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: March 31, 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 April 3, 1998
Common Stock, par value $.01 2,007,349 shares
--------
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<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP.
AND SUBSIDIARY
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition as of March 31, 1998
and December 31, 1997.................................................. 3
Condensed Consolidated Statements of Income for the three months
ended March 31, 1998 and 1997.......................................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997................................... 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1998 and 1997..................... 7
Notes to the Condensed Consolidated Financial Statements as of
March 31, 1998......................................................... 9
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operation................................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 17
Part II. Other Information...................................................19
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
- -------------------------------------------------------------------------------
March 31, December 31,
ASSETS 1998 1997
---- ----
Cash on hand and due from banks $13,398 $14,883
Securities available-for-sale, at fair value 35,578 34,703
Securities held-to-maturity (fair value: 55,087 46,418
1998 - $56,024, 1997 - $47,418)
Loans Receivable, net 81,658 76,159
Property, plant and equipment, net 2,281 2,099
FHLB Stock, at cost 1200 987
Accrued interest and other assets 1,821 1,434
------------ ----------
Total Assets $ 191,023 $ 176,683
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 133,264 $ 130,958
FHLB advances 11,000
24,000
Advances from borrowers for taxes and insurance
538 804
Accrued interest and other liabilities 3,494
2,291
---------------- ----------
Total Liabilities 160,093 146,256
Stockholders' equity
Common stock, $.01 par value; 3,100,000 shares
authorized; 2,076,325 shares issued 21 21
Surplus 20,143 20,105
Unearned ESOP, 145,342 shares (1,453) (1495)
Unearned stock awards (1,317) (1382)
Retained earnings 12,463 12,203
Accumulated other comprehensive income 1,073 975
---------------- ----------
Total Stockholders' Equity 30,930 30,427
---------------- ----------
Total Liabilities and Stockholders' Equity $ 191,023 $ 176,683
========== ========
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<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
March 31,
1998 1997
Interest and Dividend Income
Loans $ 1,473 $1,066
Investment securities 1,386 1,218
Interest bearing deposits 246 280
------------ ------------
Total interest
Income 3,105 2,564
Interest expense
Deposits 1,348 1,416
FHLB advances 263 36
------------ ------------
Total Interest Expense 1,611 1,452
Net interest income 1,494 1,112
Provision for loan losses 0 0
------------ ------------
Net interest income after
provision for loan losses 1,494 1,112
Non-interest income
Service fees 138 50
Other income 29 59
------------ ------------
Total Non-interest Income 167 109
Non-interest expenses
Salaries and employee benefits 535 390
Occupancy and equipment expense 143 156
Computer service fees 64 67
Foundation contribution 0 1,000
Other expenses 260 146
------------ ------------
Total Non-interest
Expense 1,002 1,759
------------ ------------
Income before income taxes 659 (538)
Provision for income taxes 255 (179)
------------ ------------
Net income/(loss) $ 404 $(359)
========= =========
Earnings per share - Basic $ 0.21 N/A
========= =========
Earnings per share - Diluted $ 0.21 N/A
========= =========
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<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
March 31, March 31,
1998 1997
Cash flows from operating activities
Net income/(loss) $ 404 $ (359)
Adjustments to reconcile net income to net
cash from operating activities
Provision for depreciation 27 25
Net amortization of investment security
premiums/discounts 61 81
Change in deferred loan fees (25) (13)
Loss on sale of securities 0 2
Provision for loan losses 0 0
Change in accrued interest receivable
and other assets (387) 321
Change in accrued interest payable and
other liabilities (1,266) 965
Stock Awards Expense 65 0
ESOP compensation 80 0
--------- ----------
Net cash provided by operating activities (1,041) 1,022
Cash flows from investing activities
Purchase of securities available-for-sale (3,181) (6,000)
Proceeds from sales of securities available for sale 0 596
Principal payments of mortgage-backed
securities and collateralized mortgage obligations 8,972 4,731
Proceeds from maturities and calls of securities 2,450 2,800
Purchase of FHLB stock (213) 0
Net increase in loans (5,474) (34)
Purchases of securities held-to-maturity (17,684) (9,821)
Purchases of building and equipment, net (209) 0
--------- ----------
Net cash used in investing activities (15,339) (7,728)
