UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
                    For the fiscal year ended December 31, 1998
                                       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              0-22103

                      HEMLOCK FEDERAL FINANCIAL CORPORATION
--------------------------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

                 Delaware                                   36-4126192
------------------------------------------       -------------------------------
       (State or other jurisdiction of                   (I.R.S. Employer
               incorporation                            Identification No.)
              or organization)                     

5700 West 159th Street, Oak Forest , Illinois                            60452
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

Issuer's telephone number, including area
code:                                                  (708) 687-9400
                                          --------------------------------------

              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  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant 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 herein, and no disclosure will be contained,  to
the  best  of  registrant'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]

     State issuer's revenues for its most recent fiscal year:  $13.7 million.

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant, computed by reference to the average of the bid and asked prices
of such  stock on the  Nasdaq  Stock  Market  as of March  19,  1999,  was $19.0
million. (The exclusion from such amount of the market value of the shares owned
by any  person  shall not be deemed an  admission  by the  registrant  that such
person is an affiliate of the registrant.)

     As of March 22, 1999, there were issued and outstanding 1,785,974 shares of
the Issuer's Common Stock.

    Transitional Small Business Disclosure Format (check one):  Yes       No   X

                          DOCUMENTS INCORPORATED BY REFERENCE

Parts II and IV of Form 10-KSB - Annual  Report to  Stockholders  for the fiscal
year ended December 31, 1998.
Part  III  of  Form  10-KSB  -  Proxy  Statement  for  1999  Annual  Meeting  of
Stockholders.



<PAGE>



                                    PART I

Item 1.  Business

General

      Hemlock  Federal  Financial  Corporation  ("Hemlock" or the "Company") was
formed in 1997 by Hemlock  Federal  Bank for Savings  ("Hemlock  Federal" or the
"Bank")  under the laws of Delaware  for the purpose of becoming the savings and
loan holding company of the Bank. The Company's  business consists  primarily of
the business of Hemlock Federal.

      Hemlock Federal is a federally  chartered stock savings bank headquartered
in Oak Forest,  Illinois.  Hemlock Federal was originally  chartered in 1904. In
1959,  Hemlock Federal  converted to a federal mutual  charter.  In 1997 Hemlock
Federal  converted  from a mutual to a federally  chartered  stock savings bank.
Hemlock  Federal  currently  serves the financial  needs of  communities  in its
market area through its main office located in Oak Forest,  Illinois and its two
branch offices located in the village of Oak Lawn and Chicago.  Its deposits are
insured up to applicable  limits by the Federal  Deposit  Insurance  Corporation
("FDIC").  At December  31,  1998,  Hemlock  Federal had total  assets of $204.4
million,  deposits of $143.1  million and equity of $27.2  million (or 13.31% of
total assets).

      Hemlock  Federal has been, and intends to continue to be, an  independent,
community oriented,  financial institution.  Hemlock Federal's business involves
attracting  deposits from the general public and using such  deposits,  together
with  other  funds,  to  originate  primarily  one- to  four-family  residential
mortgages and, to a much lesser extent,  multi-family,  consumer and other loans
primarily in its market area. At December 31, 1998, $87.0 million, or 84.79%, of
the Bank's total loan  portfolio  consisted of one- to  four-family  residential
mortgage loans.  The Bank also invests in  mortgage-backed  and other securities
and other permissible investments.

      The  executive  offices of the Bank are located at 5700 West 159th Street,
Oak Forest,  Illinois  60452-3198  and its telephone  number is (708)  687-9400.
Unless the context  otherwise  requires all references herein to the Bank or the
Company include the Company and the Bank on a consolidated basis.

Lending Activities

      General. The principal lending activity of the Bank is originating for its
portfolio fixed and to a lesser extent,  adjustable rate ("ARM")  mortgage loans
secured by one- to four-family residences located primarily in the Bank's market
area. To a much lesser extent, Hemlock Federal also originates multi-family real
estate,  consumer and other loans in its market area. At December 31, 1998,  the
Bank's loans receivable, net totaled $102.0 million.

      Under  federal  law,  the  aggregate  amount  of  loans  that  the Bank is
permitted to make to any one borrower is generally  limited to 15% of unimpaired
capital  and  surplus  (25%  if  the  security  for  such  loan  has a  "readily
ascertainable" value or 30% for certain residential development

                                      2

<PAGE>



loans).  At  December  31,  1998,  based on the  above,  the  Bank's  regulatory
loans-to-one  borrower limit was approximately  $3.9 million.  On the same date,
the Bank had no borrowers with outstanding balances in excess of this amount. As
of December 31, 1998, the largest  dollar amount  outstanding or committed to be
lent to one  borrower or group of related  borrowers  related to a  multi-family
loan  totaling  $402,000  secured  by a 12-unit  apartment  building  located in
Bridgeview,  Illinois.  The second largest amount outstanding or committed to be
lent to one  borrower  or group of related  borrowers  as of  December  31, 1998
related to a multi-family  loan totaling $394,000 secured by a 12-unit apartment
building located in Chicago Ridge, Illinois. At December 31, 1998, this loan was
performing in accordance with its terms. As of December 31, 1998,  there were no
other loans with carrying values in excess of $350,000.

      All of the Bank's lending is subject to its written underwriting standards
and to loan origination  procedures.  Decisions on loan applications are made on
the basis of detailed applications and property valuations  (consistent with the
Bank's  appraisal  policy).  The loan  applications  are  designed  primarily to
determine the borrower's  ability to repay and the more significant items on the
application are verified  through use of credit reports,  financial  statements,
tax  returns or  confirmations.  All loans  originated  by Hemlock  Federal  are
approved  by the loan  committee  currently  comprised  of  Chairman  Partynski,
President Stevens,  Director Bucz and Chief Lending Officer Neil Christenson and
ratified by the full Board of Directors.

      The  Bank  requires  title  insurance  or other  evidence  of title on its
mortgage  loans,  as well as fire and extended  coverage  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 when the
property is located in a flood plain.


                                      3

<PAGE>



      Loan Portfolio Composition. The following table sets forth the composition
of the Bank's  loan  portfolio  in dollar  amounts  and in  percentages  (before
deductions  (or additions)  for loans in process,  deferred fees  (premiums) and
discounts and allowances for losses) as of the dates indicated.

<TABLE>
<CAPTION>

                                                                      December 31,
                              --------------------------------------------------------------------------------------------
                                     1998               1997              1996               1995               1994
                              -----------------  ----------------  -----------------  -----------------  -----------------
                                Amount  Percent  Amount   Percent   Amount   Percent  Amount    Percent   Amount   Percent
                              -------- --------  ------ ---------  -------- --------  ------- ---------  -------- --------
                                                                 (Dollars in Thousands)
<S>                           <C>      <C>      <C>      <C>      <C>       <C>     <C>       <C>       <C>       <C>

Real Estate Loans:
One- to four-family..........  $87,041    84.79% $68,283    88.94%  $48,339    89.05% $39,089     85.08% $30,792    80.45%
Multi-family.................   12,070    11.76    4,951     6.45     2,783     5.13    3,386      7.37    3,742     9.78
Commercial...................      191      .18      209      .27       573     1.06    1,101      2.40    1,566     4.09
                              --------  -------  -------  -------   -------  -------  -------   -------  -------   ------
  Total real estate loans....   99,302    96.73   73,443    95.66    51,695    95.24   43,576     94.85   36,100    94.32

Consumer loans:
Deposit account..............      129      .13      116      .15       169      .31      158      0.34      150     0.39
Automobile...................      381      .37      473      .62       301      .55      229      0.50      120     0.31
Home equity..................    2,844     2.77    2,740     3.57     2,114     3.90    1,981      4.31    1,908     4.98
                              --------  -------  -------  -------   -------  -------  -------   -------  -------   ------
  Total consumer loans.......    3,354     3.27    3,329     4.34     2,584     4.76    2,368      5.15    2,178     5.68
                              --------  -------  -------  -------   -------  -------  -------   -------  -------
  Total loans................  102,656   100.00%  76,772   100.00%   54,279   100.00%  45,944    100.00%  38,278   100.00%
                                         ======            ======             ======             ======            ======

Less:
Loans in process.............     (313)             (125)               ---               (28)               ---
Deferred fees and discounts..      409               287                  2               (84)              (150)
Allowance for losses.........     (775)             (775)              (745)             (600)              (469)
                              --------           -------            -------           -------            -------
  Total loans receivable, net $101,977           $76,159            $53,536           $45,232            $37,659
                              ========           =======            =======           =======            =======

</TABLE>

                                      4

<PAGE>



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

<TABLE>
<CAPTION>

                                                                       December 31,
                              ---------------------------------------------------------------------------------------------------
                                   1998                 1997               1996                 1995                 1994
                              -----------------   -----------------  -----------------  --------------------  -------------------
                               Amount   Percent   Amount   Percent   Amount    Percent   Amount     Percent    Amount     Percent
                              -----------------   -----------------  -----------------  --------------------  -------------------
                                                                            (Dollars in Thousands)
<S>                           <C>      <C>      <C>       <C>      <C>       <C>      <C>        <C>         <C>       <C>

