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, 1999
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 36-410848-0
- ------------------------------ --------------------
(State or other jurisdiction of (IRS 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
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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 NOVEMBER 8, 1999
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Common Stock, Par Value $.01 2,154,369
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS OF BIG FOOT FINANCIAL CORP.
Consolidated Statements of Financial Condition (Unaudited)
September 30, 1999 and June 30, 1999.......................................... Page 3
Consolidated Statements of Earnings (Unaudited) - Three months
ended September 30, 1999 and 1998............................................. Page 4
Consolidated Statements of Cash Flows (Unaudited) - Three months
ended September 30, 1999 and 1998............................................. 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 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................................... Page 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................... Page 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... Page 17
ITEM 5. OTHER INFORMATION............................................................. Page 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................. Page 18
SIGNATURES
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BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands, except share data)
SEPTEMBER 30, JUNE 30,
ASSETS 1999 1999
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Cash and due from banks ........................................................... $ 3,090 $ 3,126
Interest-earning deposits........................................................... 1,227 7,501
Mortgage-backed securities held-to-maturity, at amortized cost
(fair value of $24,613 at September 30, 1999 and $28,055 at June 30, 1999)......... 25,239 28,567
Mortgage-backed securities available-for-sale, at fair value........................ 23,262 25,447
Investment in mutual funds and preferred stock, at fair value....................... 3,093 3,320
Loans receivable, net............................................................... 144,406 138,517
Accrued interest receivable......................................................... 962 979
Stock in Federal Home Loan Bank of Chicago, at cost................................. 2,600 2,600
Investment in real estate held for sale and development, net........................ - 154
Office properties and equipment, net................................................ 4,765 4,820
Prepaid expenses and other assets................................................... 450 462
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Total assets........................................................................ $209,094 $215,493
========= =========
LIABILITIES
Noninterest-bearing NOW accounts.................................................... $ 5,896 $ 5,949
Interest-bearing NOW accounts....................................................... 7,912 10,020
Money market demand accounts........................................................ 10,578 10,865
Passbook accounts................................................................... 38,090 39,358
Certificates of deposit............................................................. 56,475 57,725
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Total savings deposits.............................................................. 118,951 123,917
Borrowed money...................................................................... 51,000 52,000
Advance payments by borrowers for taxes and insurance............................... 2,168 1,866
Accrued interest payable and other liabilities...................................... 2,915 2,988
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Total liabilities................................................................... 175,034 180,771
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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
Treasury stock, at cost (286,301 shares at September 30, 1999 and 241,801
shares at June 30, 1999)....................................................... (3,869) (3,259)
Additional paid-in capital.......................................................... 24,483 24,463
Retained earnings-substantially restricted.......................................... 16,935 16,866
Common stock acquired by the ESOP................................................... (1,508) (1,508)
Common stock acquired by Recognition and Retention Plan............................. (1,290) (1,385)
Accumulated other comprehensive income (loss)....................................... (716) (480)
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Total stockholders' equity.......................................................... 34,060 34,722
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Total liabilities and stockholders' equity.......................................... $ 209,094 $215,493
========= =========
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(See accompanying notes to unaudited consolidated financial statements)
3
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BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
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INTEREST INCOME
Mortgage-backed securities held-to-maturity............. $ 364 $ 640
Mortgage-backed securities available-for-sale........... 380 473
Mutual funds and preferred stock........................ 54 43
Loans receivable........................................ 2,464 2,191
Interest-earning deposits............................... 74 158
FHLB of Chicago stock................................... 42 57
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Total interest income................................... 3,378 3,562
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INTEREST EXPENSE
Savings deposits........................................ 1,083 1,203
Borrowed money.......................................... 729 747
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Total interest expense.................................. 1,812 1,950
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Net interest income before provision for loan losses.... 1,566 1,612
Provision for loan losses............................... - -
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Net interest income after provision for loan losses..... 1,566 1,612
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NONINTEREST INCOME
Service fees............................................ 70 61
Other................................................... 10 8
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Total noninterest income................................ 80 69
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NONINTEREST EXPENSE
Compensation and benefits............................... 747 727
Office occupancy........................................ 289 267
Federal deposit insurance premiums...................... 18 19
Real estate held for sale and development............... 8 12
Professional services................................... 119 72
