1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission File Number 0-24834
-------
MILTON FEDERAL FINANCIAL CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1412064
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
25 Lowry Drive, West Milton, Ohio 45383
(Address of principal executive offices) (zip code)
(937) 698-4168
--------------
(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 [ ]
As of February 9, 2000, the latest practicable date, 2,099,995 shares of the
registrant's common shares, no par value, were issued and outstanding.
2
MILTON FEDERAL FINANCIAL CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets .................................................................... 3
Consolidated Statements of Income .............................................................. 4
Consolidated Statements of Comprehensive Income................................................. 5
Condensed Consolidated Statements of Changes in Shareholders' Equity............................ 6
Condensed Consolidated Statements of Cash Flows ................................................ 7
Notes to Consolidated Financial Statements ..................................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk.................................. 20
Part II - Other Information
Item 1. Legal Proceedings.......................................................................... 22
Item 2. Changes in Securities and Use of Proceeds.................................................. 22
Item 3. Defaults Upon Senior Securities............................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders........................................ 22
Item 5. Other Information.......................................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................................... 22
SIGNATURES ........................................................................................... 23
2.
3
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
December 31, September 30,
1999 1999
---- ----
ASSETS
Cash and amounts due from depository institutions $ 2,936,017 $ 3,138,920
Interest-bearing deposits in other financial institutions 667,624 403,342
------------- -------------
Total cash and cash equivalents 3,603,641 3,542,262
Securities available for sale 35,935,746 36,668,997
Securities held to maturity (Estimated fair value of $11,755,797
at December 31, 1999 and $12,199,160 at September 30, 1999) 11,993,427 12,317,173
Federal Home Loan Bank stock 3,374,400 3,131,700
Loans held for sale 2,626,923 2,626,923
Loans, net 196,445,239 192,115,024
Premises and equipment, net 2,576,268 2,629,439
Cash surrender value of life insurance 1,678,626 1,661,644
Accrued interest receivable 1,253,779 1,335,349
Real estate owned 149,886 201,015
Other assets 324,843 447,108
------------- -------------
Total assets $ 259,962,778 $ 256,676,634
============= =============
LIABILITIES
Deposits $ 166,315,336 $ 168,471,283
Borrowed funds 66,359,203 61,483,463
Advance payments by borrowers for taxes and insurance 798,607 551,027
Accrued interest payable 320,042 352,075
Other liabilities 880,873 790,896
------------- -------------
Total liabilities 234,674,061 231,648,744
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares authorized,
none outstanding -- --
Common stock, no par value, 9,000,000 shares authorized,
2,578,875 shares issued -- --
Additional paid-in capital 25,273,266 25,231,035
Retained earnings 8,675,497 8,529,714
Treasury stock, at cost, 478,880 shares at December 31, 1999
and September 30, 1999 (7,017,271) (7,017,271)
Unearned employee stock ownership plan shares (914,287) (969,101)
Unearned recognition and retention plan shares (588,595) (638,715)
Accumulated other comprehensive income (139,893) (107,772)
------------- -------------
Total shareholders' equity 25,288,717 25,027,890
------------- -------------
Total liabilities and shareholders' equity $ 259,962,778 $ 256,676,634
============= =============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
4
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
------------
1999 1998
---- ----
INTEREST AND DIVIDEND INCOME
Loans, including fees $3,750,332 $3,402,019
Securities 732,678 738,159
Other, including dividend income 53,335 74,724
---------- ----------
4,536,345 4,214,902
INTEREST EXPENSE
Deposits 1,966,244 2,035,806
Borrowed funds 893,824 724,811
---------- ----------
2,860,068 2,760,617
---------- ----------
NET INTEREST INCOME 1,676,277 1,454,285
Provision for loan losses 25,000 30,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,651,277 1,424,285
NONINTEREST INCOME
Service charges and other fees 102,993 61,701
Gain on sale of securities 2,003 --
Gain on sale of loans -- 52,615
Gain on sale of REO 6,366 --
Other income 30,919 42,541
---------- ----------
142,281 156,857
NONINTEREST EXPENSE
Salaries and employee benefits 649,713 636,093
Occupancy expense 114,145 102,766
Data processing services 71,726 58,488
State franchise taxes 80,197 87,191
Federal deposit insurance premiums 24,776 22,132
Advertising 14,595 19,870
Other expenses 158,534 181,218
---------- ----------
1,113,686 1,107,758
---------- ----------
INCOME BEFORE INCOME TAX 679,872 473,384
Income tax expense 231,200 162,000
---------- ----------
NET INCOME $ 448,672 $ 311,384
========== ==========
Earnings per share - Basic $ .23 $ .15
========== ==========
Earnings per share - Diluted $ .23 $ .15
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
5
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
1999 1998
---- ----
NET INCOME $ 448,672 $ 311,384
Other comprehensive income:
Unrealized holding gains (losses) on available for sale securities
arising during the period (46,666) 1,213
Reclassification adjustment for (gains) losses realized on securities
sales included in net income (2,003) --
--------- ---------
Net unrealized gain (loss) (48,669) 1,213
Tax effect 16,548 (415)
--------- ---------
Total other comprehensive income (32,121) 798
--------- ---------
COMPREHENSIVE INCOME $ 416,551 $ 312,182
========= =========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5.
