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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ______________to___________________
Commission File Number: 0-24834
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MILTON FEDERAL FINANCIAL CORPORATION
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(Name of registrant as specified in its charter)
Ohio 31-1412064
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 Lowry Drive, West Milton, Ohio 45383
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (513) 698-4168
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Securities registered pursuant to Section 12(b) of the Exchange Act:
None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
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(Title of Class)
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 during the
preceding 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
Based upon the last sale price provided by The Nasdaq Stock Market, the
aggregate market value of the voting stock held by nonaffiliates of the issuer
on November 28, 1997, was $29,269,230.
2,266,836 of the issuer's common shares were issued and outstanding on
November 28, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Exhibit 99.2 is incorporated by reference into Item 1 of this Form 10-K.
The following sections of the definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders of Milton Federal Financial Corporation are incorporated
by reference into Part III of this Form 10-K:
1. Board of Directors;
2. Executive Officers;
3. Compensation of Executive Officers and Directors;
4. Voting Securities and Ownership of Certain Beneficial Owners and Management;
5. Certain Transactions with MFFC
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PART I
ITEM 1. BUSINESS
Milton Federal Financial Corporation, an Ohio corporation ("MFFC"), is a unitary
savings and loan holding company which owns all of the issued and outstanding
common shares of Milton Federal Savings Bank ("Milton Federal"), a federal
savings bank chartered under the laws of the United States. On October 6, 1994,
MFFC acquired all of the common shares issued by Milton Federal upon its
conversion from a mutual savings and loan association to a stock savings bank
(the "Conversion"). Prior to the Conversion, Milton Federal's name was Milton
Federal Savings and Loan Association.
GENERAL
Milton Federal is principally engaged in the business of making permanent first
mortgage loans secured by 1-4 family residential real estate located in Milton
Federal's designated lending area. Milton Federal also originates loans for the
construction of 1-4 family residential real estate and loans secured by
multifamily real estate (over four units) and nonresidential real estate. The
origination of consumer loans, including unsecured loans and loans secured by
deposits, automobiles, recreational vehicles and boats, and home improvement and
commercial loans constitutes a small portion of Milton Federal's lending
activities. Loan funds are obtained primarily from savings deposits, which are
insured up to applicable limits by the Federal Deposit Insurance Corporation
(the "FDIC"), borrowings from the Federal Home Loan Bank (the "FHLB"), and loan
and mortgage-backed and related securities repayments. In addition to
originating loans, Milton Federal invests in U.S. Government and agency
obligations, interest-bearing deposits in other financial institutions,
mortgage-backed securities, collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits ("REMICs").
Milton Federal conducts business from its main office in West Milton, Ohio, and
from its full-service branch offices located in Englewood and Brookville, Ohio.
Milton Federal also operates a loan production office in Tipp City, Ohio. Milton
Federal's designated lending area consists of portions of Miami, Montgomery and
Darke Counties, Ohio. Milton Federal's primary market area for savings deposits
consists of Miami and Montgomery Counties and all contiguous counties.
As a savings and loan holding company, MFFC is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the "OTS"). As a savings bank chartered under
the laws of the United States, Milton Federal is subject to regulation,
supervision and examination by the OTS and the FDIC. Deposits in Milton Federal
are insured up to applicable limits by the FDIC. Milton Federal is also a member
of the FHLB of Cincinnati.
Other than investing excess funds from the Conversion in investment and
mortgage-backed and related securities, MFFC's activities have been limited
primarily to holding the common stock of Milton Federal since acquiring such
common stock in connection with the Conversion. Consequently, the following
discussion focuses primarily on the business of Milton Federal.
FORWARD LOOKING STATEMENTS. When used in this Form 10-K, 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 Milton Federal's
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in Milton Federal'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 MFFC's financial performance and could cause MFFC's actual
results for future periods to differ materially from any statements expressed
with respect to future periods. See Exhibit 99.2 hereto "Safe
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Harbor Under the Private Securities Litigation Reform Act of 1995," which is
incorporated herein by reference.
MFFC 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.
LENDING ACTIVITIES
GENERAL. Milton Federal's primary lending activity is the origination of
conventional mortgage loans secured by 1-4 family residential real estate
located in Milton Federal's designated lending area. Loans for the construction
of 1-4 family homes and mortgage loans on multifamily properties containing five
units or more and nonresidential properties are also offered by Milton Federal.
Milton Federal does not originate loans insured by the Federal Housing Authority
or loans guaranteed by the Veterans Administration. In addition to mortgage
lending, Milton Federal makes unsecured loans and consumer loans secured by
deposits, automobiles, boats and recreational vehicles.
LOAN PORTFOLIO COMPOSITION. The following table presents certain information
with respect to the composition of Milton Federal's loan portfolio at the dates
indicated:
At September 30,
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1997 1996 1995
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Percent Percent Percent
of Total of Total of Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Residential real estate loans:
1-4 family
(first mortgage) $ 108,941 81.62% $ 102,393 83.02% $ 88,899 84.45%
Home equity (1-4 family
second mortgage) 4,051 3.04 2,929 2.38 1,129 1.07
Multifamily 1,457 1.09 2,249 1.82 1,986 1.89
Nonresidential real estate loans 6,215 4.66 4,425 3.59 4,750 4.51
Construction loans 9,400 7.04 9,083 7.36 6,353 6.04
----------- ------- ----------- ------- ---------- -------
Total real estate loans 130,064 97.45 121,079 98.17 103,117 97.96
Consumer loans:
Automobile loans 2,305 1.73 1,929 1.56 1,847 1.75
Loans on deposits 281 0.21 199 0.16 193 0.18
Other consumer loans 246 0.18 130 0.11 115 0.11
----------- ------- ----------- ------- ---------- -------
Total consumer loans 2,832 2.12 2,258 1.83 2,155 2.04
Commercial loans 575 0.43 -- -- -- --
----------- ------- ----------- ------- ---------- -------
Total loans 133,471 100.00% 123,337 100.00% 105,272 100.00%
Less: ----------- ======= ----------- ======= ---------- =======
Unearned and deferred income (536) (627) (647)
Loans in process (4,977) (5,474) (3,534)
Allowance for loan losses (562) (487) (333)
----------- ----------- ----------
Net loans $ 127,396 $ 116,749 $ 100,758
=========== =========== ==========
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LOAN MATURITY SCHEDULE. The following table sets forth certain information as of
September 30, 1997, regarding the dollar amount of loans maturing in Milton
Federal's portfolio based on their contractual terms to maturity. Demand loans
and loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less.
Due during the year ending Due 4-5 Due 6-10 Due 11-20 Due 20 or
September 30, years years years more years
--------------------------- after after after after
1998 1999 2000 9/30/97 9/30/97 9/30/97 9/30/97 Total
---- ---- ---- ------- ------- ------- ------- -----
Mortgage loans: (In thousands)
1-4 family
(first mortgage) $ 410 $ 130 $ 365 $ 1,494 $ 14,184 $ 41,598 $ 50,760 $108,941
Home equity (1-4
family second
mortgage) 3,923 -- 7 -- 34 87 -- 4,051
Multifamily and
nonresidential -- 313 420 770 3,074 2,266 829 7,672
Construction loans 126 344 -- -- 763 1,530 6,637 9,400
Consumer loans 165 267 526 1,698 164 12 -- 2,832
Commercial loans 316 -- -- 190 69 -- -- 575
--------- --------- --------- --------- -------- -------- -------- ----------
Total loans $ 4,940 $ 1,054 $ 1,318 $ 4,152 $ 18,288 $ 45,493 $ 58,226 $ 133,471
========= ========= ========= ========= ======== ======== ======== ==========
The following table sets forth at September 30, 1997, the dollar amount of all
loans before net items, due after one year from September 30, 1997, which have
predetermined interest rates and floating or adjustable interest rates:
Floating or
Predetermined Adjustable
Rates Rates
----- -----
(In thousands)
Mortgage loans:
1-4 family residential $ 102,315 $ 6,217
Home equity loans -- 128
Multi-family and nonresidential 7,559 112
Construction loans 8,447 827
Consumer loans 2,667 --
Commercial loans -- 259
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Total loans $ 120,988 $ 7,543
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1-4 FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending activity of Milton
Federal has been the origination of permanent conventional loans secured by 1-4
family residences, primarily single-family residences, located within Milton
Federal's designated lending area. Milton Federal also originates loans for the
construction of 1-4 family residences and home equity loans secured by second
mortgages on 1-4 family residential real estate. Each of such loans is secured
by a mortgage on the underlying real estate and improvements thereon, if any.
OTS regulations limit the amount which Milton Federal may lend in relationship
to the appraised value of the real estate and improvements at the time of loan
origination. In accordance with such regulations, Milton Federal makes
fixed-rate loans on 1-4 family residences up to 95% of the value of the real
estate and improvements (the "Loan-to-Value Ratio" or "LTV"). Milton Federal
requires private mortgage insurance for such loans in excess of 90% of the value
of the real estate securing such loans. Residential real estate loans are
offered by Milton Federal for terms of up to 30 years.
While the majority of Milton Federal's loans have fixed rates of interest,
Milton Federal began originating adjustable rate mortgage loans ("ARMs") in
fiscal year 1995. ARMs are offered by Milton Federal for terms of up to 30
years. The interest rate adjustment periods on the ARMs are either one year,
three years or five
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years. The interest rate adjustments on ARMs presently originated by Milton
Federal are tied to changes in the weekly average yield on the one-, three- and
five-year U.S. Treasury constant maturities index. Rate adjustments are computed
by adding a stated margin, typically 3%, to the index. The maximum allowable
adjustment at each adjustment date is usually 2% with a maximum adjustment of 6%
over the term of the loan. The initial rate is dependent, in part, on how often
the rate can be adjusted. Milton Federal originates ARMs which have initial
interest rates lower than the sum of the index plus the margin. Such loans are
subject to increased risk of delinquency or default due to increasing monthly
payments as the interest rates on such loans increase to the fully-indexed
level, although such increase is considered in Milton Federal's underwriting of
such loans.
The aggregate amount of Milton Federal's 1-4 family residential real estate
loans equaled approximately $108.9 million at September 30, 1997, and
represented 81.6% of loans at such date. At such date, loans secured by 1-4
family residential real estate with outstanding balances of $562,000, or .5% of
its 1-4 family residential real estate loan balance, were more than 90 days
delinquent or nonaccruing. See "Delinquent Loans, Nonperforming Assets and
Classified Assets."
MULTIFAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on 1-4 family
properties, Milton Federal makes loans secured by multifamily properties
containing over four units. Such loans are made with fixed and adjustable
interest rates and a maximum LTV of 75%. ARMs on multifamily properties are
offered with the same adjustment periods and index as ARMs on 1-4 family
properties and typically with a margin of 4% over the index.
Multifamily lending is generally considered to involve a higher degree of risk
because the loan amounts are larger and the borrower typically depends upon
income generated by the project to cover operating expenses and debt service.
The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower. Milton
Federal attempts to reduce the risk associated with multifamily lending by
evaluating the credit-worthiness of the borrower and the projected income from
the project and by obtaining personal guarantees on loans made to corporations
and partnerships. Milton Federal currently requires that borrowers agree to
submit financial statements and tax returns annually to enable Milton Federal to
monitor the loan.
At September 30, 1997, loans secured by multifamily properties totaled
approximately $1.5 million, or 1.1% of total loans, all of which were secured by
property located in Miami and Montgomery Counties, Ohio. At such date, loans
secured by multifamily residential real estate with outstanding balances of
$28,000, or 1.9% of its multifamily real estate loan balance, were more than 90
days delinquent or nonaccruing. See "Delinquent Loans, Nonperforming Assets and
Classified Assets."
CONSTRUCTION LOANS. Milton Federal makes loans for the construction of
residential and nonresidential real estate. Such loans are structured as
permanent loans with fixed and adjustable rates of interest and for terms of up
to 30 years. Almost all of the construction loans originated by Milton Federal
are made to owner-occupants for the construction of single-family homes by a
general contractor. The remainder are made to builders for small projects, some
of which have not been pre-sold.
Construction loans generally involve greater underwriting and default risks than
do loans secured by mortgages on existing properties due to the concentration of
principal in a limited number of loans and borrowers and the effects of general
economic conditions on real estate developments, developers, managers and
builders. In addition, such loans are more difficult to evaluate and monitor.
Loan funds are advanced upon the security of the project under construction,
which is more difficult to value before the completion of construction.
Moreover, because of the uncertainties inherent in estimating construction
costs, it is relatively difficult to evaluate accurately the LTVs and the total
loan funds required to complete a project. In the event a default on a
construction loan occurs and foreclosure follows, Milton Federal must take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project.
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At September 30, 1997, a total of $9.4 million, or approximately 7.0% of Milton
Federal's total loans, consisted of construction loans. At such date, there were
no construction loans which were more than 90 days delinquent or nonaccruing.
The majority of Milton Federal's construction loans are secured by property in
Miami and Montgomery Counties and the economy of such lending area has been
relatively stable.
NONRESIDENTIAL REAL ESTATE LOANS. Milton Federal also makes loans secured by
nonresidential real estate consisting primarily of retail stores, office
buildings and churches. Such loans are originated with a 21-year amortization
schedule, but with the balance due in a lump sum after seven years. Milton
Federal will extend such loans for two seven-year periods, if warranted upon
review of Milton Federal's underwriting criteria and the interest rate on the
loan is adjusted at each such extension. Such loans have a maximum LTV of 75%.
Nonresidential real estate lending is generally considered to involve a higher
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Milton Federal has endeavored to reduce such
risk by evaluating the credit history and past performance of the borrower, the
location of the real estate, the quality of the management constructing and
operating the property, the debt service ratio, the quality and characteristics
of the income stream generated by the property and appraisals supporting the
property's valuation.
At September 30, 1997, Milton Federal had a total of $6.2 million invested in
nonresidential real estate loans, all of which were secured by property located
in Miami and Montgomery Counties, Ohio. Such loans comprised approximately 4.7%
of Milton Federal's total loans at such date. At such date Milton Federal had no
nonresidential real estate loans which were more than 90 days delinquent or
nonaccruing. See "Delinquent Loans, Nonperforming Assets and Classified Assets."
Federal regulations limit the amount of nonresidential mortgage loans which an
association may make to 400% of its capital. At September 30, 1997, Milton
Federal's nonresidential mortgage loans totaled 29.2% of Milton Federal's
capital.
CONSUMER LOANS. Milton Federal makes various types of consumer loans, including
unsecured loans and loans secured by deposits, automobiles, boats and
recreational vehicles. Such loans are made at fixed rates of interest only.
Milton Federal has been attempting to increase its consumer loan portfolio as
part of its interest rate risk management efforts.
Consumer loans may entail greater risk than do residential mortgage loans. The
risk of default on consumer loans increases during periods of recession, high
unemployment and other adverse economic conditions. Although Milton Federal has
not had significant delinquencies on consumer loans, no assurance can be
provided that delinquencies will not increase.
At September 30, 1997, Milton Federal had approximately $2.8 million, or 2.1% of
its total loans, invested in consumer loans. At such date, consumer loans with
outstanding balances of $15,000, or .5% of its consumer loan balance, were more
than 90 days delinquent or nonaccruing. See "Delinquent Loans, Nonperforming
Assets and Classified Assets."
COMMERCIAL LOANS. Federal law authorizes federally-chartered thrift
institutions, such as Milton Federal, to make secured or unsecured loans for
commercial, corporate, business and agricultural purposes, up to a maximum of
20% of total assets, so long as the amount above 10% of total assets is for
small business purposes.
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In fiscal 1997, Milton Federal implemented a commercial loan program, which
includes extending letters of credit and commercial loans to finance commercial
and industrial business activities including equipment financing, commercial
lines of credit and working capital.
Unlike residential mortgage loans, which generally are granted on the basis of
the borrower's ability to repay the debt from employment and other income and
which are secured by real property, the value of which tends to be more easily
ascertainable, business loans are of higher risk and typically are granted on
the basis of the borrower's ability to repay the debt from the cash flow of the
underlying business. In addition, it is generally the practice of Milton Federal
to request additional collateral in the form of personal guarantees. Additional
collateral may include, on occasion, a lien on the business owner's personal
residence. Nonetheless, the availability of funds for the repayment of business
loans generally is dependent on the success of the business itself.
At September 30, 1997, Milton Federal had approximately $575,000, or .4% of its
total loans, invested in commercial loans. No commercial loans were more than 90
days delinquent or nonaccruing. See "Delinquent Loans, Nonperforming Assets and
Classified Assets."
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a number
of sources, including continuing business with depositors, borrowers and real
estate developers, periodic newspaper and radio advertisements, solicitations by
Milton Federal's lending staff and walk-in customers.
Loan applications for permanent mortgage loans are taken by loan personnel.
Milton Federal obtains a credit report, verification of employment and other
documentation concerning the credit-worthiness of the borrower. An appraisal of
the fair market value of the real estate on which Milton Federal will be granted
a mortgage to secure the loan is prepared by an independent fee appraiser
approved by the Board of Directors. An environmental study is conducted for all
business properties and for other real estate only if the appraiser or the loan
committee has reason to believe that an environmental problem may exist.
Commencing in 1992, Milton Federal required a survey of the property for every
real estate loan.
For multifamily and nonresidential mortgage loans, a personal guarantee of the
borrower's obligation to repay the loan is required. Milton Federal also obtains
information with respect to prior projects completed by the borrower. Upon the
completion of the appraisal and the receipt of information on the borrower, the
application for a loan is submitted to the Loan Committee for approval or
rejection if the loan does not exceed $300,000. If the loan amount exceeds
$300,000, the application is approved or rejected by the full Board of
Directors.
If a mortgage loan application is approved, title insurance is obtained on the
title to the real estate which will secure the mortgage loan. Prior to September
1990, Milton Federal did not require title insurance but did obtain an
attorney's opinion of title. Borrowers are required to carry fire and casualty
insurance and flood insurance, if applicable, and to name Milton Federal as an
insured mortgagee.
The procedure for approval of construction loans is the same as for permanent
mortgage loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. Milton Federal
also evaluates the feasibility of the proposed construction project and the
experience and financial status of the builder.
Consumer loans are underwritten on the basis of the borrower's credit history
and an analysis of the borrower's income and expenses, ability to repay the loan
and the value of the collateral, if any.
Milton Federal's loans carry no pre-payment penalties but do provide that the
entire balance of the loan is due upon sale of the property securing the loan.
Milton Federal generally enforces such due-on-sale provisions.
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LOAN ORIGINATIONS, PURCHASES AND SALES. Prior to 1995, Milton Federal had been
actively originating only new fixed-rate loans. In fiscal 1995, Milton Federal
began to originate adjustable-rate loans in addition to fixed-rate loans. In the
first quarter of fiscal 1997, Milton Federal sold a pool of 1-4 family first
mortgage loans with a carrying value of $10.3 million. The loans were sold as a
means to manage interest rate risk by reducing the Milton Federal's investment
in various lower-yielding or longer-term fixed rate loans. Management intends
to continue, in the future, to originate, fixed-rate loans in a manner which
permits their sale into the secondary mortgage market. Milton Federal intends to
retain the servicing of loans sold in the secondary mortgage market. At
September 30, 1997, Milton Federal had no mortgage loans which were classified
as held for sale. Milton Federal occasionally participates in loans originated
by other institutions.
The following table presents Milton Federal's loan origination and sale activity
for the periods indicated:
Year ended September 30,
-------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Loans originated
1-4 family residential $ 27,150 $ 29,774 $ 17,026
Multifamily residential -- 71 86
Nonresidential 2,263 150 33
Construction 8,915 7,912 7,555
Consumer 2,286 1,717 1,857
Commercial 608 -- --
----------- ----------- -----------
Total loans originated 41,222 39,624 26,557
----------- ----------- -----------
Loan participations purchased -- -- --
----------- ----------- -----------
Reductions:
Principal repayments (10,057) (23,633) (16,905)
Sales (10,259) -- --
Transfers from loans to real estate owned and
repossessed assets -- -- (70)
----------- ----------- -----------
Total reductions (20,316) (23,633) (16,975)
Increase (decrease) in other items, net (1) (22) 21 (42)
----------- ----------- -----------
Net increase (decrease) $ 20,884 $ 16,012 $ 9,540
=========== =========== ===========
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(1) Consists of unearned and deferred fees, deferred costs and allowance for
loan losses.
OTS regulations generally limit the aggregate amount that a savings association
may lend to any one borrower to an amount equal to 15% of the association's
total capital for regulatory capital purposes plus any additional loan reserves
not included in total capital (collectively, "Lending Limit Capital"). A savings
association may lend to one borrower an additional amount not to exceed 10% of
the association's Lending Limit Capital if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." In addition, the regulations require
that loans to certain related or affiliated borrowers be aggregated for purposes
of such limits. An exception to these limits permits loans to one borrower of up
to $500,000 "for any purpose."
Based on such limits, Milton Federal was able to lend approximately $3.2 million
to any one borrower at September 30, 1997. The largest amount Milton Federal had
outstanding to one borrower was $750,050. Such loan was secured by multifamily
residential real estate and was current at September 30, 1997.
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LOAN ORIGINATION AND OTHER FEES. Milton Federal realizes loan origination fees
and other fee income from its lending activities. In addition, Milton Federal
also realizes income from late payment charges, application fees, and fees for
other miscellaneous services.
Loan origination fees and other fees are a volatile source of income, varying
with the volume of lending, loan repayments and general economic conditions. All
nonrefundable loan origination fees and certain direct loan origination costs
are deferred and recognized as an adjustment to yield over the life of the
related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. When a borrower
fails to make a required payment on a loan, Milton Federal attempts to cause the
deficiency to be cured by contacting the borrower. In most cases, deficiencies
are cured promptly.
When a real estate loan is fifteen days or more delinquent, the borrower is sent
a delinquency notice. When a loan is thirty days delinquent, Milton Federal
sends a letter to the borrower and may telephone the borrower. Depending upon
the circumstances, Milton Federal may also inspect the property and inform the
borrower of the availability of credit counseling from Milton Federal and
counseling agencies. When a loan becomes 90 days delinquent, it is generally
referred to an attorney for foreclosure, unless the Board of Directors deems
appropriate alternative payment arrangements to eliminate the arrearage. A
decision as to whether and when to initiate foreclosure proceedings is based on
such factors as the amount of the outstanding loan in relation to the original
indebtedness, the extent of the delinquency and the borrower's ability and
willingness to cooperate in curing delinquencies. If a foreclosure occurs, the
real estate is sold at public sale and may be purchased by Milton Federal.
Real estate acquired, or deemed acquired, by Milton Federal as a result of
foreclosure proceedings is classified as real estate owned ("REO") until it is
sold. When property is so acquired, or deemed to have been acquired, it is
initially recorded by Milton Federal at the fair value of the real estate, less
estimated costs to sell. Interest accrual, if any, ceases no later than the date
of acquisition of the real estate. Any reduction in fair value is reflected in a
valuation allowance account established by a charge to income. Costs incurred to
carry other real estate are charged to expense. Milton Federal held no REO
property at September 30, 1997.