Cash flows from financing activities
Net increase (decrease) in deposits 2,306 (549)
Decrease in advance payments by borrowers
for taxes and insurance (266) (273)
Issuance of Common Stock 0 18,346
Borrowing of FHLB Advances 13,000 0
Dividends Paid (145) 0
--------- ----------
Net cash provided by financing activities 14,895 17,524
Net increase (decrease) in cash and cash equivalents (1,485) 10,818
Cash and cash equivalents at beginning of period 14,883 17,410
--------- ---------
Cash and cash equivalents at end of period $ 13,398 $ 28,228
Supplemental disclosure of cash flow information ======== =========
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<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Interest $ 1,567 $ 1,459
Income taxes
72 (260)
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<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
For Three Months Ended March 31, 1998 and
1997 (In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income ESOP
Balance at December 31, 1996 $ - $ - $11,508 $ 607 $ -
Issuance of Common Stock 21 19,986 - - (1,661)
Net loss for three months
ended March 31, 1997 - - (359) - -
Change in unrealized gain on
securities available for sale - - - (26) -
------- ------- ------- --------- --------
Balance at March 31, 1997 $ 21 $19,986 $11,149 $ 581 $ (1,661)
======= ======= ======= ======== =========
Balance at December 31, 1997 $ 21 $20,105 $12,203 $ 975 $ (1,495)
Net income for three months
ended March 31, 1998 - - 404 - -
ESOP shares earned - 38 - - 42
Stock award earned - - - - -
Change in unrealized gain on
securities available for sale - - - 98 -
Dividends Paid - - (145) - -
Balance at March 31, 1998 $ 21 $20,143 $12,463 $1,073 $ (1,453)
====== ======== ======= ======= ========
</TABLE>
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<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
For Three Months Ended March 31, 1998 and
1997 (In thousands, except share data)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Total
Unearned Unearned
Stock Stockholder Comprehensive
Awards Equity Income (Loss)
Balance at December 31, 1996 $ - $12,115
Issuance of Common Stock 18,346
Net income for three months
ended March 31, 1997 (359) (359)
Change in unrealized gain on
securities available for sale - (26) (26)
------- --------- -------
Balance at March 31, 1997 $ $30,076 $(385)
======== ======== ======
Balance at December 31, 1997 $ (1,382) $30,427
Net income for three months
ended March 31, 1998 - 404 404
ESOP shares earned 80
Stock awards earned 65 65
Change in unrealized gain on
securities available for sale - 98 98
Dividends Paid - (145) -
-------- -------- --------
Balance at March 31, 1998 $(1,317) $30,930 $502
======== ======== =====
</TABLE>
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<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
- --------------------------------------------------------------------------------
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 March 31, 1998
and December 31, 1997, and the results of its consolidated operations, for the
three month period ended March 31, 1998, and its consolidated cash flows and
changes in stockholders' equity for the three month period ended March 31, 1998.
The results of operations for the period ended March 31, 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 ESOP, certain
depositors of the Bank, and certain members 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 March 31, 1998 (in 000's):
Commitments to originate loans $ 5,239
Standby letters of credit 0
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<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 4
A reconciliation of the numerators and denominators for earnings per common
share computations for the quarter ended March 31, 1998 is presented below.
Basic earnings per share
Net income available to common stockholders $ 404
======
Weighted average common shares outstanding 1,896
Basic earnings per share $ .21
======
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 March 31, 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 stock price 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.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1998
The following discussion focuses on the consolidated financial condition of
Hemlock Federal Financial Corp. and Subsidiary at March 31, 1998 and the
consolidated results of operations for the three months ending March 31, 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 first quarter of 1998 totaled
$404,000, compared to a loss of ($359,000), earned for the first quarter of
1997, an increase of $763,000. The primary factor that led to the increase in
net income for the first quarter of 1998 was the establishment of a $1.00
million accrual to fund the Hemlock Federal Foundation, which took place during
the first quarter of 1997. In addition, the investment of net proceeds from the
initial public offering into interest earning assets resulted in an increase in
net interest income.
