EX-99.1 2 ex99-1.txt EXHIBIT 99.1 1 Exhibit 99.1 MILTON FEDERAL FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS September 30, 1999 and 1998
1999 1998 ---- ---- ASSETS Cash and amounts due from depository institutions $ 3,138,920 $ 1,049,982 Interest-bearing deposits in other financial institutions 403,342 327,941 Overnight deposits in other financial institutions -- 2,200,000 ------------- ------------- Total cash and cash equivalents 3,542,262 3,577,923 Securities available for sale 36,668,997 36,912,196 Securities held to maturity (Estimated fair value of $12,199,160 in 1999 and $14,528,202 in 1998) 12,317,173 14,559,907 Federal Home Loan Bank stock 3,131,700 2,814,200 Loans held for sale 2,626,923 -- Loans, net 192,115,024 171,346,497 Premises and equipment, net 2,629,439 2,739,778 Cash surrender value of life insurance 1,661,644 1,593,383 Accrued interest receivable 1,335,349 1,225,037 Real estate owned 201,015 -- Other assets 447,108 506,702 ------------- ------------- Total assets $ 256,676,634 $ 235,275,623 ============= ============= LIABILITIES Deposits Noninterest-bearing demand $ 10,552,744 $ 1,922,658 Interest-bearing demand -- 8,806,042 Money market 27,670,839 10,441,306 Passbook savings 15,763,490 16,618,056 Certificates of deposit 114,484,210 116,859,080 ------------- ------------- Total deposits 168,471,283 154,647,142 Borrowed funds 61,483,463 52,430,023 Advance payments by borrowers for taxes and insurance 551,027 258,357 Accrued interest payable 352,075 284,706 Other liabilities 790,896 1,372,169 ------------- ------------- Total liabilities 231,648,744 208,992,397 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 25,231,035 25,143,563 Retained earnings 8,529,714 8,167,236 Treasury stock, at cost, 478,880 shares in 1999 and 342,039 shares in 1998 (7,017,271) (5,104,494) Unearned employee stock ownership plan shares (969,101) (1,199,087) Unearned recognition and retention plan shares (638,715) (839,194) Accumulated other comprehensive income (107,772) 115,202 ------------- ------------- Total shareholders' equity 25,027,890 26,283,226 ------------- ------------- Total liabilities and shareholders' equity $ 256,676,634 $ 235,275,623 ============= =============
See accompanying notes to consolidated financial statements. A-1 2 MILTON FEDERAL FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended September 30, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- INTEREST AND DIVIDEND INCOME Loans, including fees $14,179,426 $11,937,278 $ 9,578,767 Securities 2,960,529 4,043,965 4,033,602 Dividends on Federal Home Loan Bank stock 206,578 179,692 101,880 Other 17,042 57,703 58,696 ----------- ----------- ----------- 17,363,575 16,218,638 13,772,945 INTEREST EXPENSE Deposits 8,028,545 7,574,249 6,749,161 Borrowed funds 3,004,548 2,773,629 1,399,995 ----------- ----------- ----------- 11,033,093 10,347,878 8,149,156 ----------- ----------- ----------- NET INTEREST INCOME 6,330,482 5,870,760 5,623,789 Provision for loan losses 120,000 229,000 75,000 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,210,482 5,641,760 5,548,789 NONINTEREST INCOME Service charges and other fees 304,163 215,542 147,232 Gain on sale of securities 46,672 247,996 115,072 Gain on sale of loans 73,913 207,662 118,281 Other income 127,404 125,110 117,209 ----------- ----------- ----------- 552,152 796,310 497,794 NONINTEREST EXPENSE Salaries and employee benefits 2,460,241 2,419,868 2,295,007 Occupancy expense 437,075 387,626 289,902 Data processing services 265,712 220,504 179,096 State franchise taxes 327,854 350,175 371,575 Federal deposit insurance premiums 94,651 89,547 121,044 Advertising 63,335 67,782 57,541 Other expenses 687,706 610,071 644,980 ----------- ----------- ----------- 4,336,574 4,145,573 3,959,145 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 2,426,060 2,292,497 2,087,438 Income tax expense 823,000 790,000 709,000 ----------- ----------- ----------- NET INCOME $ 1,603,060 $ 1,502,497 $ 1,378,438 =========== =========== =========== Earnings per common share - Basic $ .80 $ .72 $ .65 =========== =========== =========== Earnings per common share - Diluted $ .80 $ .71 $ .65 =========== =========== ===========
See accompanying notes to consolidated financial statements. A-2 3 MILTON FEDERAL FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended September 30, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- NET INCOME $ 1,603,060 $ 1,502,497 $ 1,378,438 Other comprehensive income Unrealized holding gains (losses) on available for sale securities arising during the period (291,164) 507,442 165,765 Reclassification adjustment for (gains) losses realized on securities sales included in net income (46,672) (247,996) (115,072) ----------- ----------- ----------- Net unrealized gain (loss) (337,836) 259,446 50,693 Tax effect 114,862 (88,211) (17,234) ----------- ----------- ----------- Total other comprehensive income (loss) (222,974) 171,235 33,459 ----------- ----------- ----------- COMPREHENSIVE INCOME $ 1,380,086 $ 1,673,732 $ 1,411,897 =========== =========== ===========
See accompanying notes to consolidated financial statements. A-3 4 MILTON FEDERAL FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended September 30, 1999, 1998 and 1997
Unearned Accumulated Additional Employee Other Paid-In Retained Treasury Benefit Comprehensive Capital Earnings Stock Plan Shares Income Total ------- -------- ----- ----------- ------ ----- Balance, October 1, 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 net unrealized gain (loss) on securities available for sale, net of tax 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 Net income for the year ended September 30, 1998 1,502,497 1,502,497 Cash dividends - $.60 per share (1,310,796) (1,310,796) Commitment to release 20,931 employee stock ownership plan shares 94,333 245,082 339,415 14,957 shares earned under recognition and retention plan 215,381 215,381 Tax benefit realized on vesting of recognition and retention plan shares 31,811 31,811 Purchase 68,000 shares of treasury stock, at cost (1,054,187) (1,054,187) Change in net unrealized gain (loss) on securities available for sale, net of tax 171,235 171,235 ----------- ----------- ----------- ----------- -------- ----------- Balance, September 30, 1998 $25,143,563 $ 8,167,236 $(5,104,494) $(2,038,281) $115,202 $26,283,226 =========== =========== =========== =========== ======== ===========
(Continued) A-4 5 MILTON FEDERAL FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued) Years ended September 30, 1999, 1998 and 1997
Unearned Accumulated Additional Employee Other Paid-In Retained Treasury Benefit Comprehensive Capital Earnings Stock Plan Shares Income Total ------- -------- ----- ----------- ------ ----- Balance, September 30, 1998 $ 25,143,563 $ 8,167,236 $ (5,104,494) $ (2,038,281) $ 115,202 $ 26,283,226 Net income for the year ended September 30, 1999 1,603,060 1,603,060 Cash dividends - $.60 per share (1,240,582) (1,240,582) Commitment to release 19,531 employee stock ownership plan shares 58,279 229,986 288,265 13,923 shares earned under recognition and retention plan 200,479 200,479 Tax benefit realized on vesting of recognition and retention plan shares 29,193 29,193 Purchase 136,841 shares of treasury stock, at cost (1,912,777) (1,912,777) Change in net unrealized gain (loss) on securities available for sale, net of tax (222,974) (222,974) ------------ ----------- ------------ ------------ ----------- ------------ Balance, September 30, 1999 $ 25,231,035 $ 8,529,714 $ (7,017,271) $ (1,607,816) $ (107,772) $ 25,027,890 ============ =========== ============ ============ =========== ============
See accompanying notes to consolidated financial statements. A-5 6 MILTON FEDERAL FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended September 30, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,603,060 $ 1,502,497 $ 1,378,438 Adjustments to reconcile net income to net cash from operating activities Amortization of deferred loan fees (170,550) (160,278) (97,093) Amortization of premiums, accretion of discounts, net 39,593 45,205 24,759 Amortization of mortgage servicing rights 52,625 29,019 6,894 Provision for loan losses 120,000 229,000 75,000 Depreciation 219,674 214,952 151,028 Increase in cash value of life insurance (68,261) (68,881) (69,009) Net realized gain on sale of securities available for sale (46,672) (247,996) (115,072) Origination of loans held for sale (6,977,250) -- -- Proceeds from sale of loans held for sale 4,371,901 -- -- Net gain on sale of loans (73,913) (207,662) (118,281) Federal Home Loan Bank stock dividends (206,300) (179,600) (101,700) Compensation expense for ESOP shares 288,265 339,415 269,029 Compensation expense for RRP shares 200,479 215,381 215,382 Tax benefit realized on vesting of RRP shares 29,193 31,811 3,009 Deferred taxes (31,745) 52,035 284,289 Net change in accrued interest receivable and other assets (42,474) 153,911 (385,058) Net change in accrued interest payable and other liabilities (367,296) 514,255 (466,500) ------------ ------------ ------------ Net cash from operating activities (1,059,671) 2,463,064 1,055,115 CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale Purchases (13,549,457) (9,693,205) (36,287,712) Proceeds from maturities and principal payments 7,472,623 11,336,810 6,855,042 Proceeds from sales 6,038,015 15,321,317 18,785,046 Securities held to maturity Purchases (125,000) (5,661,533) (4,006,975) Proceeds from maturities and principal payments 2,318,994 6,428,744 3,086,696 Purchase of Federal Home Loan Bank stock (111,200) (621,400) (730,000) Net increase in loans (20,927,522) (52,246,154) (20,883,830) Proceeds from sale of loans -- 8,434,138 10,377,554 Premises and equipment expenditures (109,335) (220,022) (1,344,060) Proceeds from sale of real estate owned -- -- 74,710 ------------ ------------ ------------ Net cash from investing activities (18,992,882) (26,921,305) (24,073,529)