Fixed-Rate Loans:
Real estate:
One- to four-family..........  $76,331    74.36%  $50,671    66.00%  $43,583    80.29%   $36,358      79.14%   $28,654     74.86%
Multi-family.................   11,887    11.58     4,767     6.21     2,783     5.13      3,386       7.37      3,742      9.78
Commercial...................      191      .18       209      .27       573     1.06      1,101       2.40      1,566      4.09
Construction or development..      ---      ---       ---      ---       ---      ---        ---        ---        ---       ---
                              --------  -------   -------   ------   -------   ------    -------     ------    -------    ------
  Total real estate loans....   88,409    86.12    55,647    72.48    46,939    86.48     40,845      88.91     33,962     88.73
Consumer.....................    3,354     3.27     3,329     4.34     2,584     4.76      2,368       5.15      2,178      5.68
                              --------   ------   -------   ------   -------   ------    -------     ------    -------    ------
  Total fixed-rate loans.....   91,763    89.39    58,976    76.82    49,523    91.24     43,213      94.06     36,140     94.41

Adjustable-Rate Loans:
Real estate:
One-to four-family...........   10,710    10.43    17,612    22.94     4,756     8.76      2,731       5.94      2,138      5.59
Multi-family.................      183      .18       184      .24       ---      ---        ---        ---        ---       ---
                              --------  -------   -------   ------    ------   ------     ------     ------     ------    ------
Total adjustable rate loans..   10,893    10.61    17,796    23.18     4,756     8.76      2,731       5.94      2,138      5.59
                              --------  -------   -------   ------    ------   ------     ------     ------     ------    ------

  Total loans................  102,656  100.00%    76,772   100.00%   54,279   100.00%    45,944     100.00%    38,278    100.00%
                                        =======             ======             ======                ======               ======
Less:
----
Loans in process.............     (313)              (125)               ---                 (28)                  ---
Deferred fees and discounts..      409                287                  2                 (84)                 (150)
Allowance for losses.........     (775)              (775)              (745)               (600)                 (469)
                              --------            -------            -------             -------               -------
  Total loans receivable, net $101,977            $76,159            $53,536             $45,232               $37,659
                              ========            =======            =======             =======               =======
</TABLE>


                                           5

<PAGE>



      The following schedule  illustrates the contractual maturity of the Bank's
loan  portfolio  at  December  31,  1998.  Mortgages  which have  adjustable  or
renegotiable interest rates are shown as maturing in the period during which the
contract  is due.  The  schedule  does  not  reflect  the  effects  of  possible
prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>

                                        Real Estate
                          ---------------------------------------
                                               Multi-family and
                                               Commercial Real                        
                          One- to four-family       Estate             Consumer              Total
                          ------------------- ------------------- -------------------- -------------------
                                    Weighted            Weighted           Weighted               Weighted
                                     Average             Average            Average                Average
                           Amount     Rate     Amount     Rate     Amount     Rate      Amount       Rate
                          ------------------- ------------------- -------------------- -------------------
                                                        (Dollars in Thousands)
<S>                        <C>       <C>     <C>       <C>      <C>         <C>      <C>        <C>

 Due During Year(s) Ended
       December 31,
1999(1)...................  $     5    7.50%  $   ---      ---%    $  222     10.29%   $    227     10.22%
2000 and 2001.............      901    7.94       111     8.93      1,078      8.02       2,090      8.04
2002 to 2006..............    9,857    7.26     1,658     7.90      1,426      8.36      12,941      7.46
2007 to 2021..............   44,889    7.08     9,789     7.63        628      8.46      55,306      7.20
2022 and following........   31,389    7.31       703     7.80        ---       ---      32,092      7.32
                            -------           -------              ------               -------
    Total.................  $87,041           $12,261              $3,354              $102,656
                            =======           =======              ======              ========
<FN>

-------------
(1) Included demand loans, loans having no stated maturity and overdraft loans.

</FN>
</TABLE>


      The  total  amount  of loans  due  after  December  31,  1999  which  have
predetermined  interest  rates is $91.5  million while the total amount of loans
due after such dates which have floating or adjustable  interest  rates is $10.9
million.



                                      6

<PAGE>



      One- to Four-Family  Residential  Real Estate Lending.  The cornerstone of
the Bank's lending  program is the  origination of loans secured by mortgages on
owner-occupied one- to four- family residences.  Historically,  the Bank focused
its  residential  lending  activities on fixed rate loans with 30 year terms. In
the 1980s,  in order to reduce the average term to repricing of its assets,  the
Bank began to stress also the origination of 15 year fixed rate loans as well as
adjustable  rate  loans.  Substantially  all of the Bank's  one- to  four-family
residential  mortgage  originations  are  secured by  properties  located in its
market area.  All mortgage loans  currently  originated by the Bank are retained
and  serviced by it,  although  the Bank may  consider  selling a portion of its
residential loan originations in the future.

      The Bank currently offers  fixed-rate  mortgage loans with maturities from
10 to 30 years.  The Bank also  offers a fixed rate seven year  balloon  product
with a 30 year  amortization  schedule  which is due in seven  years but  which,
under certain circumstances, may be converted into a fully amortizing fixed rate
loan for an additional  term of up to 23 years.  Interest rates and fees charged
on these fixed-rate loans are established on a regular basis according to market
conditions.  As of December  31,  1998,  the Bank had $8.5 million of fixed rate
loans (most of which were seven year balloon  loans) with original terms of less
than 10 years,  $39.6 million of fixed rate loans with  original  terms of 10-15
years and $28.2 million of fixed rate loans with original  terms of more than 15
years. See  "--Originations,  Purchases and Sales and Loans and  Mortgage-Backed
Securities."

      The Bank also offers ARMs which carry interest rates which adjust annually
at a margin  (generally 250 basis points) over the yield on the One Year Average
Monthly U.S.  Treasury  Constant Maturity Index ("one year CMT"). Such loans may
carry terms to maturity of up to 30 years.  The ARM loans  currently  offered by
the Bank provide for up to 200 basis point annual interest rate change cap and a
lifetime cap generally 600 basis points over the initial rate.  Initial interest
rates offered on the Bank's ARMs may be approximately 100 basis points below the
fully indexed rate,  although borrowers are qualified at the fully indexed rate.
As a result,  the risk of default on these loans may increase as interest  rates
increase.  The Bank also  originates  ARMs which carry  interest rates which are
fixed for an initial term of up to five years and  subsequently  adjust annually
to a margin  over the  one-year  CMT.  The Bank's  ARMs do not  permit  negative
amortization  of  principal,  do not  contain  prepayment  penalties  and may be
convertible  into  fixed-rate  loans.  At December 31, 1998, one- to four-family
ARMs totaled $10.7 million or 10.43% of the Bank's total loan portfolio.

      Hemlock  Federal will  generally lend up to 90% of the lesser of the sales
price or appraised  value of the  security  property on owner  occupied  one- to
four-family  loans.  The  loan-to-value  ratio on  non-owner  occupied,  one- to
four-family loans is generally 80% of the lesser of the sales price or appraised
value of the security property.  Non-owner occupied one-to four-family loans may
pose a  greater  risk  to the  Bank  than  traditional  owner  occupied  one- to
four-family  loans. In underwriting one- to four-family  residential real estate
loans,  the  Bank  currently  evaluates  both  the  borrower's  ability  to make
principal,  interest and escrow  payments,  the value of the property  that will
secure the loan and debt to income ratios.


                                      7

<PAGE>



      Residential  loans do not  currently  include  prepayment  penalties,  are
non-assumable  and do not  produce  negative  amortization.  Although  the  Bank
currently originates mortgage loans only for its portfolio, the Bank's loans are
generally  underwritten to permit their sale in the secondary market, except for
loans with loan to value ratios below 75% which are  underwritten  for portfolio
with a limited property evaluation rather than full appraisal.

      While  the  Bank  seeks  to  originate  most of its  one-  to  four-family
residential  loans in  amounts  which are less  than or equal to the  applicable
Federal Home Loan Mortgage  Corporation maximum (currently  $240,000),  the Bank
does,  on an  exception  basis,  make one-to  four-family  residential  loans in
amounts in excess of such  maximum.  The Bank's  delinquency  experience on such
loans has been similar to its experience on its other residential loans.

      The Bank's  residential  mortgage loans  customarily  include  due-on-sale
clauses  giving  the Bank the  right to  declare  the loan  immediately  due and
payable in the event that,  among other things,  the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.

      Multi-family and Commercial Real Estate Lending.  In order to increase the
yield of its loan portfolio and to complement residential lending opportunities,
the Bank from time to time originates  permanent  multi-family real estate loans
secured by  properties  in its primary  market  area.  The Bank made a strategic
decision in the early 1990s to  eliminate  its  commercial  real estate  lending
program.  At December 31, 1998, the Bank had  multi-family  loans totaling $12.1
million,  or  11.76%  of the  Bank's  total  loan  portfolio,  and  $191,000  in
commercial real estate loans, representing 0.18% of the total loan portfolio.

