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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, 2000
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
(State or other jurisdiction of incorporation
or organization)		 36-4126192
(I.R.S. Employer Identification No.)
 
5700 West 159th Street, Oak Forest , Illinois
(Address of principal executive offices)		 60452
(Zip Code)
 
Issuer's telephone number, including area code: (708) 687-9400
Securities Registered Pursuant to Section 12(b) of the Act:      None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
(Title of class)


            Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES   X   NO ___

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

            State issuer's revenues for its most recent fiscal year: $18.7 million.

            The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the bid and asked prices of such stock on the Nasdaq Stock Market as of March 20, 2001, was $5.6 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 20, 2001, there were issued and outstanding 1,039,686 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, 2000.
Part III of Form 10-K - Proxy Statement for 2001 Annual Meeting of Stockholders.

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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, 2000, Hemlock Federal had total assets of $276.7 million, deposits of $179.4 million and equity of $19.1 million (or 6.9% 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, 2000, $123.4 million, or 79.7%, 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, 2000. 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;

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changes in local and national economic conditions; customer deposit disintermediation; changes in 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, 2000, the Bank's net loans receivable, totaled $154.8 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, 2000, based on the above, the Bank's regulatory loans-to-one borrower limit was approximately $3.3 million. As of December 31, 2000, the largest dollar amount outstanding or committed to be lent to one borrower or group of related borrowers related to Casimer Kopec totaling $1,161,808 secured by five 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, 2000 related to Leo and Ann Wilczek totaling $1,192,495 secured by three separate multi-family dwellings located in Oak Lawn and Chicago Ridge, Illinois. At December 31, 2000, these loans were performing in accordance with their terms. As of December 31, 2000, 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.

December 31,
2000
 1999
 1998
 1997
 1996
Amount
 Percent
 Amount
 Percent
 Amount
 Percent
 Amount
 Percent
 Amount
 Percent
(Dollars in Thousands)
Real Estate Loans:
One- to four-family $123,372 79.66% $ 91,505 78.03% $87,041 84.79% $68,283 88.94% $48,339 89.05%
Multi-family 24,430 15.77    21,031 17.94    12,070 11.76    4,951 6.45    2,783 5.13   
Commercial 430
 .28   
 181
 .15   
 191
 .18   
 209
 .27   
 573
 1.06   
      Total real estate loans 148,232 95.71    112,717 96.12    99,302 96.73    73,443 95.66    51,695 95.24   
Consumer loans:
Deposit account 150 .10    114 .10    129 .13    116 .15    169 .31   
Automobile 358 .23    265 .23    381 .37    473 .62    301 .55   
Home equity 6,137
 3.96   
 4,164
 3.55   
 2,844
 2.77   
 2,740
 3.57   
 2,114
 3.90   
      Total consumer loans 6,645
 4.29   
 4,543
 3.88   
 3,354
 3.27   
 3,329
 4.34   
 2,584
 4.76   
      Total loans 154,877 100.00%
 117,260 100.00%
 102,656 100.00%
 76,772 100.00%
 54,279 100.00%
Less:
Loans in process --- --- (313) (125) ---
Deferred fees and discounts 913 533 409 287 2
Allowance for losses (969)
 (795)
 (775)
 (775)
 (745)
      Total loans receivable, net $154,821
 $116,998
 $101,977
 $76,159
 $53,536





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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.