(Continued) A-6 7 MILTON FEDERAL FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years ended September 30, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits $ 13,824,141 $ 11,815,359 $ 14,277,676 Net change in advance payments by borrowers for taxes and insurance 292,670 92,552 (17,005) Net change in short term borrowings 9,200,000 (1,600,000) (1,600,000) Long term advances from Federal Home Loan Bank 1,000,000 54,320,000 24,975,000 Principal payments on long term Federal Home Loan Bank advances (1,146,560) (39,859,883) (1,294,297) Cash dividends paid (1,240,582) (1,310,796) (6,938,183) Purchase of treasury stock (1,912,777) (1,054,187) (2,052,667) ------------ ------------ ------------ Net cash from financing activities 20,016,892 22,403,045 27,350,524 ------------ ------------ ------------ Net change in cash and cash equivalents (35,661) (2,055,196) 4,332,110 Cash and cash equivalents at beginning of year 3,577,923 5,633,119 1,301,009 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,542,262 $ 3,577,923 $ 5,633,119 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for Interest $ 10,965,724 $ 10,255,367 $ 8,061,779 Income taxes 636,750 858,317 398,000 Noncash activities Transfers of loans to real estate owned 209,545 -- --
See accompanying notes to consolidated financial statements. A-7 8 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Milton Federal Financial Corporation ("MFFC") and its wholly-owned subsidiary, Milton Federal Savings Bank (the "Bank"), a federal stock savings bank, together referred to as the Corporation. The financial statements of the Bank include the accounts of its wholly-owned subsidiary, Milton Financial Service Corporation. Milton Financial Service Corporation holds stock in Intrieve, Inc., which is the data processing center utilized by the Bank. All significant intercompany accounts and transactions have been eliminated. Nature of Operations: MFFC is a thrift holding company and through its subsidiary Bank, is engaged in the business of commercial and retail banking services with operations conducted through its main office in West Milton, Ohio and its full service branch offices located in Englewood, Brookville and Tipp City, Ohio. The Corporation is primarily organized to operate in the financial institution industry. Substantially all revenues are derived from the financial institution industry. Miami, Montgomery and Darke Counties provide the source of substantially all of the Bank's deposit and lending activities. 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 allowance for loan losses, fair values of financial instruments and status of contingencies are particularly subject to change. 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. Net cash flows are reported for customer loan and deposit transactions, as well as short-term borrowings under its cash management line of credit with the Federal Home Loan Bank ("FHLB"). 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 other comprehensive income. Interest income includes amortization of purchase premiums and discounts. Gains and losses on sales are determined using the amortized cost of the specific security sold. Securities are written down to fair value when a decline in fair value is not considered temporary. Loans: Loans are reported at the principal balance outstanding, net of deferred loan fees, loans in process and the allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income is reported on the interest method and includes the amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days (180 days for residential mortgages). Payments received on such loans are reported as principal reductions. (Continued) A-8 9 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Losses on Loans: The allowance for losses on loans is a valuation allowance for probable credit losses, 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 nature and volume of 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. Loan impairment is reported when full payment under the loan terms is not expected. 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. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of expected future cash flows using the loan's existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. 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 a loan is initially recorded at estimated fair value at acquisition. Any reduction to fair value from the carrying value of the related loan at the time the property is acquired is accounted for as a loan charge-off. 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. Servicing Rights: Servicing rights are recognized as assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net 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. Income Taxes: Income tax expense is the total of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences for the temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Concentrations of Credit Risk: The Bank grants loans to customers located primarily in Miami, Montgomery and Darke Counties. At year-end 1999 and 1998, approximately 78.6% and 84.8% of the loans in the Bank's loan portfolio had interest rates fixed until the maturity of the loans. (Continued) A-9 10 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) At September 30, 1999 and 1998, the Bank had interest-bearing deposits and overnight deposits in the FHLB of Cincinnati totaling $403,342 and $2,527,941 and owned stock in the FHLB with a carrying value of $3,131,700 and $2,814,200. Employee Stock Ownership Plan: The cost of shares issued to the Employee Stock Ownership Plan ("ESOP"), but not yet allocated to participants, is shown as a reduction of shareholders' equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest. Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Recognition and Retention Plan ("RRP") shares are considered outstanding as they become vested. Diluted earnings per common share include the dilutive effect of RRP shares and the additional potential common shares issuable under stock options. Stock Compensation: Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method of Statement of Financial Accounting Standards ("SFAS") No. 123 to measure expense for options granted after fiscal 1995, using an option pricing model to estimate fair value. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which is also recognized as a separate component of shareholders' equity. The accounting standard that requires reporting comprehensive income first applies for fiscal 1999, with prior information restated to be comparable. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to its shareholders. Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully described in a separate note. Fair value estimates involve uncertainties and matters of significant judgement regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Reclassifications: Some items in prior financial statements have been reclassified to conform to the current presentation. (Continued) A-10 11 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 2 - SECURITIES The amortized cost and fair values of securities were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- SEPTEMBER 30, 1999 Available for sale Equity $ 15,000 $ -- $ -- $ 15,000 Mortgage-backed 36,817,287 254,886 (418,176) 36,653,997 --------------- ----------- ------------- ---------------- Total $ 36,832,287 $ 254,886 $ (418,176) $ 36,668,997 =============== =========== ============= ================ Held to maturity Municipal obligations $ 125,000 $ -- $ (1,820) $ 123,180 Mortgage-backed 12,192,173 136,856 (253,049) 12,075,980 --------------- ----------- ------------- ---------------- Total $ 12,317,173 $ 136,856 $ (254,869) $ 12,199,160 =============== =========== ============= ================ SEPTEMBER 30, 1998 Available for sale Equity $ 15,000 $ -- $ -- $ 15,000 Mortgage-backed 36,722,650 304,109 (129,563) 36,897,196 --------------- ----------- ------------- ---------------- Total $ 36,737,650 $ 304,109 $ (129,563) $ 36,912,196 =============== =========== ============= ================ Held to maturity Mortgage-backed $ 14,559,907 $ 85,137 $ (116,842) $ 14,528,202 =============== =========== ============= ================
