UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended: September 30, 1998
[ ] 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 000-22103
HEMLOCK FEDERAL FINANCIAL CORP.
(Exact Name of Registrant as Specified In Its Charter)
Delaware 36-4126192
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
5700 West 159th Street 60452
(Address of Principal Executive Offices) (Zip Code)
708-687-9400
(Registrant's telephone number, including area code)
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 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
Indicate the number of shares outstanding of each the issuer's classes of common
stock, as of the latest practicable date:
Class Outstanding at October 26, 1998
Common Stock, par value $.01 1,794,922 shares
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HEMLOCK FEDERAL FINANCIAL CORP.
AND SUBSIDIARY
<TABLE>
<CAPTION>
INDEX
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition as of September 30, 1998
and December 31, 1997..................................................... 3
Condensed Consolidated Statements of Income for the three and nine months
ended September 30, 1998 and 1997......................................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997.................................. 5
Condensed Consolidated Statements of Changes in Stockholders Equity
for the nine months ended September 30, 1998 and 1997..................... 6
Notes to the Condensed Consolidated Financial Statements as of
September 30, 1998........................................................ 7
Item 2. Management's Discussion and Analysis of the Financial Condition and
Results of Operation...................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 11
Part II. Other Information...................................................... 13
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<CAPTION>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
<S> <C> <C>
September 30, December 31,
ASSETS 1998 1997
---- ----
Cash on hand and due from banks $2,825 $14,883
Securities available-for-sale, at fair value 37,951 34,703
Securities held-to-maturity (fair value:
1998 - $57,634 1997 - $50,260) 56,507 46,418
Loans receivable, net 94,299 76,159
Property, plant and equipment, net 2,679 2,099
FHLB stock, at cost 1,450 987
Accrued interest and other assets 1,869 1,434
----------- --------
Total Assets $197,580 $176,683
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $136,819 $130,958
FHLB advances 29,000 11,000
Advances from borrowers for taxes and insurance 493 804
Accrued interest and other liabilities 3,274 3,494
----------- -------
Total Liabilities 169,586 146,256
Stockholders' Equity
Common stock, $.01 par value; 3,100,000 shares
authorized; 2,076,325 shares issued 21 21
Surplus 20,193 20,105
Unearned ESOP, 137,036 shares (1,370) (1,495)
Unearned stock awards (1,186) (1,382)
Retained earnings 12,926 12,203
Net unrealized gain on securities
available-for-sale, net of tax 941 975
Treasury stock at cost 198,350 shares (3,531) 0
----------- ------
Total Stockholders' Equity 27,994 30,427
----------- ------
Total Liabilities and Stockholders' Equity $197,580 $176,683
====== ======
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3
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<CAPTION>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands)
Three months ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest and Dividend Income
Loans $1,695 $1,157 $ 4,790 $3,323
Investment securities 1,252 1,506 4,025 4,161
Interest bearing deposits 193 171 671 730
-------- ------- -------- -------
Total Interest
Income 3,240 2,834 9,486 8,214
Interest expense
Deposits
1,394 1,385 4,126 4,145
FHLB advances 338 21 932 94
-------- ------ -------- -------
Total Interest Expense 1,732 1,406 5,058 4,239
Net interest income 1,408 1,428 4,428 3,975
Provision for loan losses 0 0 21 0
--------- ------ ------- -------
Net interest income after provision for loan losses 1,408 1,428 4,407 3,975
Non-interest income
Service fees 135 51 414 156
Other income 33 0 89 212
Gain /(Loss) on sale of available for sale securities 0 82 37 (2)
---------- ------ ------- ------
Total Non-interest
Income 168 133 540 368
Non-interest expenses
Salaries and employee benefits 544 483 1,655 1,344
Occupancy and equipment expense 136 160 424 472
Computer service fees 56 52 174 176
Foundation contribution 0 0 0 1,000
Other expenses 238 210 774 500
--------- ------ -------- ------
Total Non-interest
Expense 974 905 3,027 3,492
--------- ------ -------- ------
Income before Income Taxes 602 656 851
Provision for Income Taxes 230 236 323
--------- ------ -------- ------
Net Income $ 372 $ 420 $ 1,178 $ 528
======= ====== ======= =====
Earnings per share - Basic $ 0.22 $ 0.22 $ 0.65 $ 0.24
======= ====== ======= =====
Earnings per share - Diluted $ 0.22 $ 0.22 $ 0.65 $ 0.24
======= ====== ======= =====
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4
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<TABLE>
<CAPTION>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands except share data)
Nine months ended
