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, 2001
                                       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              (I.R.S. Employer Identification No.)
 of incorporation or organization)

5700 West 159th Street, Oak Forest, Illinois                 60542
(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-K 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-K or any
amendment to this Form 10-K. [X]

     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 15, 2002, was $14.4
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 15, 2002, there were issued and outstanding 1,013,186 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-K - Annual Report to Stockholders for the fiscal year
                            ended December 31, 2001.

            Part III of Form 10-K - Proxy Statement for 2002 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 five
branch offices located in Oak Lawn, Bolingbrook, Lemont, and Chicago. Its
deposits are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). At December 31, 2001, Hemlock Federal had total assets of
$288.7 million, deposits of $189.5 million and equity of $20.9 million (or 7.2 %
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 lesser extent, multi-family, consumer and other loans
primarily in its market area. At December 31, 2001, $114.0 million, or 77.1%, 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.

Forward-Looking Statements

     The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for periods subsequent to December 31, 2001. The Company
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements for subsequent periods
are subject to greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements.

     In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements: pricing
pressures on loan and deposit products; actions of competitors; changes in local
and national economic conditions; customer deposit disintermediation; changes in


                                       2
<PAGE>


customers' acceptance of the Company's products and services; the extent and
timing of legislative and regulatory actions and reforms.

     The Company's forward-looking statements speak only as of the date on which
such statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
or circumstances.

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 lesser extent, Hemlock Federal also originates multi-family real
estate, consumer and other loans in its market area. At December 31, 2001, the
Bank's net loans receivable including loans held for sale, totaled $156.5
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 loans). At December 31, 2001,
based on the above, the Bank's regulatory loans-to-one borrower limit was
approximately $3.1 million. As of December 31, 2001, the largest dollar amount
outstanding or committed to be lent to one borrower or group of related
borrowers relates to one borrower totaling $947,801 secured by four separate
multi-family dwellings located in Oak Lawn and Chicago Ridge, Illinois. The
second largest amount outstanding or committed to be lent to one borrower or
group of related borrowers as of December 31, 2001 related to one borrower
totaling $872,263 secured by three separate multi-family dwellings located in
Oak Lawn and Chicago Ridge, Illinois. The third largest amount outstanding or
committed to be lent to one borrower or group of related borrowers related to
one borrower totaling $727,591 secured by two separate multi-family dwellings as
well as a single family residence, all located in Illinois. At December 31,
2001, these loans were performing in accordance with their terms. As of December
31, 2001, there were no other loans with carrying values in excess of $500,000.

     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,
                                  ------------------------------------------------------------------------------
                                            2001                       2000                        1999
                                  ----------------------     -----------------------       ---------------------
                                    Amount      Percent        Amount       Percent         Amount      Percent
                                  ---------    ---------     ---------     ---------       --------    ---------
                                                             (Dollars in Thousands)
<S>                               <C>           <C>           <C>           <C>           <C>          <C>

Real Estate Loans:
-----------------
One-to-four family(1) .......     $ 122,608       78.31%      $ 123,372       79.66%      $  91,505      78.03%
Multi-family ................        27,330       17.45          24,430       15.77          21,031      17.94
Commercial ..................           379         .24             430         .28             181        .15
                                  ---------     -------       ---------     -------       ---------    -------
  Total real estate loans ...       150,317       96.00         148,232       95.71         112,717      96.12

Consumer loans:
--------------
Deposit account .............            78         .05             150         .10             114        .10
Automobile ..................           227         .15             358         .23             265        .23
Home equity .................         5,952        3.80           6,137        3.96           4,164       3.55
                                  ---------     -------       ---------     -------       ---------    -------
  Total consumer loans ......         6,257        4.00           6,645        4.29           4,543       3.88
                                  ---------     -------       ---------     -------       ---------    -------
  Total loans ...............       156,574      100.00%        154,877      100.00%        117,260     100.00%
                                                =======                     =======                    =======

Less:
----
Loans in process ............            --                          --                          --
Deferred fees and discounts .           868                         913                         533
Allowance for losses ........          (969)                       (969)                       (795)
                                  ---------                   ---------                   =--------
  Total loans receivable, net     $ 156,473                   $ 154,821                   $ 116,998
                                  =========                   =========                   =========

<CAPTION>
                                                             December 31,
                                          ----------------------------------------------------
                                                   1998                        1997
                                          -----------------------     ------------------------
                                           Amount        Percent       Amount         Percent
                                          --------      ---------     --------       ---------
                                                        (Dollars in Thousands)
<S>                                       <C>           <C>           <C>           <C>
Real Estate Loans:
-----------------
One-to-four family(1) .......             $  87,041        84.79%     $  68,283        88.94%
Multi-family ................                12,070        11.76          4,951         6.45
Commercial ..................                   191          .18            209          .27
                                          ---------     --------      ---------     --------
  Total real estate loans ...                99,302        96.73         73,443        95.66

Consumer loans:
-------------
Deposit account .............                   129          .13            116          .15
Automobile ..................                   381          .37            473          .62
Home equity .................                 2,844         2.77          2,740         3.57
                                          ---------     --------      ---------     --------
  Total consumer loans ......                 3,354         3.27          3,329         4.34
                                          ---------     --------      ---------     --------
  Total loans ...............               102,656       100.00%        76,772       100.00%
                                                        ========                    ========

Less:
----
Loans in process ............                  (313)                       (125)
Deferred fees and discounts .                   409                         287
Allowance for losses ........                  (775)                       (775)
                                          ---------                   ---------
  Total loans receivable, net             $ 101,977                   $  76,159
                                          =========                   =========
</TABLE>

(1)   Including loans held for sale.


