1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number 0-24834
MILTON FEDERAL FINANCIAL CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1412064
- ---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
25 Lowry Drive, West Milton, Ohio 45383
---------------------------------------
(Address of principal executive offices) (zip code)
(937) 698-4168
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
As of February 4, 1998 the latest practicable date, 2,256,836 shares of the
registrant's common shares, no par value, were issued and outstanding.
2
MILTON FEDERAL FINANCIAL CORPORATION
INDEX
Page
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PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets ................................................ 3
Consolidated Statements of Income .......................................... 4
Consolidated Statements of Changes in Shareholders' Equity.................. 5
Consolidated Statements of Cash Flows ...................................... 7
Notes to Consolidated Financial Statements ................................. 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 20
Item 3. Quantitative and Qualitative Disclosure About Market Risk.............. 27
PART II - OTHER INFORMATION....................................................... 29
SIGNATURES ....................................................................... 30
2.
3
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
December 31, September 30,
1997 1997
---- ----
ASSETS
Cash and amounts due from depository institutions $ 671,033 $ 696,629
Overnight deposits in other financial institutions 3,500,000
Interest-bearing deposits in other financial institutions 126,189 1,436,490
------------ ------------
Total cash and cash equivalents 797,222 5,633,119
Securities available for sale 4,016,098 5,519,885
Securities held to maturity (Estimated fair value of
$4,253,719 at December 31, 1997 and $3,260,087 at
September 30, 1997) 4,253,983 3,254,385
Mortgage-backed and related securities available for sale 47,242,253 47,842,476
Mortgage-backed and related securities held to maturity
(Estimated fair value of $16,257,372 at December 31,
1997 and $12,055,248 at September 30, 1997) 16,361,641 12,125,253
Federal Home Loan Bank stock 2,390,100 2,013,200
Loans, net 138,223,376 127,395,541
Premises and equipment, net 2,709,864 2,734,708
Cash surrender value of life insurance 1,541,976 1,524,502
Accrued interest receivable 1,173,834 1,184,122
Other assets 255,309 730,547
------------ ------------
Total assets $218,965,656 $209,957,738
============ ============
LIABILITIES
Deposits $144,917,493 $142,831,783
Borrowed funds 46,512,390 39,569,906
Advance payments by borrowers for taxes and insurance 433,680 165,805
Accrued interest payable 229,557 192,195
Other liabilities 955,431 810,179
------------ ------------
Total liabilities 193,048,551 183,569,868
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 25,042,530 25,017,419
Retained earnings 7,940,409 7,975,535
Treasury stock, at cost, 312,039 shares at December 31,
1997 and 274,039 shares at September 30, 1997 (4,625,744) (4,050,307)
Unearned employee stock ownership plan shares (1,382,896) (1,444,169)
Unearned recognition and retention plan shares (1,000,730) (1,054,575)
Unrealized loss on securities available for sale, net of tax (56,464) (56,033)
------------ ------------
Total shareholders' equity 25,917,105 26,387,870
------------ ------------
Total liabilities and shareholders' equity $218,965,656 $209,957,738
============ ============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
4
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended
December 31,
------------
1997 1996
---- ----
INTEREST AND DIVIDEND INCOME
Loans, including fees $2,704,720 $2,368,933
Mortgage-backed and related securities 1,030,173 771,101
Securities 144,322 116,559
Other, including dividend income 46,954 44,532
---------- ----------
3,926,169 3,301,125
INTEREST EXPENSE
Deposits 1,842,442 1,618,056
Borrowed funds 627,783 264,952
---------- ----------
2,470,225 1,883,008
---------- ----------
NET INTEREST INCOME 1,455,944 1,418,117
Provision for loan losses 24,000 20,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,431,944 1,398,117
NONINTEREST INCOME
Service charges and other fees 48,583 35,070
Net realized gain on sale of available for sale securities 32,691
Gain on sale of loans 118,281
Other income 30,100 24,947
---------- ----------
78,683 210,989
NONINTEREST EXPENSE
Salaries and employee benefits 629,814 540,424
Occupancy expense 92,732 66,786
Data processing services 47,375 37,834
Federal deposit insurance premiums 21,787 72,996
State franchise taxes 88,508 105,961
Advertising 14,862 17,462
Other expenses 169,937 168,705
---------- ----------
1,065,015 1,010,168
---------- ----------
INCOME BEFORE INCOME TAX 445,612 598,938
Income tax expense 155,000 204,000
---------- ----------
NET INCOME $ 290,612 $ 394,938
========== ==========
Earnings per common share - Basic $ .14 $ 0.18
========== ==========
Earnings per common share - Diluted $ .14 $ 0.18
========== ==========
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See accompanying notes to consolidated financial statements.
4.
5
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended December 31, 1997 and 1996
(Unaudited)
- --------------------------------------------------------------------------------
Unrealized
Unearned Gain on
Additional Employee Securities
Paid-In Retained Treasury Benefit Plan Available
Capital Earnings Stock Shares for Sale Total
------- -------- ----- ------ -------- -----
Balance at October 1, 1996 $24,951,691 $13,535,280 $(1,997,640) $(2,920,436) $(89,492) $33,479,403
Net income for the period 394,938 394,938
Cash dividends -
$2.64 per share (5,958,318) (5,958,318)
Commitment to release 4,782
employee stock ownership
plan shares 16,468 51,576 68,044
3,739 shares earned under
recognition and retention plan 53,846 53,846
Purchase of treasury stock
68,500 shares at cost (957,812) (957,812)
Change in unrealized loss
on securities available
for sale 12,272 12,272
----------- ----------- ----------- ----------- -------- -----------
Balance at December 31, 1996 $24,968,159 $ 7,971,900 $(2,955,452) $(2,815,014) $(77,220) $27,092,373
=========== =========== ============ =========== ======== ===========
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(Continued)
5.