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,178 $ 528
Adjustments to reconcile net income to net
cash from operating activities
Provision for depreciation 81 89
Net amortization of investment security
premiums/discounts 264 211
Change in deferred loan fees (87) (66)
(Gain)/Loss on sale of securities (37) 2
Provision for loan losses 21 0
Change in accrued interest receivable
and other assets (434) 328
Change in accrued interest payable and
other liabilities 1,102 435
Stock awards expense 196 0
ESOP compensation 213 161
---------- ---------
Net cash provided by operating activities 2,497 1,688
Cash flows from investing activities
Purchase of securities (11,136) (12,053)
available-for-sale
Proceeds from sales of securities available for sale
37 596
Principal payments of mortgage-backed
securities and collateralized mortgage obligations 39,835 14,538
Proceeds from maturities and calls of securities 3,450 15,100
Purchase of FHLB stock (463) (86)
Net increase in loans (18,074) (6,552)
Purchases of securities held-to-maturity (45,723) (34,305)
Purchases of building and equipment, net (662) (1,164)
---------- ---------
Net cash used in investing activities (32,736) (23,926)
Cash flows from financing activities
Net increase (decrease) in deposits 5,860 (2,368)
Decrease in advance payments by borrowers
for taxes and insurance (311) (346)
Issuance of common stock 0 18,346
Change in FHLB advances 18,000 (1,500)
Treasury stock purchase (4,913) 0
Stock conversion expense 0 30
Dividends paid (455) (125)
----------- ----------
Net cash provided by financing activities 18,181 14,037
Net increase (decrease) in cash and cash equivalents (12,058) (8,201)
Cash and cash equivalents at beginning of period 14,883 17,410
-------- ---------
Cash and cash equivalents at end of $ 2,825 $ 9,209
period
========= =========
</TABLE>
Supplemental disclosure of cash flow information
Cash paid during period for
Interest $ 5,129 $ 4,262
Income taxes 678
811
5
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<CAPTION>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands except share data)
Net Unrealized Gain
(Loss) on Securities Unearned Total
Common Retained Available for Sale Unearned Treasury Stock Stockholders' Comprehensive
Stock Surplus Earnings Net of Tax ESOP Stock Awards Equity Income (Loss)
----- ------- -------- ----------------- ---- ----- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ - $ - $11,508 $ 607 $ - $ - $ - $12,115 $ -
Issuance of Common Stock 21 19,986 - - (1,661) - - 18,346 -
Net income for nine months
ended September 30, 1997 - - 528 - - - - 528 528
ESOP shares earned - 51 - - 110 - - 161 -
Conversion Costs - 30 - - - - - 30 -
Dividends Paid - - (125) - - - - (125) -
Change in unrealized
gain on securities
available for sale - - - 207 - - - 207 207
---- ------- ------- -------- ----- ---- ---- ------- ------
Balance at September 30, 1997 $21 $20,067 $11,911 $ 814 $(1,551) $ - $ - $31,262 $ 735
==== ======= ======= ======== ======== ==== ==== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized Gain
(Loss) on Securities Unearned Total
Common Retained Available for Sale Unearned Treasury Stock Stockholders' Comprehensive
Stock Surplus Earnings Net of Tax ESOP Stock Awards Equity Income (Loss)
----- ------- -------- ----------------- ---- ----- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 21 $20,105 $12,203 $ 975 $(1,495) $ - $(1,382) $30,427 $ -
Net income for nine months
ended September 30, 1998 - - 1,178 - - - - 1,178 1,178
ESOP shares earned - 88 - - 125 - - 213 -
Stock award earned - - - - - - 196 196 -
Dividends paid - - (455) - - - - (455) -
Change in unrealized
Gain on securities
Available for sale - - - (34) - - - (34) (34)
Treasury Stock Purchase - net - - - - - (3,531) - (3,531) -
---- ------- ------- ------- ------- ------- ----- ------ -----
Balance at September 30, 1998 $ 21 $20,193 $12,926 $ 941 $(1,370) $(3,531) $(1,186) $27,994 $1,144
==== ======= ======= ======= ======= ======= ======== ======= ======
</TABLE>
6
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 1
Hemlock Federal Financial Corp. (Corporation) is a one thrift holding
company which owns 100% of the voting stock of Hemlock Federal Bank for
Savings (Bank), a federally chartered thrift located in Oak Forest,
Illinois. The Corporation was incorporated under Delaware law in December
of 1996. In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments (consisting of
normally recurring items) necessary to present fairly the Corporation's
consolidated financial position as of September 30, 1998 and December 31,
1997, and the results of its consolidated operations, for the three and
nine month periods ended September 30, 1998 and 1997, and its consolidated
cash flows and changes in stockholders' equity for the nine month period
ended September 30, 1998 and 1997. The results of operations for the
periods ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
The financial statements and notes are presented as permitted by Form 10-Q
and do not contain certain information included in the Corporation's annual
financial statements and notes thereto.