      The Bank's  permanent  multi-family  real estate loans  generally  carry a
maximum term of 15 years and have fixed rates. These loans are generally made in
amounts of up to 80% of the lesser of the appraised  value or the purchase price
of the property.  Appraisals on properties securing  multi-family and commercial
real estate loans are performed by an  independent  appraiser  designated by the
Bank at the time the loan is made.  All appraisals on  multi-family  real estate
loans are  reviewed  by the  Bank's  loan  committee.  In  addition,  the Bank's
underwriting  procedures require  verification of the borrower's credit history,
income and financial statements,  banking  relationships,  references and income
projections  for the  property.  The Bank obtains  personal  guarantees on these
loans.

      At  December  31,  1998,  the Bank's  largest  commercial  real  estate or
multi-family  loan  outstanding  totaled  $402,000  and was secured by a 12-unit
apartment building in Bridgeview, Illinois.

      Multi-family  and commercial  real estate loans may 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.  While  the Bank has  experienced  losses on
several multi-family

                                      8

<PAGE>



and  commercial  real estate loans in the past,  as of December 31, 1998,  there
were no multi-family loans or commercial real estate loans delinquent 90 days or
more.

      Consumer Lending. Management believes that offering consumer loan products
helps to expand  the Bank's  customer  base and to create  stronger  ties to its
existing  customer  base. In addition,  because  consumer  loans  generally have
shorter terms to maturity and carry higher rates of interest than do residential
mortgage loans, they can be valuable asset/liability  management tools. The Bank
originates a variety of different types of consumer loans, including home equity
loans, automobile and deposit account loans for household and personal purposes.
Due to the tax  advantages  to the borrower of home equity  loans,  the Bank has
focused  its recent  consumer  lending  activities  on home equity  lending.  At
December 31, 1998  consumer  loans  totaled $3.4 million or 3.27% of total loans
outstanding.

      Consumer  loan terms vary  according to the type and value of  collateral,
length of contract and  creditworthiness  of the borrower.  The Bank's  consumer
loans are made at fixed interest rates, with terms of up to 10 years.

      The Bank's  home  equity  loans are  written so that the total  commitment
amount,  when  combined  with the balance of the first  mortgage  lien,  may not
exceed 85% of the  appraised  value of the property or $50,000.  These loans are
written with fixed terms of up to 10 years and carry fixed  interest  rates.  At
December 31, 1998,  the Bank's home equity loans totaled $2.8 million,  or 2.77%
of the Bank's total loan  portfolio.  In 1998 the Bank also began  offering home
equity lines of credit to qualifying borrowers.  These loans, when combined with
the balance of a first  mortgage  lien, may not exceed 90% if the first mortgage
lien is held by the Bank, or 80% if the first  mortgage lien is held  elsewhere,
or in either case  $100,000.  At December 31, 1998, the Bank's home equity lines
of  credit  totaled  $522,000  outstanding,  or 0.5% of the  Bank's  total  loan
portfolio.

      The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's payment history on other debts and 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.  Consumer  loans may entail greater credit
risk than do residential  mortgage  loans,  particularly in the case of consumer
loans which are unsecured or 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, my limit the amount
which can be recovered on such loans.


                                      9

<PAGE>



Originations of Loans

      Real  estate  loans are  originated  by Hemlock  Federal's  staff  through
referrals from existing customers or real estate agents. In the early 1990s, the
Bank determined to increase its one- to four-family  residential  loan marketing
activities and to hire several commissioned loan underwriters.  As a result, the
Bank has experienced significant loan growth in recent years.

      The Bank's ability to originate  loans is dependent  upon customer  demand
for loans in its market and to a limited extent,  various  marketing efforts and
its ability to hire commissioned  loan officers.  Demand is affected by both the
local  economy and the interest  rate  environment.  See "- Market  Area." Under
current  policy,  all loans  originated  by Hemlock  Federal are retained in the
Bank's  portfolio.  See  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - Asset/Liability  Management" in the Annual
Report attached hereto as Exhibit 13.

     In  order  to  supplement  loan  originations,  the  Bank  has  acquired  a
substantial  amount  of  mortgage-backed  and other  securities  which are held,
depending   on   the   investment   intent,   in   the   "held-to-maturity"   or
"available-for-sale"  portfolios.  See "Investment Activities - Mortgage- Backed
and Related Securities." In addition,  depending on market conditions,  the Bank
may also consider the purchase of residential loans from other lenders.

      As a result in large part of the Bank's  relatively  low loans to deposits
ratios since the early 1980s,  the Bank has not sold any loans in the  secondary
market for many years. In view of the apparent success of the Bank's recent loan
origination  efforts and the related  increases in its loans to deposits  ratio,
the Bank may consider the sale of a portion of its residential loan originations
in the future.


                                      10

<PAGE>



      The following table shows the loan origination and repayment activities of
the Bank for the periods indicated.

<TABLE>
<CAPTION>

                                                        Year Ended
                                                       December 31,
                                          -------------------------------------
                                              1998          1997         1996
                                          ------------- ------------  ---------
                                                      (In Thousands)
<S>                                        <C>         <C>          <C>

Originations by type:
Adjustable rate:
  Real estate - one- to four-family......   $    981      $ 1,852       $2,569
                  - multi-family.........        ---          185          ---
                                            --------      -------       ------
        Total adjustable-rate............        981        2,037        2,569
Fixed rate:
  Real estate - one- to four-family......     37,090       12,782       11,439
                  - multi-family.........      8,062        2,358          404
  Non-real estate - consumer.............      1,838        2,158        1,308
                                            --------      -------       ------
        Total fixed-rate.................     46,990       17,298       13,151
                                            --------      -------       ------
          Total loans originated.........     47,971       19,335       15,720

Purchases;
  Real estate - one- to four-family......        ---       12,607          ---

Principal repayments.....................    (22,087)      (9,449)      (7,385)
                                            --------      -------       ------
        Total reductions.................    (22,087)      (9,449)      (7,385)
Increase (decrease) in other items, net..        (66)         130          (31)
                                            --------      -------       ------
        Net increase.....................   $ 25,818      $22,623       $8,304
                                            ========      =======       ======
</TABLE>


Delinquencies and Non-Performing Assets

      Delinquency  Procedures.  When a borrower fails to make a required payment
on a loan, the Bank attempts to cure the delinquency by contacting the borrower.
Generally,  Bank personnel  work with the delinquent  borrower on a case by case
basis  to  solve  the  delinquency.  Generally,  a late  notice  is  sent on all
delinquent   loans  followed  by  a  phone  call  after  the  thirtieth  day  of
delinquency.  Additional  written  and  verbal  contacts  may be made  with  the
borrower between 30 and 60 days after the due date. If the loan is contractually
delinquent for 90 days, the Bank may institute  appropriate  action to foreclose
on the  property.  After 120 days,  foreclosure  procedures  are  initiated.  If
foreclosed,  the  property  is sold at public sale and may be  purchased  by the
Bank.

      Real estate  acquired by Hemlock  Federal as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired by foreclosure or deed in lieu of  foreclosure,  it is
recorded at the lower of cost or fair value less estimated selling costs.  After
acquisition,  all costs incurred in maintaining the property are expensed. Costs
relating to the  development  and  improvement  of the  property,  however,  are
capitalized.

                                      11

<PAGE>



      Delinquent  Loans. The following table sets forth  information  concerning
delinquent  mortgage and other loans at December 31, 1998. The amounts presented
represent the total remaining  principal  balances of the related loans,  rather
than the actual payment amounts which are overdue.  Percentages are exclusive of
mortgage-backed securities.


<TABLE>
<CAPTION>

                                               Real Estate
                         ---------------------------------------------------
                             One- to four-family   Commercial/Multi-Family         Consumer and Other              Total
                         ------------------------ --------------------------  -------------------------- ---------------------------
                         Number   Amount Percent  Number   Amount   Percent    Number   Amount   Percent   Number  Amount   Percent
                         ------- ------- -------- ------ --------- ---------  -------- -------- -------- -------- -------- ---------
                                                                      (Dollars in Thousands)
<S>                       <C>    <C>     <C>      <C>     <C>      <C>        <C>     <C>      <C>        <C>     <C>      <C>

Loans delinquent for
December 31, 1998:
 30-59 days.............    ---    $ ---    ---%     ---   $  ---       ---%      ---   $  ---      ---%      ---  $  ---     ---%
 60-89 days.............      5      269   0.31      ---      ---       ---       ---      ---      ---         5     269    0.26
 90 days and over.......      3      124   0.14      ---      ---       ---       ---      ---      ---         3     124    0.12
                          -----    -----   ----    -----     ----    ------     -----   ------    -----      ----  ------    ----
     Total..............      8    $ 393   0.45%     ---   $  ---       ---%      ---   $  ---      ---%        8  $  393    0.38%
                          =====    =====   ====    =====   ======    ======     =====   ======    =====      ====  ======    ====
</TABLE>


                                            12

<PAGE>



      Classification of Assets.  Federal  regulations  require that each savings
institution  classify  its own  assets  on a  regular  basis.  In  addition,  in
connection  with  examinations of savings  institutions,  OTS and FDIC examiners
have authority to identify  problem assets and, if appropriate,  require them to
be classified.  There are three classifications for problem assets: Substandard,
Doubtful and Loss.  Substandard  assets have one or more defined  weaknesses and
are  characterized  by the distinct  possibility that the Bank will sustain some
loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses
of Substandard assets, with the additional  characteristics  that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable,  and there is a high possibility of loss. An
asset classified Loss is considered  uncollectible and of such little value that
continuance  as an  asset  on  the  balance  sheet  of  the  institution  is not
warranted.  Assets classified as Substandard or Doubtful require the institution
to establish prudent general  allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss  allowance.  If an  institution  does not agree with an examiner's
classification  of an asset,  it may appeal this  determination  to the District
Director of the OTS.

