The Bank is a member
of the FHLB of Chicago and is subject to certain limited regulation by the Board
of Governors of the Federal Reserve System  ("Federal  Reserve  Board").  As the
savings and loan holding  company of North Federal,  the Company also is subject
to federal  regulation  and  oversight.  The  purpose of the  regulation  of the
Company  and  other  holding   companies  is  to  protect   subsidiary   savings
associations.  North Federal's  deposits are insured by the Savings  Association
Insurance Fund ("SAIF"), which together with the Bank Insurance Fund (the "BIF")
are the two deposit insurance funds  administered by the FDIC. As a result,  the
FDIC has certain regulatory and examination authority over North Federal.

         Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.


                                       23


<PAGE>


FEDERAL REGULATION OF SAVINGS ASSOCIATIONS

         The  OTS  has  extensive  authority  over  the  operations  of  savings
associations.  As part of this  authority,  North  Federal is  required  to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC  examinations  of North Federal were
as of  September  30, 1996 and November  10,  1990,  respectively.  Under agency
scheduling  guidelines,  it is likely that another examination will be initiated
in the near future. When examinations are conducted by the OTS and the FDIC, the
examiners may require an  association  to provide for higher general or specific
loan loss  reserves.  All  savings  associations  are  subject to a  semi-annual
assessment,  based upon the  savings  association's  total  assets,  to fund the
operations of the OTS. North  Federal's OTS assessment for the fiscal year ended
December 31, 1997, was $36,411.

         The OTS also  has  extensive  enforcement  authority  over all  savings
institutions  and their holding  companies,  including the Bank and the Company.
This enforcement  authority includes,  among other things, the ability to assess
civil  money  penalties,  to issue  cease-and-desist  or  removal  orders and to
initiate  injunctive  actions.  In  general,  these  enforcement  actions may be
initiated  for  violations  of  laws  and  regulations  and  unsafe  or  unsound
practices. Other actions or inactions,  including misleading or untimely reports
filed with the OTS, may provide the basis for enforcement  action.  Except under
certain circumstances, public disclosure of final enforcement actions by the OTS
is required.

         In addition,  the investment,  lending and branching authority of North
Federal is prescribed by federal laws and it is prohibited  from engaging in any
activities not permitted by such laws. For instance,  no savings institution may
invest in  non-investment  grade  corporate debt  securities.  In addition,  the
permissible  level of  investment  by federal  associations  in loans secured by
non-residential real property may not exceed 400% of total capital,  except with
approval of the OTS. Federal savings  associations are also generally authorized
to  branch   nationwide.   North  Federal  is  in  compliance   with  the  noted
restrictions.

         The Bank's general permissible lending limit for  loans-to-one-borrower
is equal to the  greater of $500,000  or 15% of  unimpaired  capital and surplus
(except for loans fully secured by certain  readily  marketable  collateral,  in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1997,  the Bank's  lending  limit under this  restriction  was $2.5
million.   North  Federal  is  in  compliance  with  the   loans-to-one-borrower
limitation.

         The OTS, as well as the other  federal  banking  agencies,  has adopted
guidelines  establishing  safety and soundness standards on such matters as loan
underwriting and  documentation,  asset quality,  earnings  standards,  internal
controls and audit  systems,  interest rate risk exposure and  compensation  and
other  employee  benefits.  Any  institution  which  fails to comply  with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an  approved  plan will  subject  the  institution  to further  enforcement
action.  The OTS and the other  federal  banking  agencies  have  also  proposed
additional guidelines on asset quality and earnings standards.  No assurance can
be given as to whether or in what form the proposed regulations will be adopted.


                                       24


<PAGE>


INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC

         North  Federal is a member of the SAIF,  which is  administered  by the
FDIC.  Deposits  are  insured  up to  applicable  limits  by the  FDIC  and such
insurance  is  backed  by  the  full  faith  and  credit  of the  United  States
Government.  As insurer,  the FDIC  imposes  deposit  insurance  premiums and is
authorized to conduct  examinations of and to require  reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC  determines  by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate  enforcement
actions  against  savings  associations,  after giving the OTS an opportunity to
take such action,  and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to  risk-weighted  assets  ("Tier 1  risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.

         The FDIC is authorized to increase  assessment  rates,  on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

         For the  first six  months of 1995,  the  assessment  schedule  for BIF
members and SAIF members  ranged from .23% to .31% of  deposits.  As is the case
with the SAIF, the FDIC is authorized to adjust the insurance  premium rates for
banks that are insured by the BIF in order to maintain the reserve  ratio of the
BIF at 1.25%  of BIF  insured  deposits.  As a result  of the BIF  reaching  its
statutory  reserve  ratio the FDIC revised the premium  schedule for BIF insured
institutions  to  provide  a range of .04% to .31% of  deposits.  The  revisions
became  effective in the third quarter of 1995. In addition,  the BIF rates were
further revised,  effective  January 1996, to provide a range of 0% to .27%. The
SAIF rates,  however,  were not  adjusted.  At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below),
the SAIF would not attain its designated reserve ratio until the year 2002. As a
result,  SAIF insured  members would continue to be generally  subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.