The municipal obligation classified as held to maturity at September 30, 1999 matures December 2002. The Corporation maintains a significant portfolio of mortgage-backed securities in the form of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and Government National Mortgage Association ("GNMA") participation certificates. Mortgage-backed securities generally entitle the Corporation to receive a portion of the cash flows from an identified pool of mortgages, and FHLMC, FNMA and GNMA securities are each guaranteed by their respective agencies as to principal and interest. The Corporation has also invested significant amounts in collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs") which are included in mortgage-backed securities. Substantially all CMOs and REMICs are backed by pools of mortgages insured or guaranteed by the FNMA and FHLMC. During 1999, proceeds from the sales of securities available for sale were $6,038,015 with gross realized gains of $46,672 included in earnings. During 1998, proceeds from sales of securities available for sale were $15,321,317 with gross realized gains of $247,996 included in earnings. During 1997, proceeds from the sales of securities available for sale were $18,785,046 with gross realized gains of $115,862 and gross realized losses of $790 included in earnings. (Continued) A-11 12 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 3 - LOANS Year-end loans were as follows:
1999 1998 ---- ---- Residential real estate loans 1-4 family (first mortgage) $ 159,291,522 $ 141,279,664 Home equity (1-4 family second mortgage) 5,347,292 4,244,314 Multi-family 2,028,190 2,670,477 Nonresidential real estate loans 14,947,922 8,804,909 Construction loans 11,872,585 16,412,903 ------------- ------------- Total real estate loans 193,487,511 173,412,267 Consumer Automobile loans 3,034,752 3,480,341 Loans on deposits 317,653 290,640 Other consumer loans 378,095 344,244 ------------- ------------- Total consumer loans 3,730,500 4,115,225 Commercial loans 3,466,079 2,753,493 ------------- ------------- Total loans 200,684,090 180,280,985 Less: Net deferred loan fees (609,131) (605,224) Loans in process (7,194,703) (7,652,849) Allowance for loan losses (765,232) (676,415) ------------- ------------- Net loans $ 192,115,024 $ 171,346,497 ============= =============
The Corporation has sold various loans to other financial intermediaries while retaining the servicing rights. Gains and losses on loan sales are recorded at the time of the sale. Loans sold for which the Corporation has retained servicing totaled $15,428,430 at September 30, 1999 and, $15,615,077 at September 30, 1998. Capitalized mortgage servicing rights totaled $189,000 at September 30, 1999 and 1998. At September 30, 1999, $2,626,923 of one- to four-family residential real estate loans have been designated as held for sale. At September 30, 1998, no loans were held for sale. Proceeds from the sale of loans during 1999, 1998 and 1997 were $4,371,901, $8,434,138 and $10,377,554 with net realized gains of $73,913, $207,662 and $118,281 included in earnings. Activity in the allowance for loan losses was as follows:
1999 1998 1997 ---- ---- ---- Beginning balance $ 676,415 $ 562,202 $ 487,202 Provision for loan losses 120,000 229,000 75,000 Loans charged-off (31,203) (115,090) -- Recoveries 20 303 -- ------------ ------------ ------------ Ending balance $ 765,232 $ 676,415 $ 562,202 ============ ============ ============
(Continued) A-12 13 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 3 - LOANS (Continued) Nonaccrual loans for which interest has been suspended totaled $231,000 and $359,000 at September 30, 1999 and 1998. Loans considered impaired within the scope of SFAS No. 114 were not significant in 1999, 1998 or 1997. Certain directors, executive officers and companies with which they are affiliated were loan customers of the Bank during the year ended September 30, 1999. A summary of activity on related party loans during 1999 was as follows:
Beginning balance - October 1, 1998 $ 567,280 New loans 140,079 Repayments (247,925) -------------- Ending balance - September 30, 1999 $ 459,434 ==============
NOTE 4 - PREMISES AND EQUIPMENT Year-end premises and equipment were as follows:
1999 1998 ---- ---- Land $ 282,031 $ 282,031 Buildings and improvements 2,692,341 2,685,146 Leasehold improvements 62,879 62,879 Furniture and equipment 1,412,267 1,311,416 ------------- ------------- 4,449,518 4,341,472 Accumulated depreciation (1,820,079) (1,601,694) ------------- ------------- $ 2,629,439 $ 2,739,778 ============= =============
NOTE 5 - 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 that 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 $57,337, $53,472, and $49,866 for 1999, 1998 and 1997. 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 insurance contracts would be used as a funding source for the deferred compensation plan. (Continued) A-13 14 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 6 - DEPOSITS The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was $5,478,000 and $5,476,000 at year-end 1999 and 1998. Deposits in excess of $100,000 are not insured by the FDIC. At year-end 1999, scheduled maturities of certificates of deposit were as follows:
Year ending September 30: 2000 $ 75,554,110 2001 22,908,299 2002 7,704,438 2003 5,708,449 2004 2,608,914 --------------- $ 114,484,210 ===============
NOTE 7 - INCOME TAXES Income tax expense was as follows:
1999 1998 1997 ---- ---- ---- Current $ 825,552 $ 706,154 $ 421,702 Tax effect of vesting RRP shares 29,193 31,811 3,009 Deferred (31,745) 52,035 284,289 ------------ ------------ ------------ $ 823,000 $ 790,000 $ 709,000 ============ ============ ============
The sources of year-end gross deferred tax assets and liabilities were as follows:
1999 1998 ---- ---- Deferred tax assets Deferred compensation $ 109,787 $ 95,460 Recognition and retention plan 68,163 73,231 Unrealized loss on securities available for sale 55,518 -- Other 8,045 6,589 ------------- ------------- 241,513 175,280 Deferred tax liabilities Allowance for loan losses 49,871 149,102 Federal Home Loan Bank stock dividends 370,402 300,261 Depreciation 43,171 40,031 Mortgage servicing rights 64,280 64,377 Unrealized gain on securities available for sale -- 59,346 Other 10,033 5,016 ------------- ------------- 537,757 618,133 ------------- ------------- Net deferred tax liability $ 296,244 $ 442,853 ============= =============
(Continued) A-14 15 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 7 - INCOME TAXES (Continued) Effective tax rates differ from the statutory federal income tax rate applied to financial statement income due to the following:
1999 1998 1997 ---- ---- ---- Income tax computed at the statutory rate $ 824,860 $ 779,449 $ 709,729 Tax effect of Officer's life insurance (23,209) (23,420) (23,463) ESOP 26,408 38,669 21,359 Other (5,059) (4,698) 1,375 ------------- ------------- ------------- $ 823,000 $ 790,000 $ 709,000 ============= ============= ============= Statutory tax rate 34.0% 34.0% 34.0% ============= ============= ============= Effective tax rate 33.9% 34.5% 34.0% ============= ============= =============
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, 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 was delayed until the first taxable year beginning after December 31, 1997, because the institution met certain residential lending requirements. At September 30, 1999 and 1998, the Bank had $941,420 and $1,129,704 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 1999, $188,284 bad debt reserves were recaptured. Retained earnings at September 30, 1999 and 1998, include $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 that 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, 1999 and 1998. 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. (Continued) A-15 16 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 8 - BORROWED FUNDS At September 30, 1999, the Bank had a cash-management line-of-credit enabling it to borrow up to $12,413,550 from the FHLB of Cincinnati. The line of credit must be renewed on an annual basis. The next renewal date is April 16, 2000. Variable rate borrowings of $9,200,000 were outstanding related to this cash-management line-of-credit at September 30, 1999. There were no borrowings outstanding on this line of credit at September 30, 1998. As a member of the FHLB system, the Bank has the ability to obtain additional borrowings up to a maximum total of 50% of Bank assets subject to the level of qualified, pledgable one- to four-family residential real estate loans. The Bank had variable rate borrowings totaling $7,000,000, with interest rates ranging from 5.33% to 5.51%, at September 30, 1999 and $4,000,000, with an interest rate of 5.54% at September 30, 1998. The Bank had fixed rate borrowings totaling $11,283,463 at September 30, 1999 and $12,430,023 at September 30, 1998. The interest rates on these borrowings ranged from 5.80% to 6.42% at September 30, 1999 and 1998. The Bank also had $34,000,000 and $36,000,000 in convertible advances at September 30, 1999 and 1998 whereby the interest rates are fixed for a specified period of time and then change to variable for the remaining term of the advance. The interest rates on these advances ranged from 5.12% to 5.65% at September 30, 1999 and 4.66% to 5.65% at September 30, 1998. The maximum month-end balance of FHLB advances outstanding was $61,524,000 in 1999 and $55,251,000 in 1998. Average balances of borrowings outstanding during 1999 and 1998 were $55,376,000 and $48,744,000. Mortgage loans and all shares of FHLB stock owned by the Bank totaling $92,225,195 and $3,131,700 at September 30, 1999 and $78,645,035 and $2,814,200 at September 30, 1998, were pledged as collateral for the FHLB advances. At September 30, 1999, required annual principal payments were as follows:
Year ending September 30: 2000 $ 14,615,031 2001 3,910,033 2002 2,226,352 2003 2,259,852 2004 707,248 Thereafter 37,764,947 --------------- $ 61,483,463 ===============
NOTE 9 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES Various contingent liabilities are not reflected in the consolidated 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 the financial condition or the results of operations of the Corporation. Some financial instruments are used in the normal course of business to meet financing needs of customers and reduce exposure to interest rate changes. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These involve, to varying degrees, credit and interest rate risk in excess of the amounts reported in the financial statements. (Continued) A-16 17 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 9 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued) Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit, standby letters of credit and financial guarantees written. The same credit policies are used for commitments and conditional obligations as are used for loans. The amount of collateral obtained, if deemed necessary, on extension of credit is based on management's credit evaluation and generally consists of residential or commercial real estate. Lines of credit are primarily home equity lines collateralized by second mortgages on one- to four-family residential real estate and commercial lines of credit collateralized by business assets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being used, the total commitments do not necessarily represent future cash requirements. As of September 30, 1999 and 1998, the Corporation had commitments to make fixed rate one- to four-family residential real estate loans at current market rates totaling $1,040,000 and $1,516,000. Loan commitments are generally for thirty days. The interest rate on the fixed rate commitments ranged from 7.00% to 10.25% at September 30, 1999 and 6.38% to 8.50% at September 30, 1998. The Corporation had commitments to make nonresidential real estate loans at 7.75% totaling $397,000 at September 30, 1999. The Corporation had commitments to make variable rate, one- to four-family residential real estate loans totaling $223,000, with interest rates ranging from 7.13% to 7.63 at September 30, 1999. The Corporation had no such commitments at September 30, 1998. As of September 30, 1999 and 1998, the Corporation had $4,540,000 and $4,711,000 in unused variable rate home equity lines of credit and $2,034,000 and $820,000 in unused variable rate commercial lines of credit. At September 30, 1999 and 1998, the Corporation had standby letter of credit commitments totaling $465,000 and $150,000. At September 30, 1999 and 1998, compensating balances of $1,693,000 and $518,000 were required as deposits with the FHLB and Federal Reserve Bank. These balances do not earn interest. The Corporation has entered employment agreements with certain officers of the Corporation. Each of the agreements provide for a term of three years and a salary and performance review by the Board of Directors not less than annually, as well as inclusion of the employee in any formally established employee benefit, bonus, pension and profit-sharing plans for which management personnel are eligible. (Continued) A-17 18 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 10 - REGULATORY CAPITAL REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by the federal regulatory agencies. 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. 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. At September 30, 1999 and 1998, management believes the Bank complies with all regulatory capital requirements. Based upon the computed regulatory capital ratios, the Bank is considered well capitalized under the Federal Deposit Insurance Improvement Act criteria at September 30, 1999 and 1998. Management believes no conditions or events have occurred subsequent to the last notification by regulators that would cause the Bank's capital category to change. At year-end 1999 and 1998, the Bank's actual capital level and minimum required levels were:
Minimum Required To Be Minimum Adequately Capitalized Required To Be Under Prompt Well Capitalized Corrective Under Prompt Corrective Actual Action Regulations Action Regulations ----------------- ---------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in thousands) SEPTEMBER 30, 1999 Total capital (to risk-weighted assets) $ 23,538 17.7% $ 10,643 8.0% $ 13,304 10.0% Tier 1 (core) capital (to risk-weighted assets) 22,806 17.1 5,322 4.0 7,892 6.0 Tier 1 (core) capital (to adjusted total assets) 22,806 8.9 10,264 4.0 12,829 5.0 Tangible capital (to adjusted total assets) 22,806 8.9 3,849 1.5 N/A SEPTEMBER 30, 1998 Total capital (to risk-weighted assets) $ 22,323 18.5% $ 9,635 8.0% $ 12,043 10.0% Tier 1 (core) capital (to risk-weighted assets) 21,681 18.0 4,817 4.0 7,226 6.0 Tier 1 (core) capital (to adjusted total assets) 21,681 9.3 9,332 4.0 11,666 5.0 Tangible capital (to adjusted total assets) 21,681 9.3 3,500 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. (Continued) A-18 19 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 10 - REGULATORY CAPITAL REQUIREMENTS (Continued) An application must be submitted and approval from the OTS must be obtained by a subsidiary of a savings and loan holding company (1) if the proposed distribution would cause total distributions for the year to exceed net income for that calendar year to date plus the savings association's retained net income for the preceding two years; (2) if the savings association will not be at least adequately capitalized following the capital distribution; (3) if the proposed distribution would violate a prohibition contained in any applicable statute, regulation or agreement between the savings association and the OTS (or the FDIC), or a condition imposed on the savings association in an OTS-approved application or notice; or, (4) if the savings association has not received certain favorable examination ratings from the OTS. If a savings association subsidiary of a holding company is not required to file an application, it must file a notice with the OTS. At September 30, 1999, the Bank could dividend $382,310 without approval from the OTS. NOTE 11 - EMPLOYEE PENSION AND PROFIT INCENTIVE PLANS The Corporation is part of a qualified noncontributory multi-employer trust, 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. The Corporation has not been required to contribute to the Retirement Fund and as a result, did not recognize any pension expense in 1999, 1998 or 1997. 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 1999, 1998 and 1997. 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 contribution expense included in salaries and employee benefits was $12,490, $11,509, and $9,484 for 1999, 1998 and 1997. NOTE 12 - STOCK OPTION PLAN On March 20, 1995, the Stock Option Committee of the Board of Directors granted options to purchase 238,545 common shares 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 190,836 and 143,127 shares were exercisable at September 30, 1999 and 1998. No options were exercised during 1999, 1998, or 1997. In addition, 19,342 shares of authorized but unissued common stock are reserved for which no options have been granted. NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN The Corporation offers an ESOP for the benefit of substantially all employees of the Corporation. 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. (Continued) A-19 20 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 13 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued) The ESOP borrowed funds from MFFC 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. When loan payments are made, ESOP shares are allocated to participants based on relative compensation. ESOP compensation expense was $288,265, $339,415, and $269,029 for 1999, 1998, and 1997. ESOP shares at September 30, 1999 and 1998 were as follows:
1999 1998 ---- ---- Allocated shares 90,922 69,991 Shares released for allocation 19,531 20,931 Unreleased shares 80,787 100,318 -------------- -------------- Total ESOP shares 191,240 191,240 ============== ============== Fair value of unreleased shares $ 939,149 $ 1,279,055 ============== ==============
NOTE 14 - RECOGNITION AND RETENTION PLAN The Corporation maintains a recognition and retention plan ("RRP") for the benefit of directors and certain key employees of the 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. The Bank contributed sufficient funds to enable the RRP to purchase a number of common shares in the open market equal to 4% of the common shares sold in connection with the Conversion. On October 16, 1995, the RRP Committee of the Board of Directors awarded 74,784 shares to certain directors and officers of 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 2,064 shares forfeited during the year ended September 30, 1999. As a result, there were 30,435 and 28,371 shares at September 30, 1999 and 1998 reserved for future awards. Compensation expense is based on the cost of the shares, which approximates fair value at the date of grant, and was $200,479, $215,381 and $215,382 for 1999, 1998 and 1997. (Continued) A-20 21 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of financial instruments at year-end were:
1999 1998 ----------------------- ------------------------ Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- FINANCIAL ASSETS (In thousands) Cash and cash equivalents $ 3,542 $ 3,542 $ 3,578 $ 3,578 Securities available for sale 36,669 36,669 36,912 36,912 Securities held to maturity 12,317 12,199 14,560 14,528 FHLB stock 3,132 3,132 2,814 2,814 Loans held for sale 2,627 2,627 -- -- Loans, net 192,115 190,505 171,346 174,776 Cash surrender value of life insurance 1,662 1,662 1,593 1,593 Accrued interest receivable 1,335 1,335 1,225 1,225 Mortgage servicing rights 189 189 189 189 FINANCIAL LIABILITIES Deposits $(168,471) $(168,446) $(154,647) $(155,366) Borrowed funds (61,483) (60,902) (52,430) (52,646) Advance payments by borrowers for taxes and insurance (551) (551) (258) (258) Accrued interest payable (352) (352) (285) (285)
The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amount is considered to estimate fair value for all items except those described below. 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. The fair value of borrowed funds 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 amounts are not material. (Continued) A-21 22 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 16 - EARNINGS PER SHARE The factors used in the earnings per share computation are as follows:
1999 1998 1997 ---- ---- ---- BASIC EARNINGS PER COMMON SHARE Net income $ 1,603,060 $ 1,502,497 $ 1,378,438 =========== =========== =========== Weighted average common shares outstanding 2,159,040 2,252,091 2,343,916 Less: Average unallocated ESOP shares (91,204) (111,596) (144,170) Less: Average nonvested RRP shares (51,873) (66,349) (81,304) ----------- ----------- ----------- Average shares 2,015,963 2,074,146 2,118,442 =========== =========== =========== Basic earnings per common share $ .80 $ .72 $ .65 =========== =========== =========== DILUTED EARNINGS PER COMMON SHARE Net income $ 1,603,060 $ 1,502,497 $ 1,378,438 =========== =========== =========== Weighted average common shares outstanding for basic earnings per common share 2,015,963 2,074,146 2,118,442 Add: Dilutive effects of average nonvested RRP shares -- 10,992 5,822 Add: Dilutive effects of stock options -- 20,575 4,272 ----------- ----------- ----------- Average shares and dilutive potential common shares 2,015,963 2,105,713 2,128,536 =========== =========== =========== Diluted earnings per common share $ .80 $ .71 $ .65 =========== =========== ===========
Unearned RRP shares and stock options did not have a dilutive effect on EPS for the year ended September 30, 1999, as the fair value of the RRP shares on the date of grant and the exercise price of the stock options were greater than the average market price for the period. (Continued) A-22 23 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS Condensed financial information of MFFC is as follows: Condensed Balance Sheets September 30, 1999 and 1998
1999 1998 ---- ---- ASSETS Cash and cash equivalents $ 869,585 $ 2,045,724 Securities available for sale -- 625,427 Investment in subsidiary 22,698,994 21,822,890 Loan receivable from ESOP 1,237,860 1,444,170 Accrued interest receivable and other assets 228,541 350,895 --------------- ---------------- Total assets $ 25,034,980 $ 26,289,106 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities $ 7,090 $ 5,880 Shareholders' equity 25,027,890 26,283,226 --------------- ---------------- Total liabilities and shareholders' equity $ 25,034,980 $ 26,289,106 =============== ================
Condensed Statements of Income Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- INTEREST AND DIVIDEND INCOME Dividends from subsidiary $ 1,000,000 $ 1,700,000 $ 1,000,000 Securities 24,509 71,650 175,512 Loan to ESOP 111,794 139,428 157,263 Other 54,981 26,422 46,310 -------------- -------------- --------------- Total interest and dividend income 1,191,284 1,937,500 1,379,085 Gain on sale of securities 846 1,023 34,621 Operating expenses 59,971 80,033 99,322 -------------- -------------- --------------- INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 1,132,159 1,858,490 1,314,384 Income tax expense 45,000 54,000 104,348 -------------- -------------- --------------- INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 1,087,159 1,804,490 1,210,036 Equity in undistributed earnings of subsidiary (distributions in excess of earnings) 515,901 (301,993) 168,402 -------------- -------------- --------------- NET INCOME $ 1,603,060 $ 1,502,497 $ 1,378,438 ============== ============== ===============
(Continued) A-23 24 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Continued) Condensed Statement of Cash Flows Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,603,060 $ 1,502,497 $ 1,378,438 Adjustments to reconcile net income to cash provided by operations: (Equity in undistributed income) distributions in excess of earnings of subsidiary (515,901) 301,993 (168,402) Gain on sale of securities (846) (1,023) (34,621) Amortization of premiums, accretion of Discount, net 756 1,723 391 Net change in other assets 124,989 352,955 (326,345) Net change in other liabilities 1,210 207 (62,206) ----------- ----------- ----------- Net cash from operating activities 1,213,268 2,158,352 787,255 CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale Purchases -- -- (994,145) Proceeds from maturities and principal payments 100,649 463,375 259,633 Proceeds from sales 517,116 284,960 5,136,692 Proceeds from principal payments on loan to ESOP 206,310 206,310 206,310 ----------- ----------- ----------- Net cash from investing activities 824,075 954,645 4,608,490 CASH FLOWS FROM FINANCING ACTIVITIES Purchase of treasury stock (1,912,777) (1,054,187) (2,052,667) Cash dividends paid (1,240,582) (1,310,796) (6,938,183) Dividends on unallocated ESOP shares (60,123) (42,706) (472,745) ----------- ----------- ----------- Net cash from financing activities (3,213,482) (2,407,689) (9,463,595) ----------- ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS (1,176,139) 705,308 (4,067,850) Cash and cash equivalents at beginning of year 2,045,724 1,340,416 5,408,266 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 869,585 $ 2,045,724 $ 1,340,416 =========== =========== ===========
A-24 25 MILTON FEDERAL FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) -------------------------------------------------------------------------------- Item 1. Financial Statements --------------------
