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, 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 November 5, 1999
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Common Stock, par value $.01 1,525,624 shares
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP.
AND SUBSIDIARY
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition as of September 30, 1999
and December 31, 1998..................................................... 3
Condensed Consolidated Statements of Income for the three and nine months
ended September 30, 1998 and 1999......................................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1999.................................. 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1998 and 1999..................... 8
Notes to the Condensed Consolidated Financial Statements as of
September 30, 1999........................................................10
Item 2. Management's Discussion and Analysis of the Financial Condition
and Results of Operation...................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......17
Part II. Other Information...................................................20
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<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
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September 30, December 31,
ASSETS 1999 1998
------------- ------------
Cash on hand and due from banks $ 4,143 $ 6,036
Securities available-for-sale, at fair value 30,502 30,513
Securities held-to-maturity 63,730 58,617
Loans receivable, net 115,238 101,977
Property, plant and equipment, net 3,585 3,567
FHLB stock, at cost 1,975 1,850
Accrued interest and other assets 2,002 1,864
-------- --------
Total Assets $221,175 $204,424
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $151,380 $143,149
FHLB advances 39,500 31,000
Advances from borrowers for taxes and insurance 1,593 1,075
Accrued interest and other liabilities 2,051 1,994
-------- --------
Total Liabilities 194,524 177,218
Stockholders' Equity
Common stock, $.01 par value; 3,100,000 shares
authorized; 2,076,325 shares issued 21 21
Surplus 20,253 20,208
Unearned ESOP, (1999 - 120,427 shares;
1998 - 132,885 shares) (1,204) (1,329)
Unearned stock awards (925) (1,120)
Retained earnings 13,898 13,207
Net unrealized gain on securities
available-for-sale, net of tax 688 1,082
Treasury stock at cost ( 1999 - 376,683;
shares 1998 - 287,384 shares) (6,080) (4,863)
-------- --------
Total Stockholders' Equity 26,651 27,206
-------- --------
Total Liabilities and Stockholders' Equity $221,175 $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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Interest and Dividend Income
Loans $2,064 $1,695 $5,962 $4,790
Investment securities 1,406 1,252 4,130 4,025
Interest bearing deposits 48 193 158 671
------ ------ ------ ------
Total Interest Income 3,518 3,140 10,250 9,486
Interest expense
Deposits 1,406 1,394 4,217 4,126
FHLB advances 397 338 1,083 932
------ ------ ------ ------
Total Interest Expense 1,803 1,732 5,300 5,058
Net interest income 1,715 1,408 4,950 4,428
Provision for loan losses 0 0 20 21
------ ------ ------ ------
Net interest income after
provision for loan losses 1,715 1,408 4,930 4,407
Non-interest income
Service fees 125 135 379 414
Other income 31 33 103 89
Gain/(Loss) on sale of available
for sale securities (18) 0 27 37
------ ------ ------ ------
Total Non-interest Income 138 168 509 540
Non-interest expenses
Salaries and employee benefits 608 544 1,787 1,655
Occupancy and equipment expense 247 136 697 424
Computer service fees 63 56 196 174
Other expenses 248 238 764 774
------ ------ ------ ------
Total Non-interest Expense 1,166 974 3,444 3,027
------ ------ ------ ------
Income before Income Taxes 687 602 1,995 1,920
Provision for Income Taxes 261 230 762 742
====== ====== ====== ======
Net Income $ 426 $ 372 $1,233 $1,178
====== ====== ====== ======
Earnings per share - Basic $ 0.28 $ 0.22 $ 0.79 $ 0.65
====== ====== ====== ======
Earnings per share - Diluted $ 0.28 $ 0.22 $ 0.79 $ 0.65
====== ====== ====== ======
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Nine months ended
---------------------------
September 30, September 30,
1999 1998
------------- -------------
Cash flows from operating activities
Net income $ 1,233 $ 1,178
Adjustments to reconcile net income to net
cash from operating activities
Provision for depreciation 174 81
Net amortization of investment security
premiums/discounts 211 264
Change in deferred loan fees (105) (87)
(Gain)/Loss on sale of securities (26) (37)
Provision for loan losses 20 21
Change in accrued interest receivable
and other assets (238) (434)
Change in accrued interest payable and
other liabilities 356 1,102
Stock awards expense 195 196
ESOP compensation 170 213
-------- --------
Net cash provided by operating activities 1,990 2,497
Cash flows from investing activities
Purchase of securities available-for-sale (10,721) (11,136)
Proceeds from sales of securities
available-for-sale 2,517 37
Principal payments of mortgage-backed
securities and collateralized 25,052 39,835
mortgage obligations
Proceeds from maturities and calls of securities 1,174 3,450
Sale/(Purchase) of FHLB stock (125) (463)
Net increase in loans (13,176) (18,074)
Purchases of securities held-to-maturity (23,957) (45,723)
Purchases of building and equipment, net (193) (662)
-------- --------
Net cash used in investing activities (19,429) (32,736)
Cash flows from financing activities
Net increase in deposits 8,231 5,860
Increase in advance payments by borrowers
for taxes and insurance 519 (311)
Issuance of common stock 0 0
