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: June 30, 1999
[ ] 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.
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(Exact Name of Registrant as Specified In Its Charter)
Delaware 36-4126192
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
5700 West 159th Street 60452
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(Address of Principal Executive Offices) (Zip Code)
708-687-9400
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(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 August 11, 1999
- ----------------------------- -----------------------------------
Common Stock, par value $.01 1,517,683 shares
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HEMLOCK FEDERAL FINANCIAL CORP.
AND SUBSIDIARY
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition as of June 30, 1999
and December 31, 1998.................................................... 3
Condensed Consolidated Statements of Income for the three and six months
ended June 30, 1998 and 1999............................................. 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1999...................................... 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1998 and 1999.......................... 7
Notes to the Condensed Consolidated Financial Statements as of
June 30, 1999............................................................ 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......16
Part II. Other Information...................................................19
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
June December
30, 31,
ASSETS 1999 1998
-------- --------
Cash on hand and due from banks $3,625 $6,036
Securities available-for-sale, at fair value 27,214 30,513
Securities held-to-maturity (fair value:
1999 - $56,569 1998 - $49,423) 56,657 58,617
Loans receivable, net 114,578 101,977
Property, plant and equipment, net 3,600 3,567
FHLB stock, at cost 1,475 1,850
Accrued interest and other assets 1,749 1,864
-------- --------
Total Assets $208,898 $204,424
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $150,244 $143,149
FHLB advances 29,000 31,000
Advances from borrowers for taxes and insurance 1,157 1,075
Accrued interest and other liabilities 2,119 1,994
-------- --------
Total Liabilities 182,520 177,218
Stockholders' Equity
Common stock, $.01 par value; 3,100,000 shares
authorized; 2,076,325 shares issued 21 21
Surplus 20,236 20,208
Unearned ESOP, (1999 - 124,580 shares
1998 - 132,885 shares) (1,246) (1,329)
Unearned stock awards (989) (1,120)
Retained earnings 13,641 13,207
Net unrealized gain on securities
available-for-sale, net of tax 795 1,082
Treasury stock at cost ( 1999 - 376,683 shares
1998 - 287,384 shares) (6,080) (4,863)
-------- --------
Total Stockholders' Equity 26,378 27,206
--------
--------
Total Liabilities and Stockholders' Equity $208,898 $204,424
======== ========
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six Months Ended
June 30, June 30,
--------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
Interest and Dividend Income
Loans $2,032 $1,622 $3,898 $3,095
Investment securities 1,319 1,387 2,724 2,773
Interest bearing deposits 38 232 110 478
------ ------ ------ ------
Total Interest Income 3,389 3,241 6,732 6,346
Interest expense
Deposits 1,401 1,384 2,811 2,732
FHLB advances 338 331 686 594
------ ------ ------ ------
Total Interest Expense 1,739 1,715 3,497 3,326
Net interest income 1,650 1,526 3,235 3,020
Provision for loan losses 20 21 20 21
------ ------ ------ ------
Net interest income after provision
for loan losses 1,630 1,505 3,215 2,999
Non-interest income
Service fees 126 141 254 279
Other income 35 27 72 56
Gain on sale of available
for sale securities 12 37 45 37
------ ------ ------ ------
Total Non-interest Income 173 205 371 372
Non-interest expenses
Salaries and employee benefits 587 576 1,179 1,111
Occupancy and equipment expense 226 145 450 288
Computer service fees 64 54 133 118
Other expenses 261 276 516 536
------ ------ ------ ------
Total Non-interest 1,138 1,051 2,278 2,053
------ ------ ------ ------
Income before Income Taxes 665 659 1,308 1,318
Provision for Income Taxes 253 257 501 512
------ ------ ------ ------
Net Income $ 412 $ 402 $ 807 $ 806
====== ====== ====== ======
Earnings per share - Basic $ 0.26 $ 0.22 $ 0.52 $ 0.43
====== ====== ====== ======
Earnings per share - Diluted $ 0.26 $ 0.22 $ 0.52 $ 0.43
====== ====== ====== ======
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Six months ended
June 30, June 30,
1999 1998
---- ----
Cash flows from operating activities
Net income $ 807 $ 806
Adjustments to reconcile net income to net
cash from operating activities
Provision for depreciation 114 54
Net amortization of investment security
premiums/discounts 167 113