      On the basis of management's  review of its assets,  at December 31, 1998,
the Bank had  classified  a total of $393,000  of its loans and other  assets as
follows:

                                      December 31,
                                          1998
                                     --------------
                                     (In Thousands)

Special Mention...............          $      393
Substandard...................                 ---
Doubtful......................                 ---
Loss..........................                 ---
                                         ---------
     Total....................                 393
                                         =========
General loss allowance........                 775
                                         =========
Specific loss allowance.......                 ---
                                         =========
Charge-offs...................                  21
                                         =========



                                      13

<PAGE>



      Non-Performing  Assets.  The  table  below  sets  forth  the  amounts  and
categories of  non-performing  assets in the Bank's loan  portfolio.  Foreclosed
assets include assets acquired in settlement of loans.

                                             December 31,
                                    ------------------------------
                                     1998        1997       1996
                                    -------- ---------- ----------
                                        (Dollars in Thousands)
Non-accruing loans:
  One- to four-family.........        $124       $256    $    ---
  Multi-family................         ---        ---         ---
  Commercial real estate......         ---        ---         ---
  Construction or development.         ---        ---         ---
  Consumer....................         ---        ---         ---
                                   -------    -------      ------
       Total..................         124        256         ---

Accruing loans delinquent
more than 90 days:............         ---        ---         ---
  One- to four-family.........         ---        ---         ---
  Multi-family................         ---        ---         ---
  Commercial real estate......         ---        ---         ---
  Construction or development.         ---        ---         ---
  Consumer....................         ---        ---         ---
                                    ------     ------      ------
       Total..................         ---        ---         ---

Foreclosed assets:
  One- to four-family.........         ---        ---         ---
  Multi-family................         ---        ---         ---
  Commercial real estate......         ---        ---         ---
  Construction or development.         ---        ---         ---
  Consumer....................         ---        ---         ---
                                    ------     ------      ------
       Total..................         ---        ---         ---

Renegotiated loans............                             

Total non-performing assets...       $ 124      $ 256      $  ---
                                     =====      =====      ======
Total as a percentage of             
total assets..................         .06%       .15%        ---%
                                     =====      =====      ====== 

                                     
      For the years ended  December  31, 1998 and 1997,  gross  interest  income
which  would have been  recorded  had the  non-accruing  loans  been  current in
accordance   with  their   original  terms  amounted  to  $10,493  and  $19,713,
respectively.  The amounts that were  included in interest  income on such loans
were  $6,902  and  $13,165  for the  years  ended  December  31,  1998 and 1997,
respectively.


                                      14

<PAGE>



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

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


                                      Year Ended December 31,
                                    ---------------------------
                                      1998      1997     1996
                                    -------- --------- --------
                                       (Dollars in Thousands)

Balance at beginning of period..      $775      $745      $600

Charge-offs:
  One- to four-family...........        21       ---         5
  Multi-family..................       ---       ---       ---
  Commercial real estate........       ---       ---       ---
  Consumer......................       ---       ---       ---
                                    ------     -----     -----
                                        21       ---         5
                                     -----     -----      ----

Recoveries:
  One- to four-family...........       ---       ---       ---
  Multi-family..................       ---       ---       ---
  Commercial real estate........       ---       ---       ---
  Consumer......................       ---       ---       ---
                                     -----     -----     -----
                                       ---       ---       ---
                                     -----     -----     -----

Net charge-offs.................       (21)      ---        (5)
Additions charged to operations.        21        30       150
                                     -----     -----     -----

Balance at end of period........      $775      $775      $745
                                      ====      ====      ====

Ratio of net charge-offs
(recoveries) during the period 
 to average loans outstanding 
 during the period..............      0.02%      ---%     0.01%
  
Ratio of net charge-offs
(recoveries) during                  
 the period to average
 non-performing assets..........     12.96%      ---%     3.52%
                                     =====      ====     ===== 


                                       15

<PAGE>



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

<TABLE>
<CAPTION>


                                                               December 31,
                      ------------------------------------------------------------------------------------------------
                                    1998                            1997                               1996
                      ------------------------------ -------------------------------- --------------------------------
                                             Percent                         Percent                          Percent         
                                            of loans                         of loans                         of loans
                       Amount      Loan     in Each    Amount      Loan      in Each     Amount       Loan    in Each
                       of loan    Amounts   Category  of loan     Amounts    Category  of loan      Amounts   Category
                        loss        by      of Total   loss         by       of Total    loss         by      of Total
                      Allowance  Category    Loans   Allowance   Category     Loans    Allowance   Category    Loans
                      --------- ---------- --------- ---------- ----------- --------- ---------- ----------- ---------
                                                                 (In Thousands)
<S>                     <C>    <C>       <C>        <C>        <C>         <C>       <C>       <C>           <C>

One- to four-family...   $174   $ 87,041     84.79%    $341       $68,283     88.94%     $242      $48,339      89.05%
Multi-family..........    119     12,070     11.76      149         4,951      6.45        83        2,783       5.13
Commercial real estate      6        191       .18       11           209       .27        29          573       1.06
Consumer..............     10      3,354      3.27       18         3,329      4.34        13        2,584       4.76
Unallocated...........    466        ---       ---      256           ---       ---       378          ---        ---
                         ----   --------    ------     ----       -------    ------      ----      -------     ------
     Total..........     $775   $102,656    100.00%    $775       $76,772    100.00%     $745      $54,279     100.00%
                         ====   ========    ======     ====       =======    ======      ====      =======     ======
</TABLE>


      The allowance for loan losses is established  through a provision for loan
losses charged to earnings based on management's evaluation of the risk inherent
in its entire loan portfolio.  Such  evaluation,  which includes a review of all
loans of which full collectibility may not be reasonably assured,  considers the
market value of the underlying  collateral,  growth and  composition of the loan
portfolio, delinquency trends, adverse situations that may affect the borrower's
ability to repay, prevailing and projected economic conditions and other factors
that warrant recognition in providing for an adequate allowance for loan losses.
In determining the general reserves under these policies, historical charge-offs
and recoveries, changes in the mix and levels of the various types of loans, net
realizable  values,  the  current and  prospective  loan  portfolio  and current
economic conditions are considered.

      While management  believes that it uses the best information  available to
determine  the  allowance  for  loan  losses,  unforeseen  economic  and  market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly  affected, if circumstances differ substantially
from the assumptions used in making the final determination.

Investment Activities

      General.  Hemlock Federal must maintain  minimum levels of investments and
other assets 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,  Hemlock
Federal 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. At December 31, 1998, Hemlock Federal's liquidity ratio for regulatory
purposes was 10.45%.

      Generally,  the  investment  policy of Hemlock  Federal is to invest funds
among   categories  of  investments   and  maturities   based  upon  the  Bank's
asset/liability  management  policies,  investment  quality,  loan  and  deposit
volume, liquidity needs and performance objectives.

                                      16

<PAGE>


As  required  by SFAS 115,  securities  are  classified  into three  categories:
trading, held-to-maturity and available-for-sale. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading  securities and are reported at fair value with unrealized  gains and
losses  included in trading  account  activities in the statement of operations.
Securities  that Hemlock  Federal has the positive intent and ability to hold to
maturity are classified as held-to-maturity  and reported at amortized cost. All
other securities not classified as trading or held-to-maturity are classified as
available-for-sale.  At December 31,  1998,  Hemlock  Federal had no  securities
which were  classified  as trading  and $52.5  million  of  mortgage-backed  and
related   securities  and  $6.1  million  of  other  securities   classified  as
held-to-maturity.  Available-for-sale securities are reported at fair value with
unrealized  gains and losses  included,  on an  after-tax  basis,  in a separate
component  of  retained  earnings.  At  December  31,  1998,  $28.7  million  of
mortgage-backed and related securities and $1.8 million of other securities were
classified as available-for-sale.

      Mortgage-Backed and Related Securities. In order to supplement its lending
activities and achieve its asset liability management goals, the Bank invests in
mortgage-backed  and related  securities.  As of December 31,  1998,  all of the
mortgage-backed and related securities owned by the Bank are issued,  insured or
guaranteed  either directly or indirectly by a federal agency or are rated "AAA"
by a nationally  recognized  credit rating agency.  However,  it should be noted
that, while a (direct or indirect) federal guarantee or a high credit rating may
indicate a high degree of protection against default,  they do not indicate that
the  securities  will be  protected  from  declines in value based on changes in
interest rates or prepayment speeds.

