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 as an Illinois-chartered savings bank. 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, 2002, Hemlock Federal had total assets of $316.2 million, deposits of $201.7 million and equity of $21.5 million (or 6.8% 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, 2002, $112.0 million, or 76.0%, 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, 2002. 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
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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, 2002, the Bank's net loans receivable, totaled $147.4 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, 2002, based on the above, the Bank's regulatory loans-to-one borrower limit was approximately $3.3 million. As of December 31, 2002, the largest dollar amount outstanding or committed to be lent to one borrower or group of related borrowers relates to one borrower totaling $2.4 million 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, 2002 related to one borrower totaling $1.0 million 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 $853,000 secured by two separate multi-family dwellings as well as a single family residence, all located in Illinois. At December 31, 2002, these loans were performing in accordance with their terms. As of December 31, 2002, 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.
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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.
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(1) Including loans held for sale.
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	The following table shows the composition of the Bank's loan portfolio by fixed- and adjustable-rate at the dates indicated.
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(1) Including loans held for sale.
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	The following schedule illustrates the contractual maturity of the Bank's loan portfolio at December 31, 2002. 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.
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(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, 2003 which have predetermined interest rates is $135.6 million while the total amount of loans due after such dates which have floating or adjustable interest rates is $6.4 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. 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, 2002, the Bank had $23.7 million of fixed rate loans (most of which were seven year balloon loans) with contractual terms of less than 10 years, $47.9 million of fixed rate loans with contractual terms of 10-15 years and $34.0 million of fixed rate loans with contractual terms of more than 15 years.
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	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, 2002 one- to four-family ARMs totaled $6.5 million, or 4.4% 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 originates permanent multi-family real estate loans secured by properties in its primary market area. At December 31, 2002, the Bank had multi-family loans totaling $27.7 million, or 18.8% of the Bank's total loan portfolio, and $192,000 in commercial real estate loans, representing 0.1% of the total loan portfolio.
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	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, 2002, the Bank's largest multi-family loan outstanding totaled $560,000 secured by a six-unit multi-family dwelling located in Chicago Ridge, Illinois. At such date, this loan was performing in accordance with its terms.
	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, 2002, 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 and the low interest rate environment, the Bank has focused its recent consumer lending activities on home equity lending. At December 31, 2002 consumer loans totaled $7.7 million or 5.2% 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 both fixed and adjustable 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, 2002, the Bank's home equity loans totaled $7.5 million, or 5.1% of the Bank's total loan portfolio. In 1998 the Bank also began offering home equity lines of credit to qualifying borrowers. These loans, when combined with the balance of a first mortgage lien, may not exceed 90% if the first mortgage lien is held by the Bank, or 80% if the first mortgage lien is held elsewhere, or in either case $100,000. At December 31, 2002, the Bank's home equity lines of credit totaled $5.0 million outstanding, or 3.4% of the Bank's total loan portfolio.
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	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, including commissioned loan officers, through referrals from existing customers or real estate agents. 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. The Bank sold $3.4 million of residential loans originated in 2002 through its participation in the Illinois Housing Development Authority. No other loans were sold in 2002. However, the Bank may choose to originate loans for sale in 2003. The loan sales are primarily a component of the Bank's plan to manage its interest rate risk.
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	The following table shows the loan origination and repayment activities of the Bank for the periods indicated.
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.
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	Delinquent Loans. The following table sets forth information concerning delinquent mortgage and other loans at December 31, 2002. The amounts presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.
(1) Includes loans held for sale.
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	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, 2002, the Bank had classified a total of $436,000 of its loans and other assets as follows:
December 31, 2002
(In Thousands)
Special Mention $275
Substandard
Doubtful ---
Loss ---
Total $436
General loss allowance $969
Specific loss allowance ---
Charge-offs ---
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	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.
	For the years ended December 31, 2002 and 2001, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $28,736 and $23,570, respectively. The amounts that were included in interest income on such loans were $19,965 and $31,289 for the years ended December 31, 2002 and 2001, respectively.
	Management considers the Bank's non-performing and "of concern" assets in establishing its allowance for loan losses.
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	The following table sets forth an analysis of the Bank's allowance for loan losses.
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(1) During 2000, the Company acquired Midwest Savings. As a result of this acquisition, an allowance for loan losses of $174,0000 was acquired. Management has determined that maintaining this allowance is appropriate based on Midwest Savings' portfolio of loans, historical losses, and other factors.
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	The distribution of the Bank's allowance for losses on loans at the dates indicated is summarized as follows:
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(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 meet 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.
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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, 2002, Hemlock Federal's liquidity ratio was 12.0%.