                                       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,
                                   -------------------------------------------------------------------------------------
                                             2001                          2000                          1999
                                   -----------------------       ------------------------      -------------------------
                                     Amount       Percent          Amount        Percent         Amount         Percent
                                   ---------     ---------       ---------     ----------      ---------      ----------
                                                                  (Dollars in Thousands)
<S>                                <C>           <C>             <C>           <C>             <C>              <C>

Fixed-Rate Loans:
----------------
Real estate:
One-to-four family (1) ......      $ 111,640        71.31%       $ 107,612        69.48%       $  82,993         70.78%
Multi-family ................         27,330        17.45           24,430        15.77           21,031         17.94
Commercial ..................            379          .24              430          .28              181           .15
                                   ---------     --------        ---------     --------        ---------      --------
  Total real estate loans ...        139,349        89.00          132,472        85.53          104,205         88.87
Consumer ....................          6,257         4.00            6,645         4.29            4,543          3.87
                                   ---------     --------        ---------     --------        ---------      --------
  Total fixed-rate loans ....        145,606        93.00          139,117        89.82          108,748         92.74

Adjustable-Rate Loans
---------------------
Real estate:
One-to-four family ..........         10,968         7.00           15,760        10.18            8,512          7.26
Multi-family ................             --           --               --           --               --            --
                                   ---------     --------        ---------     --------        ---------      --------
Total adjustable rate loans .         10,968         7.00           15,760        10.18            8,512          7.26
                                   ---------     --------        ---------     --------        ---------      --------

  Total loans ...............        156,574       100.00%         154,877       100.00%         117,260        100.00%
                                                 ========                      ========                       ========
Less:
----
Loans in process ............             --                            --                            --
Deferred fees and discounts .            868                           913                           533
Allowance for losses ........           (969)                         (969)                         (795)
                                   ---------                     ---------                     ---------
  Total loans receivable, net      $ 156,473                     $ 154,821                     $ 116,998
                                   =========                     =========                     =========

<CAPTION>
                                                               December 31,
                                           ---------------------------------------------------
                                                     1998                        1997
                                           ------------------------     ----------------------
                                            Amount         Percent        Amount      Percent
                                           --------      ----------     ---------    ---------
                                                          (Dollars in Thousands)
<S>                                        <C>             <C>          <C>             <C>
Fixed-Rate Loans:
----------------
Real estate:
One-to-four family (1) ......              $  76,331        74.36%      $  50,671        66.00%
Multi-family ................                 11,887        11.58           4,767         6.21
Commercial ..................                    191          .18             209          .27
                                           ---------     --------       ---------     --------
  Total real estate loans ...                 88,409        86.12          55,647        72.48
Consumer ....................                  3,354         3.27           3,329         4.34
                                           ---------     --------       ---------     --------
  Total fixed-rate loans ....                 91,763        89.39          58,976        76.82

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

  Total loans ...............                102,656       100.00%         76,772       100.00%
                                                         ========                     ========
Less:
----
Loans in process ............                   (313)                        (125)
Deferred fees and discounts .                    409                          287
Allowance for losses ........                   (775)                        (775)
                                           ---------                    ---------
  Total loans receivable, net              $ 101,977                    $  76,159
                                           =========                    =========
</TABLE>

(1) Including loans held for sale.


                                       5
<PAGE>

     The following schedule illustrates the contractual maturity of the Bank's
loan portfolio at December 31, 2001. 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(2)            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,
------------------------
2002(1)................        $    399      8.04%        $    12      9.00%      $3,145      6.16%       $  3,556     6.38%
2003 and 2004..........           2,076      7.11             131      8.13          395      8.01           2,602     7.30
2005 to 2009...........          29,151      6.84           8,566      7.69        1,600      8.13          39,317     7.08
2010 to 2024...........          40,772      7.08          19,000      7.53        1,117      7.61          60,889     7.23
2025 and following.....          50,210      7.35              --        --           --        --          50,210     7.35
                                 ------                    ------                  -----                    ------
    Total..............        $122,608                   $27,709                 $6,257                  $156,574
                               ========                   =======                 ======                  ========
</TABLE>

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

(2)  Includes loans held for sale.

     The total amount of loans due after December 31, 2002 which have
predetermined interest rates is $142.0 million while the total amount of loans
due after such dates which have floating or adjustable interest rates is $11.0
million.

     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 the
Bank's market area. All fixed-rate loans currently originated by the Bank are
evaluated to determine if the loan is appropriate for sale. In all cases, loan
servicing is retained. All other loans originated are retained and serviced by
the Bank.

     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, 2001, the Bank had $24.6 million of fixed rate
loans (most of which were seven year balloon loans) with contractual terms of
less than 10 years, $44.7 million of fixed rate loans with contractual terms of
10-15 years and $42.0 million of fixed rate loans with contractual terms


                                       6
<PAGE>

of more than 15 years. In addition, the Bank had $8.6 million of loans held for
sale which had contractual 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 2.875%) 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 of up to 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, 2001 one-to-four family ARMs
totaled $11.0 million, or 7.0% of the Bank's total loan portfolio.

     Hemlock Federal will generally lend up to 95% 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 of default 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.

     Residential loans do not currently include prepayment penalties, are
non-assumable and do not produce negative amortization. Although the Bank
originates mortgage loans primarily for its portfolio, the Bank's loans are
generally underwritten to permit their sale in the secondary market.