         In order to eliminate this disparity and any  competitive  disadvantage
between  BIF and SAIF  member  institutions  with  respect to deposit  insurance
premiums,  legislation  to  recapitalize  the SAIF  was  enacted  in  1996.  The
legislation  provided  for a one-time  assessment  to be imposed on all deposits
assessed at the SAIF rates as of March 31, 1995,  in order to  recapitalize  the
SAIF.

                                       25


<PAGE>


It also provides for the merger of the BIF and the SAIF on January 1, 1999 if no
savings  associations then exist. The special assessment rate was established at
 .657% of deposits by the FDIC and the Bank's  resulting  assessment  of $486,000
was paid in November  1996.  This  special  assessment  significantly  increased
noninterest  expense and adversely affected the Bank's results of operations for
the quarter ended September 30, 1996. As a result of the special assessment, the
Bank's deposit insurance premium was reduced to zero based upon its current risk
classification  and the new assessment  schedule for SAIF insured  institutions.
These premiums are subject to change in future periods.

         All SAIF-insured institutions are required to pay an assessment for the
repayment of interest on obligations issued by a federally chartered corporation
to provide financing  ("FICO") for resolving the thrift crisis in the 1980's, in
the amount equal to 6.48 basis points for each $100 in domestic  deposits.  As a
result of the recent legislation discussed above,  BIF-insured  institutions are
also  required to pay an  assessment  for the  repayment of interest on the FICO
bonds,  in an  amount  equal to 1.52  basis  points  for each  $100 in  domestic
deposits. The assessment of SAIF-insured  institutions is expected to be reduced
to 2.43 basic points for each $100 in domestic deposits no later than January 1,
2000, by which point BIF-insured institutions will participate fully in the FICO
bond interest repayment. These assessments,  which may be revised based upon the
level of BIF and SAIF deposits, will continue until the bonds mature in 2017.

REGULATORY CAPITAL REQUIREMENTS

         Federally insured savings associations,  such as the Bank, are required
to  maintain a minimum  level of  regulatory  capital.  The OTS has  established
capital standards,  including a tangible capital  requirement,  a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such  savings  associations.  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 associations on a case-by-case basis.

         The capital  regulations  require  tangible capital of at least 1.5% of
adjusted total assets (as defined by  regulation).  Tangible  capital  generally
includes  common   stockholders'   equity  and  retained  income,   and  certain
noncumulative  perpetual  preferred stock and related income.  In addition,  all
intangible  assets,  other than a limited amount of purchased mortgage servicing
rights,  must be deducted from tangible capital.  At December 31, 1997, the Bank
did not have any intangible assets.

         The OTS regulations establish special  capitalization  requirements for
savings associations that own subsidiaries.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries the debt and equity  investments in such  subsidiaries are deducted
from  assets  and  capital.  At  December  31,  1997,  the Bank had no  material
subsidiary activity.

         At December 31, 1997,  the Bank had tangible  capital of $11.6 million,
or 9.7% of adjusted total assets,  which is approximately $9.7 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.


                                       26


<PAGE>


         The capital standards also require core capital equal to at least 3% of
adjusted total assets.  Core capital generally consists of tangible capital plus
certain intangible  assets,  including a limited amount of purchased credit card
relationships.  As a result of the prompt corrective action provisions discussed
below,  however, a savings  association must maintain a core capital ratio of at
least  4%  to  be  considered  adequately  capitalized  unless  its  supervisory
condition is such to allow it to maintain a 3% ratio.  At December 31, 1997, the
Bank had no intangibles which were subject to these tests.

         At December 31,  1997,  North  Federal had core capital  equal to $11.6
million,  or 9.7% of adjusted  total  assets,  which is $7.9  million  above the
minimum leverage ratio requirement of 3.0% as in effect on that date.

          The OTS risk-based  requirement  requires savings associations to have
total capital of at least 8% of risk-weighted  assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based  requirement  only to the extent of core capital.  The
OTS is  also  authorized  to  require  a  savings  association  to  maintain  an
additional  amount of total capital to account for  concentration of credit risk
and the risk of non-traditional  activities.  At December 31, 1997, the Bank had
$208,000 of general loss  reserves,  which was less than 1.25% of  risk-weighted
assets.

         Certain  exclusions from capital and assets are required to be made for
the purpose of calculating  total  capital.  Such  exclusions  consist of equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
nonresidential  construction  loans in excess of an 80% loan-to-value  ratio and
reciprocal holdings of qualifying capital instruments. North Federal had no such
exclusions from capital and assets at December 31, 1997.

         In  determining  the  amount  of  risk-weighted   assets,  all  assets,
including certain  off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%,  based on the risk  inherent in the type of asset.  For
example,  the OTS has assigned a risk weight of 50% for  prudently  underwritten
permanent  one- to  four-family  first lien mortgage loans not more than 90 days
delinquent  and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.