6
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Three months ended December 31, 1997 and 1996
(Unaudited)
- --------------------------------------------------------------------------------
Unrealized
Unearned Loss on
Additional Employee Securities
Paid-In Retained Treasury Benefit Plan Available
Capital Earnings Stock Shares for Sale Total
------- -------- ----- ------ -------- -----
Balance at October 1, 1997 $25,017,419 $7,975,535 $(4,050,307) $(2,498,744) $(56,033) $26,387,870
Net income for the period 290,612 290,612
Cash dividends -
$.15 per share (325,738) (325,738)
Commitment to release 5,233
employee stock ownership
plan shares 25,111 61,273 86,384
3,739 shares earned under
recognition and retention
plan 53,845 53,845
Purchase of treasury stock,
38,000 shares at cost (575,437) (575,437)
Change in unrealized loss on
securities available for sale (431) (431)
----------- ---------- ----------- ----------- -------- -----------
Balance at December 31, 1997 $25,042,530 $7,940,409 $(4,625,744) $(2,383,626) $(56,464) $25,917,105
=========== ========== =========== =========== ======== ===========
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See accompanying notes to consolidated financial statements.
6.
7
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 290,612 $ 394,938
Adjustments to reconcile net income to net cash from
operating activities
Amortization of deferred loan origination fees (28,543) (26,023)
Amortization of premiums, accretion of discounts, net 3,825 10,117
Provision for loan losses 24,000 20,000
Depreciation 53,830 34,914
Increase in cash value of life insurance (17,474) (16,839)
Net realized gain on sale of available for sale securities (32,691)
Proceeds from sale of loans 10,377,554
Net gain on sale of loans (118,281)
Deferred gain on sale of real estate owned (42,056)
Federal Home Loan Bank stock dividend (39,400) (20,700)
Compensation expense on ESOP shares 86,384 68,044
Compensation expense on RRP shares 53,845 53,846
Deferred tax expense 999 8,000
Change in accrued interest receivable and other assets 485,526 82,162
Change in income taxes payable 154,000 196,000
Change in accrued expenses and other liabilities 27,835 (763,334)
------------ -----------
Net cash from operating activities 1,095,439 10,225,651
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (3,500,000)
Proceeds from maturities 1,500,000 4,000,000
Proceeds from sales 2,000,000
Securities held to maturity
Purchases (1,000,000)
Mortgage-backed and related securities available for sale
Purchases (3,966,775)
Proceeds from principal payments 609,859 205,609
Proceeds from sales 2,236,119
Mortgage-backed and related securities held to maturity
Purchases (4,661,533)
Proceeds from principal payments 415,222 611,446
Increase in loans, net (10,823,292) (3,731,875)
Premises and equipment expenditures (28,986) (133,621)
Purchase federal Home Loan Bank stock (337,500)
Proceeds from sale of real estate owned 74,710
------------ -----------
Net cash from investing activities (14,326,230) (2,204,387)
- --------------------------------------------------------------------------------
(Continued)
7.
8
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
------------
1997 1996
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts $ 2,085,710 $ 3,355,467
Net change in advance payments by borrowers for taxes
and insurance 267,875 215,560
Net change in short-term borrowings 1,400,000 (2,200,000)
Long-term advances from Federal Home Loan Bank 6,100,000 500,000
Principal payments on Federal Home Loan Bank advances (557,516) (55,579)
Cash dividends paid (325,738) (5,958,318)
Purchase of treasury stock (575,437) (957,812)
----------- -----------
Net cash from financing activities 8,394,894 (5,100,682)
----------- -----------
Net change in cash and cash equivalents (4,835,897) 2,920,582
Cash and cash equivalents at beginning of period 5,633,119 1,301,009
----------- -----------
Cash and cash equivalents at end of period $ 797,222 $ 4,221,591
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 2,432,863 $ 1,906,376
Income taxes 252,298 --
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8.
9
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of Milton Federal Financial Corporation (the
"Corporation") at December 31, 1997, and its results of operations and cash
flows for the periods presented. All such adjustments are normal and recurring
in nature. The accompanying financial statements have been prepared in
accordance with the instructions of Form 10-Q and, therefore, do not purport to
contain all necessary financial disclosures required by generally accepted
accounting principles that might otherwise be necessary in the circumstances,
and should be read in conjunction with financial statements, and notes thereto,
of the Corporation for the fiscal year ended September 30, 1997, included in its
1997 annual report. Refer to the accounting policies of the Corporation
described in the notes to financial statements contained in the Corporation's
1997 annual report. The Corporation has consistently followed these policies in
preparing this Form 10-Q.
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, Milton Federal Savings Bank (the "Bank"). The
financial statements of the Bank include accounts of its wholly-owned
subsidiary, Milton Financial Service Corporation. Milton Financial Service
Corporation holds stock in Intrieve, Inc., the data processing center utilized
by the Bank. All significant intercompany accounts and transactions have been
eliminated.
The Corporation is a thrift holding company engaged in the business of
commercial and retail banking services with operations conducted through its
main office in West Milton, Ohio, and from its full-service branch 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 for substantially all 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.
To prepare financial statements in conformity with generally accepted accounting
principals, 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.
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.
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(Continued)
9.