6
MILTON FEDERAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
------------
1999 1998
---- ----
Balance at beginning of period $ 25,027,890 $ 26,283,226
Net income 448,672 311,384
Cash dividends (.15 per share in 1999 and 1998) (302,889) (320,494)
Commitment to release employee stock ownership plan shares
(4,634 shares in 1999 and 4,997 shares in 1998) 64,843 79,605
Shares earned under recognition and retention plan (3,481 shares in 1999 and
3,739 shares in 1998), including tax benefit on shares vesting
on October 16 of each year 82,322 83,039
Purchase of treasury stock, 31,841 shares at cost -- (454,527)
Other comprehensive income (32,121) 798
------------ ------------
Balance at end of period $ 25,288,717 $ 25,983,031
============ ============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6.
7
MILTON FEDERAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
------------
1999 1998
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 846,503 $ 1,216,478
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (850,965) (6,941,199)
Proceeds from maturities and principal payments 747,103 1,927,954
Proceeds from sales 798,312 --
Securities held to maturity
Proceeds from maturities and principal payments 315,153 578,049
Net increase in loans (4,327,656) (14,198,028)
Proceeds from sale of loans -- 2,215,110
Premises and equipment expenditures (2,750) (18,363)
Purchase FHLB stock (186,300) --
Proceeds from sale of real estate owned 57,495 --
----------- ------------
Net cash from investing activities (3,449,608) (16,436,477)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (2,155,947) 12,327,417
Net change in advance payments by borrowers for taxes
and insurance 247,580 399,479
Net change in short-term borrowings 3,200,000 --
Long-term advances from FHLB 1,800,000 1,000,000
Principal payments on FHLB advances (124,260) (124,286)
Cash dividends paid (302,889) (320,494)
Purchase of treasury stock -- (454,527)
----------- ------------
Net cash from financing activities 2,664,484 12,827,589
----------- ------------
Net change in cash and cash equivalents 61,379 (2,392,410)
Cash and cash equivalents at beginning of period 3,542,262 3,577,923
----------- ------------
Cash and cash equivalents at end of period $ 3,603,641 $ 1,185,513
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 2,892,101 $ 2,799,455
Income taxes 55,000 --
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7.
8
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of Milton Federal Financial Corporation ("MFFC") at
December 31, 1999, and its results of operations and cash flows for the periods
presented. All such adjustments are normal and recurring in nature. The
accompanying financial statements have been prepared in accordance with the
instructions of Form 10-Q and, therefore, do not purport to contain all
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances, and should be
read in conjunction with the consolidated financial statements, and notes
thereto, of MFFC for the fiscal year ended September 30, 1999, included in its
1999 annual report. MFFC has consistently followed the accounting policies
described in the notes to financial statements contained in MFFC's 1999 annual
report in preparing this Form 10-Q.
The consolidated financial statements include the accounts of MFFC and its
wholly-owned subsidiary, Milton Federal Savings Bank (the "Bank"), together
referred to as the Corporation. The financial statements of the Bank include the
accounts of its wholly-owned subsidiary, Milton Financial Service Corporation.
Milton Financial Service Corporation holds stock in Intrieve, Inc., the data
processing center utilized by the Bank. All significant intercompany accounts
and transactions have been eliminated.
MFFC is a thrift holding company, and through the subsidiary Bank, is engaged in
the business of commercial and retail banking services with operations conducted
through its main office in West Milton, Ohio, and from its full service branch
offices located in Englewood, Brookville and Tipp City, Ohio. The Corporation is
primarily organized to operate in the financial institution industry.
Substantially all revenues are derived from the financial institution industry.
Miami, Montgomery and Darke Counties, Ohio provide the source for substantially
all the Corporation's deposit and lending activities.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses, fair values of financial instruments and
status of contingencies are particularly subject to change.
Income tax expense is the total of the current-year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax amounts for the temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
Some items in prior financial statements have been reclassified to conform to
the current presentation.
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Employee Stock Option
Plan ("ESOP") shares are considered outstanding for this calculation unless
unearned. Recognition and Retention Plan ("RRP") shares are considered
outstanding as they become vested. Diluted earnings per common share include the
dilutive effect of RRP shares and the additional potential common shares
issuable under stock options.
