1
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended June 30, 1996
[ ] 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
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MILTON FEDERAL FINANCIAL CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer 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)
(513) 698-4168
------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 August 5, 1996 the latest practicable date, 2,449,932 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
Consolidated Balance Sheets .................................................................... 3
Consolidated Statements of Income .............................................................. 4
Consolidated Statements of Changes in Shareholders' Equity...................................... 5
Consolidated Statements of Cash Flows .......................................................... 7
Notes to Consolidated Financial Statements ..................................................... 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................. 20
PART II - OTHER INFORMATION........................................................................... 29
SIGNATURES ........................................................................................... 30
2.
3
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
June 30, September 30,
1996 1995
------------- -------------
ASSETS
Cash and amounts due from depository institutions $ 506,190 $ 949,114
Interest-bearing deposits in other financial institutions 461,568 751,626
------------- -------------
Total cash and cash equivalents 967,758 1,700,740
Investment securities available for sale (Note 3) 9,530,202 11,077,800
Investment securities held to maturity (Estimated
market value of $481,093 at June 30, 1996) (Note 3) 500,000
Mortgage-backed and related securities available for sale
(Note 3) 34,583,484 17,110,006
Mortgage-backed and related securities held to maturity
(Estimated market value of $14,321,255 at June 30, 1996
and $25,812,581 at September 30, 1995) (Note 3) 14,529,796 25,973,686
Federal Home Loan Bank stock, at cost 1,161,100 1,099,400
Loans receivable - net (Note 4) 112,468,140 100,757,649
Premises and equipment - net 1,557,199 1,443,629
Real estate owned - net 32,554 32,654
Cash surrender value of life insurance 1,438,771 1,388,855
Accrued interest receivable 973,779 891,413
Other assets 547,158 204,337
------------- -------------
Total assets $ 178,289,941 $ 161,680,169
============= =============
LIABILITIES
Deposits $ 127,456,094 $ 117,897,908
Borrowed funds 16,043,954 5,260,000
Advance payments by borrowers for taxes and insurance 380,570 260,117
Accrued interest payable 97,419 27,190
Federal income taxes payable 266,810 447,751
Other liabilities 288,261 284,746
------------- -------------
Total liabilities 144,533,108 124,177,712
------------- -------------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY (NOTE 2)
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 24,940,362 24,880,297
Retained earnings 13,952,441 15,787,634
Treasury stock, 128,943 shares at cost (1,997,640)
Unearned employee stock ownership plan shares (Note 7) (1,701,008) (1,855,736)
Unearned recognition and retention plan shares (Note 8) (1,323,802) (1,485,339)
Unrealized gain/(loss) on securities available for sale (113,520) 175,601
------------- -------------
Total shareholders' equity 33,756,833 37,502,457
------------- -------------
Total liabilities and shareholders' equity $ 178,289,941 $ 161,680,169
============= =============
- - -----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
4
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
- - --------------------------------------------------------------------------------
Three months ended Nine months ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---------- ---------- ---------- ----------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $2,226,765 $2,014,073 $6,501,728 $5,846,335
Interest on mortgage-backed
and related securities 789,391 580,893 2,210,749 1,584,544
Interest on investments 161,631 179,802 465,064 556,840
Other interest and dividend
income 27,573 75,534 160,458 223,155
---------- ---------- ---------- ----------
3,205,360 2,850,302 9,337,999 8,210,874
INTEREST EXPENSE
Interest on deposits 1,554,941 1,373,789 4,618,566 3,775,628
Interest on borrowed funds 203,350 368,521
---------- ---------- ---------- ----------
1,758,291 1,373,789 4,987,087 3,775,628
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,447,069 1,476,513 4,350,912 4,435,246
Provision for loan losses (Note 4) 32,000 37,000 70,100 62,300
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,415,069 1,439,513 4,280,812 4,372,946
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges and other fees 30,980 33,139 97,639 100,506
Income from equity in Pool Three 23,289
Gain on sale of mortgage-backed
and related securities 27,851 214,097
Other income 24,831 24,092 74,680 72,549
---------- ---------- ---------- ----------
83,662 57,231 386,416 196,344
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 492,007 445,488 1,457,296 1,341,632
Occupancy expense 72,397 71,199 219,206 210,846
Data processing services 36,706 36,291 116,814 108,329
Federal deposit insurance
premiums 70,355 69,881 203,902 203,183
State franchise taxes 106,173 55,006 267,019 159,950
Advertising 7,998 9,591 29,389 35,387
Other expenses 129,613 123,996 447,333 416,094
---------- ---------- ---------- ----------
915,249 811,452 2,740,959 2,475,421
---------- ---------- ---------- ----------
Income before income tax 583,482 685,292 1,926,269 2,093,869
Income tax expense 199,000 220,000 660,000 706,654
---------- ---------- ---------- ----------
NET INCOME $ 384,482 $ 465,292 $1,266,269 $1,387,215
========== ========== ========== ==========
Earnings per common share $ .17 $ .19 $ .54 $ .57
========== ========== ========== ==========
- - ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
5
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended June 30, 1996 and 1995
- - ------------------------------------------------------------------------------
Additional
Paid-In Retained Treasury
Capital Earnings Stock
------- -------- -----
Balance at October 1, 1994 $ 14,394,363
Net income for the period 1,387,215
Cash dividends -
$.12 per share (289,071)
Effect of change in accounting
for investment securities
at October 1, 1994 (Note 1)
Sale of 2,578,875 shares of no
par common stock, net of
conversion costs (Note 2)
$ 24,844,095
Shares purchased under
employee stock
ownership plan (Note 2)
Commitment to release
employee stock ownership
plan shares (Note 7) 19,743
Change in unrealized loss on
securities available for sale
------------ ------------ ------------
Balance at June 30, 1995 $ 24,863,838 $ 15,492,507 $ -
============ ============ ============
Unrealized
Gain/(Loss) on
Unearned Unearned Securities
ESOP RRP Available
Shares Shares for Sale Total
------ ------ -------- -----
Balance at October 1, 1994 $ 14,394,363
Net income for the period 1,387,215
Cash dividends -
$.12 per share (289,071)
Effect of change in accounting
for investment securities
at October 1, 1994 (Note 1) $ (7,597) (7,597)
Sale of 2,578,875 shares of no
par common stock, net of
conversion costs (Note 2)
24,844,095
Shares purchased under
employee stock
ownership plan (Note 2) $ (2,082,634) (2,082,634)
Commitment to release
employee stock ownership
plan shares (Note 7) 154,729 174,472
Change in unrealized loss on
securities available for sale 158,843 158,843
------------ ------------ ------------ ------------
Balance at June 30, 1995 $ (1,927,905) $ - $ 151,246 $ 38,579,686
============ ============ ============ ============
- - ------------------------------------------------------------------------------
(Continued)
5.