NOTE 2
On March 31, 1997, Hemlock Federal Bank for Savings (Bank) converted from a
federally chartered mutual thrift to a federally chartered stock thrift.
The Bank issued all of its common stock at $10.00 per share to the
Corporation. The Corporation issued all of its common stock at $10.00 per
share to the ESOP, certain depositors of the Bank, and certainmembers of
the general public, all pursuant to a plan of conversion.
The ESOP purchased 166,106 shares of common stock representing 8% of the
total issued shares. The ESOP borrowed $1,661,060 from the Corporation to
purchase the stock using the stock as collateral for the loan. The loan is
to be paid principally from the Bank's contributions to the ESOP over a
period of up to 10 years.
NOTE 3
The Bank had the following contractual amounts of financial instruments
outstanding at September 30, 1998 (in 000's):
Commitments to originate loans $ 3,006
Standby letters of credit 0
NOTE 4
A reconciliation of the numerators and denominators for earnings per common
share computations is presented below.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic earnings per share
Net income available to common stockholders $ 372 $ 420 $ 1,178 $ 528
======= ======= ======== ======
Weighted average common shares outstanding 1,808 1,916 1,808 1,916
Basic earnings per share $ .22 $ .22 $ .65 $ .24
======== ======= ======== =======
</TABLE>
7
<PAGE>
The Corporation's outstanding stock options were not considered in the
computations of earnings per common share - assuming dilution because the
effects of assumed exercise would have been antidilutive. In addition, the
Corporation's outstanding performance-based stock awards granted in 1997
were not considered in the computations of earnings per common share -
assuming dilution because the performance conditions for such awards had
not been attained as of September 30, 1998. In future years, outstanding
stock options may be exercised which would increase the weighted average
common shares outstanding and, thereby, dilute earnings per common share.
In addition, if the average common stockprice were to exceed the exercise
price of outstanding options in a future year or if the performance
conditions specified under the performance-based stock award plan were to
be met by the end of a future year, the assumed exercise of the options
and/or the assumed issuance of the performance awards may have a dilutive
effect on earnings per common share for that future year.
Earnings per share for the nine months ended September 30, 1997 reflect
earnings since March 31, 1997 (date of conversion) available to common
stockholders divided by the weighted average number of common shares
outstanding since March 31, 1997.
The following discussion focuses on the consolidated financial condition of
Hemlock Federal Financial Corp. and Subsidiary at September 30, 1998 and
the consolidated results of operations for the three and nine months ending
September 30, 1998, compared to the same period in 1997. For the purposes
of this Form 10-Q, the results of operations in 1997 presented herein are
for the Bank as a predecessor entity to the Corporation, since the initial
public offering was not completed until March 31, 1997. The purpose of this
discussion is to provide a better understanding of the condensed
consolidated financial statements and the operations of the Corporation and
its subsidiary, Hemlock Federal Bank for Savings (Bank). This discussion
should be read in conjunction with the interim condensed consolidated
financial statements and notes thereto included herein.
Results of Operations
Consolidated net income of the Corporation for the third quarter of 1998
totaled $372,000, or $.22 per share, as compared to net income of $420,000,
or $.22 per share earned for the third quarter of 1997. Net income for the
nine month period ended September 30, 1998 totaled $1.18 million, or $.65
per share, as compared to net income of $528,000 for same period in 1997.
