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: June 30, 2000
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 Identification No.)
Incorporation or Organization)
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 July 31, 2000
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Common Stock, par value $.01 960,490 shares
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP.
AND SUBSIDIARY
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition as of June 30,
2000 and December 31, 1999...........................................3
Condensed Consolidated Statements of Income for the three and six
months ended June 30, 1999 and 2000..................................4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 2000..................................5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1999 and 2000......................6
Notes to the Condensed Consolidated Financial Statements as of
June 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
2.
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
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June 30, December 31,
2000 1999
-------- --------
ASSETS
Cash and cash equivalents $ 6,979 $ 9,813
Securities available-for-sale, at fair value 31,469 32,982
Securities held-to-maturity 59,678 61,126
Loans receivable, net 159,744 116,998
Premises and equipment, net 3,713 3,538
FHLB stock, at cost 3,230 2,325
Accrued interest receivable and other assets 4,489 1,675
-------- --------
Total assets $269,302 $228,457
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 179,904 $150,576
FHLB advances 63,183 49,500
Advances from borrowers for taxes and insurance 1,689 1,133
Note payable 4,000 -
Accrued interest payable and other liabilities 1,821 1,527
-------- --------
Total liabilities 250,597 202,736
Stockholders' equity
Common stock, $.01 par value; 3,100,000 shares
authorized; 2,076,325 shares issued 21 21
Surplus 20,301 20,270
Unearned ESOP, (2000 - 107,969 shares;
1999 - 116,274 shares) (1,080) (1,163)
Unearned stock awards (728) (859)
Retained earnings 14,780 14,235
Accumulated other comprehensive income 289 444
Treasury stock at cost ( 2000 - 962,639 shares;
1999 - 457,762 shares) (14,878) (7,227)
-------- --------
Total stockholders' equity 18,705 25,721
-------- --------
Total liabilities and stockholders' equity $269,302 $228,457
======== ========
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See accompanying notes to unaudited financial statements.
3.
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and Six months ended June 30, 2000 and 1999
(In thousands, except per share data)
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Six months ended Three months ended
---------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
Interest income
Loans $4,587 $3,898 $2,467 $2,032
Securities 3,237 2,724 1,613 1,319
Interest bearing deposits 123 110 67 38
------ ------ ------ ------
Total interest income 7,947 6,732 4,147 3,389
Interest expense
Deposits 2,887 2,811 1,490 1,401
FHLB advances 1,369 686 752 338
Note payable 86 - 70 -
------ ------ ------- ------
Total interest expense 4,342 3,497 2,312 1,739
------ ------ ------- ------
Net interest income 3,605 3,235 1,835 1,650
Provision for loan losses - 20 - 20
------ ------ ------- ------
Net interest income after provision
for loan losses 3,605 3,215 1,835 1,630
Non-interest income
Service fees 284 254 157 126
Other income 100 72 59 35
Gain (loss) on sale of securities (34) 45 (21) 12
------ ------ -------- ------
Total non-interest income 350 371 195 173
Non-interest expense
Salaries and employee benefits 1,324 1,179 714 587
Occupancy and equipment expense 492 450 253 226
Computer service fees 210 133 127 64
Other expenses 602 516 342 261
------ ------ ------- ------
Total non-interest expense 2,628 2,278 1,436 1,138
------ ------ ------- ------
Income before income taxes 1,327 1,308 594 665
Provision for income taxes 474 501 213 253
------ ------ ------- ------
Net income $ 853 $ 807 $ 381 $ 412
====== ====== ======= ======
Earnings per share - basic and diluted $ .73 $ .52 $ .38 $ .26
===== ====== ======= ======
Comprehensive income $ 698 $ 520 $ 388 $ 302
====== ====== ====== ======
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See accompanying notes to unaudited financial statements.
4.