     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 $300,700), the Bank
does, on an exceptional 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. At December 31, 2001, the Bank
had multi-family loans totaling $27.3 million, or 17.5% of


                                       7
<PAGE>

the Bank's total loan portfolio, and $379,000 in commercial real estate loans,
representing 0.24% 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, 2001, the Bank's largest commercial real estate or
multi-family loan outstanding totaled $361,685 secured by a five-unit
multi-family dwelling located in Chicago Ridge, 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 and commercial real estate loans in the past, as of
December 31, 2001, 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, 2001 consumer loans totaled $6.3 million or 4.0% 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 90% of the appraised value of the property or $100,000. These loans are
written with fixed terms of up to 10 years and carry fixed interest rates. At
December 31, 2001, the Bank's home equity loans totaled $2.9 million, or 1.8% 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


                                       8
<PAGE>

first mortgage lien is held elsewhere, or in either case $100,000. At December
31, 2001, the Bank's home equity lines of credit totaled $3.1 million
outstanding, or 2.0% 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, may limit the amount
which can be recovered on such loans.

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 the
Bank's 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 fixed rate loans are evaluated for sale on a
quarter-by-quarter basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Quantitative and Qualitative Disclosures
About Market Risk" in the Annual Report attached hereto as Exhibit 13.

     In order to supplement loan originations, the Bank has acquired
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 of the Bank's relatively low loans to deposits ratios since the
early 1980s, the Bank did not sell loans in the secondary market. In view of the
success of the Bank's recent loan origination efforts and the related increases
in its loans to deposits ratio, as well as the increase in loans receivable
resulting from the Midwest Savings acquisition, the Bank sold a portion of its
residential loan originations in 2001, and may continue to originate loans for
sale in 2002. The sale of loans is primarily a result of the Bank's plan to
improve its interest rate risk.


                                       9
<PAGE>

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

<TABLE>
<CAPTION>
                                                                 Year Ended
                                                                December 31,
                                                      --------------------------------
                                                       2001         2000         1999
                                                      ------       ------       ------
                                                               (In Thousands)
          <S>                                        <C>          <C>          <C>
          Originations by type:
          --------------------
          Adjustable rate:
            Real estate - one-to-four family ....    $  1,259     $    761     $  1,443
                      - multi-family ............          --           --           --
                                                     --------     --------     --------
               Total adjustable-rate ............       1,259          761        1,443
          Fixed rate:
            Real estate - one-to-four family ...      41,234       27,384       23,393
                            - multi-family ......       6,987        3,391        9,856
            Non-real estate - consumer ..........       5,363        4,163        3,123
                                                     --------     --------     --------
                  Total fixed-rate ..............      53,584       34,938       36,372
                                                     --------     --------     --------
                    Total loans originated ......      54,843       35,699       37,815

            Loans acquired ......................          --       39,429           --

          Sales:
          -----
            Real estate - one-to-four family ....      14,900       16,555        2,110

          Principal repayments ..................      41,547       20,582       21,101
                                                     --------     --------     --------
                  Total reductions ..............      56,447       37,137       23,211
          Increase (decrease) in other items, net         (45)        (168)         417
                                                     --------     --------     --------
                  Net increase ..................    $ (1,649)    $ 37,823     $ 15,021
                                                     ========     ========     ========
</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.


                                       10
<PAGE>

     Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at December 31, 2001. The amounts presented
represent the total remaining principal balances of the related loans, rather
than the actual payment amounts which are overdue.

<TABLE>
<CAPTION>
                                                   Real Estate
                          --------------------------------------------------------------
                              One-to-Four Family(1)           Commercial/Multi-Family              Consumer and Other
                          -----------------------------     -----------------------------     -----------------------------

                          Number     Amount     Percent     Number     Amount     Percent     Number     Amount     Percent
                          ------     ------     -------     ------     ------     -------     ------     ------     -------

                                                                                 (Dollars in Thousands)

Loans delinquent for:

December 31, 2001:
-----------------
<S>                          <C>        <C>         <C>        <C>       <C>         <C>         <C>       <C>         <C>
 30-59 days .........         --     $   --          --%        --      $ --          --%         --      $ --          --%
 60-89 days .........          8        691         .56         --        --          --          --        --          --
 90 days and over ...         10        588         .48         --        --          --          --        --          --
                          ------     ------        ----       ----      ----        ----        ----      ----        ----
     Total ..........         18     $1,279        1.04%        --      $ --          --%         --      $ --          --%
                          ======     ======        ====       ====      ====        ====        ====      ====        ====

<CAPTION>

                                       Total
                           -----------------------------

                           Number      Amount    Percent
                           ------      ------    -------

Loans delinquent for:

December 31, 2001:
-----------------
<S>                           <C>         <C>       <C>
 30-59 days .........          --      $   --       --%
 60-89 days .........           8         691       .56
 90 days and over ...          10         588       .48
                           ------      ------      ----
     Total ..........          18      $1,279      1.04%
                           ======      ======      ====
</TABLE>


(1)  Includes loans held for sale.


                                       11
<PAGE>

     Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with the 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. Assets classified as Doubtful 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, 2001,
the Bank had classified a total of $702,000 of its loans and other assets as
follows:

                                                        December 31, 2001
                                                        -----------------
                                                          (In Thousands)

          Special Mention ..............................          $204

          Substandard ..................................           498

          Doubtful .....................................            --

          Loss .........................................            --
                                                                  ----

               Total ...................................          $702
                                                                  ====

          General loss allowance .......................          $969
                                                                  ====

          Specific loss allowance ......................            --
                                                                  ====

          Charge-offs ..................................            --
                                                                  ====


                                       12
<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.

