UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
(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, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the
transition period from to
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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
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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 28, 1999
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Common Stock, par value $.01 1,794,922 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 March 31, 1999
and December 31, 1998................................................. 3
Condensed Consolidated Statements of Income for the three months
ended March 31, 1999 and 1998......................................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998.................................. 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1999 and 1998.................... 7
Notes to the Condensed Consolidated Financial Statements as of
March 31, 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..... 17
Part II. Other Information................................................. 19
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CONDITION
(In thousands, except share data)
March 31, December 31,
ASSETS 1999 1998
--------- ----------
Cash on hand and due from banks $ 2,475 $ 6,036
Securities available-for-sale, at fair value 29,208 30,513
Securities held-to-maturity (fair value: 54,426 58,617
1999 - $55,214, 1998 - $59,527)
Loans Receivable, net 110,481 101,977
Property, plant and equipment, net 3,586 3,567
FHLB Stock, at cost 1,850 1,850
Accrued interest and other assets 1,805 1,864
--------- ----------
Total Assets $ 203,831 $ 204,424
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 146,689 $ 143,149
FHLB advances 27,000 31,000
Advances from borrowers for taxes and insurance 710 1,075
Accrued interest and other liabilities 2,102 1,994
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Total Liabilities 176,501 177,218
Stockholders' equity
Common stock, $.01 par value; 3,100,000 shares
authorized; 2,076,325 shares issued 21 21
Surplus 20,222 20,208
Unearned ESOP (1,287) (1,329)
Unearned stock awards (1,055) (1,120)
Treasury Stock (4,863) (4,863)
Retained earnings 13,387 13,207
Net unrealized gain on securities
available-for-sale, net of tax 905 1,082
--------- ----------
Total Stockholders' Equity 27,330 27,206
--------- ----------
Total Liabilities and Stockholders' Equity $ 203,831 $ 204,424
========= ==========
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands, except share data)
March 31, December 31,
1999 1998
--------- ----------
Interest and Dividend Income
Loans $ 1,866 $ 1,473
Investment Securities 1,405 1,386
Interest-bearing deposits 72 246
--------- ----------
Total Interest Income 3,343 3,105
Interest expense
Deposits 1,410 1,348
FHLB advances 348 263
--------- ----------
Total Interest Expense 1,758 1,611
Net interest income 1,585 1,494
Provision for loan losses 0 0
--------- ----------
Net interest income after provision
for loan losses 1,585 1,494
Non-interest income
Service fees 128 138
Gain on Sale of Securities 33 0
Other income 37 29
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Total Non-interest Income 198 167
Non-interest expenses
Salaries nad employee benefits 592 535
Occupancy and equipment expense 224 143
Computer service fees 69 64
Other expenses 255 260
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Total Non-interest Expense 1,140 1,002
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Income before income taxes 643 659
Provision for income taxes 248 255
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Net Income $ 395 $ 404
========= ==========
Earnings per share $ 0.25 $ 0.21
========= ==========
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
March 31, December 31,
1999 1998
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Cash flows from operating activites
Net income $ 395 $ 404
Adjustments to reconcile net income to net
cash from operating activities
Provision for depreciation 57 27
Net amoritization of investment security
premiums/discounts 64 61
Change in deferred loan fees (54) (25)
Gain on sale of securities (33) 0
Provision for loan losses 0 0
Change in accrued interest receivable and
other liabilities 4 (387)
Change in accured interest payable and
other liabilities 221 (1,266)
Stock Awards Expense 65 65
ESOP compensation 56 80
--------- ----------
Net cash used in operating activities 775 (1,041)
Cash flows from investing activities
Purchase of securities available-for-sale (3,262) (3,181)
Proceeds from sales of securities
availabe-for-sale 34 0