Change in FHLB advances 8,500 18,000
Treasury stock purchase (1,217) (4,913)
Dividends paid (487) (455)
-------- --------
Net cash provided by financing activities 15,546 18,181
Net increase (decrease) in cash and cash equivalents (1,893) (12,058)
Cash and cash equivalents at beginning of period 6,036 14,883
-------- --------
Cash and cash equivalents at end of period $ 4,143 $ 2,825
======== ========
Supplemental disclosure of cash flow information
Cash paid during period for
Interest $ 5,301 $ 5,129
Income taxes 656 678
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<TABLE>
<CAPTION>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands except share data)
Net Unrealized Gain
(Loss) on Securities
Available Unearned Total
Common Retained 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 -
Change in unrealized gain on
securities available for sale - - - (34) - - - (34) (34)
Treasury Stock Purchase-net - - - - - (3,531) - (3,531) -
Dividends Paid - - (455) - - - - (455) -
----- ------- ------- -------- ------- ------- ------- ------- ------
Balance at September 30, 1998 $ 21 $20,193 $12,926 $ 941 $(1,370) $(3,531) $(1,186) $27,994 $1,144
===== ======= ======= ======== ======= ======= ======= ======= ======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands except share data)
Net Unrealized Gain
(Loss) on Securities
Available Unearned Total
Common Retained 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 nine months
ended September 30, 1999 - - 1,233 - - - - 1,233 1,233
ESOP shares earned - 45 - - 125 - - 170 -
Stock award earned - - - - - - 195 195 -
Change in unrealized gain on
securities available for sale - - - (394) - - - (394) (394)
Treasury Stock Purchase - net - - - - - (1,217) - (1,217) -
Dividends Paid - - (542) - - - - (542) -
----- ------- ------- ------ ------- ------- ------ ------- ------
Balance at September 30, 1999 $ 21 $20,253 $13,898 $ 688 $(1,204) $(6,080) $(925) $26,651 $839
===== ======= ======= ====== ======= ======= ====== ======= ======
</TABLE>
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<PAGE>
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 September 30, 1999 and December 31,
1998, and the results of its consolidated operations, for the three and
nine month periods ended September 30, 1999 and 1998, and its consolidated
cash flows and changes in stockholders' equity for the nine month periods
ended September 30, 1999 and 1998. The results of operations for the
period ended September 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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<PAGE>
NOTE 3
A reconciliation of the numerators and denominators for earnings per
common share computations is presented below.
Three months ended Nine months ended
September 30, September 30,
-------------------- ------------------
1999 1998 1999 1998
-------- --------- ------- ---------
Basic earnings per share
Net income available to
common stockholders $ 426 $ 372 $1,233 $ 1,178
====== ======= ====== =======
Weighted average common
shares outstanding 1,522 1,808 1,558 1,820
Basic earnings per share $ .28 $ .22 $ .79 $ .65
====== ======= ====== =======
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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<PAGE>
Item 2. Management's Discussion and Analysis of the Financial Condition and
Results of Operations
The following discussion focuses on the consolidated financial condition
of Hemlock Federal Financial Corp. and Subsidiary at September 30, 1999
and the consolidated results of operations for the three and nine months
ending September 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 third quarter of 1999
totaled $426,000, or $.28 per share, as compared to net income of
$372,000, or $.22 per share earned for the third quarter of 1998. Net
income for the nine month period ended September 30, 1999 totaled $1.23
million, or $.79 per share, as compared to net income of $1.18 million, or
$.65 per share for the same period in 1998.
Net Interest Income
Net interest income before provision for loan losses was $1.72 million and
$4.95 million for the three and nine month periods ended September 30,
1999, respectively, as compared to $1.41 million and $4.43 million for the
same periods in 1998. For the three and nine month periods ended September
30, 1999, interest income increased to $3.52 million and $10.25 million,
respectively, from $3.14 million and $9.49 million for the same periods
ended September 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 and FHLB advances. Interest expense increased
to $1.80 million and $5.30 million for the three and nine months ended
September 30, 1999, from $1.73 million and $5.06 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 September
30, 1999, equal to .69% of total loans. The bank had non-performing assets
totaling $109,000 as of September 30, 1999. No provision for loan losses
was made during the three months ended September 30, 1999, nor was a
provision made during the same period ended September 30, 1998. Management
believes the existing level of reserves is adequate, given current
economic conditions as well as loss experience and credit demand.
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<PAGE>
Changes In Non-Interest Income and Non-Interest Expense
Non-interest income decreased to $138,000 and $509,000 for the three and
nine month periods ended September 30, 1999, respectively, as compared to
$168,000 and $540,000 for the same periods ended September 30, 1998. The
decrease is due primarily to a net loss of $18,000 on the sale of
securities from the available for sale portfolio incurred during the third
quarter ended September 30, 1999.