<TABLE>
<CAPTION>
                                                                    December 31,
                                                              ------------------------
                                                               2001     2000     1999
                                                              ------   ------   ------
                                                               (Dollars in Thousands)
          <S>                                                  <C>      <C>      <C>
          Non-accruing loans:
            One-to-four family ............................    $588     $212     $258
            Multi-family ..................................      --       --       --
            Commercial real estate ........................      --       --       --
            Construction or development ...................      --       --       --
            Consumer ......................................      --       --       --
                                                               ----     ----     ----
                 Total ....................................     588      212      258

          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 .....................    $588     $212     $258
                                                               ====     ====     ====

          Total as a percentage of total assets ...........     .20%     .08%     .11%
                                                               ====     ====     ====
</TABLE>

     For the years ended December 31, 2001 and 2000, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $23,570 and $18,503, respectively. The
amounts that were included in interest income on such loans were $31,289 and
$12,586 for the years ended December 31, 2001 and 2000, respectively.

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


                                       13
<PAGE>

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

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                              -----------------------
                                                              2001      2000      1999
                                                             ------    ------    ------
                                                               (Dollars in Thousands)

          <S>                                                 <C>       <C>       <C>
          Balance at beginning of period ...............      $969      $795      $775

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

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

          Net charge-offs ..............................        --        --        --
          Allowance acquired(1) ........................        --       174        --
          Additions charged to operations ..............        --        --        20
                                                              ----      ----      ----
          Balance at end of period .....................      $969      $969      $795
                                                              ====      ====      ====
          Ratio of net charge-offs (recoveries) during
            the period to average loans outstanding
            during the period ..........................        --%       --%       --%
                                                              ====      ====      ====
          Ratio of net charge-offs (recoveries) during
            the period to average non-performing assets         --%       --%       --%
                                                              ====      ====      ====
</TABLE>

-------------
(1) During 2000, the Company acquired Midwest Savings. As a result of this
acquisition, an allowance for loan losses of $134,0000 was acquired. Management
has determined that maintaining this allowance is appropriate based on Midwest
Savings' portfolio of loans, historical losses, and other factors.


                                       14
<PAGE>

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

<TABLE>
<CAPTION>
                                                                         December 31,
                            ------------------------------------------------------------------------------------------------------
                                          2001                               2000                                1999
                            --------------------------------   --------------------------------    -------------------------------
                                                    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(1)....       $245    $122,608       78.31%      $248     $123,372       79.66%      $183     $91,505       78.03%

Multi-family.............        273      27,330       17.45        244       24,430       15.77        210      21,031       17.94

Commercial real estate...         12         379         .24         13          430         .28          6         181         .15

Consumer.................         19       6,257        4.00         20        6,645        4.29         14       4,543        3.88

Unallocated..............        420          --          --        444           --          --        382          --          --
                                 ---       -----      ------       ----     --------       -----       ----     -------      ------
     Total...............       $969    $156,574      100.00%      $969     $154,877      100.00%      $795    $117,260      100.00%
                                ====    ========      ======       ====     ========      ======       ====    ========      ======
</TABLE>

(1) Includes loans held for sale.

     The Bank recognizes that credit losses will be experienced and the risk of
loss will vary with, among other things, general economic conditions; the type
of loan being made; the creditworthiness of the borrower over the terms of the
loan; and in the case of a collateralized loan, the quality of the collateral
for such loan. The allowance for losses represents the Bank's estimate of the
allowance necessary to provide for probable incurred losses in the portfolio. In
making this determination, the Bank analyzes the ultimate collectibility of the
loans in its portfolio, incorporating feedback provided by internal loan staff
and information provided by examinations performed by regulatory agencies. The
Bank makes an ongoing evaluation as to the adequacy of the allowance for loan
losses.

     On a quarterly basis, management of the Bank meets to review the adequacy
of the allowance for loan losses. Individual credits are graded. The grading
system is in compliance with the regulatory classifications and the allowance is
allocated to the loans based on the regulatory grading, except in instances
where there are known differences (i.e., collateral value is nominal, etc.).

     The analysis of the allowance for loan losses is comprised of three
components: specific credit allocation, general portfolio allocation, and
subjective determined allocation. The specific credit allocation includes a
detailed review of the credit in accordance with SFAS 114 and 118 and an
allocation is made based on this analysis. The general portfolio allocation
consists of an assigned reserve percentage based on the credit rating of the
loan. The subjective portion of the allowance is influenced by current economic
conditions and trends in the portfolio including delinquencies and impairments,
as well as changes in the composition of the portfolio.

     The allowance for loan losses is based on estimates, and ultimate losses
will vary from current estimates. These estimates are reviewed monthly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The methodology
used to determine the adequacy of the allowance for loan losses is consistent
with prior years.


                                       15
<PAGE>

Investment Activities

     General. Hemlock Federal must maintain minimum levels of investments and
other assets that qualify as liquid assets under OTS regulations to ensure
Hemlock Federal's safe and sound operation. 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 believed adequate to meet the requirements of normal
operations, including potential deposit outflows. At December 31, 2001, Hemlock
Federal's liquidity ratio was 14.4%.

     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. As required by Statement of
Financial Accounting Standard No. 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, 2001,
Hemlock Federal had no securities which were classified as trading and $51.9
million of mortgage-backed and related securities and $4.4 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,
2001, $20.4 million of mortgage-backed and related securities and $16.5 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, 2001, 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,
2001, $34.9 million, or 48.0% 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 $12.6 million of fixed rate
collateralized mortgage obligations ("CMOs") with anticipated average lives of
five years or less.