In the case of delinquencies on consumer loans, a notice is sent to the borrower
when payment is not received by the tenth business day after the payment due
date. When a payment is fifteen days past due, a letter is sent or the borrower
is contacted by telephone. If no payment or satisfactory promise is made by the
second due date, a collection officer makes a personal visit to the borrower's
residence. If an account is ninety days delinquent, the borrower is provided a
written notice that legal action will be taken if the account is not brought
current within ten days, and the failure to so bring the account current
generally results in repossession of the collateral, if any.
Milton Federal places a loan on nonaccrual status when the loan is delinquent 90
days or more, unless the value of the collateral provides sufficient equity to
warrant the continued accrual of interest.
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The following table reflects the number and amount of loans in a delinquent
status as of the dates indicated:
At September 30,
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1997 1996 1995
------------------------- ------------------------- ------------------------------
(Dollars in thousands)
Percent of Percent of Percent of
Total Total Total
No. Amt. Loans No. Amt. Loans No. Amt. Loans
--- ---- ----- --- ---- ----- --- ---- -----
Loans delinquent for (1):
30-59 days 6 $ 268 0.20 13 $ 337 0.27% 9 $ 413 0.39%
60-89 days 5 212 0.16 3 124 0.10 5 170 0.16
90 days and over 18 624 0.47 10 597 0.49 11 520 0.50
-- -------- ----- -- ------ ---- -- ------ ----
Total delinquent loans 29 $ 1,104 (2) 0.83% 26 $1,058 0.86% 25 $1,103 1.05%
== ========= ===== == ====== ==== == ====== ====
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(1) The number of days a loan is delinquent is measured from the day the payment
was due under the terms of the loan agreement.
(2) Of such amount, $915,000 is secured by 1-4 family real estate.
The following table sets forth information with respect to the accrual and
nonaccrual status of Milton Federal's loans which are 90 days or more past due
and other nonperforming assets at the dates indicated:
At September 30,
-----------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Accruing loans delinquent more than 90 days (1) $ 276 $ 285 $ 367
Loans accounted for on a nonaccrual basis:
Real estate:
Residential 348 312 153
Nonresidential -- -- --
Consumer -- -- --
-------- -------- ---------
Total nonaccrual loans 348 312 153
Other nonperforming assets (2) -- 32 32
-------- -------- ---------
Total nonperforming assets $ 624 $ 629 $ 552
======== ======== =========
Total loan loss allowance $ 562 $ 487 $ 333
Total nonperforming assets as a percentage of total assets 0.30% 0.35% 0.34%
Loan loss allowance as a percent of nonperforming loans 90.06% 81.57% 64.04%
- -------------------------------------------------------------------------------------------------------------------
(1) All are secured by 1-4 family real estate.
-11-
12
(2) Other nonperforming assets represent real estate acquired by Milton Federal
through foreclosure, which is carried at the lower of the fair value of the
real estate, less selling expenses, or the unpaid principal balance of the
loan at the date of foreclosure.
As of and for the year ended September 30, 1997, no loans were considered
impaired within the scope of Statement of Financial Accounting Standards
("SFAS") No. 114. During the year ended September 30, 1997, $29,000 would have
been recorded on nonaccruing loans had such loans been accruing pursuant to
contractual terms. During such period, no interest income was recorded on such
loans. Management believes that no loans, other than loans which are currently
classified as nonaccrual, more than 90 days past due or restructured, may be so
classified in the near future due to concerns as to the ability of the borrowers
to comply with repayment terms.
OTS regulations require that each thrift institution classify its own assets on
a regular basis. Problem assets are classified as "substandard," "doubtful" or
"loss." "Substandard" assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. "Doubtful" assets have
the same weaknesses as "substandard" assets, with the additional characteristics
that (i) the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable and (ii) there is a
high possibility of loss. An asset classified "loss" is considered uncollectible
and of such little value that its continuance as an asset of the institution is
not warranted. The regulations also contain a "special mention" category,
consisting of assets which do not currently expose an institution to a
sufficient degree of risk to warrant classification but which possess credit
deficiencies or potential weaknesses deserving management's close attention.
Generally, Milton Federal classifies as "substandard" all loans that are
delinquent more than 60 days, unless management believes the delinquency status
is short-term due to unusual circumstances. Loans delinquent fewer than 60 days
may also be classified if the loans have the characteristics described above
rendering classification appropriate.
The aggregate amounts of Milton Federal's classified assets at the dates
indicated were as follows:
At September 30,
------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Substandard $ 790 $ 714 $ 370
Doubtful 10 -- 38
Loss 149 149 148
--------- --------- ---------
Total classified assets $ 949 $ 863 $ 556
========= ========= =========
Federal examiners are authorized to classify an association's assets. If an
association does not agree with an examiner's classification of an asset, it may
appeal this determination to the District Director of the OTS. Milton Federal
had no disagreements with the examiners regarding the classification of assets
at the time of the last examination.
OTS regulations require that Milton Federal establish prudent general allowances
for loan losses for any loan classified as substandard or doubtful. If an asset,
or portion thereof, is classified as loss, the association must either establish
specific allowances for losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount.
ALLOWANCE FOR LOAN LOSSES. Milton Federal maintains an allowance for loan losses
based upon a number of relevant factors, including, but not limited to, trends
in the level of nonperforming assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes in
the composition of the loan portfolio.
-12-
13
The single largest component of Milton Federal's loan portfolio consists of 1-4
family residential real estate loans. Substantially all of these loans are
secured by residential real estate and generally require a down payment of at
least 10% of the lower of the sales price or appraisal value of the real estate.
Private mortgage insurance is required for such loans with less than a 10% down
payment. In addition, these loans are secured by property in Milton Federal's
designated lending area consisting of portions of Miami, Montgomery and Darke
Counties in Ohio. Milton Federal's practice of making the majority of its loans
in its designated lending area and requiring a 10% down payment have contributed
to a low historical charge-off rate.
In addition to 1-4 family residential real estate loans, Milton Federal makes
additional real estate loans, including home equity, multifamily residential
real estate, nonresidential real estate and construction loans. These real
estate loans are secured by property in Milton Federal's designated lending area
and also require the borrower to provide a down payment. Milton Federal has not
experienced any charge-offs from these other real estate loan categories.
A small portion of Milton Federal's total loans consists of consumer loans,
primarily automobile loans. These loans typically have a lower down payment and
are secured by collateral that declines in value. Such loans therefore carry a
higher degree of risk than the real estate loans. Milton Federal has, however,
recorded less than $2,000 of charge-offs on consumer loans since these loans
have been offered.
The allowance for loan losses is reviewed quarterly by management's Asset
Classification Committee and the Board of Directors. While the Board of
Directors believes that it uses the best information available to determine the
allowance for loan losses, unforeseen market conditions could result in material
adjustments, and net earnings could be significantly adversely affected, if
circumstances differ substantially from the assumptions used in making the final
determination.
The following table sets forth an analysis of Milton Federal's allowance for
loan losses for the periods indicated.
Year ended September 30,
------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Balance at beginning of period $ 487 $ 333 $ 269
Charge-offs (1) -- -- --
Recoveries -- -- --
Provision for loan losses (charged to operations) 75 154 64
-------- -------- ---------
Balance at end of period $ 562 $ 487 $ 333
======== ======== =========
Ratio of net charge-offs (recoveries) to average loans outstanding
during the period 0.00% 0.00% 0.00%
Ratio of allowance for loan losses to total loans 0.42 0.40 0.32
Allowance for loan losses as a percentage of nonperforming loans 90.06 81.57 64.04
- -------------------------------------------------------------------------------------------------------------------
(1) Actual charge-offs for the year ended September 30, 1995, were $326 which
rounds to $0 when rounding to the nearest thousand. The entire amount of
charge-offs were related to consumer loans.
-13-
14
The following schedule is a breakdown of the allowance for loan losses allocated
by type of loan and related ratios.
At September 30,
-----------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Real estate and
construction loans $ 339 97.45% $ 321 98.17% $ 298 97.96%
Consumer loans 8 2.12 3 1.83 2 2.04
Commercial loans -- .43 -- 0.00 -- 0.00
Unallocated 215 -- 163 -- 33 --
----------- ------- ----------- -------- ----------- -------
Total $ 562 100.00% $ 487 100.00% $ 333 100.00%
=========== ======= =========== ======== =========== =======
While management's periodic analysis of the adequacy of the allowance for loan
losses may allocate portions of the allowance for specific problem loan
situations, the entire allowance is available for any loan charge-offs that may
occur.
MORTGAGE-BACKED AND RELATED SECURITIES
MFFC maintains a significant portfolio of mortgage-backed securities in the form
of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage
Association ("FNMA"), Government National Mortgage Association ("GNMA") and
Small Business Association ("SBA") participation certificates. Mortgage-backed
securities generally entitle MFFC to receive a portion of the cash flows from an
identified pool of mortgages, and FHLMC, FNMA, GNMA and SBA securities are each
guaranteed by their respective agencies as to principal and interest.
MFFC has also invested significant amounts in CMOs and REMICs. CMOs and REMICs
are mortgage derivative products, secured by an underlying pool of mortgages.
MFFC has no ownership interest in the mortgages, except to the extent they serve
as collateral. Payment streams from the mortgages serving as collateral are
reconfigured with varying terms and time of payment to the investor. Though they
can be used for hedging and investment, CMOs and REMICs can expose investors to
higher risk of loss than direct investments in mortgage-backed pass-through
securities, particularly with respect to price volatility and lack of a broad
secondary market in such securities. The OTS has deemed certain CMOs and other
mortgage derivative products to be "high-risk." None of MFFC's CMOs or REMICs
are in such "high-risk" category.
Although mortgage-backed and related securities generally yield less than
individual loans originated by Milton Federal, they present less credit risk,
because mortgage-backed securities are guaranteed as to principal repayment by
the issuing agency and CMOs and REMICs are secured by the underlying collateral.
All of MFFC's CMOs and REMICs are backed by pools of mortgages that are insured
or guaranteed by FNMA and FHLMC. Although certain mortgage-backed and related
securities designated as available for sale are a potential source of liquid
funds for loan originations and deposit withdrawals, the prospect of a loss on
the sale of such investments limits the usefulness of these investments for
liquidity purposes.
In addition, MFFC has purchased adjustable-rate mortgage-baked and related
securities as part of its effort to reduce its interest rate risk. In a period
of declining interest rates, MFFC is subject to prepayment
-14-
15
risk on such adjustable-rate mortgage-backed and related securities. MFFC
attempts to mitigate this prepayment risk by purchasing mortgage-backed and
related securities at or near par. If interest rates rise in general, the
interest rates on the loans backing the mortgage-backed and related securities
will also adjust upward, subject to the interest rate caps in the underlying
adjustable-rate mortgage loans. However, MFFC is still subject to interest rate
risk on such securities if interest rates rise faster than the 1% to 2% maximum
annual interest rate adjustments on the underlying loans.
At September 30, 1997, almost all of the $60.0 million of MFFC's mortgage-backed
and related securities had adjustable rates.
The following table sets forth information regarding MFFC's mortgage-backed and
related securities at the dates indicated.
At September 30,
------------------------------------------------------------
1997 1996
-------------------------- ---------------------------
Available Held to Available Held to
For Sale Maturity For Sale Maturity
-------- -------- -------- --------
(Dollars in thousands)
FNMA certificates $ 2,851 5,191 $ 524 $ 5,904
GNMA certificates -- 810 -- 918
FHLMC certificates 2,863 6,124 2,659 7,180
Collateralized mortgage obligations
and REMICs 42,128 -- 30,826 --
----------- ----------- ----------- -----------
Total $ 47,842 $ 12,125 $ 34,009 $ 14,002
=========== =========== =========== ===========
-15-
16
The following table sets forth information regarding scheduled maturities,
amortized costs, market value and weighted average yields of MFFC's
mortgage-backed and related securities at September 30, 1997. Actual maturities
will differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments. The
weighted average yield has been computed using the historical amortized cost for
available-for-sale securities.
At September 30, 1997
------------------------------------------------------------------
After After
One Year or Less One to Five Years Five to Ten Years
------------------- -------------------- ------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
Securities available for sale
FNMA certificates $ -- --% $ -- --% $ -- --%
FHLMC certificates -- -- -- -- -- --
CMOs and REMICs -- -- 599 7.40 -- --
--------- ---- --------- ----- --------- ------
Total $ -- --% $ 599 7.40% $ -- --%
========= ==== ========= ===== ========= ======
Securities held to maturity
FNMA certificates $ -- --% $ -- --% $ -- --%
GNMA certificates -- -- -- -- 13 8.50
FHLMC certificates -- -- 2 12.00 -- --
--------- ---- -------- ------- --------- ------
Total $ -- --% $ 2 12.00% $ 13 8.50%
========= ==== ======== ======= ========= ======
At September 30, 1997
-----------------------------------------------------------
Total
After Ten Years Mortgage-Backed Portfolio
-------------------- ----------------------------------
Carrying Average Carrying Fair Average
Value Yield Value Value Yield
----- ----- ----- ----- -----
(Dollars in thousands)
Securities available for sale
FNMA certificates $ 2,851 11.08% $ 2,851 $ 2,851 11.08%
FHLMC certificates 2,863 7.04 2,863 2,863 7.04
CMOs and REMICs 41,529 6.20 42,128 42,128 6.22
---------- ------ ---------- --------- ------
Total $ 47,243 6.54% $ 47,842 $ 47,842 6.55%
========== ====== ========== ========= ======
Securities held to maturity
FNMA certificates $ 5,191 6.73% $ 5,191 $ 5,144 6.73%
GNMA certificates 797 7.31 810 852 7.33
FHLMC certificates 6,122 6.76 6,124 6,059 6.76
---------- ------ ---------- --------- ------
Total $ 12,110 6.77% $ 12,125 $ 12,055 6.78%
========== ====== ========== ========= ======
For additional information, see Note 3 of the Notes to Consolidated Financial
Statements.
-16-
17
INVESTMENT ACTIVITIES
OTS regulations require that Milton Federal maintain a minimum amount of liquid
assets, which may be invested in U.S. Treasury obligations, securities of
various federal agencies, certificates of deposit at insured banks, bankers'
acceptances and federal funds. Milton Federal is also permitted to make
investments in certain commercial paper, corporate debt securities rated in one
of the four highest rating categories by one or more nationally recognized
statistical rating organizations, and mutual funds, as well as other investments
permitted by federal regulations. See "REGULATION."
The following table sets forth the composition of MFFC's interest-bearing
deposits and investment portfolio at the dates indicated:
At September 30,
-----------------------------------------------------------------------------------
1997 1996
---------------------------------------- ----------------------------------------
Carrying % of Market % of Carrying % of Market % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Interest-bearing deposits in other
financial institutions $ 4,936 36.0% $ 4,936 36.0% $ 854 8.6% $ 854 8.7%
Securities available for sale:
U.S. Government and federal
agency securities 5,505 40.2 5,505 40.1 8,507 86.1 8,507 86.2
Equity securities 15 0.1 15 0.1 15 0.2 15 0.2
Securities held to maturity:
U.S. Government and federal
agency securities 3,254 23.7 3,260 23.8 500 5.1 484 4.9
-------- ------ -------- ------ ------- ------- ------- -------
Total interest-bearing deposits
and investment securities $ 13,710 100.0% $ 13,716 100.0% $ 9,876 100.0% $ 9,860 100.0%
======== ====== ======== ====== ======= ======= ======= =======
At September 30,
--------------------------------------
1995
--------------------------------------
Carrying % of Market % of
Value Total Value Total
----- ----- ----- -----
(Dollars in thousands)
Interest-bearing deposits in other
financial institutions $ 752 6.4% $ 752 6.4%
Securities available for sale:
U.S. Government and federal
agency securities 11,063 93.5 11,063 93.5
Equity securities 15 0.1 15 0.1
Securities held to maturity:
U.S. Government and federal
agency securities -- -- -- --
-------- ------- --------- -----
Total interest-bearing deposits
and investment securities $ 11,830 100.0% $ 11,830 100.0%
======== ====== ========= ======
-17-
18
The following table sets forth the contractual maturities, carrying values,
market values and average yields for MFFC's interest-bearing deposits in other
financial institutions and investment securities at September 30, 1997. The
weighted average yield has been computed using the historical amortized cost
for available-for-sale securities.
At September 30, 1997
------------------------------------------------------------------------
After After
One Year or Less One to Five Years Five to Ten Years (2)
---------------- ----------------- -----------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
Interest-bearing deposits in
other financial institutions $ 4,936 5.34% $ -- -- -- --
Securities available for sale:
U.S. Government and
federal agency securities 1,504 6.00 4,001 6.43% -- --
Equity securities (1) 15 -- -- -- -- --
Securities held to maturity:
U.S. Government and
federal agency
securities -- -- 2,754 6.83 $ 500 7.00%
--------- ------ --------- ------- -------- -----
Total $ 6,455 5.49% $ 6,755 6.59% $ 500 7.00%
========= ====== ========= ======= ======== =====
At September 30, 1997
--------------------------------------------------
Total Interest-Bearing Deposits in Other
Financial Institutions and Investment Securities
------------------------------------------------
Average Weighted
Life Carrying Market Average
In Years Value Value Yield
-------- ----- ----- -----
(Dollars in thousands)
Interest-bearing deposits in other financial
institutions .01 $ 4,936 $ 4,936 5.34%
Securities available for sale:
U.S. Government and federal agency securities 2.17 5,505 5,505 6.31
Equity securities (1) N/A 15 15 --
Securities held to maturity:
U.S. Government and federal agency securities 3.83 3,254 3,260 6.86
------ ---------- --------- ------
Total 1.79 $ 13,710 $ 13,716 6.08%
====== ========== ========= ======
- --------------------------------------------------------------------------------
(1) Comprised of Intrieve, Incorporated ("Intrieve"), stock, which is reported
at the fair value, which approximates cost.
(2) All investment securities mature within ten years.
-18-
19
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of Milton Federal's
funds for use in lending and other investment activities. In addition to
deposits, Milton Federal derives funds from interest payments and principal
repayments on loans and mortgage-backed and related securities, income on
earning assets, service charges and gains on the sale of assets. Loan payments
are a relatively stable source of funds, while deposit inflows and outflows
fluctuate more in response to general interest rates and money market
conditions.
DEPOSITS. Deposits are attracted principally from within Milton Federal's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, money
market accounts, passbook savings accounts, term certificate accounts,
individual retirement accounts ("IRAs") and Keogh retirement accounts
("Keoghs"). Interest rates paid, maturity terms, service fees and withdrawal
penalties for the various types of accounts are established periodically by the
management of Milton Federal based on Milton Federal's liquidity requirements,
growth goals and interest rates paid by competitors. Milton Federal does not use
brokers to attract deposits.
At September 30, 1997, Milton Federal's certificates of deposit totaled
$110.5 million, or 77.4% of total deposits. Of such amount, approximately
$66.0 million in certificates of deposit mature within one year. Based on past
experience and Milton Federal's prevailing pricing strategies, management
believes that a substantial percentage of such certificates will renew with
Milton Federal at maturity. If there is a significant deviation from historical
experience, Milton Federal can utilize borrowings from the FHLB as an
alternative to this source of funds.
The following table sets forth the dollar amount of deposits in the various
types of savings programs offered by Milton Federal at the dates indicated:
As of September 30,
---------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ ----------------------
(Dollars in thousands)
Transaction accounts:
- ---------------------
NOW accounts (1) $ 8,795 6.16% $ 9,202 7.16% $ 7,146 6.06%
Money market accounts (2) 7,065 4.95 6,744 5.24 8,602 7.30
Passbook savings
accounts (3) 16,461 11.52 16,760 13.04 17,427 14.78
----------- ------- ----------- -------- ----------- -------
Total transaction
accounts 32,321 22.63 32,706 25.44 33,175 28.14
Certificates of deposit (4): 110,511 77.37 95,848 74.56 84,723 71.86
- ----------------------- ----------- ------- ----------- -------- ----------- -------
Total deposits (5) $ 142,832 100.00% $ 128,554 100.00% $ 117,898 100.00%
=========== ====== =========== ======== =========== ========
- --------------------------------------------------------------------------------
(1) Milton Federal's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At September 30,
1997, 1996 and 1995, the weighted average rates on NOW accounts were 2.13%,
2.40% and 2.08%, respectively.
(2) Milton Federal's weighted average interest rate paid on money market
accounts fluctuates with the general movement of interest rates. At
September 30, 1997, 1996 and 1995, the weighted average rates on money
market accounts were 2.89%, 3.00% and 3.00%, respectively.
(Footnotes continued on next page)
-19-
20
(3) Milton Federal's weighted average rate on passbook savings accounts
fluctuates with the general movement of interest rates. The weighted average
interest rate on passbook accounts was 2.52% at September 30, 1997, 1996 and
1995, respectively.
(4) The interest rate on individual certificates of deposit remains fixed until
maturity. At September 30, 1997, 1996 and 1995 the weighted average rates on
certificates of deposit were 5.91%, 5.82% and 6.16%, respectively.
(5) IRAs and Keoghs are included in the various certificates of deposit
balances. IRAs and Keoghs totaled $21.0 million, $18.5 million and
$17.0 million as of September 30, 1997, 1996 and 1995, respectively.
At September 30, 1997, scheduled maturities of certificates of deposit were
as follows:
Year Ended September 30, Amount
------------------------ ------
(In thousands)
1998 $ 65,959
1999 23,066
2000 13,495
2001 2,907
2002 5,084
--------
$110,511
========
The following table presents the amount of Milton Federal's certificates of
deposit of $100,000 or more by the time remaining until maturity as of September
30, 1997:
Maturity Amount
-------- ------
(In thousands)
Three months or less $ 924
Over 3 months to 6 months 744
Over 6 months to 12 months 550
Over 12 months 2,937
-----------
Total $ 5,155
===========
The following table sets forth Milton Federal's deposit account balance activity
for the periods indicated:
Year Ended September 30,
----------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Beginning balance $ 128,554 $ 117,898 $ 134,790
Deposits 180,052 160,602 158,975
Withdrawals (171,487) (155,225) (180,180)
------------ ------------ -------------
Net increases (decreases) before interest credited 8,565 5,377 (21,205)
Interest credited 5,713 5,279 4,313
------------ ------------ ------------
Ending balance $ 142,832 $ 128,554 $ 117,898
============ ============ ============
Net increase (decrease) $ 14,278 $ 10,656 $ (16,892)
Percent increase (decrease) 11.11% 9.04% (12.53)%
-20-
21
BORROWINGS. The FHLB System functions as a central reserve bank providing
credit for its member institutions and certain other financial institutions.
See "REGULATION - Federal Home Loan Banks." As a member in good standing of the
FHLB of Cincinnati, Milton Federal is authorized to apply for advances from the
FHLB of Cincinnati, provided certain standards of creditworthiness have been
met. Under current regulations, an association must meet certain
qualifications to be eligible for FHLB advances. The extent to which an
association is eligible for such advances will depend upon whether it meets the
Qualified Thrift Lender Test (the "QTL Test"). See "REGULATION - OTS
Regulations -- Qualified Thrift Lender Test." If an association meets the QTL
Test, it will be eligible for 100% of the advances it would otherwise be
eligible to receive. If an association does not meet the QTL Test, it will be
eligible for such advances only to the extent it holds specified QTL Test
assets. At September 30, 1997, Milton Federal was in compliance with the QTL
Test. As of September 30, 1997 and 1996, Milton Federal had borrowed $39.6
million and $17.5 million, respectively. Most of the borrowed funds have been
invested in mortgage-backed and related securities to leverage a portion of
Milton Federal's excess capital. Milton Federal borrowed $1 million for
approximately three months during fiscal year 1994 as a temporary source of
funds, rather than other alternatives, with the expectation that substantial
funds would be available following completion of the Conversion.