- --------------------------------------------------------------------------------
(Continued)
8.
9
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The factors used in the earnings per share computation are as follows:
Three Months Ended
December 31,
------------
1999 1998
---- ----
BASIC EARNINGS PER COMMON SHARE
Net income $ 448,672 $ 311,334
========== ==========
Weighted average common shares outstanding 2,099,995 2,222,613
Less: Average unallocated ESOP shares (79,153) (98,561)
Less: Average nonvested RRP shares (43,171) (57,006)
---------- ----------
Average shares 1,977,671 2,067,046
========== ==========
Basic earnings per common share $ .23 $ .15
========== ==========
DILUTED EARNINGS PER COMMON SHARE
Net income $ 448,672 $ 311,334
========== ==========
Weighted average common shares outstanding
for basic earnings per common shares 1,977,671 2,067,046
Add: Dilutive effects of average nonvested RRP shares -- 209
Add: Dilutive effects of stock options -- 2,109
---------- ----------
Average shares and dilutive potential common shares 1,977,671 2,069,364
========== ==========
Diluted earnings per common share $ .23 $ .15
========== ==========
Unearned RRP shares and stock options did not have a dilutive effect on the
weighted average shares outstanding for the three months ended December 31,
1999, due to the fair value at the date of grant for the RRP shares and the
exercise price for the stock options exceeding the average stock price of the
Corporation for the three months ended December 31, 1999.
NOTE 2 - SECURITIES
The amortized cost and fair values of securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
DECEMBER 31, 1999
- -----------------
Available for sale
Equity $ 15,000 $ -- $ -- $ 15,000
Mortgage-backed 36,132,705 196,877 (408,836) 35,920,746
----------- -------- --------- -----------
Total $36,147,705 $196,877 $(408,836) $35,935,746
=========== ======== ========= ===========
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(Continued)
9.
10
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
DECEMBER 31, 1999
- -----------------
Held to maturity
Municipal obligations $ 125,000 $ -- $ (2,378) $ 122,622
Mortgage-backed 11,868,427 38,149 (273,401) 11,633,175
----------- -------- --------- -----------
Total $11,993,427 $ 38,149 $(275,779) $11,755,797
=========== ======== ========= ===========
SEPTEMBER 30, 1999
- ------------------
Available for sale
Equity $ 15,000 $ -- $ -- $ 15,000
Mortgage-backed 36,817,287 254,886 (418,176) 36,653,997
----------- -------- --------- -----------
Total $36,832,287 $254,886 $(418,176) $36,668,997
=========== ======== ========= ===========
Held to maturity
Municipal obligations $ 125,000 $ -- $ (1,820) $ 123,180
Mortgage-backed 12,192,173 136,856 (253,049) 12,075,980
----------- -------- --------- -----------
Total $12,317,173 $136,856 $(254,869) $12,199,160
=========== ======== ========= ===========
The municipal obligation classified as held to maturity at December 31, 1999
matures December 2002.
The Corporation maintains a significant portfolio of mortgage-backed securities
in the form of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA") participation certificates. Mortgage-backed securities
generally entitle the Corporation to receive a portion of the cash flows from an
identified pool of mortgages, and FHLMC, FNMA and GNMA securities are each
guaranteed by their respective agencies as to principal and interest. The
Corporation has also invested significant amounts in collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs")
which are included in mortgage-backed securities. Substantially all CMOs and
REMICs are backed by pools of mortgages insured or guaranteed by the FNMA and
FHLMC.
During the three months ended December 31, 1999, proceeds from sales of
securities available for sale were $798,312 with gross realized gains of $2,003
included in earnings. The Corporation had no sales of securities for the three
months ended December 31, 1998.
- --------------------------------------------------------------------------------
(Continued)
10.