         OTS regulations  also require that every savings  association with more
than normal  interest rate risk exposure to deduct from its total  capital,  for
purposes of determining compliance with such requirement, an amount equal to 50%
of its  interest-rate  risk  exposure  multiplied  by the  present  value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings  association,  greater  than 2% of the  present  value of its
assets,  based upon a  hypothetical  200 basis  point  increase  or  decrease in
interest rates (whichever results in a greater decline).  Net portfolio value is
the  present  value  of  expected  cash  flows  from  assets,   liabilities  and
off-balance  sheet  contracts.  The rule will not become effective until the OTS
evaluates the process by which savings  associations may appeal an interest rate
risk deduction determination.  It is uncertain as to when this evaluation may be
completed.  Any savings  association with less than $300 million in assets and a
total capital ratio in excess of 12%, such as North Federal, is exempt from this
requirement unless the OTS determines  otherwise.  This new rule is not expected
to have any material adverse effect on the Bank.


                                       27


<PAGE>


         On December 31, 1997,  North Federal had total capital of $11.8 million
(including   $11.6   million  in  core  capital  and   $208,000  in   qualifying
supplementary  capital)  and  risk-weighted  assets  of $46.4  million  or total
capital of 25.4% of risk-weighted assets. This amount was $8.0 million above the
8.0% requirement in effect on that date.

         The OTS and the FDIC are authorized  and,  under certain  circumstances
required, to take certain actions against savings associations that fail to meet
their  capital  requirements.  The OTS is  generally  required to take action to
restrict the activities of an "undercapitalized  association" (generally defined
to be  one  with  less  than  either  a 4%  core  capital  ratio,  a 4%  Tier  1
risked-based  capital  ratio  or an  8%  risk-based  capital  ratio).  Any  such
association  must  submit a  capital  restoration  plan and  until  such plan is
approved by the OTS may not increase its assets,  acquire  another  institution,
establish a branch or engage in any new  activities,  and generally may not make
capital   distributions.   The  OTS  is  authorized  to  impose  the  additional
restrictions that are applicable to significantly undercapitalized associations.

          As a condition to the approval of the capital  restoration  plan,  any
company  controlling  an  undercapitalized  association  must agree that it will
enter  into  a  limited  capital  maintenance  guarantee  with  respect  to  the
institution's achievement of its capital requirements.

         Any savings  association  that fails to comply with its capital plan or
is  "significantly  undercapitalized"  (i.e.,  Tier 1 risk-based or core capital
ratios of less than 3% or a  risk-based  capital  ratio of less than 6%) must be
made  subject  to one or more of  additional  specified  actions  and  operating
restrictions  which may cover all aspects of its operations and include a forced
merger  or  acquisition  of  the   association.   An  association  that  becomes
"critically  undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly  undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator  with the concurrence of the FDIC) for a
savings  association,  with certain limited exceptions,  within 90 days after it
becomes critically undercapitalized.

         Any  undercapitalized  association  is  also  subject  to  the  general
enforcement  authority of the OTS and the FDIC,  including the  appointment of a
conservator or receiver.  The OTS is also generally  authorized to reclassify an
association into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.

         The imposition by the OTS or the FDIC of any of these measures on North
Federal  may have a  substantial  adverse  effect on the Bank's  operations  and
profitability.  The Company's  shareholders do not have preemptive  rights,  and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of  Common  Stock,  such  issuance  may  result  in the  dilution  in the
percentage of ownership of the Company.

LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS

         OTS regulations  impose various  restrictions  on savings  associations
with respect to their ability to make  distributions  of capital,  which include
dividends,  stock  redemptions  or  repurchases,   cash-out  mergers  and  other
transactions  charged to the capital  account.  OTS regulations  also prohibit a
savings  association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result,  the  regulatory  capital  of the  association
would be

                                       28


<PAGE>


reduced below the amount required to be maintained for the  liquidation  account
established in connection with its mutual to stock conversion.

         Generally,  savings  associations,  such as the Bank,  that  before and
after the  proposed  distribution  meet  their  capital  requirements,  may make
capital  distributions  during any calendar year equal to the greater of 100% of
net  income for the  year-to-date  plus 50% of the amount by which the lesser of
the  association's  tangible,  core or  risk-based  capital  exceeds its capital
requirement  for such  capital  component,  as measured at the  beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However,  an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority  restricted by the OTS. The Bank may pay
dividends in accordance with this general authority.

         Savings  associations  proposing to make any capital  distribution need
only  submit  written  notice  to the OTS 30 days  prior  to such  distribution.
Savings  associations  that do not,  or would  not meet  their  current  minimum
capital requirements  following a proposed capital  distribution,  however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution  during that 30-day  period  notice  based on safety and  soundness
concerns. See "Regulatory Capital Requirements."