The following table sets forth certain information regarding FHLB advances for
the periods indicated:
Year ended September 30,
---------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Maximum amount of FHLB advances
outstanding at any month end during year $ 39,570 $ 17,826 $ 5,260
Average amount of FHLB advances outstanding
during year 24,179 10,751 118
Weighted average interest rate of FHLB advances
outstanding during year 5.79% 5.77% 5.93%
Amount of FHLB advances outstanding at
end of year 39,570 17,489 5,260
Weighted average interest rate of FHLB advances
outstanding at end of year 5.76% 5.70% 6.07%
YIELDS EARNED AND RATES PAID
The spread between the average interest rate on interest-earning assets and the
average interest rate on interest-bearing liabilities decreased from 2.55%
during the year ended September 30, 1996, to 2.42% for the year ended September
30, 1997. The cost of funds of Milton Federal increased from 5.05% for the year
ended September 30, 1996, to 5.12% for the year ended September 30, 1997, due
to a larger portion of the deposit portfolio being in higher yielding
certificates of deposit. The yield on interest-earning assets decreased
slightly from 7.60% for the year ended September 30, 1996, to 7.54% for the
year ended September 30, 1997.
-21-
22
The following table sets forth certain information relating to MFFC's average
balance sheet information and reflects the average yield on interest-earning
assets and the average cost of interest-bearing liabilities for the years
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of interest-earning assets or interest-bearing
liabilities, respectively, for the years presented. Average balances are
derived from daily balances, which include nonaccruing loans in the loan
portfolio, net of the allowance for loan losses.
Year Ended September 30,
----------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- --------------------------------- ---------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------- ----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
Interest-earning
assets: %
Interest-bearing
deposits in
other financial
institutions $ 1,516 $ 59 3.89% $ 2,429 $ 104 4.28% $ 4,478 $ 192 4.29%
Investment
securities
available for
sale (1) 5,440 340 6.24 9,404 600 6.42 11,210 740 6.60
Investment
securities held
to maturity 2,435 165 6.78 422 29 6.87 -- -- --
Mortgage-backed
and related
securities
available for
sale (1) 41,535 2,716 6.52 30,797 1,991 6.48 10,996 609 5.54
Mortgage-backed
and related
securities held
to maturity 13,043 812 6.23 15,318 1,004 6.55 24,908 1,615 6.48
Loans receivable
(2) 117,194 9,579 8.17 107,321 8,859 8.25 94,504 7,913 8.37
Federal Home
Loan Bank stock 1,428 102 7.14 1,130 79 6.99 1,055 70 6.64
--------- ------- --------- -------- -------- --------
Total interest-
earning assets 182,591 13,773 7.54 166,821 12,666 7.60 147,151 11,139 7.57
Noninterest-earning
assets:
Cash and amounts
due from depository
institutions 504 962 430
Premises and
equipment, net 2,011 1,471 1,489
Other nonearning
assets 2,690 1,886 2,453
-------- -------- --------
Total assets $187,796 $171,140 $151,523
======== ======== ========
(Continued on next page.)
-22-
23
Year Ended September 30,
------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- -------------------------------- ---------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
Interest-bearing
liabilities:
NOW accounts $ 9,101 $ 166 1.82% $ 8,451 $ 160 1.89% $ 7,648 $ 150 1.96%
Money market
accounts 6,909 203 2.94 7,396 220 2.97 8,525 241 2.83
Passbook savings
accounts 16,804 419 2.49 17,498 439 2.51 17,588 445 2.53
Certificates of
deposit 102,270 5,961 5.83 90,873 5,380 5.92 79,335 4,393 5.54
---------- ------- ---------- ------- ---------- -------
Total deposits 135,084 6,749 5.00 124,218 6,199 4.99 113,096 5,229 4.62
Borrowings 24,179 1,400 5.79 10,751 620 5.77 118 7 5.93
---------- ------- ---------- ------- ---------- -------
Total interest-
earning
liabilities 159,263 8,149 5.12 134,969 6,819 5.05 113,214 5,236 4.62
------- ------- -------
Noninterest-bearing
liabilities 1,386 1,321 1,401
---------- ---------- ----------
Total liabilities 160,649 136,290 114,615
Shareholders'
equity 27,147 34,850 36,908
---------- ---------- ----------
Total liabilities and
shareholders'
equity $ 187,796 $ 171,140 $ 151,523
=========== =========== ===========
Net interest income;
interest rate
spread $ 5,624 2.42% $ 5,847 2.55% $ 5,903 2.95%
======== ====== ======== ====== ======== ======
Net interest margin
(net interest income
as a percent of
average interest-
earning assets) 3.08% 3.50% 4.01%
====== ====== ======
Average interest-
earnings assets to
interest-bearing
liabilities 114.74% 123.25% 129.96%
====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Average balance includes unrealized gains and losses, while yield is based
on amortized cost.
(2) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
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The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected MFFC's interest income and expense during the years indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(change in volume multiplied by prior year rate), (ii) changes in rate (change
in rate multiplied by prior year volume) and (iii) total changes in rate and
volume. The combined effects of changes in both volume and rate, which cannot
be separately identified, have been allocated proportionately to the change due
to volume and the change due to rate:
Year Ended September 30,
-------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------ -------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
------ ------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
Interest income attributable to:
Interest-bearing deposits in
other financial institutions $ (36) $ (9) $ (45) $ (88) $ -- $ (88)
Investment securities available
for sale (244) (16) (260) (120) (20) (140)
Investment securities held to
maturity 136 -- 136 29 -- 29
Mortgage-backed and related
securities available for sale 713 12 725 1,262 120 1,382
Mortgage-backed and related
securities held to maturity (144) (48) (192) (628) 17 (611)
Loans receivable 808 (88) 720 1,059 (113) 946
Federal Home Loan Bank stock 21 2 23 5 4 9
---------- ---------- --------- -------- --------- ---------
Total interest income 1,254 (147) 1,107 1,519 8 1,527
---------- ---------- --------- -------- --------- ---------
Interest expense attributable to:
NOW accounts 12 (6) 6 15 (5) 10
Money market accounts (14) (3) (17) (33) 12 (21)
Passbook savings accounts (17) (3) (20) (2) (4) (6)
Certificates of deposit 665 (84) 581 669 318 987
Borrowings 777 3 780 613 -- 613
---------- ---------- --------- -------- --------- ---------
Total interest expense 1,423 (93) 1,330 1,262 321 1,583
---------- ---------- --------- -------- --------- ---------
Increase (decrease) in net interest
income $ (169) $ (54) $ (223) $ 257 $ (313) $ (56)
========== ========== ========= ======== ========= =========
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
Milton Federal, 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. As a part of its effort to monitor its
interest rate risk, Milton Federal reviews the reports of the OTS which set
forth the application of the "net portfolio value" ("NPV") methodology adopted
by the OTS as part of its capital regulations to the assets and liabilities of
Milton Federal. Although Milton Federal is not currently subject to the NPV
regulation because such regulation does not apply to institutions with less
than $300 million in assets and risk-based capital in excess of 12%, the
application of the NPV methodology may illustrate Milton Federal's interest
rate risk.
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Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash
flows on interest-bearing liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point (1 basis point equals .01%) change in
market interest rates. Both a 200 basis point increase in market interest rates
and a 200 basis point decrease in market interest rates are considered. If the
NPV would decrease more than 2% of the present value of the institution's
assets with either an increase or a decrease in market rates, the institution
must deduct 50% of the amount of the decrease in excess of such 2% in the
calculation of the institution's risk-based capital.
At September 30, 1997, 2% of the present value of Milton Federal's assets was
approximately $4.1 million. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate
risk of a 200 basis point decrease) was $10.0 million at September 30, 1997,
Milton Federal would have been required to deduct approximately $3.0 million
(50% of the approximate $5.9 million difference) from its capital in
determining whether Milton Federal met its risk-based capital requirement.
Regardless of such reduction, however, Milton Federal's risk-based capital at
September 30, 1997, would still have exceeded the regulatory requirement by
approximately $11.2 million.
Presented below, as of September 30, 1997 and 1996, is an analysis of Milton
Federal's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts of 100 basis points in market interest rates. The
table also contains policy limits set by the Board of Directors of Milton
Federal as the maximum change in NPV that the Board of Directors deems
advisable in the event of various changes in interest rates. Such limits are
established with consideration of the dollar impact of various changes and
Milton Federal's strong capital position.
As illustrated in the table, 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, the
amount of interest Milton Federal 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 Milton Federal would pay on its deposits would
increase rapidly because Milton Federal's deposits generally have shorter
periods to repricing. Assumptions used in calculating the amounts in this table
are OTS assumptions.
September 30, 1997 September 30, 1996
---------------------- ------------------------
Change in
Interest Rate Board Limit $ Change % Change $ Change % Change
(Basis Points) % Change in NPV in NPV in NPV in NPV
-------------- -------- ------ ------ ------ ------
(Dollars in thousands)
+300 (40)% $ (15,466) (60)% $ (12,184) (52)%
+200 (30) (9,964) (39) (8,071) (35)
+100 (15) (4,682) (18) (4,024) (17)
0 0 0 0 0 0
-100 15 3,337 13 3,072 13
-200 20 4,946 19 4,738 20
-300 25 6,163 24 5,141 22
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 the risk calculations.
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At September 30, 1997 and 1996, Milton Federal exceeded the Board limit
percentage change for an increase in interest rates of 100, 200 and 300 basis
points. As a part of management's overall strategy to manage interest rate
risk, the mortgage-backed and related security portfolio was structured so that
substantially all of the mortgage-backed and related securities reprice on at
least an annual basis. In addition, management has increased consumer lending
although it still remains 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 risk. In addition, management
continuing to originate adjustable-rate mortgage loans as an additional tool to
manage interest rate risk. Adjustable-rate loans increased from $3.1 million at
September 30, 1996 to $7.3 million at September 30, 1997. Additionally, during
fiscal 1997, Milton Federal sold a pool of long-term, fixed-rate mortgage loans
and invested the funds in shorter-term fixed-rate loans, adjustable-rate loans
and adjustable-rate mortgage-backed and related securities which have less
exposure to interest rate risk.
COMPETITION
Milton Federal competes for deposits with other savings associations,
commercial banks and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, Milton Federal competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage companies and other lenders. Milton Federal
competes for loan originations primarily through the interest rates and loan
fees offered and through the efficiency and quality of services provided.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable.
The size of financial institutions competing with Milton Federal is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon Milton Federal.
SUBSIDIARIES
Milton Federal owns all of the outstanding shares of Milton Financial Service
Corporation ("Milton Financial"), the only asset of which is stock of Intrieve,
Inc., a data service provider. The net book value of Milton Federal's
investment in Milton Financial at September 30, 1997, was $15,000.
PERSONNEL
As of September 30, 1997, Milton Federal had 53 full-time employees and 5
part-time employees. Milton Federal believes that relations with its employees
are good. Milton Federal offers health, disability and life insurance benefits.
None of the employees of Milton Federal are represented by a collective
bargaining unit. MFFC has no full-time employees.
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REGULATION
GENERAL
As a savings bank organized under the laws of the United States, Milton Federal
is subject to regulation, examination and oversight by the OTS. Because Milton
Federal's deposits are insured by the FDIC, Milton Federal is also subject to
regulatory oversight by the FDIC. Milton Federal must file periodic reports
with the OTS concerning its activities and financial condition. Examinations
are conducted periodically by the OTS to determine whether Milton Federal is in
compliance with various regulatory requirements and is operating in a safe and
sound manner. Milton Federal is a member of the FHLB of Cincinnati.
MFFC is a savings and loan holding company within the meaning of the Home
Owners Loan Act, as amended (the "HOLA"). Consequently, MFFC is subject to
regulation, examination and oversight by the OTS and must submit periodic
reports thereto. Because MFFC is a corporation organized under Ohio law, it is
subject to provisions of the Ohio Revised Code applicable to corporations
generally.
Congress is considering legislation which may eliminate the OTS and may require
that Milton Federal be regulated under federal law as a bank. As a result,
Milton Federal may become subject to additional regulation, examination and
oversight by the FDIC. In addition, MFFC might become a bank holding company
subject to examination, regulation and oversight by the Board of Governors of
the Federal Reserve Board ("FRB"), including greater activity and capital
requirements than imposed on it by the OTS. Although such legislation, if
enacted, may change the activities in which MFFC or Milton Federal are
authorized to engage, it is not anticipated that the current activities of
either MFFC or Milton Federal will be materially affected by those activity
levels.
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code regulates
certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an
Ohio corporation and any person who has the right to exercise, alone or with
others, 10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted
only if, prior to the time such person first becomes an Interested Shareholder,
the Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may not
occur unless (1) one of the specified exceptions applies, (2) the holders of at
least two-thirds of the voting shares, and of at least a majority of the voting
shares not beneficially owned by the Interested Shareholder, approve the
business combination at a meeting called for such purpose, or (3) the business
combination meets certain statutory criteria designed to ensure that the
issuing public corporation's remaining shareholders receive fair consideration
for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the statute
by specifically providing in its articles of incorporation that the statute
does not apply to any business combination of such corporation. However, the
statute still prohibits for twelve months any business combination that would
have been prohibited but for the adoption of such an opt-out amendment. The
statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. Neither
the Articles of Incorporation of MFFC nor Milton Federal opt out of the
protection afforded by Chapter 1704.
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CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code (the
"Control Share Acquisition Statute") requires that certain acquisitions of
voting securities which would result in the acquiring shareholder owning 20%,
33-1/3%, or 50% of the outstanding voting securities of MFFC (a "Control Share
Acquisition") must be approved in advance by the holders of at least a majority
of the outstanding voting shares represented at a meeting at which a quorum is
present and a majority of the portion of the outstanding voting shares
represented at such a meeting, excluding the voting shares owned by the
acquiring shareholder, by certain other persons who acquire or transfer voting
shares after public announcement of the acquisition or by certain officers or
directors of the corporation who are employees of the corporation. The Control
Share Acquisition Statute was intended, in part, to protect shareholders of
Ohio corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law provides that an offeror may not make a tender
offer or request an invitation for tenders that would result in the offeror
beneficially owning more than ten percent of any class of the target company's
equity securities unless such offeror files certain information with the Ohio
Division of Securities (the "Securities Division") and provides such
information to the target company and the offerees within Ohio. The Securities
Division may suspend the continuation of the control bid if the Securities
Division determines that the offeror's filed information does not provide full
disclosure to the offerees of all material information concerning the control
bid. The statute also provides that an offeror may not acquire any equity
security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all savings associations.
Deposits of federally chartered savings institutions are insured by the Savings
Association Insurance Fund (the "SAIF") of the FDIC. The OTS issues regulations
governing the operation of savings associations, regularly examines such
associations and imposes assessments on savings associations based on their
asset size to cover the cost of general supervision and examination. The OTS
charters federally chartered associations, such as Milton Federal, and
prescribes their permissible investments and activities, including the types of
loans and investments in real estate, subsidiaries and securities they may
make. The OTS has authority over mergers and acquisitions of control of
federally chartered savings and loan associations. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosure, equal credit opportunity, fair credit reporting
and community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of an association to
open a new branch or engage in a merger. Community reinvestment regulations
evaluate how well and to what extent an institution lends and invests in its
designated service area, with particular emphasis on low- to moderate-income
areas. Milton Federal received an "Outstanding" rating under these regulations.
REGULATORY CAPITAL REQUIREMENTS. Milton Federal is required by OTS regulations
to meet certain minimum capital requirements. Such requirements call for
tangible capital of 1.5% of adjusted total assets, core capital (which for
Milton Federal consists solely of tangible capital) of 3.0% of adjusted total
assets and risk-based capital (which for Milton Federal consists of core
capital and general valuation allowances) of 8% of risk-weighted assets (assets
and certain off balance sheet items are weighted at
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percentage levels ranging from 0% to 100% depending on their relative risk).
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. Milton
Federal does not anticipate that it will be adversely affected if the core
capital requirements regulations is amended as proposed.
The following table sets forth the amount and percentage level of regulatory
capital of Milton Federal at September 30, 1997, and the amount by which it
exceeds its requirements. Tangible and core capital are reflected as a
percentage of adjusted total assets. Risk-based (or total) capital, which
consists of core and supplementary capital, is reflected as a percentage of
risk-weighted assets.
At September 30, 1997
--------------------------------
Amount Percent
------ -------
(In thousands)
Tangible capital $ 21,385 10.34%
Requirement 3,103 1.50
----------- -------
Excess 18,282 8.84
Core capital 21,385 10.34
Requirement 6,206 3.00
----------- -------
Excess 15,179 7.34
Risk-based capital 21,799 22.83
Risk-based requirement 7,637 8.00
----------- -------
Excess 14,162 14.83
The OTS has adopted regulations governing prompt corrective action to resolve
the problems of capital deficient and otherwise troubled savings associations.
At each successively lower defined capital category, an association is subject
to more restrictive and numerous mandatory or discretionary regulatory actions
or limits, and the OTS has less flexibility in determining how to resolve the
problems of the institution. In addition, the OTS generally can downgrade an
association's capital category, notwithstanding its capital level, based on
less than satisfactory examination ratings in areas other than capital or,
after notice and opportunity for hearing, if the association is deemed to be in
an unsafe or unsound condition or to be engaging in an unsafe or unsound
practice. Each undercapitalized association must submit a capital restoration
plan to the OTS within 45 days after it becomes undercapitalized. Such
institution will be subject to increased monitoring and asset growth
restrictions and will be required to obtain prior approval for acquisitions,
branching and engaging in new lines of business. Furthermore, critically
undercapitalized institutions must be placed in conservatorship or receivership
within 90 days of reaching that capitalization level, except under limited
circumstances. Milton Federal's capital at September 30, 1997, meets the
standards for the highest category, a "well-capitalized" institution.
Federal law prohibits an insured institution from making a capital distribution
to anyone or paying management fees to any person having control of the
institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
plan until the institution has been adequately capitalized on an average during
each of four consecutive calendar quarters and must provide adequate assurances
of performance. The aggregate liability pursuant to such guarantee is limited
to the lesser of (a) an amount equal to 5% of the institution's total assets at
the time the institution became undercapitalized or (b) the amount that is
necessary to bring the institution into compliance with all capital standards
applicable to such association at the time the institution fails to comply with
its capital restoration plan.
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LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions or
requirements on the ability of associations, including Milton Federal, to make
capital distributions, including dividend payments. OTS regulations also
establish a system limiting capital distributions according to ratings of
associations based on their capital level and supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year equal to
the greater of 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, or 75% of its net income over
the most recent four-quarter period. A Tier 1 association deemed to be in need
of more than normal supervision by the OTS may be downgraded to a Tier 2 or
Tier 3 association. Milton Federal meets the requirements for a Tier 1
association and has not been notified of any need for more than normal
supervision.
Tier 2 associations consist of associations that meet current, but not fully
phased-in, capital requirements, may make capital distributions of up to 75% of
net income over the most recent four quarters. Tier 3 associations do not meet
current minimum capital requirements and must obtain OTS approval of any
capital distribution. Tier 2 associations that propose to make a capital
distribution in excess of the noted safe harbor provisions must also obtain OTS
approval. Tier 2 associations proposing to make a capital distribution within
the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior
to such distribution. The OTS may object to the distribution during that 30
day period based on safety and soundness concerns.
In April, 1997, MFFC began a program authorizing the purchase of up to 5% of
its outstanding common shares over a six-month period. The shares will be
purchased periodically in the over-the-counter market. The number shares to be
purchased and the price to be paid will depend upon the availability of shares,
the prevailing market prices and any other considerations which may, in the
opinion of the MFFC's Board of Directors or management, affect the advisability
of purchasing shares.
LIQUIDITY. OTS regulations require that savings associations maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States Government, state or federal agency
obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon associations failing to meet these
liquidity requirements. The eligible liquidity of Milton Federal, as computed
under current regulations, at September 30, 1997, was approximately $10.5
million, or 7.04%, and exceeded the then applicable 5.00% liquidity requirement
by approximately $3.1 million. Effective November 24, 1997, the liquidity
requirement was reduced to 4.00%.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet the QTL
Test. Prior to September 30, 1996, the QTL Test required savings associations
to maintain a specified amount of investments in assets that are designated as
qualifying thrift investments ("QTI"), which are generally related to domestic
residential real estate and manufactured housing and include stock issued by
any FHLB, the FHLMC or the FNMA. Under this test, 65% of an institution's
"portfolio assets" (total assets less goodwill and other intangibles, property
used to conduct business and 20% of liquid assets) must consist of QTI on a
monthly average basis in 9 out of every 12 months. Congress created a second
QTL Test, effective September 30, 1996, pursuant to which a savings association
may also meet the QTL Test if at least 60% of the institution's assets ( on a
tax basis) consist of specified assets (generally loans secured by residential
real estate or deposits, educational loans, cash and certain governmental
obligations). The OTS may grant exceptions to the QTL Test under certain
circumstances. If a savings association fails to meet the QTL Test, the
association and its holding company become subject to certain operating and
regulatory restrictions. A savings association that fails to meet the QTL Test
will not be eligible for new FHLB advances. At September 30, 1997, Milton
Federal met the QTL Test.
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LENDING LIMIT. OTS regulations generally limit the aggregate amount that a
savings association can lend to one borrower or a group of related borrowers to
an amount equal to 15% of the association's Lending Limit Capital. A savings
association may loan to one borrower an additional amount not to exceed 10% of
the association's Lending Limit Capital, if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." Certain types of loans are not
subject to these limits. Notwithstanding the specified limits, an association
may lend to one borrower up to $500,000 for any purpose. In applying these
limits, the regulations require that loans to certain related borrowers be
aggregated. At September 30, 1997, Milton Federal was in compliance with these
lending limits, with its largest extension of credit to one borrower being
$750,050. Such loan was secured by multifamily residential real estate and was
current at September 30, 1997. See "THE BUSINESS OF MILTON FEDERAL - Lending
Activities -- Loan Originations, Purchases and Sales."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform
to limits on loans to one borrower, and the total of such loans to executive
officers, directors, principal shareholders and their related interests cannot
exceed the association's Lending Limit Capital (200% of total capital for
eligible, adequately capitalized institutions with less than $100 million in
assets). Most loans to directors, executive officers and principal shareholders
must be approved in advance by a majority of the "disinterested" members of the
board of directors of the association with any "interested" director not
participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered to all
employees of Milton Federal. In addition, no loan may be made to an executive
officer, except loans for specific authorized purposes such as financing the
education of the executive officer's children or financing the purchase of the
executive officer's primary residence. Milton Federal was in compliance with
such restrictions at September 30, 1997.