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands)
-------------------------------------------------------------------------------
2000 1999
------- --------
Cash flows from operating activities
Net income $ 853 $ 807
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 168 114
Net amortization of security premiums/discounts 32 167
Change in deferred loan fees (63) (88)
(Gain) loss on sale of securities 34 (45)
Provision for loan losses - 20
Change in accrued interest receivable and
other assets (323) 13
Change in accrued interest payable and other
liabilities 217 355
Stock awards expense 131 131
ESOP compensation 114 112
------- --------
Net cash provided by operating activities 1,163 1,586
------- --------
Cash flows from investing activities
Midwest Savings Bank acquisition, net (728) -
Purchase of securities available-for-sale (4,274) (3,356)
Proceeds from sales of securities available-for-sale 3,912 282
Principal payments of mortgage-backed securities and
collateralized mortgage obligations 5,780 19,600
Proceeds from maturities and calls of securities 2 1,174
Sale/(Purchase) of FHLB stock (40) 375
Net increase in loans (3,772) (12,533)
Purchases of securities held-to-maturity (82) (13,034)
Purchases of premises and equipment, net (35) (147)
------- --------
Net cash provided by (used in) investing activities 763 (7,639)
------- --------
Cash flows from financing activities
Net increase in deposits 1,143 7,095
Change in advance payments by borrowers for taxes
and insurance 556 82
Purchase of treasury shares (7,651) (1,217)
Change in FHLB advances (2,500) (2,000)
Change in note payable 4,000 -
Dividends paid (308) (318)
------- --------
Net cash provided by (used in) financing activities (4,760) 3,642
------- --------
Net decrease in cash and cash equivalents (2,834) (2,411)
Cash and due from banks at beginning of period 9,813 6,036
------- --------
Cash and due from banks at end of period $ 6,979 $ 3,625
======= ========
Supplemental disclosure of cash flow information
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See accompanying notes to unaudited financial statements.
5.
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands except share data)
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<TABLE>
<CAPTION>
Accumulated Total
Other Unearned Stock- Compre-
Common Retained Comprehen- Unearned Treasury Stock holders hensive
Stock Surplus Earnings sive Income ESOP Stock Awards Equity Income
------ ------- -------- ----------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $21 $20,208 $13,207 $1,082 $(1,329) $(4,863) $(1,120) $27,206 $ -
Net income for six months
ended June 30, 1999 - - 807 - - - - 807 807
ESOP shares earned - 28 - - 83 - - 111 -
Stock awards earned - - - - - - 131 131 -
Change in unrealized gain
on securities available-for-sale, net - - - (287) - - - (287) (287)
Treasury stock purchase, net - - - - - (1,217) - (1,217) -
Dividends declared ($.18 per share) - - (373) - - - - (373) -
--- ------- ------- ------ ------- ------- ------- ------- -----
Balance at June 30, 1999 $21 $20,236 $13,641 $ 795 $(1,246) $(6,080) $ (989) $26,378 $ 520
=== ======= ======= ====== ======= ======= ======= ======= =====
</TABLE>
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Continued
6.
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(In thousands except share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Total
Other Unearned Stock- Compre-
Common Retained Comprehen- Unearned Treasury Stock holders hensive
Stock Surplus Earnings sive Income ESOP Stock Awards Equity Income
------ ------- -------- ----------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 21 $20,270 $14,235 $ 444 $(1,163) $ (7,227) $ (859) $25,721 $ -
Net income for six months
ended June 30, 2000 - - 853 - - - - 853 853
ESOP shares earned - 31 - - 83 - - 114 -
Stock awards earned - - - - - - 131 131 -
Change in unrealized gain
on securities available-for-sale, net - - - (155) - - - (155) (155)
Treasury stock purchase, net - - - - - (7,651) - (7,651) -
Dividends declared ($.22 per share) - - (308) - - - - (308) -
---- ------- ------- ------- ------- -------- ------ ------- ----
Balance at June 30, 2000 $ 21 $20,301 $14,780 $ 289 $(1,080) $(14,878) $ (728) $18,705 $698
==== ======= ======= ======= ======= ======== ====== ======= ====
</TABLE>
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See accompanying notes to unaudited financial statements.
7.
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
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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 quarter and six months ended June 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 an
average 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.
NOTE 3
A reconciliation of the numerators and denominators for earnings per common
share computations is presented below:
Three months Six months
ended June 30, ended June 30,
-------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
Earnings per share
Net income available to common stockholders $381 $ 412 $ 853 $ 807
==== ====== ====== ======
Weighted average common shares outstanding 990 1,558 1,164 1,569
==== ====== ====== ======
Earnings per share $.38 $ .26 $ .73 $ .52
==== ====== ====== ======
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(Continued)
8.
<PAGE>
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.
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. At June 9, 2000 Midwest Savings Bank had total assets of $47.8 million.
The acquisition was recorded using the purchase method of accounting and
concurrent with the transaction Midwest Savings Bank was merged into Hemlock
Federal Bank. 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 proforma total net interest income, Total income, net
income, basic and diluted earnings per share for the three and six months ended
June 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 Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
-------- --------- -------- ---------
(in thousands)
Net Interest Income $2,034 $2,023 $4,154 $3,963
Total Income 4,910 4,428 9,740 8,787
Net Income 357 408 778 825
Basic and diluted Earnings
per share .36 .26 .67 .53
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(Continued)
9.