11
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans were as follows:
December 31, September 30,
1999 1999
---- ----
Residential real estate loans
1-4 family (first mortgage) $ 162,509,195 $ 159,291,522
Home equity (1-4 family second mortgage) 6,160,248 5,347,292
Multi-family 4,372,558 4,220,538
Nonresidential real estate loans 13,315,047 12,755,574
Construction loans 9,327,595 11,872,585
------------- -------------
Total real estate loans 195,684,643 193,487,511
Consumer loans
Automobile 2,947,069 3,034,752
Loans on deposits 231,919 317,653
Other consumer loans 358,750 378,095
------------- -------------
Total consumer loans 3,537,738 3,730,500
Commercial loans 3,887,665 3,466,079
------------- -------------
Total loans 203,110,046 200,684,090
Less:
Net deferred loan fees (597,894) (609,131)
Loans in process (5,276,206) (7,194,703)
Allowance for loan losses (790,707) (765,232)
------------- -------------
Net loans $ 196,445,239 $ 192,115,024
============= =============
The Corporation has sold various loans to other financial intermediaries while
retaining the servicing rights. Gains and losses on loan sales are recorded at
the time of the sale. Loans sold for which the Corporation has retained
servicing totaled $15,048,545 at December 31, 1999 and $15,428,430 at September
30, 1999. Capitalized mortgage-servicing rights totaled $189,000 at December 31,
1999 and September 30, 1999. At December 31, 1999 and September 30, 1999,
$2,626,923 of one- to four-family residential real estate loans were held for
sale. Proceeds from the sale of loans during the three months ended December 31,
1998 were $2,215,110 with net realized gains of $52,615 included in earnings. No
loans were sold during the three months ended December 31, 1999.
Activity in the allowance for losses on loans was as follows:
Three Months Ended
December 31,
------------
1999 1998
---- ----
Beginning balance $ 765,232 $676,415
Provision for loan losses 25,000 30,000
Recoveries 547 --
Charge-offs (72) --
--------- --------
Ending balance $ 790,707 $706,415
========= ========
- --------------------------------------------------------------------------------
(Continued)
11.
12
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Loans considered impaired within the scope of SFAS No. 114 were not significant
at December 31, 1999 and September 30, 1999 and during the three months ended
December 31, 1999 and 1998.
Nonperforming loans were as follows.
December 31, September 30,
1999 1999
---- ----
Loans past due over 90 days still on accrual $445,000 $225,000
Nonaccrual loans 231,000 231,000
NOTE 4 - BORROWED FUNDS
At December 31, 1999, the Bank had a cash-management line-of-credit enabling it
to borrow up to $12,413,550 from the Federal Home Loan Bank ("FHLB") of
Cincinnati. The line of credit must be renewed on an annual basis. The next
renewal date is April 16, 2000. Variable rate borrowings of $12,400,000 and
$9,200,000 were outstanding related to this cash management line of credit at
December 31, 1999 and September 30, 1999.
As a member of the FHLB system, the Bank has the ability to obtain additional
borrowings up to a total of 50% of Bank assets subject to the level of
qualified, pledgable one- to four-family residential real estate loans. The Bank
had variable rate borrowings totaling $27,800,000, with interest rates ranging
from 6.00% to 6.48%, at December 31, 1999 and $7,000,000, with interest rates
ranging from 5.33% to 5.51%, at September 30, 1999. The Bank had fixed rate
borrowings totaling $11,159,203 at December 31, 1999 and $11,283,463 at
September 30, 1999. The interest rates on these borrowings ranged from 5.80% to
6.42% at December 31, 1999 and September 30, 1999. The Bank also had $15,000,000
and $34,000,000 in convertible advances at December 31, 1999 and September 30,
1999, whereby the interest rates are fixed for a specified period of time and
then change to variable for the remaining term of the advance. $19,000,000 of
these advances converted to variable rate during the three months ended December
31, 1999. The interest rates on the convertible advances ranged from 5.26% to
5.65% at December 31, 1999 and 5.12% to 5.65% at September 30, 1999.
Advances under the borrowing agreements are collateralized by a blanket pledge
of the Bank's residential mortgage loan portfolio and FHLB stock.
At December 31, 1999, required annual principal payments are as follows:
Period ending December 31:
2000 $20,615,526
2001 3,910,996
2002 2,227,740
2003 1,261,632
2004 709,392
Thereafter 37,633,917
-----------
$66,359,203
===========
- --------------------------------------------------------------------------------
(Continued)
12.
13
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters is not
expected to have a material effect on financial condition or results of
operations of the Corporation.
Some financial instruments are used in the normal course of business to meet
financing needs of customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. These
involve, to varying degrees, credit and interest rate risk in excess of the
amount reported in the financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based on
management's credit evaluation and generally consists of residential or
commercial real estate. Lines of credit are primarily home equity lines
collateralized by second mortgages on one- to four-family residential real
estate and commercial lines of credit collateralized by business assets.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements.
As of December 31, 1999 and September 30, 1999, the Corporation had commitments
to make fixed rate, one- to four-family residential real estate loans at current
market rates totaling $418,000 and $1,040,000. Loan commitments are generally
for thirty days. The interest rate on the fixed rate commitments ranged from
7.50% to 8.50% at December 31, 1999 and 7.00% to 10.25% at September 30, 1999.