	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, 2002, Hemlock Federal had no securities which were classified as trading and $72.3 million of mortgage-backed and related securities and $5.1 million of other securities classified as held-to-maturity. Available- for-sale securities are reported at fair value with unrealized gains and losses included, on an after-tax basis, in a separate component of retained earnings. At December 31, 2002, $23.8 million of mortgage-backed and related securities and $16.1 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, 2002, 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, 2002, $42.7 million, or 44.4% 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 $21.7 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
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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.
	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.
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	The following table sets forth the contractual maturities of the Bank's mortgage-backed securities at December 31, 2002.
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	As of December 31, 2002, 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 $36.8 million, $8.0 million and $22.5 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.
	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.
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	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 $5.2 million. At December 31, 2002, 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.
	In addition to the Bank's portfolio of securities and other earning assets, the Company also maintains a securities portfolio. The Company's portfolio consists primarily of equity investments in companies within the financial services industry. As of December 31, 2002, the Company's investment in equity securities had a carrying value of $2.9 million.
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	The composition and maturities of the debt securities portfolio, excluding FNMA and FHLB stock and other equity securities, are indicated in the following 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 STAR, 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.
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	The following table sets forth the savings flows at the Bank during the periods indicated.
	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.
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	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, 2002.
	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.
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	The following table sets forth certain information as to the Bank's FHLB advances at the dates indicated.
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, 2002, 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.
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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, 2002, Hemlock Federal's lending limit under this restriction was $3.3 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
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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, 2002, Hemlock Federal had intangible assets totaling $1.4 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, 2002, Hemlock Federal had tangible capital of $22.2 million, or 7.1% of adjusted total assets, which is approximately $17.5 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date.
	The capital standards also require core capital equal to at least 3% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships. As a result of the prompt corrective action provisions discussed below, however, a savings association must maintain a core capital ratio of at least 4% to be considered adequately capitalized unless its supervisory condition is such to allow it to maintain a 3% ratio. At December 31, 2002, Hemlock Federal had no intangibles which were subject to these tests.
	At December 31, 2002, Hemlock Federal had core capital equal to $22.2 million, or 7.1% of adjusted total assets, which is $9.7 million above the minimum leverage ratio requirement of 4% as in effect on that date.
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	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, 2002, 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 $1.1 million in exclusions from capital and assets at December 31, 2002.
	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, 2002, Hemlock Federal had total capital of $23.2 million (including $22.2 million in core capital and $1.0 million in qualifying supplementary capital) and risk-weighted assets of $138.7 million; or total capital of 16.7% of risk-weighted assets. This amount was $12.1 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
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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. Based on this authority, Hemlock Federal would be limited to making capital distributions no greater than $3.5 million as of December 31, 2002.
	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."
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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, 2002, 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
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addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of Hemlock Federal include the Holding Company and any company which is under common control with Hemlock Federal. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. Hemlock Federal's subsidiaries are not deemed affiliates; however, the OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case-by-case basis.
	Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals.
Holding Company Regulation
	The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association.
	As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than Hemlock Federal or any other SAIF-insured savings association) would become subject to such restrictions unless such other associations each qualify as a QTL and were acquired in a supervisory acquisition.
	If Hemlock Federal fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple savings and loan holding companies or their subsidiaries. In addition, within one year of such failure the Company must register as, and will become subject to, the restrictions applicable to bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple savings and loan holding company. See "- Qualified Thrift Lender Test."
	The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association.
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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, 2002, 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)
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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 42, 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, 2002, the Bank had a total of 88 employees including 19 part-time employees. None of the Bank's employees are represented by any collective bargaining agreement. Management considers its employee relations to be good.
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Item 2.
Item 2. Properties
	The following table sets forth information concerning the main office and each branch office of the Bank at December 31, 2002. At December 31, 2002, the Bank's premises had an aggregate net book value of approximately $4.4 million.
Location Year
Acquired Owned or
Leased Net Book Value at
December 31, 2002
(In Thousands)
Main Office:
5700 West 159th Street
Oak Forest, Illinois 60452 Owned $ 544
Full Service Branches:
8855 South Ridgeland Ave.
Oak Lawn, Illinois 60453 Leased(1)
4636 South Damen Avenue
Chicago, Illinois 60609 Leased(2)
15730 West 127th Street
Lemont, Illinois 60439 Owned(3) 2,092
234 Bolingbrook Drive
Bolingbrook, Illinois 60440 Owned(4) 1,535
3030 West Cermak Avenue
Chicago, Illinois 60623 Owned
___________________
(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 2005.
(3)Construction of the building housing the Lemont branch was completed in 1998.