Other................................................... 178 188
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Total noninterest expense............................... 1,359 1,285
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Income before income taxes.............................. 287 396
Income tax expense...................................... 106 145
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NET INCOME $ 181 $ 251
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Earnings per share:
Basic................................................ $ 0.09 $ 0.11
Diluted.............................................. 0.09 0.11
(See accompanying notes to unaudited consolidated financial statements)
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BIG FOOT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
FOR THE
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income......................................................................... $ 181 $ 251
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 119 104
Market adjustment for committed ESOP shares........................................ 20 22
Amortization of award of RRP shares................................................ 95 97
Net amortization of deferred loan fees............................................. (15) (43)
Net amortization of discounts and premiums......................................... 90 89
(Increase) decrease in accrued interest receivable................................. 17 (59)
(Increase) decrease in prepaid expenses and other assets........................... 12 (42)
Increase (decrease) in accrued interest payable and other liabilities, net......... 48 (126)
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Net cash provided by operating activities.......................................... 567 293
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CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of loans receivable.................................................... (11,333) (8,537)
Principal repayment of loans receivable............................................ 5,459 4,444
Principal repayments on mortgage-back securities held-to-maturity.................. 3,260 4,642
Principal repayments on mortgage-back securities available-for-sale................ 2,033 5,069
Purchase of investment securities available-for-sale............................... - (1,001)
Proceeds from sale of real estate held for development............................. 154 -
Purchase of office properties and equipment........................................ (64) (300)
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Net cash provided by (used in) investing activities................................ (491) 4,317
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in savings deposits........................................ (4,966) 930
Net decrease in borrowed money..................................................... (1,000) (1,000)
Increase in advance payments by borrowers for taxes and insurance.................. 302 220
Payment of cash dividend........................................................... (112) -
Purchase of treasury stock......................................................... (610) (324)
Purchase of RRP shares............................................................. - (1,013)
-------- -------
Net cash used in financing activities.............................................. (6,386) (1,187)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cashequivalents................................ (6,310) 3,423
Cash and cash equivalents at the beginning of period............................... 10,627 13,146
-------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD................................. $ 4,317 $ 16,569
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .............................................................. 1,837 1,955
Income taxes .......................................................... 20 210
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(See accompanying notes to unaudited consolidated financial statements)
5
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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, 1999
and June 30, 1999 and for the three month periods ended September 30, 1999 and
1998. 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, 1999, and the notes thereto included in the
Company's Annual Report.
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) EARNINGS PER SHARE
Earnings per share of common stock are calculated according to the
guidelines of the Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share" ("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:
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THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
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BASIC:
Net income....................................... $ 181,000 $ 251,000
Weighted average shares outstanding.............. 2,112,517 2,317,233
Basic earnings per share......................... 0.09 0.11
DILUTED:
Net income....................................... $ 181,000 $ 251,000
Weighted average shares outstanding.............. 2,112,517 2,317,233
Effect of dilutive stock options outstanding..... 809 2,646
Diluted weighted average shares outstanding...... 2,113,326 2,319,879
Diluted earnings per share....................... 0.09 0.11
(3) COMPREHENSIVE INCOME
The Company's comprehensive income for the three month periods ended
September 30, 1999 and 1998 is as follows:
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THREE MONTHS ENDED
SEPTEMBER 30
1999 1998
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Net income........................................................ $ 181,000 $ 251,000
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during the period.... (236,000) 18,000
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Comprehensive income (loss)....................................... $ (55,000) $ 269,000
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(4) DIVIDEND DECLARATION
On August 17, 1999, the Board of Directors declared a quarterly dividend of
$.05 per share, payable on September 15, 1999 to stockholders of record on
August 31, 1999.
(5) STOCK REPURCHASE PROGRAM
The OTS provided its non-objection to the Company's three stock repurchase
programs that were adopted by the Board of Directors. The shares of common stock
available for repurchase under the repurchase programs amounts to approximately
14.26% of the total shares issued by the Company in the initial public offering.
The Company intends to repurchase shares in open market transactions. At
September 30, 1999, 286,301 shares had been repurchased at an average cost of
$13.51 per share. As of November 8, 1999, the three repurchase programs have
been completed at an average cost of $13.50 per share. Management continues to
believe that stock repurchase
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programs are an effective capital management tool and provide enhanced value to
both the Company and its stockholders.
ITEM 2
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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 "Year 2000."
GENERAL
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, advances from the Federal Home Loan Bank of Chicago (the
"FHLB"). The Bank does not have any subsidiaries.