December 31,
2000
 1999
 1998
 1997
 1996
Amount
 Percent
 Amount
 Percent
Amount
 Percent
 Amount
 Percent
 Amount
 Percent
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family $107,612 69.48% $82,993 70.78% $76,331 74.36% $50,671 66.00% $43,583 80.29%
Multi-family 24,430 15.77    21,031 17.94    11,887 11.58    4,767 6.21    2,783 5.13   
Commercial 430
 .28   
 181
 .15   
 191
 .18   
 209
 .27   
 573
 1.06   
      Total real estate loans 132,472 85.53    104,205 88.87    88,409 86.12    55,647 72.48    46,939 86.48   
Consumer 6,645
 4.29   
 4,543
 3.87   
 3,354
 3.27   
 3,329
 4.34   
 2,584
 4.76   
      Total fixed-rate loans 139,117 89.82    108,748 92.74    91,763 89.39    58,976 76.82    49,523 91.24   
Adjustable-Rate Loans:
Real estate:
One-to four-family 15,760 10.18    8,512 7.26    10,710 10.43    17,612 22.94    4,756 8.76   
Multi-family ---
 ---   
 ---
 ---   
 183
 .18   
 184
 .24   
 ---
 ---   
      Total adjustable rate loans 15,760
 10.18   
 8,512
 7.26   
 10,893
 10.61   
 17,796
 23.18   
 4,756
 8.76   
      Total loans 154,877 100.00%
 117,260 100.00%
 102,656 100.00%
 76,772 100.00%
 54,279 100.00%
Less:
Loans in process --- --- (313) (125) ---
Deferred fees and discounts 913 533 409 287 2
Allowance for losses (969)
 (795)
 (775)
 (775)
 (745)
      Total loans receivable, net $154,821
 $116,998
 $101,977
 $76,159
 $53,536






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            The following schedule illustrates the contractual maturity of the Bank's loan portfolio at December 31, 2000. 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.

Real Estate
One- to four-family
 Multi-family and
Commercial Real
Estate
 Consumer
 Total
Amount
 Weighted
Average
Rate
 Amount
 Weighted
Average
Rate
 Amount
 Weighted
Average
Rate
 Amount
 Weighted
Average
Rate
(Dollars in Thousands)
Due During Year(s) Ended
December 31,
2001(1) $ 469 7.98% $ 18 8.83% $2,702 9.40% $ 3,189 9.19%
2002 and 2003 2,375 7.42    163 8.73    452 8.44    2,990 7.65   
2004 to 2008 20,498 7.33    5,984 7.96    2,074 8.34    28,556 7.54   
2009 to 2023 45,512 7.15    18,406 7.67    1,417 8.74    65,335 7.33   
2024 and following 54,518
 7.63    289
 7.25    ---
 ---    54,807
 7.63   
      Total $123,372 $24,860 $6,645 $154,877
_____________
(1) Included demand loans, loans having no stated maturity and overdraft loans.

            The total amount of loans due after December 31, 2001 which have predetermined interest rates is $135.9 million while the total amount of loans due after such dates which have floating or adjustable interest rates is $15.8 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 on a quarter-by-quarter basis 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, 2000, the Bank had $16.0 million of fixed rate loans (most of which were seven year balloon loans) with contractual terms of less than 10 years, $43.4 million of fixed rate loans with contractual terms of 10-15 years and $48.2 million of fixed rate loans with contractual terms of more than 15 years. See "--Originations, Purchases and Sales and Loans and Mortgage-Backed Securities."

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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 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, 2000 one- to four-family ARMs totaled $15.8 million, or 10.2% 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 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 currently originates mortgage loans only for its portfolio, the Bank's loans are generally underwritten to permit their sale in the secondary market, except for loans with loan to value ratios below 75% which are underwritten for portfolio with a limited property evaluation rather than full appraisal.

            While the Bank seeks to originate most of its one- to four-family residential loans in amounts which are less than or equal to the applicable Federal Home Loan Mortgage Corporation maximum (currently $240,000), the Bank does, on an 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, 2000, the Bank had multi-family loans totaling $24.4 million, or 15.8% of the Bank's total loan portfolio, and $430,000 in commercial real estate loans, representing 0.28% 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, 2000, the Bank's largest commercial real estate or multi-family loan outstanding totaled $390,713 secured by a twelve-unit multi-family dwelling located in Bridgeview, Illinois.