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MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," on December 31, 1997. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share ("EPS") for entities with
complex capital structures. All prior EPS data has been restated to conform to
the new method. Basic EPS is based on net income divided by the weighted average
number of shares outstanding during the period. Diluted EPS shows the dilutive
effect of unearned recognition and retention plan ("RRP") shares and the
additional common shares issuable under stock options. The weighted average
number of shares outstanding for basic EPS was 2,091,391 and 2,167,039 for the
three months ended December 31, 1997 and 1996, respectively. The weighted
average number of shares outstanding for diluted EPS, which includes the effect
of stock options granted and unearned RRP shares using the treasury stock
method, was 2,118,542 and 2,172,668 for the three months ended December 31, 1997
and 1996, respectively. The dilutive effect of unearned RRP shares was to
increase weighted average shares outstanding for basic EPS by 6,104 and 307 for
the three months ended December 31, 1997 and 1996, respectively. The dilutive
effect of stock options was to increase weighted average shares outstanding for
basic EPS by 21,047 and 5,322 for the three months ended December 31, 1997 and
1996, respectively. Unreleased employee stock ownership plan ("ESOP") shares are
not considered to be outstanding for determining the weighted average number of
shares used in calculating both basic and diluted EPS. Unearned RRP shares are
not considered to be outstanding shares for determining the weighted average
number of shares used in calculating basic EPS.
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.
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 estimates 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.
A loan is considered impaired when management believes full collection of
principal and interest is not probable. The carrying value of impaired loans is
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.
Loan impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer and credit card loans, and on an
individual loan basis for other loans. In addition, loans held for sale are
excluded from consideration as impaired. 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 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 passage of
time are reported as part of the provision for loan losses.
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(Continued)
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MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Corporation has sold various loans to other financial intermediaries while
retaining servicing rights. Gains and losses on loan sales are recorded at the
time of the cash sale. Under a new accounting standard adopted in fiscal 1997,
mortgage servicing rights are recorded as assets when the related loan is sold.
These assets are amortized in proportion to, and over the period of, estimated
net servicing income and are evaluated periodically for impairment. Impairment
is evaluated based on the fair value of the rights using groupings of underlying
loans with similar characteristics. The adoption of this standard did not
materially affect the financial statements in 1997 or 1996.
SFAS No. 129, "Disclosures of Information about Capital Structure," became
effective for the Corporation as of December 31, 1997. SFAS No. 129 consolidated
existing accounting guidance relating to disclosure about a company's capital
structure. SFAS No. 129 did not affect the Corporation's disclosures.
In June 1997, the Financial Account Standards Board ("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 losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires all items 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 an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 requires 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 No. 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." SFAS No. 131 significantly changes the way
public business enterprises report information about operating segments in
annual financial statements, and requires 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 No. 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 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, SFAS No. 131 requires significantly more information be disclosed for
each reportable segment than is presently being reported in annual financial
statements and also requires selected information be reported in interim
financial statements. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997.
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(Continued)
11.
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MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - SECURITIES
The amortized cost and estimated fair values of securities are as follows:
------------------December 31, 1997---------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE
Securities
U.S. Government and
federal agency securities $ 4,000,279 $ 1,019 $ (200) $ 4,001,098
Equity securities 15,000 15,000
----------- -------- --------- -----------
Total securities $ 4,015,279 $ 1,019 $ (200) $ 4,016,098
=========== ======== ========= ===========
Mortgage-backed and related
securities
FNMA certificates $ 2,683,822 $ 23,344 $ 2,707,166
FHLMC certificates 2,672,145 19,936 $ (618) 2,691,463
Collateralized mortgage
obligations and REMICs 41,972,656 250,307 (379,339) 41,843,624
----------- -------- --------- -----------
Total mortgage-backed
and related securities $47,328,623 $293,587 $(379,957) $47,242,253
=========== ======== ========= ===========
SECURITIES HELD TO MATURITY
Securities
U.S. Government and
federal agency securities $ 4,253,983 $ 1,487 $ (1,751) $ 4,253,719
=========== ======== ========= ===========
Mortgage-backed and related
securities
FNMA certificates $ 5,050,409 $ 22,203 $ (82,017) $ 4,990,595
GNMA certificates 765,397 40,019 805,416
FHLMC certificates 5,885,226 39,944 (90,431) 5,834,739
Collateralized mortgage
obligations and REMICs 4,660,609 (33,987) 4,626,622
----------- -------- --------- -----------
Total mortgage-backed
and related securities $16,361,641 $102,166 $(206,435) $16,257,372
=========== ======== ========= ===========
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(Continued)
12.
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MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
-------------------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
=========== ======== ========= ===========
SECURITIES HELD TO MATURITY
Securities
U.S. Government and
federal agency security $ 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
=========== ======== ========= ===========
Substantially all collateralized mortgage obligations and REMICs (real estate
mortgage investment conduits) are backed by pools of mortgages insured or
guaranteed by the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC").
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(Continued)
13.
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MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair value of securities at December 31, 1997,
by contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at
a single maturity, primarily mortgage-backed and related securities, are shown
separately.
Amortized Estimated
Cost Fair Value
---- ----------
SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 1,500,279 $ 1,500,135
Due after one through five years 2,500,000 2,500,963
Equity securities 15,000 15,000
----------- -----------
Total securities 4,015,279 4,016,098
Mortgage-backed and related securities 47,328,623 47,242,253
----------- -----------
Total $51,343,902 $51,258,351
=========== ===========
SECURITIES HELD TO MATURITY
Due after one through five years $ 3,753,983 $ 3,753,871
Due after five through ten years 500,000 499,848
----------- -----------
Total securities 4,253,983 4,253,719
Mortgage-backed and related securities 16,361,641 16,257,372
----------- -----------
Total $20,615,624 $20,511,091
=========== ===========
No securities available for sale were sold during the three months ended
December 31, 1997 or 1996.
There were no sales of mortgage-backed and related securities available for sale
during the three months ended December 31, 1997. During the three months ended
December 31, 1996, proceeds from the sales of mortgage-backed and related
securities available for sale were $2,236,119 with gross realized gains of
$32,572 included in earnings.
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(Continued)
14.