     The Bank's CMOs 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. Although a
significant proportion of the Bank's CMOs 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 is subject to change.


                                       16
<PAGE>

     The Bank invests in CMOs as an alternative to mortgage loans and
conventional mortgage-backed securities as part of its asset/liability
management strategy. Management believes that CMOs 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 (five years 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,
                                      ------------------------------------------------------------------------------
                                                 2001                       2000                      1999
                                      ------------------------   ------------------------   ------------------------
                                       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.........................         $19,419         26.88%     $15,585         23.45%     $14,791         20.25%
  FNMA.........................          17,054         23.61       11,536         17.36       14,396         19.70
  FHLMC........................           4,874          6.75        7,060         10.63        9,260         12.67
  CMOs.........................          10,518         14.56        5,916          8.90        6,868          9.40
                                         ------         -----        -----          ----        -----          ----
                                         51,865         71.80       40,097         60.34       45,315         62.02
Mortgage-backed securities
available-for- sale:
  FNMA.........................           3,759          5.20        2,160          3.25        2,670          3.65
  FHLMC........................           1,383          1.92        1,936          2.91        2,283          3.13
  CMOs.........................          15,229         21.08       22,260         33.50       22,795         31.20
                                         ------         -----       ------         -----       ------         -----
                                         20,371         28.20       26,356         39.66       27,748         37.98
                                         ------         -----       ------         -----       ------         -----
Total mortgage-backed
 securities....................         $72,236        100.00%     $66,453        100.00%     $73,063        100.00%
                                        =======        ======      =======        ======      =======        ======
</TABLE>


                                       17
<PAGE>

     The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at December 31, 2001.

<TABLE>
<CAPTION>
                                                                                   Due in
                                              ----------------------------------------------------------------------------------
                                              6 Months   6 Months      1 to        3 to 5      5 to 10      10 to 20     Over 20
                                               or Less   to 1 Year    3 Years       Years        Years        Years       Years
                                              --------   ---------    -------      -------     -------       -------     -------
                                                                               (In Thousands)
<S>                                           <C>        <C>          <C>          <C>          <C>          <C>         <C>
Federal Home Loan Mortgage Corporation .      $    --     $    --     $     7      $   234      $   713      $ 4,363     $   888
Federal National Mortgage Association ..           --          --       1,243           --        4,577        6,758       8,129
Government National Mortgage Association           --          --          21           --           79        1,292      18,027
CMOs ...................................           --          --           7           --        8,214        2,974      14,220
                                              -------     -------     -------      -------      -------      -------     -------
 Total                                             --          --     $ 1,278      $   234      $13,583      $15,387     $41,264
                                              =======     =======     =======      =======      =======      =======     =======

Weighted average yield .................          --%         --%        6.67%        8.00%        6.77%        6.86%       6.59%

<CAPTION>
                                                      December 31,
                                                         2001
                                               ----------------------
                                               Amortized     Carrying
                                                  Cost        Value
                                               ---------     --------
                                                   (In Thousands)
<S>                                             <C>          <C>
Federal Home Loan Mortgage Corporation .        $ 6,205      $ 6,257
Federal National Mortgage Association ..         20,707       20,813
Government National Mortgage Association         19,419       19,419
CMOs ...................................         25,415       25,747
                                                -------      -------
 Total                                          $71,746      $72,236
                                                =======      =======

Weighted average yield .................           6.69%        6.64%
</TABLE>



                                       18
<PAGE>

     As of December 31, 2001, 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 $20.8 million, $6.3 million and $19.4 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,
                                             --------------------------------------
                                                 2001          2000          1999
                                             ------------    --------      --------
                                                          (In Thousands)
          <S>                                  <C>           <C>           <C>
          Purchases:
          ---------
            Adjustable-rate ..............     $ 13,045      $     --      $  4,408
            Fixed-rate ...................        5,268         2,703         3,505
            CMOs .........................       18,695         5,442         8,716
                                               --------      --------      --------
              Total purchases .......            37,008         8,145        16,629

          Sales:
          -----
            Adjustable-rate ..............           --            --            --
            Fixed-rate ...................           --            --            --
            CMOs .........................        2,347         3,310            --
                                               --------      --------      --------
              Total sales ..........              2,347         3,310            --

            Principal repayments .........      (30,068)      (11,533)      (21,921)
            Discount/premium net change ..          701           (55)         (406)
            Fair value net change ........          489           141          (437)
                                               --------      --------      --------
              Net increase (decrease)          $  5,783      $ (6,612)     $ (6,135)
                                               ========      ========      ========
</TABLE>

     The Bank continues to maintain a moderate 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.