March 31, September 30, 2000 1999 ---- ---- ASSETS Cash and amounts due from depository institutions $ 1,163,487 $ 3,138,920 Interest-bearing deposits in other financial institutions 953,719 403,342 ------------ ------------ Total cash and cash equivalents 2,117,206 3,542,262 Securities available for sale 34,768,624 36,668,997 Securities held to maturity (Estimated fair value of $11,551,917 at March 31, 2000 and $12,199,160 at September 30, 1999) 11,667,959 12,317,173 Federal Home Loan Bank stock 3,477,000 3,131,700 Loans held for sale 20,000,000 2,626,923 Loans, net 180,552,887 192,115,024 Premises and equipment, net 2,524,875 2,629,439 Cash surrender value of life insurance 1,696,530 1,661,644 Accrued interest receivable 1,337,662 1,335,349 Real estate owned 221,099 201,015 Other assets 612,496 447,108 ------------ ------------ Total assets $258,976,338 $256,676,634 ============ ============ LIABILITIES Deposits $164,353,649 $168,471,283 Borrowed funds 68,365,945 61,483,463 Advance payments by borrowers for taxes and insurance 419,378 551,027 Accrued interest payable 420,231 352,075 Other liabilities 429,335 790,896 ------------ ------------ Total liabilities 233,988,538 231,648,744 SHAREHOLDERS' EQUITY Preferred stock, no par value, 1,000,000 shares authorized, none outstanding -- -- Common stock, no par value, 9,000,000 shares authorized, 2,578,875 shares issued -- -- Additional paid-in capital 25,294,682 25,231,035 Retained earnings 8,773,338 8,529,714 Treasury stock, at cost, 478,880 shares at March 31, 2000 and September 30, 1999 (7,017,271) (7,017,271) Unearned employee stock ownership plan shares (859,484) (969,101) Unearned recognition and retention plan shares (538,383) (638,715) Accumulated other comprehensive income (665,082) (107,772) ------------ ------------ Total shareholders' equity 24,987,800 25,027,890 ------------ ------------ Total liabilities and shareholders' equity $258,976,338 $256,676,634 ============ ============
-------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. A-25 26 MILTON FEDERAL FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) --------------------------------------------------------------------------------
Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2000 1999 2000 1999 ---- ---- ---- ---- INTEREST AND DIVIDEND INCOME Loans, including fees $3,775,950 $3,540,373 $7,526,282 $6,942,392 Securities 761,098 778,194 1,493,776 1,516,353 Other, including dividend income 53,213 46,461 106,548 121,185 ---------- ---------- ---------- ---------- 4,590,261 4,365,028 9,126,606 8,579,930 INTEREST EXPENSE Deposits 1,962,315 2,030,546 3,928,559 4,066,352 Borrowed funds 986,500 752,850 1,880,324 1,477,661 ---------- ---------- ---------- ---------- 2,948,815 2,783,396 5,808,883 5,544,013 ---------- ---------- ---------- ---------- NET INTEREST INCOME 1,641,446 1,581,632 3,317,723 3,035,917 Provision for loan losses 20,000 30,000 45,000 60,000 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,621,446 1,551,632 3,272,723 2,975,917 NONINTEREST INCOME Service charges and other fees 97,883 67,603 200,876 129,304 Gain on sale of securities -- 28,837 2,003 28,837 Gain on sale of loans -- 21,298 -- 73,913 Gain on sale of REO -- -- 6,366 -- Other income 30,177 28,631 61,096 71,172 ---------- ---------- ---------- ---------- 128,060 146,369 270,341 303,226 NONINTEREST EXPENSE Salaries and employee benefits 658,383 621,408 1,308,096 1,257,501 Occupancy expense 107,322 113,176 221,467 215,942 Data processing services 108,630 69,283 180,356 127,771 State franchise taxes 76,247 80,262 156,444 167,453 Federal deposit insurance premiums 8,826 23,644 33,602 45,776 Advertising 5,770 10,660 20,365 30,530 Other expenses 170,606 201,489 329,140 382,707 ---------- ---------- ---------- ---------- 1,135,784 1,119,922 2,249,470 2,227,680 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAX 613,722 578,079 1,293,594 1,051,463 Income tax expense 213,000 197,000 444,200 359,000 ---------- ---------- ---------- ---------- NET INCOME $ 400,722 $ 381,079 $ 849,394 $ 692,463 ========== ========== ========== ========== Earnings per common share - Basic $ .20 $ .19 $ .43 $ .34 ========== ========== ========== ========== Earnings per common share - Diluted $ .20 $ .19 $ .43 $ .34 ========== ========== ========== ========== Dividends per common share $ .16 $ .15 $ .31 $ .30 ========== ========== ========== ==========
-------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. A-26 27 MILTON FEDERAL FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) --------------------------------------------------------------------------------
Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2000 1999 2000 1999 ---- ---- ---- ---- NET INCOME $ 400,722 $381,079 $ 849,394 $692,463 Other comprehensive income (loss): Unrealized holding gains (losses) on available for sale securities arising during the period (795,741) 81,091 (842,407) 82,284 Reclassification adjustment for (gains) losses realized on securities sales included in net income -- (28,837) (2,003) (28,837) --------- -------- --------- -------- Net unrealized gain (loss) (795,741) 52,254 (844,410) 53,447 Tax effect 270,552 (17,778) 287,100 (18,173) --------- -------- --------- -------- Total other comprehensive Income (loss) (525,189) 34,476 (557,310) 35,274 --------- -------- --------- -------- COMPREHENSIVE INCOME (LOSS) $(124,467) $415,555 $ 292,084 $727,737 ========= ======== ========= ========
-------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. A-27 28 MILTON FEDERAL FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) --------------------------------------------------------------------------------
Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2000 1999 2000 1999 ---- ---- ---- ---- Balance at beginning of period $25,288,717 $25,983,031 $25,027,890 $26,283,226 Net income 400,722 381,079 849,394 692,463 Cash dividends (302,881) (314,893) (605,770) (635,387) Commitment to release employee stock ownership plan shares 76,219 75,029 141,062 154,634 Shares earned under recognition and retention plan, including tax benefit 50,212 46,394 132,534 129,433 Purchase of treasury stock -- (928,375) -- (1,382,902) Other comprehensive income (loss) (525,189) 34,476 (557,310) 35,274 ----------- ----------- ----------- ----------- Balance at end of period $24,987,800 $25,276,741 $24,987,800 $25,276,741 =========== =========== =========== ===========
-------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. A-28 29 MILTON FEDERAL FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) --------------------------------------------------------------------------------
Six Months Ended March 31, --------- 2000 1999 ---- ---- NET CASH FLOWS FROM OPERATING ACTIVITIES $ 946,685 $ 614,013 CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale Purchases (850,965) (9,588,941) Proceeds from maturities and principal payments 1,125,452 4,483,159 Proceeds from sales 798,312 3,011,615 Securities held to maturity Purchases -- (125,000) Proceeds from maturities and principal payments 632,415 1,290,205 Net increase in loans (5,927,153) (18,169,179) Proceeds from sale of loans -- 4,371,901 Premises and equipment expenditures (4,526) (26,300) Purchase FHLB stock (230,200) (39,400) Proceeds from sale of real estate owned 57,495 -- ----------- ------------ Net cash from investing activities (4,399,170) (14,791,940) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits (4,117,634) 13,293,588 Net change in advance payments by borrowers for taxes and insurance (131,649) 83,617 Net change in short-term borrowings (6,190,000) 600,000 Long-term advances from FHLB 13,800,000 1,000,000 Principal payments on FHLB advances (727,518) (851,646) Cash dividends paid (605,770) (635,387) Purchase of treasury stock -- (1,382,902) ----------- ------------ Net cash from financing activities 2,027,429 12,107,270 ----------- ------------ Net change in cash and cash equivalents (1,425,056) (2,070,657) Cash and cash equivalents at beginning of period 3,542,262 3,577,923 ----------- ------------ Cash and cash equivalents at end of period $ 2,117,206 $ 1,507,266 =========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for Interest $ 5,740,727 $ 5,504,543 Income taxes 504,000 180,500 Noncash activities Transfer of loans from portfolio to held for sale $17,373,077 -- Transfer of loans to real estate owned 71,213 --
-------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. A-29 30 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These interim financial statements are prepared without audit and reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position of Milton Federal Financial Corporation ("MFFC") at March 31, 2000, and its results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying financial statements have been prepared in accordance with the instructions of Form 10-Q and, therefore, do not purport to contain all necessary financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances, and should be read in conjunction with the consolidated financial statements, and notes thereto, of MFFC for the fiscal year ended September 30, 1999, included in its 1999 annual report. MFFC has consistently followed the accounting policies described in the notes to financial statements contained in MFFC's 1999 annual report in preparing this Form 10-Q. The consolidated financial statements include the accounts of MFFC and its wholly-owned subsidiary, Milton Federal Savings Bank (the "Bank"), together referred to as the Corporation. The financial statements of the Bank include the accounts of its wholly-owned subsidiary, Milton Financial Service Corporation. Milton Financial Service Corporation holds stock in Intrieve, Inc., the data processing center utilized by the Bank. All significant intercompany accounts and transactions have been eliminated. MFFC is a thrift holding company and, through the Bank, is engaged in the business of commercial and retail banking services with operations conducted through its main office in West Milton, Ohio, and from its full service branch offices located in Englewood, Brookville and Tipp City, Ohio. The Corporation is primarily organized to operate in the financial institution industry. Substantially all revenues are derived from the financial institution industry. Miami, Montgomery and Darke Counties, Ohio provide the source for substantially all the Corporation's deposit and lending activities. To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments and status of contingencies are particularly subject to change. Income tax expense is the total of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Income tax expense is based on the effective rate expected to be applicable for the entire year. Some items in prior financial statements have been reclassified to conform to the current presentation. Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Employee Stock Option Plan ("ESOP") shares are considered outstanding for this calculation unless unearned. Recognition and Retention Plan ("RRP") shares are considered outstanding as they become vested. Diluted earnings per common share include the dilutive effect of RRP shares and the additional potential common shares issuable under stock options. -------------------------------------------------------------------------------- (Continued) A-30 31 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The factors used in the earnings per share computation are as follows:
Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2000 1999 2000 1999 ---- ---- ---- ---- BASIC EARNINGS PER COMMON SHARE Net income $ 400,722 $ 381,079 $ 849,394 $ 692,463 ========== ========== ========== ========== Weighted average common shares outstanding 2,099,995 2,181,112 2,099,995 2,210,873 Less: Average unallocated ESOP shares (74,558) (93,639) (76,868) (101,258) Less: Average nonvested RRP shares (39,687) (53,614) (41,439) (58,980) ---------- ---------- ---------- ---------- Average Shares 1,985,750 2,033,859 1,981,688 2,050,635 ========== ========== ========== ========== Basic earnings per common share $ .20 $ .19 $ .43 $ .34 ========== ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE Net income $ 400,722 $ 381,079 $ 849,394 $ 692,463 ========== ========== ========== ========== Weighted average common shares outstanding 1,985,750 2,033,859 1,981,688 2,050,635 Less: Dilutive effects of stock options 12,103 10,073 -- 6,125 Less: Dilutive effects of average nonvested RRP shares 2,604 2,198 -- 2,909 ---------- ---------- ---------- ---------- Average shares and dilutive potential common shares 2,000,457 2,046,130 1,981,688 2,059,669 ========== ========== ========== ========== Diluted earnings per common share $ .20 $ .19 $ .43 $ .34 ========== ========== ========== ==========
Stock options and nonvested RRP shares did not have a dilutive effect on the weighted average shares outstanding for the six months ended March 31, 2000, due to the exercise price for the stock options and the fair value at the date of grant for the RRP shares exceeding the average stock price of the Corporation for the six months ended March 31, 2000. -------------------------------------------------------------------------------- (Continued) A-31 32 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 2 - SECURITIES The amortized cost and fair values of securities were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- MARCH 31, 2000 -------------- Available for sale Equity $ 15,000 $ -- $ -- $ 15,000 Mortgage-backed 35,761,324 53,610 (1,061,310) 34,753,624 ----------- -------- ----------- ----------- Total $35,776,324 $ 53,610 $(1,061,310) $34,768,624 =========== ======== =========== =========== Held to maturity Municipal obligations $ 125,000 $ -- $ (2,478) $ 122,522 Mortgage-backed 11,542,959 143,267 (256,831) 11,429,395 ----------- -------- ----------- ----------- Total $11,667,959 $143,267 $ (259,309) $11,551,917 =========== ======== =========== =========== SEPTEMBER 30, 1999 ------------------ Available for sale Equity $ 15,000 $ -- $ -- $ 15,000 Mortgage-backed 36,817,287 254,886 (418,176) 36,653,997 ----------- -------- ----------- ----------- Total $36,832,287 $254,886 $ (418,176) $36,668,997 =========== ======== =========== =========== Held to maturity Municipal obligations $ 125,000 $ -- $ (1,820) $ 123,180 Mortgage-backed 12,192,173 136,856 (253,049) 12,075,980 ----------- -------- ----------- ----------- Total $12,317,173 $136,856 $ (254,869) $12,199,160 =========== ======== =========== ===========
The municipal obligation classified as held to maturity at March 31, 2000 matures December 2002. The Corporation maintains a significant portfolio of mortgage-backed securities in the form of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and Government National Mortgage Association ("GNMA") participation certificates. Mortgage-backed securities generally entitle the Corporation to receive a portion of the cash flows from an identified pool of mortgages, and FHLMC, FNMA and GNMA securities are each guaranteed by their respective agencies as to principal and interest. The Corporation has also invested significant amounts in collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs") which are included in mortgage-backed securities. Substantially all CMOs and REMICs are backed by pools of mortgages insured or guaranteed by the FNMA and FHLMC. -------------------------------------------------------------------------------- (Continued) A-32 33 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 2 - SECURITIES (Continued) During the six months ended March 31, 2000, proceeds from sales of securities available for sale were $798,312 with gross realized gains of $2,003 included in earnings. No sales occurred during the three months ended March 31, 2000. During the three and six months ended March 31, 1999, proceeds from sales of securities available for sale were $3,011,615 with gross realized gains of $28,837 included in earnings. NOTE 3 - LOANS Loans were as follows:
March 31, September 30, 2000 1999 ---- ---- Residential real estate loans 1-4 family (first mortgage) $145,375,495 $159,291,522 Home equity (1-4 family second mortgage) 6,502,098 5,347,292 Multi-family 4,767,157 4,220,538 Nonresidential real estate loans 13,676,171 12,755,574 Construction loans 6,989,269 11,872,585 ------------ ------------ Total real estate loans 177,310,190 193,487,511 Consumer loans Automobile 3,016,732 3,034,752 Loans on deposits 294,096 317,653 Other consumer loans 334,086 378,095 ------------ ------------ Total consumer loans 3,644,914 3,730,500 Commercial loans 4,044,037 3,466,079 ------------ ------------ Total loans 184,999,141 200,684,090 Less: Net deferred loan fees (586,918) (609,131) Loans in process (3,086,999) (7,194,703) Allowance for loan losses (772,337) (765,232) ------------ ------------ Net loans $180,552,887 $192,115,024 ============ ============
The Corporation has sold various loans to other financial intermediaries while retaining the servicing rights. Gains and losses on loan sales are recorded at the time of the sale. Loans sold for which the Corporation has retained servicing totaled $14,791,383 at March 31, 2000 and $15,428,430 at September 30, 1999. Capitalized mortgage servicing rights totaled $189,000 at March 31, 2000 and September 30, 1999. At September 30, 1999, $2,626,923 of one- to four-family residential real estate loans were held for sale. As part of management's plan to improve the Corporation's interest-rate risk position, $17,373,077 of one- to four-family residential fixed-rate real estate loans were transferred from the portfolio to held for sale effective March 31, 2000. Proceeds from the sale of loans during the three and six months ended March 31, 1999 were $2,156,791 and $4,371,901 with net realized gains of $21,298 and $73,913 included in earnings. No loans were sold during the three or six months ended March 31, 2000. -------------------------------------------------------------------------------- (Continued) A-33 34 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 3 - LOANS (Continued) Activity in the allowance for losses on loans was as follows:
Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2000 1999 2000 1999 ---- ---- ---- ---- Beginning balance $790,707 $706,415 $765,232 $676,415 Provision for loan losses 20,000 30,000 45,000 60,000 Recoveries 6,459 -- 7,006 -- Charge-offs (44,829) -- (44,901) -- -------- -------- -------- -------- Ending balance $772,337 $736,415 $772,337 $736,415 ======== ======== ======== ========
Loans considered impaired within the scope of SFAS No. 114 were not significant at March 31, 2000 and September 30, 1999 and during the three and six months ended March 31, 2000 and 1999. Nonperforming loans were as follows.