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)
SEPTEMBER 30, JUNE 30,
1999 1999
------------- -----------
SELECTED FINANCIAL CONDITION DATA:
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Total assets............................................................. $209,094 $215,493
Loans receivable (net)................................................... 144,406 138,517
Allowance for loan losses................................................ 300 300
Mortgage-backed securities.............................................. 48,501 54,014
Savings deposits......................................................... 118,951 123,917
Borrowed funds........................................................... 51,000 52,000
Stockholders' equity..................................................... 34,060 34,722
AT OR FOR THE
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------- -----------
SELECTED OPERATING DATA:
Net interest income before provision for loan losses..................... $ 1,566 $ 1,612
Net income............................................................... 181 251
SELECTED FINANCIAL RATIOS:
Bank Capital ratios:
Tangible............................................................ 13.25 % 12.39 %
Core................................................................ 13.25 12.39
Risked-based........................................................ 30.52 31.53
Return on average assets(1).............................................. 0.34 0.46
Return on average stockholders' equity(1)............................ 2.09 2.67
Consolidated equity to assets at end of period........................ 16.29 16.86
Noninterest expense to average assets(1).............................. 2.55 2.34
Non-performing assets as a percent of total assets.................... 0.12 0.06
Allowance for loan losses as a percent of total loans................ 0.21 0.25
Allowance for loan losses as a percent of non-performing loans... 121.95 214.28
PER SHARE DATA:
Basic earnings per share................................................. $ 0.09 $ 0.11
Diluted earnings per share............................................... 0.09 0.11
Book value per share..................................................... 15.30 14.89
Cash dividend per share................................................ 0.05 -
STOCK QUOTES:
High..................................................................... $ 15.063 $ 18.500
Low...................................................................... 13.125 12.750
At September 30.......................................................... 13.625 14.750
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(1) Three months results have been annualized.
9
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COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND JUNE 30, 1999
Total assets decreased $6.4 million from $215.5 million at June 30, 1999 to
$209.1 million at September 30, 1999. The components of the Company's asset base
also changed from June 30, 1999 to September 30, 1999. Mortgage-backed
securities ("MBS") (including both held-to-maturity and available-for-sale
portfolios) decreased $5.5 million from $54.0 million at June 30, 1999 to $48.5
million at September 30, 1999. This decrease is primarily due to the receipt of
$5.3 million principal repayments during the three month period. An increase of
$5.9 million in loans receivable was the result of loan originations of $11.3
million which exceeded the $5.4 million of loan repayments. Interest earning
deposits decreased $4.9 million from $118.0 million at June 30, 1999 to $113.1
million at September 30, 1999. Short-term overnight investments funded the
savings outflows.
Investments in mutual funds and preferred stock are recorded on the balance
sheet at fair value and were $3.1 million and $3.3 million at September 30, 1999
and June 30, 1999, respectively. The net unrealized loss in this portfolio is
included as a component of accumulated other comprehensive income (loss).
The allowance for loan losses at September 30, 1999 and June 30, 1999 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 0.21% and 0.26% at September 30, 1999 and June 30, 1999, respectively. At
September 30, 1999 and June 30, 1999, the ratio of the allowance for loan losses
to non-performing loans was 121.95% and 155.44%, respectively. The Bank had
three non-performing loans totaling approximately $246,000 at September 30, 1999
and three non-performing loans totaling approximately $193,000 at June 30, 1999.
There were no loan chargeoffs during the three month periods ended September 30,
1999 and 1998.
Savings deposits decreased $4.9 million from June 30, 1999 to September 30,
1999; during this time, borrowed funds decreased by $1.0 million. Interest
bearing NOW accounts declined $2.1 million primarily due to withdrawals from
government entity deposits, whose balances fluctuate during the year. Passbook
savings were $38.1 million at September 30, 1999 compared to $39.4 million at
June 30, 1999. Certificate of deposit accounts declined $1.2 million to $56.5
million at September 30, 1999 from June 30, 1999. Some maturing CD's were
withdrawn from the Bank during the quarter.
Stockholders' equity at September 30, 1999 was $34.1 million or $662,000
less than at June 30, 1999. This decline is due primarily to the Company's stock
repurchase program under which the Company acquired 44,500 shares of the
Company's common stock at a cost of $610,000 during the quarter ended September
30, 1999. These shares are held as treasury stock. The Company also paid its
first cash dividend on its common stock of five cents ($0.05) per share on
September 15, 1999.
10
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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
GENERAL. For the three months ended September 30, 1999, net income was
$181,000 or $0.09 per basic and diluted share, compared to net income of
$251,000 or $0.11 per basic and diluted share for the three months ended
September 30, 1998.
INTEREST INCOME. Interest income was $3.4 million and $3.6 million for the
three months ended September 30, 1999 and 1998, respectively. The average
balance of interest-earning assets decreased $6.0 million from $210.4 million
for the three months ended September 30, 1998 to $204.4 million for the three
months ended September 30, 1999. The average yield on the Bank's
interest-earning assets decreased 16 basis point from 6.77% for the three months
ended September 30, 1998 to 6.61% for the three months ended September 30, 1999.