      Consistent with its asset/liability  management strategy,  at December 31,
1998, $60.5 million,  or 74.5% of Hemlock Federal's  mortgage-backed and related
securities had adjustable or floating interest rates. In addition,  as discussed
below,  as of  the  same  date,  the  Bank  had  $12.8  million  of  fixed  rate
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs") with anticipated average lives of five years or less.

      The Bank's CMOs and REMICs are securities derived by reallocating the cash
flows from  mortgage-backed  securities  or pools of mortgage  loans in order to
create  multiple  classes,  or  tranches,  of  securities  with coupon rates and
average lives that differ from the underlying  collateral as a whole.  The terms
to maturity of any particular  tranche is dependent upon the prepayment speed of
the  underlying  collateral  as well as the structure of the  particular  CMO or
REMIC.  Although a  significant  proportion  of the  Bank's  CMOs and REMICs are
interests in tranches which have been  structured  (through the use of cash flow
priority and "support"  tranches) to give somewhat more  predictable cash flows,
the cash flow and hence the value of CMOs and REMICs is subject to change.

      The Bank invests in CMOs and REMICs as an  alternative  to mortgage  loans
and conventional mortgage-backed securities as part of its asset/liability
management strategy.

                                      17

<PAGE>



Management  believes  that  CMOs  and  REMICs  represent  attractive  investment
alternatives  relative to other  investments due to the wide variety of maturity
and repayment options available  through such  investments.  In particular,  the
Bank has from time to time concluded that short and  intermediate  duration CMOs
and REMICs (five year or less average life) often represent a better combination
of rate and duration than adjustable rate mortgage-backed securities.

      The   following   table   sets  forth  the   composition   of  the  Bank's
mortgage-backed securities at the dates indicated.

<TABLE>
<CAPTION>

                                                           December 31,
                        -----------------------------------------------------------------------------
                                   1998                       1997                     1996
                        --------------------------  ----------------------   ------------------------
                          Carrying         % of      Carrying      % of        Carrying     % of
                           Value          Total       Value        Total        Value       Total
                        -----------   ------------  ----------   ---------   -----------  -----------
                                           (Dollars in Thousands)
<S>                     <C>          <C>          <C>            <C>       <C>            <C>

Mortgage-backed
securities
 held-to- maturity:
  GNMA.................  $ 19,186         24.23%     $ 4,328         7.02%     $ 3,058         4.81%
  FNMA.................    13,607         17.18       11,977        19.42       13,916        21.89
  FHLMC................     8,007         10.11        7,773        12.61       10,094        15.88
  CMOs.................    11,716         14.79        7,605        12.33        2,469         3.88
                         --------        ------      -------       ------      -------        -----
                           52,516         66.31       31,683        51.38       29,537        46.46
Mortgage-backed                                                                
securities                                                                     
available-for- sale:                                                           
  FNMA.................     4,118          5.20        7,777        12.61       12,821        20.17
  FHLMC................     3,434          4.34        5,347         8.67        7,742        12.17
  CMOs.................    19,130         24.15       16,859        27.34       13,478        21.20
                         --------        ------      -------       ------      -------       ------
                           26,682         33.69       29,983        48.62       34,041        53.54
                         --------        ------      -------       ------      -------       ------
                                                                               
Total mortgage-backed    
 securities............  $ 79,198        100.00%     $61,666       100.00%     $63,578       100.00%
                         ========        ======      =======       ======      =======       ======    
</TABLE>


                                      18

<PAGE>



      The following  table sets forth the  contractual  maturities of the Bank's
mortgage-backed securities at December 31, 1998.


<TABLE>
<CAPTION>
                                                                                                                      December 31,
                                                                            Due in                                        1998
                                            ------------------------------------------------------------------- --------------------
                                            6 Months   6 Months   1 to     3 to 5  5 to 10  10 to 20    Over 20  Amortized  Carrying
                                             or Less  to 1 Year  3 Years    Years    Years    Years      Years     Cost      Value
                                            --------  ---------  -------  -------  -------  --------  --------- ----------  --------
                                                                                      (In Thousands)
<S>                                          <C>      <C>      <C>       <C>     <C>      <C>       <C>        <C>        <C> 

Federal Home Loan Mortgage Corporation....    $  ---   $  ---    $   45    $ ---   $  896   $ 5,166   $  5,218   $ 11,325  $ 11,441
Federal National Mortgage Association.....       ---      ---       841      ---      323     7,545      8,913     17,622    17,725
Government National Mortgage Association..       ---      ---        13      ---       73     1,050     18,050     19,186    19,186
CMOs .....................................       ---      ---        60       82    6,999     1,688     21,937     30,766    30,846
                                              ------   ------    ------    -----   ------   -------   --------   --------  --------
     Total................................    $  ---   $  ---    $  959    $  82   $8,291   $15,449   $ 54,118   $ 78,899  $ 79,198
                                              ======   ======    ======    =====   ======   =======   ========   ========  ========

Weighted average yield....................       ---      ---      7.41%    9.00%    6.43%     7.78%      6.92%      7.04%     7.01%

</TABLE>


                                            19

<PAGE>



      As of  December  31,  1998,  the Bank  did not  have  any  mortgage-backed
securities in excess of 10% of retained earnings except for FNMA, FHLMC and GNMA
issues,   amounting  to  $17.7   million,   $11.4  million  and  $19.2  million,
respectively.

      The market  values of a portion of the Bank's  mortgage-backed  securities
held-to-maturity  have been from time to time lower than their carrying  values.
However, for financial reporting purposes, such declines in value are considered
to be temporary in nature since they have been due to changes in interest  rates
rather than credit concerns.

      The following table shows  mortgage-backed  securities purchase,  sale and
repayment activities of the Bank for the periods indicated.

<TABLE>
<CAPTION>

                                                Year Ended December 31,
                                          --------------------------------------
                                             1998          1997          1996
                                          -----------  ------------  -----------
                                                      (In Thousands)
<S>                                     <C>           <C>          <C>

Purchases:
  Adjustable-rate.....................     $     ---     $ 3,561       $11,960
  Fixed-rate..........................        25,680         ---           ---
  CMOs................................        25,698      14,179        10,075
                                           ---------     -------       -------
         Total purchases..............        51,378      17,740        22,035

Sales:
  Adjustable-rate.....................           ---         ---           979
  Fixed-rate..........................           ---         ---           ---
  CMOs................................         1,911         ---         3,754
                                           ---------     -------       -------
          Total sales.................         1,911         ---         4,733

  Principal repayments................       (32,017)    (19,865)      (22,112)
  Discount/premium net change.........           333         (91)         (230)
  Fair value net change...............          (251)        304          (108)
                                           ---------     -------       -------
         Net increase (decrease)......     $  17,532     $(1,912)      $(5,148)
                                           =========     =======       =======
</TABLE>

      The Bank  continues  to  maintain a  substantial  portion of its assets in
mortgage-backed  securities,  although in recent  years the  percentage  of such
securities to total assets has  decreased.  Since  pass-through  mortgage-backed
securities  generally carry a yield  approximately  50 to 100 basis points below
that of the  corresponding  type of residential loan (due to the implied federal
agency  guarantee  fee and the  retention  of a  servicing  spread  by the  loan
servicer),  and the Bank's CMOs and REMICs  also carry lower  yields (due to the
implied  federal  agency  guarantee  and because  such  securities  tend to have
shorter actual  durations than 30 year loans),  in the event that the proportion
of the Bank's  assets  consisting  of  mortgage-backed  and  related  securities
increases,  the Bank's asset yields could be somewhat  adversely  affected.  The
Bank will  evaluate  mortgage-backed  and related  securities  purchases  in the
future  based  on  its   asset/liability   objectives,   market  conditions  and
alternative investment opportunities.



                                      20

<PAGE>



      Securities. 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.

      In  order  to  complement  its  lending  and  mortgage-backed   securities
investment  activities  and to  increase  its  holding of short and medium  term
assets,   the  Bank  invests  in  liquidity   investments  and  in  high-quality
investments, such as U.S. Treasury and agency obligations. At December 31, 1998,
the Bank's securities  portfolio totaled $7.9 million. At December 31, 1998, the
Bank did not own any  securities  of a single  issuer which  exceeded 10% of the
Bank's retained earnings, other than federal agency obligations.

      The following  table sets forth the  composition of the Bank's  securities
and other earning assets at the dates indicated.

