<PAGE> 1
Exhibit 99.1
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
A-1
<PAGE> 2
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
A-2
<PAGE> 3
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
A-3
<PAGE> 4
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Unearned Accumulated
Additional Employee Other
Paid-In Retained Treasury Benefit Comprehensive
Capital Earnings Stock Plan Shares Income Total
------- -------- ----- ----------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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
=========== =========== =========== =========== ======== ===========
</TABLE>
(Continued)
A-4
<PAGE> 5
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued) Years ended September 30, 1999,
1998 and 1997
<TABLE>
<CAPTION>
Unearned Accumulated
Additional Employee Other
Paid-In Retained Treasury Benefit Comprehensive
Capital Earnings Stock Plan Shares Income Total
------- -------- ----- ----------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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
============ =========== ============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
A-5
<PAGE> 6
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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)
</TABLE>
(Continued)
A-6
<PAGE> 7
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
A-7
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
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
=============== =========== ============= ================
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
============= =============
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
(Continued)
A-12
<PAGE> 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:
<TABLE>
<CAPTION>
<S> <C>
Beginning balance - October 1, 1998 $ 567,280
New loans 140,079
Repayments (247,925)
--------------
Ending balance - September 30, 1999 $ 459,434
==============
</TABLE>
NOTE 4 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
============= =============
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
<S> <C>
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
===============
</TABLE>
NOTE 7 - INCOME TAXES
Income tax expense was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
The sources of year-end gross deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
============= =============
</TABLE>
(Continued)
A-14
<PAGE> 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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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%
============= ============= =============
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
<S> <C>
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
===============
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
============== ==============
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1999 1998
----------------------- ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
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)
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
=============== ================
</TABLE>
Condensed Statements of Income
Years Ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
============== ============== ===============
</TABLE>
(Continued)
A-23
<PAGE> 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
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
A-24
<PAGE> 25
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
--------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
A-25
<PAGE> 26
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
A-26
<PAGE> 27
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
========= ======== ========= ========
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
A-27
<PAGE> 28
MILTON FEDERAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
A-28
<PAGE> 29
MILTON FEDERAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
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 --
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
A-29
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
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
=========== ======== =========== ===========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
<S> <C> <C>
Loans past due over 90 days still on accrual $ 10,000 $225,000
Nonaccrual loans 265,000 231,000
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Period ending March 31:
<S> <C>
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
===========
</TABLE>
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.
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(Continued)
A-35
<PAGE> 36
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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.
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