Net Interest Income
Net interest income before provision for loan losses was $1.41 million and
$4.43 million for the three and nine month periods ended September 30,
1998, respectively, as compared to $1.43 million and $3.98 million, for the
same periods in 1997. For the three and nine month periods ended September
30, 1998, interest income increased to $3.24 and $9.49 million,
respectively, from $2.83 and $8.21 million for the same periods ended
September 30, 1997. This increase is due primarily to an increase in
average balances of securities and loans, funded by FHLB advances with
terms to maturity ranging from one to ten years. Interest expense increased
to $1.73 and $5.06 million for the three and nine months ended September
30, 1998, from $1.41 and $4.24 million for the same periods in 1997. This
increase is primarily attributable to increases in FHLB advances which is
partially offset by changes in deposit rates.
Provision for Loan Losses
The Corporation's allowance for loan losses was $775,000 as of September
30, 1998, equal to .82% of total loans. The bankhad non-performing assets
totaling $12,000 as of September 30, 1998. Management believes the existing
level of reserves is adequate, given current economic conditions as well as
loss experience and credit demand. A provision for loan losses of $21,000
was made during the nine months ended September 30, 1998, as a result of
growth in the loan portfolio, with no provision made during the same period
ended September 30, 1997.
Changes In Non-Interest Income and Non-Interest Expense
Non-interest income increased to $168,000 and $540,000 for the three and
nine month periods ended September 30, 1998, respectively, as compared to
$133,000 and $368,000 for the same periods ended September 30, 1997. The
increase is due primarily to an increase in fees associated with lending
activities, as well as fees implemented for non-customer ATM transactions.
8
<PAGE>
Non-interest expense for the three month period ended September 30, 1998
increased to $974,000, as compared to $905,000 for the same period ended
September 30, 1997. The increase in expenses for the quarter is due to an
increase in compensation expense associated with the RRP plan, which was
implemented in October of 1997. In addition, loan expense has increased,
resulting from an increase in loan activity. Non-interest expense for the
nine month period ended September 30, 1998 decreased to $3.03 million, as
compared to $3.49 million for the same period ended September 30, 1997. The
$465,000 decrease in non-interest expense for the nine month period ended
September 30, 1998 is due to the $1 million contribution to establish the
Hemlock Federal Foundation, which was recorded during the first nine months
of 1997,partially offset by the increases in loan expense and compensation
expense, as discussed above.
Provision for Income Taxes
The Corporation's federal and state income tax expense decreased to
$230,000 for the three months ended September 30, 1998, from $236,000 for
the same period ended September 30, 1997 The decrease in income tax was the
result of a decrease in net income before income taxes. The Corporation's
federal and state income tax expense increased to $742,000 for the nine
months ended September 30, 1998, from $323,000 for the same period ended
September 30, 1997, as a result of an increase in pretax income.
Financial Condition
Consolidated total assets increased to $197.58 million as of September 30,
1998, from $176.68 million as of December 31, 1997, an increase in total
assets of $20.90 million. Loans receivable increased to $94.30 million as
of September 30, 1998 from $76.16 million as of December 31, 1997, due to
an increase in loan originations, resulting from a surge in refinancing
activity, as well as the addition of a new loan officer. In addition,
securities held to maturity increased to $56.51 million as of September 30,
1998, from $46.42 million as of December 31, 1997, an increase of $10.09
million, and securities available forsale increased to $37.95 million as of
September 30, 1998, from $34.70 million as of December 31, 1997. These
increases were partially offset by a decrease in cash, from $14.88 million
as of December 31, 1997, to $2.83 million as of September 30, 1998, a
decrease of $12.05 million.
Total liabilities increased to $169.59 million as of September 30, 1998,
from $146.26 million as of December 31, 1997. The $23.33 million increase
in liabilities is due primarily to an $18 million increase in FHLB
borrowings, which grew to $29.00 million as of September 30, 1998, from
$11.00 million as of December 31, 1997. In addition, total deposits
increased to $136.82 million as of September 30, 1998 from $130.96 million
as of December 31, 1997, an increase of $5.86 million. The increase in
deposits is attributable to a certificate of deposit promotion, as well as
consumers' response to merger activity of financial institutions within the
Bank's market area.