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MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans consisted of the following:
December 31, September 30,
1997 1997
---- ----
Residential real estate loans
1-4 family (first mortgage) $117,004,135 $108,941,460
Home equity (1-4 family second mortgage) 4,094,112 4,051,527
Multi-family 1,568,602 1,456,604
Nonresidential real estate loans 7,268,590 6,214,622
Construction loans 10,061,353 9,399,848
------------ ------------
Total real estate loans 139,996,792 130,064,061
Consumer loans
Automobile 2,643,685 2,305,331
Loans on deposits 301,282 280,542
Other consumer loans 281,029 246,543
------------ ------------
Total consumer loans 3,225,996 2,832,416
Commercial loans 960,340 574,819
------------ ------------
Total loans 144,183,128 133,471,296
Less
Deferred loan fee income 558,456 536,713
Loans in process 4,915,865 4,976,840
Allowance for loan losses 485,431 562,202
------------ ------------
Net loans $138,223,376 $127,395,541
============ ============
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 $9,278,932 at December 31, 1997 and $9,843,149 at September
30, 1997. Capitalized mortgage servicing rights at December 31, 1997 were
$103,198 and $109,473 at September 30, 1997. At December 31, 1997 and September
30, 1997, no loans were held for sale. Proceeds from the sale of loans during
the three months ended December 31, 1996 were $10,377,554 with net realized
gains of $118,281 included in earnings. No loans were sold during the three
months ended December 31, 1997.
Activity in the allowance for losses on loans for the three-month periods ended
December 31, 1997 and 1996 is as follows:
Three months ended
December 31
-----------
1997 1996
---- ----
Beginning balance $ 562,202 $487,202
Provision for loan losses 24,000 20,000
Recoveries
Charge-offs (100,771)
--------- --------
Ending balance $ 485,431 $507,202
========= ========
As of and for the three months ended December 31, 1997 and 1996, there were no
loans for which impairment was required to be evaluated on an individual loan by
loan basis.
- --------------------------------------------------------------------------------
(Continued)
15.
16
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - BORROWED FUNDS
At December 31, 1997, the Bank had a cash management line of credit enabling it
to borrow up to $8,600,000 from the Federal Home Loan Bank (FHLB) of Cincinnati.
The line of credit must be renewed on an annual basis. The next renewal date is
April 18, 1998. Borrowings outstanding on this line of credit totaled
$3,000,000, with an interest rate 5.87%, at December 31, 1997,and $1,600,000,
with an interest rate of 5.90%, at September 30, 1997. Additionally, as a member
of the FHLB system, the Bank has the ability to obtain additional borrowings up
to a total of $54,321,000, including the line of credit. Accordingly, the Bank
had variable-rate borrowings totaling $35,405,000 at December 31, 1997 and
$32,805,000 at September 30, 1997. The interest rates on the borrowings adjust
monthly. The interest rates on the borrowings ranged from 5.92% to 6.20% at
December 31, 1997 and 5.61% to 6.20% at September 30, 1997. The Bank also had
fixed-rate borrowings totaling $8,107,390 at December 31, 1997 and $5,164,906 at
September 30, 1997. The interest rates on these borrowings ranged 5.80% to 6.42%
at December 31, 1997 and September 30, 1997. Advances under the borrowing
agreement are collateralized by a blanket pledge of the Bank's residential
mortgage loan portfolio and FHLB stock.
At December 31, 1997, required annual principal payments are as follows:
Period ending December 31:
1998 $ 9,245,469
1999 19,790,113
2000 11,955,616
2001 2,296,987
2002 1,699,232
Thereafter 1,524,973
-----------
$46,512,390
===========
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, 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 more than the amount reported in the
financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based on
management's credit evaluation and generally consists of residential or
commercial real estate. Lines of credit are primarily home equity lines
collateralized by second mortgages on one- to four-family residential real
estate and commercial lines of credit collateralized by business assets.
- --------------------------------------------------------------------------------
(Continued)
16.
17
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
(Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements.
As of December 31, 1997 and September 30, 1997, the Corporation had commitments
to make fixed-rate, 1-4 family residential real estate loans at current market
rates totaling $2,108,000 and $1,780,000. Loan commitments are generally for 30
days. The interest rate on commitments ranged from 6.50% to 9.25% at December
31, 1997, and 6.25% to 9.25% at September 30, 1997. The Corporation had
commitments to make variable-rate, 1-4 family residential loans totaling
$510,000 at December 31, 1997 and $75,000 at September 30, 1997. As of December
31, 1997 and September 30, 1997, the Corporation had $4,095,000 and $3,617,000
in unused variable-rate home equity lines of credit. During fiscal 1997, the
Corporation began offering commercial-purpose line-of-credit loans.
At December 31, 1997 and September 30, 1997, unused commercial lines of credit
totaled $395,000 and $239,000.
Standby letters of credit are conditional commitments to guarantee a customer's
performance to a third party. At December 31, 1997, and September 30, 1997, the
Corporation had standby letter-of-credit commitments totaling $86,000 and
$301,000.
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 December 31, 1997 and September 30, 1997, compensating balances of $526,000
and $352,000 were required as deposits with the FHLB. The balances do not earn
interest.
The Corporation and the Bank have entered employment agreements with certain
officers of the Corporation and the Bank. Each of the agreements provide for a
term of three years and a salary and performance review by the Board of
Directors not less than annually, as well as inclusion of the employee in any
formally-established employee benefit, bonus, pension and profit-sharing plans
for which management personnel are eligible. The employment agreements also
provide for vacation and sick leave.
NOTE 6 - 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 exercisable on each of the first five
anniversaries of the date of grant. The option period expires 10 years from the
date of grant. At December 31, 1997 and September 30, 1997, options to purchase
95,418 shares were exercisable. No options were exercised during the three-month
periods ended December 31, 1997 and 1996. In addition, there are 19,342 shares
of authorized but unissued common stock reserved for which no options have been
granted.