Change in deferred loan fees (88) (73)
(Gain)/Loss on sale of securities (45) (37)
Provision for loan losses 20 21
Change in accrued interest receivable
and other assets 13 (557)
Change in accrued interest payable and
other liabilities 355 (1,361)
Stock awards expense 131 130
ESOP compensation 112 155
------ ------
Net cash provided by operating activities 1,586 (749)
Cash flows from investing activities
Purchase of securities (3,356) (4,495)
available-for-sale
Proceeds from sales of securities
available for sale 282 37
Principal payments of mortgage-backed
securities and collateralized
mortgage obligations 19,600 26,760
Proceeds from maturities and calls of securities 1,174 2,450
Sale/(Purchase) of FHLB stock 375 (213)
Net increase in loans (12,533) (14,811)
Purchases of securities held-to-maturity (13,034) (26,272)
Purchases of building and equipment, net (147) (303)
------- -------
Net cash used in investing activities (7,639) (16,847)
Cash flows from financing activities
Net increase in deposits 7,095 5,062
Increase in advance payments by borrowers
for taxes and insurance 82 189
Issuance of common stock 0 0
Change in FHLB advances (2,000) 13,000
Treasury stock purchase (1,217) (2,108)
Dividends paid (318) (298)
------ -------
Net cash provided by financing activities 3,642 15,845
Net increase (decrease) in cash
and cash equivalents (2,411) (1,751)
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Cash and cash equivalents at
beginning of period 6,036 14,883
------ -------
Cash and cash equivalents at
end of period $3,625 $13,132
====== =======
Supplemental disclosure of cash flow information
Cash paid during period for
Interest $3,458 $3,280
Income taxes 243 516
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS EQUITY
FOR SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands except share data)
<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 six months
ended June 30, 1998 - - 806 - - - - 806 806
ESOP shares earned - 71 - - 83 - - 154 -
Stock Award Earned - - - - - - 131 131 -
Change in unrealized
Gain on securities
Available for sale - - - (3) - - - (3) (3)
Treasury Stock Purchase-net - - - - - (2,108) - (2,108) -
Dividends Paid - - (298) - - - - (298) -
----- ------- ------- --------- ------- ------- ------- ------- -------
Balance at June 30, 1998 $ 21 $20,176 $12,711 $ 972 $(1,412)$(2,108) $(1,251) $29,109 $ 803
===== ======= ======= ========= ======= ======= ======= ======= =======
</TABLE>
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS EQUITY
FOR SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands except share data)
<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, 1998 $ 21 $20,208 $13,207 $ 1,082 $(1,329) $(4,863) $(1,120) $27,206 $ -
Net income for six months
ended June 30, 1999 - - 807 - - - - 807 807
ESOP shares earned - 28 - - 83 - - 111 -
Stock award earned - - - - - - 131 131 -
Change in unrealized
Gain on securities
Available for sale - - - (287) - - - (287) (287)
Treasury Stock Purchase - net - - - - - (1,217) - (1,217) -
Dividends Paid - - (373) - - - - (373) -
------ ------- ------- ------- ------- ------- ------- ------- ----
Balance at June 30, 1999 $ 21 $20,236 $13,641 $ 795 $(1,246) $(6,080) $ (989) $26,378 $520
====== ======= ======= ======= ======= ======= ======= ======= ====
</TABLE>
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
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Notes to the Consolidated Financial Statements
NOTE 1
Hemlock Federal Financial Corp. (Corporation) is a unitary 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 June 30, 1999 and December 31, 1998, and the results of its consolidated
operations, for the three and six month periods ended June 30, 1999 and 1998,
and its consolidated cash flows and changes in stockholders' equity for the six
month periods ended June 30, 1999 and 1998. The results of operations for the
period ended June 30, 1999 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 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.
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
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NOTE 3
A reconciliation of the numerators and denominators for earnings per common
share computations is presented below.
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------ ------- --------
Basic earnings per share
Net income available to
common stockholders $ 412 $ 402 $ 807 $ 806
====== ======= ===== ======
Weighted average common
shares outstanding 1,558 1,808 1,569 1,820
Basic earnings per share $ .26 $ .22 $ .52 $ .43
====== ======= ===== =====
The Corporation's outstanding stock options and stock awards were not considered
in the computations of earnings per common share - assuming dilution because the
effects of assumed exercise would have been antidilutive.