6
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Nine months ended June 30, 1996 and 1995
- - ------------------------------------------------------------------------------
Additional
Paid-In Retained Treasury
Capital Earnings Stock
------- -------- -----
Balance at October 1, 1995 $ 24,880,297 $ 15,787,634
Net income for the period 1,266,269
Cash dividends -
$1.30 per share (3,101,462)
Commitment to release
employee stock ownership
plan shares (Note 7) 60,065
Shares earned under
recognition and retention
plan (Note 8)
Purchase of treasury stock,
128,943 shares at cost $ (1,997,640)
Change in unrealized gain/
(loss) on securities
available for sale
------------ ------------ ------------
Balance at June 30, 1996 $ 24,940,362 $ 13,952,441 $ (1,997,640)
============ ============ ============
Unrealized
Gain/(Loss) on
Unearned Unearned Securities
ESOP RRP Available
Shares Shares for Sale Total
------ ------ -------- -----
Balance at October 1, 1995 $ (1,855,736) $ (1,485,339) $ 175,601 $ 37,502,457
Net income for the period 1,266,269
Cash dividends -
$1.30 per share (3,101,462)
Commitment to release
employee stock ownership
plan shares (Note 7) 154,728 214,793
Shares earned under
recognition and retention
plan (Note 8) 161,537 161,537
Purchase of treasury stock,
128,943 shares at cost (1,997,640)
Change in unrealized gain/
(loss) on securities
available for sale (289,121) (289,121)
------------ ------------ ------------ ------------
Balance at June 30, 1996 $ (1,701,008) $ (1,323,802) $ (113,520) $ 33,756,833
============ ============ ============ ============
- - -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6.
7
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
Nine Months Ended
June 30,
--------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,266,269 $ 1,387,215
Adjustments to reconcile net income to net cash from
operating activities
Amortization of deferred loan origination fees (111,210) (78,369)
Amortization of premiums, accretion of discounts, net 34,918 34,984
Provision for loan losses 70,100 62,300
Depreciation 111,032 116,956
Increase in cash value of life insurance (49,916) (47,496)
Net gain on sale of mortgage-backed and related securities (214,097)
Loss on sale or disposal of premises and equipment 67 192
Federal Home Loan Bank stock dividend (58,500) (51,000)
Compensation expense on ESOP shares 214,793 174,472
Compensation expense on RRP shares 161,537
Deferred tax expense 3,873 33,000
Change in accrued interest receivable and other assets (425,087) (109,613)
Change in income taxes payable (35,872) 5,104
Change in accrued expenses and other liabilities 73,744 41,229
------------ ------------
Net cash from operating activities 1,041,651 1,568,974
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment securities available for sale
Purchases (500,000) (9,992,080)
Proceeds from maturities 2,000,000 2,000,000
Investment securities held to maturity
Purchases (500,000)
Mortgage-backed securities available for sale
Purchases (19,286,413) (11,373,493)
Proceeds from principal payments 1,684,523 270,950
Proceeds from sales 8,949,173
Mortgage-backed securities held to maturity
Purchases (4,808,855)
Proceeds from principal payments 2,411,843 3,180,095
Proceeds from maturities 1,093,622
Increase in loans, net (11,669,381) (6,087,108)
Purchase Federal Home Loan Bank stock (3,200)
Premises and equipment expenditures (224,669) (52,034)
------------ ------------
Net cash from investing activities (17,138,124) (25,768,903)
------------ ------------
- - -------------------------------------------------------------------------------
(Continued)
7.
8
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- - ------------------------------------------------------------------------------
Nine Months Ended
June 30,
--------
1996 1995
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 9,558,186 (19,742,305)
Net increase in advance payments by borrowers for
taxes and insurance 120,453 201,853
Net change in short-term borrowings 700,000
Long-term advances from Federal Home Loan Bank 10,120,000
Principal payments on Federal Home Loan Bank advances (36,046)
Dividends paid (3,101,462) (289,071)
Proceeds from issuance of common stock,
net of conversion costs 24,844,095
Shares purchased under ESOP plan (2,082,634)
Purchase of treasury stock (1,997,640)
------------ ------------
Net cash from financing activities 15,363,491 2,931,938
------------ ------------
Net change in cash and cash equivalents (732,982) (21,267,991)
Cash and cash equivalents at beginning of period 1,700,740 25,603,694
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 967,758 $ 4,335,703
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 4,916,858 $ 3,783,408
Income taxes 692,000 668,754
Noncash activities
Transfers from loans to real estate owned 69,928
Transfers of investment securities to
available for sale from held to maturity
upon initial adoption of Statement of
Financial Accounting Standards (SFAS) No. 115 3,015,000
Transfers of mortgage-backed and related securities
from held to maturity to available for sale as allowed
by the SFAS No. 115 implementation guide 9,090,701
- - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8.
9
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
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 (the
"Corporation") at June 30, 1996, 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-QSB and therefore do not purport to contain all
the 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 financial statements and notes thereto of the
Corporation for the fiscal year ended September 30, 1995 included in its 1995
annual report. Reference is made to the accounting policies of the Corporation
described in the notes to financial statements contained in the Corporation's
1995 annual report. The Corporation has consistently followed these policies in
preparing this form 10-QSB.
The consolidated financial statements include the accounts of Milton Federal
Financial Corporation and its wholly-owned subsidiary, Milton Federal Savings
Bank (the "Bank"). The financial statements of Milton Federal Savings Bank
include the accounts of its wholly-owned subsidiary, Milton Financial Service
Corporation. Milton Financial Service Corporation holds stock in Intrieve, Inc.,
which is the data processing center utilized by the Bank. All significant
intercompany accounts and transactions have been eliminated.
The Corporation is a thrift holding company 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 office
located in Englewood, Ohio. Miami and Montgomery counties provide the source for
substantially all of the Corporation's deposit and lending activities. The
majority of the Corporation's income is derived from residential, nonresidential
and consumer lending activities.