The Corporation had commitments to make variable rate, one- to four-family
residential real estate loans totaling $223,000, with interest rates ranging
from 7.13% to 7.63% at September 30, 1999. No variable rate loan commitments
were outstanding at December 31, 1999. As of December 31, 1999 and September 30,
1999, the Corporation had $4,530,000 and $4,540,000 in unused variable rate home
equity lines of credit and $2,181,000 and $2,034,000 in unused variable rate
commercial lines of credit.
At December 31, 1999 and September 30, 1999, the Corporation had standby letter
of credit commitments totaling $465,000.
At December 31, 1999 and September 30, 1999, compensating balances of $1,687,000
and $1,693,000 were required as deposits with the FHLB and Federal Reserve.
These balances do not earn interest.
The Corporation has entered employment agreements with certain officers of the
Corporation. Each of the agreements provide for a term of three years and a
salary and performance review by the Board of Directors not less than annually,
as well as inclusion of the employee in any formally established employee
benefit, bonus, pension and profit sharing plans for which management personnel
are eligible.
- --------------------------------------------------------------------------------
(Continued)
13.
14
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - PROPOSED MERGER
A definitive agreement was signed on January 13, 2000 whereby BancFirst Ohio
Corp. ("BFOC") will acquire the Corporation. Under the terms of the agreement,
BFOC will exchange .444 of a share of its common stock and $6.80 cash for each
of the 2,099,995 outstanding shares of the Corporation. The Corporation's
unexercised stock options will be redeemed for cash equal to the acquisition
price per share less than the exercise price of the options prior to closing.
Based on BFOC's closing price of $20.375 on January 12, 2000, the transaction
would be valued at $33.3 million.
The merger is expected to be consummated in the second quarter of 2000, pending
approval by the Corporation's shareholders, regulatory approval and other
customary conditions of closing. The Corporation has granted to BFOC an option
to purchase up to 19.9% of the Corporation's outstanding shares upon the
occurrence of certain events.
- --------------------------------------------------------------------------------
(Continued)
14.
15
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discusses the financial condition of the Corporation as of
December 31, 1999, as compared to September 30, 1999, and the results of
operations for the three month period ended December 31, 1999, compared with the
same period in 1998. This discussion should be read in conjunction with the
interim financial statements and footnotes included herein.
FORWARD-LOOKING STATEMENTS
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimated," "projected" or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Bank's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Bank's market
area and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Factors listed
above could affect the Corporation's financial performance and could cause the
Corporation's actual results for future periods to differ materially from any
statements expressed with respect to future periods.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly revise any forward looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $260.0 million at December 31, 1999, an
increase of $3.3 million, or 1.3%, from $256.7 million at September 30, 1999.
The growth in assets was primarily in loans. Such growth was funded by Federal
Home Loan Bank advances.
Net loans increased from $192.1 million at September 30, 1999 to $196.4 million
at December 31, 1999. The growth in loans was primarily in one- to four-family
first mortgage loans real estate loans, which increased $3.2 million. Growth in
total real estate loans is primarily related to growth in the Corporation's
market area, as the Corporation has not changed its philosophy regarding pricing
or underwriting standards during the period. Construction loans decreased $2.5
million as loans were converted to more permanent financing upon completion of
construction. Changes in other types of loans were not significant.
The Corporation began originating one- to four-family first mortgage loans with
the intent of selling them in the secondary market in fiscal 1999. The loans
were sold as a means to manage interest rate risk by reducing the Corporation's
investment in longer term, fixed rate loans. The Corporation retained the right
to service the loans for a fee to provide an additional source of fee income. As
a result, $2.6 million in loans were held for sale at December 31, 1999 and
September 30, 1999. Prior to fiscal 1999, the Corporation sold pools of
portfolio loans from time to time to manage interest rate risk.
- --------------------------------------------------------------------------------
15.
16
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Total deposits decreased $2.2 million, or 1.3%, from $168.5 million at September
30, 1999 to $166.3 million at December 31, 1999. The Corporation experienced
decreases in all deposit types. However, no individual type made up a
significant amount of the decrease. The overall decrease partially resulted from
customer withdrawals related to Year 2000 concerns and the Holiday season.
Borrowed funds totaled $61.5 million at September 30, 1999 and $66.4 million at
December 31, 1999. The majority of borrowed funds are invested in
mortgage-backed and related securities to leverage the Corporation's excess
capital and to provide liquidity for future loan growth. The Corporation has
used nearly all of their cash management line of credit with the Federal Home
Loan Bank to support the loan demand.
COMPARISON OF RESULTS OF OPERATIONS
The operating results of the Corporation are affected by general economic
conditions, monetary and fiscal policies of federal agencies and policies of
agencies regulating financial institutions. The Corporation's cost of funds is
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are influenced by demand for real estate loans
and other types of loans which, in turn, is affected by the interest rates at
which such loans are made, general economic conditions and availability of funds
for lending activities.