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
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Item 2. Management's Discussion and Analysis of the Financial Condition and
Results of Operation
The following discussion focuses on the consolidated financial condition of
Hemlock Federal Financial Corp. and Subsidiary at June 30, 1999 and the
consolidated results of operations for the three and six months ending June 30,
1999, compared to the same period in 1998. 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 second quarter of 1999
totaled $412,000, or $.26 per share, as compared to net income of $402,000, or
$.22 per share earned for the second quarter of 1998. Net income for the six
month period ended June 30, 1999 totaled $807,000, or $.52 per share, as
compared to net income of $806,000, or $.43 per share for same period in 1998.
Net Interest Income
Net interest income before provision for loan losses was $1.65 million and $3.24
million for the three and six month periods ended June 30, 1999, respectively,
as compared to $1.53 million and $3.02 million for the same periods in 1998. For
the three and six month periods ended June 30, 1999, interest income increased
to $3.39 million and $6.73 million, respectively, from $3.24 million and $6.35
million for the same periods ended June 30, 1998. This increase is due primarily
to an increase in the average balance of loans receivable, funded by an increase
in the average balances of deposits. Interest expense increased to $1.74 million
and $3.50 million for the three and six months ended June 30, 1999, from $1.72
million and $3.33 million for the same periods in 1998. This increase is
attributable to increases in the balance of deposits and FHLB advances which
were partially offset by a decrease in the cost of funds.
Provision for Loan Losses
The Corporation's allowance for loan losses was $795,000 as of June 30, 1999,
equal to .69% of total loans. The bank had non-performing assets totaling
$219,000 as of June 30, 1999. 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 $20,000 was made during the three
months ended June 30, 1999, as a result of growth in the loan portfolio, with a
provision of $21,000 made during the same period ended June 30, 1998.
Changes In Non-Interest Income and Non-Interest Expense
Non-interest income decreased to $173,000 and $371,000 for the three and six
month periods ended June 30, 1999, respectively, as compared to $205,000 and
$372,000 for the same periods ended June 30, 1998. The decrease is due primarily
to a decrease in the gain on the sale of securities as well as a decrease in
fees associated with lending activities, partially offset by an increase in fees
charged for non-customer ATM transactions.
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
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Non-interest expense for the three and six month periods ended June 30, 1999
increased to $1.14 million and $2.28 million, respectively, as compared to $1.05
million and $2.05 million for the same periods ended June 30, 1998. The increase
in expenses is due to the increased compensation, occupancy, and equipment
expenses associated with the opening of a new full service branch facility in
Lemont, Illinois in December of 1998.
Provision for Income Taxes
The Corporation's federal and state income tax expense decreased to $253,000 and
$501,000, respectively, for the three and six month periods ended June 30, 1999,
from $257,000, and $512,000 for the same periods ended June 30, 1998. The
decrease in income tax was the result of a decrease in income before income
taxes.
Financial Condition
Consolidated total assets increased to $208.90 million as of June 30, 1999, from
$204.42 million as of December 31, 1998, an increase in total assets of $4.48
million. Loans receivable increased to $114.58 million as of June 30, 1999 from
$101.98 million as of December 31, 1998, due to new loan originations resulting
from the commissioned loan officer program. This increase was partially offset
by a decrease in securities held to maturity, to $56.66 million as of June 30,
1999, from $58.62 million as of December 31, 1998, a decrease of $1.96 million,
as well as a decrease in securities available for sale, which decreased to
$27.21 million as of June 30, 1999, from $30.51 million as of December 31, 1998,
a decrease of $3.30 million.
Total liabilities increased to $182.52 million as of June 30, 1999, from $177.22
million as of December 31, 1998. The $5.30 million increase in liabilities is
due primarily to an increase in total deposits to $150.24 million as of June 30,
1999 from $143.15 million as of December 31, 1998, an increase of $7.09 million.
The increase in deposits is attributable primarily to the new branch facility in
Lemont, Illinois. This increase in deposits was partially offset by a $2.00
million decrease in FHLB advances, to $29.00 million as of June 30, 1999 from
$31.00 million as of June 30, 1998.
Stockholders' equity decreased to $26.38 million as of June 30, 1999 from $27.21
million as of December 31, 1998, a decrease of $830,000. This decrease is
primarily attributable to the repurchase of 89,299 shares of the Corporation's
common stock in the open market. In addition, the Corporation paid dividends of
$318,000 during the first six months of 1999, which was partially offset by net
income.