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions in
preparing the consolidated financial statements that effect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year. The Corporation follows the liability method
of accounting for income taxes. The liability method provides that deferred tax
assets and liabilities are recorded based on the difference between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes.
- - ------------------------------------------------------------------------------
(Continued)
9.
10
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per common share were computed by dividing net income by the weighted
average number of shares outstanding for the three and nine months ended June
30, 1996 and 1995. The weighted average number of shares outstanding for the
three and nine months ended June 30, 1996 were 2,274,466 and 2,322,970,
respectively. The weighted average number of shares outstanding for the three
and nine months ended June 30, 1995 were 2,403,751 and 2,420,800, respectively.
Stock options outstanding do not presently have a dilutive effect of greater
than 3% on earnings per common share and are therefore not considered for
purposes of the per share disclosure. Unreleased ESOP shares and unallocated RRP
shares are not considered to be outstanding shares for the purpose of
determining the weighted average number of shares used in the earnings per
common share calculation.
The Corporation classifies securities into held-to-maturity and
available-for-sale categories. Held-to-maturity securities are those which the
Corporation has the positive intent to hold to maturity and are reported at
amortized cost. Available-for-sale securities are those which the Corporation
could sell for liquidity, asset-liability management or other reasons even
though the Corporation does not intend selling those securities at the present
time. Available-for-sale securities are reported at fair value, with unrealized
gains or losses included as a separate component of equity, net of tax.
At October 1, 1994, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 115 and accordingly classified its securities into the
categories discussed above. Prior to this date, all securities were reported at
amortized cost. This reclassification decreased equity by $7,597 at October 1,
1994, which is the after tax effect of the adjustment from amortized cost to
fair value for securities available for sale at that date.
The Financial Accounting Standards Board ("FASB") issued a Question and Answer
Implementation Guide to SFAS No. 115 in November 1995. Based upon the reading
thereof and in accordance with the provisions of this implementation guidance,
the Corporation conducted a one-time reassessment of the appropriateness of its
securities classifications and transferred $9,090,701 of investment securities
classified as "held-to-maturity" to "available-for-sale." The unrealized gain at
the time securities were transferred was approximately $179,000.
SFAS No. 114, as amended by SFAS No. 118, was adopted at October 1, 1995. Under
this standard, loans considered to be impaired are reduced to the present value
of expected future cash flows or to the fair value of collateral, by allocating
a portion of the allowance for loan losses to such loans. If these allocations
cause the allowance for loan losses to require increase, such increase is
reported as bad debt expense. The effect of adopting this standard did not
materially affect the allowance for loan losses at October 1, 1995 or the
provision for loan losses for the three- and nine-month periods ending June 30,
1996.
- - -------------------------------------------------------------------------------
(Continued)
10.
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MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Management analyzes commercial and commercial real estate loans on an individual
basis and classifies a loan as impaired when an analysis of the borrower's
operating results and financial condition indicates that underlying cash flows
are not adequate to meet its debt service requirements. Often this is associated
with a delay or shortfall in payments of 30 days or more. Smaller-balance
homogeneous loans are evaluated for impairment in total. Such loans include
residential first-mortgage loans secured by one- to four-family residences,
residential construction loans, consumer automobile, boat and home equity loans
with balances less than $300,000. Loans are generally moved to nonaccrual status
when 90 days or more past due. These loans are often also considered impaired.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The nature of disclosures for impaired loans is considered generally comparable
to prior nonaccrual loans and nonperforming and past due asset disclosures.
Interest on loans is accrued over the term of the loans based upon the principal
outstanding. Management reviews loans delinquent 90 days or more to determine if
the interest accrual should be discontinued. Under SFAS No. 114, as amended by
SFAS No. 118, the carrying value of impaired loans is periodically adjusted to
reflect cash payments, revised estimates of future cash flows and increases in
the present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash payments
are reported as reductions in carrying value. Increases or decreases in carrying
value due to changes in estimates of future payments or the passage of time are
reported as reductions or increases in bad debt expense.
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS BANK
WITH THE CONCURRENT FORMATION OF A HOLDING COMPANY
On February 21, 1994, the Board of Directors of the Association unanimously
adopted a plan of conversion to convert from a federally chartered mutual
savings and loan association to a federally chartered stock savings bank with
the concurrent formation of a holding company, Milton Federal Financial
Corporation. The Board of Directors amended the plan of conversion on June 6,
1994. The conversion was consummated on October 6, 1994 by amending the
Association's federal charter and the sale of the Corporation's common shares in
an amount equal to the market value of the Bank after giving effect to the
conversion. A total of 2,578,875 common shares of the Corporation were sold at
$10.00 per share and net proceeds from the sale were $24,844,095 after deducting
the costs of conversion.
The Corporation retained 50% of the net proceeds from the sale of common shares.
The remainder of the net proceeds were invested in the capital stock issued by
the Bank to the Corporation as a result of the conversion.
- - -------------------------------------------------------------------------------
(Continued)
11.
12
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS BANK
WITH THE CONCURRENT FORMATION OF A HOLDING COMPANY (Continued)
Under Office of Thrift Supervision (OTS) regulations, limitations have been
imposed on all capital distributions, including cash dividends. The regulation
establishes a three-tiered system of restrictions, with the greatest flexibility
afforded to thrifts which are both well-capitalized and given favorable
qualitative examination ratings by the OTS.
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED AND RELATED SECURITIES
The amortized cost and estimated market values of investment and mortgage-backed
and related securities are as follows:
-------------------------------June 30, 1996---------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
SECURITIES AVAILABLE FOR SALE
Investment securities
U.S. Treasury securities $ 7,998,558 $ 30,185 $ 8,028,743
U.S. Government and federal
agency securities 1,500,000 $ 13,541 1,486,459
Equity securities 15,000 15,000
----------------- ------------ ------------ -----------------
Total investment
securities $ 9,513,558 $ 30,185 $ 13,541 $ 9,530,202
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 619,613 $ 11,984 $ 631,597
GNMA certificates 810,795 9,497 820,292
FHLMC certificates 2,807,736 55,393 2,863,129
Collateralized mortgage
obligations and REMICs 30,533,982 136,999 $ 402,515 30,268,466
----------------- ------------ ----------- -----------------
Total mortgage-backed
and related securities $ 34,772,126 $ 213,873 $ 402,515 $ 34,583,484
================= ============ ============ =================
- - -------------------------------------------------------------------------------
(Continued)
12.