INTEREST EXPENSE. Interest expense decreased $138,000 to $1.8 million for
the three months ended September 30, 1999, as compared to the same period in
1998. The average rate paid on interest-bearing liabilities decreased 24 basis
points from 4.53% for the three months ended September 30, 1998 to 4.29% for the
three months ended September 30, 1999. The average balance of interest-bearing
liabilities decreased $3.0 million to $167.8 million for the three months ended
September 30, 1999 from $170.8 million for the three months ended September 30,
1998. The decrease in the cost of average interest-bearing liabilities resulted
primarily from the renewal of maturing certificates of deposit at lower rates.
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, 1999 and 1998. The average interest rate spread increased eight
basis points from 2.24% for the three months ended September 30, 1998 to 2.32%
for the comparable period in 1999. Net interest margin declined one basis point
and was 3.09% for the three months ended September 30, 1999.
PROVISION FOR LOAN LOSSES. There was no provision for loan losses for the
three months ended September 30, 1999 or for the comparable period in 1998.
NONINTEREST INCOME. Noninterest income was $80,000 for the three months
ended September 30, 1999, compared to $69,000 for the three months ended
September 30, 1998. The difference was primarily due to an increase in ATM/Debit
card service fee income in the current quarter.
NONINTEREST EXPENSE. Noninterest expense increased $74,000 from $1.3
million for the three months ended September 30, 1998 to $1.4 million for the
comparable period in 1999. Compensation expense increased $20,000 over the
similar period last year primarily due to normal salary increases. Office
occupancy expense was $289,000 for the three months ended September 30, 1999,
compared to $267,000 for the same period in 1998. This increase was primarily
due to furniture and fixture depreciation expense, resulting from the purchase
of new ATMs and in-house data processing equipment which were placed into
service in the second half of fiscal year 1999.
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Professional services expense was $119,000 for the first quarter of 1999, an
increase of $47,000, primarily due to legal fees in a suit to recover damages in
a real estate development known as The Trails of Olympia Fields. Other
noninterest expense was $178,000 for the three months ended September 30, 1999,
compared to $188,000 for the comparable period in 1998. The decrease was due to
expenses incurred in fiscal year 1999 for Year 2000 preparations.
INCOME TAX EXPENSE. Income tax expense decreased $39,000 from $145,000 for
the three months ended September 30, 1998 to $106,000 for the three months ended
September 30, 1999. This decrease was due to the decrease of $109,000 in pre-tax
income. The effective tax rate was 36.9% and 36.6% for the three month periods
ended September 30, 1999 and 1998, 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 which the Company electronically or
operationally interfaces (e.g. third party vendors providing data processing,
information system management, maintenance of computer systems, and 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, payments or due dates and
other operating functions, may 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 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 Problem
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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 corrective action
regulations.
In order to address the Year 2000 issue and to minimize its potential
adverse impact, management implemented 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 was formed to evaluate
the effects that the upcoming Year 2000 could have on the Bank and its
operations. 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 was completed during the quarter
ended June 30, 1999; and (5) Implementation Phase - components certified as Year
2000 compliant and moved to production. This phase was completed during the
quarter ended June 30, 1999.
Third party vendors provide the majority of software used by the Company.
The Company has provided notice to its vendors concerning the Year 2000
situation. The Company's software vendors have provided upgraded or replacement
software which is stated to be Year 2000 compliant. This has enabled the Company
to devote substantial time to the testing of the upgraded systems prior to the
arrival of the millennium. The Company also 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 critical application software and hardware for the Company's in-house
computer system has been tested both by the respective service providers and
internally, and has been stated by the respective vendors to be Year 2000
compliant. The Company presently believes that due to the modifications to
existing software and conversions to new software, the Year 2000 problem, as it
relates to systems and other operations utilized by the Company, will be
negotiated without causing a material adverse impact on the operations of the
Company. However, even with these modifications and conversions the Year 2000
Problem could have an adverse impact on the operations of the Company. Thus, the
Company has also developed, and the Board of Directors has approved, a
Remediation Contingency Plan to mitigate risks associated with the failure to
successfully complete renovation, validation or implementation
13
<PAGE>
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 Business Resumption Contingency Plan, is to mitigate the
risks associated with the failure of applications at critical dates. The
Business Resumption Contingency Plan has been developed, and the Board of
Directors has approved such plan. The Company will continue to closely monitor
the progress of its Year 2000 compliance plan.
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.
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 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'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.
Both direct and indirect costs of addressing the Year 2000 Problem will be
charged to earnings as incurred. Total direct costs incurred to date are
approximately $33,000. The Company currently estimates that the direct costs
should not exceed $50,000 and does not believe that such costs will have a
material effect on the results of operations.