         The OTS has proposed  regulations that would revise the current capital
distribution  restrictions.  Under the proposal a savings association may make a
capital  distribution  without notice to the OTS (unless it is a subsidiary of a
holding  company)  provided  that  it  has a  CAMEL  1 or 2  rating,  is  not of
supervisory concern, and would remain adequately  capitalized (as defined in the
OTS prompt corrective action regulations)  following the proposed  distribution.
Savings  associations  that would remain  adequately  capitalized  following the
proposed  distribution but do not meet the other noted  requirements must notify
the OTS 30 days prior to  declaring  a capital  distribution.  The OTS stated it
will generally regard as permissible that amount of capital  distributions  that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings  association  may not make a capital
distribution  without  prior  approval  of  the  OTS  and  the  FDIC  if  it  is
undercapitalized  before,  or as a result of, such a distribution.  As under the
current  rule,  the  OTS  may  object  to a  capital  distribution  if it  would
constitute  an unsafe  or  unsound  practice.  No  assurance  may be given as to
whether or in what form the regulations may be adopted.

LIQUIDITY

         All savings  associations,  including  North  Federal,  are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings  payable  in one  year or  less.  For a  discussion  of what the Bank
includes  in  liquid  assets,  see  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations -Liquidity and Capital Resources."
This liquid asset ratio  requirement  may vary from time to time (between 4% and
10%)  depending  upon  economic  conditions  and  savings  flows of all  savings
associations. At the present time, the minimum liquid asset ratio is 4%.

         Penalties may be imposed upon associations for violations of the liquid
asset ratio  requirement.  At December 31, 1997, the Bank was in compliance with
the requirement, with a liquid asset ratio of 15.0%.


                                       29


<PAGE>


ACCOUNTING

         An  OTS  policy  statement   applicable  to  all  savings  associations
clarifies  and  re-emphasizes  that  the  investment  activities  of  a  savings
association  must be in  compliance  with  approved  and  documented  investment
policies and strategies,  and must be accounted for in accordance with Generally
Accepted  Accounting  Principles.  Under the policy  statement,  management must
support its  classification  of and accounting  for loans and securities  (i.e.,
whether held for investment,  sale or trading) with  appropriate  documentation.
North Federal is in compliance with these amended rules.

         OTS accounting regulations,  which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must  incorporate any other accounting  regulations or orders  prescribed by the
OTS.

QUALIFIED THRIFT LENDER TEST

         All savings associations, including North Federal, are required to meet
a qualified  thrift lender ("QTL") test to avoid certain  restrictions  on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly  average  for nine out of every 12  months  on a  rolling  basis.  As an
alternative,  the savings  association  may  maintain 60% of its assets in those
assets  specified in Section 7701 (a) (19) of the Internal  Revenue Code.  Under
either test, such assets primarily consist of residential  housing related loans
and investments.  At December 31, 1997, the Bank met the test and has always met
the test since its effectiveness.

         Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible  for both a  savings  association  and a  national  bank,  and it is
limited to national bank branching  rights in its home state.  In addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "- Holding Company Regulation."

COMMUNITY REINVESTMENT ACT

         Under the  Community  Reinvestment  Act  ("CRA"),  every  FDIC  insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking  practices to help meet the credit needs of its entire  community,
including  low and moderate  income  neighborhoods.  The CRA does not  establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's  discretion to develop the types of products and services
that it believes are best suited to its particular  community,  consistent  with
the CRA. The CRA requires the OTS, in connection  with the  examination of North
Federal, to assess the institution's record

                                       30


<PAGE>


of meeting  the  credit  needs of its  community  and to take such  record  into
account  in its  evaluation  of  certain  applications,  such as a merger or the
establishment of a branch, by the Bank. An unsatisfactory  rating may be used as
the basis for the denial of an application by the OTS.

         The federal banking agencies,  including the OTS, have recently revised
the CRA  regulations  and  the  methodology  for  determining  an  institution's
compliance with the CRA. Due to the heightened  attention being given to the CRA
in the past few years,  the Bank may be required to devote  additional funds for
investment and lending in its local community.  The Bank received a satisfactory
CRA rating on its most recent CRA compliance examination.

TRANSACTIONS WITH AFFILIATES

         Generally,   transactions   between  a  savings   association   or  its
subsidiaries  and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates.  In addition,  certain of these
transactions,  such as loans to an affiliate,  are restricted to a percentage of
the  association's  capital.  Affiliates of the Bank include the Company and any
company which is under common control with North Federal. In addition, a savings
association may not lend to any affiliate  engaged in activities not permissible
for a bank holding  company or acquire the  securities of most  affiliates.  The
Bank's  subsidiary  is not  deemed  an  affiliate,  however,  the  OTS  has  the
discretion to treat subsidiaries of savings associations as affiliates on a case
by case basis.

         Certain  transactions with directors,  officers or controlling  persons
are also subject to conflict of interest  regulations enforced by the OTS. These
conflict of interest  regulations and other statutes also impose restrictions on
loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

HOLDING COMPANY REGULATION

         The Company is a unitary  savings and loan holding  company  subject to
regulatory  oversight  by the OTS. As such,  the Holding  Company is required to
register  and  file  reports  with  the OTS and is  subject  to  regulation  and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Holding Company and its non-savings association  subsidiaries which also permits
the OTS to restrict or prohibit  activities  that are determined to be a serious
risk to the subsidiary savings association.