(4)Construction of the building housing the Bolingbrook branch was completed in 2002.
	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, 2002 was approximately $27,000.
Item 3.
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.
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Item 4.
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, 2002.
PART II
Item 5.
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, 2002, portions of which are included as Exhibit 13 to this Form 10-K, is incorporated herein by reference.
Item 6.
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, 2002, portions of which are included as Exhibit 13 to this Form 10-K, is incorporated herein by reference.
Item 7.
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, 2002, portions of which are included as Exhibit 13 to this Form 10-K, is incorporated herein by reference.
Item 7A.
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, 2002, portions of which are included as Exhibit 13 to this Form 10-K, is incorporated herein by reference.
Item 8.
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, 2002, portions of which are included as Exhibit 13 to this Form 10-K, are incorporated herein by reference.
Item 9.
Item 9.	 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
	No disclosure under this item is required.
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PART III
Item 10.
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 April, 2003, 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.
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 April, 2003, 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 12.
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 April 30, 2003, 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.
Plan Category	 Number of securities to
be issued upon exercise
of outstanding options Weighted-average
exercise price of
outstanding options Number of Securities
remaining available for
future issuance
1997 Stock Option Plan 198,516 $17.76 5,117
2002 Stock Option Plan 41,700 $24.60 6,867
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Item 13.
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 April, 2003, 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 14.
Item 14. Controls and Procedures
	(a)	Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act") was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the company's senior management within the 90-day period preceding the filing date of this annual report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
	(b)	Changes in Internal Controls: In the quarter ended December 31, 2002, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls.
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PART IV
Item 15.
Item 15. 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:
Annual Report Section Page in
Annual Report
Report of Independent Auditors
Consolidated Statements of Financial Condition at
December 31, 2002 and 2001
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2002, 2001 and 2000 21-22
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 23-24
Notes to Consolidated Financial Statements 25-49
	 (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.
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	 (a)(3) Exhibits
Regulation
S-K Exhibit
Number Document Reference to
Prior Filing
or Exhibit Number
Attached Hereto
Plan of acquisition, reorganization, arrangement, liquidation or succession None
3(i) Articles of Incorporation *
3(ii) By-Laws *
Instruments defining the rights of security holders, including debentures *
Voting Trust Agreement None
Material contracts:
(i) 1997 Stock Option and Incentive Plan
(ii) 1997 Recognition and Retention Plan
(iii) 2002 Stock Option and Incentive Plan
(iv) Employment Agreement with Executive Officers *
**
**
***
Statement re: computation of per share earnings None
Annual Report
Letter re: change in certifying accountants None
Letter re: change in accounting principles None
Subsidiaries of Registrant
Published report regarding matters submitted to vote of security holders None
Consent of Experts and Counsel
Power of attorney Not required
Information from reports furnished to state insurance regulatory authorities None
Additional Exhibits None
________________
*Filed as exhibit to the Company's Form S-1 registration statement filed on December 27, 1996 (File No. 333-18895) pursuant to Section 5 of the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K.
**Filed as exhibit to the Company's definitive proxy statement for its special meeting of stockholders held on October 22, 1997, and incorporated herein by reference.
***Filed as exhibit to the Company's definitive proxy statement for its annual meeting of stockholders held on May 1, 2002, and incorporated herein by reference.
	The Company did not file any reports on Form 8-K during the quarter ended December 31, 2002.
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SIGNATURES
	Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HEMLOCK FEDERAL FINANCIAL CORPORATION
Date: March 14, 2003 By: /s/ Maureen G. PartynskiMaureen 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.
Certifications of President
CERTIFICATIONS
	I, Michael R. Stevens, certify that:
1.I have reviewed this annual report on Form 10-K of Hemlock Federal Financial Corporation;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
By: /s/ Michael R. Stevens Michael R. Stevens
President
Certifications of Chief Financial Officer
CERTIFICATIONS
	I, Jean M. Thornton, certify that:
1.I have reviewed this annual report on Form 10-K of Hemlock Federal Financial Corporation;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
By: /s/ Jean M. Thornton Jean M. Thornton
Chief Financial Officer
Section 906 Certification
CERTIFICATION
	Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in his capacity as an officer of Hemlock Federal Financial Corporation (the "Company") that the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.
Date: March 27, 2003
By: /s/ Michael R. Stevens Michael R. Stevens
President
(Principal Executive Officer)
Date: March 27, 2003
By: /s/ Jean M. Thornton Jean M. Thornton
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit Index
Exhibit Index
Exhibit
No. Document
Annual Report
Subsidiaries of Registrant
Consent of Crowe, Chizek and Company LLP
End.