                                       19
<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 liquid investments and in high-quality investments,
such as U.S. Treasury and agency obligations. At December 31, 2001, the Bank's
securities portfolio totaled $4.4 million. At December 31, 2001, 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,
                                           ------------------------------------------------------------------
                                                   2001                   2000                    1999
                                           ------------------      ------------------      ------------------
                                           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 .........     $ 4,402     100.00%     $14,802      93.68%     $15,811      94.05%

Securities available-for sale:
  Federal agency obligations .........          --         --          998       6.32          980       5.95
                                           -------     ------      -------     ------      -------     ------

       Total securities ..............     $ 4,402     100.00%     $15,800     100.00%     $16,791     100.00%
                                           =======     ======      =======     ======      =======     ======

Average remaining life of securities:      7 years                 8 years                 8 years

Other earning assets:
  Interest-earning deposits with banks     $23,228      56.39%     $13,303      50.71%     $ 4,779      45.19%
  FHLB stock .........................       3,745       9.09        3,497      13.33        2,325      21.99
  FHLMC stock ........................       8,849      21.49        3,918      14.93        3,470      32.82
  FNMA Stock .........................       5,368      13.03        5,516      21.03           --         --
                                           -------     ------      -------     ------      -------     ------
        Total ........................     $41,190     100.00%     $26,234     100.00%     $10,574     100.00%
                                           =======     ======      =======     ======      =======     ======
</TABLE>


                                       20
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       December 31, 2001
                             -------------------------------------------------------------------------------------------------------
                               Less Than          1 to 5            5 to 10            Over
                                 1 Year            Years             Years           10 years               Total Securities
                               ---------         ---------         ---------         ---------       -------------------------------
                             Amortized Cost    Amortized Cost    Amortized Cost    Amortized Cost    Amortized Cost   Carrying Value
                             --------------    --------------    --------------    --------------    --------------   --------------
                                                                      (Dollars in Thousands)
<S>                             <C>              <C>               <C>                 <C>              <C>              <C>
Federal agency obligations      $  --            $   1,400         $   3,002           $  --            $   4,402        $   4,402
                                -----            ---------         ---------           -----            ---------        ---------
Weighted average yield ...         --%                6.18%             6.33%             --%                6.29%            6.29%
                                =====            =========         =========           =====            =========        =========
</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 six
offices and four automated teller machines. In addition, the Bank's customers
may access their accounts through JEANNIE, a nationwide ATM network. The Bank
also offers its customers account access through its online internet location.
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.

     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. 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.


                                       21
<PAGE>

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

                                      Year Ended December 31,
                               ---------------------------------------
                                  2001          2000            1999
                               ---------      ---------      ---------
                                       (Dollars In Thousands)

          Opening balance .    $ 179,424      $ 150,576      $ 143,149
          Deposits ........      459,330        435,018        299,461
          Withdrawals .....     (455,862)      (412,764)      (297,660)
          Interest credited        6,564          6,594          5,626
                               ---------      ---------      ---------

          Ending balance ..    $ 189,456      $ 179,424      $ 150,576
                               =========      =========      =========

          Net increase ....    $  10,032      $  28,848      $   7,427
                               =========      =========      =========

          Percent increase          5.59%         19.16%          5.19%
                               =========      =========      =========

     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,
                                       ----------------------------------------------------------------------
                                               2001                     2000                     1999
                                       ---------------------    ---------------------    --------------------
                                                    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 1.75% ..........     $ 65,148      34.39%     $ 59,833      33.35%     $ 51,788      34.39%
NOW Accounts .50% ................       26,987      14.24        25,782      14.37        18,388      12.21
Money Market Accounts 1.65% ......       10,203       5.39         8,555       4.76         7,203       4.79
                                       --------     ------      --------     ------      --------     ------

Total Non-Certificates ...........      102,338      54.02        94,170      52.48        77,379      51.39

Certificates:
------------
0.00 - 3.99% .....................       42,178      22.26            --         --            --         --
4.00 - 5.99% .....................       38,407      20.27        55,422      30.89        70,296      46.68
6.00 - 7.99% .....................        6,533       3.45        29,832      16.63         2,901       1.93
                                       --------     ------      --------     ------      --------     ------

Total Certificates ...............       87,118      45.98        85,254      47.52        73,197      48.61
                                       --------     ------      --------     ------      --------     ------

Total Deposits ...................     $189,456     100.00%     $179,424     100.00%     $150,576     100.00%
                                       ========     ======      ========     ======      ========     ======
</TABLE>


                                       22
<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,
2001.

<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 ..............      $23,495      $17,927      $23,035      $13,364      $77,821

Certificates of deposit of
 $100,000 or more ...........        2,211        2,818        2,657        1,611        9,297
                                   -------      -------      -------      -------      -------

Total certificates of deposit      $25,706      $20,745      $25,692      $14,975      $87,118
                                   =======      =======      =======      =======      =======
</TABLE>


     Borrowings. Hemlock Federal's other available sources of funds include
advances from the FHLB of Chicago, notes payable 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 and notes payable for the periods indicated. The Bank
had no other outstanding borrowings during the periods shown.

                                                      Year Ended
                                                     December 31,
                                                     ------------
                                              2001       2000       1999
                                             -------    -------    -------
                                                (Dollars In Thousands)
          Maximum Balance:
          ---------------
             FHLB Advances .............     $69,450    $69,450    $49,500
             Notes Payable .............     $ 6,200    $ 5,250    $    --

          Average Balance:
          ---------------
             FHLB Advances .............     $64,305    $57,449    $34,269
             Notes Payable .............     $ 5,730    $ 3,400    $    --


                                       23
<PAGE>

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

<TABLE>
<CAPTION>
                                                                     December 31,
                                                      -----------------------------------------
                                                          2001           2000           1999
                                                      -----------     ----------     ----------
                                                               (Dollars in Thousands)

          <S>                                          <C>            <C>            <C>
          FHLB advances ...........................    $   68,985     $   69,450     $   49,500

          Weighted average interest rate during the
           period of FHLB advances ................          5.76%          6.16%          4.93%

          Weighted average interest rate at end of
           period of FHLB advances ................          5.59%          6.02%          5.22%
</TABLE>


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, 2001, Hemlock Federal did
not have any subsidiaries.