            Multi-family and commercial real estate loans may present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. While the Bank has experienced losses on several multi-family and commercial real estate loans in the past, as of December 31, 2000, 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, 2000 consumer loans totaled $6.6 million or 4.3% 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, 2000, the Bank's home equity loans totaled $3.3 million, or 3.9% 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, 2000, the Bank's home equity lines of credit totaled $2.7 million outstanding, or 1.7% 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 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 other fixed rate loans are evaluated for sale on a quarter-by-quarter basis. All loans originated by Hemlock Federal are retained in the Bank's portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management" in the Annual Report attached hereto as Exhibit 13.

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

            As a result 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 2000, and may continue to originate loans for sale in 2001. The sale of loans is primarily a result of the Bank's plan to improve 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.

Year Ended December 31,
2000
 1999
 1998
(In Thousands)
Originations by type:
Adjustable rate:
      Real estate - one- to four-family $ 761 $ 1,443 $ 981
                           - multi-family ---
 ---
 ---
            Total adjustable-rate 761 1,443 981
Fixed rate:
      Real estate - one- to four-family 27,384 23,393 37,090
                           - multi-family 3,391 9,856 8,062
      Non-real estate - consumer 4,163
 3,123
 1,838
            Total fixed-rate 34,938
 36,372
 46,990
            Total loans originated 35,699 37,815 47,971
      Loans acquired 39,429 --- ---
Sales:
      Real estate - one- to four-family 16,555 2,110 ---
Principal repayments 20,582
 21,101
 22,087
            Total reductions 37,137 23,211 (22,087)
Increase (decrease) in other items, net (168)
 417
 (66)
            Net increase $37,823
 $15,021
 $25,818


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, 2000. The amounts presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue. Percentages are exclusive of mortgage-backed securities.


Real Estate
One- to four-family
 Commercial/Multi-Family
 Consumer and Other
 Total
Number
 Amount
 Percent
 Number
 Amount
 Percent
 Number
 Amount
 Percent
 Number
 Amount
 Percent
(Dollars in Thousands)
Loans delinquent for:
December 31, 2000:
   30-59 days --- $ --- ---% --- $ --- ---% --- $ --- ---% --- $ --- ---%
   60-89 days 2 153 .12    --- --- ---    1 2 .03    3 155 .15   
   90 days and over 4
 210
 .17   
 ---
 ---
 ---   
 ---
 ---
 ---   
 4
 210
 .17   
Total 6
 $ 363
 .29%
 ---
 $ ---
 ---%
 1
 $ 2
 .03%
 7
 $ 365
 .32%






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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. Doubtful assets have the weaknesses of Substandard assets, with the additional characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified Loss is considered uncollectible and of such little value that continuance as an asset on the balance sheet of the institution is not warranted. Assets classified as Substandard or Doubtful require the institution to establish prudent general allowances for loan losses. If an asset or portion thereof is classified as a loss, the institution charges off such amount against the loan loss allowance. If an institution does not agree with an examiner's classification of an asset, it may appeal this determination to the District Director of the OTS.

            On the basis of management's review of its assets, at December 31, 2000, the Bank had classified a total of $364,000 of its loans and other assets as follows:

December 31, 2000
(In Thousands)
Special Mention $278
Substandard 86
Doubtful ---
Loss ---
            Total $ 364
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.

December 31,
2000
 1999
 1998
(Dollars in Thousands)
Non-accruing loans:
      One- to four-family $212 $258 $124
      Multi-family --- --- ---
      Commercial real estate --- --- ---
      Construction or development --- --- ---
      Consumer ---
 ---
 ---
            Total 212 258 124
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 $ 212
 $ 258
 $ 124
Total as a percentage of total assets .08%
 .11%
 .06%


            For the years ended December 31, 2000 and 1999, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $18,503 and $22,771, respectively. The amounts that were included in interest income on such loans were $12,586 and $9,808 for the years ended December 31, 2000 and 1999, 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.