Savings associations must comply with Sections 23A and 23B of the Federal
Reserve Act (the "FRA") pertaining to transactions with affiliates. An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. MFFC is
an affiliate of Milton Federal. Generally, Sections 23A and 23B of the FRA (i)
limit the extent to which a savings association or its subsidiaries may engage
in "covered transactions" with any one affiliate to an amount equal to 10% of
such institution's capital stock and surplus for any one affiliate and 20% of
such capital stock and surplus for the aggregate of such transactions with all
affiliates and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a nonaffiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition to limits in Sections 23A and
23B, Milton Federal may not make any loan or other extension of credit to an
affiliate unless the affiliate is engaged only in activities permissible for a
bank holding company and may not purchase or invest in securities of any
affiliate, except for shares of a subsidiary. Exemptions from Section 23A or
23B of the FRA may be granted only by the Federal Reserve Board. Milton Federal
was in compliance with these requirements at September 30, 1997.
HOLDING COMPANY REGULATION. MFFC is a savings and loan holding company within
the meaning of the HOLA. The HOLA generally prohibits a savings and loan
holding company from controlling any other savings association or savings and
loan holding company, without prior approval of the OTS, or from acquiring or
retaining more than 5% of the voting shares of a savings association or holding
company thereof, which is not a subsidiary. Under certain circumstances, a
savings and loan holding company is permitted to acquire, with the approval of
the OTS, up to 15% of the previously unissued voting shares of an
undercapitalized savings association for cash without such savings association
being deemed to be controlled by the holding company. Except with the prior
approval of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock may also acquire control of any savings institution, other
than a subsidiary institution, or any other savings and loan holding company.
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MFFC is a unitary savings and loan holding company. Under current law, there
are generally no restrictions on the activities of a unitary savings and loan
holding company and such companies are the only financial institution holding
companies that may engage in commercial, securities and insurance activities
without limitation. The broad latitude to engage in activities under current
law can be restricted if the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the OTS may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL Test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At September 30, 1997, Milton Federal met the QTL
Test.
If MFFC were to acquire control of another savings institution, other than
through a merger or other business combination with Milton Federal, MFFC would
become a multiple savings and loan holding company. Unless the acquisition is
an emergency thrift acquisition and each subsidiary savings association meets
the QTL Test, the activities of MFFC and any of its subsidiaries (other than
Milton Federal or other subsidiary savings associations) would thereafter be
subject to activity restrictions. The HOLA provides that, among other things,
no multiple savings and loan holding company or subsidiary thereof that is not
a savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than (i) furnishing or performing
management services for a subsidiary savings institution, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing or liquidating
assets owned by or acquired from a subsidiary savings institution, (iv) holding
or managing properties used or occupied by a subsidiary savings institution,
(v) acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by federal regulation as of March 5, 1987, to be engaged in
by multiple holding companies, or (vii) those activities authorized by the FRB
as permissible for bank holding companies, unless the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the OTS
prior to being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a multiple
savings and loan holding company that controls savings associations in more
than one state only if the multiple savings and loan holding company involved
controls a savings association that operated a home or branch office in the
state of the association to be acquired as of March 5, 1987, or if the laws of
the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Federal legislative proposals have been introduced or are under consideration
that would either limit unitary savings and loan holding companies to the same
activities as multiple savings and loan holding companies and other financial
institutions holding companies or would permit certain bank holding companies
to engage in commercial activities. MFFC cannot predict when, and in what form,
these proposals might become law.
No subsidiary savings association of a savings and loan holding company may
declare or pay a dividend on its permanent or nonwithdrawable stock unless it
first gives the Director of the OTS 30 days advance notice of such declaration
and payment. Any dividend declared during such period or without the giving of
such notice shall be invalid.
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Congress is considering legislation which may require that MFFC become a bank
holding company regulated by the FRB. Bank holding companies with more than
$150 million in assets are subject to capital requirements similar to those
imposed on Milton Federal and have more extensive interstate acquisition
authority than savings and loan holding companies. They are also subject to
more restrictive activity and investment limits than savings and loan holding
companies. No assurances can be given that such legislation will be enacted,
and MFFC cannot be certain of the legislation's impact on its future operations
until it is enacted.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF MFFC AND MILTON FEDERAL. In
addition to the Ohio law limitations on the merger and acquisition of MFFC
previously discussed, federal limitations generally require regulatory approval
of acquisitions at specified levels. Under pertinent federal law and
regulations, no person, directly or indirectly, or acting in concert with
others, may acquire control of Milton Federal or MFFC without 60 days prior
notice to the OTS. "Control" is generally defined as having more than 25%
ownership or voting power; however, ownership or voting power of more than 10%
may be deemed "control" if certain factors are in place. If the acquisition of
control is by a company, the acquiror must obtain approval, rather than give
notice, of the acquisition as a savings and loan holding company.
In addition, any merger of Milton Federal or of MFFC in which MFFC is not the
resulting company must also be approved by the OTS.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE. The FDIC is an independent federal agency that insures the
deposits, up to prescribed statutory limits, of federally insured banks and
thrifts and safeguards the safety and soundness of the banking and thrift
industries. The FDIC administers two separate insurance funds, the Bank
Insurance Fund ("BIF") for commercial banks and state savings banks and the
SAIF for savings associations. Milton Federal is a member of the SAIF and its
deposit accounts are insured by the FDIC, up to the prescribed limits. The FDIC
has examination authority over all insured depository institutions, including
Milton Federal, and has authority to initiate enforcement actions against
federally insured savings associations, if the FDIC does not believe the OTS
has taken appropriate action to safeguard safety and soundness and the deposit
insurance fund.
ASSESSMENTS. The FDIC is required to maintain designated levels of reserves in
each fund. The FDIC may increase assessment rates for either fund if necessary
to restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such assessment rates if such target
level has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the
risk the institution poses to its deposit insurance fund. This risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Prior to September 1996, the SAIF's ratio of reserves to insured deposits was
significantly below the level required by law, while the BIF's ratio was above
the required level. As a result, institutions with SAIF-insured deposits were
paying higher deposit insurance assessments than institutions with BIF-insured
deposits. Federal legislation providing for the recapitalization of the SAIF
became effective in September 1996 and included a special assessment of $.657
per $100 of SAIF-insured deposits held at March 31,1995. Milton Federal had
approximately $110.8 million in deposits at March 31, 1995, and paid, on
November 27, 1996, a pre-tax assessment of $728,000.
In addition, MFFC might become subject to more restrictive holding company
requirements, including activity limits and capital requirements similar to
those imposed on Milton Federal. MFFC cannot predict the impact of the
conversion of Milton Federal to, or regulation of Milton Federal as, a bank
until the legislation requiring such change is enacted.
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FEDERAL RESERVE BOARD
Effective December 16, 1997, FRB regulations require savings associations to
maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up
to $47.8 million (subject to an exemption of up to $4.7 million) and of 10% of
net transaction accounts in excess of $47.8 million. At September 30, 1997,
Milton Federal was in compliance with the reserve requirements then in effect
as well as the new requirements.
FEDERAL HOME LOAN BANKS
The FHLBs, under the regulatory oversight of the Federal Housing Financing
Board, provide credit to their members in the form of advances. Milton Federal
is a member of the FHLB of Cincinnati and must maintain an investment in the
capital stock of that FHLB in an amount equal to the greater of 1.0% of the
aggregate outstanding principal amount of Milton Federal's residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or 5% of its advances from the FHLB. Milton Federal is in compliance with
this requirement with an investment in stock of the FHLB of Cincinnati of $2.0
million at September 30, 1997.
Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully disbursed, whole first mortgage
loans on improved residential property or securities representing a whole
interest in such loans; securities issued, insured or guaranteed by the United
States government or an agency thereof; deposits in any FHLB; or other real
estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or service
that its members must maintain for continued access to long-term advances from
the FHLBs. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by each FHLB must be made only to provide funds for
residential housing finance.
TAXATION
FEDERAL TAXATION
MFFC and Milton Federal are subject to the federal tax laws and regulations
which apply to corporations generally. However, certain thrift institutions
such as Milton Federal were, prior to the enactment of the Small Business Jobs
Protection Act, which was signed into law on August 21, 1996, allowed
deductions for bad debts under methods more favorable to those granted to other
taxpayers. Qualified thrift institutions could compute deductions for bad
debts using either the specific charge-off method of Section 166 of the Code,
or the reserve method of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct bad
debts under either (i) the "percentage of taxable income" method applicable
only to thrift institutions, or (ii) the "experience" method that also was
available to small banks. Under the "percentage of taxable income" method, a
thrift institution generally was allowed a deduction for an addition to its bad
debt reserve equal to 8% of its taxable income (determined without regard to
this deduction and with additional adjustments). Under the "experience" method,
a thrift institution was generally allowed a deduction for an addition to its
bad debt reserve equal to the greater of (i) an amount based on its actual
average experience for losses in the current and five preceding taxable years,
or (ii) an amount necessary to restore the reserve to its balance as of the
close of the base year. A thrift institution could elect annually to compute
its allowable addition to bad debt reserves for
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qualifying loans either under the "experience" method or the "percentage of
taxable income" method. For tax years 1995, 1994 and 1993, Milton Federal used
the "percentage of taxable income" method because such method provided a higher
bad debt deduction than the "experience" method.
Section 1616(a) of the Small Business Job Protection Act repealed the Section
593 reserve method of accounting for bad debts by thrift institutions,
effective for taxable years beginning after 1995. Thrift institutions that
would be treated as small banks are allowed to utilize the "experience" method
applicable to such institutions, while thrift institutions that are treated as
large banks are required to use on the specific charge-off method. The
"percentage of taxable income" method of accounting for bad debts is no longer
available for any financial institution.
A thrift institution required to change its method of computing reserves for
bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer, and having been made with the consent of the
Secretary of the Treasury. Any adjustments under Section 481(a) of the Code
required to be recaptured with respect to such change generally will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the "applicable excess reserves" will be taken into
account ratably over a six-taxable-year period, beginning with the first
taxable year beginning after 1995, subject to the residential loan requirement
described below. In the case of a thrift institution that becomes a large bank,
the amount of the institution's applicable excess reserves generally is the
excess of (i) the balances of its reserve for losses on qualifying real
property loans (generally loans secured by improved real estate) and its
reserve for losses on nonqualifying loans (all other types of loans) as of the
close of its last taxable year beginning before January 1, 1996, over (ii) the
balances of such reserves as of the close of its last taxable year beginning
before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift
institution that becomes a small bank, like Milton Federal, the amount of the
institution's "applicable excess reserves" generally is the excess of (i) the
balances of its reserve for loan losses on qualifying real property loans and
its reserve for losses on nonqualifying loans as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the greater balance of
(a) its "pre-1988 reserves" or (b) what the thrift's reserves would have been
at the close of its last year beginning before January 1, 1996, had the thrift
always used the "experience" method.
For taxable years that begin after December 31, 1995, and before January 1,
1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the "applicable excess reserves" otherwise required to be taken
into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax
year, the principal amount of residential loans made by the thrift during the
year is not less than its "base amount." The "base amount" generally is the
average of the principal amounts of the residential loans made by the thrift
during the six most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of the
property to acquire, construct or improve the property.
The balance of the "pre-1988 reserves" is subject to the provisions of Section
593(e) as modified by the Small Business Job Protection Act which requires
recapture in the case of certain excessive distributions to shareholders. The
"pre-1988 reserves" may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (except to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: First, out of the institution's post-1951 accumulated earnings
and profits; second, out of the "pre-1988 reserves"; and, third, out of such
other accounts as may be proper. To the extent a distribution by Milton Federal
to MFFC is deemed paid out of its "pre-1988 reserves" under these rules, the
"pre-1988 reserves" would be reduced and Milton Federal's gross income for tax
purposes would be increased by the amount which, when reduced by the income
tax, if any, attributable to the inclusion of such amount in its gross income,
equals the amount deemed paid out of the "pre-1988 reserves." As of September
30, 1997, Milton Federal's "pre-1988 reserves" subject to potential recapture
for tax purposes totaled approximately $3.4 million. Milton Federal believes it
has approximately $1.8 million of accumulated earnings and profits
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for tax purposes as of September 30, 1997, which would be available for
dividend distributions, provided regulatory restrictions applicable to the
payment of dividends are met. No representation can be made as to whether
Milton Federal will have current or accumulated earnings and profits in
subsequent years.
In addition to the regular income tax, MFFC and Milton Federal may be subject
to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate
of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current
earnings" exceeds its "alternative minimum taxable income" computed without
regard to this preference item and prior to reduction by net operating losses,
is included in "alternative minimum taxable income." Net operating losses can
offset no more than 90% of "alternative minimum taxable income." The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax. Payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years. In addition, for taxable years
after 1986 and before 1996, MFFC and Milton Federal are also subject to an
environmental tax equal to 0.12% of the excess of "alternative minimum taxable
income" for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2.0 million.
The tax returns of Milton Federal have been audited or closed without audit
through 1993. In the opinion of management, any examination of open returns
would not result in a deficiency which could have a material adverse effect on
the financial condition of Milton Federal.
OHIO TAXATION
MFFC is subject to the Ohio corporation franchise tax, which, as applied to
MFFC, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income
and 8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582%
times taxable net worth. For tax years beginning after December 31, 1998, the
tax rate is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or
(ii) .400% times taxable net worth; however, MFFC may be exempt from the net
worth tax if various conditions are satisfied.
In computing its tax under the net worth method, MFFC may exclude 100% of its
investment in the capital stock of Milton Federal, as reflected on the balance
sheet of MFFC, in computing its taxable net worth as long as it owns at least
25% of the issued and outstanding capital stock of Milton Federal. The
calculation of the exclusion from net worth is based on the ratio of the
excludable investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, MFFC may be entitled to various other deductions in computing
taxable net worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including MFFC,
subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Milton Federal is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of Milton Federal's
book net worth determined in accordance with generally accepted accounting
principles. For the tax year 1999, however, the franchise tax on financial
institutions will be 1.4% of book net worth and for the tax year 2000 and years
thereafter, the tax will be 1.3% of book net worth. As a "financial
institution," Milton Federal is not subject to any tax based upon net income or
net profits imposed by the State of Ohio.
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ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at September 30, 1997,
regarding the properties on which the main office and the branch office of
Milton Federal are located:
Owned Date Square Net
Location or leased acquired footage book value (1)
- -------- --------- -------- ------- ----------
25 Lowry Drive
West Milton, Ohio 45383 Owned 1966 7,606 $ 876,671
415 West National Road
Englewood, Ohio 45322 Owned 1972 3,249 243,176
709 Arlington Road
Brookville, Ohio 45309 Owned 1996 3,750 1,192,618
280-A South Garber Road
Tipp City, Ohio 45371 Leased 1997 400 N/A
- -----------------------------------------------------------------------------------------------------------------
(1) At September 30, 1997, Milton Federal's office premises and equipment had a
total net book value of $2,734,708. For additional information regarding
Milton Federal's office premises and equipment, see Notes 1 and 5 to
Financial Statements.
The management of MFFC believes that its properties are adequately insured.
ITEM 3. LEGAL PROCEEDINGS
Neither MFFC nor Milton Federal is presently involved in any legal proceedings
of a material nature. From time to time, Milton Federal is a party to legal
proceedings incidental to its business to enforce its security interest in
collateral pledged to secure loans made by Milton Federal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MFFC had 2,266,836 common shares outstanding on November 28, 1997, held of
record by approximately 1,087 shareholders. Price information with respect to
MFFC's common shares is quoted on The Nasdaq National Market System ("Nasdaq").
The high and low trading prices for the common shares of MFFC, as quoted by
Nasdaq, by quarter, are shown below.
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997
------------ --------- -------- -------------
High $ 16.50 $ 14.75 $ 14.25 $ 15.25
Low 12.75 13.50 13.25 13.75
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996
------------ --------- -------- -------------
High $ 17.13 $ 16.25 $ 15.75 $ 14.38
Low 14.50 15.25 12.25 11.50
For the year ended September 30, 1997, MFFC paid regular quarterly dividends
per common share of $.14 on November 15, 1996, $.15 on February 14, 1997, $.15
on May 15, 1997 and $.15 on August 15, 1997. MFFC also paid a special dividend
of $2.50 per common share on November 15, 1996. For the year ended September
30, 1996, MFFC paid regular quarterly dividends per common share of $.08 on
November 15, 1995, $.10 on February 15, 1996, $.12 on May 15, 1996 and $.13 on
August 15, 1996. MFFC also paid a special dividend of $1.00 per common share on
December 8, 1995. Income of MFFC consists of interest on mortgage-backed
securities and other securities and dividends which were periodically declared
and paid by the Board of Directors of Milton Federal on common shares of Milton
Federal held by the MFFC.
In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital distributions
by savings associations. Under OTS regulations applicable to converted savings
associations, Milton Federal is not permitted to pay a cash dividend on its
common shares if its regulatory capital would, as a result of payment of such
dividend, be reduced below the amount required for the Liquidation Account (the
account established for the purpose of granting a limited priority claim on the
assets of the Bank in the event of complete liquidation to those members of the
Bank before the Conversion who maintain a savings account at the Bank after the
Conversion), or applicable regulatory capital requirements prescribed by the
OTS.
OTS regulations applicable to all savings and loan associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half that which its total capital to assets
ratio exceeded its required capital to assets ratio at the beginning of the
calendar year, or (2) 75% of its net earnings for the most recent four-quarter
period. Savings associations with total capital in excess of the capital
requirements that have been notified by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends. A savings
association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.
The Bank currently meets all of its capital requirements and, because the OTS
has not determined that the Bank is an institution requiring more than normal
supervision, the Bank may pay dividends in accordance with the foregoing
provisions of OTS regulations.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth certain information concerning the financial
condition, earnings and other data regarding Milton Federal at the dates and
for the periods indicated. The financial information should be read in
conjunction with the financial statements and notes thereto included elsewhere
herein.
At September 30,
--------------------------------------------------------------------
Selected financial data: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Total amount of:
Assets $ 209,958 $ 180,831 $ 161,680 $ 149,927 $ 123,131
Cash and cash equivalents (1) 5,633 1,301 1,701 25,604 3,853
Investment securities available
for sale (2) 5,520 -- -- 8,522 11,078
Investment securities held to
maturity (2) 3,254 500 -- 3,015 4,318
Mortgage-backed and related
securities available for sale (2) 47,842 34,009 17,110 -- --
Mortgage-backed and related
securities held to maturity (2) 12,125 14,002 25,974 25,183 28,516
FHLB stock 2,013 1,182 1,099 1,029 977
Loans receivable - net 127,396 116,749 100,758 91,246 81,827
Deposits 142,832 128,554 117,898 134,790 109,483
Borrowings 39,570 17,489 5,260
Shareholders' equity (3) 26,388 33,479 37,502 14,394 13,012
(Tables and footnotes continue on following page.)
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At September 30,
--------------------------------------------------------------------
Summary of earnings: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Interest and dividend income $ 13,773 $ 12,665 $ 11,139 $ 9,239 $ 9,375
Interest expense 8,149 6,819 5,236 4,631 4,772
----------- ----------- ----------- ----------- -----------
Net interest income 5,624 5,846 5,903 4,608 4,603
Provision for loan losses 75 154 64 42 14
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 5,549 5,692 5,839 4,566 4,589
Noninterest income 497 457 257 247 200
Noninterest expense 3,959 4,410 3,300 2,751 2,510
----------- ----------- ----------- ----------- -----------
Income before income tax 2,087 1,739 2,796 2,062 2,279
Income tax expense 709 595 947 680 791
----------- ----------- ----------- ----------- -----------
Net income $ 1,378 $ 1,144 $ 1,849 $ 1,382 $ 1,488
=========== =========== =========== =========== ===========
Earnings per share (4) $ .63 $ .49 $ .77
=========== =========== ==========
Dividends declared per share (4) $ 3.09 $ 1.43 $ .19
=========== =========== ==========
At September 30,
------------------------------------------------
Selected financial ratios and other data: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Return on assets (5) .73% 0.67% 1.22% 1.09% 1.25%
Return on equity (6) 5.08 3.28 5.01 10.13 12.13
Interest rate spread (7) 2.42 2.55 2.94 3.37 3.55
Net interest margin (8) 3.08 3.50 4.01 3.74 3.96
Operating expenses to average assets (9) 2.11 2.58 2.18 2.16 2.11
Average equity to average assets 14.46 20.36 24.36 10.74 10.32
Dividend payout ratio 503.34 296.89 24.66 -- --
Nonperforming assets to total assets 0.30 0.35 0.34 0.22 0.61
Nonperforming loans to total loans 0.47 0.48 0.49 0.35 0.80
Allowance for loan losses as a percentage of
nonperforming loans 90.06 81.57 64.04 94.14 33.51
Allowance for loan losses to total loans .42 0.40 0.32 0.29 0.27
Net charge-offs to average loans -- -- -- -- (0.03)
Number of offices, all full service 3 2 2 2 2
- ---------------------------------------------------------------------------------------------------------------
(1) Includes cash and amounts due from depository institutions and
interest-bearing deposits in other financial institutions.
(2) At October 1, 1994, MFFC adopted SFAS No. 115 and accordingly classified
its securities into held-to-maturity, available-for-sale and trading
categories. Prior to this date, all securities were classified as held to
maturity and reported at amortized cost.
(3) Retained earnings only prior to September 30, 1995.
(4) Earnings and dividends per share are not applicable for any of the periods
presented prior to September 30, 1995, due to Milton Federal's mutual form
of ownership prior to October 6, 1994.
(5) Net income divided by average total assets.
(6) Net income divided by average total equity.
(7) Average yield on interest-earning assets less average cost of
interest-bearing liabilities.
(8) Net interest income as a percentage of average interest-earning assets.
(9) Noninterest expense divided by average total assets.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND RESULTS OF
OPERATIONS
BUSINESS OF MILTON FEDERAL
FINANCIAL CORPORATION
Milton Federal Financial Corporation, a unitary thrift holding company
incorporated under the laws of the State of Ohio (the "Corporation"), owns all
issued and outstanding common stock of Milton Federal Savings Bank, a savings
bank chartered under the laws of the United States (the "Bank"). On October 6,
1994, the Corporation acquired all of the common stock issued by the Bank upon
its conversion from a mutual savings and loan association to a stock savings
bank (the "Conversion"). Other than investing excess funds from the Conversion
in securities, the Corporation's activities have been limited primarily to
holding the common shares of the Bank.
Serving the West Milton, Ohio area since 1887, the Bank conducts business from
its main office at 25 Lowry Drive in West Milton and from its full-service
branch offices located in Englewood and Brookville, Ohio. The Bank also
operates a loan production office in Tipp City, Ohio. The Bank is engaged
principally in making first mortgage loans secured by 1-4 family residential
real estate located in the Bank's designated lending area, and also originates
loans for the construction of 1-4 family residential real estate, loans secured
by multi-family residences (over four units), nonresidential real estate,
deposits, automobiles, recreational vehicles and boats and home improvement and
commercial loans. The Bank also invests in U.S. Government and agency
obligations, interest-bearing deposits in other financial institutions,
mortgage-backed securities, collateralized mortgage obligations ("CMOs"), real
estate mortgage investment conduits ("REMICs") and other investments permitted
by applicable law. Funds for lending and other investment activities come
primarily from savings deposits, borrowed funds and loan and security sales and
principal repayments.
As a savings and loan holding company, the Corporation is subject to
regulation, supervision and examination by the Office of Thrift Supervision of
the United States Department of the Treasury (the "OTS"). As a savings bank
chartered under the laws of the United States, the Bank is subject to
regulation, supervision and examination by the OTS and the Federal Deposit
Insurance Corporation (the "FDIC"). Deposits in the Bank are insured up to
applicable limits by the FDIC. The Bank is also a member of the Federal Home
Loan Bank (the "FHLB") of Cincinnati.