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
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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 June 30, 1999 and December 31, 1998.
Actual
Regulatory --------------------------
Requirement 6/30/99 12/31/98
------------- ------------ -----------
Core capital 4.0% 26.81% 28.98%
Risk-based capital 8.0% 27.72% 29.97%
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 June 30, 1999 was 8.70%, a portion of
which includes interest-earning assets with terms of 5 years or less. Loan
commitments outstanding totaled $1.81 million at June 30, 1999.
Impact of New Accounting Standards
Statement of Financial Accounting Standards No. 131, Disclosure about Segments
of a Business Enterprise ("SFAS 131"), establishes standards for the way that
public enterprises report information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of an enterprise
about which separate financial information is available and that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The Company operates in only one
business segment.
Statement of Financial Accounting Standards (Statement) No. 133 on derivatives
will, in 2000, require all derivatives to be recorded at fair value in the
balance sheet, with changes in fair value charged or credited to income. If
derivatives are documented and effective as hedges, the change in the derivative
fair value will be offset by an equal change in the fair value of the hedged
item. Under the new standard, securities held-to-maturity can no longer be
hedged, except for changes in the issuer's creditworthiness. Therefore, upon
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
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adoption of Statement No. 133, companies will have another one-time window of
opportunity to reclassify held-to-maturity securities to either trading or
available-for-sale, provided certain criteria are met. This Statement may be
adopted early at the start of a calendar quarter. Since the Company has no
significant derivative instruments or hedging activities, adoption of Statement
No. 133 is not expected to have a material impact on the Company's financial
statements.
Statement No. 134 on mortgage banking allows mortgage loans that are securitized
to be classified as trading; available-for-sale; or, in certain circumstances,
held-to-maturity. Previously, these were classified as trading. Since the
Company has not securitized mortgage loans, Statement No. 134 did not have an
affect on the Company.
Year 2000
General. The Year 2000 ("YK") issue confronting the Company and its suppliers,
customers, customers' suppliers, and competitors centers on the inability of
computer systems to recognize the year 2000. Many existing computer programs and
systems originally were programmed with six-digit dates that provided only two
digits to identify the calendar year in the date field. With the impending new
millennium, these programs and computers will recognize "00" as the year 1900
rather than the year 2000.
Financial institution regulators recently have increased their focus upon Y2K
compliance issues and have issued guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institutions Examination
Council has issued several interagency statements on Y2K project management
awareness. These statements require financial institutions to, among other
things, examine the Y2K implications of their reliance on vendors and with
respect to the data exchange and the potential impact of the Y2K issue on their
customers, suppliers, and borrowers. These statements also require each
federally regulated institution to survey its exposure, measure its risk, and
prepare a plan to address the Y2K issue. In addition, the federal banking
regulators have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Bank, to assure resolution of any Y2K
problems. The federal banking agencies have assessed that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and, thus, that an institution's failure to address appropriately the Y2K
issue could result in supervisory action, including reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions, or the imposition of civil money penalties.
Risks. Like most financial service providers, the Company and its operations may
be significantly affected by the Y2K issue due to its dependence on technology
and date-sensitive data. Computer software and hardware and other equipment,
both within and outside the Company's direct control, and third parties with
whom the Company electronically or operationally interfaces (including without
limitation its customers and third party vendors) are likely to be affected. If
the computer systems are not modified in order to be able to identify the year
2000, many computer applications could fail or create erroneous results. As a
result, many calculations which rely on date field information, such as
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
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interest, payment on due dates, and all operating functions, could generate
results which are significantly misstated and the Company could experience an
inability to process transactions, prepare statements, or engage in similar
normal business activities. Likewise, under certain circumstances, a failure to
adequately address the Y2K issue could adversely affect the viability of the
Company's suppliers and creditors and the creditworthiness of its borrowers.
Thus, if not adequately addressed, the Y2K issue could result in a significant
adverse impact on the Company's operations and, in turn, its financial condition
and results of operations.
State of Readiness. The Company has established a formal plan to address the Y2K
issue consisting of the following phases:
Awareness Phase. The Company formally established a Y2K plan and
established a project team for management of the Y2K project. The project
team created a plan of action that includes milestones, budget estimates,
strategies, and methodologies to track and report the status of the
project. Members of the project team also attended conferences and
information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is substantially
complete.