Principal payments of mortgage-backed
securities and collateralized
mortgage obligations 13,227 8,972
Proceeds from maturities and calls of securities 1,174 2,450
Purchase of FHLB stock 0 (213)
Net increase in loans (8,450) (5,474)
Purchases of securities held-to-maturity (5,997) (17,684)
Purchases of building and equipment, net (77) (209)
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Net cash used in investing activities (3,351) (15,339)
Cash flows from financing activities
Net increase in deposits 3,540 2,306
Decrease in advance payments by borrowers
for taxes and insurance (365) (266)
Issuance of Common Stock 0 0
Process of FHLB Advances (4,000) 13,000
Stock conversion expense 0 0
Dividends Paid (160) (145)
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Net cash used in financing activities (985) 14,895
Net (decrease) in cash and cash equivalents (3,561) (1,485)
Cash and cash equvalents at beginning of period 6,036 14,883
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Cash and cash equivalents at end of period $ 2,475 $ 13,398
========= ==========
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands)
March 31, December 31,
1999 1998
--------- ----------
Supplemental disclosure of cash flow information
Cash paid during period for
Interest $ 1,748 $ 1,567
Income taxes 18 72
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS EQUITY
FOR THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands, except share data)
Accumulated
Other
Retained Compre-
Common hensive Unearned Treasury
Stock Surplus Earnings Income ESOP Stock
------- ------- ------- ------- -------- --------
Balance at December 31, 1997 $ 21 $20,105 $12,203 $ 975 $(1,495) $ -
ESOP shares earned - 38 - - 42 -
Stock awards earned - - - - - -
Cash dividends - - (144) - - -
Comprehensive Income
Net income - - 404 - - -
Change in unrealized
gain on securities
available for sale,
net of reclassification
and tax effects - - - 98 - -
Total comprehensive
income
Balance at March 31, 1998 $ 21 $20,143 $12,463 $1,073 $(1,453) $ -
====== ======= ======= ====== ======= =======
Balance at December 31, 1998 $ 21 $20,208 $13,207 $1,082 $(1,329) $(4,863)
ESOP shares earned - 14 - - 42 -
Stock awards earned - - - - - -
Cash dividends - - (215) - - -
Purchase of treasury stock - - - - - -
Comprehensive Income:
Net income - - 395 - - -
Change in unrealized gain on
securities available-for-sale,
net of reclassification and
tax effects
Total comprehensive
Income - - - (177) - -
Balance at March 31, 1999 $ 21 $20,222 $13,387 $ 905 $(1,287) $(4,863)
====== ======= ======= ====== ======= =======
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS EQUITY
FOR THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands, except share data)
Unearned Total
Stock Stockholder Comprehensive
Awards Equity Income (Loss)
------------ --------------- ---------------
Balance at December 31, 1997 $(1,382) $30,427 $ -
ESOP shares earned - 80 -
Stock awards earned 65 65 -
Cash dividends - (144) -
Comprehensive Income:
Net Income - 404 404
Change in unrealized gain on
securities available-for-sale,
net of reclassification and
tax effects - 98 98
Total comprehensive income
Balance at March 31, 1998 $(1,317) $30,930 $502
======= ======= ====
Balance at December 31, 1998 $(1,120) $27,206 $ -
ESOP shares earned - 56 -
Stock awards earned 65 65 -
Cash dividends - (215) -
Purchase of treasury stock
Comprehensive income:
Net income - 395 395
Change in unrealized gain on
securities available-for-sale,
net of reclassification and
tax effects
Total comprehensive
Income - (177) (177)
Balance at March 31, 1999 $(1,055) $27,330 $218
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
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NOTE 1
Hemlock Federal Financial Corp. (Corporation) is a unitary thrift holding
company which owns 100% of the outstanding 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, 1999 and December 31,
1998, and the results of its consolidated operations, for the three month
periods ended March 31, 1999 and 1998, and its consolidated cash flows and
changes in stockholders' equity for the three month period ended March 31,
1999. The results of operations for the period ended March 31, 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.
NOTE 3
The Bank had the following contractual amounts of financial instruments
outstanding at March 31, 1999 (in 000's):
Commitments to originate loans $2,077
Standby letters of credit 0
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
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NOTE 4
A reconciliation of the numerators and denominators for earnings per
common share computations is presented below.