Net Interest Income
Net interest income increased $382,000, to $1.49 million for the three month
period ended March 31, 1998, compared to $1.11 million for the same period in
1997. Interest income increased $541,000, from $2.56 million as of March 31,
1997, to $3.10 as of March 31, 1998. This increase is due primarily to an
increase in securities and loans as the net proceeds from the initial public
offering were invested in interest earning assets. Interest expense increased
$159,000, from $1.11 million as of March 31, 1997, to $1.49 million as of March
31, 1998. This increase is attributable to an increase in FHLB advances.
Provision for Loan Losses
The Bank's allowance for loan losses was $775,000 as of March 31, 1998. The
allowance was equal to .94% of total loans as of March 31, 1998. The bank had
non-performing assets totaling $312,000 as of March 31, 1998. Management
believes the existing level of reserves is adequate, given current economic
conditions as well as loss experience and credit demand. No provision for loan
losses were made for the quarters ended March 31, 1998 or March 31, 1997.
Changes In Non-Interest Income and Non-Interest Expense
Non-interest income totaled $167,000 for the three month period ended March 31,
1998, as compared to $109,000 for the same period one year ago. The $58,000
increase is due primarily to
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1998
an increase in fees associated with loan originations, as well as additional fee
income received on ATM transactions.
Non-interest expense for the three months ended March 31, 1998 decreased from
$1.76 million for the three month period ended March 31, 1997 to $1.00 million
for the three month period ended
March 31, 1998. This decrease was due to the establishment of a $1.00 million
accrual to fund the Hemlock Federal Foundation, which took place during the
first quarter of 1997. This decrease was partially offset by a $145,000 increase
in compensation expense associated with the ESOP and RRP benefit plans. In
addition, other expenses increased $114,000, attributable to expenses associated
with operating as a public entity. Excluding the impact of the foundation
accrual, non interest expense for the first quarter of 1997 would have been
$759,000.
Provision for Income Taxes
The Bank's federal and state income tax expense increased from a benefit of
$179,000 for the three month period ended March 31, 1997 to $255,000 for the
three month period ended March 31, 1998. The $434,000 increase in income tax was
the result of the increase in net income before income taxes.
Financial Condition
Consolidated total assets increased to $191.02 million as of March 31, 1998,
from $176.68 million as of December 31, 1997, an increase in total assets of
$14.34 million, or 8.12%. Loans receivable increased to $81.66 million as of
March 31, 1998 from $76.16 million as of December 31, 1997, due to an increase
in loan originations. In addition, securities held to maturity increased to
$55.09 as of March 31, 1998, from $46.42 million as of December 31, 1997. The
$8.67 million increase is primarily attributable to the reinvestment of FHLB
advances.
Total liabilities increased to $160.09 million as of March 31, 1998, from
$146.26 million as of December 31, 1997. The $13.84 million increase in
liabilities is due primarily to a $13 million increase in FHLB borrowings, which
grew to $24 million as of March 31, 1998, from $11 million as of December 31,
1997. Total deposits increased to $133.26 million as of March 31, 1998 from
$130.96 million as of December 31, 1997, an increase of $2.30 million, or 1.76%.
Shareholders' equity increased to $30.93 million as of March 31, 1998 from
$30.43 million as of December 31, 1997. During the first quarter of 1998, 68,980
shares of the Corporation's common stock were purchased in the open market for
the purpose of funding the Recognition and Retention Plan.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1998
Capital Resources and Commitments
The Bank is subject to three capital to asset requirements in accordance with
bank regulations. The following table summarizes the Bank's regulatory capital
requirements versus actual capital as of March 31, 1998 and December 31, 1997.