MARKET PRICE OF THE CORPORATION'S
COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
The Corporation had 2,266,836 common shares outstanding on November 28, 1997,
held of record by approximately 1,087 shareholders. Price information with
respect to the Corporation's common shares is quoted on The Nasdaq National
Market System. The high and low trading prices for the common shares of the
Corporation, as quoted by The Nasdaq Stock Market, Inc., by quarter, are shown
below.
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997
------------ --------- -------- -------------
High $ 16.50 $ 14.75 $ 14.25 $ 15.25
Low 12.75 13.50 13.25 13.75
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996
------------ --------- -------- -------------
High $ 17.13 $ 16.25 $ 15.75 $ 14.38
Low 14.50 15.25 12.25 11.50
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For the year ended September 30, 1997, the Corporation paid regular quarterly
dividends per common share of $.14 on November 15, 1996, $.15 on February 14,
1997, $.15 on May 15, 1997 and $.15 on August 15, 1997. The Corporation also
paid a special dividend of $2.50 per common share on November 15, 1996. For the
year ended September 30, 1996, the Corporation paid regular quarterly dividends
per common share of $.08 on November 15, 1995, $.10 on February 15, 1996, $.12
on May 15, 1996 and $.13 on August 15, 1996. The Corporation also paid a
special dividend of $1.00 per common share on December 8, 1995. Income of the
Corporation consists of interest on mortgage-backed securities and other
securities and dividends which were periodically declared and paid by the Board
of Directors of the Bank on common shares of the Bank held by the Corporation.
In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital distributions
by savings associations. Under OTS regulations applicable to converted savings
associations, the Bank is not permitted to pay a cash dividend on its common
shares if its regulatory capital would, as a result of payment of such
dividend, be reduced below the amount required for the Liquidation Account (the
account established for the purpose of granting a limited priority claim on the
assets of the Bank in the event of complete liquidation to those members of the
Bank before the Conversion who maintain a savings account at the Bank after the
Conversion), or applicable regulatory capital requirements prescribed by the
OTS.
OTS regulations applicable to all savings and loan associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half that which its total capital to assets
ratio exceeded its required capital to assets ratio at the beginning of the
calendar year, or (2) 75% of its net earnings for the most recent four-quarter
period. Savings associations with total capital in excess of the capital
requirements that have been notified by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends. A savings
association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.
The Bank currently meets all of its capital requirements and, because the OTS
has not determined that the Bank is an institution requiring more than normal
supervision, the Bank may pay dividends in accordance with the foregoing
provisions of OTS regulations.
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SELECTED CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the consolidated
financial condition, earnings and other data regarding the Corporation at the
dates and for the periods indicated. As the Conversion was completed on October
6, 1994, information prior to the year ended September 30, 1995 is for the
Bank.
Selected financial condition At September 30,
and other data: ---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(In thousands)
Total amount of:
Assets $ 209,958 $ 180,831 $ 161,680 $ 149,927 $ 123,121
Cash and cash equivalents(1) 5,633 1,301 1,701 25,604 3,853
Securities available for sale 5,520 8,522 11,078
Securities held to maturity 3,254 500 3,015 4,318
Mortgage-backed and
related securities available
for sale 47,842 34,009 17,110
Mortgage-backed and
related securities held to
maturity 12,125 14,002 25,974 25,183 28,516
FHLB stock - at cost 2,013 1,182 1,099 1,029 977
Loans receivable - net 127,396 116,749 100,758 91,246 81,827
Deposits 142,832 128,554 117,898 134,790 109,483
Shareholders' equity(2) 26,388 33,479 37,502 14,394 13,012
Year ended September 30,
---------------------------------------------------------------------------
Summary of earnings: 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(In thousands except per share data)
Interest and dividend income $ 13,773 $ 12,665 $ 11,139 $ 9,239 $ 9,375
Interest expense 8,149 6,819 5,236 4,631 4,772
------------ ------------ ------------ ------------ ------------
Net interest income 5,624 5,846 5,903 4,608 4,603
Provision for loan losses 75 154 64 42 14
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 5,549 5,692 5,839 4,566 4,589
Noninterest income 497 457 257 247 200
Noninterest expense 3,959 4,410 3,300 2,751 2,510
------------ ------------ ------------ ------------ ------------
Income before income tax 2,087 1,739 2,796 2,062 2,279
Income tax expense 709 595 947 680 791
------------ ------------ ------------ ------------ ------------
Net income $ 1,378 $ 1,144 $ 1,849 $ 1,382 $ 1,488
============ ============ ============ ============ ============
Earnings per share(3) $ .63 $ .49 $ .77
============ ============ ============
Dividends declared per share(3) $ 3.09 $ 1.43 $ .19
============ ============ ============
- ------------------------
(1) Includes cash and amounts due from depository institutions, overnight
deposits and interest-bearing deposits in other financial institutions.
(2) Retained earnings only prior to September 30, 1995.
(3) Earnings and dividends per share for the Corporation is not applicable for
any of the periods presented prior to September 30, 1995, due to its mutual
form of ownership prior to October 6, 1994.
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At or for the year ended September 30,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
Selected financial ratios:
Interest rate spread
(difference between average yield
on interest-earning assets and
average cost of interest-
bearing liabilities) 2.42% 2.55% 2.95% 3.37% 3.55%
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) 3.08 3.50 4.01 3.74 3.96
Return on equity (net earnings
divided by average equity) 5.08 3.28 5.01 10.13 12.13
Return on assets (net earnings
divided by average total assets) .73 .67 1.22 1.09 1.25
Equity-to-assets ratio (average
equity divided by average total
assets) 14.46 20.36 24.36 10.74 10.32
Allowance for loan losses as a
percentage of nonperforming
loans 90.06 81.57 64.04 94.14 33.51
QUARTERLY FINANCIAL DATA
The following table is a summary of selected quarterly results of operations
for the years ended September 30, 1997 and 1996.
Three months ended
------------------
September 30, 1997 December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
(In thousands except per share data)
Interest and dividend income $ 3,301 $ 3,223 $ 3,516 $ 3,733
Interest expense 1,883 1,871 2,086 2,309
------------ ---------- ---------- -------------
Net interest income 1,418 1,352 1,430 1,424
Provision for loan losses 20 21 32 2
------------ ----------- ---------- -------------
Net interest income after
provision for loan losses 1,398 1,331 1,398 1,422
Noninterest income 211 67 102 117
Noninterest expense 1,010 971 961 1,017
------------ ----------- ---------- -------------
Income before income tax 599 427 539 522
Income tax expense 204 144 183 178
------------ ---------- ---------- -------------
Net income $ 395 $ 283 $ 356 $ 344
============ ========== ========== =============
Earnings per share $ .18 $ .13 $ .16 $ .16
============ ========== ========== =============
Dividends declared per share $ 2.64 $ .15 $ .15 $ .15
============ ========== ========== =============
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Three months ended
------------------
September 30, 1996 December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
(In thousands except per share data)
Interest and dividend income $ 3,075 $ 3,057 $ 3,205 $ 3,328
Interest expense 1,595 1,634 1,758 1,832
------------ ----------- ----------- ------------
Net interest income 1,480 1,423 1,447 1,496
Provision for loan losses 15 23 32 84
------------ ----------- ----------- ------------
Net interest income after
provision for loan losses 1,465 1,400 1,415 1,412
Noninterest income 151 152 84 70
Noninterest expense(1) 906 920 915 1,669
------------ ----------- ----------- ------------
Income before income tax 710 632 584 (187)
Income tax expense 245 216 199 (65)
------------ ----------- ----------- ------------
Net income $ 465 $ 416 $ 385 $ (122)
============ =========== =========== ============
Earnings per share $ .20 $ .18 $ .17 $ (.06)
============ =========== =========== ============
Dividends declared per share $ 1.08 $ .10 $ .12 $ .13
============ =========== =========== ============
- ------------------------
(1) Included in noninterest expense for the three months ended September 30,
1996 is $728,000 related to the Savings Association Insurance Fund (the
"SAIF") special assessment.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
In the following pages, management presents an analysis of the Corporation's
financial condition and results of operations as of and for the year ended
September 30, 1997, compared to prior years. This discussion is designed to
provide shareholders with a more comprehensive review of the operating results
and financial position than could be obtained from an examination of the
financial statements alone. This analysis should be read in conjunction with
the financial statements and related footnotes and the selected financial data
included elsewhere in this report.
The Bank is primarily engaged in the business of attracting savings deposits
from the general public and investing such funds in permanent mortgage loans
secured by 1-4 family residential real estate located primarily in Miami,
Montgomery and Darke Counties, Ohio. The Bank also originates loans for the
construction of 1-4 family residential real estate, loans secured by
multifamily real estate (over four units), and nonresidential real estate,
consumer and commercial loans and invests in U.S. government obligations,
interest-bearing deposits in other financial institutions, mortgage-backed and
related securities and other investments permitted by applicable law.
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Corporation's operations, and the
Corporation's actual results could differ significantly from those discussed in
the forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also include changes in
the economy and interest rates in the nation and in the Corporation's general
market area.
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Some of the forward-looking statements included herein are the statements
regarding the following:
1. Management's determination of the amount of loan loss allowance and the
amount of the loan loss provision;
2. The Corporation's intention to borrow additional funds as opportunities to
leverage excess capital arise;
3. Changes in the amount of deposit insurance assessments;
4. The sufficiency of the Corporation's liquidity and capital reserves; and
5. The effect on the Corporation of amendments to the core capital requirement
regulations.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $210.0 million, at September 30, 1997, an
increase of $29.2 million, or 16.2%, from $180.8 million at September 30, 1996.
The growth in assets was primarily in mortgage-backed and related securities
and loans receivable. Such growth was funded by increased deposits and borrowed
funds.
Total securities and FHLB stock increased $12.6 million from $58.2 million at
September 30, 1996, to $70.8 million at September 30, 1997. The increase was
due to $40.3 million in securities purchases. Most of the securities purchased
were part of the Corporation's strategy of borrowing long-term, variable-rate
funds from the FHLB to purchase similar-maturity, variable-rate mortgage-backed
and related securities to capitalize on the yield spread. Offsetting the
purchases were $18.7 million in sales of securities and mortgage-backed and
related securities available for sale and maturities and principal repayments
of $9.9 million. Sales were primarily made for interest rate risk strategy
purposes. Mortgage-backed and related securities include Federal Home Loan
Mortgage Corporation ("FHLMC"), Government National Mortgage Association
("GNMA") and Federal National Mortgage Association ("FNMA") participation
certificates and CMOs and REMICs. The majority of securities are classified as
available for sale to provide the Corporation with the flexibility to move
funds into loans as demand warrants. The mortgage-backed and related securities
also provide the Corporation with a constant cash flow stream from principal
repayments.
The Corporation's investment policy limits investments in U.S. Treasury and
government agency securities to securities with terms of ten years or less for
fixed-rate investments and thirty years or less for adjustable-rate
investments. Mortgage-backed securities guaranteed by FHLMC, GNMA or FNMA may
have terms of up to forty years. Substantially all CMOs and REMICs are
collateralized with FHLMC, GNMA or FNMA securities and may have terms of up to
forty years. CMOs and REMICs must meet OTS guidelines and not be "high risk" at
the time of purchase as defined by Thrift Bulletin No. 52. The Corporation has
not invested in any derivative securities other than CMOs and REMICs.
Management's strategy emphasizes investment in securities guaranteed by the
U.S. Government and its agencies as a means to mediate credit risk. The
investment strategy also includes purchasing adjustable-rate mortgage-backed
security products with monthly payments and interest rates that adjust annually
or more frequently. These securities provide the Corporation a continued cash
flow stream through principal paydowns as well as provide some protection
against interest rate risk. As an additional effort to manage interest rate
risk, the Corporation purchases government agency securities which reprice
annually, monthly and weekly.
Net loans receivable, including loans held for sale, increased from $116.7
million at September 30, 1996, to $127.4 million at September 30, 1997. The
Corporation experienced increases in the majority of its real estate loan
categories.
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Loans secured by 1-4 family first mortgages increased from $102.4 million at
September 30, 1996, to $108.9 million at September 30, 1997, as a result of a
high volume of loan originations. Despite the high volume of originations,
overall growth was partly constrained by the sale of a pool of 1-4 family first
mortgage loans with a carrying value of $10.3 million. The loans were sold as a
means to manage interest rate risk by reducing the Corporation's investment in
various lower-yielding or longer-term fixed-rate loans. Additionally, some of
the proceeds were used to partially fund a special $2.50 per share dividend
paid during the first quarter of fiscal 1997. Home equity loans and
nonresidential real estate loans increased from $2.9 million and $4.4 million,
respectively, at September 30, 1996, to $4.1 million and $6.2 million,
respectively, at September 30, 1997. Home equity loans increased as a result of
the Corporation's competitive marketing effort to target such loans, while the
increase in nonresidential real estate loans was due to the origination of a
few larger balance loans primarily in the latter half of fiscal 1997. The
continued growth in total real estate loans is 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.
There were no loans classified as held for sale at September 30, 1997, while
loans classified as held for sale totaled $10.4 million at September 30, 1996.
Held for sale loans are included in the total for 1-4 family first mortgage
loans discussed above.
The Corporation's consumer loan portfolio increased slightly between September
30, 1996, and September 30, 1997. Consumer loans remain a small portion of the
entire loan portfolio and represented only 2.1% and1.8% of total loans at
September 30, 1997 and 1996, respectively.
During the third quarter of fiscal 1997, the Corporation began originating
commercial-purpose business loans secured by collateral other than real estate.
At September 30, 1997, commercial loans totaled $575,000 and represented less
than 1.0% of the Corporation's overall loan portfolio.
Premises and equipment, net of accumulated depreciation, totaled $2.7 million
at September 30, 1997, compared to $1.5 million at September 30, 1996, an
increase of $1.2 million. The increase was primarily due to the construction of
a new branch office in Brookville, Ohio. Construction began during the first
quarter of fiscal 1997 and the facility was placed into service in August,
1997.
Total deposits increased $14.2 million, or 11.1%, from $128.6 million at
September 30, 1996, to $142.8 million at September 30, 1997. The Bank
experienced a slight decrease in passbook savings accounts which decreased from
13.0% of total deposits at September 30, 1996, to 11.5% of total deposits at
September 30, 1997. A decrease in negotiable order of withdrawal ("NOW")
accounts was offset by an increase in money market accounts while the combined
demand deposit portfolio decreased from 12.4% of total deposits at September
30, 1996, to 11.1% of total deposits at September 30, 1997. Certificates of
deposit increased 15.3% and were the primary reason for the overall deposit
growth. Growth in certificates of deposit has been due to normal operating
procedures as the Corporation has not used special promotions to attract the
increased volume. The certificate of deposit portfolio increased from 74.6% of
total deposits at September 30, 1996, to 77.4% at September 30, 1997. All of
the time deposits held at the Bank mature in less than five years.
Borrowed funds increased $22.1 million from $17.5 million at September 30,
1996, to $39.6 million at September 30, 1997. The increase due to new long term
advances of $25.0 million was partially offset by principal repayments of $1.3
million and a net decrease in short-term advances under the Bank's cash
management line of credit of $1.6 million. As discussed above, the majority of
borrowed funds are invested in mortgage-backed and related securities available
for sale to leverage the Bank's excess capital provided from the Conversion.
These securities may be sold in the future, if necessary, to provide liquidity
for loan growth.
Other liabilities decreased from $1.0 million at September 30, 1996, to
$810,000 at September 30, 1997. At September 30, 1996, other liabilities
included an accrued expense of approximately $728,000 as a result of
legislation passed to recapitalize the Savings Association Insurance Fund
("SAIF") of the FDIC. The special assessment was subsequently paid during the
first quarter of fiscal 1997. The SAIF was below the level required by law
because a significant portion of the assessments paid into the SAIF by thrifts,
like
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48
the Bank, were used to pay the cost of prior thrift failures. The legislation
called for a one-time assessment of $.657 per $100 of SAIF insured deposits
held as of March 31, 1995. As a result of the recapitalization of the SAIF, the
current disparity between bank and thrift insurance assessments was reduced.
Thrifts had been paying assessments of $.23 per $100 of deposits, which, for
most thrifts, was reduced to $.064 per $100 in deposits in January 1997 and is
expected to be $.024 per $100 in deposits no later than January 2000.
The legislation also provides for the merger of the SAIF and the BIF effective
January 1, 1999, assuming there are no savings associations under federal law.
Under separate proposed legislation, Congress is considering the elimination of
the federal thrift charter and the separate federal regulation of thrifts. As a
result, the Bank would be required to convert to a different financial
institution charter and the Bank and the Corporation might become subject to
more restrictive activity limits. The Corporation cannot predict the impact of
any such legislation until it is enacted.
COMPARISON OF RESULTS OF OPERATIONS
NET INCOME. 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 $1,378,000 for 1997 represented a $234,000
increase from the $1,144,000 in net income for 1996. Similarly, earnings per
share increased by $.14 per share from $.49 per share for 1996, to $.63 per
share for 1997. The increase in earnings was primarily due to the combination
of a decrease in noninterest expense and a slight increase in noninterest
income partially offset by a decrease in net interest income.
The Corporation's net income of $1,144,000 for 1996 represented a $705,000
decrease from the $1,849,000 in net income for 1995. Similarly, earnings per
share decreased by $.28 per share from $.77 per share for 1995 to $.49 per
share for 1996. The decrease in earnings was due to a slight decrease in net
interest income combined with an increase in noninterest expense, resulting
primarily from a one-time deposit insurance assessment, partially offset by
gains from the sales of mortgage-backed and related securities, as more fully
discussed below.
NET INTEREST INCOME. 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 in periods of rising interest rates, the Corporation's net
interest spread is negatively affected because the interest rates paid on
deposits increases at a faster pace than the rates earned on loans. As part of
the Corporation'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 September 30, 1997 and 1996, the Corporation had $7.3
million and $3.1 million in adjustable-rate mortgages. Additionally, the
mortgage-backed and related securities portfolio has been structured so that
substantially all of the mortgage-backed and related securities reprice on at
least an annual basis. At September 30, 1997, 98.3% of the Corporation's
mortgage-backed and related securities portfolio reprices on at least an annual
basis.
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49
The net interest income of the Corporation decreased by $223,000 for 1997,
compared to 1996. The change in net interest income is primarily attributable
to a decline in the ratio of average interest-earning assets to average
interest-bearing liabilities combined with a decrease in the average interest
rate spread from 2.55% in 1996, to 2.42% in 1997. Management has employed
strategies such as large, special dividends and common stock repurchase
programs to reduce the excess capital position of the Corporation in an effort
to improve its return on equity. As a result, deposits and borrowed funds have
increased in order to continue funding the Corporation's growth. See "Yields
Earned and Rates Paid."
The net interest income of the Corporation decreased by $56,000 for 1996,
compared to 1995. The change in net interest income was attributable to
increases in higher yielding interest-earning asset balances being entirely
offset by an overall increase in the cost of funds for deposits with 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 $9,579,000 for 1997, compared to $8,859,000
and $7,913,000 for 1996 and 1995. Such increase in interest income was due to
higher average loans receivable balances, despite the loan sale in 1997,
related to the origination of new 1-4 family first mortgage, home equity and
nonresidential real estate loans, partially offset by a decrease in the average
yield earned to 8.17% in 1997 from 8.25% and 8.37% in 1996 and 1995.
Interest on mortgage-backed and related securities totaled $3,528,000 for 1997,
compared to $2,995,000 and $2,224,000 for 1996 and 1995. The increase in 1997
over 1996 was due to an increase in the average balance of mortgage-backed and
related securities, partially offset by a slight decrease in the average yield
on mortgage-backed and related securities from 6.50% in 1996 to 6.45% in 1997.
The increase in 1996 over 1995 was due to a larger percentage of higher
yielding mortgage-backed and related securities in 1996 as compared to the
prior period combined with an overall increase in the level of mortgage-backed
and related securities. The increase in the yield was the result of most
mortgage-backed and related securities repricing to higher yield levels for
1996. 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 other securities totaled $505,000 for 1997, compared to $629,000
for 1996, and $740,000 for 1995. The decreases were the result of lower average
balances of securities combined with decreases in the overall portfolio yield
to 6.40% in 1997 from 6.44% in 1996 and 6.60% in 1995.
Other interest and dividend income totaled $161,000 in 1997, compared to
$183,000 in 1996 and $262,000 in 1995. The decrease in 1997 from 1996 was due
to lower average balances of interest-bearing deposits in other financial
institutions combined with a lower yield on such deposits. The effect of the
decreased volume of lower yielding interest bearing deposits was partially
offset by a larger investment in higher yielding FHLB stock. The decrease in
other interest and dividend income in 1996 from 1995 was due to lower average
balances in overnight funds, partially offset by higher yields earned on FHLB
stock.
Interest paid on deposits totaled $6,749,000 in 1997, compared to $6,199,000 in
1996 and $5,230,000 in 1995. The increases resulted from increasing average
deposit balances over the comparable periods combined with an overall increase
in the average cost of deposits to 5.00% in 1997 from 4.99% in 1996 and 4.62%
in 1995. The increase in the average cost of deposits was a result of a larger
percentage of the deposit portfolio being in high yielding certificates of
deposit.
Interest on borrowed funds totaled $1,400,000 in 1997 compared to $620,000 in
1996 and $7,000 in 1995. The increase is the result of higher average balances
of borrowed funds over each of the comparable periods. Beginning 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 excess
capital, as discussed previously. The Corporation borrowed additional
adjustable-rate funds for the same purpose in subsequent quarters. The
Corporation also borrowed fixed-rate funds to provide for long-term liquidity
needs. Total borrowed funds increased during fiscal 1996 and began to decline
slightly during the first
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50
two quarters of fiscal 1997; however, during the third and fourth quarters of
fiscal 1997, new advances, net of repayments, totaled $23.9 million. As
opportunities arise to further leverage the Corporation's excess capital, the
Corporation may make additional borrowings to fund loan demand and
mortgage-backed and related security purchases.
PROVISION FOR LOAN LOSSES. 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 did not experience any net charge-offs in 1997 or 1996, while
net charge-offs for 1995 were less than $1,000. 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 1-4 family
residential real estate loans, established income information and defined
ratios of debt to income. Loans secured by real estate make up 97.4% of the
Corporation's loan portfolio, and loans secured by first mortgages on 1-4
family residential real estate constituted 81.6% of total loans at September
30, 1997. Notwithstanding the historical charge-off history, however,
management believes that continuing to increase the allowance for loan losses
is prudent as total loans, particularly consumer and commercial 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. The provision for loan losses totaled $75,000, $154,00 and
$64,000 in 1997, 1996 and 1995, respectively.
NONINTEREST INCOME. Noninterest income totaled $498,000 in 1997, compared to
$457,000 in 1996 and $257,000 in 1995. The increase in 1997 over 1996 was due
to increases in service charges and other fees as well as other income. The
effect of the $118,000 gain on the sale of loans discussed above was offset by
a decrease in realized gains on the sales of available-for-sale securities. The
primary source of the increase in 1996 over 1995 was from realized gains of
$226,000 from sales of mortgage-backed and related securities held in the
available-for-sale portfolio. The securities sales in 1997 and 1996 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. Other changes in noninterest income were
insignificant.