13
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED AND RELATED SECURITIES
(Continued)
----------------------------June 30, 1996-----------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
SECURITIES HELD TO MATURITY
Investment Securities
U.S. Government and
federal agency securities $ 500,000 $ - $ 18,907 $ 481,093
=========== ======= ======== ===========
Mortgage-backed and related
securities
FNMA certificates $ 6,125,064 $23,117 $143,611 $ 6,004,570
GNMA certificates 945,181 15,018 960,199
FHLMC certificates 7,459,551 52,522 155,587 7,356,486
----------- ------- -------- -----------
Total mortgage-backed
and related securities $14,529,796 $90,657 $299,198 $14,321,255
=========== ======= ======== ===========
-----------------------September 30, 1995----------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
SECURITIES AVAILABLE FOR SALE
Investment securities
U.S. Treasury securities $ 7,995,248 $ 71,952 $ 8,067,200
U.S. Government and
federal agency securities 3,001,113 3,577 $ 9,090 2,995,600
Equity securities 15,000 15,000
----------- -------- ------- -----------
Total investment
securities $11,011,361 $ 75,529 $ 9,090 $11,077,800
=========== ======== ======= ===========
Mortgage-backed and related
securities
FNMA certificates $ 932,055 $ 18,527 $ 950,582
GNMA certificates 1,908,315 53,134 1,961,449
FHLMC certificates 3,682,673 46,284 3,728,957
Collateralized mortgage
obligations and REMICs 10,387,339 97,083 $15,404 10,469,018
----------- -------- ------- -----------
Total mortgage-backed
and related securities $16,910,382 $215,028 $15,404 $17,110,006
=========== ======== ======= ===========
- - -------------------------------------------------------------------------------
(Continued)
13.
14
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED AND RELATED SECURITIES
(Continued)
----------------September 30, 1995-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- -------- -------- -----------
SECURITIES HELD TO MATURITY
Mortgage-backed and related
securities
FNMA certificates $ 6,862,444 $ 23,272 $114,855 $ 6,770,861
GNMA certificates 2,954,990 102,720 2,747 3,054,963
FHLMC certificates 8,863,328 54,001 201,041 8,716,288
SBA certificates 39,154 245 38,909
Collateralized mortgage
obligations and REMICs 7,253,770 126,668 148,878 7,231,560
----------- -------- -------- -----------
Total mortgage-backed
and related securities $25,973,686 $306,661 $467,766 $25,812,581
=========== ======== ======== ===========
Substantially all collateralized mortgage obligations and REMICs (real estate
mortgage investment conduits) are backed by pools of mortgages that are insured
or guaranteed by U.S. Government agencies.
The amortized cost and estimated market value of investment securities at June
30, 1996, by contractual maturity, are shown below. Actual maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
Cost Market Value
---------- ------------
SECURITIES AVAILABLE FOR SALE
Due in one year or less $8,998,558 $9,022,077
Due after one through five years 500,000 493,125
Equity securities 15,000 15,000
---------- ----------
$9,513,558 $9,530,202
========== ==========
SECURITIES HELD TO MATURITY
Due after five through ten years $ 500,000 $ 481,093
========== ==========
- - ------------------------------------------------------------------------------
(Continued)
14.
15
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 3 - INVESTMENT AND MORTGAGE-BACKED AND RELATED SECURITIES
(Continued)
Realized gains or losses are determined based on the amortized cost of the
specific security sold. During the three and nine months ended June 30, 1996,
proceeds from the sales of mortgage-backed and related securities available for
sale were $4,201,209 and $8,949,173, with gross gains of $54,961 and $241,207
and gross losses of $27,110 and $27,110 included in earnings. There were no
sales of investment and mortgage-backed and related securities during the three
or nine months ended June 30, 1995. Interest and dividend income, adjusted by
amortization of purchase premium or discount, is included in earnings.
The Corporation had a 44.77% ownership interest in Pool Three Service
Corporation. The Corporation received proceeds from the completion of the
liquidation of assets owned by Pool Three of $23,289 during the nine months
ended June 30, 1995. There were no proceeds received from the liquidation of
assets during the three or nine months ended June 30, 1996 or the three months
ended June 30, 1995.
NOTE 4 - LOANS RECEIVABLE
Loans receivable consisted of the following:
June 30, September 30,
1996 1995
---- ----
Residential real estate loans
1-4 family (first mortgage) $101,081,984 $ 88,898,814
Home equity (1-4 family second mortgage) 2,223,732 1,128,590
Multi-family 2,226,917 1,986,929
Nonresidential real estate loans 4,370,192 4,749,984
Construction loans 5,353,038 6,352,789
------------ ------------
Total real estate loans 115,255,863 103,117,106
Consumer loans
Automobile 1,883,769 1,846,729
Loans on deposits 148,413 192,850
Other consumer loans 123,843 114,850
------------ ------------
Total consumer loans 2,156,025 2,154,429
------------ ------------
Total loans 117,411,888 105,271,535
------------ ------------
Less
Unearned and deferred income 626,556 646,518
Loans in process 3,914,190 3,534,466
Allowance for loan losses 403,002 332,902
------------ ------------
Net loans $112,468,140 $100,757,649
============ ============
- - ------------------------------------------------------------------------------
(Continued)
15.
16
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE (Continued)
Activity in the allowance for losses on loans for the three- and nine-month
periods ended June 30, 1996 and 1995 are as follows:
Three months ended Nine months ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
Balance at beginning of period $371,002 $294,228 $332,902 $268,928
Provision for loan losses 32,000 37,000 70,100 62,300
Recoveries
Charge-offs
-------- -------- -------- --------
Balance at end of period $403,002 $331,228 $403,002 $331,228
======== ======== ======== ========
As of and for the three and nine months ended June 30, 1996, there were no loans
for which impairment was required to be evaluated on an individual loan by loan
basis.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to make loans and the unfunded
portion of approved lines of credit. The Corporation's exposure to credit loss
in the event of nonperformance by the other party to the financial instrument
for commitments to make loans is represented by the contractual amount of those
instruments. The Corporation follows the same credit policy to make such
commitments as is followed for those loans recorded in the financial statements.
