UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[
X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the period ended:
September 30, 2000
Commission file number
000-22103
HEMLOCK FEDERAL FINANCIAL CORPORATION
|
| (Exact Name of Registrant as Specified In Its Charter) |
| |
|
|
Delaware
|
|
36-4126192
|
(State or Other Jurisdiction of
Incorporation or Organization) |
|
(IRS Employer
Identification No.) |
| |
|
|
5700 West 159th Street
|
|
60452
|
| (Address of Principal Executive Offices) |
|
(Zip Code) |
| |
|
|
708-687-9400
|
| (Registrant's telephone number, including area code) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate the number of shares outstanding of each the issuer's classes of common stock, as of the latest practicable
date:
Class
|
Outstanding at October 30, 2000
|
| Common Stock, par value $.01 |
928,934 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 September
30, 2000 and December 31, 1999 |
3 |
| |
|
|
|
|
|
Condensed Consolidated Statements of Income and Comprehensive
Income for the three and nine months ended
September 30, 1999 and 2000 |
4 |
| |
|
|
|
|
|
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 2000 |
5 |
| |
|
|
|
|
|
Condensed Consolidated Statements of Changes in Stockholder's
Equity for the nine months ended September 30, 1999 and 2000 |
6 |
| |
|
|
|
|
|
Notes to the Condensed Consolidated Financial Statements as of
September 30, 2000 |
8 |
| |
|
|
|
|
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operation |
10 |
| |
|
|
|
|
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
14 |
| |
|
|
|
| Part II. |
|
Other Information |
17 |
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
|
September 30, |
December 31, |
|
2000
|
1999
|
| ASSETS |
|
|
| Cash and cash equivalents |
$ 5,672 |
$ 9,813 |
| Securities available-for-sale |
37,648 |
32,982 |
| Securities held-to-maturity |
56,912 |
61,126 |
| Loans receivable, net |
162,430 |
116,998 |
| Premises and equipment, net |
3,850 |
3,538 |
| FHLB stock, at cost |
3,435 |
3,325 |
| Accrued interest receivable and other assets |
3,749
|
1,675
|
| Total assets |
$273,696
======== |
$228,457
======== |
| LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
| Deposits |
$178,960 |
$150,576 |
| FHLB advances |
68,781 |
49,500 |
| Advances from borrowers for taxes and insurance |
724 |
1,113 |
| Note payable |
4,750 |
-- |
| Accrued interest payable and other liabilities |
1,867
|
1,527
|
| Total liabilities |
255,082 |
202,736 |
| Stockholders' equity |
|
|
Common stock, $.01 par value; 3,100,000 shares
authorized; 2,076,325 shares issued |
21 |
21 |
| Surplus |
20,326 |
20,270 |
Unearned ESOP (2000 - 103,816 shares;
1999 - 120,427 shares) |
(1,038) |
(1,163) |
| Unearned stock awards |
(663) |
(859) |
| Retained earnings |
15,048 |
14,235 |
| Accumulated other comprehensive income |
483 |
444 |
Treasury stock at cost (2000 - 1,005,136 shares;
1999- 457,762) |
(15,563)
|
(7,227)
|
| Total stockholders' equity |
18,614
|
25,721
|
| Total liabilities and stockholders' equity |
$273,696
======== |
$228,457
======== |
See accompanying notes to unaudited financial statements.