NONINTEREST EXPENSE. Noninterest expense totaled $3,959,000 in 1997, compared
to $4,410,000 in 1996 and $3,300,00 in 1995. Federal deposit insurance premiums
were the primary cause of the spike in non-interest expense in 1996. As
discussed above, the Bank recognized an additional expense of approximately
$728,000 in September 1996, as a result of legislation passed to recapitalize
the SAIF of the FDIC.
Absent the effect of the special, one-time deposit insurance assessment,
salaries and employee benefits and state franchise taxes made up the remainder
of the general increase over the comparable periods. Salaries and employee
benefits increased due to annual merit increases, additional personnel to staff
the new Brookville office, increased compensation expense related to the Milton
Federal Financial Corporation Employee Stock Ownership Plan ("ESOP") as a
result of the Corporation's stock price increasing, and the added expense from
the Milton Federal Savings Bank Recognition and Retention Plan and Trust
Agreement ("RRP"), which had not been implemented during 1995. State franchise
taxes
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51
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 quarter of fiscal 1996 was the first period in which
the franchise taxes were impacted by the capital raised in the mutual to stock
conversion. Other changes in noninterest expense were not significant.
INCOME TAX EXPENSE. The volatility of income tax expense is primarily
attributable to the change in net income before income taxes. See Note 9 of the
Notes to Consolidated Financial Statements. Income tax expense totaled $709,000
in 1997, $595,000 in 1996 and $947,000 in 1995 resulting in effective tax rates
of 34.0%, 34.2% and 33.9%, respectively.
Prior to the enactment of legislation discussed below, thrifts which met
certain tests relating to the composition of assets had been permitted to
establish reserves for bad debts and to make annual additions thereto which
could, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "nonqualifying loans" was computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" could be computed under either the experience method or the
percentage of taxable income method, based on an annual election.
In August 1996, legislation was enacted that repealed the percentage of taxable
income method of accounting used by many thrifts to calculate their bad debt
reserve for federal income tax purposes. As a result, small thrifts, such as
the Bank, must recapture that portion of the reserve that exceeds the amount
that could have been taken under the experience method for tax years beginning
after December 31, 1987. The legislation also requires thrifts to account for
bad debts for federal income tax purposes on the same basis as commercial banks
for tax years beginning after December 31, 1995. The recapture will occur over
a six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997, provided the institution meets
certain residential lending requirements. At September 30, 1997, the Bank had
approximately $1.1 million in bad debt reserves subject to recapture for
federal income tax purposes. The deferred tax liability related to the
recapture has been previously established.
YIELDS EARNED AND RATES PAID. The following table sets forth certain
information relating to the Corporation's average balance sheet information and
reflects the average yield on interest-earning assets and the average cost of
interest-bearing liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average monthly balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods presented. Average balances are derived from daily balances, which
include nonaccruing loans in the loan portfolio, net of the allowance for loan
losses.
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52
Year ended September 30,
---------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ---------------------------- -------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits in other
financial institutions $ 1,516 $ 59 3.89% $ 2,429 $ 104 4.28% $ 4,478 $ 192 4.29%
Investment securities available
for sale (1) 5,440 340 6.24 9,404 600 6.42 11,210 740 6.60
Investment securities held to
maturity 2,435 165 6.78 422 29 6.87
Mortgage-backed and related
securities available for sale (1) 41,535 2,716 6.52 30,797 1,991 6.48 10,996 609 5.54
Mortgage-backed and related
securities held to maturity 13,043 812 6.23 15,318 1,004 6.55 24,908 1,615 6.48
Loans receivable (2) 117,194 9,579 8.17 107,321 8,859 8.25 94,504 7,913 8.37
Federal Home Loan Bank stock 1,428 102 7.14 1,130 79 6.99 1,055 70 6.64
--------- ------- -------- ------- --------- --------
Total interest-earning assets 182,591 13,773 7.54% 166,821 12,666 7.60% 147,151 11,139 7.57%
------- ------- --------
Noninterest earning assets:
Cash and amounts due from
depository institutions 504 962 430
Premises and equipment, net 2,011 1,471 1,489
Other nonearning assets 2,690 1,886 2,453
---------- -------- ---------
Total assets $ 187,796 $171,140 $ 151,523
========== ======== =========
Interest-bearing liabilities:
NOW accounts $ 9,101 166 1.82% $ 8,451 160 1.89% $ 7,648 150 1.96%
Money market accounts 6,909 203 2.94 7,396 220 2.97 8,525 241 2.83
Passbook savings accounts 16,804 419 2.49 17,498 439 2.51 17,588 445 2.53
Certificates of deposit 102,270 5,961 5.83 90,873 5,380 5.92 79,335 4,393 5.54
---------- --------- ------ -------- ------- --------- --------
Total deposits 135,084 6,749 5.00 124,218 6,199 4.99 113,096 5,229 4.62
Borrowings 24,179 1,400 5.79 10,751 620 5.77 118 7 5.93
---------- --------- -------- ------- --------- --------
Total interest-bearing
liabilities 159,263 8,149 5.12% 134,969 6,819 5.05% 113,214 5,236 4.62%
------- --------
Noninterest-bearing liabilities 1,386 1,321 1,401
---------- -------- ---------
Total liabilities 160,649 136,290 114,615
Shareholders' equity 27,147 34,850 36,908
---------- -------- ---------
Total liabilities
shareholders' equity $ 187,796 $171,140 $ 151,523
========== ======== =========
Net interest income;
interest rate spread $ 5,624 2.42% $ 5,847 2.55% $ 5,903 2.95%
======== ====== ======= ====== ======== =======
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.08% 3.50% 4.01%
====== ======= ======
Average interest-earning assets to
average interest-bearing liabilities 114.74% 123.60% 129.96%
====== ====== ======
- ------------------------
(1) Average balance includes unrealized gains and losses while yield is based
on amortized cost.
(2) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
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The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Corporation's interest income and expense during the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) changes in
volume (multiplied by prior year rate), (2) changes in rate (multiplied by
prior year volume) and (3) total changes in rate and volume. The combined
effects of changes in both volume and rate, that are not separately identified,
have been allocated proportionately to the change due to volume and change due
to rate:
Year ended September 30,
-------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------- --------------------------------
Increase Increase
(decrease) (decrease)
due to due to
------------------ -----------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
Interest income attributable to:
Interest-bearing deposits in
other financial institutions $ (36) $ (9) $ (45) $ (88) $ (88)
Securities available for sale (244) (16) (260) (120) $ (20) (140)
Securities held to maturity 136 136 29 29
Mortgage-backed and related
securities available for sale 713 12 725 1,262 120 1,382
Mortgage-backed and related
securities held to maturity (144) (48) (192) (628) 17 (611)
Loans receivable 808 (88) 720 1,059 (113) 946
Federal Home Loan Bank stock 21 2 23 5 4 9
--------- -------- --------- ------- -------- -------
Total interest income 1,254 (147) 1,107 1,519 8 1,527
--------- -------- --------- ------- -------- -------
Interest expense attributable to:
NOW accounts 12 (6) 6 15 (5) 10
Money market accounts (14) (3) (17) (33) 12 (21)
Passbook savings accounts (17) (3) (20) (2) (4) (6)
Certificates of deposit 665 (84) 581 669 318 987
Borrowings 777 3 780 613 613
--------- -------- --------- ------- -------- -------
Total interest expense 1,423 (93) 1,330 1,262 321 1,583
--------- -------- --------- ------- -------- -------
Increase (decrease) in net
interest income $ (169) $ (54) $ (223) $ 257 $ (313) $ (56)
--------- -------- --------- ------- -------- -------
ASSET AND LIABILITY MANAGEMENT
The Bank, 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. 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. Although the Bank is not
currently subject to NPV regulation because such regulation does not apply to
institutions with less than $300 million in assets and risk-based capital in
excess of 12%, application of NPV methodology may illustrate the Bank's
interest rate risk.
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Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash
flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
that would result from a theoretical 200 basis point (1 basis point equals
0.01%) change in market interest rates. Both a 200 basis point increase in
market interest rates and a 200 basis point decrease in market interest rates
are considered. If the NPV would decrease by more than 2% of the present value
of the institution's assets with either an increase or a decrease in market
rates, the institution must deduct 50% of the amount of decrease in excess of
such 2% in the calculation of the institution's risk-based capital. See
"Liquidity and Capital Resources."
At September 30, 1997, 2% of the present value of the Bank's assets was
approximately $4,136,000. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate
risk of a 200 basis point decrease) was $9,964,000 at September 30, 1997, the
Bank would have been required to deduct approximately $2,914,000 (50% of the
approximate $5,828,000 difference) from its capital in determining whether the
Bank met its risk-based capital requirement. Regardless of such reduction,
however, the Bank's risk-based capital at September 30, 1997, would still have
exceeded the regulatory requirement by approximately $11,248,000.
Presented below, as of September 30, 1997 and 1996, 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. The
table also contains policy limits set by the Board of Directors of the Bank as
the maximum change in NPV that the Board of Directors deems advisable in the
event 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.
As illustrated in the table, 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. Assumptions used in calculating the amounts in this table are OTS
assumptions.
September 30, 1997 September 30, 1996
------------------------------------ ----------------------------------
Change in Interest Rate Board limit $ change % change $ change % change
(Basis Points) % change in NPV in NPV in NPV in NPV
------------------------ ---------- -------------- ---------------- -------------- --------------
(Dollars in thousands)
+300 (40)% $ (15,466) (60)% $ (12,184) (52)%
+200 (30) (9,964) (39) (8,071) (35)
+100 (15) (4,682) (18) (4,024) (17)
0 0 0 0 0 0
-100 15 3,337 13 3,072 13
-200 20 4,946 19 4,738 20
-300 25 6,163 24 5,141 22
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
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55
withdrawal levels from certificates of deposit, would likely deviate
significantly from those assumed in making risk calculations.
At September 30, 1997 and 1996, the Corporation exceeded the Board limit
percentage change for an increase in interest rates of 100, 200 and 300 basis
points. As part of management's overall strategy to manage interest rate risk,
the mortgage-backed and related security portfolio was structured so that
substantially all of the mortgage-backed and related securities reprice on at
least an annual basis. In addition, management has increased consumer lending
although it still remains 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 risk. In addition, management is
continuing to originate adjustable-rate mortgage loans as an additional tool to
manage interest rate risk. Adjustable-rate loans increased from $3.1 million at
September 30, 1996 to $7.3 million at September 30, 1997. Additionally, during
fiscal 1997, the Corporation sold a pool of fixed-rate mortgage loans and
invested the funds in shorter-term fixed-rate loans, adjustable-rate loans and
adjustable-rate mortgage-backed and related securities which have less exposure
to interest rate risk.
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 years ended September 30, 1997, 1996 and 1995.
Year Ended September 30,
--------------------------------------------------
1997 1996 1995
-------------- ------------ -------------
(In thousands)
Net income $ 1,378 $ 1,144 $ 1,849
Adjustments to reconcile net income to net cash from
operating activities (323) 392 259
------------- ------------ ------------
Net cash from operating activities 1,055 1,536 2,108
Net cash from investment activities (24,074) (19,350) (35,260)
Net cash from financing activities 27,351 17,414 9,249
------------- ------------ ------------
Net change in cash and cash equivalents 4,332 (400) (23,903)
Cash and cash equivalents at beginning of period 1,301 1,701 25,604
------------- ------------ ------------
Cash and cash equivalents at end of period $ 5,633 $ 1,301 $ 1,701
============= ============ ============
The Corporation's principal sources of funds are deposits, loan and securities
repayments, maturities of securities, sales of securities available for sale
and other funds provided by operations. The Bank also has the ability to borrow
from the FHLB. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are more influenced by interest rates, general economic
conditions, and competition. The Corporation maintains investments in liquid
assets based upon management's assessment of (1) need for funds, (2) expected
deposit flows, (3) yields available on short-term liquid assets and (4)
objectives of the asset/liability management program.
OTS regulations presently require the Bank 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 Bank'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 Bank may rely, if necessary, to fund deposit withdrawals or other
short-term funding needs. At September 30, 1997, the Bank's regulatory
liquidity ratio was 7.04%. At
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56
such date, the Bank had commitments to originate fixed-rate loans totaling
$1,780,000 and adjustable-rate loans totaling $75,000. The Bank had 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.
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 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.
The following table summarizes the Bank's regulatory capital requirements and
actual capital at September 30, 1997.
Excess of Actual
Capital Over Current
Actual capital Current requirement Requirement Applicable
Amount Percent Amount Percent Amount Percent Asset Total
------ ------- ------ ------- ------ ------- -----------
(Dollars in thousands)
Tangible Capital $ 21,385 10.34% $ 3,103 1.50% $ 18,282 8.84% $ 206,881
Core Capital 21,385 10.34 6,206 3.00 15,179 7.34 206,881
Risk-based Capital 21,799 22.83 7,637 8.00 14,162 14.83 95,466
At September 30, 1997, the Corporation had no material commitments for capital
expenditures.
In April, 1997, the Board of Directors of the Corporation authorized the
purchase of up to 5% of the Corporation's outstanding common shares over a
six-month period. The shares will be purchased in the over-the-counter market.
The number of shares to be purchased and the price to be paid will depend upon
the availability of shares, the prevailing market prices and any other
considerations which may, in the opinion of the Corporation's Board of
Directors or management, affect the advisability of purchasing shares.
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," was issued by the Financial Accounting Standards Board ("FASB")
in 1996. SFAS 125 revises the accounting for transfers of financial assets,
such as loans and securities, and for distinguishing between sales and secured
borrowings. It was originally effective for some transactions in 1997 and
others in 1998. SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125," was issued in December 1996. SFAS 127
defers, for one year, the effective date of provisions related to securities
lending, repurchase agreements and other similar transactions. The remaining
portions of SFAS 125 continued to be effective January 1, 1997. SFAS 125 did
not have a material impact on the Corporation's financial statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is
effective for financial statements for periods ending after December 15, 1997,
including interim periods. SFAS 128 simplifies the calculation of earnings per
share ("EPS") by replacing primary EPS with basic EPS. It also requires dual
presentation of basic EPS and diluted EPS for entities with complex capital
structures. Basic EPS includes no dilution and is computed by dividing income
available to common shareholders by the
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57
weighted-average common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in earnings such as stock
options, warrants or other common stock equivalents. All prior period EPS data
will be restated to conform with the new presentation; however, the Corporation
does not expect such restatement to be materially different from EPS data
previously presented.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS 129 consolidated existing accounting guidance
relating to disclosure about a company's capital structure. Public companies
generally have always been required to make disclosures now required by SFAS
129 and, therefore, SFAS 129 should have no impact on the Corporation. SFAS 129
is effective for financial statements for periods ending after December 15,
1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and loses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in
that financial statement.
SFAS 130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement significantly changes the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 uses a "management approach" to disclose financial and descriptive
information about an enterprise's reportable operating segments which is based
on reporting information the way the management organizes the segments within
the enterprise for making operating decisions and assessing performance. For
many enterprises, the management approach will likely result in more segments
being reported. In addition, the Statement requires significantly more
information to be disclosed for each reportable segment than is presently being
reported in annual financial statements. The Statement also requires that
selected information be reported in interim financial statements. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes included herein have been
prepared in accordance with generally accepted accounting principles ("GAAP").
Presently, GAAP requires the Corporation to measure financial position and
operating results primarily in terms of historic dollars. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in
the inflation rate. While interest rates are greatly influenced by changes in
the inflation rate, they do not change at the same rate or in the same
magnitude as the inflation rate. Rather, interest rate volatility is based on
changes in the expected rate of inflation, as well as on changes in monetary
and fiscal policies.
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58
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Milton Federal Financial Corporation
West Milton, Ohio
We have audited the accompanying consolidated balance sheets of Milton Federal
Financial Corporation as of September 30, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1997. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Milton Federal
Financial Corporation as of September 30, 1997 and 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Corporation changed its method of accounting for impaired loans in 1996 and its
method of accounting for certain investments in 1995 to comply with new
accounting guidance.
Crowe, Chizek and Company LLP
Columbus, Ohio
October 17, 1997
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59
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
- --------------------------------------------------------------------------------
1997 1996
---- ----
ASSETS
Cash and amounts due from depository institutions $ 696,629 $ 446,731
Overnight deposits in other financial institutions 3,500,000
Interest-bearing deposits in other financial institutions 1,436,490 854,278
----------------- -----------------
Total cash and cash equivalents 5,633,119 1,301,009
Securities available for sale 5,519,885 8,521,559
Securities held to maturity (Estimated fair values of
$3,260,087 in 1997 and $484,375 in 1996) 3,254,385 500,000
Mortgage-backed and related securities available for sale 47,842,476 34,009,393
Mortgage-backed and related securities held to maturity
(Estimated fair values of $12,055,248 in 1997 and
$13,807,113 in 1996) 12,125,253 14,002,137
Federal Home Loan Bank stock 2,013,200 1,181,500
Loans, net 127,395,541 116,748,891
Premises and equipment, net 2,734,708 1,541,676
Real estate owned 32,654
Cash surrender value of life insurance 1,524,502 1,455,493
Accrued interest receivable 1,184,122 1,057,428
Other assets 730,547 479,077
----------------- -----------------
Total assets $ 209,957,738 $ 180,830,817
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 142,831,783 $ 128,554,107
Borrowed funds 39,569,906 17,489,203
Advance payments by borrowers for taxes and insurance 165,805 182,810
Accrued interest payable 192,195 104,818
Other liabilities 810,179 1,020,476
----------------- -----------------
Total liabilities 183,569,868 147,351,414
----------------- -----------------
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 25,017,419 24,951,691
Retained earnings 7,975,535 13,535,280
Treasury stock, 274,039 shares in 1997 and 128,943 shares
in 1996 at cost (4,050,307) (1,997,640)
Unearned employee stock ownership plan shares (1,444,169) (1,650,479)
Unearned recognition and retention plan shares (1,054,575) (1,269,957)
Unrealized loss on securities available for sale (56,033) (89,492)
------------------ -----------------
Total shareholders' equity 26,387,870 33,479,403
----------------- -----------------
Total liabilities and shareholders' equity $ 209,957,738 $ 180,830,817
================= =================
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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60
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 9,578,767 $ 8,858,805 $ 7,913,407
Mortgage-backed and related securities 3,528,348 2,995,124 2,223,779
Other securities 505,254 628,619 740,116
Interest-bearing deposits and overnight funds 58,696 103,790 191,721
Dividends on Federal Home Loan Bank
stock 101,880 79,152 70,245
--------------- --------------- ----------------
Total interest income 13,772,945 12,665,490 11,139,268
INTEREST EXPENSE
Deposits 6,749,161 6,199,016 5,229,721
Borrowed funds 1,399,995 619,790 6,761
--------------- --------------- ----------------
Total interest expense 8,149,156 6,818,806 5,236,482
--------------- --------------- ----------------
NET INTEREST INCOME 5,623,789 5,846,684 5,902,786
Provision for loan losses 75,000 154,300 64,300
--------------- --------------- ----------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 5,548,789 5,692,384 5,838,486
NONINTEREST INCOME
Service charges and other fees 147,232 131,696 136,221
Net gain on sale of loans 118,281
Net realized gain on sale of available for sale
securities 115,072 225,797
Other income 117,209 99,498 120,909
--------------- --------------- ----------------
Total noninterest income 497,794 456,991 257,130
NONINTEREST EXPENSE
Salaries and employee benefits 2,295,007 1,958,788 1,783,944
Occupancy 289,902 283,422 285,889
Data processing services 179,096 158,180 146,895
Federal deposit insurance premiums 121,044 1,003,897 266,927
State franchise taxes 371,575 372,980 214,956
Advertising 57,541 42,472 45,007
Other expenses 644,980 590,658 555,963
--------------- --------------- ----------------
Total noninterest expense 3,959,145 4,410,397 3,299,581
--------------- --------------- ----------------
INCOME BEFORE INCOME TAX 2,087,438 1,738,978 2,796,035
Income tax expense 709,000 595,000 946,654
--------------- --------------- ----------------
NET INCOME $ 1,378,438 $ 1,143,978 $ 1,849,381
=============== =============== ================
Earnings per common share $ .63 $ .49 $ .77
=============== =============== ================
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
-60-
61
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Unrealized
Gain (Loss) on
Additional Unearned Securities
Paid-In Retained Treasury Employee Benefit Available
Capital Earnings Stock Plan Shares for Sale Total
------- -------- ----- ----------- -------- -----
Balance, October 1, 1994 $14,394,363 $ 14,394,363
Net income for the year
ended September 30, 1995 1,849,381 1,849,381
Cash dividends -
$.19 per share (456,110) (456,110)
Effect of change in accounting
for investment securities at
October 1, 1994 $ (7,597) (7,597)
Sale of 2,578,875 shares of
no par common stock,
net of conversion costs $ 24,844,095 24,844,095
191,240 shares purchased
under employee stock
ownership plan $ (2,062,046) (2,062,046)
Commitment to release
19,124 employee stock
ownership plan shares 36,202 206,310 242,512
103,155 shares purchased
under recognition and
retention plan (1,485,339) (1,485,339)
Change in unrealized
gain (loss) on securities
available for sale 183,198 183,198
---------- ----------- ----------- ------------ ----------- ------------
Balance, September 30, 1995 24,880,297 15,787,634 (3,341,075) 175,601 37,502,457
- -------------------------------------------------------------------------------
(Continued)
-61-
62
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Years ended September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Unrealized
Gain (Loss) on
Additional Unearned Securities
Paid-In Retained Treasury Employee Benefit Available
Capital Earnings Stock Plan Shares for Sale Total
------- -------- ----- ----------- -------- -----
Net income for the year
ended September 30, 1996 1,143,978 1,143,978
Cash dividends -
$1.43 per share (3,396,332) (3,396,332)
Commitment to release
19,124 employee stock
ownership plan shares 71,394 205,257 276,651
14,957 shares earned under
recognition and retention
plan 215,382 215,382
Purchase 128,943 shares
of treasury stock at cost $(1,997,640) (1,997,640)
Change in unrealized gain
(loss) on securities
available for sale (265,093) (265,093)
------------- ----------- ----------- ------------ ----------- ------------
Balance, September 30, 1996 24,951,691 13,535,280 (1,997,640) (2,920,436) (89,492) 33,479,403
Net income for the year
ended September 30, 1997 1,378,438 1,378,438
Cash dividends -
$3.09 per share (6,938,183) (6,938,183)
Commitment to release
19,124 employee stock
ownership plan shares 62,719 206,310 269,029
14,957 shares earned under
recognition and retention
plan 215,382 215,382
Tax benefit realized on
vesting of recognition and
retention plan shares 3,009 3,009
Purchase 145,096 shares
of treasury stock at cost (2,052,667) (2,052,667)
Change in unrealized gain
(loss) on securities
available for sale 33,459 33,459
------------- ----------- ----------- ------------ ----------- ------------
Balance, September 30, 1997 $ 25,017,419 $ 7,975,535 $(4,050,307) $ (2,498,744) $ (56,033) $ 26,387,870
============= =========== =========== ============ =========== ============
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
-62-
63
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,378,438 $ 1,143,978 $ 1,849,381
Adjustments to reconcile net income to net
cash from operating activities
Amortization of deferred loan
origination fees (97,093) (133,449) (105,669)
Amortization of premiums, accretion
of discounts, net 24,759 43,407 43,658
Provision for loan losses 75,000 154,300 64,300
Depreciation 151,028 145,234 153,279
Increase in cash value of life insurance (69,009) (66,638) (63,576)
Net realized gain on sale of available for sale
securities (115,072) (225,797)
Net gain on sale of loans (118,281)
Federal Home Loan Bank stock dividend (101,700) (78,900) (70,000)
Compensation expense on ESOP shares 269,029 276,651 242,512
Compensation expense on RRP shares 215,382 215,382
Tax benefit realized on vesting of RRP shares 3,009
Deferred tax expense (benefit) 284,289 (304,334) 56,645
Net change in accrued interest receivable
and other assets (378,164) (440,672) (150,302)
Net change in accrued interest payable
and other liabilities (466,500) 806,505 88,044
---------------- --------------- ---------------
Net cash from operating activities 1,055,115 1,535,667 2,108,272
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (5,000,000) (4,503,769) (9,992,080)
Proceeds from maturities 6,000,000 7,000,000 2,000,000
Proceeds from sales 2,000,000
Securities held to maturity
Purchases (4,006,975) (500,000)
Proceeds from maturities 1,250,000
Mortgage-backed securities available for sale
Purchases (31,287,712) (21,889,791) (17,460,956)
Proceeds from principal payments 855,042 2,182,385 584,620
Proceeds from sales 16,785,046 11,788,658
Mortgage-backed securities held to maturity
Purchases (5,793,067)
Proceeds from principal payments 1,836,696 2,831,653 4,919,948
Purchase of Federal Home Loan Bank stock (730,000) (3,200)
Increase in loans, net (20,883,830) (16,012,093) (9,540,273)
Proceeds from sale of loans 10,377,554
Premises and equipment expenditures (1,344,060) (243,364) (64,529)
Proceeds from sale of real estate owned 74,710 85,898
--------------- --------------- ---------------
Net cash from investing activities (24,073,529) (19,349,521) (35,260,439)
- -------------------------------------------------------------------------------
(Continued)
-63-
64
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended September 30, 1997, 1995 and 1994
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 14,277,676 10,656,199 (16,891,606)
Net change in advance payments by
borrowers for taxes and insurance (17,005) (77,307) 41,273
Net change in short-term borrowings (1,600,000) 2,200,000 1,000,000
Long-term advances from Federal Home
Loan Bank 24,975,000 10,120,000 4,260,000
Principal payments on long-term Federal
Home Loan Bank advances (1,294,297) (90,797)
Cash dividends paid (6,938,183) (3,396,332) (456,110)
Proceeds from issuance of common stock,
net of conversion costs 24,844,095
Cash provided to ESOP (2,063,100)
Shares purchased under RRP (1,485,339)
Purchase of treasury stock (2,052,667) (1,997,640)
---------------- --------------
Net cash from financing activities 27,350,524 17,414,123 9,249,213
--------------- -------------- ----------------
Net change in cash and cash equivalents 4,332,110 (399,731) (23,902,954)
Cash and cash equivalents at beginning
of year 1,301,009 1,700,740 25,603,694
--------------- -------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,633,119 $ 1,301,009 $ 1,700,740
=============== ============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for
Interest $ 8,061,779 $ 6,741,178 $ 5,238,072
Income taxes 398,000 932,000 887,754
Noncash activities
Transfer from loans to real estate owned 69,928
Transfers of 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.
