SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-21491
Big Foot Financial Corp.
(Exact name of registrant as specified in its charter)
ILLINOIS 36-4108480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
1190 RFD, Long Grove, IL 60047-7304
(Address of principal executive offices)
(Zip Code)
(847) 634-2100
(Registrant's telephone number including area code)
NA
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirement for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
OUTSTANDING AT
CLASS OCTOBER 31, 1998
----- ----------------
Common Stock, Par Value $.01 2,458,100
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS OF BIG FOOT FINANCIAL CORP.
Consolidated Statements of Financial Condition (Unaudited)
September 30, 1998 and June 30, 1998........................ Page 3
Consolidated Statements of Earnings (Unaudited) -
Three months ended September 30, 1998 and 1997.............. Page 4
Consolidated Statements of Cash Flows (Unaudited) -
Three months ended September 30, 1998 and 1997.............. Page 5
Notes to Unaudited Consolidated Financial Statements........ Page 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... Page 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... Page 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................. Page 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................... Page 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .............................. Page 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... Page 18
ITEM 5. OTHER INFORMATION............................................. Page 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. Page 18
SIGNATURES
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<TABLE>
<CAPTION>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands, except share data)
SEPTEMBER 30, JUNE 30,
ASSETS 1998 1998
---- ----
<S> <C> <C>
Cash and due from banks......................................................... $ 3,015 $ 3,345
Interest-earning deposits....................................................... 13,554 9,801
Mortgage-backed securities held-to-maturity, at amortized cost.................. 42,013 46,729
Mortgage-backed securities available-for-sale, at fair value.................... 28,156 33,035
Investment in mutual funds, at fair value....................................... 3,382 2,569
Loans receivable, net........................................................... 119,608 115,472
Accrued interest receivable..................................................... 1,027 968
Investment in real estate held for sale and development......................... 262 262
Stock in Federal Home Loan Bank of Chicago, at cost............................. 3,400 3,400
Office properties and equipment, net............................................ 4,863 4,667
Prepaid expenses and other assets............................................... 398 356
--------- ---------
Total assets.................................................................... $ 219,678 $ 220,604
========= =========
LIABILITIES
Noninterest-bearing NOW accounts................................................ $ 5,854 $ 5,847
Interest-bearing NOW accounts................................................... 8,263 7,668
Money market demand accounts.................................................... 11,854 11,797
Passbook accounts............................................................... 37,571 38,838
Certificates of deposit......................................................... 61,223 59,685
--------- ---------
Total savings deposits.......................................................... $ 124,765 $ 123,835
Borrowed money.................................................................. 52,000 53,000
Advance payments by borrowers for taxes and insurance........................... 1,994 1,774
Accrued interest payable and other liabilities.................................. 3,872 3,901
--------- ---------
Total liabilities .............................................................. $ 182,631 $ 182,510
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 2,000,000 shares authorized; none issued....... - -
Common Stock, $.01 par value, 8,000,000 shares authorized; 2,512,750
shares issued................................................................. 25 25
Additional paid-in capital...................................................... 24,443 24,224
Retained earnings-substantially restricted...................................... 16,299 16,049
Treasury stock, at cost (24,650 shares at September 30, 1998.................... (324) -
Common stock acquired by the ESOP .............................................. (1,709) (1,709)
Common stock acquired by the Recognition and Retention Plan..................... (1,741) (531)
--------- ---------
Accumulated other comprehensive income.......................................... 54 36
--------- ---------
Total stockholders' equity ..................................................... 37,047 38,094
--------- ---------
Total liabilities and stockholders' equity...................................... $ 219,678 $ 220,604
========= =========
</TABLE>
(See accompanying notes to unaudited consolidated financial statements)
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<TABLE>
<CAPTION>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
FOR THE THREE MONTHS
ENDED
SEPTEMBER 30,
--------------------
1998 1997
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<S> <C> <C>
INTEREST INCOME:
Mortgage-backed securities held-to-maturity..................................... $ 640 $ 683
Mortgage-backed securities available-for-sale................................... 473 964
Mutual funds and preferred stock................................................ 43 -
Loans receivable................................................................ 2,191 1,853
nterest-earning deposits........................................................ 158 25
FHLB of Chicago stock........................................................... 57 43
----- -----
Total interest income........................................................... 3,562 3,568
----- -----
INTEREST EXPENSE:
Savings deposits................................................................ 1,203 1,191
Borrowed money.................................................................. 747 776
----- -----
Total interest expense.......................................................... 1,950 1,967
----- -----
Net interest income before provision for loan losses............................ 1,612 1,601
Provision for loan losses....................................................... - -
----- -----
Net interest income after provision for loan losses............................. 1,612 1,601
----- -----
NONINTEREST INCOME:
Service fees.................................................................... 61 58
Other........................................................................... 8 10
----- -----
Total noninterest income........................................................ 69 68
----- -----
NONINTEREST EXPENSE:
Compensation and benefits....................................................... 727 669
Office occupancy................................................................ 267 276
Federal deposit insurance premiums.............................................. 19 20
Real estate held for development................................................ 12 11
Professional services........................................................... 72 100
Other........................................................................... 188 238
----- -----
Total noninterest expense....................................................... 1,285 1,314
----- -----
Income before income tax expense................................................ 396 355
Income tax expense.............................................................. 145 123
----- -----
NET INCOME $ 251 232
===== =====
- ----------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic........................................................................ $0.11 $0.10
Diluted...................................................................... 0.11 0.10
</TABLE>
(See accompanying notes to unaudited consolidated financial statements)
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<TABLE>
<CAPTION>
BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
FOR THE
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................ ..................................................... $ 251 $ 232
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.................................................................... 104 103
Net amortization of deferred loan fees.......................................... (43) (20)
Net amortization of discounts and premiums...................................... 89 65
Increase in prepaid expenses and other assets................................... (42) (86)
Increase in accrued interest receivable......................................... (59) (6)
Market adjustment for committed ESOP shares..................................... 22 39
Decrease in accrued interest payable and other liabilities, net................. (29) (397)
-------- --------
Net cash provided by (used in) operating activities............................. 293 (70)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of loans receivable................................................. (8,537) (6,710)
Principal repayment of loans receivable......................................... 4,444 3,164
Principal repayments on mortgage-backed securities held-to-maturity............. 4,642 2,161
Principal repayments on mortgage-backed securities available-for-sale........... 5,069 3,340
Purchase of investment securities available-for-sale............................ (1,001) (122)
Purchase of stock in Federal Home Loan Bank of Chicago.......................... - (100)
Purchase of office properties and equipment..................................... (300) (69)
-------- --------
Net cash provided by investing activities....................................... 4,317 1,664
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in savings deposits..................................... 930 (976)
Net increase (decrease) in borrowed money....................................... (1,000) 2,000
Increase (decrease) in advance payments by borrowers for taxes and insurance.... 220 (994)
Purchase of Recognition and Retention Plan stock................................ (1,013) -
Purchase of treasury stock...................................................... (324) -
Net cash provided by (used in) financing activities............................. (1,187) 30
- ----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents....................................... 3,423 1,624
Cash and cash equivalents at beginning of period................................ 13,146 3,892
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD.................................. $ 16,569 $ 5,516
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................ 1,955 2,000
Income taxes........................................................ 210 120
</TABLE>
(See accompanying notes to unaudited consolidated financial statements)
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BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Big Foot Financial Corp. (the "Company") and its wholly-owned
subsidiary, Fairfield Savings Bank, F.S.B. (the "Bank") as of September 30, 1998
and June 30, 1998 and for the three month periods ended September 30, 1998 and
1997, respectively. Material intercompany accounts and transactions have been
eliminated in consolidation. The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In the opinion of management the unaudited consolidated financial
statements include all necessary adjustments, consisting of normal recurring
accruals, necessary for a fair presentation for the periods presented. These
consolidated financial statements should be read in conjunction with the audited
financial statements for the year ended June 30, 1998, and the notes thereto
included in the Company's Form 10-K.
The Company believes that the disclosures are adequate to make the
information presented not misleading, however, the results for the periods
presented are not necessarily indicative of results to be expected for the
entire fiscal year.