As of June 30, 1996 and September 30, 1995, the Corporation had commitments to
make fixed rate 1-4 family residential real estate loans at current market rates
approximating $3,165,000 and $1,054,000, respectively. Loan commitments are
generally for thirty days. The interest rates on the commitments ranged from
6.50% to 10.00% at June 30, 1996 and 7.00% to 10.00% at September 30, 1995.
There were no commitments to make variable rate 1-4 family residential real
estate loans at June 30, 1996 or September 30, 1995.
As of June 30, 1996 and September 30, 1995, the Corporation had approximately
$1,976,000 and $1,195,000, respectively in unused home equity lines of credit.
- - ------------------------------------------------------------------------------
(Continued)
16.
17
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
Since commitments to make loans and lines of credit may expire without being
used, the amounts do not necessarily represent future cash commitments.
Collateral obtained upon exercise of the commitment is determined using
management's credit evaluation of the borrower, and generally consists of
residential or commercial real estate. Lines of credit are primarily home equity
lines collateralized by second mortgages on 1-4 family residential real estate.
At June 30, 1996, the Bank had a cash management line of credit enabling it to
borrow up to $7,000,000 with the Federal Home Loan Bank (FHLB) of Cincinnati.
The line of credit must be renewed on an annual basis. There were $1,700,000 in
borrowings outstanding on this line of credit at June 30, 1996. Borrowings
outstanding on this line of credit totaled $1,000,000 at September 30, 1995.
Additionally, as a member of the Federal Home Loan Bank system, the Bank has the
ability to obtain up to approximately $37,827,000 of advances from the FHLB. As
a result of this membership, the Bank had borrowings totaling $14,343,954 at
June 30, 1996 and $4,260,000 at September 30, 1995. Advances under the borrowing
agreement are collateralized by a blanket pledge of the Bank's residential
mortgage loan portfolio and Federal Home Loan Bank stock.
At June 30, 1996, required annual principal payments are as follows:
Year ending June 30:
1997 $ 1,292,867
1998 3,941,432
1999 1,310,853
2000 291,117
2001 5,552,239
Thereafter 1,955,446
-----------
$14,343,954
===========
NOTE 6 - STOCK OPTION PLAN
On March 20, 1995, the Compensation Committee of the Board of Directors granted
options to purchase 238,545 shares of common stock at an exercise price of
$13.69 to certain officers and directors of the Bank and Corporation. One-fifth
of the options awarded become first exercisable on each of the first five
anniversaries of the date of grant. The option period expires 10 years from the
date of grant. No options were exercised during the three and nine months ended
June 30, 1996. In addition, there are 19,342 shares of authorized but unissued
common stock reserved for which no options have been granted.
- - ------------------------------------------------------------------------------
(Continued)
17.
18
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 6 - STOCK OPTION PLAN (Continued)
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, entities to use a
"fair value based method" to account for stock-based compensation plans. If the
fair value accounting encouraged by SFAS No. 123 is not adopted, entities must
disclose the pro forma effect on net income and on earnings per share had the
accounting been adopted. Fair value of a stock option is to be estimated using
an option-pricing model, such as Black-Scholes, that considers: exercise price,
expected life of the option, current price of the stock, expected price
volatility, expected dividends on the stock and the risk-free interest rate.
Once estimated, the fair value of an option is not later changed. The accounting
and disclosure requirements of this statement are effective for transactions
entered into in fiscal years beginning after December 15, 1995. Pro forma
disclosures required for entities that elect to continue to measure compensation
cost using existing accounting methods must include the effects of all awards
granted in the first fiscal year beginning after December 15, 1994. Currently,
the Corporation does not have any options subject to the new accounting or
disclosure requirements.
NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN
Milton Federal Financial Corporation has established an employee stock ownership
plan ("ESOP") for the benefit of substantially all employees of the Corporation
and the Bank. The establishment of the ESOP and the purchase by the ESOP of the
common shares of the Corporation are subject to the receipt of a favorable
determination letter on the qualified status of the ESOP under applicable
provisions of the Internal Revenue Code. Although no assurances can be given,
the Corporation expects that the ESOP will receive a favorable determination
letter.
The ESOP borrowed funds from Milton Federal Financial Corporation with which to
acquire common shares of the Corporation. The loan is secured by the shares
purchased with the loan proceeds and will be repaid by the ESOP with funds from
the Bank's discretionary contributions to the ESOP and earnings on ESOP assets.
All dividends received on unallocated shares by the ESOP are used to pay debt
service. The shares purchased with the loan proceeds are held in a suspense
account for allocation among participants as the loan is repaid. As payments are
made and the shares are released from the suspense account, such shares will be
validly issued, fully paid and nonassessable.
- - -------------------------------------------------------------------------------
(Continued)
18.
19
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)
The Corporation accounts for its ESOP in accordance with Statement of Position
93-6. Accordingly, the shares pledged as collateral are reported as unearned
ESOP shares in the consolidated balance sheet. As shares are released from
collateral, the company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings-per-share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt and accrued interest. ESOP compensation expense was $66,151
and $214,793 for the three and nine months ended June 30, 1996 and $60,286 and
$174,472 for the three and nine months ended June 30, 1995. The ESOP shares as
of June 30, 1996 and September 30, 1995 were as follows:
June 30, September 30,
1996 1995
---- ----
Allocated shares 9,536
Shares released for allocation 23,934 19,124
Unreleased shares 157,770 172,116
---------- ----------
Total ESOP shares 191,240 191,240
========== ==========
Fair value of unreleased shares $1,932,682 $2,710,827
========== ==========
NOTE 8 - RECOGNITION AND RETENTION PLAN
On October 16, 1995, the Recognition and Retention Plan Committee of the Board
of Directors awarded 74,784 shares to certain directors and officers of the Bank
and the Corporation. No shares had been previously awarded. One-fifth of such
shares will be earned and nonforfeitable on each of the first five anniversaries
of the date of the awards. In the event of the death or disability of a
participant, however, the participant's shares will be deemed to be earned and
nonforfeitable upon such date. There were 28,365 and 103,155 shares at June 30,
1996 and September 30, 1995, respectively, reserved for future awards.
Compensation expense, which is based upon the cost of the shares, was $53,846
and $161,537 for the three and nine months ended June 30, 1996.
- - -------------------------------------------------------------------------------
19.