- --------------------------------------------------------------------------------
(Continued)
17.
18
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - STOCK OPTION PLAN (Continued)
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
earnings per share had the accounting method been adopted. Fair value of a stock
option is to be estimated using an option-pricing model considering exercise
price, expected life of the option, current price of the stock, expected price
volatility, expected dividends on the stock and the risk-free interest rate.
Once estimated, the fair value of an option is not changed. Currently, the
Corporation does not have any options subject to the new accounting and
disclosure requirements.
NOTE 7 - 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. The ESOP has
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 to acquire common shares of the
Corporation. The loan is secured by the shares purchased with the loan proceeds,
and will be repaid by the ESOP with funds from the Bank's discretionary
contributions to the ESOP and earnings on ESOP assets. All dividends received on
unallocated shares by the ESOP are used to pay debt service. The shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is repaid. As payments are made and 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, shares pledged as collateral are reported as unearned
ESOP shares in the consolidated balance sheets. As shares are released from
collateral, the Corporation reports compensation expense equal to the current
market price of the shares, and 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 $86,384
and $68,044 for the three months ended December 31, 1997, and 1996. The ESOP
shares as of December 31, 1997 and September 30, 1997 were as follows:
December 31, September 30,
1997 1997
---- ----
Allocated shares 69,991 38,248
Shares released for allocation 5,233 19,124
Unreleased shares 116,016 133,868
---------- ----------
Total ESOP shares 191,240 191,240
========== ==========
Fair value of unreleased shares $1,783,746 $2,041,487
========== ==========
- --------------------------------------------------------------------------------
(Continued)
18.
19
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - RECOGNITION AND RETENTION PLAN
The Corporation maintains recognition and retention plan ("RRP") for the benefit
of directors and certain key employees of the Bank and Corporation. The RRP is
used to provide such individuals 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 was equal to 4% of the common shares
sold in connection with the Bank's conversion from a mutual savings and loan
association to a stock savings bank.
In October 1995, the RRP 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 case of the death or disability of a participant, however, the
participant's shares will be deemed earned and nonforfeitable upon such date. As
of December 31, 1997 and September 30, 1997, 29,914 and 14,957 shares,
respectively, have been earned and distributed. There were 28,371 shares at
December 31, 1997 and September 30, 1997, reserved for future awards.
Compensation expense, which is based on the cost of the shares, totaled $53,845
and $53,846 for the three-month periods ended December 31, 1997 and 1996,
respectively.
- --------------------------------------------------------------------------------
19.
20
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
The following discusses the financial condition of the Corporation as of
December 31, 1997, as compared to September 30, 1997, and the results of
operations for the three-month period ended December 31, 1997, compared with the
same period in 1996. This discussion should be read in conjunction with the
interim financial statements and footnotes included herein.
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein, the following
discussion contains forward-looking statements involving risks and
uncertainties. Economic circumstances, the Corporation's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some 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.
Some of the forward-looking statements included herein are statements regarding:
1. Management's determination of the amount of loan loss allowance and 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 core capital
requirement regulations.
See Exhibit 99, Safe Harbor Under the Private Securities Litigation Reform Act
of 1995, included in this document.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $219.0 million at December 31, 1997, an
increase of $9.0 million, or 4.3%, from $210.0 million at September 30, 1997.
The growth in assets was primarily in mortgage-backed and related securities and
loans. Such growth was funded by the use of overnight deposits and
interest-bearing deposits in other financial institutions, increased deposits
and borrowed funds.
Total securities and FHLB stock increased $3.5 million from $70.8 million at
September 30, 1997 to $74.3 million at December 31, 1997. The increase was due
to $5.7 million in securities purchases. Most 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
maturities, and principal repayments of $2.5 million. Mortgage-backed and
related securities include Federal Home Loan Mortgage Corporation ("FHLMC"),
Government National Mortgage Association ("GNMA") and Federal National Mortgage
- --------------------------------------------------------------------------------
20.
21
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Association ("FNMA") participation certificates and collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs").
Net loans increased from $127.4 million at September 30, 1997 to $138.2 million
at December 31, 1997. The growth in loans was primarily in 1-4 family first
mortgage loans which increased 7.4% from $108.9 million at September 30, 1997 to
$117.0 million at December 31, 1997. Construction loans and nonresidential real
estate loans increased from $9.4 million and $6.2 million at September 30, 1997
to $10.1 million and $7.3 million at December 31, 1997. Changes in other types
of real estate loans were not significant. As interest rates have decreased
slightly since September 30, 1997, the growth in 1-4 family first mortgages is
primarily the result of customers refinancing their higher-rate loans from the
Corporation's competitors. In addition to growth spurred by refinancings, the
continued growth in total real estate loans is also 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.
The Corporation's consumer loan portfolio increased $394,000 between September
30, 1997 and December 31, 1997. Despite the increase, consumer loans remain a
small portion of the entire loan portfolio and represented 2.2% and 2.1% of
total loans at December 31, 1997 and September 30, 1997.
During the third quarter of fiscal 1997, the Corporation began originating
commercial-purpose business loans secured by collateral other than real estate.
Commercial loans totaled $960,000 at December 31, 1997 and $575,000 at September
30, 1997, and were not a significant part of the overall loan portfolio.
Total deposits increased $2.1 million, or 1.5%, from $142.8 million at September
30, 1997 to $144.9 million at December 31, 1997. The Corporation experienced
slight increases in passbook savings, negotiable order of withdrawal ("NOW") and
money market accounts. Certificates of deposit increased $1.2 million, or 1.1%,
and had the largest increase of all types of deposits. Certificate of deposit
growth has been due to normal operating procedures as the Corporation has not
used special promotions to attract increased volume. The portfolio as a percent
of total deposits decreased slightly from 77.4% at September 30, 1997 to 77.1%
at December 31, 1997. All certificates of deposit held at the Bank mature in
less than five years.