(2) CONVERSION TO STOCK FORM OF OWNERSHIP
On May 21, 1996, the Board of Directors of the Bank adopted a Plan of
Conversion ("Plan") (which was amended on September 17, 1996) whereby the Bank
converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank. The Plan was approved by the Office of Thrift
Supervision (the "OTS") and by the Bank's members at a special meeting. The
stock of the Bank was issued to the Company, which was formed in connection with
the conversion. On December 19, 1996, shares of common stock of the Company were
fully subscribed by eligible members of the Bank and the Company's Employee
Stock Ownership Plan.
The common stock was offered and sold at $10 per share. A total of
2,512,750 shares were sold. After giving effect to offering expenses of
approximately $1,125,000 and the cost of 201,020 shares issued to the Company's
tax qualified Employee Stock Ownership Plan, net proceeds from the conversion
were $22.0 million.
Capital distribution regulations limit the Bank's ability to make capital
distributions which include dividends, stock redemptions or repurchases,
cash-out mergers, interest payments on certain convertible debt and other
transactions charged to the capital account based on the Bank's capital level
and supervisory condition. Federal regulations also preclude any repurchase of
the stock of the Bank or its holding company for three years after conversion
except for repurchases pursuant to an offer made on a
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pro rata basis to all stockholders and with prior approval of the OTS; or
pursuant to an open-market stock repurchase program that complies with certain
regulatory criteria.
(3) EARNINGS PER SHARE
Earnings per share of common stock for the three months ended September 30,
1998 have been calculate according to the guidelines of Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings per Share" (Statement 128).
Earnings per share of common stock for the three months ended September 30, 1997
have been restated under the provisions of Statement 128. ESOP shares are only
considered outstanding for earnings per share calculations when they are
committed to be released. Presented below are the calculations for basic and
diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
<S> <C> <C>
BASIC:
Net income.................................................... $ 251,000 $ 232,000
Weighted average, shares outstanding.......................... 2,317,233 2,321,781
Basic earnings per share...................................... 0.11 0.10
DILUTED:
Net income.................................................... $ 251,000 $ 232,000
Weighted average shares outstanding........................... 2,317,233 2,321,781
Effect of dilutive stock options outstanding.................. 2,646 22,659
Diluted weighted average shares outstanding................... 2,319,879 2,344,440
Diluted earnings per share.................................... 0.11 0.10
</TABLE>
(4) COMPREHENSIVE INCOME
The Financial Accounting Standards Board (FASB) has issued SFAS No. 130,
"Reporting Comprehensive Income", which is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS No. 130 on July 1, 1998, and all
annual required disclosures will be included beginning with the Company's June
30, 1999 Annual Report.
The Company's comprehensive income for the three month periods ended
September 30, 1998 and 1997, is as follows:
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 251,000 $ 232,000
Other comprehensive income, net of tax - unrealized gain on securities:
Unrealized holding gains arising during the period............... 18,000 363,000
Less: reclassification adjustment for net gains realized in net income - -
---------- ----------
Subtotals........................................................... $ 18,000 $ 363,000
---------- ----------
Comprehensive income................................................ $ 269,000 $ 595,000
========== ==========
</TABLE>
ITEM 2
------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
- --------------------------
This Quarterly Report on Form 10-Q contains certain forward looking
statements consisting of estimates with respect to the financial condition,
results of operations and business of the Company that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include: changes in general, economic and market
conditions; the development of an adverse interest rate environment that
adversely affects the interest rate spread or other income anticipated from the
Company's operations and investments; depositor and borrower preferences; and
the factors described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000."
GENERAL
- -------
Big Foot Financial Corp. (the "Company"), an Illinois corporation, is the
holding company for Fairfield Savings Bank, F.S.B. (the "Bank"), a federally
chartered stock savings bank. On December 19, 1996, the Bank completed its
conversion (the "Conversion") from a federally chartered mutual savings bank to
a federally chartered stock savings bank, and all of the capital stock of the
Bank was acquired by the Company. The Company issued and sold 2,512,750 shares
of its common stock, $.01 par value, at a price of $10.00 per share in a
subscription offering (the "Offering") to eligible members of the Bank and to
the Company's Employee Stock Ownership Plan ("ESOP"). Net proceeds from the
Offering amounted to $22.0 million.