<PAGE>
HEMLOCK FEDERAL FINANCIAL CORPORATION AND SUBSIDIARY
June 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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The following discussion focuses on the consolidated financial condition of
Hemlock Federal Financial Corp. and Subsidiary at June 30, 2000 and the
consolidated results of operations for the three and six months ending June 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 second quarter of 2000
totaled $381,000, or $.38 per share, as compared to net income of $412,000, or
$.26 per share earned for the second quarter of 1999. Net income for the six
month period ended June 30, 2000 totaled $853,000, or $.73 per share, as
compared to net income of $807,000, or $.52 per share for same period in 1999.
Net Interest Income
-------------------
Net interest income before provision for loan losses was $1.84 million and $3.60
million for the three and six month periods ended June 30, 2000, respectively,
as compared to $1.65 million and $3.24 million for the same periods in 1999. For
the three and six month periods ended June 30, 2000, interest income increased
to $4.15 million and $7.95 million, respectively, from $3.39 million and $6.73
million for the same periods ended June 30, 1999. This increase is due primarily
to an increase in the average balance of loans receivable, as a result of the
Midwest acquisition, funded by an increase in the average balances of deposits.
Interest expense increased to $2.31 million and $4.34 million for the three and
six months ended June 30, 2000, from $1.74 million and $3.50 million for the
same periods in 1999. This increase is attributable to increases in deposits and
FHLB advances, as well as interest expense related to the note payable.
Provision for Loan Losses
-------------------------
The Corporation's allowance for loan losses was $969,000 as of June 30, 2000,
equal to .61% of total loans. The bank had non-performing assets totaling
$307,000 as of June 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 June 30, 2000. A provision of $20,000 was made during the
same period ended June 30, 1999.
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(Continued)
10.
<PAGE>
Changes In Non-Interest Income and Non-Interest Expense
-------------------------------------------------------
Non-interest income increased to $195,000 for the three month period ended June
30, 2000, as compared to $173,000 for the same period ended June 30, 1999. The
increase is due primarily to an increase in fees associated with lending
activities, as well as an increase in fees charged for non-customer ATM
transactions and checking accounts. Non-interest income decreased to $350,000
for the six month period ended June 30, 2000, as compared to $371,000 for the
same period ended June 30, 1999. The decrease is due primarily to a $34,000 loss
incurred on the sale of securities from the available-for-sale portfolio for the
six month period ended June 30, 2000, compared to a $45,000 gain incurred on the
sale of securities from the available-for-sale portfolio for the six month
period ended June 30, 1999.
Non-interest expense increased to $1.44 million and $2.63 million for the three
and six month periods ended June 30, 2000, respectively, as compared to $1.14
million and $2.28 million for the same period one year ago. The increase is due
primarily to a data processing conversion fee and an overall increase in
salaries, 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 $213,000 and
$474,000 for the three and six month periods ended June 30, 2000, respectively,
from $253,000 and $501,000, for the same periods ended June 30, 1999. The
decrease in income tax was the result of a decrease in income before income
taxes, as well as an increase in income from securities exempt from state income
tax.
Financial Condition
--------------------
Consolidated total assets increased to $269.30 million as of June 30, 2000, from
$228.46 million as of December 31, 1999, an increase in total assets of $40.84
million. Cash on hand decreased to $6.98 million as of June 30, 2000, as
compared to $9.81 million as of December 31, 1999, a decrease of $2.83 million.
In addition, total securities decreased by $2.96 million, from $94.11 million as
of December 31, 1999, to $91.15 million as of June 30, 2000 due to principal pay
down of mortgage related securities. Loans receivable increased to $159.74
million as of June 30, 2000 from $117.00 million as of December 31, 1999, an
increase of $42.74 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 $2.8 million primarily as a result of goodwill and
deferred taxes related to the acquisition of Midwest Savings Bank.
Total liabilities increased to $250.60 million as of June 30, 2000, from $202.74
million as of December 31, 1999. The $47.86 million increase in liabilities is
due in part to an increase in total
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(Continued)
11.
<PAGE>
deposits to $179.90 million as of June 30, 2000 from $150.58 million as of
December 31, 1999, an increase of $29.32 million, as well as an increase in
notes payable due to a $4.00 million borrowing made by the holding company. In
addition, FHLB advances increased by $13.68 million, to $63.18 million as of
June 30, 2000, from $49.50 million as of December 31, 1999. The increase in
deposits is primarily attributable to the Midwest Savings acquisition, as well
as increases in deposits in both the Oak Forest and Lemont branches. Deposits
acquired from Midwest Savings Bank totaled $28.2 million. The $4.00 million
borrowing by the holding company was used to partially fund the Company's Dutch
auction tender offer. The increase in FHLB advances is due to the outstanding
advances of $16.2 million assumed by the Bank as a result of the Midwest
acquisition.