The Corporation's net income is primarily dependent upon its net interest income
(the difference between interest income generated on interest-earning assets and
interest expense incurred on interest-bearing liabilities). Net income is also
affected by provisions for loan losses, service charges, gains on sale of assets
and other income, noninterest expense and income taxes. The Corporation's net
income of $449,000 for the three months ended December 31, 1999 represented an
increase of $137,000 when compared to the same period in 1998. Basic earnings
per share increased $.08 per share from $.15 per share for 1998 to $.23 for
1999.
Net interest income is the largest component of the Corporation's income and is
affected by the interest rate environment and volume and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
totaled $1,676,000 for the three months ended December 31, 1999, compared to
$1,454,000 for the same period in 1998. The increase resulted from the
Corporation's overall growth in assets. Additionally, the Corporation had a
larger proportion of funds invested in higher yielding loans as opposed to
securities. The Corporation remains liability sensitive, whereby its
interest-bearing liabilities will generally reprice more quickly than its
interest-earning assets. Therefore, the Corporation's net interest margin will
generally increase in periods of falling interest rates in the market and will
decrease in periods of rising interest rates. Accordingly, in a rising rate
environment, the Corporation may need to increase rates to attract and retain
deposits. Due to the negative gap position, such a rise in interest rates may
not have such an immediate impact on interest-earning assets. This lag could
negatively affect net interest income.
Interest and fees on loans totaled $3,750,000 for the three months ended
December 31, 1999 compared to $3,402,000 for the three months ended December 31,
1998. The increase in interest and fees on loans was due to higher average loan
balances primarily related to the origination of one- to four-family first
mortgage loans.
- --------------------------------------------------------------------------------
16.
17
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Interest on deposits totaled $1,966,000 for the three months ended December 31,
1999 and $2,036,000 for the three months ended December 31, 1998. The decrease
resulted from a lower average cost of deposits for the period.
Interest on borrowed funds totaled $894,000 for the three months ended December
31, 1999 compared to $725,000 for the same period in 1998. The increase was the
result of higher average balances of borrowed funds during the period. Beginning
in the fourth quarter of fiscal 1995, the Corporation borrowed funds and
invested a portion of these funds in mortgage-backed securities to leverage
excess capital. From time to time, the Corporation has borrowed additional
adjustable rate funds for similar purposes as well as to provide funding for
loan growth. The Corporation has also borrowed fixed rate funds to provide for
long term liquidity needs. As opportunities arise, the Corporation may make
additional borrowings to fund loan demand and mortgage-backed and related
security purchases.
The Corporation maintains an allowance for loan losses in an amount, which, in
management's judgment, is adequate to absorb probable losses in the loan
portfolio. While management utilizes its best judgment and information
available, ultimate adequacy of the allowance is dependent on a variety of
factors, including performance of the Corporation's loan portfolio, the economy,
changes in real estate values and interest rates and the view of the regulatory
authorities toward loan classifications. The provision for loan losses is
determined by management as the amount to be added to the allowance for loan
losses after net charge-offs have been deducted to bring the allowance to a
level considered adequate to absorb probable losses in the loan portfolio. The
amount of the provision is based on management's regular review of the loan
portfolio and consideration of such factors as historical loss experience,
general prevailing economic conditions, changes in size and composition of the
loan portfolio and specific borrower considerations, including ability of the
borrower to repay the loan and the estimated value of the underlying collateral.
Other than $115,000 in charge-offs during fiscal 1998, the Corporation has not
experienced any significant charge-offs for the past several years. The
charge-off related to a single loan relationship for which the Corporation
maintained a specific valuation allowance. The Corporation's low historical
charge-off history is the product of a variety of factors, including the
Corporation's underwriting guidelines, which generally require a down payment of
20% of the lower of sales price or appraised value of one- to four-family
residential real estate loans, established income information and defined ratios
of debt to income. Loans secured by real estate make up 96.3% of the
Corporation's loan portfolio, and loans secured by first mortgages on one- to
four-family residential real estate constituted 80.0% of total loans at December
31, 1999. Notwithstanding the historically low level of charge-offs, management
believes it is prudent to continue increasing the allowance for loan losses as
total loans increase. Accordingly, management anticipates it will continue its
provisions to the allowance for loan losses at current levels for the near
future, providing the volume of nonperforming loans remains insignificant. The
provision for loan losses totaled $25,000 during the three months ended December
31, 1999, compared to $30,000 for the same period in 1998.