Year Ended December 31,
2000
 1999
 1998
(Dollars in Thousands)
Balance at beginning of period $795 $775 $775
Charge-offs:
      One- to four-family --- --- 21
      Multi-family --- --- ---
      Commercial real estate --- --- ---
      Consumer ---
 ---
 ---
---
 ---
 21
Recoveries:
      One- to four-family --- --- ---
      Multi-family --- --- ---
      Commercial real estate --- --- ---
      Consumer ---
 ---
 ---
---
 ---
 ---
Net charge-offs --- --- (21)
Allowance acquired(1) 174 --- ---
Additions charged to operations ---
 20
 21
Balance at end of period $969
 $795
 $775
Ratio of net charge-offs (recoveries) during
   the period to average loans outstanding
   during the period 		 
 
---%
  
 
---%
  
 
0.02%
Ratio of net charge-offs (recoveries) during
   the period to average non-performing assets 		 
---%
  
---%
  
12.96%

_____________
(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.






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

December 31,
2000
 1999
 1998
Amount
of loan
loss
Allowance
 Loan
Amounts
by
Category
 Percent
of loans
in Each
Category
of Total
Loans
 Amount
of loan
loss
Allowance
 Loan
Amounts
by
Category
 Percent
of loans
in Each
Category
of Total
Loans
 Amount
of loan
loss
Allowance
 Loan
Amounts
by
Category
 Percent
of loans
in Each
Category
of Total
Loans
(In Thousands)
One- to four-family $248 $123,372 79.66% $183 $ 91,505 78.03% $174 $87,041 84.79%
Multi-family 244 24,430 15.77    210 21,031 17.94    119 12,070 11.76   
Commercial real estate 13 430 .28    6 181 .15    6 191 .18   
Consumer 20 6,645 4.29    14 4,543 3.88    10 3,354 3.27   
Unallocated 444
 ---
 ---   
 382
 ---
 ---   
 466
 ---
 ---   
      Total $969
 $154,877
 100.00%
 $795
 $117,260
 100.00%
 $775
 $102,656
 100.00%



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

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

Investment Activities

            General. Hemlock Federal must maintain minimum levels of investments and other assets that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, Hemlock Federal has maintained liquid assets at levels significantly above the minimum requirements imposed by the OTS regulations and above levels believed adequate to meet the requirements of normal operations, including potential deposit outflows. At December 31, 2000, Hemlock Federal's liquidity ratio for regulatory purposes was 10.0%.

            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

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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, 2000, Hemlock Federal had no securities which were classified as trading and $40.1 million of mortgage-backed and related securities and $14.8 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, 2000, $26.4 million of mortgage-backed and related securities and $998,000 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, 2000, 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, 2000, $30.4 million, or 45.7% 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 $11.6 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.

            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 year or less average life) often represent a better combination of rate and duration than adjustable rate mortgage-backed securities.

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

December 31,
2000
 1999
 1998
Carrying
Value
 % of
Total
 Carrying
Value
 % of
Total
 Carrying
Value
 % of
Total
(Dollars in Thousands)
Mortgage-backed securities
   held-to- maturity:
      GNMA $15,585 23.45% $14,791 20.25% $ 19,186 24.23%
      FNMA 11,536 17.36    14,396 19.70    13,607 17.18   
      FHLMC 7,060 10.63    9,260 12.67    8,007 10.11   
      CMOs 5,916
 8.90   
 6,868
 9.40   
 11,716
 14.79   
40,097 60.34    45,315 62.02    52,516 66.31   
Mortgage-backed securities
   available-for- sale:
      FNMA 2,160 3.25    2,670 3.65    4,118 5.20   
      FHLMC 1,936 2.91    2,283 3.13    3,434 4.34   
      CMOs 22,260
 33.50   
 22,795
 31.20   
 19,130
 24.15   
26,356
 39.66   
 27,748
 37.98   
 26,682
 33.69   
Total mortgage-backed
   securities 		$66,453
 100.00%
 $73,063
 100.00%
 $ 79,198
 100.00%














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            The following table sets forth the contractual maturities of the Bank's mortgage-backed securities at December 31, 2000.