Stockholders' equity decreased to $18.71 million as of June 30, 2000 from $25.72
million as of December 31, 1999, a decrease of $7.01 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 84,930 shares at a cost of
$1.22 million for the three month period ended June 30, 2000. In addition, the
Corporation paid dividends of $308,000 during the first six months of 2000,
which was partially offset by net income.
Capital Resources and Commitments
---------------------------------
The Bank is subject to two capital to asset requirements in accordance with bank
regulations. The following table summarizes the Bank's regulatory capital
requirements versus actual capital as of June 30, 2000 and December 31, 1999.
Regulatory
Requirement Actual
To Be Adequately June 30, December 31,
Capitalized 2000 1999
------------------ ------------ -----------------
Core capital 4.0% 14.75% 28.86%
Risk-based capital 8.0% 15.85% 24.14%
Liquidity
---------
Liquidity measures the ability of the Corporation to meet maturing obligations
and its existing commitments, to withstand fluctuations in deposit levels, to
fund operations, and to provide for customers' credit needs. The liquidity of
the Corporation principally depends on cash flows from operating activities,
investment in and maturity of assets, changes in balances of deposits and
borrowings, and its ability to borrow funds in the money or capital markets.
The Bank's regulatory liquidity ratio at June 30, 2000 was 13.09%, a portion of
which includes interest-earning assets with terms of 5 years or less. Loan
commitments outstanding totaled $5.7 million at June 30, 2000.
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(Continued)
12.
<PAGE>
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.
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
--------------------------------------------------------------------------------
(Continued)
13.
<PAGE>
transactions to assure attainment of the Bank's objectives in the most effective
manner. In addition, the Board anticipates reviewing on a quarterly basis the
Bank's asset/liability position, including simulations of the effect on the
Bank's capital of various interest rate scenarios.
In managing its asset/liability mix, Hemlock Federal, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, at times places more emphasis on managing net interest
margin than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.
Management utilizes the net portfolio value ("NPV") analysis to quantify
interest rate risk. In essence, this approach calculates the difference between
the present value of liabilities, expected cash flows from assets and cash flows
from off balance sheet contracts. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of an immediate and sustained
200 basis point change in interest rates is a decrease in the institution's NPV
in an amount not exceeding 2% of the present value of its assets. Pursuant to
this regulation, thrift institutions with greater than "normal" interest rate
exposure must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to the 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets. Savings institutions, however, with less than
$300 million in assets and a total capital ratio in excess of 12%, will be
exempt from this requirement unless the OTS determines otherwise. The OTS has
postponed the implementation of the rule until further notice. Based upon its
asset size and capital level at June 30, 2000, the Bank would qualify for an
exemption from this rule; management believes that the Bank would be required to
make a deduction from capital of $28,000 if it were subject to this rule.
The following table sets forth, at March 31, 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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(Continued)
14.
<PAGE>
Change in Estimated Increase
Interest Estimated Ratio (Decrease) in NPV
Rates NPV of NPV to ---------------------------
(Basis Points) Amount of Assets Amount Percent
--------------------------------------------------------------------------------
+300 $ 13,685 6.61 $ (9,704) (41)
+200 17,582 8.26 (5,807) (25)
+100 20,690 9.49 (2,698) (12)
- 23,388 10.50 - -
-100 25,607 11.27 2,218 9
-200 26,110 11.34 2,721 12
-300 26,720 11.45 3,332 14
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, 1999,
management believes that the Bank's interest rate risk as of June 30, 2000 has
not significantly changed from the level indicated in the above table.
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15.
<PAGE>
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
Michael R Stevens 804,267 59,334
Kenneth J. Bazarnik 804,992 59,609
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, 2000.
NUMBER OF PERCENTAGE
VOTES OF VOTES
FOR 844,428 97.8%
AGAINST 17,023 2.0%
ABSTAIN 2,150 0.2%
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. Reports on Form 8-K - none
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16.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEMLOCK FEDERAL FINANCIAL CORP.
(Registrant)
/s/ Maureen G. Partynski
-------------------------
Maureen G. Partynski
Chief Executive Officer
August 8 , 2000
/s/ Michael R. Stevens
-------------------------
Michael R. Stevens
President
August 8, 1999
/s/ Jean M. Thornton
-------------------------
Jean M. Thornton
Chief Financial Officer
August 8, 1999
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17.