20
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
The following discusses the financial condition of Milton Federal Financial
Corporation (the "Corporation") as of June 30, 1996, as compared to September
30, 1995, and the results of operations for the three and nine months ended June
30, 1996, compared with the same periods in 1995. This discussion should be read
in conjunction with the interim financial statements and footnotes included
herein.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $178.3 million at June 30, 1996, an increase of
$16.6 million, or 10.3%, from $161.7 million at September 30, 1995.
Investment securities, mortgage-backed and related securities and FHLB stock
increased from $55.3 million at September 30, 1995, to $60.3 million at June 30,
1996. The increase is due to the purchase of $19.3 million of mortgage-backed
and related securities, the majority of which occurred during the second and
third quarters. Some of the securities purchased were a part of the
Corporation's strategy of borrowing long-term, variable-rate funds from the
Federal Home Loan Bank to fund the purchase of similar-maturity, variable-rate
mortgage-backed and related securities to capitalize on the yield spread.
Additional variable rate mortgaged-backed and related securities were purchased
with funds provided by long-term, fixed-rate borrowings from the Federal Home
Loan Bank. The Corporation took advantage of low, long-term, fixed-rate
borrowings to provide additional liquidity for future loan growth without
increasing the cost of funds. The overall increase in investment and
mortgage-backed and related securities was offset somewhat by the redirection of
funds provided from maturities and principal repayments to loans primarily
during the first and third quarters. Additionally, the Corporation sold
mortgage-backed and related securities with an amortized cost of $8.9 million to
provide funds for the $1.00 per share special dividend to shareholders during
the first quarter and for the purchase of treasury shares and loan growth during
the second and third quarters. Mortgage-backed and related securities include
Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Small
Business Administration ("SBA") participation certificates, collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs"). Investment securities are comprised of United States Treasury and
government agency securities.
Net loans receivable increased from $100.8 million at September 30, 1995 to
$112.5 million at June 30, 1996. Slight fluctuations were noted in almost all
loan categories except for construction loans which decreased from $6.4 million
at September 30, 1995 to $5.4 million at June 30, 1996, home equity loans which
increased from $1.1 million at September 30, 1995 to $2.2 million at June 30,
1996 and 1-4 family first mortgage loans which increased from $88.9 million at
September 30, 1995 to $101.1 million at June 30, 1996. The primary reasons for
these changes were the conversion of construction loans to permanent financing
of 1-4 family residences upon completion of construction and a high volume of
residential real estate and home equity loan originations. The substantial
increase in mortgage loans was related to
- - ------------------------------------------------------------------------------
20.
21
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
growth in the Corporation's market area as the Corporation has not changed its
philosophy regarding pricing of underwriting standards during the period.
The Corporation's consumer loan portfolio remained relatively unchanged between
September 30, 1995 and June 30, 1996. Consumer loans are a small portion of the
entire loan portfolio and represented 1.8% of total loans at June 30, 1996.
Total deposits increased $9.6 million, or 8.1%, from $117.9 million at September
30, 1995 to $127.5 million at June 30, 1996. The Bank experienced little change
in passbook savings accounts. A decrease in money market accounts was offset by
an increase in negotiable order of withdrawal ("NOW") accounts. Certificates of
deposit increased 10.0% and were the primary reason for the overall deposit
growth. Again, certificates of deposit growth has been due to normal operating
procedures. The Corporation has not used special promotions to attract increased
volume. The portfolio increased from 71.9% of total deposits at September 30,
1995 to 73.1% June 30, 1996. All of the time deposits held at the Bank mature in
less than five years.
Borrowed funds increased from $5.3 million at September 30, 1995 to $16.0
million at June 30, 1996. As discussed above, a portion of the borrowed funds
were invested in mortgage-backed and related securities to leverage the Bank's
excess capital from the Conversion and to provide liquidity for future loan
growth.
COMPARISON OF RESULTS OF OPERATIONS
The operating results of the Corporation are affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate 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 the 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 the availability of funds for lending activities.
The Corporation's net income is primarily dependent upon its net interest
income, which is 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 the sale of assets and other income, noninterest expense and
income taxes.
The Corporation's net income of $384,000 and $1,266,000 for the three and nine
months ended June 30, 1996 represented a $81,000 and $121,000 decrease from the
$465,000 and $1,387,000 in net income for the three and nine months ended June
30, 1995. Similarly, earnings per common share decreased by $.02 and $.03 for
the three and nine month periods ended June 30, 1996 as compared to the same
periods in 1995. The decline in net income is the combined
- - ------------------------------------------------------------------------------
21.
22
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
result of decreases in net interest income and increased noninterest expense
partially offset by gains from the sales of mortgage-backed and related
securities.
Net interest income is the largest component of the Corporation's income and is
affected by the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities.
Historically, the Corporation had only fixed-rate loans in its loan portfolio.
Consequently, due to interest rates rising from historically low levels during
most of fiscal 1995, the Corporation's net interest spread was negatively
affected since the interest rate paid on deposits increased at a faster pace
than the rates earned on loans. This trend has slowed as interest rates have
stabilized and even declined during the first half of 1996. Interest rates have
started to increase again during June of 1996. As a part of management's overall
strategy to manage interest rate risk, management began to originate
adjustable-rate mortgage loans in the latter quarters of fiscal 1995. As of June
30, 1996 the Corporation had approximately $1.8 million in adjustable-rate
mortgage loans as compared to $1.3 million at September 30, 1995. Additionally,
almost the entire portfolio of the Corporation's mortgage-backed and related
securities reprices on at least an annual basis.
The net interest income of the Corporation decreased by $29,000 and $84,000 for
the three and nine months ended June 30, 1996 compared to the three- and
nine-month periods ended June 30, 1995. The change in net interest income is
attributable to increases in higher yielding interest-earning asset balances
being entirely offset by an overall increase in the cost of funds for deposits,
a larger portion of the deposit base being in higher cost certificates of
deposit and an increased level of borrowed funds.
Interest and fees on loans totaled $2.2 million and $6.5 million for the three
and nine months ended June 30, 1996 compared to $2.0 million and $5.8 million
for the three and nine months ended June 30, 1995. Such increase in interest
income was due to higher average loans receivable balances related to the
origination of new 1-4 family real estate loans.