The Company's principal business is its investment in the Bank, which is a
community-oriented financial institution providing a variety of financial
services to the communities which it serves. The Bank's principal business
consists of gathering savings deposits from the general public within its market
area and investing those funds primarily in mortgage loans secured by one- to
four-family owner occupied properties, mortgage-backed securities and
obligations of the U.S. Government. To a lesser extent, the Bank makes
multifamily residential loans, commercial real estate loans, land, construction
and development loans, consumer loans and commercial lines of credit. The Bank's
revenues are derived principally from interest on mortgage loans and interest
and dividends on investments, mortgage-backed securities and, to a much lesser
extent, short-term investments. The Bank also derives income from fees and
service charges. The Bank's primary sources of funds are savings deposits and,
to a lesser extent,
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advances from the Federal Home Loan Bank of Chicago (the "FHLB"). The Bank does
not have any subsidiaries.
On November 6, 1998, the OTS provided its non-objection to the Company's
notification that it intends to implement a second stock repurchase program to
repurchase up to 119,356 shares of its common stock ("Second Repurchase
Program"), upon completion of its existing repurchase program ("Repurchase
Program"). The Repurchase Program and Second Repurchase Program authorize the
Company to repurchase a total of up to 244,993 shares, or 9.75 percent, of its
2,512,750 outstanding common shares. The repurchases, if any, will be made from
time to time at the discretion of management. At October 31, 1998, the Company
had repurchased 54,650 shares of its common stock at a cost of $747,000 pursuant
to the Repurchase Program. On December 4, 1997, the OTS provided its
non-objection to the Company's notification that it would repurchase up to an
additional 4% of its shares of common stock, or 100,510 shares, for the
Company's 1997 Recognition and Retention Plan ("RRP"). At September 30, 1998,
100,510 shares of common stock have been repurchased for the RRP.
The selected financial ratios and other data of the Company set forth in
the table on the next page are derived in part from, and should be read in
conjunction with, the Unaudited Consolidated Financial Statements of the Company
presented elsewhere in this report.
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FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- -------------
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets............................................................... $ 219,678 $ 220,604
Loans receivable (net)..................................................... 119,608 115,472
Allowance for loan losses.................................................. 300 300
Mortgage-backed securities................................................. 70,169 79,764
Savings deposits........................................................... 124,765 123,835
Borrowed funds............................................................. 52,000 53,000
Stockholders' equity....................................................... 37,047 38,094
At or for the
Three Months ended
September 30,
1998 1997
------------- -------------
SELECTED OPERATING DATA:
Net interest income before provision for loan losses....................... 1,612 1,601
Net income................................................................. 251 232
SELECTED FINANCIAL RATIOS:
Bank Capital ratios:
Tangible.............................................................. 12.39% 12.26%
Core.................................................................. 12.39 12.26
Risked-based.......................................................... 31.53 33.92
Return on average assets(1)................................................ 0.46 0.42
Return on average stockholders' equity(1).................................. 2.67 2.49
Consolidated equity to assets at end of period............................. 16.86 17.48
Noninterest expense to average assets(1)................................... 2.34 2.44
Non-performing assets as a percent of total assets......................... 0.06 0.09
Allowance for loan losses as a percent of total loans...................... 0.25 0.31
Allowance for loan losses as a percent of non-performing loans............. 214.28 150.80
PER SHARE DATA:
Basic earnings per share................................................... $ 0.11 $ 0.10
Diluted earnings per share................................................. 0.11 0.10
Book value per share....................................................... 14.89 14.97
STOCK QUOTES:
High....................................................................... $ 18.500 $ 17.875
Low........................................................................ 12.750 16.000
At September 30............................................................ 14.750 17.375
</TABLE>
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(1) Three months results have been annualized.
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COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998
Total assets decreased $926,000 from $220.6 million at June 30, 1998 to
$219.7 million at September 30, 1998. The components of the Company's asset base
also changed from June 30, 1998 to September 30, 1998. Mortgage-backed
securities ("MBS") (including both held-to-maturity and available-for-sale
portfolios) decreased $9.6 million from $79.8 million at June 30, 1998 to $70.2
million at September 30, 1998. This decrease is primarily due to $9.7 million
principal repayments during the three month period. An increase of $4.1 million
in loans receivable was the result of loan originations of $8.5 million which
exceeded the $4.4 million of loan repayments. Interest earning deposits
increased $3.8 million from $9.8 million at June 30, 1998 to $13.6 million at
September 30, 1998. The excess cash flow from principal repayments from MBS was
invested in short-term overnight investments which caused the increase in
interest earning deposits.