         As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan  holding  company,  and the  activities  of the  Company and any of its
subsidiaries  (other  than  North  Federal  or any  other  SAIF-insured  savings
association)  would  become  subject  to such  restrictions  unless  such  other
associations  each  qualify  as  a  QTL  and  were  acquired  in  a  supervisory
acquisition.

         If North  Federal  fails the QTL test,  the  Company  must  obtain  the
approval of the OTS prior to continuing after such failure,  directly or through
its other  subsidiaries,  any business  activity  other than those  approved for
multiple savings and loan holding companies or their subsidiaries.  In addition,
within one year of such  failure the Company  must  register as, and will become
subject  to,  the  restrictions  applicable  to  bank  holding  companies.   The
activities  authorized for a bank holding  company are more limited than are the
activities  authorized  for a  unitary  or  multiple  savings  and loan  holding
company. See "--Qualified Thrift Lender Test."

                                       31


<PAGE>


         The Company must obtain approval from the OTS before acquiring  control
of  any  other  SAIF-insured   association.   Such  acquisitions  are  generally
prohibited  if they  result  in a  multiple  savings  and loan  holding  company
controlling  savings  associations  in  more  than  one  state.   However,  such
interstate  acquisitions are permitted based on specific state  authorization or
in a supervisory acquisition of a failing savings association.

FEDERAL SECURITIES LAW

         The Common  Stock of the Company is  registered  with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.

         Holding  Company  stock held by persons who are  affiliates  (generally
officers,  directors and principal  stockholders) of the Holding Company may not
be resold without  registration or unless sold in accordance with certain resale
restrictions.  If the Holding Company meets specified current public information
requirements,  each  affiliate  of the  Holding  Company  is able to sell in the
public  market,  without  registration,  a  limited  number  of  shares  in  any
three-month period.

FEDERAL RESERVE SYSTEM

         The Federal  Reserve  Board  requires all  depository  institutions  to
maintain  non-interest  bearing  reserves  at  specified  levels  against  their
transaction accounts (primarily checking,  NOW and Super NOW checking accounts).
At December  31,  1997,  North  Federal  was in  compliance  with these  reserve
requirements.  The balances maintained to meet the reserve  requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity  requirements that
may be imposed by the OTS. See "-Liquidity."

         Savings  associations are authorized to borrow from the Federal Reserve
Bank  "discount   window,"  but  Federal  Reserve  Board   regulations   require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

FEDERAL HOME LOAN BANK SYSTEM

         North  Federal is a member of the FHLB of  Chicago,  which is one of 12
regional FHLBs,  that  administers the home financing credit function of savings
associations.  Each FHLB  serves as a reserve  or central  bank for its  members
within its assigned  region.  It is funded  primarily from proceeds derived from
the sale of  consolidated  obligations  of the FHLB  System.  It makes  loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal  Housing  Finance  Board.  All advances from the FHLB are required to be
fully secured by  sufficient  collateral as determined by the FHLB. In addition,
all  long-term  advances  are  required to provide  funds for  residential  home
financing.

         As a member,  North Federal is required to purchase and maintain  stock
in the FHLB of Chicago.  At December 31, 1997, the Bank had $1.7 million in FHLB
stock, which was in compliance with this requirement.


                                       32


<PAGE>


         Under  federal  law the FHLBs are  required  to  provide  funds for the
resolution  of  troubled  savings  associations  and to  contribute  to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects.  These  contributions  have  affected  adversely  the  level  of  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction  in value of the  Bank's  FHLB  stock may  result  in a  corresponding
reduction in North Federal's capital.

         For the year ended  December  31, 1997,  dividends  paid by the FHLB of
Chicago to North Federal totaled  $100,000,  which constitute a $29,000 increase
from the amount of dividends received in 1996. The $30,000 dividend received for
the quarter ended  December 31, 1997 reflects an  annualized  rate of 7.00%,  or
0.27% above the rate for 1996.

FEDERAL AND STATE TAXATION

FEDERAL TAXATION

         General. The following is a discussion of material tax matters and does
not purport to be a comprehensive description of the tax rules applicable to the
Bank or the  Company.  The  Company  and Bank have not been  audited  by the IRS
during the last 12 years.  For federal income tax purposes,  the Company and the
Bank file consolidated  income tax returns and report their income on a calendar
year basis using the  accrual  method of  accounting  and are subject to federal
income taxation in the same manner as other  corporations  with some exceptions,
such as the Bank's tax reserve for bad debts, discussed below.

RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES

         Prior to the  enactment,  on August 20, 1996, of the Small Business Job
Protection  Act of 1996 (the  "Small  Business  Act"),  for  federal  income tax
purposes,  thrift institutions such as the Bank, which met certain  definitional
tests  primarily  relating to their  assets and nature of their  business,  were
permitted to establish  tax reserves for bad debts and to make annual  additions
thereto,  which additions could,  within specified  limitations,  be deducted in
arriving  at  their  taxable  income.  The  Bank's  deduction  with  respect  to
"qualifying  loans," which are generally  loans secured by certain  interests in
real property,  could be computed using the  "Experience  Method" which would be
the greater of an amount based on a six-year moving average of the Bank's actual
loss  experience or an amount which would increase the Bank's reserve for losses
on qualifying real property loans to the base year  percentage,  or a percentage
equal to 8.0% of the Bank's taxable income (the "PTI Method"),  computed without
regard to this deduction and with  additional  modifications  and reduced by the
amount of any permitted addition to the non-qualifying reserve.