Borrowed funds increased $6.9 million from $39.6 million at September 30, 1997
to $46.5 million at December 31, 1997. The net increase of $1.4 million in
short-term advances under the Bank's cash management line of credit combined
with new, long-term advances of $6.1 million was slightly offset by principal
repayments of $558,000. The majority of borrowed funds are invested in
mortgage-backed and related securities to leverage the Bank's excess capital and
to provide liquidity for future loan growth.
Other liabilities increased from $810,000 at September 30, 1997 to $955,000 at
December 31, 1997. At December 31, 1997, other liabilities included an
interest-bearing deposit in another financial institution, which had an
overdraft balance of $140,000. Although the Corporation's accounting records
reflect an overdraft due to various items in the process of clearing, the
deposit account balance recorded by the other financial institution did not
reflect an overdraft.
- --------------------------------------------------------------------------------
21.
22
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS
Operating results of the Corporation are affected by general economic
conditions, monetary and fiscal policies of federal agencies and policies of
agencies regulating financial institutions. The Corporation's cost of funds is
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are influenced by demand for real estate loans
and other types of loans which, in turn, is affected by interest rates at which
such loans are made, general economic conditions and availability of funds for
lending activities.
The Corporation's net income is primarily dependent on its net interest income;
the difference between interest income generated on interest-earning assets and
interest expense incurred on interest-bearing liabilities. Net income is also
affected by provisions for loan losses, service charges, gains on sale of assets
and other income, noninterest expense and income taxes.
The Corporation's net income of $291,000 for the three months ended December 31,
1997 represented a $104,000 decrease from $395,000 in net income for the three
months ended December 31, 1996. Similarly, both basic and diluted earnings per
common share decreased by $.04 for the three months ended December 31, 1997 as
compared to the same period in 1996. The decline in net income resulted as gains
realized on sales of available-for-sale securities and loans during the three
months ended December 31, 1996 were not realized in the three months ended
December 31, 1997.
Net interest income is the largest component of the Corporation's income and is
affected by the interest rate environment and volume and composition of
interest-earning assets and interest-bearing liabilities.
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 rate paid on
deposits increases faster than the rates earned on loans. As a part of an
overall strategy to manage interest rate risk, management began to originate
variable-rate mortgage loans in the latter quarters of fiscal 1995. As of
December 31, 1997, the Corporation had approximately $10.3 million in
variable-rate mortgage loans, compared to $7.3 million at September 30, 1997.
Additionally, most of the Corporation's mortgage-backed and related securities
portfolio is scheduled to reprice on at least an annual basis.
Net interest income of the Corporation increased by $38,000 for the three months
ended December 31, 1997, compared to the same period in 1996, despite little
change in the ratio of average interest-earning assets to average
interest-bearing liabilities over the comparable periods. The increase resulted
as the Corporation had a larger proportion of funds invested in higher-yielding
loans and securities, as opposed to overnight deposits and interest-bearing
deposits in other financial institutions, during the three months ended December
31, 1997, compared to the three months ended December 31, 1996. The increase in
interest income from the redistribution of investments was partly offset by the
increased interest expense resulting from a higher cost of funds. The cost of
funds increased due to an increase in the average level of borrowings and a
higher percentage of the deposit portfolio being in certificates of deposit.
Interest and fees on loans totaled $2,705,000 for the three months ended
December 31, 1997, compared to $2,369,000 for the three months ended December
31, 1996. Such increase in interest income was due to higher average loan
balances related to the origination of new 1-4 family first mortgages and
nonresidential real estate loans.
- --------------------------------------------------------------------------------
22.
23
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Interest on mortgage-backed and related securities totaled $1,030,000 for the
three months ended December 31, 1997, compared to $771,000 for the three months
ended December 31, 1996. The increase was primarily due to an increase in volume
the of mortgage-backed and related securities, combined with a slight increase
in yield on mortgage-backed and related securities, compared to the prior
periods. Several mortgage-backed and related securities have repriced to higher
yield levels as compared to the prior year. The adjustable-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 securities totaled $144,000 for the three months ended December 31,
1997, compared to $117,000 for the comparable period in 1996. Other interest
income, including dividend income, totaled $47,000 for the three months ended
December 31, 1997, compared to $45,000 for the comparable period in 1996. The
combined increase for such investments from 1996 levels are the result of higher
average balances of securities and FHLB stock.
Interest on deposits totaled $1,842,000 for the three months ended December 31,
1997, and $1,618,000 for the three months ended December 31, 1996. This increase
resulted from an overall increase in the average cost of funds during the
comparable periods combined with higher average deposit balances over the prior
periods.
Interest on borrowed funds totaled $628,000 for the three months ended December
31, 1997, compared to $265,000 during the comparable period in 1996. The
increase is the result of higher average balances of borrowed funds during the
three months ended December 31, 1997. 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. From time to time, the Corporation has borrowed additional
adjustable-rate funds for similar purposes as well as to provide funding for
loan growth The Corporation has also borrowed fixed-rate funds to provide for
long-term liquidity needs. As opportunities arise to leverage the Corporation's
excess capital, the Corporation may make additional borrowings to fund loan
demand and mortgage-backed and related security purchases.