The allowance for loan losses at September 30, 1998 and June 30, 1998 was
$300,000. Management believes that the allowance for loan losses is adequate to
cover any known losses, and any losses reasonably expected in the loan
portfolio. While management estimates loan losses using the best available
information, no assurance can be made that future additions to the allowance
will not be necessary. The ratio of the allowance for loan losses to total loans
was 0.25% and 0.26% at September 30, 1998 and June 30, 1998, respectively. At
September 30, 1998 and June 30, 1998, the ratio of the allowance for loan losses
to non-performing loans was 214.28% and 87.72%, respectively. The Bank had two
non-performing loans totaling to approximately $141,000 at September 30, 1998
and three non-performing loans totaling to approximately $342,000 at June 30,
1998. There were no loan chargeoffs during the three month periods ending
September 30, 1998 and 1997.
Savings deposits increased $930,000 from June 30, 1998 to September 30,
1998; during this time, borrowed funds decreased by $1.0 million. The savings
categories of NOW accounts, money market demand accounts, and certificates of
deposits all had increased balances, while passbook accounts declined $1.3
million.
Stockholders' equity at September 30, 1998 was $37.0 million or $1.0
million less than at June 30, 1998. This decline is due to the purchase of
62,850 shares of the Company's common stock for the Recognition and Retention
Plan and the purchase of 24,650 shares of treasury stock under the Company's
stock repurchase program.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
GENERAL. For the three months ended September 30, 1998, net income was
$251,000 or $0.11 per basic and diluted share, compared to a net income of
$232,000 or $0.10 per basic and diluted share for the three months ended
September 30, 1997.
INTEREST INCOME. Interest income remained constant at $3.6 million for the
three months ended September 30, 1998, and 1997. The average balance of
interest-earning assets increased $3.6 million from $206.8 million for the three
months ended September 30, 1997 to $210.4 million for the three months ended
September 30, 1998. The average yield on the Bank's interest-earning assets
decreased 13 basis point from 6.90% for the three months ended September 30,
1997 to 6.77% for the three months ended September 30, 1998.
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INTEREST EXPENSE. Interest expense decreased $17,000 to $2.0 million for
the three months ended September 30, 1998, as compared to the same period in
1997. The average rate paid on interest-bearing liabilities decreased ten basis
points from 4.63% for the three months ended September 30, 1997 to 4.53% for the
three months ended September 30, 1998. The average balance of interest-bearing
liabilities increased $2.3 million to $170.8 million for the three months ended
September 30, 1998 from $168.5 million for the three months ended September 30,
1997. The decrease in the cost of average interest-bearing liabilities resulted
primarily from the renewal of borrowed funds at lower rates than maturing
borrowed funds.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
before provision for loan losses was $1.6 million for the three months ended
September 30, 1998 and 1997. The average interest rate spread decreased three
basis points from 2.27% for the three months ended September 30, 1997 to 2.24%
for the comparable period in 1998. Net interest margin also declined three basis
points and was 3.10% at September 30, 1998.
PROVISION FOR LOAN LOSSES. There was no provision for loan losses for the
three months ended September 30, 1998 or for the comparable period in 1997.
NONINTEREST INCOME. Noninterest income was $69,000 for the three months
ended September 30, 1998, compared to $68,000 for the three months ended
September 30, 1997.
NONINTEREST EXPENSE. Total general and administrative expenses decreased
$29,000 from $1,314,000 for the three months ended September 30, 1997 to
$1,285,000 for the comparable period in 1998. Compensation expense increased
$58,000 over the similar period last year due to increased cost of employee
benefits. This increase was offset by decreases of $50,000, $28,000 and $9,000
in other operating, professional services and office occupancy expenses,
respectively. Other operating expense was $188,000 for the three months ended
September 30, 1998, compared to $238,000 for the comparable period in 1997. The
decrease in this expense was due to a $40,000 one time charge in 1997 relating
to the operation of the Company as a stock company. Professional services
declined due to reduced legal fees relating to ongoing litigation.