Interest on mortgage-backed and related securities totaled $789,000 and
$2,211,000 for the three and nine months ended June 30, 1996, compared to
$581,000 and $1,585,000 for the three and nine months ended June 30, 1995. The
increase was due to a larger percentage of higher yielding mortgage-backed and
related securities as compared to the prior period combined with an overall
increase in the level of mortgage-backed and related securities. Most of the
mortgage-backed and related securities have repriced to higher yield levels over
the past year. 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.
Interest on investment securities totaled $162,000 and $465,000 for the three
and nine months ended in June 30, 1996, compared to $180,000 and $557,000 for
the comparable periods in 1995. Other interest and dividend income totaled
$28,000 and $160,000 for the three and nine months ended June 30, 1996 compared
to $76,000 and $223,000 for the comparable periods in 1995. The
- - ------------------------------------------------------------------------------
22.
23
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
decreases from 1995 levels are the result of lower average balances of
investment securities and overnight funds partially offset by an increase in the
overall portfolio yield.
Interest on deposits totaled $1.6 million and $4.6 million for the three and
nine months ended June 30, 1996 and $1.4 million and $3.8 million for the three
and nine months ended June 30, 1995. This resulted from an overall increase in
the average cost of funds during the comparable periods combined with higher
average deposit balances over the prior periods.
Interest on borrowed funds totaled $204,000 and $369,000 for the three and nine
months ended June 30, 1996 as compared with no interest expense related to
borrowed funds during the comparable periods in 1995. In the fourth quarter of
fiscal 1995, the Corporation borrowed funds and invested a portion of these
funds in mortgage-backed and related securities to leverage the Corporation's
excess capital position. During the second and third quarters of fiscal 1996 the
Corporation borrowed additional variable-rate funds for the same purpose. The
Corporation also borrowed fixed-rate funds to provide for long-term liquidity
needs. There were no borrowings during the first three quarters of fiscal 1995.
The Corporation maintains an allowance for loan losses in an amount which, in
management's judgment, is adequate to absorb reasonable foreseeable losses
inherent in the loan portfolio. While management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is dependent upon
a variety of factors, including the 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 which is considered adequate to absorb losses inherent 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 the size and
composition of the loan portfolio and specific borrower considerations,
including the ability of the borrower to repay the loan and the estimated value
of the underlying collateral.
The Corporation has not experienced net charge-offs in any of the periods
presented. 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 the sales price or
appraised value of 1- to 4-family residential real estate loans, established
income information and defined ratios of debt to income. Loans secured by real
estate make up 98.2% of the Corporation's loan portfolio and loans secured by
first mortgages on 1-4 family residential real estate constituted 86.1% of total
loans at June 30, 1996. Notwithstanding the historical charge-off history,
however, management believes that it is prudent to continue to increase the
allowance for loan losses as total loans increase. Accordingly, management
anticipates that it will continue its provisions to the allowance for loan
losses at current levels for the foreseeable future, providing the volume of
nonperforming loans remains insignificant.
- - ------------------------------------------------------------------------------
23.
24
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
Noninterest income totaled $84,000 and $386,000 for the three and nine months
ended June 30, 1996 and $57,000 and $196,000 for the three and nine months ended
June 30, 1995. The primary source of the increase was from the sales of
mortgage-backed and related securities held in the available-for-sale portfolio.
The sales were primarily made for interest rate risk strategy purposes. The
Corporation was able to restructure its mortgage-backed and related securities
portfolio so that its securities reprice monthly and in the process also
increased the interest rate caps on the securities. The Corporation realized
gains totaling $92,000, $94,000 and $28,000 during the first, second and third
quarters of fiscal 1996, respectively. Offsetting the increase from the gains
were proceeds received from the liquidation of assets owned by the Pool Three
Service Corporation during the nine months ending June 30, 1995. The proceeds
from the completion of the Pool Three liquidation totaled $23,000. No proceeds
were received during the three and nine months ended June 30, 1996 and the three
months ended June 30, 1995. Other changes in noninterest income were
insignificant.
Noninterest expense increased $266,000, or 10.7%, during the nine months ended
June 30, 1996, compared to the nine months ended June 30, 1995, and increased
$104,000, or 12.8%, during the three months ended June 30, 1996, compared to the
comparable three-month period in 1995. Salaries and employee benefits and Ohio
franchise taxes were the primary causes of the increases. Salaries and employee
benefits increased due to annual merit increases, increased compensation expense
related to the ESOP as a result of the Corporation's stock price increasing and
the added expense from the RRP, which had not been implemented during the nine
months ended June 30, 1995. Increases as a result of these items were offset
during the second quarter of fiscal 1996 by a $42,000 reduction of the accrual
for the retirement fund contribution. The Corporation reduced the benefits paid
to employees upon retirement which caused the plan to become overcapitalized.
Ohio franchise taxes increased due to the change in corporate structure during
fiscal 1995 and the resulting tax impact of higher capital levels at the Bank
and earnings at the Corporation. The second and third quarters of fiscal 1996
were the first periods in which the franchise taxes were impacted by the capital
raised in the mutual to stock conversion. Other changes in noninterest expense
were insignificant.
The equity of the Bank may be affected in the near future by the
undercapitalization of the Savings Association Insurance Fund of the Federal
Deposit Insurance Bank ("SAIF"). The reserves of the SAIF are below the level
required by law because a significant portion of the assessments paid into the
SAIF by Savings Associations are used to pay the cost of prior thrift failures.
The Bank Insurance Fund ("BIF"), which is subject to the same reserve level as
the SAIF, has met its required reserve level. As a result of the respective
reserve levels of the funds, deposit insurance assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits for 1995 and no BIF assessments will be
required of healthy commercial banks in 1996 except a $2,000 minimum fee. The
premium disparity could have a negative competitive impact on the Bank and other
savings institutions.
- - -------------------------------------------------------------------------------
24.
25
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
Congress is considering legislation to recapitalize the SAIF and eliminate the
significant premium disparity. Currently, that recapitalization plan provides
for a special assessment of approximately $.85 to $.90 per $100 of SAIF deposits
held on March 31, 1995, to increase SAIF reserves to the level required by law.