The Corporation maintains an allowance for loan losses in an amount, which, in
management's judgment, is adequate to absorb reasonable, foreseeable losses
inherent in the loan portfolio. While management utilizes its best judgment and
information available, ultimate adequacy of the allowance is dependent on a
variety of factors, including performance of the Corporation's loan portfolio,
the economy, changes in real estate values and interest rates and the view of
the regulatory authorities toward loan classifications. The provision for loan
losses is determined by management as the amount to be added to the allowance
for loan losses after net charge-offs have been deducted to bring the allowance
to a level considered adequate to absorb 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 size and composition of the
loan portfolio and specific borrower considerations, including ability of the
borrower to repay the loan and the estimated value of the underlying collateral.
Other than a $101,000 charge-off during the three months ended December 31,
1997, the Corporation has not experienced any significant charge-offs for the
past several years. The $101,000 charge-off was related to a single loan
relationship for which the Corporation maintained a one hundred percent specific
valuation allowance. The Corporation's low historical charge-off history is the
product of a variety of factors, including the Corporation's underwriting
guidelines, which generally require a down payment of 20% of the lower of sales
price or appraised value of 1-4 family residential real estate loans,
established
- --------------------------------------------------------------------------------
23.
24
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
income information and defined ratios of debt to income. Loans secured by real
estate make up 97.1% of the Corporation's loan portfolio, and loans secured by
first mortgages on 1-4 family residential real estate constituted 81.1% of total
loans at December 31, 1997. Notwithstanding the historically low level of
charge-offs, management believes it is prudent to continue increasing the
allowance for loan losses as total loans increase. Accordingly, management
anticipates it will continue its provisions to the allowance for loan losses at
current levels for the near future, providing volume of nonperforming loans
remains insignificant.
Noninterest income totaled $79,000 for the three months ended December 31, 1997
and $211,000 for the three months ended December 31, 1996. The decrease resulted
as realized gains on sales of available for sale securities and loans during the
three months ended December 31, 1996 were not realized in the three months ended
December 31, 1997. The loan and securities sales during the three months ended
December 31, 1996 were primarily made for interest rate risk strategy purposes.
Such opportunities to restructure the securities and loan portfolio did not
arise during the three months ended December 31, 1997. Other changes in
noninterest income for the three-month periods were insignificant.
Noninterest expense totaled $1,065,000 for the three months ended December 31,
1997, compared to $1,010,000 for the three months ended December 31, 1996.
Increases in occupancy expense and salaries and employee benefits were partly
offset by decreases in federal deposit insurance premiums. Occupancy expense
increased $26,000 over the comparable periods as a result of the new branch
office in Brookville, Ohio, which opened during the latter part of fiscal 1997.
Salaries and employee benefits increased $89,000 over the comparable periods due
to annual merit increases and increased staffing for the new branch office.
Federal deposit insurance premiums decreased $51,000 over the comparable periods
due to a reduction of assessed premiums which began in January 1997 as a result
of legislation which fully capitalized the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The SAIF was
below the level required by law because a significant portion of assessments
paid into the SAIF by thrifts, like 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 June 30, 1995. Because of the
recapitalization of the SAIF, the 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. Other changes in noninterest expense were insignificant.
The legislation discussed above also provides for the merger of the SAIF and the
Bank Insurance Fund ("BIF") effective January 1, 1999, assuming there are no
savings associations under federal law. Under separate proposed legislation,
Congress is considering eliminating the federal thrift charter and separate
federal regulation of thrifts. Therefore, 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.
Prior to the enactment of legislation discussed below, thrifts meeting certain
tests related 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 or the percentage of taxable income method,
based on an annual election.
- --------------------------------------------------------------------------------
24.
25
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
In August 1996, legislation was enacted repealing the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. Therefore, small thrifts such as the Bank must recapture
the portion of reserve exceeding 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 December 31, 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. As such, the recapture will not impact the Bank's or the
Corporation's net income.
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. Income tax expense totaled $155,000, or an
effective rate of 34.8%, for the three months ended December 31, 1997, compared
to $204,000, or an effective rate of 34.1%, for the three months ended December
31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, primarily represented by cash equivalents, is a
result of operating, investing and financing activities. These activities are
summarized below for the three months ended December 31, 1997 and 1996.
Three months ended
December 31,
------------
1997 1996
---- ----
(In thousands)
Net income $ 291 $ 395
Adjustments to reconcile net income to net cash from
operating activities 804 9,831
-------- -------
Net cash from operating activities 1,095 10,226
Net cash from investing activities (14,326) (2,204)
Net cash from financing activities 8,395 (5,101)
-------- -------
Net change in cash and cash equivalents (4,836) 2,921
Cash and cash equivalents at beginning of period 5,633 1,301
-------- -------
Cash and cash equivalents at end of period $ 797 $ 4,222
======== =======
The Corporation's principal sources of funds are deposits, loan and security
repayments, securities available for sale and other funds provided by
operations. The Corporation also has the ability to borrow from the FHLB of
Cincinnati. While scheduled loan repayments and maturing securities are
relatively predictable, deposit flows and early loan and mortgage-backed
security repayments are more influenced by interest rates, general economic
conditions and competition. The Corporation maintains investments in liquid
assets based on management's assessments of (1) the need for funds, (2) expected
deposit flows, (3) the yields available on short-term liquid assets and (4) the
objectives of the asset/liability management program.
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25.
26
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Office of Thrift Supervision ("OTS") regulations presently require the
Corporation to maintain an average daily balance of investments in United States
Treasury, federal agency obligations and other investments having maturities of
five years or less in an amount equal to 4% of the sum of the Corporation's
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement, which may be changed
from time to time by the OTS to reflect changing economic conditions, is
intended to provide a source of relatively liquid funds on which the Corporation
may rely, if necessary, to fund deposit withdrawals or other short-term funding
needs. At December 31, 1997, the Corporation's regulatory liquidity was 6.93%.