INCOME TAX EXPENSE. Income tax expense increased $22,000 from $123,000 for
the three months ended September 30, 1997 to a tax expense of $145,000 for the
three months ended September 30, 1998. This increase was due to the increase of
$41,000 in pre-tax income. The effective tax rate was 36.6% and 34.6% for the
three month periods ended September 30, 1998 and 1997, respectively.
YEAR 2000
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers could recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and its operations may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Software, hardware, and equipment both within and outside the
Company's direct control and with whom the Company electronically or
operationally interfaces (e.g. third party vendors providing data processing,
information system management, maintenance of computer systems, and
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credit bureau information) are likely to be affected. Furthermore, if computer
systems are not adequately changed to identify the Year 2000, many computer
applications could fail or create erroneous results. As a result, many
calculations which rely on the date field information, such as interest, payment
or due dates and other operating functions, will generate results which could be
significantly misstated, and the Company could experience a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
In addition, noninformation technology systems, such as telephones, copiers
and elevators may also contain embedded technology which controls its operation
and which may be affected by the Year 2000 Problem. When the Year 2000 arrives,
systems, including some of those with embedded chips, may not work properly
because of the way they store date information. They may not be able to deal
with the date 01/01/00, and may not be able to deal with operational `cycles'
such as `do x every 100 days'. Thus, even noninformation technology systems may
affect the normal operations of the Company upon the arrival of the Year 2000.
Under certain circumstances, failure to adequately address the Year 2000
Problem could adversely affect the viability of the Company's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact on
the Company's products, services and competitive condition.
The Office of Thrift Supervision ("OTS"), the Company's primary federal
bank regulatory agency, along with the other federal bank regulatory agencies,
has published substantive guidance on the Year 2000 Program and has included
Year 2000 compliance as a substantive area of examination for both regularly
scheduled and special bank examinations. These publications, in addition to
providing guidance as to examination criteria, have outlined requirements for
creation and implementation of a compliance plan and target dates for testing
and implementation of corrective action, as discussed below. As a result of the
oversight by and authority vested in the federal bank regulatory agencies, a
financial institution that does not become Year 2000 compliant could become
subject to administrative remedies similar to those imposed on financial
institutions otherwise found not to be operating in a safe and sound manner,
including remedies available under prompt correction active regulations.
In order to address the Year 2000 issue and to minimize its potential
adverse impact, management has begun a process to identify areas that will be
affected by the Year 2000 Problem, assess its potential impact on the operations
of the Bank, monitor the progress of third party software vendors in addressing
the matter, test changes provided by these vendors, and develop contingency
plans for any critical systems which are not effectively reprogrammed. A
committee of senior officers and employees of the Company has been formed to
evaluate the effects that the upcoming Year 2000 could have on the computer
programs utilized by the Bank. The Company's plan is divided into five phases:
(1) Awareness Phase - define the problem, obtain executive level support,
develop an overall strategy. This phase was completed in September 1997; (2)
Assessment Phase identify all systems and criticality. This phase was completed
in December 1997; (3) Renovation Phase - program enhancements, hardware and
software upgrades, system replacements, and vendor certifications. This phase
was completed in September 1998; (4) Validation Phase - test and verify system
changes and coordinate with outside parties. This phase is in process with a
scheduled completion date of December 31, 1998 for internal applications and a
scheduled completion date of March 31, 1999 for external applications; and (5)
Implementation Phase - components certified as Year 2000 compliant and moved to
production. This phase is in process with a scheduled completion date of
December 31, 1998.
-13-
<PAGE>
Third party vendors provide the majority of software used by the Company.
All of the Company's vendors are aware of the Year 2000 situation, and have
provided the Company with upgraded or replacement software which is stated to be
Year 2000 compliant. This will enable the Company to devote substantial time to
the testing of the upgraded systems prior to the arrival of the millennium. The
Company utilizes the service of a third party vendor to provide the software
which is used to process and maintain most customer-related accounts. This
vendor has provided the Company with a software version which has been stated to
be Year 2000 compliant. Testing by the Company to verify compliance for its
applications and usage was completed in October, 1998. The Company presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 Problem will be mitigated without causing a material
adverse impact on the operations of the Company. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 Problem
could have an adverse impact on the operations of the Company.