                                   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.


                                       24
<PAGE>

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 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 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, 2001, Hemlock Federal's lending
limit under this restriction was $3.1 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


                                       25
<PAGE>

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.

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. 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, 2001, Hemlock Federal had
intangible assets totaling $1.5 million, consisting of goodwill and core deposit
intangibles, 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, 2001, Hemlock Federal had tangible capital of $20.5
million, or 7.2% of adjusted total assets, which is approximately $16.2 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, 2001,
Hemlock Federal had no intangibles which were subject to these tests.

     At December 31, 2001, Hemlock Federal had core capital equal to $20.5
million, or 7.2% of adjusted total assets, which is $11.5 million above the
minimum leverage ratio requirement of 3% as in effect on that date.


                                       26
<PAGE>

     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, 2001, Hemlock
Federal had $969,000 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 $1.5
million in exclusions from capital and assets at December 31, 2001.

     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.

     On December 31, 2001, Hemlock Federal had total capital of $22.0 million
(including $20.5 million in core capital and $1.5 million in qualifying
supplementary capital) and risk-weighted assets of $133.1 million; or total
capital of 16.6% of risk-weighted assets. This amount was $11.4 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


                                       27
<PAGE>

and operating restrictions which may cover all aspects of its operations and
include a forced merger or acquisition of the association. An association that
becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or
less) is subject to further mandatory restrictions on its activities in addition
to those applicable to significantly undercapitalized associations. In addition,
the OTS must appoint a receiver (or conservator with the concurrence of the
FDIC) for a savings association, with certain limited exceptions, within 90 days
after it becomes critically undercapitalized. Any undercapitalized association
is also subject to the general enforcement authority of the OTS and the FDIC,
including the appointment of a conservator or 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

     Office of Thrift Supervision regulations impose various restrictions on
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account.

     Generally, savings institutions, such as Hemlock Federal, that before and
after the proposed distribution remain well-capitalized, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the Office of Thrift Supervision may have its dividend authority
restricted by the Office of Thrift Supervision. Hemlock Federal may pay
dividends in accordance with this general authority.

     Savings institutions proposing to make any capital distribution need not
submit written notice to the Office of Thrift Supervision prior to such
distribution unless they are a subsidiary of a holding company or would not
remain well-capitalized following the distribution. Savings institutions that do
not, or would not meet their current minimum capital requirements following a
proposed capital distribution or propose to exceed these net income limitations
must obtain Office of Thrift Supervision approval prior to making such
distribution. The Office of Thrift Supervision may object to the distribution
during that 30-day period based on safety and soundness concerns. See "-
Regulatory Capital Requirements."


                                       28
<PAGE>

Accounting

     An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with accounting principles
generally accepted in the United States of America. 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.

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, 2001, 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."

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


                                       29
<PAGE>

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. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.


                                       30
<PAGE>

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.

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 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.

     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, 2001, Hemlock Federal's Excess for tax purposes
totaled approximately $3.8 million.

     The Company and Hemlock Federal file consolidated 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)


                                       31
<PAGE>

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.

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 41, 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, 2001, the Bank had a total of 86 employees including 20
part-time employees. None of the Bank's employees are represented by any
collective bargaining agreement. Management considers its employee relations to
be good.


                                       32
<PAGE>

Item 2. Properties

     The following table sets forth information concerning the main office and
each branch office of the Bank at December 31, 2001. At December 31, 2001, the
Bank's premises had an aggregate net book value of approximately $2.94 million.


<TABLE>
<CAPTION>
                                                            Year           Owned or          Net Book Value at
         Location                                         Acquired          Leased           December 31, 2001
---------------------------                               --------          ------           -----------------
                                                                                               (In Thousands)
<S>                                                         <C>           <C>                        <C>
Main Office:

5700 West 159th Street                                      1974             Owned                   $ 597
Oak Forest, Illinois 60452

Full Service Branches:

8855 South Ridgeland Ave.                                   1975           Leased(1)                   163
Oak Lawn, Illinois 60453

4636 South Damen Avenue                                     1990             Leased                     39
Chicago, Illinois 60609

15730 West 127th Street                                     1998          Owned(2)(3)                2,123
Lemont, Illinois 60439

324 Commons Drive                                           2000           Leased(4)                     8
Bolingbrook, Illinois 60440

3030 West Cermak Avenue                                     2000             Owned                      10
Chicago, Illinois 60623
</TABLE>


(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 2027, title to the building
housing the branch will pass to the landlord.

(2) The lease on the branch located at 4646 South Damen in Chicago, Illinois
expires in 2002. The lease contains an option to extend the lease for an
additional three years at the Company's discretion. It is management's intention
at this time to exercise the option.

(3) Construction of the building housing the Lemont branch was completed in
1998.

(4) The lease on the Bolingbrook branch expires on December 31, 2002. Management
has discussed the possibility of a new lease with the landlord, and is also
exploring other potential nearby locations for the branch.


     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, 2001 was
approximately $66,000.


                                       33
<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,
2001.

                                     PART II

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

     The information under the caption "Market Information" in the Company's
Annual Report to Stockholders for the year ended December 31, 2001, portions of
which are included as Exhibit 13 to this Form 10-K, is incorporated herein by
reference.