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HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and Nine months ended September 30, 2000 and 1999
(In thousands, except per share data)
|
Nine months ended
|
Three months ended
|
|
2000
|
1999
|
2000
|
1999
|
| Interest income |
|
|
|
|
| Loans |
$7,582 |
$5,962 |
$2,995 |
$2,064 |
| Securities |
4,808 |
4,130 |
1,571 |
1,406 |
| Interest bearing deposits |
304
|
158
|
181
|
48
|
| Total interest income |
12,694 |
10,250 |
4,747 |
3,518 |
| Interest expense |
|
|
|
|
| Deposits |
4,640 |
4,217 |
1,753 |
1,406 |
| FHLB advances |
2,389 |
1,083 |
1,020 |
397 |
| Note payable |
188
|
--
|
102
|
--
|
| Total interest expense |
7,217
|
5,300
|
2,875
|
1,803
|
| Net interest income |
5,477 |
4,950 |
1,872 |
1,715 |
| Provision for loan losses |
--
|
20
|
--
|
--
|
Net interest income after provision
for loan losses |
5,477 |
4,930 |
1,872 |
1,715 |
| Non-interest income |
|
|
|
|
| Service fees |
484 |
379 |
200 |
125 |
| Other income |
155 |
103 |
55 |
31 |
| Gain (loss) on the sale of securities |
(5)
|
27
|
29
|
(18)
|
| Total non-interest income |
634 |
509 |
284 |
138 |
| Non-interest expense |
|
|
|
|
| Salaries and employee benefits |
2,096 |
1,787 |
772 |
608 |
| Occupancy and equipment expense |
765 |
697 |
273 |
247 |
| Computer service fees |
297 |
196 |
87 |
63 |
| Other expenses |
1,020
|
764
|
418
|
248
|
| Total non-interest expense |
4,178
|
3,444
|
1,550
|
1,166
|
| Income before income taxes |
1,933 |
1,995 |
606 |
687 |
| Privision for income taxes |
679
|
762
|
205
|
261
|
| Net income |
$1,254
======== |
$1,233
======== |
$ 401
======== |
$ 426
======== |
| Earnings per share - basic and diluted |
$ 1.15
======== |
$ .79
======== |
$ .42
======== |
$ .28
======== |
| Comprehensive income |
$1,293
======== |
$839
======== |
$595
======== |
$319
======== |
See accompanying notes to unaudited financial statements.
NEXT PAGE
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
|
2000
|
1999
|
| Cash flows from operating activities |
|
|
| Net income |
$1,254 |
$1,233 |
Adjustments to reconcile net income to net cash
from operating activities |
|
|
| Depreciation |
264 |
174 |
| Amortization of intangibles |
23 |
-- |
| Net amortization of security premiums/discounts |
20 |
211 |
| Change in deferred loan fees |
(85) |
(105) |
| (Gain) loss on sale of securities |
5 |
(27) |
| Provision for loan losses |
-- |
20 |
| Chnage in accrued interest receivable and other assets |
207 |
(237) |
| Change in accrued interest payable and other liabilities |
161 |
356 |
| Stock awards expense |
196 |
195 |
| ESOP compensation |
181
|
170
|
| Net cash provided by operating activities |
2,226
|
1,990
|
| Cash flows from investing activities |
|
|
| Midwest Savings Bank acquisition, net |
(728) |
-- |
| Purchase of securities available-for-sale |
(11,679) |
(10,721) |
| Proceeds from sales of securities available-for-sale |
4,272 |
2,517 |
Principal payments of mortgage-backed securities and
collateralized mortgage obligations |
9,369 |
25,052 |
| Proceeds from maturities and calls of securities |
405 |
1,174 |
| Purchase of FHLB stock |
(245) |
(125) |
| Net increase in loans |
(6,449) |
(13,176) |
| Purchases of securities held-to-maturity |
(82) |
(23,957) |
| Purchases of premises and equipment, net |
(79)
|
(193)
|
| Net cash used in investing activities |
(5,216)
|
(19,429)
|
| Cash flows from financing activities |
|
|
| Net increase in deposits |
187 |
8,231 |
| Change in advance payments by borrowers for taxes and insurance |
(409) |
519 |
| Purchase of treasury shares |
(8,336) |
(1,217) |
| Change in FHLB advances |
3,098 |
8,500 |
| Change in note payable |
4,750 |
-- |
| Dividends paid |
(441)
|
(487)
|
| Net cash provided by (used in) financing activities |
(15,546)
|
(1,151)
|
| Net decrease in cash and cash equivalents |
(4,141) |
(1,893) |
| Cash and due from banks at beginning of period |
9,813
|
6,036
|
| Cash and due from banks at end of period |
$5,672
======== |
$4,143
======== |
Supplemental disclosure of cash flow information
See accompanying notes to unaudited financial statements.