         Under the Small  Business Act, the PTI Method was repealed and the Bank
has been be required to use the Experience Method of computing  additions to its
bad debt  reserve for  taxable  years  beginning  with the Bank's  taxable  year
beginning January 1, 1996. In addition, the Bank is required to recapture (i.e.,
take into  taxable  income)  over  six-year  period,  beginning  with the Bank's
taxable  year  beginning  January 1, 1996,  the excess of the balance of its bad
debt reserves (other than the supplemental reserve) as of December 31, 1995 over
the greater of (a) its "base year  reserve,"  i.e., the balance of such reserves
as of  December  31,  1987 or (b) an amount  that would have been the balance of
such reserves as of December 31, 1995 had the Bank always computed the additions
to its reserves using the Experience Method.  However,  under the Small Business
Act such recapture requirements will be suspended for each of the two successive
taxable

                                       33


<PAGE>


years beginning January 1, 1996 in which the Bank originates a minimum amount of
certain residential loans during such years that is not less than the average of
the  principal  amounts of such loans  made by the Bank  during its six  taxable
years preceding January 1, 1996.

         Distributions.   To  the  extent  that  the  Bank  makes   "nondividend
distributions" to shareholders,  such distributions will be considered to result
in  distributions  from the Bank's base year  reserve to the extent  thereof and
then from its  supplemental  reserve for losses on loans, and an amount based on
the  amount   distributed  will  be  included  in  the  Bank's  taxable  income.
Nondividend  distributions include distributions in excess of the Bank's current
and accumulated  earnings and profits,  distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out of
the Association's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not constitute nondividend  distributions and,
therefore, will not be included in the Bank's income.

         The amount of  additional  taxable  income  created from a  nondividend
distribution  is equal  to the  lesser  of the  Bank's  base  year  reserve  and
supplemental reserve for losses on loans; or an amount that, when reduced by the
tax  attributable  to the  income,  is equal to the amount of the  distribution.
Thus,  approximately one and one-half times the nondivided distribution would be
includable  in gross  income for  federal  income tax  purposes,  assuming a 34%
federal corporate income tax rate.

         Corporate  Alternative  Minimum Tax. the Internal Revenue Code of 1986,
as amended (the "Code"),  imposes a tax ("AMT") on alternative  minimum  taxable
income  ("AMTI")  at a rate  of  20%.  Only  90% of AMTI  can be  offset  by net
operating  loss  carryovers of which the Bank  currently has none.  AMTI is also
adjusted by  determining  the tax  treatment  of certain  items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items.  Thus,  the Bank's  AMTI is  increased  by an amount  equal to 75% of the
amount  by  which  the  Bank's  adjusted   current  earnings  exceeds  its  AMTI
(determined  without  regard to this  adjustment  and prior to reduction for net
operating losses).  In addition,  for taxable years beginning after December 31,
1986 and before January 1, 1996, an environmental  tax of 0.12% of the excess of
AMTI (with certain  modifications)  over $2 million is imposed on  corporations,
including the Bank,  whether or not an AMT is paid.  Under  pending  legislative
proposals,  the  environmental  tax would be extended to taxable years beginning
before  January 1, 2007.  The Bank does not expect to be subject to the AMT, but
may be subject to the environmental tax liability.

         Elimination of Dividends; Dividends Received Deduction. The Company may
exclude from its income 100% of dividends  received from the Bank as a member of
the same affiliated group of corporations.  A 70% dividends  received  deduction
generally applies with respect to dividends received from domestic  corporations
that are not members of such  affiliated  group,  except  that an 80%  dividends
received  deduction applies if the Company and the Bank own more than 20% of the
stock of a corporation paying a dividend.  Under pending legislative  proposals,
the 70%  dividends  received  deduction  would be reduced to 50% with respect to
dividends paid after enactment of such legislation.

STATE AND LOCAL TAXATION

         STATE OF ILLINOIS.  The Company and the Bank file a combined
unitary Illinois income tax return.  For Illinois income tax purposes the
Company and the Bank are taxed at an effective rate equal to 7.3% of Illinois
Taxable Income.  For these purposes, "Illinois Taxable Income"

                                       34


<PAGE>


generally  means  federal  taxable  income,   subject  to  certain   adjustments
(including  the addition of interest  income on state and municipal  obligations
and the exclusion of interest income on United States Treasury obligations). The
exclusion  of income on United  States  Treasury  obligations  has the effect of
reducing the Illinois Taxable Income of the Company and the Bank.

         As a Delaware holding company,  the Company has registered as a foreign
corporation  authorized to transact  business in Illinois.  As such, it files an
Illinois Foreign  Corporation  Annual Report and pays an annual franchise tax to
the State of Illinois.