The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of a third
party's Year 2000 Problem, and are based on presently available information.
However, there can be no guarantee that the systems of the other companies on
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company. The
Company believes it has no exposure to contingencies related to the Year 2000
Problem for the products it has sold.
In addition, monitoring and managing the Year 2000 project will result in
additional direct and indirect costs to the Company and the Bank. Direct costs
include potential charges by third party software vendors for product
enhancements, costs involved in testing software products for Year 2000
compliance, and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. Indirect costs will
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans. The Company currently estimates that the
aggregate direct and indirect costs will be between $25,000 and $50,000 and does
not believe that such costs will have a material effect on the results of
operations. Both direct and indirect costs of addressing the Year 2000 Problem
will be charged to earnings as incurred. Such costs have not been material to
date.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties. The
critical application software and hardware for the Company's in-house computer
system has been tested by the respective service providers and internally, and
has been stated to be Year 2000 compliant. The Company has developed a
Remediation Contingency Plan which is to mitigate risks associated with the
failure to successfully complete renovation, validation or implementation of any
applications. After an application is implemented, the Company is allowed to
drop the application from the Remediation Contingency Plan. A second contingency
plan, the Busines Resumption Contingency Plan is to mitigate the risks
associated with the failure of applications at critical dates. The Business
Resumption Contingency Plan is in development and scheduled for completion by
December 31, 1998. The Company will continue to closely monitor the progress of
its Year 2000 compliance plan.
-14-
<PAGE>
There has been limited litigation filed against corporations regarding the
Year 2000 Problem and such corporations' compliance efforts. To date, no such
litigation has resulted in a decided case imposing liability on the corporate
entity. Nonetheless, the law in this area will likely continue to develop well
into the new millennium. Should the Company experience a Year 2000 failure,
exposure of the Company could be significant and material, unless there is
legislative action to limit such liability. Legislation has been introduced in
several jurisdictions regarding the Year 2000 Problem. However, no assurance can
be given that the legislation will be enacted in jurisdictions where the Company
does business that will have the effect of limiting any potential liability.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are savings deposits, principal and
interest payments on loans and mortgage-backed securities, and borrowings from
the FHLB. While maturities and scheduled amortization of loans and
mortgage-backed securities provide an indication of the timing of the receipt of
funds, changes in interest rates, economic conditions and competition strongly
influence mortgage prepayment rates and savings deposit flows, reducing the
predictability of the timing of sources of funds.
The Bank is required to maintain an average daily balance of liquid assets
(cash, certain time deposits, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than a specified percentage of its net withdrawable deposits
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 4%. At September 30, 1998, the Bank's liquidity ratio was
41.56%. The Bank's liquidity ratio is high due to the amount of
mortgage-backed-securities in the portfolio with a stated maturity of less than
five years. The levels of the Bank's short-term liquid assets are dependent on
the Bank's operating, financing and investing activities during any given
period.
The primary investing activities of the Bank during the three months ended
September 30, 1998 were the origination of mortgage loans, and other loans.
See the "Consolidated Statements of Cash Flows" in the Unaudited
Consolidated Financial Statements included in this Form 10-Q for the sources and
uses of cash flows for operating activities and financing activities for the
three months ended September 30, 1998 and 1997.
At September 30, 1998, the Bank had outstanding loan origination
commitments of $4.6 million and unused lines of consumer credit of $427,000. The
Bank anticipates that it will have sufficient funds available to meet its
current origination and other lending commitments. Certificates of deposit
scheduled to mature in one year or less from September 30, 1998 totaled $43.2
million. Based upon the Bank's most recent pricing strategy, management believes
that a significant portion of such deposits will remain with the Bank.
Management believes it will have adequate resources to fund all commitments on a
short term and long term basis in accordance with its business strategy.