At such date, the Corporation had commitments to originate fixed-rate loans
totaling $2,108,000 and variable-rate loans totaling $510,000. The Corporation
had no commitments to purchase or sell loans. The Corporation considers its
liquidity and capital reserves sufficient to meet its outstanding short- and
long-term needs. See Note 5 of the Notes to Consolidated Financial Statements.
The Bank is required by OTS regulations to meet certain minimum capital
requirements, which must be generally as stringent as standards 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 relative risk). The Bank exceeded all capital requirements
at December 31, 1997 and September 30, 1997. The OTS has proposed to amend the
core capital requirement so 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 it will be adversely affected if
the core capital requirement regulations are amended as proposed.
The following table summarizes the Bank's regulatory capital requirements and
actual capital at December 31, 1997.
Excess of actual
capital over current
Actual capital Current requirement requirement
-------------- ------------------- ----------- Applicable
(Dollars in thousands) Amount Percent Amount Percent Amount Percent Asset Total
------ ------- ------ ------- ------ ------- -----------
Tangible capital $21,802 10.0% $3,262 1.5% $18,540 8.5% $217,485
Core capital 21,802 10.0 6,525 3.0 15,277 7.0 217,485
Risk-based capital 22,287 21.8 8,191 8.0 14,096 13.8 102,382
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 repurchase program was extended for an additional six-month period
in October 1997. 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.
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26.
27
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The principal market risk affecting the Corporation is interest-rate risk. The
Bank does not maintain a trading account for any class of financial instrument
and the Corporation is not affected by foreign currency exchange rate risk or
commodity price risk. Because the Corporation does not hold any equity
securities other than stock in the FHLB of Cincinnati and an insignificant
investment in its data processing servicer, Intrieve, Inc., the Corporation is
not subject to equity price risk.
The Corporation, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. One of the Corporation's principal financial
objectives is to achieve long-term profitability while reducing its exposure to
fluctuations in interest rates. The Corporation has sought to reduce exposure of
its earnings to changes in market interest rates by managing asset and liability
maturities and interest rates primarily through structuring the mortgage-backed
and related securities portfolio so that substantially all of the
mortgage-backed and related securities reprice on at least an annual basis. The
variable-rate feature of these securities helps mitigate the Corporation's
exposure to upward interest rate movement due to its primarily fixed-rate loan
portfolio. Some mortgage-backed securities have been purchased with funds
provided by similar maturity, long-term borrowings from the FHLB to capitalized
on the yield differential. The Corporation also invests in U.S. Government and
federal agency securities with maturities of five years or less. The majority of
the Corporation's securities are classified as available for sale to allow
management the flexibility to move these funds into higher-yielding loans as
demand warrants. The mortgage-backed and related securities also provide the
Corporation with a constant cash flow stream from principal repayments.
As the Corporation's loan portfolio is primarily made up of fixed-rate loans,
the Corporation is particularly sensitive to periods of rising interest rates In
such periods, the Corporation's net interest spread is negatively affected
because the interest rate paid on deposits increases faster than the rates
earned on loans. Management is continuing to originate variable-rate mortgage
loans as the primary means to manage this risk. Variable-rate loans increased
from $7.3 million at September 30, 1997 to $10.3 million at December 31, 1997.
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. 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. As the Corporation,
through the Bank, is an authorized seller/servicer for the FHLMC, all of its
loans are originated in accordance with secondary market guidelines. As such,
the Corporation has the ability to sell additional pools of fixed-rate loans in
the future should the need exist.
Lastly, as part of its effort to monitor and manage interest rate risk, the Bank
uses the "net portfolio value" ("NPV") methodology adopted by the OTS as part of
its capital regulations. Presented in the Corporation's 1997 annual report, as
of September 30, 1997, is an analysis of the Bank's interest rate risk as
measured by changes in NPV for instantaneous and sustained parallel shifts of
100 basis points in market interest rates. Also presented are policy limits set
by the Board of Directors of the Bank as to the maximum change in NPV that the
Board of Directors deems advisable in the event of various changes in interest
rates. Such limits are established with consideration of the dollar impact of
various rate changes
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27.
28
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
and the Bank's strong capital position. Management believes that no events have
occurred since September 30, 1997 which would significantly change the Bank's
NPV at December 31, 1997 under each of the assumed shifts of 100 basis points in
market interest rates.
The Bank's NPV is more sensitive to rising rates than declining rates. Such
difference in sensitivity occurs principally because, as rates rise, borrowers
do not prepay fixed-rate loans as quickly as they do when interest rates are
declining. Thus, in a rising interest rate environment, because the Bank has
predominantly fixed-rate loans in its loan portfolio, the amount of interest the
Bank would receive on its loans would increase relatively slowly as loans are
slowly prepaid and new loans at higher rates are made. Moreover, the interest
the Bank would pay on its deposits would increase rapidly because the Bank's
deposits generally have shorter periods to repricing.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit, would likely deviate
significantly from those assumed in making risk calculations.
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28.
29
MILTON FEDERAL FINANCIAL CORPORATION
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. 27: Financial Data Schedule.
(b) Exhibit No. 99: Safe Harbor Under the Private Securities
Litigation Reform Act of 1995.
(c) No current reports on Form 8-K were filed by the Registrant
during the quarter ended December 31, 1997.
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29.
30
MILTON FEDERAL FINANCIAL CORPORATION
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 9, 1998 /s/ Glenn E. Aidt
-------------------------- -----------------------------------
Glenn E. Aidt
President
Date: February 9, 1998 /s/ Thomas P. Eyer
-------------------------- -----------------------------------
Thomas P. Eyer
Treasurer (Chief Financial Officer)
- --------------------------------------------------------------------------------
30.
31
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
27 Financial Data Schedule 32
99 Safe Harbor Under the Private Securities Litigation Reform
Act of 1995 34
- --------------------------------------------------------------------------------
32.