Revocation Phase. The Company's corporate inventory revealed that Y2K
upgrades were available for all vendor-supplied mission-critical systems,
and all these Y2K-ready versions have been delivered and placed into
production and have entered the validation process.
Validation Phase. The validation phase is designed to test the ability of
hardware and software to accurately process date-sensitive data. The
Company has substantially completed the validation testing of each
mission-critical system. The project team completed various tests, and
during the validation testing process, no significant Y2K problems have
been identified relating to any modified or upgraded mission-critical
system.
Company Resources Invested. The Company's Y2K project team has been
assigned the task of ensuring that all systems across the Company are
identified, analyzed for Y2K compliance, corrected if necessary, tested,
and have the changes into service by March 31, 1999. The Y2K project team
members represent all functional areas of the Company, including data
processing, loan administration, accounting, item processing and
operations, compliance, human resources, and marketing. The Company's Board
of Directors oversees the Y2K plan and provides guidance and resources to,
and receives quarterly updates from, the Y2K team.
The Company is expensing all costs associated with required system changes
as those costs are incurred, and such costs are being funded through
operating cash flows. The total cost of the Y2K conversion project since
commencement for the Company is estimated to be less than $30,000. The
Company does not expect significant increases in future data processing
costs related to Y2K compliance.
Contingency Plans. During the assessment phase, the Company began
developing back-up or contingency plans for each of its mission-critical
systems. Virtually all of the Company's mission-critical systems are
dependent upon third party vendors or service providers. Therefore,
contingency plans include selecting a new vendor or service provider and
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
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converting to their system. In the event a current vendor's system fails
during the validation phase and it is determined that the vendor is unable
or unwilling to correct the failure, the Company will convert to a new
system for a pre-selected list of prospective vendors. In each case,
realistic trigger dates have been established to allow for orderly and
successful conversions. For some systems, contingency plans consist of
using spreadsheet software or reverting to manual systems until system
problems can be corrected.
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 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.
- 16 -
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
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 June 30, 1999, 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 March 31, 1999, 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.
Estimated
Ratio of NPV Increase
Change in Estimated to (Decrease)
(Basis Interest NPV PV of Assets in NPV
Points) Rates Amount Amount Percent
-------------------------------------------------------------------
(Dollars in Thousands)
+300 20,670 10.69 (7,447) (26)
-------------------------------------------------------------------
+200 23,809 12.01 (4,308) (15)
-------------------------------------------------------------------
+100 26,471 13.06 (1,646) (6)
-------------------------------------------------------------------
--- 28,117 13.63 --- ---
-------------------------------------------------------------------
-100 28,992 13.85 876 3
-------------------------------------------------------------------
-200 29,334 13.84 1,217 4
-------------------------------------------------------------------
-300 30,042 13.97 1,926 7
-------------------------------------------------------------------
- 17 -
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
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 March 31, 1999,
management believes that the Bank's rate risk as of June 30, 1999 has not
significantly changed from the level indicated in the above table.
- 18 -
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORPORATION 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
The following is a record of the votes cast at the Corporation's Annual Meeting
of Stockholders in the election of directors of the Corporation:
FOR VOTE WITHHELD
--------- -------------
Maureen Partynski 1,527,549 19,610
Charles Gjondla 1,526,774 20,385
Accordingly, the individuals named above were declared to be duly elected
directors of the Corporation for the term indicated.
The following is a record of the votes cast in respect of the proposal to ratify
the appointment of Crowe, Chizek and Company LLP as the Corporation's auditors
for the fiscal year ending December 31, 1999.
NUMBER OF ELIGIBLE ACTUALLY
VOTES TO BE CAST CAST
--------- ---------- --------
FOR 1,523,500 85.5% 98.4%
AGAINST 13,355 .7% .8%
ABSTAIN 10,304 .6% .6%
Accordingly, the proposal described above was declared to be duly adopted by the
stockholders of the Corporation.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits - 3(ii) Amended and Restated Bylaws
27 Financial Data Schedule
b. Reports on Form 8-K - none
- 19 -
<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
August 11, 1999
/s/ Michael R. Stevens
- -----------------------------
Michael R. Stevens
President
August 11, 1999
/s/ Jean M. Thornton
- -----------------------------
Jean M. Thornton
Chief Financial Officer
August 11, 1999
- 20 -
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