         STATE OF DELAWARE.  As a Delaware holding company not earning income in
Delaware,  the Company is exempted  from  Delaware  corporate  income tax but it
files an annual  report  with and pays an annual  franchise  tax to the State of
Delaware.


COMPETITION

         North Federal faces strong competition, both in originating real estate
and other loans and in attracting  deposits.  Competition  in  originating  real
estate loans comes primarily from other savings institutions,  commercial banks,
credit unions and mortgage  bankers  making loans secured by real estate located
in the Bank's market area.  Other  savings  institutions,  commercial  banks and
credit unions provide vigorous competition in consumer lending.

         The Bank  attracts  all of its  deposits  through  its main and  branch
office,  primarily  from the  communities  in which those  offices are  located;
therefore,  competition  for those  deposits is  principally  from other savings
institutions,  commercial  banks,  mutual funds and credit unions located in the
same communities.  The Bank competes for these deposits by offering a variety of
deposit accounts at highly  competitive rates,  convenient  business hours, with
interbranch  deposit and  withdrawal  privileges at each and access to automated
teller machines.

EMPLOYEES

         At  December  31,  1997,  the  Company  had a  total  of 37  employees,
including one part-time employee. Management considers its employee relations to
be excellent.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

         The following is a description of the Company and the Bank's  executive
officers who are not also directors as of December 31, 1997.

         Victor E. Caputo - Mr. Caputo, age 53, joined the Bank as Senior Vice
President  for  Operations in January  1995.  He was  appointed  Executive  Vice
President and Corporate Secretary of the Company and the Bank in April 1995. Mr.
Caputo formerly was Senior Vice President and Chief  Operations  Officer of Argo
Federal Savings Bank. Mr. Caputo has also served as an audit  supervisor at KPMG
Peat  Marwick  LLP in  Chicago.  He has over 22 years  experience  in the thrift
industry.  He  is a  member  of  the  American  Institute  of  Certified  Public
Accountants,  the  Financial  Managers  Society  and  the  Illinois  Society  of
Certified Public Accountants.

         Martin W. Trofimuk - Mr. Trofimuk, age 37, was appointed as Vice
President  and Treasurer of the Company and the Bank in 1993.  Mr.  Trofimuk has
served in various capacities

                                       35


<PAGE>


since joining the Bank in 1985. He is a past President of the Chicago Chapter of
the  Financial  Managers  Society  and a member of the  Institute  of  Financial
Education.

         John K. Taylor - Mr. Taylor, age 44, joined the Bank as Loan Department
Manager in March 1993.  He was  promoted to Vice  President  in April 1994.  Mr.
Taylor has 18 years of banking experience. He is a graduate of Kelly College, in
England and is a member of the Society of Mortgage  Professionals.  He is also a
member of the parish Council and lector of St. Germaine Church in Oak Lawn.

         Karla A. Lauer - Ms. Lauer, age 30, rejoined the Bank as Vice President
in 1997. Ms. Lauer previously worked for the Bank as an Assistant Branch Manager
and a New  Accounts  Officer in 1994 and 1995.  Ms. Lauer has served as a Branch
Manager for the Harris Bank and for Cragin Federal Savings and Loan Association.


ITEM 2.           DESCRIPTION OF PROPERTY

         The Bank owns its main office  building and leases space for its branch
office.  The  Bank  also  owns a  parking  lot at 1635 N.  Clark  St.,  Chicago,
Illinois.  As of December 31, 1997, the net book value of the Bank's  investment
in premises, equipment and leaseholds was approximately $1,043,000.


ITEM 3.           LEGAL PROCEEDINGS

         The Company and its  subsidiary  are involved as plaintiff or defendant
in various legal actions arising in the normal course of their businesses. While
the ultimate outcome of the various legal proceedings  involving the Company and
its  subsidiary  cannot  be  predicted  with  certainty,  it is the  opinion  of
management,  after consultation with counsel, that the resolution of these legal
actions  should  not  have  a  material  effect  on the  Company's  consolidated
financial position.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matter was  submitted  to a vote of  security  holders,  through the
solicitation  of proxies or  otherwise,  during the quarter  ended  December 31,
1997.


                                     PART II


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

         Page 47 of the Company's 1997 Annual Report to  Stockholders  is herein
incorporated by reference.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


                                       36


<PAGE>


         Pages 4 through 16 of the Company's 1997 Annual Report to  Stockholders
are herein incorporated by reference.


ITEM 7.   FINANCIAL STATEMENTS

         Pages 17 through 46 of the Company's 1997 Annual Report to Stockholders
and herein incorporated by reference.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         There has been no  Current  Report  on Form 8-K filed  within 24 months
prior to the date of the most recent financial  statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.


                                    PART III


ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS

         Information  concerning Directors of the Company is incorporated herein
by  reference  from the  Company's  definitive  Proxy  Statement  for the Annual
Meeting of  Stockholders  to be held in 1998,  a copy of which will be filed not
later than 120 days after the close of the fiscal year.

         Information  concerning the Company's and the Bank's executive officers
who are  not  also  directors  is  contained  in  Item 1 of  this  report  under
"Executive Officers who are not Directors."