NEXT PAGE
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
|
Common
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Unearned
ESOP
|
Treasury
Stock
|
Stock
Awards
|
Total
Stockholders
Equity
|
Compre-
hensive
Income
|
| 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 awards earned |
-- |
-- |
-- |
-- |
-- |
-- |
195 |
195 |
-- |
Change in unrealized gain
on securities available-for-sale, net |
-- |
-- |
-- |
(394) |
-- |
-- |
-- |
(394) |
(394) |
| Treasury stock purchase, net |
-- |
-- |
-- |
-- |
-- |
(1,217) |
-- |
(1,217) |
-- |
| Dividends declared ($.28 per share) |
--
|
--
|
(542)
|
--
|
--
|
--
|
--
|
(542)
|
--
|
| Balance at September 30, 1999 |
$21
==== |
$20,253
======= |
$13,898
====== |
$688
====== |
$(1,204)
====== |
$(6,080)
======= |
$(925)
===== |
$26,651
====== |
$839
====== |
Continued
NEXT PAGE
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
|
Common
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Unearned
ESOP
|
Treasury
Stock
|
Stock
Awards
|
Total
Stockholders
Equity
|
Compre-
hensive
Income
|
| Balance at December 31, 1999 |
$21 |
$20,270 |
$14,235 |
$444 |
$(1,163) |
$(7,227) |
$(859) |
$25,721 |
$ -- |
Net income for nine months
ended September 30, 2000 |
-- |
-- |
1,254 |
-- |
-- |
-- |
-- |
1,254 |
1,254 |
| ESOP shares earned |
-- |
56 |
-- |
-- |
125 |
-- |
-- |
181 |
-- |
| Stock awards earned |
-- |
-- |
-- |
-- |
-- |
-- |
196 |
196 |
-- |
Change in unrealized gain
on securities available-for-sale, net |
-- |
-- |
-- |
39 |
-- |
-- |
-- |
39 |
39 |
| Treasury stock purchase, net |
-- |
-- |
-- |
-- |
-- |
(8,336) |
-- |
(8,336) |
-- |
| Dividends declared ($.34 per share) |
--
|
--
|
(441)
|
--
|
--
|
--
|
--
|
(441)
|
--
|
| Balance at September 30, 2000 |
$21
==== |
$20,326
======= |
$15,048
====== |
$483
====== |
$(1,038)
====== |
$(15,563)
======= |
$(663)
===== |
$18,614
====== |
$1,293
====== |
See accompanying notes to unaudited consolidated financial statements.
NEXT PAGE
HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
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. The accompanying
unaudited interim consolidated financial statements of the Corporation have been prepared in accordance with
generally accepted accounting principles and with the rules and regulations of the Securities and Exchange
Commission for interim financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements. In the
opinion of management, all normal and recurring adjustments which are necessary to fairly present the results
for the interim periods presented have been included. The preparation of financial statements requires
management to make estimates and assumptions that affect the recorded amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period reported. Actual results could differ from those estimates. For further
information with respect to significant accounting policies followed by the Corporation in the preparation of
its consolidated financial statements, refer to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1999. Annualized results of operations during the three and nine months ended
September 30, 2000 are not necessarily indicative of results to be expected for the full year of 2000.
NOTE 2
The Corporation completed its repurchase of 419,947 shares of common stock at a total cost of $6.30 million,
plus expenses of $130,000, through a Dutch auction tender offer during the quarter ended March 31, 2000.
The Corporation's stock repurchase was funded with $3.0 million in borrowings and $3.0 million in dividends
from the Bank. An additional 127,427 shares were repurchased during the nine months ended September 30,
2000 at a total cost of $1.91 million. The stock repurchase was funded with $1.75 million in borrowings.
NOTE 3
A reconciliation of the numerators and denominators for earnings per common share computations is
presented below:
|
Three months ended
September 30, |
Nine months ended
September 30, |
|
2000
|
1999
|
2000
|
1999
|
| Earnings per share |
|
|
|
|
| Net income available to common stockholders |
$401 |
$426 |
$1,254 |
$1,233 |
| Weighted average common shares outstanding |
947 |
1,522 |
1,091 |
1,558 |
| Earnings per share |
$ .42 |
$ .28 |
$ 1.15 |
$ .79 |
NEXT PAGE
HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
The Corporations outstanding stock options and stock awards were not considered in the computations of
earnings per common share because the effects of assumed exercise would have been antidilutive.