<TABLE>
<CAPTION>

                                                                        December 31,
                                           ----------------------------------------------------------------------
                                                    1998                    1997                    1996
                                           ----------------------  ----------------------  ----------------------
                                            Carrying      % of       Carrying      % of      Carrying     % of
                                             Value        Total       Value        Total       Value      Total
                                           ----------------------  ----------------------  ----------------------
                                                                     (Dollars in Thousands)
<S>                                      <C>          <C>        <C>          <C>         <C>         <C> 

Securities held-to-maturity:
  Federal agency obligations...........     $ 6,101      77.12%     $14,735        80.29%    $   ---         ---%
                                                                                            
Securities available-for sale:                                                              
  Federal agency obligations...........       1,810      22.88        3,617        19.71       7,827      100.00
                                            -------     ------      -------       ------     -------      ------
                                                                                            
       Total securities................     $ 7,911     100.00%     $18,352       100.00%    $ 7,827      100.00%
                                            =======     ======      =======       ======     =======      ======
                                                                                            
Average remaining life of securities:         3 years                4 years                    1 year
                                                                                            
Other earning assets:                                                                       
  Interest-earning deposits with banks.     $ 3,107      47.42%     $12,169        85.34%    $15,639       90.45%
  FHLB stock...........................       1,850      28.24          987         6.92         901        5.21
  FHLMC stock..........................       1,595      24.34        1,103         7.74         751        4.34
                                            -------     ------      -------       ------     -------      ------
        Total..........................     $ 6,552     100.00%     $14,259       100.00%    $17,291      100.00%
                                            =======     ======      =======       ======     =======      ======
                                                                                         
</TABLE>


                                            21

<PAGE>



      The composition and maturities of the securities portfolio, excluding FHLB
stock, are indicated in the following table.

<TABLE>
<CAPTION>


                                                                 December 31, 1998
                               -------------------------------------------------------------------------------------
                                 Less Than      1 to 5        5 to 10         Over
                                  1 Year         Years         Years        10 years          Total Securities
                               ------------   -----------   -----------   -----------    ---------------------------
                                Book Value    Book Value    Book Value     Book Value    Book Value   Carrying Value
                               ------------   -----------   -----------   -----------    -----------  --------------
                                                              (Dollars in Thousands)
<S>                            <C>         <C>           <C>           <C>           <C>            <C>

Federal agency obligations...    $  2,475      $  3,164      $  2,266         $  ---      $  7,905      $   7,911
                                 --------      --------      --------         ------      --------      ---------
Weighted average yield.......        4.38%         6.24%         6.64%           ---%         5.82%          5.81%
                                 ========      ========      ========         ======      ========      =========
</TABLE>


Sources of Funds

     General.  The  Bank's  primary  sources  of funds  are  deposits,  payments
(including  prepayments)  of  loan  principal,  interest  earned  on  loans  and
securities,  repayments  of  securities,  borrowings  and  funds  provided  from
operations.

      Deposits.  Hemlock Federal offers deposit  accounts having a wide range of
interest rates and terms.  The Bank's deposits  consist of passbook,  NOW, money
market  and  various  certificate   accounts.   The  Bank  relies  primarily  on
competitive  pricing and customer  service to attract and retain these deposits.
The Bank's  customers may access their  accounts  through any of the Bank's four
offices and three automated teller machines.  In addition,  the Bank's customers
may access their accounts  through  CIRRUS,  a nationwide ATM network.  The Bank
only solicits  deposits in its market area and does not currently use brokers to
obtain deposits.

      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.  As a result,  as  customers  have become more  interest  rate
conscious,  the Bank has become more  susceptible to short-term  fluctuations in
deposit flows.

      The  Bank  manages  the  pricing  of its  deposits  in  keeping  with  its
asset/liability management,  profitability and growth objectives. While the Bank
experienced deposit growth of 9.31% in 1998, management believes this growth was
due primarily to the consolidation of competition within its market area, and is
therefore not  sustainable.  However,  with the opening of a fourth full service
branch office in Lemont,  Illinois in December,  1998,  management believes that
deposit  growth for the Bank will be greater than that  experienced in the years
1997 and 1996.

      Management believes that the "core" portion of the Bank's regular savings,
NOW and money  market  accounts  can have a lower cost and be more  resistant to
interest  rate changes  than  certificate  accounts.  These  accounts  increased
$972,000  million since December 31, 1993. The Bank intends to utilize  customer
service and  marketing  initiatives  in an effort to maintain the volume of such
deposits. However, there can be no assurance as to whether the Bank will be able
to maintain or increase its core deposits in the future.



                                      22

<PAGE>



      The  following  table sets forth the savings  flows at the Bank during the
periods indicated.


                                               Year Ended
                                              December 31,
                                  ---------------------------------------
                                     1998          1997          1996
                                  -----------   ----------   ------------
                                         (Dollars In Thousands)

Opening balance...............    $   130,958   $  131,243    $  130,741
Deposits......................        241,772      271,622       207,748
Withdrawals...................       (235,112)    (277,503)     (212,752)
Interest credited.............          5,531        5,596         5,506
                                  -----------   ----------    ----------
Ending balance................       $143,149   $  130,958    $  131,243
                                  ===========   ==========    ==========
Net increase (decrease).......    $    12,191   $     (285)   $      502
                                  -----------   ==========    ==========
Percent increase (decrease)...           9.31%       (0.22)%        0.38%
                                         ====        =====          ====


      The following  table sets forth the dollar  amount of savings  deposits in
the  various  types of  deposit  programs  offered  by the Bank as of the  dates
indicated.

<TABLE>
<CAPTION>


                                                             December 31,
                                  ------------------------------------------------------------------
                                          1998                    1997                   1996
                                  --------------------  ---------------------  ---------------------
                                              Percent                Percent                Percent
                                    Amount   of Total     Amount    of Total     Amount    of Total
                                  ---------  ---------  ---------  ----------  ---------  ----------
                                                        (Dollars in Thousands)
<S>                               <C>       <C>       <C>        <C>        <C>         <C>

Transactions and Savings Deposits
Passbook Accounts 2.94%.........  $ 47,799     33.39%    $44,891      34.28%   $ 47,174      35.94%
NOW Accounts 2.02%..............    16,901     11.81      14,950      11.41      13,711      10.45
Money Market Accounts 3.20%.....     6,596      4.61       5,091       3.89       5,463       4.16
                                  --------    ------     -------     ------    --------     ------
                                                                               
Total Non-Certificates..........    71,296     49.81      64,932      49.58      66,348      50.55
                                                                               
Certificates:                                                                  
0.00 - 3.99%....................        48      0.03         ---        ---         ---        ---
4.00 - 5.99%....................    66,193     46.24      57,588      43.98      56,735      43.23
6.00 - 7.99%....................     5,612      3.92       8,438       6.44       8,160       6.22
                                  --------    ------    --------     ------    --------     ------
                                                                               
Total Certificates..............    71,853     50.19      66,026      50.42      64,895      49.45
                                  --------    ------    --------     ------    --------     ------
                                                                               
Total Deposits..................  $143,149    100.00%   $130,958     100.00%   $131,243     100.00%
                                  ========    ======    ========     ======    ========     ======
                                                                               
</TABLE>




                                            23

<PAGE>



      The following  table  indicates the amount of the Bank's  certificates  of
deposit and other deposits by time  remaining  until maturity as of December 31,
1998.

<TABLE>
<CAPTION>


                                                     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 less
 than $100,000.................    $    87   $ 14,140  $  29,097  $   22,607   $  65,931

Certificates of deposit of
 $100,000 or more..............        ---      1,122      3,110       1,690       5,922
                                   -------  --------- ----------  ----------   ---------

Total certificates of deposit..    $    87   $ 15,262  $  32,207  $   24,297   $  71,853
                                   =======   ========  =========  ==========   =========
</TABLE>

      Borrowings.  Hemlock  Federal's other  available  sources of funds include
advances from the FHLB of Chicago and other borrowings.  As a member of the FHLB
of Chicago, the Bank is required to own capital stock in the FHLB of Chicago and
is authorized  to apply for advances from the FHLB of Chicago.  Each FHLB credit
program has its own interest rate, which may be fixed or variable,  and range of
maturities.  The FHLB of Chicago may  prescribe  the  acceptable  uses for these
advances,  as well as  limitations  on the size of the  advances  and  repayment
provisions.

      The following table sets forth the maximum  month-end  balance and average
balance  of FHLB  advances  for the  periods  indicated.  The  Bank had no other
outstanding borrowings during the periods shown


                                         Year Ended
                                        December 31,
                                 ------------------------------  
                                    1998       1997      1996
                                 ---------- ---------- --------
                                   (Dollars In Thousands)
Maximum Balance:
  FHLB Advances...............   $ 37,000   $ 11,000  $  1,500

Average Balance:
  FHLB Advances...............   $ 24,923  $   3,462  $  1,500



                                      24

<PAGE>



      The following  table sets forth certain  information as to the Bank's FHLB
advances at the dates indicated.