March 31, September 30, 2000 1999 ---- ---- Loans past due over 90 days still on accrual $ 10,000 $225,000 Nonaccrual loans 265,000 231,000
NOTE 4 - BORROWED FUNDS At March 31, 2000, the Bank had a cash management line of credit enabling it to borrow up to $12,413,550 from the Federal Home Loan Bank ("FHLB") of Cincinnati. The line of credit must be renewed on an annual basis. The next renewal date is April 16, 2000. Variable rate borrowings of $3,010,000 and $9,200,000 were outstanding related to this cash management line of credit at March 31, 2000 and September 30, 1999. As a member of the FHLB system, the Bank has the ability to obtain additional borrowings up to a total of 50% of Bank assets subject to the level of qualified, pledgable one- to four-family residential real estate loans. The Bank had variable rate borrowings totaling $32,800,000, with interest rates ranging from 6.04% to 6.50%, at March 31, 2000 and $7,000,000, with interest rates ranging from 5.33% to 5.51%, at September 30, 1999. The Bank had fixed rate borrowings totaling $10,555,945 at March 31, 2000 and $11,283,463 at September 30, 1999. The interest rates on these borrowings ranged from 5.80% to 6.42% at March 31, 2000 and September 30, 1999. The Bank also had $22,000,000 and $34,000,000 in convertible advances at March 31, 2000 and September 30, 1999, whereby the interest rates are fixed for a specified period of time and then change to variable for the remaining term of the advance. The interest rates on these advances ranged from 5.39% to 6.85% at March 31, 2000 and 5.12% to 5.65% at September 30, 1999. During the six months ended March 31, 2000, $24,000,000 of these advances converted to variable rate and are included in the variable rate total above. Advances under the borrowing agreements are collateralized by a blanket pledge of the Bank's residential mortgage loan portfolio and FHLB stock. -------------------------------------------------------------------------------- (Continued) A-34 35 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 4 - BORROWED FUNDS (Continued) At March 31, 2000, required annual principal payments were as follows:
Period ending March 31: 2001 $12,126,144 2002 2,831,278 2003 2,663,677 2004 710,044 2005 667,760 Thereafter 49,367,042 ----------- $68,365,945 ===========
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES Various contingent liabilities are not reflected in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material effect on financial condition or results of operations of the Corporation. Some financial instruments are used in the normal course of business to meet financing needs of customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These involve, to varying degrees, credit and interest rate risk in excess of the amount reported in the financial statements. Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit, standby letters of credit and written financial guarantees. The same credit policies are used for commitments and conditional obligations as are used for loans. The amount of collateral obtained, if deemed necessary, on extension of credit is based on management's credit evaluation and generally consists of residential or commercial real estate. Lines of credit are primarily home equity lines collateralized by second mortgages on one- to four-family residential real estate and commercial lines of credit collateralized by business assets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being used, the total commitments do not necessarily represent future cash requirements. As of March 31, 2000 and September 30, 1999, the Corporation had commitments to make fixed rate, one- to four-family residential real estate loans at current market rates totaling $225,000 and $1,040,000. Loan commitments are generally for thirty days. The interest rate on the fixed rate commitments ranged from 7.50% to 9.75% at March 31, 2000 and 7.00% to 10.25% at September 30, 1999. The Corporation had commitments to make variable rate, one- to four-family residential real estate loans totaling $223,000, with interest rates ranging from 7.13% to 7.63% at September 30, 1999. No variable rate loan commitments were outstanding at March 31, 2000. As of March 31, 2000 and September 30, 1999, the Corporation had $4,233,000 and $4,540,000 in unused variable rate home equity lines of credit and $1,387,000 and $2,034,000 in unused variable rate commercial lines of credit. -------------------------------------------------------------------------------- (Continued) A-35 36 MILTON FEDERAL FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued) At March 31, 2000 and September 30, 1999, the Corporation had standby letter of credit commitments totaling $465,000. At March 31, 2000 and September 30, 1999, compensating balances of $1,552,000 and $1,693,000 were required as deposits with the FHLB and Federal Reserve. These balances do not earn interest. The Corporation has entered employment agreements with certain officers of the Corporation. Each of the agreements provide for a term of three years and a salary and performance review by the Board of Directors not less than annually, as well as inclusion of the employee in any formally established employee benefit, bonus, pension and profit sharing plans for which management personnel are eligible. NOTE 6 - PROPOSED MERGER On January 13, 2000, an Agreement and Plan and Reorganization by and between BancFirst Ohio Corp. ("BFOH"), The First National Bank of Zanesville ("FNBZ"), the Corporation and the Bank was signed. The Agreement provides for the merger of the Bank with and into FNBZ. Under the terms of the Agreement, BFOH will exchange .444 shares of its common stock and $6.80 in cash for each of the outstanding shares of the Corporation. The Corporation's unexercised stock options will be redeemed for cash equal to the consideration to be received by BFOH shareholders, less $13.69, the exercise price of the option. Based on BFOH's closing price of $20.375 on January 12, 2000, and the 2,099,995 outstanding shares of the Corporation as of May 5, 2000, the transaction would be valued at $33.3 million. The merger is expected to be consummated in the second quarter of 2000, pending approval by the Corporation's shareholders, regulatory approval and other customary conditions of closing. The Corporation has granted to BFOC an option to purchase up to 19.9% of the Corporation's outstanding shares upon the occurrence of certain events. NOTE 7 - REGULATORY MATTERS Because the Bank's sensitivity to interest rate risk, as computed in accordance with regulatory requirements, exceeds limitations established by the Corporation's Board of Directors, the Bank has submitted to the Office of Thrift Supervision ("OTS") an interest rate risk compliance plan, which includes several initiatives to be taken to decrease the Bank's interest rate risk. Those initiatives include decreasing the terms to maturity or repricing of the Bank's assets by refraining from originating fixed-rate mortgage loans (unless they have already been committed to be sold), selling some fixed-rate loans already held in the Bank's portfolio, originating and purchasing adjustable-rate loans, and selling mortgage derivative investments and reinvesting the proceeds in short-term bonds and notes. The initiatives also include lengthening the terms to maturity of the Bank's liabilities by emphasizing certificates of deposit with terms of two years or longer, and shifting borrowings toward fixed-rate advances with longer terms to maturity. In the current interest rate environment, these initiatives could negatively affect the earnings of the Corporation due to incurring losses on the sale of assets and a reduction in net interest margin. If the plan is not approved or the Bank does not comply with the plan, the OTS could initiate a process that could result in limitations being placed on the Bank's activities, growth or earnings. -------------------------------------------------------------------------------- A-36