NOTE 4
In March 2000, the Corporation established a secured revolving line of credit with LaSalle National Bank.
Interest payments are due quarterly with principal due at maturity on March 7, 2001. The note is secured by
100% of the Bank's outstanding common stock. The line of credit bears interest at a variable rate equal to
prime or three-month LIBOR plus 1.75% at the Corporation's option. In March 2000, the Corporation used
this line to finance the repurchase of common stock in the Dutch auction tender offer, and has since used the
line for additional repurchases of the Corporation's stock.
NOTE - 5
On June 9, 2000 the Bank completed its acquisition of Midwest Savings Bank. Cash of $3.3 million was paid
for all of the outstanding shares of Midwest Savings Bank. The acquisition was recorded using the purchase
method of accounting and concurrent with the transaction Midwest Savings Bank was merged into Hemlock
Federal Bank. At June 9, 2000 Midwest Savings Bank had total assets of $47.8 million, which included $39.6
million of loans, $28.2 million of deposits, and $16.2 million of FHLB advances. The acquisition resulted in
goodwill of approximately $1.0 million which is being amortized over 15 years, and a core deposit intangible
of $700,000 which is being amortized over 8 years.
Midwest Savings Bank's results of operations have been reflected in the Corporation's consolidated
statements of income beginning as of the acquisition date. On a pro forma basis, the pro forma total net
interest income, total income, net income, basic and diluted earnings per share for the three and nine months
ended September 30, 2000 after giving effect to the Midwest Savings Bank acquisition as if it occurred on
January 1, 1999 are as follows:
|
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|
2000
|
1999
|
2000
|
1999
|
| Net Interest Income |
$1,872 |
$2,059 |
$6,026 |
$6,022 |
| Total Income |
5,031 |
4,528 |
14,771 |
13,315 |
| Net Income |
401 |
431 |
1,179 |
1,260 |
| Basic and Diluted Earnings Per Share |
.42 |
.28 |
1.08 |
.81 |
NEXT PAGE
HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
September 30, 2000
Item 2. Management's Discussion and Analysis of 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, 2000 and the consolidated results of operations for the three and nine months
ending September 30, 2000, compared to the same period in 1999. 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 2000 totaled $401,000, or $.42 per share,
as compared to net income of $426,000, or $.28 per share earned for the third quarter of 1999. Net income for
the nine month period ended September 30, 2000 totaled $1,254,000, or $1.15 per share, as compared to net
income of $1,233,000, or $.79 per share for same period in 1999. The primary reason for the decrease in net
income for the three and nine month periods is a decrease in net interest margin, as deposits have repriced
faster than loans, and an overall increase in non-interest expense.
Net Interest Income
Net interest income before provision for loan losses was $1.87 million and $5.48 million for the three
and nine month periods ended September 30, 2000, respectively, as compared to $1.72 million and $4.95
million for the same periods in 1999. For the three and nine month periods ended September 30, 2000,
interest income increased to $4.75 million and $12.69 million, respectively, from $3.52 million and
$10.25 million for the same periods ended September 30, 1999. This increase is due primarily to an
increase in the average balance of loans receivable, as a result of the Midwest acquisition. Interest
expense increased to $2.88 million and $7.22 million for the three and nine months ended September 30,
2000, from $1.72 million and $5.30 million for the same periods in 1999. This increase is attributable to
increases in deposits and FHLB advances as a result of the Midwest acquisition, as well as interest
expense related to the note payable. The overall net interest margin has decreased from 3.33% for the
quarter ended September 30, 1999 to 2.88% for the quarter ended September 30, 2000. The decrease in
net interest margin is due primarily to the reduction in capital and increase in borrowings due primarily
to the repurchase of stock over the past several quarters. The Company expects, because of the interest
rate risk discussed in Item 3 and the various options being contemplated to reduce this risk, that the net
interest margin will continue to decrease modestly during the next several quarters.
NEXT PAGE
HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
September 30, 2000
Provision for Loan Losses
The Corporation's allowance for loan losses was $969,000 as of September 30, 2000, equal to .60% of total
loans. The bank had non-performing assets totaling $523,000 as of September 30, 2000. Management
believes the existing level of reserves is adequate, given current economic conditions as well as historical loss
experience and credit demand. No provision for loan losses was made during the three months ended
September 30, 2000. A provision of $20,000 was made during the same period ended September 30, 1999.