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Exchange Act requires the Company's  directors and
executive  officers,  and persons who own more than 10% of a registered class of
the Company's equity  securities,  to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity  securities  of
the Company. Officers,  directors and greater than 10% stockholders are required
by SEC  regulation to furnish the Company with copies of all Section 16(a) forms
they file.

         To the Company's  knowledge,  based solely on a review of the copies of
such reports furnished to the Company and written  representations that no other
reports were  required,  during the fiscal year ended  December  31,  1997,  the
Registrant complied with all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners.

                                       37


<PAGE>


ITEM 10.          EXECUTIVE COMPENSATION

         Information concerning executive compensation is incorporated herein by
reference  from  the  definitive  Proxy  Statement  for the  Annual  Meeting  of
Stockholders  to be held in 1998,  a copy of which  will be filed not later than
120 days after the close of the fiscal year.

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information  concerning security ownership of certain beneficial owners
and management is  incorporated  herein by reference  from the definitive  Proxy
Statement for the Annual Meeting of  Stockholders  to be held in 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information  concerning certain  relationships and related transactions
is incorporated  herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.


                                       38


<PAGE>
<TABLE>
<CAPTION>

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K

            (a)            EXHIBITS



                                                                             REFERENCE TO
                                                                             PRIOR FILING
                                                                              OR EXHIBIT
    REGULATION                                                                  NUMBER
   S-B EXHIBIT                                                                 ATTACHED
      NUMBER                              DOCUMENT                              HERETO
   -----------   ---------------------------------------------------        --------------

<S>               <C>                                                       <C>

        2         Plan of acquisition, reorganization,                           None
                  arrangement, liquidation or succession
       3(i)       Certificate of Incorporation                                    *
      3(ii)       By-Laws                                                         *
        4         Instruments defining the rights of holders,                     *
                  including indentures
        9         Voting trust agreement                                         None
       10.1       1993 Stock Option and Incentive Plan                           ***
       10.2       Recognition and Retention Plan                                 ***
       10.3       Supplemental Employee Stock Retirement                          *
                  Plan
       10.4       Form of employment agreement with Mary                          *
                  Ann Hass, Joseph A. Graber, Victor E.
                  Caputo and Martin W. Trofimuk
        11        Statement regarding computation of per share                   None
                  earnings
        13        Annual report to security holders                               13
        16        Letter on change in certifying accountant                      None
        18        Letter on change in accounting principles                      None
        21        Subsidiaries of Registrant                                      **
        22        Published report regarding matters submitted                   None
                  to vote
        23        Consents of independent accountants                             23
        24        Power of attorney                                          Not required
        27        Financial data schedule                                         27
        28        Information from reports furnished to state                    None
                  insurance regulatory authorities
        99        Additional exhibits                                        Not required

<FN>
*        Filed as exhibits to the Registrant's Form S-1 registration statement
         (File No. 33-69444) and incorporated herein by reference.
**       Filed as an exhibit to the  Registrant's  Annual  Report on Form 10-KSB
         for the year  ended  December  31,  1996  and  incorporated  herein  by
         reference.
***      Filed as an exhibit to the Registrant's Quarterly Report on Form 10-QSB
         for the  quarter  ended  March  31,  1997 and  incorporated  herein  by
         reference.
</FN>
</TABLE>

                                       39


<PAGE>


            (b)            REPORTS ON FORM 8-K

         The Company filed reports on Form 8-K on October 15, 1997 regarding the
release of earnings for September 30, 1997, a quarterly dividend, Nasdaq listing
requirements,  and the election of a Director,  on November 24, 1997 regarding a
three-for-two  stock split,  and on December 29, 1997 regarding the rejection of
an unsolicited offer to purchase.

                                       40


<PAGE>


                                   SIGNATURES

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

                                    NORTH BANCSHARES, INC.

                                     By:/S/ MARY ANN HASS
                                     Mary Ann Hass, Chairman and
                                     Chief Executive Officer
                                     (Duly Authorized Representative)

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


/S/ MARY ANN HASS
----------------------------
Mary Ann Hass, Chairman and
Chief Executive Officer
(Principal Executive Officer)

Date:       MARCH 31, 1998


/S/ JAMES L. FERSTEL
-----------------------------
James L. Ferstel, Director

Date:       MARCH 31, 1998


/S/ ROBERT H. RUSHER
-----------------------------
Robert H. Rusher, Director

Date:       MARCH 31, 1998


/S/ ELMER L. HASS
--------------------------
Elmer L. Hass, Director

Date:    MARCH 31, 1998


/S/ GREGORY W. ROSE
---------------------------
Gregory W. Rose, Director

Date:   MARCH 31, 1998


/S/ MARTIN W. TROFIMUK
--------------------------------
Martin W. Trofimuk, Vice President and
Treasurer
(Principal Financial and Accounting
Officer)

Date:    MARCH 31, 1998


/S/ JOSEPH A. GRABER
--------------------------------
Joseph A. Graber, President and Director

Date:  MARCH 31, 1998