<PAGE> 1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number 0-24834
-------
MILTON FEDERAL FINANCIAL CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1412064
- ---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
25 Lowry Drive, West Milton, Ohio 45383
---------------------------------------
(Address of principal executive offices) (zip code)
(937) 698-4168
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
As of May 4, 1998 the latest practicable date, 2,236,836 shares of the
registrant's common shares, no par value, were issued and outstanding.
<PAGE> 2
MILTON FEDERAL FINANCIAL CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets ....................................... 3
Consolidated Statements of Income ................................. 4
Consolidated Statements of Changes in Shareholders' Equity......... 5
Consolidated Statements of Cash Flows ............................. 7
Notes to Consolidated Financial Statements ........................ 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 20
Item 3. Quantitative and Qualitative Disclosure About Market Risk..... 28
PART II - OTHER INFORMATION.............................................. 30
SIGNATURES .............................................................. 31
2.
<PAGE> 3
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 664,959 $ 696,629
Overnight deposits in other financial institutions - 3,500,000
Interest-bearing deposits in other financial institutions 201,240 1,436,490
------------- -------------
Total cash and cash equivalents 866,199 5,633,119
Securities available for sale 1,015,000 5,519,885
Securities held to maturity (Fair value of
$2,001,720 at March 31, 1998 and $3,260,087 at
September 30, 1997) 2,003,574 3,254,385
Mortgage-backed and related securities available for sale 47,209,732 47,842,476
Mortgage-backed and related securities held to maturity
(Fair value of $15,788,583 at March 31, 1998 and
$12,055,248 at September 30, 1997) 15,821,535 12,125,253
Federal Home Loan Bank stock 2,432,800 2,013,200
Loans, net 151,507,243 127,395,541
Premises and equipment, net 2,670,664 2,734,708
Cash surrender value of life insurance 1,558,093 1,524,502
Accrued interest receivable 1,183,762 1,184,122
Other assets 442,615 730,547
------------- -------------
Total assets $ 226,711,217 $ 209,957,738
============= =============
LIABILITIES
Deposits $ 151,690,217 $ 142,831,783
Borrowed funds 46,663,748 39,569,906
Advance payments by borrowers for taxes and insurance 224,686 165,805
Accrued interest payable 250,863 192,195
Other liabilities 2,157,661 810,179
------------- -------------
Total liabilities 200,987,175 183,569,868
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares
authorized, none outstanding
Common stock, no par value, 9,000,000 shares authorized,
2,578,875 shares issued
Additional paid-in capital 25,070,257 25,017,419
Retained earnings 8,003,797 7,975,535
Treasury stock, at cost, 342,039 shares at March 31,
1998 and 274,039 shares at September 30, 1997 (5,106,371) (4,050,307)
Unearned employee stock ownership plan shares (1,321,623) (1,444,169)
Unearned recognition and retention plan shares (946,884) (1,054,575)
Unrealized gain/(loss) on securities available for sale, net of tax 24,866 (56,033)
------------- -------------
Total shareholders' equity 25,724,042 26,387,870
------------- -------------
Total liabilities and shareholders' equity $ 226,711,217 $ 209,957,738
============= =============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
<PAGE> 4
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
--------- ---------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees $2,862,049 $2,272,200 $5,566,769 $4,641,133
Mortgage-backed and
related securities 979,024 788,012 2,009,197 1,559,113
Securities 76,042 110,829 220,364 227,388
Other, including dividend income 62,086 52,229 109,040 96,761
---------- ---------- ---------- ----------
3,979,201 3,223,270 7,905,370 6,524,395
INTEREST EXPENSE
Deposits 1,855,675 1,646,325 3,698,117 3,264,381
Borrowed funds 664,602 224,609 1,292,385 489,561
---------- ---------- ---------- ----------
2,520,277 1,870,934 4,990,502 3,753,942
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,458,924 1,352,336 2,914,868 2,770,453
Provision for loan losses 60,000 21,000 84,000 41,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,398,924 1,331,336 2,830,868 2,729,453
NONINTEREST INCOME
Service charges and other fees 49,557 27,265 98,140 62,335