At September 30, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $26.1 million, or 12.39% of total
adjusted assets, which is above the required level of $3.2 million or 1.5%; core
capital of $26.1 million, or 12.39% of total adjusted assets, which is above the
required level of $6.3 million or 3.0%; and total risk-based capital of $26.4
million, or 31.53% of risk-weighted assets, which is above the required level of
$6.7 million, or 8.0%.
-15-
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (Statement 131) which
establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operatting segments in
interim financial reports issued to shareholders. Statement 131 is effective for
financial periods beginning after December 15, 1997 and is not expected to have
a material impact on the Company.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" (Statement No 132) which amends the
disclosure requirements of Statements No. 87, "Employers' Accounting for
Pensions" (Statement No. 87), No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"
(Statement No. 88), and No. 106, "Employers' Accounting Postretirement Benefits
Other Than Pensions" (Statement No. 106).
This Statement standardizes the disclosure requirements of Statements No.
87 and No. 106 to the extent practicable and recommends a parallel format for
presenting information about pensions and other postretirement benefits.
Statement No. 132 only addresses disclosure and does not change any of the
measurement of recognition provisions provided for in Statement No. 87, No. 88,
or No. 106. Statement 132 is effective for fiscal years beginning after December
15, 1997 and is not expected to have a material impact on the Company.
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement 133 standardizes the accounting
for derivative instruments, including certain derivative instruments imbedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for the changes in fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and, if so, on the reason for holding it. The gain or loss due to changes in
fair value is recognized in earnings or as other comprehensive income in the
statement of shareholders' equity, depending on the type of instrument and
whether or not it is considered a hedge. Statement No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. The Company
has not yet determined the impact this new statement may have on its future
financial condition or its results of operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendement of FASB Statement
No. 65" (Statement 134). Statement No. 134 amends Statement No. 65, "Accounting
for Certain Mortgage Banking Activities" to conform the subsequent accounting
for securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a nonmortgage banking enterprise.
Statement No. 134 is effective for the first quarter beginning after December
15, 1998 and is not expected to have a material impact on the Company.
-16-
<PAGE>
OTHER MATTERS
Effective September 30, 1998, William B. O'Connell retired as director of
the Company. Mr. O'Connell, who served on the Board for approximately nine
years, will continue to serve the Company as a director emeritus. On November 2,
1998, Mr. Maurice F. Leahy, a director of the Bank for over 20 years, passed
away. The Board of Directors presently consists of five members, with two
vacancies. The Company is actively seeking qualified candidates to appoint to
the Board of Directors and will nominate such individuals at the appropriate
time.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There has been no material change in market risk since that disclosed in
Item 7A of the Company's 1998 Form 10-K for the year ended June 30, 1998.
-17-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule*
(b) Reports on Form 8-K
None
*Submitted only with filing in electronic format.
SIGNATURES
Pursuant to the requirements 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.
BIG FOOT FINANCIAL CORP.
(Registrant)
By: /s/ Timothy L. Mccue
------------------------
Timothy L. McCue
Vice President and Chief
Financial Officer
November 16, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of income of Big Foot Financial
Corp. and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,015,585
<INT-BEARING-DEPOSITS> 13,554,019
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,154,776
<INVESTMENTS-CARRYING> 42,012,917
<INVESTMENTS-MARKET> 42,104,115
<LOANS> 119,607,663
<ALLOWANCE> 300,000
<TOTAL-ASSETS> 219,678,144
<DEPOSITS> 124,764,738
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 3,871,952
<LONG-TERM> 51,000,000
0
0
<COMMON> 25,128
<OTHER-SE> 37,022,235
<TOTAL-LIABILITIES-AND-EQUITY> 219,678,144
<INTEREST-LOAN> 2,191,368
<INTEREST-INVEST> 1,371,022
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,562,391
<INTEREST-DEPOSIT> 1,202,722
<INTEREST-EXPENSE> 1,949,816
<INTEREST-INCOME-NET> 1,612,575
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,285,601
<INCOME-PRETAX> 395,612
<INCOME-PRE-EXTRAORDINARY> 395,612
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 250,882
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
<YIELD-ACTUAL> 6.77
<LOANS-NON> 0
<LOANS-PAST> 140,779
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 300,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 300,000
<ALLOWANCE-DOMESTIC> 300,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