Item 6. Selected Financial Data

     The information under the heading "Selected Financial and Other Data" in
the Company's Annual Report to Stockholders for the year ended December 31,
2001, portions of which are included as Exhibit 13 to this Form 10-K, is
incorporated herein by reference.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operation

     The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report to
Stockholders for the year ended December 31, 2001, portions of which are
included as Exhibit 13 to this Form 10-K, is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset and Liability Management
and Market Risk" in the Company's Annual Report to Stockholders for the year
ended December 31, 2001, portions of which are included as Exhibit 13 to this
Form 10-K, is incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

     The consolidated financial statements and notes thereto contained in the
Company's Annual Report to Stockholders for the year ended December 31, 2001,
portions of which are included as Exhibit 13 to this Form 10-K, are incorporated
herein by reference.


                                       34
<PAGE>

Item 9. Changes In and Disagreements With Accountants on Accounting and
        Financial Disclosure

     No disclosure under this item is required.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Directors

     Information concerning the Company's directors is incorporated herein by
reference from the Company's definitive proxy statement for its Annual Meeting
of Stockholders to be held in May, 2002, except for information contained under
the headings "Compensation Committee Report on Executive Compensation",
"Shareholder Return Performance Presentation"and "Report of the Audit
Committee", a copy of which will be filed not later than 120 days after the
close of the fiscal year.

Executive Officers

     Information concerning the executive officers of the Company who are not
directors is incorporated herein by reference from Part I of this Form 10-K
under the caption "Executive Officers of the Registrant Who Are Not Directors."

Section 16(a) Beneficial Ownership Reporting Compliance

     No Disclosure under this item is required.

Item 11. Executive Compensation

     Information concerning executive compensation is incorporated herein by
reference from the Company's definitive proxy statement for its Annual Meeting
of Stockholders to be held in May, 2002, except for information contained under
the headings "Compensation Committee Report on Executive Compensation",
"Shareholder Return Performance Presentation" and "Report of the Audit
Committee", a copy of which will be filed not later than 120 days after the
close of the fiscal year.


                                       35
<PAGE>

Item 12. 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 Company's definitive
proxy statement for its Annual Meeting of Stockholders to be held May 1, 2002,
except for information contained under the headings "Compensation Committee
Report on Executive Compensation", "Shareholder Return Performance Presentation"
and "Report of the Audit Committee", a copy of which will be filed not later
than 120 days after the close of the fiscal year.

Item 13. Certain Relationships and Related Transactions

     Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's definitive proxy statement
for its Annual Meeting of Stockholders to be held in May, 2002, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation", "Shareholder Return Performance Presentation" and
"Report of the Audit Committee", a copy of which will be filed not later than
120 days after the close of the fiscal year.

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

     (a)(1) Financial Statements

     The following are contained in the portions of the Company's Annual Report
to Stockholders filed as Exhibit 13 to this Form 10-K and are incorporated by
reference into Item 8 of this Form 10-K:

<TABLE>
<CAPTION>
------------------------------------------------------------------    ------------------
                                                                             Page in
                   Annual Report Section                                  Annual Report
<S>                                                                            <C>
Independent Auditor's Report                                                   18

Consolidated Statements of Financial Condition at
   December 31, 2001 and 2000                                                  19

Consolidated Statement of Income for the Years Ended
   December 31, 2001, 2000 and 1999                                            20

Consolidated Statement of Stockholders' Equity for the Years
   Ended December 31, 2001, 2000 and 1999                                     21-22

Consolidated Statement of Cash Flows for the Years Ended
   December 31, 2001, 2000 and 1999                                            23

Notes to Consolidated Financial Statements                                    24-48
</TABLE>

     (a)(2) Financial Statement Schedules:

     All financial statement schedules have been omitted as the information is
not required under the related instructions or is not applicable.


                                       36
<PAGE>

     (a)(3) Exhibits

<TABLE>
<CAPTION>
                                                                                                      Reference to
Regulation                                                                                            Prior Filing
S-K Exhibit                                                                                         or Exhibit Number
Number                                          Document                                             Attached Hereto
--------       ---------------------------------------------------------------------------          -----------------
<S>            <C>                                                                                     <C>
      2        Plan of acquisition, reorganization, arrangement, liquidation or succession                 None
    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
     18        Letter re: change in accounting principles                                                  None
     21        Subsidiaries of Registrant                                                                   21
     22        Published report regarding matters submitted to vote of security holders                    None
     23        Consent of Experts and Counsel                                                          Not required
     24        Power of attorney                                                                       Not required
     28        Information from reports furnished to state insurance regulatory authorities                None
     99        Additional Exhibits                                                                         None
</TABLE>

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

*    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-K.

     The Company did not file any reports on Form 8-K during the quarter ended
December 31, 2001.


                                       37
<PAGE>

                                   SIGNATURES

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

                                      HEMLOCK FEDERAL
                                      FINANCIAL CORPORATION


Date: April 1, 2002                   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 and Director        Kenneth J. Bazarnik, Director

Date: April 1, 2002                               Date: April 1, 2002


  /s/ Rosanne Belczak                               /s/ Donald L. Manprisio
-------------------------------------------       ------------------------------
Rosanne Belczak, Vice-President/                  Donald L. Manprisio, Director
Secretary and Director

Date: April 1, 2002                               Date: April 1, 2002


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

Date: April 1, 2002                               Date: April 1, 2002


  /s/ Jean M. Thornton
-------------------------------------------
Jean M. Thornton, Chief Financial Officer
 Principal Financial and Accounting
 Officer

Date:  April 1, 2002


<PAGE>

                                  Exhibit Index

    Exhibit
      No.                          Document
-------------     ------------------------------------------------

      13          Annual Report

      21          Subsidiaries of Registrant