                                                         December 31,
                                             -----------------------------------
                                                1998          1997        1996
                                             ----------    ---------     -------
                                                  (Dollars in Thousands)

FHLB advances............................  $   31,000    $ 11,000      $ 1,500


Weighted average interest rate
during the period of FHLB advances.......        5.42%       5.86%        9.72%

Weighted average interest rate
at end of period of FHLB advances........        4.91%       5.86%        9.72%


Subsidiary and Other Activities

      As a federally chartered savings bank, Hemlock Federal is permitted by OTS
regulations  to  invest  up to 2% of its  assets  in the  stock of, or loans to,
service corporation subsidiaries,  and may invest an additional 1% of its assets
in service  corporations  where such additional funds are used for inner-city or
community   development   purposes.   In  addition  to  investments  in  service
corporations,  federal  institutions are permitted to invest an unlimited amount
in operating  subsidiaries  engaged solely in activities which a federal savings
association  may engage in directly.  At December 31, 1998,  Hemlock Federal did
not have any subsidiaries.


                                      25

<PAGE>



                                  REGULATION

General

      Hemlock  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,  Hemlock  Federal  is subject to broad
federal  regulation  and  oversight  extending  to all its  operations.  Hemlock
Federal  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 Hemlock Federal, the
Holding Company also is subject to federal regulation and oversight. The purpose
of the  regulation  of the Holding  Company and other  holding  companies  is to
protect  subsidiary  savings  associations.  Hemlock  Federal is a member of 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,  and the  deposits of Hemlock  Federal  are insured by the FDIC.  As a
result, the FDIC has certain  regulatory and examination  authority over Hemlock
Federal.

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

Federal Regulation of Savings Associations

      The  OTS  has  extensive   authority   over  the   operations  of  savings
associations.  As part of this  authority,  Hemlock  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 Hemlock Federal were
as of September 1997 and February 1995,  respectively.  Under agency  scheduling
guidelines,  it is likely that another examination will be initiated in the near
future.  When these  examinations  are  conducted  by the OTS and the FDIC,  the
examiners may require  Hemlock Federal 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.  Hemlock  Federal's OTS  assessment  for the fiscal year
ended December 31, 1998 was $51,000.

      The  OTS  also  has  extensive  enforcement  authority  over  all  savings
institutions  and their holding  companies,  including  Hemlock  Federal and the
Holding 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  may provide the basis for  enforcement
action,  including  misleading or untimely  reports  filed with the OTS.  Except
under certain  circumstances,  public disclosure of final enforcement actions by
the OTS is required.

      In addition,  the investment,  lending and branching  authority of Hemlock
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

                                      26

<PAGE>



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. Hemlock Federal
is in compliance with the noted restrictions.

      Hemlock    Federal'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, 1998, Hemlock Federal's lending
limit under this restriction was $3.9 million.  Hemlock 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.

Insurance of Accounts and Regulation by the FDIC

      Hemlock  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 is 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

                                      27

<PAGE>



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 of the FDIC 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 attains 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 September 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. 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 has been
established  at .657% of deposits by the FDIC and the  resulting  assessment  of
$840,000  was paid in  November  1996.  This  special  assessment  significantly
increased  noninterest  expense and  adversely  affected  the Bank's  results of
operations  for the year ended  December  31,  1996.  As a result of the special
assessment,  the Bank's deposit insurance premiums were reduced to $71,000 based
upon its current risk  classification  and the new assessment  schedule for SAIF
insured institutions. These premiums are subject to change in future periods.

Regulatory Capital Requirements

      Federally  insured  savings  associations,  such as Hemlock  Federal,  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 Hemlock Federal stock and related income.

                                      28

<PAGE>



In addition,  all  intangible  assets,  other than a limited amount of purchased
mortgage   servicing  rights,   must  be  deducted  from  tangible  capital  for
calculating  compliance  with the  requirement.  At December 31,  1998,  Hemlock
Federal did not have any intangible  assets  recorded as assets on its financial
statements.

      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.  All  subsidiaries  of Hemlock  Federal are  includable
subsidiaries.

      At  December  31,  1998,  Hemlock  Federal had  tangible  capital of $22.7
million,  or 11.24% of  adjusted  total  assets,  which is  approximately  $19.5
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.

      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,  1998,
Hemlock Federal had no intangibles which were subject to these tests.

      At December 31,  1998,  Hemlock  Federal had core  capital  equal to $22.7
million,  or 11.24% of adjusted  total assets,  which is $14.6 million above the
minimum leverage ratio requirement of 3% 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,  1998,  Hemlock
Federal had $775,000 of general loss  reserves and no capital  instruments  that
qualify as  supplementary  capital,  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.  Hemlock Federal had no
such exclusions from capital and assets at December 31, 1998.

                                      29

<PAGE>



      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% is exempt from this requirement  unless the
OTS determines otherwise.

     On December 31, 1998,  Hemlock  Federal had total  capital of $23.4 million
(including   $22.7   million  in  core  capital  and   $775,000  in   qualifying
supplementary  capital)  and  risk-weighted  assets of $78.2  million;  or total
capital of 30% of risk-weighted  assets. This amount was $17.2 million above the
8% 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

                                      30

<PAGE>



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
a 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 Hemlock
Federal may have a substantial  adverse effect on Hemlock  Federal's  operations
and  profitability.  Company  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 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 Hemlock Federal, 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 their 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.
Hemlock Federal 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 that is a
subsidiary of a holding company

                                      31

<PAGE>



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  Hemlock  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 Hemlock Federal
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 5%.

      In addition,  short-term liquid assets (e.g., cash, certain time deposits,
certain bankers  acceptances and short-term United States Treasury  obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable  deposit accounts and current  borrowings.  Penalties may be
imposed  upon   associations   for  violations  of  either  liquid  asset  ratio
requirement.  At December 31, 1998,  Hemlock Federal was in compliance with both
requirements,  with an overall  liquid  asset  ratio of 10.45% and a  short-term
liquid assets ratio of 10.19%.

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 GAAP. Under the policy
statement,  management  must support its  classification  of and  accounting for
loans  and  securities  (i.e.,   whether  investment,   sale  or  trading)  with
appropriate  documentation.  Hemlock Federal is in compliance with these amended
rules.

      OTS  accounting  regulations,  which may be made more  stringent than GAAP
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.

                                      32

<PAGE>



Qualified Thrift Lender Test

      All savings associations,  including Hemlock 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 such test such assets  primarily  consist of residential  housing related
loans and  investments.  At December 31, 1998,  Hemlock Federal 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 Hemlock
Federal,  to assess the institution's  record 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  Hemlock
Federal. 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,  Hemlock  Federal  may be  required  to devote  additional  funds for
investment and lending in its local community.  Hemlock Federal was examined for
CRA compliance in March 1997 and received a rating of satisfactory.

                                      33

<PAGE>



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 Hemlock Federal include the Holding Company
and any company which is under common control with Hemlock 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.  Hemlock Federal's subsidiaries are not deemed affiliates;  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 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 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  Hemlock  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  Hemlock  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."

      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.

                                      34

<PAGE>



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 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.

      Company  stock held by persons  who are  affiliates  (generally  officers,
directors and principal  stockholders)  of the Company may not be resold without
registration or unless sold in accordance with certain resale  restrictions.  If
the Company  meets  specified  current  public  information  requirements,  each
affiliate  of the  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, 1998, Hemlock 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

      Hemlock  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, Hemlock Federal is required to purchase and maintain stock in
the FHLB of Chicago.  At December 31, 1998,  Hemlock Federal had $1.9 million in
FHLB  stock,  which was in  compliance  with this  requirement.  In past  years,
Hemlock Federal has received substantial

                                      35

<PAGE>



dividends on its FHLB stock.  Over the past five calendar  years such  dividends
have averaged 5.63% and were 4.59% for calendar year 1998.

      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 Hemlock Federal's FHLB stock may result in a corresponding
reduction in Hemlock Federal's capital.

      For the  year  ended  December  31,  1998,  dividends  paid by the FHLB of
Chicago to Hemlock Federal totaled $76,000,  which constitute a $12,000 increase
from the  amount of  dividends  received  in  calendar  year 1997.  The  $76,000
dividend  received for the year ended December 31, 1998,  reflects an annualized
rate of 4.59%.

Federal and State Taxation

      Savings associations,  such as Hemlock Federal, are permitted to establish
reserves using an experience  method for bad debts and to make annual  additions
thereto which may, within specified  formula limits,  be taken as a deduction in
computing  taxable income for federal income tax purposes.  Under the experience
method,  the bad debt reserve  deduction is an amount determined under a formula
based generally upon the bad debts actually sustained by the savings association
over a period of years.

      In August 1996, legislation was enacted that repeals the reserve method of
accounting  (including  the  percentage of taxable  income  method) used by many
thrifts,  including  the Bank,  to calculate  their bad debt reserve for federal
income tax purposes.  As a result,  thrifts must  recapture  that portion of the
reserve  that  exceeds the amount that could have been taken under the  specific
charge-off method for post-1987 tax years. The legislation also requires thrifts
to account  for bad debts for federal  income tax  purposes on the same basis as
commercial  banks for tax years beginning after December 31, 1995. The recapture
will occur over a six-year  period,  the  commencement  of which will be delayed
until the first taxable year  beginning  after  December 31, 1997,  provided the
institution meets certain  residential lending  requirements.  The management of
the Company does not believe that the legislation will have a material impact on
the Company or the Bank.