-64-
65
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Milton Federal Financial Corporation (the "Corporation") and its
wholly-owned subsidiary, Milton Federal Savings Bank (the "Bank"), a federal
stock savings bank. 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., which is the data
processing center utilized by the Bank. All significant intercompany accounts
and transactions have been eliminated.
Nature of Operations: The Corporation is a thrift holding company and is
engaged in the business of commercial and retail banking services with
operations conducted through its main office in West Milton, Ohio and its
full-service branch offices located in Englewood and Brookville, Ohio. The
Corporation also operates a loan production office in Tipp City, Ohio. Miami,
Montgomery and Darke Counties provide the source of 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 and investments.
Use of Estimates: 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 collectibility of loans, fair values of
financial instruments and status of contingencies are particularly subject to
change.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for
short-term periods in anticipation of market gains and are carried at fair
value. Securities are written down to fair value when a decline in fair value
is not temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
On October 1, 1994, the Corporation adopted 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 classified as
available for sale at that date.
The Financial Accounting Standards Board ("FASB") issued a Question and Answer
Implementation Guide to Statement of Financial Accounting Standards ("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 securities classified as held to
maturity to available for sale in December, 1995. The unrealized gain at the
time the securities were transferred was approximately $179,000. The after-tax
effect of the transfer was to increase equity by approximately $118,000.
Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses and charge-offs. Interest
income is reported on the interest method. Fees and costs associated with
originating or acquiring loans are deferred and amortized as an adjustment to
the loan yield over the life of the respective loans. The net amount of fees
and costs deferred is reported in the consolidated balance sheets as part of
loans.
- -------------------------------------------------------------------------------
(Continued)
-65-
66
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days (180 days for residential mortgages).
Payments received on such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance
required based on past loan loss experience, known and inherent risks in the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged off.
SFAS No. 114, as amended by SFAS No. 118, was adopted October 1, 1995. These
Standards require recognition and measurement of impaired loans. Loan
impairment is reported when full payment under the loan terms is not expected.
The carrying values of impaired loans are reduced to the present value of
expected future cash flows, or to the fair value of collateral if the loan is
collateral dependent, by allocating a portion of the allowance for loan losses
to such loans. If these allocations cause the allowance for loan losses to
require an increase, such increase is reported as bad debt expense. The effect
of adopting these Standards did not affect the allowance for loan losses during
fiscal 1997 or 1996.
Loan impairment is evaluated in total for smaller-balance loans of similar
nature such as residential first mortgage loans secured by one- to four-family
residences, residential construction loans, automobile, home equity and second
mortgage loans. Commercial loans and mortgage loans secured by other properties
are evaluated individually for impairment. Loans are evaluated for impairment
when payments are delayed, typically 90 days or more, or when the internal
grading system indicates a doubtful classification. The carrying values of
impaired loans are 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, while increases or decreases due to changes in future payments
and due to the passage of time are reported as part of the provision for loan
losses.
Premises and Equipment: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated using a straight line method based on the
estimated useful lives of the assets. These assets are reviewed for impairment
when events indicate the carrying amount may not be recoverable. Maintenance
and repairs are charged to expense as incurred and improvements are
capitalized.
Real Estate Owned: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or
fair value less costs to sell. Expenses, gains and losses on disposition, and
changes in the valuation allowance are reported in the net gain or loss on
other real estate included in "Other income" on the accompanying consolidated
statements of income.
Mortgage Servicing Rights: The Corporation adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights," on October 1, 1996. Mortgage servicing rights
represent the allocated value of servicing rights retained on loans sold.
Mortgage servicing rights are expensed in proportion to, and over the period
of, estimated servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Any impairment of a grouping is reported as a valuation allowance. Mortgage
servicing rights totaled $109,473 at September 30, 1997, and are included in
"Other assets," in the accompanying consolidated balance sheet. Amortization
expense of mortgage servicing rights totaled $6,894 for fiscal 1997.
- -------------------------------------------------------------------------------
(Continued)
-66-
67
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the sum 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 consequences of
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.
Concentrations of Credit Risk: The Bank grants residential and commercial real
estate and consumer loans to customers located primarily in Miami, Montgomery
and Darke Counties. At year end 1997 and 1996, approximately 94.3% and 97.4% of
the loans in the Bank's loan portfolio had interest rates fixed until the
maturity of the loans.
At September 30, 1997 and 1996, the Bank has interest-bearing deposits and
overnight deposits in the Federal Home Loan Bank ("FHLB") of Cincinnati
totaling $3,682,264 and $809,142 and owns stock in the FHLB with a carrying
value of $2,013,200 and $1,181,500.
Cash Flow Reporting: For the purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from depository institutions,
federal funds sold and interest-bearing deposits in other financial
institutions with original maturities of 90 days or less. The Corporation
reports net cash flows for customer loan and deposit transactions, as well as
short-term borrowings under its cash management line of credit with the FHLB.
Earnings Per Common Share: Earnings per common share is computed by dividing
net income by the weighted average number of shares outstanding for the year.
The weighted average number of shares outstanding for the years ended September
30, 1997, 1996 and 1995 were 2,199,746, 2,345,244 and 2,407,464, respectively.
Stock options outstanding do not presently have a dilutive effect greater than
or equal to 3% on earnings per common share. Unreleased ESOP 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.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which is
effective for financial statements for periods ending after December 15, 1997,
including interim periods. SFAS No. 128 simplifies the calculation of earnings
per share ("EPS") by replacing primary EPS with basic EPS. It also requires
dual presentation of basic EPS and diluted EPS for entities with complex
capital structures. Basic EPS includes no dilution and is computed by dividing
income available to common shareholders by the weighted-average common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in earnings such as stock options, warrants or
other common stock equivalents. All prior period EPS data will be restated to
conform with the new presentation. Adoption of this new Standard is not
expected to have a material effect on the Corporation's EPS disclosures.
Reclassifications: Some items in prior financial statements have been
reclassified to conform with the current presentation.
- -------------------------------------------------------------------------------
(Continued)
-67-
68
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
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 Bank 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 "Conversion"). The Board of Directors amended the plan of conversion on
June 6, 1994. The Conversion was consummated on October 6, 1994 by amending the
Bank'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 the 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.
At the time of the Conversion, the Bank established a liquidation account which
was equal to its regulatory capital as of the latest practicable date prior to
the Conversion. In the event of a complete liquidation, each eligible depositor
will be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for the
accounts then held.
NOTE 3 - SECURITIES
Year-end securities were as follows:
September 30, 1997
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE
Securities
U.S. Government and federal
agency securities $ 5,500,575 $ 6,319 $ (2,009) $ 5,504,885
Equity securities 15,000 15,000
--------------- ----------- ------------- ----------------
Total securities $ 5,515,575 $ 6,319 $ (2,009) $ 5,519,885
=============== =========== ============= ================
Mortgage-backed and
related securities
FNMA certificates $ 2,819,302 $ 32,045 $ 2,851,347
FHLMC certificates 2,821,791 41,355 2,863,146
Collateralized mortgage
obligations and REMICs 42,290,593 318,118 $ (480,728) 42,127,983
--------------- ----------- ------------- ----------------
Total mortgage-backed and
related securities $ 47,931,686 $ 391,518 $ (480,728) $ 47,842,476
=============== =========== ============= ================
- -------------------------------------------------------------------------------
(Continued)
-68-
69
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
September 30, 1997
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES HELD TO MATURITY
Securities
U.S. Government and federal
agency securities $ 3,254,385 $ 11,274 $ (5,572) $ 3,260,087
=============== =========== ============= ================
Mortgage-backed and
related securities
FNMA certificates $ 5,191,291 $ 41,591 $ (88,830) $ 5,144,052
GNMA certificates 810,348 41,570 851,918
FHLMC certificates 6,123,614 53,307 (117,643) 6,059,278
--------------- ----------- ------------- ----------------
Total mortgage-backed and
related securities $ 12,125,253 $ 136,468 $ (206,473) $ 12,055,248
=============== =========== ============= ================
September 30, 1996
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
SECURITIES AVAILABLE FOR SALE ---- ----- ------ -----
Securities
U.S. Treasury securities $ 2,999,645 $ 7,230 $ 3,006,875
U.S. Government and federal
agency securities 5,503,769 620 $ (4,705) 5,499,684
Equity securities 15,000 15,000
--------------- ----------- ------------- ----------------
Total securities $ 8,518,414 $ 7,850 $ (4,705) $ 8,521,559
=============== =========== ============= ================
Mortgage-backed and
related securities
FNMA certificates $ 510,095 $ 13,526 $ 523,621
FHLMC certificates 2,596,117 63,413 2,659,530
Collateralized mortgage
obligations and REMICs 31,041,919 175,155 $ (390,832) 30,826,242
--------------- ----------- ------------- ----------------
Total mortgage-backed and
related securities $ 34,148,131 $ 252,094 $ (390,832) $ 34,009,393
=============== =========== ============= ================
SECURITIES HELD TO MATURITY
Securities
U.S. Government and federal
agency securities $ 500,000 $ (15,625) $ 484,375
=============== ============= ================
Mortgage-backed and
related securities
FNMA certificates $ 5,904,260 $ 30,425 $ (139,212) $ 5,795,473
GNMA certificates 917,818 20,166 937,984
FHLMC certificates 7,180,059 54,173 (160,576) 7,073,656
--------------- ----------- ------------- ----------------
Total mortgage-backed and
related securities $ 14,002,137 $ 104,764 $ (299,788) $ 13,807,113
=============== =========== ============= ================
- -------------------------------------------------------------------------------
(Continued)
-69-
70
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Substantially all collateralized mortgage obligations and REMICs (real estate
mortgage investment conduits) are backed by pools of mortgages that are insured
or guaranteed by the Federal National Mortgage Association ("FNMA"), the
Government National Mortgage Association ("GNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC").
Contractual maturities of debt securities at September 30, 1997, were as
follows. Securities not due at a single maturity, primarily mortgage-backed
securities, are shown separately.
Estimated
Amortized Fair
Cost Value
---- -----
SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 1,500,575 $ 1,504,073
Due after one year through five years 4,000,000 4,000,812
Equity securities 15,000 15,000
--------------- ----------------
Total securities 5,515,575 5,519,885
Mortgage-backed and related securities 47,931,686 47,842,476
--------------- ----------------
Total $ 53,447,261 $ 53,362,361
=============== ================
SECURITIES HELD TO MATURITY
Due after one year through five years $ 2,754,385 $ 2,765,659
Due after five years through ten years 500,000 494,428
--------------- ----------------
Total securities 3,254,385 3,260,087
Mortgage-backed and related securities 12,125,253 12,055,248
--------------- ----------------
Total $ 15,379,638 $ 15,315,335
=============== ================
During the fiscal year ended September 30, 1997, proceeds from the sales of
securities available for sale were $2,000,000 with gross gains of $119 included
in earnings. No securities were sold during the fiscal years ended September
30, 1996 and 1995.
During the fiscal year ended September 30, 1997, proceeds from the sales of
mortgage-backed and related securities available for sale were $16,785,046 with
gross gains of $115,743 and gross losses of $790 included in earnings. During
the fiscal year ended September 1996, proceeds from the sales of
mortgage-backed and related securities available for sale were $11,788,658 with
gross gains of $252,907 and gross losses of $27,110 included in earnings. No
mortgage-backed and related securities were sold during the fiscal year ended
September 30, 1995.
- -------------------------------------------------------------------------------
(Continued)
-70-
71
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 4 - LOANS
Year-end loans were as follows:
1997 1996
---- ----
Residential real estate loans
1-4 family (first mortgage) $ 108,941,460 $ 102,392,912
Home equity (1-4 family second mortgage) 4,051,527 2,928,693
Multi-family 1,456,604 2,248,970
Nonresidential real estate loans 6,214,622 4,425,522
Construction loans 9,399,848 9,083,082
---------------- -----------------
Total real estate loans 130,064,061 121,079,179
Consumer
Automobile loans 2,305,331 1,928,376
Loans on deposits 280,542 199,313
Other consumer loans 246,543 129,877
---------------- -----------------
Total consumer loans 2,832,416 2,257,566
Commercial loans 574,819
----------------
Total loans 133,471,296 123,336,745
---------------- -----------------
Less:
Net deferred loan fees 536,713 627,079
Loans in process 4,976,840 5,473,573
Allowance for losses on loans 562,202 487,202
---------------- -----------------
Net loans $ 127,395,541 $ 116,748,891
================ =================
The Corporation, through the Bank, is an authorized seller/servicer for the
Federal Home Loan Mortgage Corporation. 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 $9,843,149 at September
30, 1997. Capitalized mortgage servicing rights totaled $109,473 at September
30, 1997. No loans were serviced for others at September 30, 1996. At September
30, 1997, there were no loans classified as held for sale, while $10,463,058 of
loans included in 1-4 family first mortgage loans above were classified as held
for sale at September 30, 1996. Proceeds from the sale of loans during the year
ended September 30, 1997, were $10,377,554 with net realized gains of $118,281
included earnings. No loans were sold during the years ended September 30, 1996
or 1995.
Activity in the allowance for losses on loans was as follows:
1997 1996 1995
---- ---- ----
Beginning balance $ 487,202 $ 332,902 $ 268,928
Provision for loan losses 75,000 154,300 64,300
Recoveries of previous charge offs
Loans charged off (326)
------------ ------------ ------------
Ending balance $ 562,202 $ 487,202 $ 332,902
============ ============ ============
Nonaccrual loans for which interest has been suspended totaled approximately
$348,000 and $312,000 at September 30, 1997 and 1996.
- -------------------------------------------------------------------------------
(Continued)
-71-
72
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 4 - LOANS (Continued)
As of and for the years ended September 30, 1997 and 1996, no loans were
considered impaired within the scope of SFAS No. 114.
Certain directors and executive officers of the Corporation and the Bank and
their related interests were loan customers of the Bank. A summary of activity
on related party loans is as follows:
Beginning balance - October 1, 1996 $ 1,020,065
New loans 128,108
Repayments (185,672)
--------------
Ending balance - September 30, 1997 $ 962,501
==============
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
1997 1996
---- ----
Land $ 274,035 $ 274,700
Buildings and improvements 2,657,784 1,628,602
Furniture and equipment 1,206,176 924,539
------------- -------------
Total cost 4,137,995 2,827,841
Accumulated depreciation (1,403,287) (1,286,165)
------------- -------------
$ 2,734,708 $ 1,541,676
============= =============
NOTE 6 - DEFERRED COMPENSATION
The Corporation provides a deferred compensation plan for its Board of
Directors. Under the terms of the plan, directors may elect to defer a portion
of their fees which would be retained by the Corporation, with interest being
credited to the participant's deferred balance. Upon retirement, the
participant would be entitled to receive the accumulated deferred balance, paid
over a specified number of years. The Corporation accrued deferred compensation
expense of $49,866, $48,736 and $41,138 for the years ended September 30, 1997,
1996 and 1995, respectively.
The Corporation has purchased insurance contracts on the lives of the
participants in the deferred compensation plan and has named the Corporation as
beneficiary. While no direct contract exists between the deferred compensation
plan and the life insurance contracts, it is management's current intent that
the revenue from the insurance contracts be used as a funding source for the
deferred compensation plan.
- -------------------------------------------------------------------------------
(Continued)
-72-
73
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following:
1997 1996
---- ----
Investments $ 163,712 $ 148,619
Mortgage-backed and related securities 330,978 268,633
Loans receivable 689,432 640,176
-------------- --------------
$ 1,184,122 $ 1,057,428
============== ==============
NOTE 8 - DEPOSITS
Year-end deposits were as follows:
1997 1996
---- ----
NOW accounts, including
noninterest-bearing deposits
of $802,124 and $444,049 $ 8,795,378 $ 9,202,096
Money market accounts 7,064,858 6,743,866
Passbook savings accounts 16,460,814 16,760,061
Certificates of deposit 110,510,733 95,848,084
---------------- -----------------
$ 142,831,783 $ 128,554,107
================ =================
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $5,155,000 and $3,185,000 at September 30, 1997 and 1996. Deposits
in excess of $100,000 are not insured by the FDIC.
At September 30, 1997, scheduled maturities of certificates of deposit were as
follows:
Year ending September 30:
1998 $ 65,958,586
1999 23,065,945
2000 13,495,206
2001 2,907,443
2002 5,083,553
---------------
$ 110,510,733
===============
- -------------------------------------------------------------------------------
(Continued)
-73-
74
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
The provision for federal income tax consisted of the following:
1997 1996 1995
---- ---- ----
Current $ 424,711 $ 899,334 $ 890,009
Deferred 284,289 (304,334) 56,645
------------ ------------ ------------
$ 709,000 $ 595,000 $ 946,654
============ ============ ============
The sources of year-end gross deferred tax assets and liabilities were as
follows:
1997 1996
---- ----
Deferred tax assets
Deferred compensation $ 103,709 $ 78,740
SAIF insurance assessment 247,640
Recognition and retention plan 73,231 73,231
Unrealized loss on securities available for sale 28,866 46,101
------------- -------------
205,806 445,712
Deferred tax liabilities
Allowance for loan losses 192,951 218,235
Federal Home Loan Bank stock dividends 239,197 204,619
Depreciation 34,744 23,940
Mortgage servicing rights 37,221
Other 4,299
-------------
508,412 446,794
------------- -------------
Net deferred tax liability $ 302,606 $ 1,082
============= =============
The difference between the financial statement tax provision and amounts
computed by applying the statutory federal income tax rate of 34% to income
before income taxes is primarily because of the difference between the cost and
market value of ESOP shares released and nontaxable earnings on life insurance
contracts. The reconciled difference between the financial statement provision
and the amounts computed by using the statutory rate was as follows:
1997 1996 1995
---- ---- ----
Income tax computed at the
statutory rate $ 709,729 $ 591,253 $ 950,652
Tax effect of
Officer's life insurance (23,463) (22,657) (21,616)
ESOP 21,359 24,309 12,309
Other 1,375 2,095 5,309
------------- ------------- -------------
$ 709,000 $ 595,000 $ 946,654
============= ============= =============
Statutory tax rate 34.0% 34.0% 34.0%
============= ============= =============
Effective tax rate 34.0% 34.2% 33.9%
============= ============= =============
- -------------------------------------------------------------------------------
(Continued)
-74-
75
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
Prior to the enactment of legislation discussed below, thrifts which met
certain tests relating to the composition of assets had been permitted to
establish reserves for bad debts and to make annual additions thereto which
could, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "nonqualifying loans" was computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" could be computed under either the experience method or the
percentage of taxable income method, based on an annual election.
In August 1996, legislation was enacted that repeals the percentage of taxable
income method of accounting used by many thrifts to calculate their bad debt
reserve for federal income tax purposes. As a result, small thrifts such as the
Bank must recapture that portion of the reserve that exceeds the amount that
could have been taken under the experience method for tax years beginning after
December 31, 1987. The legislation also requires thrifts to account for bad
debts for federal income tax purposes on the same basis as commercial banks for
tax years beginning after December 31, 1995. The recapture will occur over a
six-year period, the commencement of which will be delayed until the first
taxable year beginning after December 31, 1997, provided the institution meets
certain residential lending requirements. At September 30, 1997, the Bank had
$1,130,000 in bad debt reserves subject to recapture for federal income tax
purposes. The deferred tax liability related to the recapture has been
previously established. In fiscal 1997, no bad debt reserves were recaptured as
the Association met the residential lending requirements.
Retained earnings at September 30, 1997 and 1996, includes $3,436,000 for which
no provision for federal income taxes has been made. This amount represents the
qualifying and nonqualifying tax bad debt reserve as of December 31, 1987 which
is the Corporation's base year for purposes of calculating the bad debt
deduction for tax purposes. The related amount of unrecognized deferred tax
liability was $1,168,000 at September 30, 1997 and 1996. If this portion of
retained earnings is used in the future for any purpose other than to absorb
bad debts, it will be added to future taxable income.