Changes In Non-Interest Income and Non-Interest Expense
Non-interest income increased to $284,000 for the three month period ended September 30, 2000, as
compared to $138,000 for the same period ended September 30, 1999. The increase is due primarily to
an increase in fees associated with the loan servicing portfolio, ATM transactions and checking accounts,
as well as a $29,000 gain on the sale of securities during the quarter ended September 30, 2000. Non-interest income increased to $634,000 for the nine month period ended September 30, 2000, as compared
to $509,000 for the same period ended September 30, 1999. The increase is due primarily to an increase
in fees associated with the loan servicing portfolio obtained as part of the Midwest acquisition, as well as
an increase in fees associated with ATM transactions and checking accounts, partially offset by a $5,000
loss incurred on the sale of securities from the available-for-sale portfolio for the nine month period
ended September 30, 2000, compared to a $27,000 gain incurred on the sale of securities from the
available-for-sale portfolio for the nine month period ended September 30, 1999.
Non-interest expense increased to $1.55 million and $4.18 million for the three and nine month periods
ended September 30, 2000, respectively, as compared to $1.17 million and $3.44 million for the same
period one year ago. The increase is due primarily to data processing conversion fees and an overall
increase in compensation, of which a portion is related to the acquisition of Midwest Savings Bank as
well as an overall increase in operating expenses associated with the operation of the two new branch
offices obtained through the Midwest Savings acquisition.
Provision for Income Taxes
The Corporation's federal and state income tax expense decreased to $205,000 and $679,000 for the three
and nine month periods ended September 30, 2000, respectively, from $261,000 and $762,000, for the
same periods ended September 30, 1999. The decrease in income tax was the result of a decrease in
overall income and an increase in income from securities exempt from federal and state income tax.
Financial Condition
Consolidated total assets increased to $273.70 million as of September 30, 2000, from $228.46 million as
of December 31, 1999, an increase in total assets of $45.24 million. Cash on hand decreased to $5.67
million as of September 30, 2000, as compared to $9.81 million as of December 31, 1999, a decrease of
$4.14 million, due to payment related to the Midwest acquisition. Total securities increased by
$450,000, from $94.11 million as of December 31, 1999,
NEXT PAGE
HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
September 30, 2000
to $94.56 million as of September 30, 2000. Loans receivable increased to $162.43 million as of
September 30, 2000 from $117.00 million as of December 31, 1999, an increase of $45.43 million. This
increase was primarily due to the loans totaling $39.6 million obtained through the Midwest acquisition,
as well as to new loan originations resulting from the commissioned loan officer program. Other assets
increased $3.49 million primarily as a result of a $1.11 million increase in FHLB stock, goodwill and
deferred taxes related to the acquisition of Midwest Savings Bank.
Total liabilities increased to $255.08 million as of September 30, 2000, from $202.74 million as of
December 31, 1999. The $52.34 million increase in liabilities is due in part to an increase in total
deposits to $178.96 million as of September 30, 2000 from $150.58 million as of December 31, 1999, an
increase of $28.38 million, as well as an increase in notes payable due to a $4.75 million borrowing made
by the holding company. In addition, FHLB advances increased by $19.28 million, to $68.78 million as
of September 30, 2000, from $49.50 million as of December 31, 1999. The increase in deposits and
FHLB advances is primarily attributable to the Midwest Savings acquisition. Deposits acquired from
Midwest Savings Bank totaled $28.2 million, while FHLB advances assumed by the Bank as a result of
the Midwest acquisition totaled $16.2 million.
Stockholders' equity decreased to $18.61 million as of September 30, 2000 from $25.72 million as of
December 31, 1999, a decrease of $7.11 million. This decrease is attributable to the repurchase of
419,947 shares of the Corporation's common stock at a cost of $6.30 million plus expenses of $130,000
through a dutch auction tender offer which occurred during the three month period ended March 31,
2000, as well as an additional repurchase of 127,427 shares at a cost of $1.91 million during the six
month period ended September 30, 2000. In addition, the Corporation paid dividends of $441,000 during
the first nine months of 2000.