Non-interest expense for the three and nine month periods ended September
30, 1999 increased to $1.17 million and $3.44 million, respectively, as
compared to $974,000 and $3.03 million for the same periods ended
September 30, 1998. The increase in expenses of $192,000 and $417,000 for
the three and nine months, respectively, is due primarily 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 increased to
$261,000 and $762,000, respectively, for the three and nine month periods
ended September 30, 1999, from $230,000, and $742,000 for the same periods
ended September 30, 1998. The increase in income tax was the result of an
increase in income before income taxes.
Financial Condition
Consolidated total assets increased to $221.18 million as of September 30,
1999, from $204.42 million as of December 31, 1998, an increase in total
assets of $16.76 million. Loans receivable increased to $115.24 million as
of September 30, 1999 from $101.98 million as of December 31, 1998, due to
new loan originations resulting from the commissioned loan officer
program. In addition, securities held to maturity increased to $63.73
million as of September 30, 1999, from $58.62 million as of December 31,
1998, an increase of $5.11 million.
Total liabilities increased to $194.52 million as of September 30, 1999,
from $177.22 million as of December 31, 1998. The $17.30 million increase
in liabilities is due to an increase in total deposits to $151.38 million
as of September 30, 1999 from $143.15 million as of December 31, 1998, an
increase of $8.23 million, as well as an increase in FHLB advances, which
rose to $39.50 million as of September 30, 1999, from $31.00 million as of
December 31, 1998, an increase of $8.50 million. The increase in deposits
is attributable primarily to the new branch facility in Lemont, Illinois.
The increase in FHLB advances was used to fund increases in both loans
receivable and securities held to maturity
Stockholders' equity decreased to $26.65 million as of September 30, 1999
from $27.21 million as of December 31, 1998, a decrease of $560,000. This
decrease is primarily attributable to the repurchase of 89,299 shares of
the Corporation's common stock in the open market over the nine month
period ended September 30, 1999. In addition, the Corporation paid
dividends of $487,000 during the first nine months of 1999, which was
partially offset by net income.
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<PAGE>
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,
1999 and December 31, 1998.
Actual
Regulatory -----------------------
Requirement 9/30/99 12/31/98
------------- ------------ ---------
Core capital 4.0% 25.77% 28.98%
Risk-based capital 8.0% 27.20% 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 September 30, 1999 was 12.98%, a
portion of which includes interest-earning assets with terms of 5 years or
less. Loan commitments outstanding totaled $2.87 million at September 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 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.
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<PAGE>
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 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.
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<PAGE>
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 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.
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<PAGE>
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.
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
- 15 -
<PAGE>
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 September 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 June 30, 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 (+/-300 basis points, measured in 100 basis point increments) as
compared to tolerance limits under the Bank's current policy.
Change in Estimated Increase
Interest Estimated Ratio of NPV (Decrease) in NPV
Rates NPV to ----------------------------
(Basis Points) Amount PV of Assets Amount Percent
------------- ---------- ------------------ ------------ --------------
(Dollars in Thousands)
+300 19,832 10.09 (9,168) (32)
+200 23,179 11.50 (5,821) (20)
+100 26,469 12.82 (2,530) (9)
--- 29,000 13.75 ---
---
-100 30,522 14.24 1,522 5
-200 31,302 14.41 2,302 8
-300 32,035 14.55 3,035 10
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, 1999,
management believes that the Bank's rate risk as of September 30, 1999 has
not significantly changed from the level indicated in the above table.
Annual Meeting
The Company's Annual Meeting for the fiscal year ending December 31, 1999
will be held on May 10 , 1999 at 10:30 a.m. at the Oak Forest office of
the Company.
- 16 -
<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
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
<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 5, 1999
/s/ Michael R. Stevens
---------------------------------
Michael R. Stevens
President
November 5, 1999
/s/ Jean M. Thornton
---------------------------------
Jean M. Thornton
Chief Financial Officer
November 5, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,511
<INT-BEARING-DEPOSITS> 632
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,502
<INVESTMENTS-CARRYING> 63,730
<INVESTMENTS-MARKET> 0
<LOANS> 115,238
<ALLOWANCE> 795
<TOTAL-ASSETS> 221,175
<DEPOSITS> 151,380
<SHORT-TERM> 39,500
<LIABILITIES-OTHER> 3,644
<LONG-TERM> 0
21
0
<COMMON> 0
<OTHER-SE> 26,630
<TOTAL-LIABILITIES-AND-EQUITY> 221,175
<INTEREST-LOAN> 2,064
<INTEREST-INVEST> 1,406
<INTEREST-OTHER> 48
<INTEREST-TOTAL> 3,518
<INTEREST-DEPOSIT> 1,406
<INTEREST-EXPENSE> 1,803
<INTEREST-INCOME-NET> 1,715
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 1,166
<INCOME-PRETAX> 687
<INCOME-PRE-EXTRAORDINARY> 665
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 426
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.28
<YIELD-ACTUAL> 3.33
<LOANS-NON> 109
<LOANS-PAST> 109
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 795
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 795
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 795
</TABLE>