The costs of the project 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.
There has been limited litigation filed against corporations regarding the
Year 2000 Problem and such corporations' compliance efforts, and 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 legislation will
be enacted in jurisdictions where the Company does business that will have the
effect of limiting any potential liability.
14
<PAGE>
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, 1999, the Bank's liquidity ratio was
38.9%. The Bank's liquidity ratio is high due to the amount of
mortgage-backed-securities held in the Bank's investment 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, 1999 were the origination of mortgage 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, 1999 and 1998.
At September 30, 1999, the Bank had outstanding loan origination
commitments of $2.7 million and unused lines of consumer credit of $394,000. 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, 1999 totaled $43.3
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, 1999, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $27.0 million, or 13.25% of total
adjusted assets, which is above the required level of $3.1 million or 1.5%; core
capital of $27.0 million, or 13.25% of total adjusted assets, which is above the
required level of $6.1 million or 3.0%; and total risk-based capital of $27.3
million, or 30.52% of risk-weighted assets, which is above the required level of
$7.1 million, or 8.0%.
15
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
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 on the balance sheet 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
stockholders' equity, depending on the type of instrument and whether or not it
is considered a hedge. Statement No. 133 was to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. In June 1999, the
FASB issued Statement 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the effective date of Statement No. 133." This
statement defers the adoption of Statement 133 to fiscal quarters of fiscal
years beginning after June 15, 2000. The Company has not yet determined the
impact Statement 133 may have on its future financial condition or its results
of operations.
FINANCIAL SERVICES MODERNIZATION BILL
The U.S. Congress recently passed legislation intended to modernize the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies and other financial
service providers. The legislation is being forwarded to the President for his
approval. Generally, the legislation would (i) repeal the historical
restrictions and eliminate many federal and state law barriers to affiliations
among banks and securities firms, insurance companies and other financial
service providers, (ii) provide a uniform framework for the activities of banks,
savings institutions and their holding companies, (iii) broaden the activities
that may be conducted by national banks, banking subsidiaries of bank holding
companies and their financial subsidiaries, (iv) provide an enhanced framework
for protecting the privacy of consumers' information, (v) adopt a number of
provisions related to the capitalization, membership, corporate governance and
other measures designed to modernize the Federal Home Loan Bank system, (vi)
modify the laws governing the implementation of the Community Reinvestment Act
and (vii) address a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions,
including the functional regulation of securities and insurance activities
conducted in a financial holding company.
In particular, the pending legislation would restrict certain of the powers
that unitary savings and loan holding companies currently have. Unitary savings
and loan holding companies that are "grandfathered," i.e., became a unitary
savings and loan holding company pursuant to an application filed with the OTS
before May 4, 1999 (such as the Company) would retain their authority under
current law. All other savings and loan holding companies would be limited to
financially related activities permissible for bank holding companies, as
defined under the new law. The proposed legislation would also prohibit
non-financial companies from acquiring savings and loan holding companies.
16
<PAGE>
Bank holding companies would be permitted to engage in a wider variety of
financial activities than permitted under current law, particularly with respect
to insurance and securities activities. In addition, in a change from current
law, bank holding companies will be in a position to be owned, controlled or
acquired by any company engaged in financially related activities.
We do not believe that the proposed legislation, as publicly reported,
would have a material adverse effect on our operations in the near term.
However, to the extent the legislation permits banks, securities firms and
insurance companies to affiliate, the financial services industry may experience
further consolidation. This could result in a growing number of larger financial
institutions that offer a wider variety of financial services than we currently
offer and that can aggressively compete in the markets we currently serve.
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 Form 10-K for the year ended June 30, 1999.
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
The Company held its Annual Meeting of Shareholders ("Meeting") on
October 19, 1999. On September 3, 1999, the record date, there were
2,255,949 shares of common stock issued and outstanding. All of the
proposals submitted to the shareholders at the Meeting were approved.
The proposals submitted to the shareholders and the tabulation of
votes for each proposal are as follows:
1. Election of one candidate to the Board of Directors, to serve for
a term of three years.
The number of votes cast with respect to this matter was as follows:
17
<PAGE>
Nominee For Withheld Broker Non-votes
------- --- -------- ----------------
Stephen E. Nelson 1,907,351 88,004 -0-
2. Ratification of the appointment of KPMG LLP as independent public
accountants for the fiscal year ending June 30, 2000.
The number of votes cast with respect to this matter was as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
1,985,315 5,464 4,576 -0-
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
Senior Vice President and Chief
Financial Officer
November 11, 1999
18
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