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, 2000
and December 31, 1999.
|
Regulatory
Requirement
To Be Adequately
Capitalized
|
Actual
September 30,
2000
|
Actual
December 31,
1999
|
| Core capital | 4.0% | 6.92% | 9.64% |
| Risk-based capital | 8.0% | 16.00% | 24.14% |
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
September 30, 2000
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, 2000 was 9.44%, a portion of which includes interest-earning assets with terms of 5 years or less. Loan commitments outstanding totaled $3.5 million at September
30, 2000.
Impact of New Accounting Standards
Statement of Financial Accounting Standards (Statement) No. 133 on derivatives will, in 2001, 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.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities
Act of 1993 as amended and Section 21E of the Securities Act of 1934 as amended. The Corporation intends
such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes
of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and
describe future plans, strategies, and expectations of the Corporation, are generally identified by the use of
words "believe," "expect," "intend," "anticipate," "estimate," or "project" or similar expressions. The
Corporation's ability to predict results or the actual effect of future plans or strategies is inherently uncertain.
Factors which could have a material adverse effect on the operations and future prospects of the Corporation
and the subsidiary include, but are not limited to, changes in interest rates; general economic conditions;
legislative/regulatory changes; monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board; the quality and composition of the loan or securities portfolios;
demand for loan products; deposit flows; competition; demand for financial services in the Corporation's
market areas; and accounting principles, policies, and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation's financial results, is included in the
Corporation's filings with the Securities and Exchange Commission.
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
September 30, 2000
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In an attempt to manage its exposure to changes in interest rates, management monitors the
Corporation'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. The following table sets forth, at June 30, 2000,
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.
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Change in
Interest
Rates |
Estimated
NPV |
Ratio
of NPV to |
Estimated Increase
(Decrease) in NPV
|
(Basis Points)
|
Amount
|
of Assets
|
Amount
|
Percent
|
| +300 |
$ 3,708 |
1.49 |
$(17,756) |
(83) |
| +200 |
10,001 |
3.91 |
(11,463) |
(53) |
| +100 |
16,153 |
6.14 |
(5,311) |
(25) |
| -- |
21,464 |
7.97 |
-- |
-- |
| -100 |
25,967 |
9.45 |
4,503 |
21 |
| -200 |
28,258 |
10.16 |
6,794 |
32 |
| -300 |
30,907 |
10.97 |
9,443 |
44 |
For the purposes of comparison, the following table sets forth the 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
Interest
Rates |
Estimated
NPV |
Ratio
of NPV to |
Estimated Increase
(Decrease) in NPV
|
(Basis Points)
|
Amount
|
of Assets
|
Amount
|
Percent
|
| +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.
The Bank has experienced a significant increase in interest rate risk during the past nine months, primarily as a
result of the Midwest acquisition, as well as from the decrease in capital incurred through the repurchase of
stock. A substantial portion of Midwest's assets were long term fixed rate loans, funded in part by a Federal
Home Loan Bank open line of credit. The Bank is currently implementing different strategic options intended
to bring about a reduction in rate risk. These options include the restructuring of FHLB advances and the sale of long term fixed rate interest earning assets.
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HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
September 30, 2000
While the above estimates are based on data provided as of June 30, 2000, management believes that the
Bank's interest rate risk as of September 30, 2000 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, 2000 will be held on May 2, 2001 at
10:30 a.m. at the Oak Forest office of the Company.
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Part II Other Information
| Item 1. | Legal Proceedings |
| | | None
| | |
| Item 2. | Changes in Securities and Use of Proceeds |
| | None |
| | |
| Item 3. | Defaults upon Senior Securities |
| | None |
| | |
| Item 4. | Submission of Matters to a vote of Security Holders |
| | None |
| | |
| Item 5. | Other Information |
| | None |
| | |
| Item 6. | Exhibits and Reports on Form 8-K |
| | a. Reports on Form 8-K - none |
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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 9, 2000
/s/ Michael R. Stevens
Michael R. Stevens
President
November 9, 2000
/s/ Jean M. Thornton
Jean M. Thornton
Chief Financial Officer
November 9, 2000