Stockholders' equity decreased to $27.99 million as of September 30, 1998
from $30.43 million as of December 31, 1997, a decrease of $2.43 million.
This decrease is primarily attributable to the repurchase of 281,403 shares
of the Corporation's common stock in the open market. In addition, the
Corporation paid dividends of $455,000 during the quarter which was
partially offset by net income.
Capital Resources and Commitments
The Bank is subject to two capital to asset requirements in accordance with
bank regulations. The following table summarizes the Bank's regulatory
capital requirements versus actual capital as of September 30, 1998 and
December 31, 1997.
Regulatory Actual
Requirement 9/30/98 12/31/97
Core capital 4.0% 11.45% 12.30%
Risk-based capital 8.0% 29.95% 34.85%
The bank is in the process of constructing a full service branch facility
in Lemont, Illinois, a southwest suburb of Chicago. The purchase price of
the land was $975,000. The building and necessary equipment are estimated
to cost $1.3 million. The branch is expected to be completed and open for
business in November of 1998.
9
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Liquidity
Liquidity measures the ability of the Corporation to meet maturing
obligations and its existing commitments, to withstand fluctuations in
deposit levels, to fund operations, and to provide for customers' credit
needs. The liquidity of the Corporation principally depends on cash flows
from operating activities, investment in and maturity of assets, changes in
balances of deposits and borrowings, and its ability to borrow funds in the
money or capital markets.
The Bank's regulatory liquidity ratio at September 30, 1998 was 16.71%, a
portion of which includes interest-earning assets with terms of 5 years or
less. Loan commitments outstanding totaled $3.01 million at September 30,
1998.
Impact of New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 125 ("SFAS No. 125"), "Accounting for Transfers and Extinguishments of
Liabilities." SFAS No. 125 provides accounting and reporting standard for
transfers and servicing of financial assets and extinguishments of
liabilities. SFAS No. 125 requires a consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred, and
derecognizes liabilities when extinguished. SFAS No. 125 also supersedes
SFAS No. 122 and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period
of estimated net servicing income or loss and requires assessment for asset
impairment or increases obligation based on their fair values.
SFAS No. 125 applies to transfers and extinguishments occurring after
December 31, 1997. The adoption of SFAS No. 125 did not have a material
impact on the results of operations or financial condition of the
Corporation.
The Financial Accounting Standards Board (SFAS) issued Statement 130, which
is effective for fiscal years beginning after December 15, 1997. This
statement provides standards for reporting and display of comprehensive
income and its components. The mostcommon items of other comprehensive
income include unrealized gains on investments in debt and equity
securities, foreign currency items, and minimum pension liabilities.
Disclosures required by SFAS 130 have been included in the financial
statements for all periods presented.
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." The statement
establishes standards for the way that public business enterprises report
information about operating segments and certain other information in
annual financial statements and requires that those enterprises report
selected information about operating segments in interimfinancial reports
issued to shareholders. The statement is effective for financial statements
for periods beginning after December 15, 1997. The Corporation adopted SFAS
No. 131 on January 1, 1997 and required disclosures will be included
beginning with the Corporation 1998 Annual Report. The Corporation operates
as a single segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded 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 changes in the fair value (i.e.
gains or losses) 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. If certain conditions are met, entities may
elect to designate a derivative instrument as a hedge of exposures to
changes in fair value, cash flows, or foreign currencies. If the hedged
exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings)
and subsequently reclassified into earnings when the forecasted transaction
affects earnings. Any amounts excluded from the assessment of hedge
effectiveness as well as the ineffective portion of the gain or loss is
reported in earnings immediately. Accounting for foreign currency hedges is
similar to accounting for fair value and cash flow hedges. If the
derivative instrument is not designated as a hedge, the gain or loss is
recognized in earnings in the period of change. This Statement will have no
effect on the Corporation.