Regulatory Actual
Requirement 3/31/98 12/31/97
Core leverage capital 4.0% 11.57% 12.30%
Risk-based capital 8.0% 33.20% 34.85%
The bank has begun construction on 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 $1.2
million. The branch is expected to be completed and open for business during the
second half of 1998.
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 March 31, 1998 was 19.44%, a portion of
which includes interest-earning assets with terms of 5 years or less. This is
primarily as a result of the reinvestment of the proceeds raised in the initial
public offering into short-term securities. Loan commitments outstanding totaled
$5.24 million at March 31, 1998.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 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, and early or retroactive application is not permitted. Because the
volume and variety of certain transactions will make it difficult for some
entities to comply, some provision have been delayed by SFAS No. 127. The
adoption of SFAS No. 125 did not have a material impact on the results of
operations or financial condition of the Bank.
On March 3, 1997, the Financial Accounting Standards Board (FASB) issued
Statement 128, "Earnings Per Share", which is effective for financial statements
beginning with year end 1997. Statement 128 simplifies the calculation of
earnings per share (EPS) by replacing primary EPS with basic EPS. It also
requires dual presentation of basic EPS and diluted EPS for entities with
complex capital structures. Basis EPS include no dilution and is computed by
dividing income available to common shareholders by the weighted-average common
shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities that could
share in earnings, such as stock options, warrants or other common stock
equivalents. The Company expects Statement 128 to have little impact on its
earnings per share calculations in future years, other than changing terminology
from primary EPS to basic EPS. All prior period EPS data will be restated to
conform with the new presentation.
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 most common 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.
The Financial Accounting Standards Board (SFAS) issued Statement 131,
"Disclosures about Segments of an Enterprise and Related Information", which is
effective for fiscal years beginning after December 15, 1997. This statement
establishes standards for the way that public business
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1998
enterprises report information about operating segments in annual financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Management does not believe that the provisions of this statement are applicable
to the Corporation, since substantially all of the Corporation's operations are
banking services.
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 to resolve 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.
Forward Looking Statements
When used in this Form 10-Q or future filings made by the Company with the
Securities and Exchange Commission, in the Company" 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 Company
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 Bank's actual results for future periods to
differ materially from those anticipated or projected.
The Company 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.
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<PAGE>
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 anticipates reviewing 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 the interest 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. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of an immediate and sustained
200 basis point change in interest rates is a decrease in the institution's NPV
in an amount not exceeding 2% of the present value of its assets. Pursuant to
this regulation, thrift institutions with greater than "normal" interest rate
exposure must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to the 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets. Savings institutions, however, with less than
$300 million in assets and a total capital ratio in excess of 12%, will be
exempt from this requirement unless the OTS determines otherwise. The OTS has
postponed the implementation of the rule until further notice. Based upon its
asset size and capital level at December 31, 1997, the Bank would qualify for an
exemption from this rule; however, management believes that the Bank would not
be required to make a deduction from capital if it were subject to this rule.
The following table sets forth, at December 31, 1997, 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) as compared to tolerance limits
under the Bank's current policy.
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<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
Change in Ratio of NPV Estimated Increase
Interest Estimated to (Decrease) in NPV
Rates NPV
(Basis Points) Amount Total Assets Amount Percent
(Dollars in Thousands)
+400 $19,037 11.68% $(7,061) (27)%
+300 21,926 12.90 (4,674) (18)
+200 23,633 13.99 (2,467) (9)
+100 25,267 14.75 (833) (3)
--- 26,100 15.10 --- ---
-100 25,986 14.98 (114) ---
-200 26,010 14.92 (90) ---
-300 26,390 15.04 290 1
-400 27,260 15.38 1,160 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 December 31, 1997,
management believes that the Bank's rate risk as of March 31, 1998 has not
significantly changed from the level indicated in the above table.
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<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 - 27 Financial Data Schedule
b. Reports on Form 8-K - none
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 __, 1997
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<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
- ------------------------------------------------------------------------------
/s/ Michael R. Stevens
Michael R. Stevens
President
November __, 1997
.
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