NOTE 10 - BORROWED FUNDS
At September 30, 1997, the Bank had a cash management line of credit enabling
it to borrow up to $8,600,000 with the FHLB. The line of credit must be renewed
on an annual basis. The next renewal date is April 18, 1998. Borrowings
outstanding on this line of credit totaled $1,600,000 with an interest rate of
5.90% at September 30, 1997, and $3,200,000 with interest rates ranging from
5.45% to 6.15% at September 30, 1996. Additionally, as a member of the FHLB
system, the Bank has the ability to obtain additional borrowings up to a
maximum total $51,704,000, including the line of credit. Accordingly, the Bank
had variable rate borrowings totaling $32,805,000 and $9,930,000 at September
30, 1997 and 1996. The interest rates on the borrowings adjust monthly. At
September 30, 1997, the interest rates ranged from 5.61% to 6.20%. At September
30, 1996, the interest rates ranged from 5.44% to 5.95%. The Bank also had
fixed rate borrowings totaling $5,164,906 and $4,359,203 at September 30, 1997
and 1996. The interest rates on these borrowings ranged from 5.80% to 6.42 at
September 30, 1997, and from 5.80% to 6.40% at September 30, 1996. The maximum
month-end balance of advances outstanding was $39,570,000 in 1997 and
$17,826,000 in 1996. Average balances of borrowings outstanding during 1997
and 1996 were $24,179,000 and $10,751,000. Advances under the borrowing
agreements are collateralized by a blanket pledge of the Bank's residential
mortgage loan portfolio and FHLB stock.
- -------------------------------------------------------------------------------
(Continued)
-75-
76
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 10 - BORROWED FUNDS (Continued)
At September 30, 1997, required annual principal payments were as follows:
Year ending September 30:
1998 $ 7,843,435
1999 17,187,967
2000 10,953,349
2001 1,294,595
2002 696,709
Thereafter 1,593,851
---------------
$ 39,569,906
===============
NOTE 11 - SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION
Included in other liabilities at September 30, 1996, and federal deposit
insurance premium expense for fiscal 1996 is approximately $728,000 for a
special assessment resulting from legislation passed and enacted into law on
September 30, 1996, to recapitalize the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation ("FDIC"). Thrifts such as the Bank
paid a one-time assessment of $.0657 for each $100 in deposits as of March 31,
1995. As a result of the recapitalization, the Bank began paying lower deposit
insurance premiums on January 1, 1997.
NOTE 12 - 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, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material effect
on financial condition or results of operations.
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 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 1-4 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.
- -------------------------------------------------------------------------------
(Continued)
-76-
77
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
As of September 30, 1997 and 1996, the Corporation had commitments to make
fixed rate 1-4 family residential real estate loans at current market rates
approximating $1,780,000 and $2,417,000. Loan commitments are generally for
thirty days. The interest rate on commitments ranged from 6.25% to 9.25% at
September 30, 1997 and 6.50% to 10.00% at September 30, 1996. The Corporation
had one commitment to make a variable rate 1-4 family residential real estate
loan for $75,000, at 6.00%, at September 30, 1997. The were no commitments to
make variable rate loans at September 30, 1996. As of September 30, 1997 and
1996, the Corporation had approximately $3,617,000 and $2,552,000 in unused
variable rate home equity lines of credit. During 1997, the Corporation began
offering commercial purpose line of credit loans. At September 30, 1997, unused
commercial lines of credit totaled $239,000.
Standby letters of credit are conditional commitments to guarantee a customer's
performance to a third party. At September 30, 1997, the Corporation had
standby letter of credit commitments totaling $301,000, while there were no
such commitments at September 30, 1996.
The Corporation has committed to participate with another financial institution
in a 15 year balloon $300,000 loan secured by multifamily residential real
estate. The Corporation's 90% interest in the loan will be $270,000. Under the
agreement, the other institution will be funding the loan with FHLB advances,
and the Corporation will be required to disburse cash only if the FHLB requires
the other financial institution to prepay the advance.
At September 30, 1997 and 1996, compensating balances of $352,000 and 351,000
were required as deposits with the FHLB. The balances do not earn interest.
The Corporation and the Bank entered into employment agreements with certain
officers of the Corporation and Bank. The agreements provide for a term of
three years and a salary and performance review by the Board of Directors not
less often 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. The employment agreements also provide for
vacation and sick leave.
NOTE 13 - REGULATORY CAPITAL REQUIREMENTS
Milton Federal Savings Bank: The Bank is subject to various regulatory capital
requirements administered by the federal regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory actions that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about the Bank's components, risk weightings and
other factors. At September 30, 1997 and 1996, management believes the Bank is
in compliance with all regulatory capital requirements. The Bank is considered
well capitalized under the Federal Deposit Insurance Act at September 30, 1997
and 1996. Management is not aware of any matters subsequent to September 30,
1997 that would cause the Bank's capital category to change.
- -------------------------------------------------------------------------------
(Continued)
-77-
78
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY CAPITAL REQUIREMENTS (Continued)
At year-end 1997 and 1996, the Bank's actual capital level and minimum required
levels (in thousands) were:
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
SEPTEMBER 30, 1997
Total capital (to risk-weighted assets) $ 21,799 22.8% $ 7,637 8.0% $ 9,547 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 21,385 22.4 3,819 4.0 5,728 6.0
Tier 1 (core) capital (to adjusted
total assets) 21,385 10.3 6,206 3.0 10,344 5.0
Tangible capital (to adjusted total assets) 21,385 10.3 3,103 1.5 N/A
SEPTEMBER 30, 1996
Total capital (to risk-weighted assets) $ 20,562 24.2% $ 6,784 8.0% $ 8,480 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 20,226 23.9 3,392 4.0 5,088 6.0
Tier 1 (core) capital (to adjusted
total assets) 20,226 11.6 5,248 3.0 8,746 5.0
Tangible capital (to adjusted total assets) 20,226 11.6 2,624 1.5 N/A
In addition to certain federal income tax considerations, the Office of Thrift
Supervision ("OTS") regulations impose limitations on the payment of dividends
and other capital distributions by savings associations. Under OTS regulations
applicable to converted savings banks, the Bank is not permitted to pay a cash
dividend on its common shares if its regulatory capital would, as a result of
payment of such dividends, be reduced below the amount required for the
Liquidation Account, or below applicable regulatory capital requirements
prescribed by the OTS.
OTS regulations applicable to all savings banks provide that a savings bank
which immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution (including a dividend) has total capital (as
defined by OTS regulations) that is equal to or greater than the amount of its
capital requirements is generally permitted without OTS approval (but
subsequent to 30 days' prior notice to the OTS) to make capital distributions,
including dividends, during a calendar year in an amount not to exceed the
greater of (1) 100% of its net earnings to date during the calendar year, plus
an amount equal to one-half that which its total capital to assets ratio
exceeded its required capital to assets ratio at the beginning of the calendar
year, or (2) 75% of its net earnings for the most recent four-quarter period.
Savings banks with total capital in excess of the capital requirements that
have been notified by the OTS that they are in need of more than normal
supervision will be subject to restrictions on dividends. A savings bank that
fails to meet current minimum capital requirements is prohibited from making
any capital distributions without the prior approval of the OTS.
The Bank currently meets all of its capital requirements and, unless the OTS
determines that the Bank is an institution requiring more than normal
supervision, the Bank may pay dividends in accordance with the foregoing
provisions of OTS regulations.
- -------------------------------------------------------------------------------
(Continued)
-78-
79
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY CAPITAL REQUIREMENTS (Continued)
Milton Federal Financial Corporation: In April, 1997, the Board of Directors of
the Corporation authorized the purchase of up to 5% of the Corporation's
outstanding common shares over a six-month period. The shares will be purchased
in the over-the-counter market. The number of shares to be purchased and the
price to be paid will depend upon the availability of shares, the prevailing
market prices and any other considerations which may, in the opinion of the
Corporation's Board of Directors or management, affect the advisability of
purchasing shares.
NOTE 14 - EMPLOYEE PENSION AND PROFIT INCENTIVE PLANS
The Corporation is part of a qualified noncontributory multiple-employer
defined benefit pension plan covering substantially all of its employees. The
plan is administered by the trustees of the Financial Institutions Retirement
Fund ("Retirement Fund").
The cost of the plan is set annually as an established percentage of wages.
During 1996, the Corporation reduced the defined benefit annual payment from 2%
to 1% of the average salary for the participant's highest five years of service
multiplied by the participant's years of service. As a result of the benefit
reduction, the contribution accrued of $38,211 at September 30, 1995 was
reversed, as no contributions were required for the years ended September 30,
1997 and 1996. The Corporation recognized no pension expense in 1997, while
expenses of $(38,211) and $131,373 for contributions made to the retirement
fund were recognized in 1996 and 1995. The Corporation also expensed $5,675,
$7,889 and $5,204 for the cost of administering the fund in 1997, 1996 and
1995, respectively.
The Corporation offers a 401(k) profit sharing plan covering substantially all
employees. The annual expense of the plan is based on a partial matching of
voluntary employee contributions of up to 4% of individual compensation. The
matching percentage was 25% for 1997, 1996 and 1995. Employee contributions are
vested at all times and the Corporation's matching contributions become fully
vested after an individual has completed three years of service. The cash
contribution and related expense included in salaries and employee benefits was
approximately $9,484, $7,500 and $7,200 for 1997, 1996 and 1995, respectively.
NOTE 15 - STOCK OPTION PLAN
On March 20, 1995, the Stock Option 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. Options to purchase 95,418 and 47,709 shares were exercisable at
September 30, 1997 and 1996, respectively. No options were exercisable at
September 30, 1995. No options were exercised during the years ended September
30, 1997 and 1996. In addition, 19,342 shares of authorized but unissued common
stock are reserved for which no options have been granted.
On October 1, 1996 the Corporation adopted 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 still disclose the pro forma effect on net income
and on earnings per share had the fair value accounting been adopted. The fair
value of a stock option is estimated using an option pricing model which
considers the 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. Currently, the Corporation does
not have any options subject to the new accounting or disclosure requirements.
- -------------------------------------------------------------------------------
(Continued)
-79-
80
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 16 - EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation offers an employee stock ownership plan ("ESOP") for the
benefit of substantially all employees of the Corporation and the Bank. During
1996, the ESOP received a favorable determination letter from the Internal
Revenue Service on the qualified status of the ESOP under applicable provisions
of the Internal Revenue Code.
The ESOP borrowed funds from the 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 on unallocated shares received 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.
The Corporation accounts for its ESOP in accordance with Statement of Position
("SOP") 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 Corporation 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 $269,029, $276,651 and $242,512 for the years ended
September 30, 1997, 1996 and 1995, respectively. The ESOP shares as of
September 30, 1997 and 1996, were as follows:
1997 1996
---- ----
Allocated shares 38,248 9,536
Shares released for allocation 19,124 28,712
Unreleased shares 133,868 152,992
-------------- --------------
Total ESOP shares 191,240 191,240
============== ==============
Fair value of unreleased shares $ 2,041,487 $ 2,065,392
============== ==============
NOTE 17 - RECOGNITION AND RETENTION PLAN
A recognition and retention plan ("RRP") was approved by the shareholders of
the Corporation on January 25, 1995, approved by the OTS on June 16, 1995 and
adopted by the Board of Directors on June 26, 1995. The RRP will be used as a
means of providing directors and certain key employees of the Bank with an
ownership interest in the Corporation in a manner designed to compensate such
directors and key employees for services to the Bank. The Bank contributed
sufficient funds to enable the RRP to purchase a number of common shares in the
open market which is equal to 4% of the common shares sold in connection with
the Conversion.
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 or a change in control of the Corporation, however,
the participant's shares will be deemed to be earned and nonforfeitable upon
such date. There were 28,371 shares at September 30, 1997 and September 30,
1996 reserved for future awards. Compensation expense, which is based upon the
cost of the shares, was $215,382 for each of the years ended September 30, 1997
and 1996. No compensation expense was recognized during the year ended
September 30, 1995.
- -------------------------------------------------------------------------------
(Continued)
-80-
81
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated year-end fair values of financial instruments were:
1997 1996
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
----- ----- ----- -----
FINANCIAL ASSETS
Cash and cash equivalents $ 5,633 $ 5,633 $ 1,301 $ 1,301
Securities and mortgage-backed and
related securities available for sale 53,362 53,362 42,531 42,531
Securities and mortgage-backed and
related securities held to maturity 15,380 15,315 14,502 14,291
FHLB stock 2,013 2,013 1,182 1,182
Loans, receivable net 127,396 128,173 116,749 116,464
Cash surrender value of life insurance 1,525 1,525 1,455 1,455
Accrued interest receivable 1,184 1,184 1,057 1,057
Mortgage servicing rights 109 109
FINANCIAL LIABILITIES
Deposits $ (142,832) $ (143,016) $ (128,554) $ (128,999)
Borrowed funds (39,570) (39,535) (17,489) (17,496)
Advance payments by borrowers
for taxes and insurance (166) (166) (183) (183)
Accrued interest payable (192) (192) (105) (105)
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair value
for cash and short-term instruments, demand deposits, short-term borrowings,
accrued interest, cash surrender value of life insurance contracts, mortgage
servicing rights and variable rate loans or deposits that reprice frequently
and fully. The fair values of securities are based on quoted market prices or,
if no quotes are available, on the rate and term of the security and on
information about the issuer. For fixed-rate loans or deposits and for
variable-rate loans or deposits with infrequent repricing or repricing limits,
the fair value is estimated by discounted cash flow analysis using current
market rates for the estimated life and credit risk. Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying
collateral values, where applicable. Fair value of loans held for sale is based
on market estimates. Fair value of excess servicing receivables are estimated
using discounted cash flows based on current market interest rates. The fair
value of debt is based on currently available rates for similar financing. The
fair value of off-balance-sheet items is based on the fees or cost that would
currently be charged to enter into or terminate such arrangements and such
amount is not material.
- -------------------------------------------------------------------------------
(Continued)
-81-
82
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
Condensed financial information of the Corporation as of and for the years
ended September 30, 1997 and 1996 is as follows:
Condensed Balance Sheets
September 30, 1997 and 1996
1997 1996
---- ----
Assets:
Cash and cash equivalents $ 1,340,416 $ 5,408,266
Securities and mortgage-backed and related
securities available for sale 1,389,264 5,793,312
Investment in subsidiary 21,314,566 20,128,716
Loan receivable from ESOP 1,650,480 1,856,790
Accrued interest receivable and other assets 698,817 360,198
--------------- ----------------
Total assets $ 26,393,543 $ 33,547,282
=============== ================
Liabilities and equity:
Other liabilities $ 5,673 $ 67,879
Shareholders' equity 26,387,870 33,479,403
--------------- ----------------
Total liabilities and shareholders' equity $ 26,393,543 $ 35,547,282
=============== ================
Condensed Statements of Income
September 30, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
INTEREST AND DIVIDEND INCOME
Dividends from subsidiary $ 1,000,000 $ 5,000,000 $ 1,000,000
Securities and mortgage-backed and related
securities 175,512 470,893 634,833
Loan to ESOP 157,263 177,581 199,290
Other 46,310 40,811 28,067
-------------- -------------- ---------------
Total interest and dividend income 1,379,085 5,689,285 1,862,190
Gain on sale of securities and mortgage-backed
and related securities 34,621 131,459
Operating expenses 99,322 88,428 35,809
-------------- -------------- ---------------
Income before taxes and equity in undistributed
earnings of subsidiary 1,314,384 5,732,316 1,826,381
Provision for income taxes 104,348 247,321 277,652
-------------- -------------- ---------------
Income before equity in undistributed earnings of
subsidiary 1,210,036 5,484,995 1,548,729
(Distributions in excess of earnings) equity in
undistributed earnings of subsidiary 168,402 (4,341,017) 300,652
-------------- -------------- ---------------
NET INCOME $ 1,378,438 $ 1,143,978 $ 1,849,381
============== ============== ===============
- -------------------------------------------------------------------------------
(Continued)
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MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
Condensed Statement of Cash Flows
September 30, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,378,438 $ 1,143,978 $ 1,849,381
Adjustments to reconcile net income to cash
provided by operations:
(Equity in undistributed income) distributions
in excess of earnings of subsidiary (168,402) 4,341,017 (300,652)
Gain on sale of securities and mortgage-backed
and related securities (34,621) (131,459)
Amortization of premiums, accretion of
discount (net) 391 1,626 (4,709)
Net change in other assets (326,345) (87,440) (292,700)
Net change in other liabilities (62,206) 65,363 2,516
-------------- -------------- ----------------
Net cash from operating activities 787,255 5,333,085 1,253,836
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities and mortgage-backed
and related securities available for sale (994,145) (7,930,739)
Purchases of mortgage-backed securities held
to maturity (2,941,875)
Proceeds from principal payments on mortgage-
backed securities available for sale 259,633 1,228,387 233,034
Proceeds from principal payments on mortgage-
backed securities held to maturity 114,531 953,626
Proceeds from sales of securities and mortgage-
backed and related securities available for sale 5,136,692 2,742,918
Purchase of stock in Milton Federal Savings Bank (12,422,047)
Loan to ESOP (2,063,100)
Proceeds from principal payments on loan to ESOP 206,310 206,310
-------------- --------------
Net cash from investing activities 4,608,490 4,292,146 (24,171,101)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock,
net of conversion costs 24,844,095
Purchase of treasury stock (2,052,667) (1,997,640)
Cash dividends paid (6,938,183) (3,396,332) (456,110)
Dividends on unallocated ESOP shares (472,745) (259,836) (33,877)
-------------- -------------- ----------------
Net cash from financing activities (9,463,595) (5,653,808) 24,354,108
-------------- -------------- ----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,067,850) 3,971,423 1,436,843
Cash at beginning of year 5,408,266 1,436,843 0
-------------- -------------- ----------------
CASH AT END OF YEAR $ 1,340,416 $ 5,408,266 $ 1,436,843
============== ============== ================
- -------------------------------------------------------------------------------
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
QUARTERLY FINANCIAL DATA
Three months ended
------------------
September 30, 1997 December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
(In thousands except per share data)
Interest and dividend income $ 3,301 $ 3,223 $ 3,516 $ 3,733
Interest expense 1,883 1,871 2,086 2,309
----------- ----------- ----------- -----------
Net interest income 1,418 1,352 1,430 1,424
Provision for loan losses 20 21 32 2
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,398 1,331 1,398 1,422
Noninterest income 211 67 102 117
Noninterest expense 1,010 971 961 1,017
----------- ----------- ----------- -----------
Income before income tax 599 427 539 522
Income tax expense 204 144 183 178
----------- ----------- ----------- -----------
Net income $ 395 $ 283 $ 356 $ 344
=========== =========== =========== ===========
Earnings per share $ .18 $ .13 $ .16 $ .16
=========== =========== =========== ===========
Dividends declared per share $ 2.64 $ .15 $ .15 $ .15
=========== =========== =========== ===========
Three months ended
------------------
September 30, 1996 December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
(In thousands except per share data)
Interest and dividend income $ 3,075 $ 3,057 $ 3,205 $ 3,328
Interest expense 1,595 1,634 1,758 1,832
----------- ----------- ----------- -----------
Net interest income 1,480 1,423 1,447 1,496
Provision for loan losses 15 23 32 84
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,465 1,400 1,415 1,412
Noninterest income 151 152 84 70
Noninterest expense(1) 906 920 915 1,669
----------- ----------- ----------- -----------
Income before income tax 710 632 584 (187)
Income tax expense 245 216 199 (65)
----------- ----------- ----------- -----------
Net income $ 465 $ 416 $ 385 $ (122)
=========== =========== =========== ===========
Earnings per share $ .20 $ .18 $ .17 $ (.06)
=========== =========== =========== ===========
Dividends declared per share $ 1.08 $ .10 $ .12 $ .13
=========== =========== =========== ===========
- ------------------------
(1) Included in noninterest expense for the three months ended September 30,
1996 is $728,000 related to the SAIF special assessment.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders of Milton Federal Financial Corporation (the "Proxy
Statement") under the captions "Board of Directors," "Executive Officers,"
"Voting Securities and Ownership of Certain Beneficial Owners and Management"
and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors" is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption "Voting
Securities and Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption "Certain
Transactions with MFFC" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
2 FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because they are
not applicable or the required information is shown in the financial statements
or notes thereto.
3 EXHIBITS.
3.1 Articles of Incorporation
3.2 Code of Regulations
10.1 Employment Agreement with Mr. Aidt
10.2 Employment Agreement with Mr. Eyer
10.3 Milton Federal Savings Bank Recognition and Retention Plan and Trust
Agreement
10.4 Milton Federal Financial Corporation 1995 Stock Option and Incentive
Plan
21 Subsidiaries of Milton Federal Financial Corporation
27 Financial Data Schedule
99.1 Proxy Statement
99.2 Safe Harbor Under the Private Securities Litigation Reform Act of 1995
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MILTON FEDERAL FINANCIAL CORPORATION
By /s/ GLENN E. AIDT
-------------------------------------
Glenn E. Aidt
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ GLENN E. AIDT By /s/ THOMAS P. EYER
--------------------------- -------------------------------
Glenn E. Aidt Thomas P. Eyer
President and Director Treasurer
(Principal Financial Officer)
Date December 12, 1997 Date December 12, 1997
-------------------------- ------------------------------
By /s/ E. LYNN APP By /s/ KENNETH J. FAZE, M.D.
-------------------------- ------------------------------
E. Lynn App Kenneth J. Faze, M.D.
Director Director
Date December 12, 1997 Date December 12, 1997
-------------------------- ------------------------------
By /s/ DAVID R. HAYES, D.V.M. By /s/ ROBERT E. HINE
-------------------------- ------------------------------
David R. Hayes, D.V.M. Robert E. Hine
Director Director/Vice Chairman
Date December 12, 1997 Date December 12, 1997
-------------------------- ------------------------------
By /s/ CHRISTOPHER S. LONG By /s/ CLETUS G. MINNICH, JR.
-------------------------- ------------------------------
Christopher S. Long Cletus G. Minnich, Jr.
Director Director/Chairman
Date December 12, 1997 Date December 12, 1997
-------------------------- ------------------------------
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87
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
3.1 Articles of Incorporation of Milton Federal Financial Incorporated by reference to Annual Report
Corporation on Form 10-KSB for the Fiscal Year Ended
September 30, 1994 (the "1994 10-KSB"),
Exhibit 3.1.
3.2 Code of Regulations of Milton Federal Financial Incorporated by reference to the 1994
Corporation 10-KSB, Exhibit 3.2.
10.1 Employment Agreement with Mr. Aidt 88
10.2 Employment Agreement with Mr. Eyer 96
10.3 Milton Federal Savings Bank Recognition and Incorporated by reference to annual report
Retention Plan and Trust Agreement on Form 10-KSB for the fiscal year ended
September 30, 1995 (the "1995 10-KSB"),
Exhibit 10.3.
10.4 Milton Federal Financial Corporation 1995 Stock Incorporated by reference to the 1995
Option and Incentive Plan 10-KSB, Exhibit 10.4.
21 Subsidiaries of Milton Federal Financial Corporation Incorporated by reference to the 1995
10-KSB, Exhibit 21.
27 Financial Data Schedule 104
99.1 Proxy Statement 106
99.2 Safe Harbor Under the Private Securities Litigation Incorporated by reference to the 1996 10-K,
Reform Act of 1995 Exhibit 99.2
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