Due in
 December 31, 2000
6 Months
or Less
6 Months
to 1 Year
 1 to 3
Years
3 to 5
Years
5 to 10
Years
10 to 20
Years
Over 20
Years
Amortized
Cost
Carrying
Value
(In Thousands)
Federal Home Loan Mortgage Corporation $ 604 $ 12 $ --- $ 493 $ 923 $ 5,226 $ 1,694 $ 8,952 $ 8,996
Federal National Mortgage Association 18 --- --- 143 484 8,156 4,826 13,627 13,696
Government National Mortgage Association --- --- --- --- 159 695 14,731 15,585 15,585
CMOs ---
 ---
 24
 ---
 5,465
 1,643
 21,152
 28,284
 28,176
      Total $ 622
 $ 12
 $ 24
 $ 636
 $7,031
 $15,720
 $42,403
 $66,448
 $66,453
Weighted average yield 6.57% 8.94% 9.00% 8.18% 7.14% 7.17% 6.88% 6.99% 6.99%







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            As of December 31, 2000, 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 $13.7 million, $9.0 million and $15.6 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.

Year Ended
December 31,
2000
 1999
 1998
(In Thousands)
Purchases:
      Adjustable-rate $ --- $ 4,408 $ ---
      Fixed-rate 2,703 3,505 25,680
      CMOs 5,442
 8,716
 25,698
            Total purchases 8,145 16,629 51,378
Sales:
      Adjustable-rate --- --- ---
      Fixed-rate --- --- ---
      CMOs 3,310
 ---
 1,911
            Total sales 3,310 --- 1,911
      Principal repayments (11,533) (21,921) (32,017)
      Discount/premium net change (55) (406) 333
      Fair value net change 141
 (437)
 (251)
            Net increase (decrease) $(6,612)
 $ (6,135)
 $ 17,532


            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, 2000, the Bank's securities portfolio totaled $23.9 million. At December 31, 2000, 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.

December 31,
2000
 1999
 1998
Carrying
Value
 % of
Total
 Carrying
Value
 % of
Total
 Carrying
Value
 % of
Total
(Dollars in Thousands)
Securities held-to-maturity:
      Federal agency obligations $14,802 93.68% $15,811 94.05% $ 6,101 77.12%
Securities available-for sale:
      Federal agency obligations 998
 6.32   
 980
 5.95   
 1,810
 22.88   
            Total securities $15,800
 100.00%
 $16,791
 100.00%
 $ 7,911
 100.00%
Average remaining life of securities: 8 years 8 years 3 years
Other earning assets:
      Interest-earning deposits with banks $13,303 64.21% $ 4,779 45.19% $ 3,677 51.63%
      FHLB stock 3,497 16.88    2,325 21.99    1,850 25.98   
      FHLMC stock 3,918
 18.91   
 3,470
 32.82   
 1,595
 22.39   
            Total $20,718
 100.00%
 $10,574
 100.00%
 $ 7,122
 100.00%


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

December 31, 2000
Less Than
1 Year
 1 to 5
Years
 5 to 10
Years
 Over
10 years
 Total Securities
Amortized Cost
 Amortized Cost
 Amortized Cost
 Amortized Cost
 Amortized Cost
 Carrying Value
(Dollars in Thousands)
Federal agency obligations $ ---
 $5,342
 $7,801
 $2,659
 $15,802
 $15,800
Weighted average yield ---%
 6.82%
 6.87%
 6.30%
 6.76%
 6.76%


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Sources of Funds

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

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

            The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. As a result, as customers have become more interest rate conscious, the Bank has become more susceptible to short-term fluctuations in deposit flows.

            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.

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

<
Year Ended December 31,
2000
 1999
 1998
(Dollars In Thousands)