In addition, the cost of prior thrift failures would be shared by both the SAIF
and the BIF, which would likely increase BIF assessments by $.02 to $.025 per
$100 deposits. SAIF assessments would initially be set at a significantly lower
level but could never be reduced below that level. These projected assessment
levels may change if commercial banks holding SAIF deposits are provided some
relief from the special assessment or are allowed to transfer their SAIF
deposits to the BIF. The last part of the recapitalization plan provides for the
merger of the SAIF and the BIF on January 1, 1998. The SAIF recapitalization
legislation currently provides for an elimination of the thrift charter or
separate thrift regulation under federal law prior to the merger of the deposit
insurance funds. As a result, the Bank would be regulated as a bank under
federal law, which would subject it to the more restrictive activity limits
imposed on national banks. The more restrictive regulations would not have a
significant impact on the Bank's operations.
The Bank had $111,746,000 in deposits at March 31, 1995. If the one-time special
assessment in the proposal is enacted into law, the Bank will pay an additional
assessment of approximately $950,000 to $1,005,000, which will reduce equity and
earnings for the quarter in which it is recorded by approximately $627,000 to
$663,000 or $.27 to $.29 per share after applicable income taxes. Quarterly SAIF
assessments are then expected to be reduced to approximately $.06 to $.065 per
$100 in deposits after such enactment.
No assurances can be given that the SAIF recapitalization plan will be enacted
into law or in what form it might be enacted. In addition, the Corporation can
give no assurance that the disparity between BIF and SAIF assessments will be
eliminated and cannot be certain of the impact of its being regulated as or
converted to a bank until the legislation requiring such change is enacted.
Under current tax laws, savings associations meeting certain requirements have
been able to deduct from income for tax purposes amounts designated as reserved
for bad debts. Currently, upon the conversion of a savings association to a
bank, certain amounts of the association's bad debt reserve must be recaptured
as taxable income over a six-year period if the association has used the
percentage of taxable income method to compute its reserve. Congress is
considering legislation requiring, generally, that even if a savings association
does not convert to a bank, bad debt reserves taken after 1987 using the
percentage of taxable income method must be included in future taxable income of
the association over a six-year period, although a two-year delay may be
permitted for institutions meeting a residential mortgage loan origination test.
The requirement that the Bank convert to a bank and the proposed tax legislation
could have an adverse effect on the Corporation, although until such proposals
are acted upon by Congress, the extent of such effect is uncertain.
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25.
26
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. Income tax expense for the three and nine months
ended June 30, 1996 of $199,000 and $660,000 represented an effective rate of
34.1% and 34.3%, compared to $220,000 and $707,000, or an effective rate of
32.1% and 33.8%, for the three and nine months ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, primarily represented by cash equivalents, is a
result of its operating, investing and financing activities. These activities
are summarized below for the nine months ended June 30, 1996 and 1995. (Dollars
in thousands)
Nine months ended
June 30,
--------
1996 1995
---- ----
Net income $ 1,266 $ 1,387
Adjustments to reconcile net income to
net cash from operating activities (225) 182
---------- -----------
Net cash from operating activities 1,041 1,569
Net cash from investing activities (17,138) (25,769)
Net cash from financing activities 15,364 2,932
---------- -----------
Net change in cash and cash equivalents (733) (21,268)
Cash and cash equivalents at
beginning of period 1,701 25,604
---------- -----------
Cash and cash equivalents at
end of period $ 968 $ 4,336
========== ===========
The Corporation's principal sources of funds are deposits; loan, investment and
mortgage-backed securities repayments; investment and mortgage-backed securities
available for sale and other funds provided by operations. The Corporation also
has the ability to borrow from the FHLB of Cincinnati. While scheduled loan
repayments and maturing investments 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 upon 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.
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26.
27
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
OTS regulations presently require the Corporation to maintain an average daily
balance of investments in United States Treasury, federal agency obligations and
other investments having maturities of five years or less in an amount equal to
5% 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
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 upon which the Corporation may rely if necessary to fund deposit
withdrawals or other short-term funding needs. At June 30, 1996, the
Corporation's regulatory liquidity was 6.7%. At such date, the Corporation had
commitments to originate fixed-rate loans totaling $3,165,000. There were no
commitments to originate adjustable-rate loans and 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 OTS regulations to meet certain minimum capital
requirements, which requirements must be generally as stringent as the
requirements established for 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 3.0% of adjusted total assets and
risk-based capital (which for the Bank consists of core capital and general
valuation allowances) of 8% of risk-weighted assets (assets are weighted at
percentage levels ranging from 0% to 100% depending on their relative risk). The
Bank exceeded all of its capital requirements at June 30, 1996 and September 30,
1995. The OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and an acceptable
level of risk will be required to maintain core capital of from 4% to 5%,
depending on the association's examination rating and overall risk. The Bank
does not anticipate that it will be adversely affected if the core capital
requirements regulations are amended as proposed.
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27.
28
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
The following table summarizes Milton Federal Savings Bank's regulatory capital
requirements and actual capital for June 30, 1996.
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 $ 25,293 14.69% $ 2,584 1.50% $ 22,709 13.19% 172,235
Core capital 25,293 14.69 5,167 3.00 20,126 11.69 172,235
Risk-based capital 25,544 32.08 6,370 8.00 19,174 24.08 79,621
At June 30, 1996, the Bank had no material commitments for capital expenditures.
On November 13, 1995 the Corporation declared a special dividend of $1.00 per
share to all shareholders of record on November 27, 1995. The dividend was paid
on December 8, 1995. Additionally, on November 20, 1995, the Corporation
announced a plan to purchase up to 5% of its outstanding common shares. The
shares were purchased periodically in the over-the-counter market during fiscal
1996. The number of shares purchased and the price paid depended upon the
availability of shares, the prevailing market prices and any other
considerations which, in the opinion of the Corporation's Board of Directors or
management, affected the advisability of purchasing such shares. As of June 30,
1996 the Corporation had purchased 128,943 shares or 5% of the outstanding
common shares at an average price of $15.49 per share.
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28.
29
MILTON FEDERAL FINANCIAL CORPORATION
PART II - OTHER INFORMATION
- - --------------------------------------------------------------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. 27.
(b) No current reports on Form 8-K were filed by the Registrant
during the quarter ended June 30, 1996.
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29.
30
MILTON FEDERAL FIANCIAL 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: August 13, 1996 /s/ GLENN E. AIDT
--------------------------- -------------------------------------
Glenn E. Aidt
President
Date: August 13, 1996 /s/ THOMAS P. EYER
--------------------------- -------------------------------------
Thomas P. Eyer
Treasurer (Chief Financial Officer)
- - ------------------------------------------------------------------------------
30.
31
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
- - ------------------------------------------------------------------------------
31.