10
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Year 2000
The Corporation has conducted a review of its computer systems to review
the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan toresolve the issue. The Year 2000
problem is the result of computer programs being written using two digits
rather than four to define the applicable year. For example, programs that
have time-sensitive software may recognize a date using "))" as the year
1900 rather than the year 2000. This could result in a major system failure
or miscalculations. The Corporation presently believes that, with
modifications to existing software and by converting to new software, the
Year 2000 problem will not pose significant operational problems for the
Corporation's computer systems as so modified and converted. However, if
such modifications and conversions are not complete in a timely manner, the
Year 2000 problem may have a material impact on the operations of the
Corporation. As of September 30, 1998, the expected costs of Year 2000
compliance are less than $30,000.
Forward Looking Statements
When used in this Form 10-Q or future filings made by the Corporation with
the Securities and Exchange Commission, in the Corporation's press releases
or other public shareholder communications, or in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result", "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Corporation wishes to caution readers
not to place undue reliance on any forward-looking statements, which speak
only as of the date made, and to advise readers that various factors -
including regional and national economic conditions, changes in levels of
market interest rates, credit risks of lending activities, and competitive
and regulatory factors - could affect the Bank's financial performance and
could cause the Corporation's actual results for future periods to differ
materially from those anticipated or projected.
The Corporation does not undertake, and specifically disclaims, any
obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
Quantitative and Qualitative Disclosures About Market Risk
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. The Board of
Directors reviews at least quarterly the Bank's interest rate risk position
and profitability. The Board of Directors also reviews the Bank's
portfolio, formulates investment strategies and oversees the timing and
implementation of transactions to assure attainment of the Bank's
objectives in the most effective manner. In addition, the Board reviews on
a quarterly basis the Bank's asset/liability position, including
simulations of the effect on the Bank's capital of various interest rate
scenarios.
In managing its asset/liability mix, Hemlock Federal, depending on the
relationship between long- and short-term interest rates, market conditions
and consumer preference, at times places more emphasis on managing net
interest margin than on better matching theinterest rate sensitivity of its
assets and liabilities in an effort to enhance net interest income.
Management believes that the increased net interest income resulting from a
mismatch in the maturity of its asset and liability portfolios can, during
periods of declining or stable interest rates, provide high enough returns
to justify the increased exposure to sudden and unexpected increases in
interest rates.
Management utilizes the net portfolio value ("NPV") analysis to quantify
interest rate risk. In essence, this approach calculates the difference
between the present value of liabilities, expected cash flows from assets
and cash flows from off balance sheet contracts.
11
<PAGE>
The following table sets forth, at June 30, 1998, an analysis of the Bank's
interest rate risk as measured by the estimated changes in NPV resulting
from instantaneous and sustained parallel shifts in the yield curve (+/-400
basis points, measured in 100 basis point increments).
Change in Ratio of NPV
Interest Estimated to Estimated Increase
Rates NPV PV of Assets (Decrease) in NPV
(Basis Points) Amount Percent Amount Percent
(Dollars in Thousands)
+400 $19,383 10.84% $(7,426) (28)%
+300 21,905 12.00 (4,903) (18)
+200 24,232 13.01 (2,576) (10)
+100 26,020 13.74 (788) (3)
--- 26,808 13.98 ---
---
-100 27,164 14.02 356 1
-200 27,017 13.83 209 1
-300 27,361 13.85 553 2
-400 27,933 13.96 1,125 4
Certain assumptions utilized in assessing the interest rate risk of thrift
institutions were employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest
rate scenarios. It was also assumed that delinquency rates will not change
as a result of changes in interest rates although there can be no assurance
that this will be the case. Even if interest rates change in the designated
amounts, there can be no assurance that the Bank's assets and liabilities
would perform as set forth above. In addition, a change in U.S. Treasury
rates in the designated amounts accompanied by a change in the shape of the
Treasury yield curve would cause significantly different changes to the NPV
than indicated above.
While the above estimates are based on data provided as of June 30, 1998,
management believes that the Bank's rate risk as of September 30, 1998 has
not significantly changed from the level indicated in the above table.
12
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
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. Exhibits - 03 Amended and Restated Bylaws
27 Financial Data Schedule
b. Reports on Form 8-K - none
13
<PAGE>
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.
HEMLOCK FEDERAL FINANCIAL CORP.
(Registrant)
/s/ Maureen G. Partynski
Maureen G. Partynski
Chief Executive Officer
November 12, 1998
/s/ Michael R. Stevens
Michael R. Stevens
President
November 12, 1998
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