      In addition to the regular  income tax,  corporations,  including  savings
associations such as Hemlock Federal, generally are subject to a minimum tax. An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative  minimum taxable income.  The Bank does not expect to be
subject to the alternative minimum tax.

                                      36

<PAGE>



      To the extent earnings  appropriated to a savings  association's  bad debt
reserves  exceed  the  allowable  amount  of such  reserves  computed  under the
experience  method  ("Excess"),   such  Excess  may  not,  without  adverse  tax
consequences,   be  utilized  for  the  payment  of  cash   dividends  or  other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of December 31,  1998,  Hemlock  Federal's  Excess for tax purposes
totaled approximately $3.1 million.

      The Company and Hemlock Federal file separate federal and state income tax
returns on a calendar basis, using the accrual method of accounting.

      The  Company  and Hemlock  Federal  have not been  audited by the IRS with
respect to federal  income tax returns in the past five years.  With  respect to
years  examined  by the IRS,  either all  deficiencies  have been  satisfied  or
sufficient reserves have been established to satisfy asserted  deficiencies.  In
the opinion of  management,  any  examination  of still open returns  (including
returns of  subsidiaries  and  predecessors  of, or entities  merged  into,  the
Company)  would not result in a deficiency  which could have a material  adverse
effect on the financial condition of the Company and its subsidiaries.

     Illinois  Taxation.  For  Illinois  income tax  purposes,  the  Company and
Hemlock  Federal  are  taxed at an  effective  rate  equal to 7.18% of  Illinois
taxable income.  For these purposes,  "Illinois  Taxable Income" 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).

      Delaware Taxation.  As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of  Delaware.  The Company is also subject to
an annual franchise tax imposed by the State of Delaware.

Competition

      Hemlock Federal faces strong  competition  both in originating real estate
loans  and in  attracting  deposits.  Competition  in  originating  loans  comes
primarily  from  commercial  banks,  credit unions,  mortgage  bankers and other
savings  institutions,  which also make loans secured by real estate  located in
the Bank's market area.  Hemlock Federal  competes for loans  principally on the
basis of the  interest  rates  and loan fees it  charges,  the types of loans it
originates and the quality of services it provides to borrowers.

      Competition  for those  deposits is  principally  from  commercial  banks,
credit unions,  mutual funds,  securities  firms and other savings  institutions
located in the same  communities.  The ability of the Bank to attract and retain
deposits  depends  on its  ability to provide  an  investment  opportunity  that
satisfies the requirements of investors as to rate of return,  liquidity,  risk,
convenient  locations and other factors. The Bank competes for these deposits by
offering  competitive rates,  convenient  business hours and a customer-oriented
staff.


                                      37

<PAGE>



Executive Officers Of the Registrant Who Are Not Directors

      The following  information as to the business  experience  during the last
five years is supplied with respect to executive officers of the Bank who do not
serve on the Company's or the Bank's Board of Directors.

     Jean  M.  Thornton.   Ms.  Thornton,   age  38,  is  currently  serving  as
Vice-President,  Controller/Treasurer.  She has worked at the Bank since 1991 as
Chief Accountant, and as Treasurer since 1995.

Employees

      At December  31, 1998,  the Bank had a total of 73 employees  including 19
part-time  employees.  None  of the  Bank's  employees  are  represented  by any
collective bargaining agreement.  Management considers its employee relations to
be good.

Item 2.  Properties

      The following table sets forth information  concerning the main office and
each branch office of the Bank at December 31, 1998.  At December 31, 1998,  the
Bank's premises had an aggregate net book value of approximately $2.86 million.


                                     Year         Owned or    Net Book Value at
Location                           Acquired        Leased     December 31, 1998
-------------------------------   ----------  -------------- -------------------
                                                                (In Thousands)
Main Office:
5700 West 159th Street               1974          Owned                   $511
Oak Forest, Illinois  60452

Full Service Branches:
8855 South Ridgeland Ave.            1975          Leased(1)                168
Oak Lawn, Illinois  60453

4646 South Damen Avenue              1990          Leased                   ---
Chicago, Illinois   60609

15730 West 127th Street              1998          Owned(2)               2,185
Lemont, Illinois 60439

(1) The land on which the Oak Lawn branch is built is leased. Under the terms of
the  lease,  upon the  expiration  of the lease in 2005,  title to the  building
housing  the  branch  which is  currently  held by the  Bank,  will  pass to the
landlord. 

(2) Construction of the building was completed in December, 1998.

      The Bank  believes  that its current  facilities  are adequate to meet the
present and foreseeable future needs of the Bank and the Company.

      The Bank's  depositor  and borrower  customer  files are  maintained by an
independent data processing  company.  The net book value of the data processing
and  computer   equipment  utilized  by  the  Bank  at  December  31,  1998  was
approximately $191,546.

                                      38

<PAGE>



Item 3.  Legal Proceedings

      From time to time,  Hemlock  Federal is involved as plaintiff or defendant
in various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty,  it is the opinion of management  that the  resolution of these legal
actions should not have a material effect on the Company's and Hemlock Federal's
financial position or results of operations.

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,
1998.

                                    PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

      Page 48 of the Annual Report is herein incorporated by reference.

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

      Pages 5  through  19 of the  Annual  Report is  herein  incorporated  by
reference.

Item 7.  Financial Statements

      (a) Financial Statements

      The  following  information  appearing in the  Company's  Annual Report to
Stockholders  for the year ended December 31, 1998, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.

Annual Report Section                             Pages in Annual Report

Common Stock and Related Information                        48

Selected Financial and Other Data                            3

Management's Discussion and Analysis                         5
 of Financial Condition and Results
 of Operations

Report of Independent Auditors                              20

Consolidated Statements of Financial Condition              21
  as of December 31, 1998 and 1997

                                      39

<PAGE>



Consolidated Statements of Income                           22
  for Years Ended December 31, 1998,
  1997 and 1996

Consolidated Statements of Changes in                       23
  Stockholders' Equity for Years Ended
  December 31, 1998, 1997 and 1996

Consolidated Statements of Cash Flows                       25
 for Years Ended December 31, 1998,
 1997 and 1996

Notes to Consolidated Financial                             27
 Statements

      With the exception of the  aforementioned  information,  the Corporation's
Annual Report to Stockholders for the year ended December 31, 1998 is not deemed
filed as part of this Annual Report on Form 10-K.

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.



                                      40

<PAGE>



                                   PART III

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

      Information  concerning Directors of the Registrant is incorporated herein
by  reference  from the  Company's  definitive  Proxy  Statement  for the Annual
Meeting of  Stockholders  to be held in 1999,  a copy of which will be filed not
later than 120 days after the close of the fiscal year.

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 1999,  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 1999, 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 1999, a copy of which will be filed
not later than 120 days after the
close of the fiscal year.

                                      41

<PAGE>



                                    PART IV

Item 13.  Exhibits and Reports on Form 8-K

      (a)  Exhibits


                                                                   Reference to
   Regulation                                                    Prior filing or
   S-K Exhibit                                                   Exhibit Number
     Number                              Document                Attached Hereto

2        Plan of acquisition, reorganization, arrangement,            None
         liquidation or succession
3(i)     Articles of Incorporation                                      *
3(ii)    By-Laws                                                        *
4        Instruments defining the rights of security holders,           *
         including debentures
9        Voting Trust Agreement                                       None
10       Material contracts:
         (i)      Stock Option and Incentive Plan                       *
         (ii)     Recognition and Retention Plan                        *
         (iii) Employment Agreement with Executive Officers             *
11       Statement re: computation of per share earnings              None
13       Annual Report                                                 13
16       Letter re: change in certifying accountants                  None
21       Subsidiaries of Registrant                                    21
22       Published report regarding matters submitted to vote         None
         of security holders
23       Consent of Experts and Counsel                           Not required
24       Power of attorney                                        Not required
27       Financial Data Schedule                                       27
28       Information from reports furnished to state insurance        None
         regulatory authorities
99       Additional Exhibits                                          None

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

*      Filed as exhibit to the Company's Form S-1  registration  statement filed
       on December  27, 1996 (File No.  333-18895)  pursuant to Section 5 of the
       Securities Act of 1933. All of such previously filed documents are hereby
       incorporated   herein  by  reference  in  accordance  with  Item  601  of
       Regulation S-B.

         The  Company  did not file any reports on Form 8-K during the quarter
ended December
31, 1998.

                                      42

<PAGE>



                                   SIGNATURES

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

                                        HEMLOCK FEDERAL
                                        FINANCIAL CORPORATION


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

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

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

Date:    March 30, 1999                      Date:    March 30, 1999
                                                              
  /s/ Rosanne Pastorek-Belczak                  /s/ Charles Gjondla
----------------------------------           ----------------------------------
Rosanne Pastorek-Belczak,                    Charles Gjondla, Director
  Vice-President/ Secretary
  and Director

Date:    March 30, 1999                      Date:    March 30, 1999


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

Date:    March 30, 1999                      Date:    March 30, 1999




<PAGE>


                                 Exhibit Index




  Exhibit   
    No.                       Document
13          Annual Report
21          Subsidiaries of Registrant
27          Financial Data Schedule