Noninterest income totaled $142,000 for the three months ended December 31, 1999
compared to $157,000 for the three months ended December 31, 1998. Gains of
$53,000 were realized on sales of loans during the three months ended December
31, 1998. Loan sales did not occur in 1999 which contributed to the decrease in
noninterest income. The decrease was partly offset by an increase in service
charges and other fees during the three months ended December 31, 1999. The loan
sales were made for interest-rate risk-strategy purposes. The increase in
service charges and other fees was the result of a change in pricing for
overdraft, stop payment and ATM surcharge fees as well as the overall growth in
the Corporation's customer deposit base.
- --------------------------------------------------------------------------------
17.
18
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
Noninterest expense totaled $1,114,000 for the three months ended December 31,
1999 compared to $1,108,000 for the three months ended December 31, 1998. The
Corporation experienced modest increases in most of the components of
noninterest expense. The increase in occupancy and data processing services
resulted from the expanded account base and services associated with the growth
experienced in the two offices opened over the past few years.
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. Income tax expense totaled $231,000, or an
effective rate of 34.0%, for the three months ended December 31, 1999, compared
to $162,000, or an effective rate of 34.2%, for the three months ended December
31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, primarily represented by cash equivalents, is a
result of operating, investing and financing activities. These activities are
summarized below for the three months ended December 31, 1999 and 1998.
Three Months Ended
December 31,
------------
1999 1998
---- ----
(In thousands)
Net income $ 449 $ 311
Adjustments to reconcile net income to net cash
from operating activities 398 905
------- --------
Net cash from operating activities 847 1,216
Net cash from investing activities (3,450) (16,436)
Net cash from financing activities 2,664 12,828
------- --------
Net change in cash and cash equivalents 61 (2,392)
Cash and cash equivalents at beginning of period 3,542 3,578
------- --------
Cash and cash equivalents at end of period $ 3,603 $ 1,186
======= ========
The Corporation's principal sources of funds are deposits, loan and security
repayments, securities available for sale and other funds provided by
operations. The Corporation also has the ability to borrow additional funds from
the FHLB of Cincinnati. While scheduled loan repayments and maturing securities
are relatively predictable, deposit flows and early loan and mortgage-backed
security repayments are more influenced by interest rates, general economic
conditions and competition. The Corporation maintains investments in liquid
assets based on management's assessments of (1) the need for funds, (2) expected
deposit flows, (3) the yields available on short term liquid assets and (4) the
objectives of the asset/liability management program.
Office of Thrift Supervision ("OTS") regulations presently require the
Corporation to maintain an average daily balance of investments in U.S.
Treasury, federal agency obligations and other investments having maturities of
five years or less in an amount equal to 4% of the sum of the Corporation's
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity
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18.
19
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
requirement, which may be changed from time to time by the OTS to reflect
changing economic conditions, is intended to provide a source of relatively
liquid funds on which the Corporation may rely, if necessary, to fund deposit
withdrawals or other short term funding needs. At December 31, 1999, the
Corporation's regulatory liquidity was 28.0%. At such date, the Corporation had
commitments to originate fixed rate loans totaling $418,000. The Corporation had
no commitments to purchase or sell loans. The Corporation considers its
liquidity and capital reserves sufficient to meet its outstanding short and
long-term needs. See Note 5 of the Notes to Consolidated Financial Statements.
The Bank is required by regulations to meet certain minimum capital
requirements, which must be generally as stringent as standards established for
commercial banks. Current capital requirements call for tangible capital of 1.5%
of adjusted total assets, core capital (which, for the Bank, consists solely of
tangible capital) of 4.0% of adjusted total assets, except for institutions with
the highest examination rating and acceptable levels of risk, and risk-based
capital (which, for the Bank, consists of core capital and general valuation
allowances) of 8.0% of risk-weighted assets (assets are weighted at percentage
levels ranging from 0% to 100% depending on their relative risk).
The following table summarizes the Bank's regulatory capital requirements and
actual capital at December 31, 1999.
Excess of actual
capital over current
Actual capital Current requirement requirement
--------------------- --------------------- ------------------- Applicable
(Dollars in thousands) Amount Percent Amount Percent Amount Percent Asset Total
------ ------- ------ ------- ------ ------- -----------
Tangible capital $23,400 9.0% $ 3,899 1.5% $19,501 7.5% $259,955
Core capital 23,400 9.0 10,398 4.0 13,002 5.0 259,955
Risk-based capital 24,157 17.8 10,848 8.0 13,309 9.8 135,605
In April 1999, the Board of Directors of the Corporation authorized the purchase
of up to 5% of the Corporation's outstanding common shares over a twelve-month
period. At December 31, 1999, 25,000 shares have been purchased.
YEAR 2000 ISSUE
The Corporation experienced no problems in their own computer application
systems, nor has management been made aware of any system problems of the
Corporation's major customers and vendors, related to Year 2000 issues. The
Corporation experienced a slight decrease in deposits which management believes
may have been Year 2000 related.