Three months ended
March 31,
----------------------
1999 1998
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(In thousands, except
per share data)
Basic earnings per share
Net income available to common stockholders $ 395 $ 402
====== =======
Weighted average common shares outstanding 1,595 1,808
Basic earnings per share $ .25 $ .21
====== =======
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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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
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The following discussion focuses on the consolidated financial condition
of Hemlock Federal Financial Corp. and Subsidiary at March 31, 1999 and
the consolidated results of operations for the three months ending March
31, 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
Net Income
Consolidated net income of the Corporation for the first quarter of 1999
totaled $395,000, or $.25 per share, as compared to net income of
$404,000, or $.21 per share earned for the first quarter of 1998. The
decrease is the result of a $138,000 increase in operating expenses
partially offset by a $31,000 increase in non-interest income and a
$91,000 in increase in net interest income.
Net Interest Income
Net interest income before provision for loan losses was $1.59 million for
the three month period ended March 31, 1999, as compared to $1.49 million
for the same period in 1998. For the three month period ended March 31,
1999, interest income increased to $3.34 million from $3.11 million for
the same period ended March 31, 1998. This increase is due primarily to an
increase in the balance of securities and loans. Interest expense
increased to $1.76 million for the three months ended March 31, 1999, from
$1.61 million for the same period in 1998. This increase is attributable
to increases in the balance of deposits and FHLB advances.
Provision for Loan Losses
No provision for loan losses was made during the three month period ending
March 31, 1999, nor was a provision made during the same period one year
ago. The Corporation's allowance for loan losses was $775,000 as of March
31, 1999, equal to .70% of total loans. The bank had non-performing assets
totaling $134,000 as of March 31, 1999. 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
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Changes In Non-Interest Income and Non-Interest Expense
Non-interest income increased to $198,000 for the three month period ended
March 31, 1999, as compared to $167,000 for the same period ended March
31, 1998. The increase is due primarily to a $33,000 gain on the sale of
securities.
Non-interest expense for the three month period ended March 31, 1999
increased to $1.14 million, as compared to $1.00 million for the same
period ended March 31, 1998. The increase in expenses for the quarter is
due to an increase in compensation and occupancy and equipment expense
associated with the new branch office, which opened in December, 1998.
Provision for Income Taxes
The Corporation's federal and state income tax expense decreased to
$248,000 for the three months ended March 31, 1999, from $255,000 for the
same period ended March 31, 1998. The decrease in income tax was the
result of a decrease in net income before income taxes.
Financial Condition
Consolidated total assets decreased to $203.83 million as of March 31,
1999, from $204.42 million as of December 31, 1998, a decrease in total
assets of $590,000. Loans receivable increased to $110.48 million as of
March 31, 1999 from $101.98 million as of December 31, 1998, due primarily
to an increase in loan originations through the Bank's multi-family loan
refinance program, which accounted for $5.64 million in loans originated
during the most recent quarter. This increase was funded primarily through
a decrease in cash, from $6.04 million as of December 31, 1998, to $2.48
million as of March 31, 1999, a decrease of $3.56 million, as well as a
decrease of $4.19 million in securities held to maturity, from $58.62
million as of December 31, 1998, to $54.43 million as of March 31, 1999.
Total liabilities decreased to $176.50 million as of March 31, 1999, from
$177.22 million as of December 31, 1998. The $720,000 decrease in
liabilities is due to a $4.00 million decrease in FHLB borrowings, which
fell to $27.00 million as of March 31, 1999, from $31.00 million as of
December 31, 1998. This was partially offset by a $3.54 million increase
in total deposits, which grew to $146.69 million as of March 31, 1999 from
$143.15 million as of December 31, 1998. The increase in deposits is
primarily attributable to growth in our new Lemont branch office, which
reached $7.08 million in deposits as of March 31, 1999.