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19.
20
MILTON FEDERAL FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosure About Market Risk
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The principal market risk affecting the Corporation is interest rate risk. The
Bank does not maintain a trading account for any class of financial instrument
and the Corporation is not affected by foreign currency exchange rate risk or
commodity price risk. Because the Corporation does not hold any equity
securities other than stock in the FHLB of Cincinnati and an insignificant
investment in its data processing servicer, Intrieve, Inc., the Corporation is
not subject to equity price risk.
The Corporation, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. One of the Corporation's principal financial
objectives is to achieve long term profitability while reducing its exposure to
fluctuations in interest rates. The Corporation has sought to reduce exposure of
its earnings to changes in market interest rates by managing asset and liability
maturities and interest rates primarily through structuring the securities
portfolio so that substantially all of the mortgage-backed securities reprice on
at least an annual basis. The variable rate feature of these securities helps
mitigate the Corporation's exposure to upward interest rate movement due to its
primarily fixed rate loan portfolio. Some mortgage-backed securities have been
purchased with funds provided by similar maturity, long term borrowings from the
FHLB to capitalize on the yield differential. The majority of the Corporation's
securities are classified as available for sale to allow management the
flexibility to move these funds into higher yielding loans as demand warrants.
The mortgage-backed and related securities also provide the Corporation with a
constant cash flow stream from principal repayments.
As the Corporation's loan portfolio is primarily made up of fixed rate loans,
the Corporation is particularly sensitive to periods of rising interest rates.
In such periods, the Corporation's net interest spread is negatively affected
because the interest rate paid on deposits increases faster than the rates
earned on loans. Management is continuing to originate variable rate mortgage
loans as the primary means to manage this risk. Variable rate loans increased
from $41.5 million at September 30, 1999 to $43.1 million at December 31, 1999.
In addition, the Corporation also originates consumer and commercial loans;
however, such loans make up only a small percentage of the overall loan
portfolio. Consumer loans typically have a significantly shorter weighted
average maturity and offer less exposure to interest rate risks while commercial
loans generally carry variable interest rates. From time to time, the
Corporation has also sold pools of fixed rate mortgage loans and invested the
funds in shorter term fixed rate loans, adjustable rate loans and adjustable
rate mortgage-backed securities. Such investments have less exposure to interest
rate risk. The Corporation may sell additional pools of fixed rate loans in the
future should the need exist.
Lastly, as part of its effort to monitor and manage interest rate risk, the Bank
uses the "net portfolio value" ("NPV") methodology adopted by the OTS as part of
its capital regulations. Presented in the Corporation's 1999 annual report, as
of September 30, 1999, is an analysis of the Bank's interest rate risk as
measured by changes in NPV for instantaneous and sustained parallel shifts of
100 basis points in market interest rates. Also presented are policy limits set
by the Board of Directors of the Bank as to the maximum change in NPV that the
Board of Directors deems advisable in case of various changes in interest rates.
Such limits are established with consideration of the dollar impact of various
rate changes and the Bank's strong capital position. Management believes that no
events have occurred since September 30, 1999 that would significantly change
the Bank's NPV at December 31, 1999 under each of the assumed shifts of 100
basis points in market interest rates.
- --------------------------------------------------------------------------------
(Continued)
20.
21
MILTON FEDERAL FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Bank's NPV is more sensitive to rising rates than declining rates. Such
difference in sensitivity occurs principally because, as rates rise, borrowers
do not prepay fixed rate loans as quickly as they do when interest rates are
declining. Thus, in a rising interest rate environment, because the Bank has
predominantly fixed rate loans in its loan portfolio, the amount of interest the
Bank would receive on its loans would increase relatively slowly as loans are
slowly prepaid and new loans at higher rates are made. Moreover, the interest
the Bank would pay on its deposits would increase rapidly because the Bank's
deposits generally have shorter periods to repricing.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit, would likely deviate
significantly from those assumed in making risk calculations.
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21.
22
MILTON FEDERAL FINANCIAL CORPORATION
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) Exhibit No. 27: Financial Data Schedule.
(b) No current reports on Form 8-K were filed by the Registrant
during the quarter ended December 31, 1999.
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22.
23
MILTON FEDERAL FINANCIAL CORPORATION
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirement 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.
Date February 10, 2000 /s/ Glenn E. Aidt
--------------------------- ------------------
Glenn E. Aidt
President
Date February 10, 2000 /s/ Thomas P. Eyer
--------------------------- -------------------
Thomas P. Eyer
Treasurer (Chief Financial Officer)
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23.
24
- --------------------------------------------------------------------------------
MILTON FEDERAL FINANCIAL CORPORATION
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
27 Financial Data Schedule 25