Stockholders' equity increased to $27.33 million as of March 31, 1999 from
$27.21 million as of December 31, 1998, an increase of $120,000. This
increase is attributable to the net income posted to retained earnings for
the quarter.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
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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 March 31, 1999
and December 31, 1998.
Actual
Regulatory --------------------
Requirement 3/31/99 12/31/98
-------------- --------- ---------
Core capital 4.0% 11.40% 12.30%
Risk-based capital 8.0% 28.53% 34.85%
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, 1999 was 10.99%, a
portion of which includes interest-earning assets with terms of 5 years or
less. Loan commitments outstanding totaled $2.08 million at March 31,
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 is 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.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans
that are securitized to be classified as trading; available-for-sale; or,
in certain circumstances, held-to- maturity. Currently, these must be
classified as trading. Since the Company has not securitized mortgage
loans, Statement No. 134 is not expected to affect the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
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The Financial Accounting Standards Board continues to study several
issues, including recording all financial instruments at fair value and
abolishing pooling-of-interests accounting. Also, it is likely that APB
25's measurement for stock option plans will be limited to employees and
not to non-employees such as directors, thereby causing compensation
expense to be required for 1999 awards of stock options to outside
directors.
Year 2000
General. The Year 2000 ("Y2K") 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 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
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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.
Renovation 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 si 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
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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
- --------------------------------------------------------------------------------
- 16 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
- --------------------------------------------------------------------------------
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 March 31, 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 December 31, 1998, an analysis of the
Bank's interest rate risk as measured by the estimated changes in NPV
resulting from instantaneous and sustained parallel shifts in the yield
curve (+/-400 basis points, measured in 100 basis point increments) 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)
+400 $18,194 9.60% $(10,183) (36)%
+300 21,362 11.00 (7,015) (25)
+200 24,395 12.25 (3,982) (14)
+100 26,870 13.21 (1,507) (5)
--- 28,377 13.71 --- ---
-100 28,735 13.71 359 1
-200 28,617 13.51 240 1
-300 28,962 13.48 585 2
-400 29,027 13.33 650 2
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,
1998, management believes that the Bank's rate risk as of March 31, 1999
has not significantly changed from the level indicated in the above table.
- --------------------------------------------------------------------------------
- 17 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
- --------------------------------------------------------------------------------
Part II Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a vote of Security Holders
The 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
Charles Gjondla 1,526,774 20,385
Maureen G. Partynski 1,527,549 19,610
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 84.88% 98.47%
AGAINST 13,355 0.74% 0.86%
ABSTAIN 10,304 0.57% 0.67%
Accordingly, the proposal described above was declared to be duly adopted
by the stockholders of the Corporation.
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
<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
June 2, 1999
/s/ Michael R. Stevens
------------------------------------
Michael R. Stevens
President
June 2, 1999
- --------------------------------------------------------------------------------
- 18 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 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> MAR-31-1999
<CASH> 2,093
<INT-BEARING-DEPOSITS> 382
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,208
<INVESTMENTS-CARRYING> 54,426
<INVESTMENTS-MARKET> 55,214
<LOANS> 110,480
<ALLOWANCE> 775
<TOTAL-ASSETS> 203,831
<DEPOSITS> 146,689
<SHORT-TERM> 27,000
<LIABILITIES-OTHER> 2,812
<LONG-TERM> 0
<COMMON> 21
0
0
<OTHER-SE> 27,309
<TOTAL-LIABILITIES-AND-EQUITY> 203,831
<INTEREST-LOAN> 1,866
<INTEREST-INVEST> 1,405
<INTEREST-OTHER> 72
<INTEREST-TOTAL> 3,343
<INTEREST-DEPOSIT> 1,410
<INTEREST-EXPENSE> 1,758
<INTEREST-INCOME-NET> 1,585
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 33
<EXPENSE-OTHER> 1,140
<INCOME-PRETAX> 643
<INCOME-PRE-EXTRAORDINARY> 643
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 395
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
<YIELD-ACTUAL> 3.23
<LOANS-NON> 134
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 775
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 775
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</TABLE>