Net realized gain on sale of
available for sale securities 174,874 11,994 174,874 44,685
Gain on sale of loans - - - 118,281
Other income 29,688 27,116 59,788 52,063
---------- ---------- ---------- ----------
254,119 66,375 332,802 277,364
NONINTEREST EXPENSE
Salaries and employee benefits 600,065 570,296 1,229,879 1,110,720
Occupancy expense 88,861 74,952 181,593 141,738
Data processing services 58,629 46,853 106,004 84,687
Federal deposit insurance
premiums 22,225 5,421 44,012 78,417
State franchise taxes 87,282 88,875 175,790 194,836
Advertising 13,831 10,103 28,693 27,565
Other expenses 149,318 174,652 319,255 343,357
---------- ---------- ---------- ----------
1,020,211 971,152 2,085,226 1,981,320
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX 632,832 426,559 1,078,444 1,025,497
Income tax expense 219,000 144,000 374,000 348,000
---------- ---------- ---------- ----------
NET INCOME $ 413,832 $ 282,559 $ 704,444 $ 677,497
========== ========== ========== ==========
Earnings per common share - Basic $ 0.20 $ 0.13 $ 0.34 $ 0.31
========== ========== ========== ==========
Earnings per common share - Diluted $ 0.20 $ 0.13 $ 0.33 $ 0.31
========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
<PAGE> 5
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six months ended March 31, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Unearned Gain/(Loss)
Additional Employee on Securities
Paid-In Retained Treasury Benefit Plan Available
Capital Earnings Stock Shares for Sale Total
------- -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996 $ 24,951,691 $ 13,535,280 $ (1,997,640) $ (2,920,436) $ (89,492) $ 33,479,403
Net income for the period - 677,497 - - - 677,497
Cash dividends -
$2.79 per share - (6,290,530) - - - (6,290,530)
Commitment to release 9,564
employee stock ownership
plan shares 31,243 - - 103,152 - 134,395
7,478 shares earned under
recognition and retention plan - - - 107,691 - 107,691
Purchase of treasury stock,
122,496 shares at cost - - (1,740,754) - - (1,740,754)
Change in unrealized gain/(loss)
on securities available for sale - - - - (18,523) (18,523)
------------ ------------ ------------ ------------ ----------- ------------
Balance at March 31, 1997 $ 24,982,934 $ 7,922,247 $ (3,738,394) $ (2,709,593) $ (108,015) $ 26,349,179
============ ============ ============ ============ =========== ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
5.
<PAGE> 6
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Six months ended March 31, 1998 and 1997
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Unearned Gain/(Loss)
Additional Employee on Securities
Paid-In Retained Treasury Benefit Plan Available
Capital Earnings Stock Shares for Sale Total
------- -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1997 $ 25,017,419 $ 7,975,535 $ (4,050,307) $ (2,498,744) $ (56,033) $ 26,387,870
Net income for the period - 704,444 - - - 704,444
Cash dividends -
$0.30 per share - (676,182) - - - (676,182)
Commitment to release 10,466
employee stock ownership
plan shares 52,838 - - 122,546 - 175,384
7,478 shares earned under
recognition and retention
plan - - - 107,691 - 107,691
Purchase of treasury stock,
68,000 shares at cost - - (1,056,064) - - (1,056,064)
Change in unrealized gain/(loss)
on securities available for sale - - - - 80,899 80,899
------------ ------------ ------------ ------------ ---------- ------------
Balance at March 31, 1998 $ 25,070,257 $ 8,003,797 $ (5,106,371) $ (2,268,507) $ 24,866 $ 25,724,042
============ ============ ============ ============ ========== ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6.
<PAGE> 7
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 704,444 $ 677,497
Adjustments to reconcile net income to net cash from
operating activities
Amortization of deferred loan origination fees (68,505) (47,927)
Amortization of premiums, accretion of discounts, net 12,490 14,434
Provision for loan losses 84,000 41,000
Depreciation 107,179 72,187
Increase in cash value of life insurance (33,591) (34,247)
Net realized gain on sale of available for sale securities (174,874) (44,685)
Proceeds from sale of loans - 10,377,554
Net gain on sale of loans - (118,281)
Deferred gain on sale of real estate owned - (42,056)
Federal Home Loan Bank stock dividends (82,100) (41,400)
Compensation expense on ESOP shares 175,384 134,395
Compensation expense on RRP shares 107,691 107,691
Deferred tax expense (10,001) 13,538
Change in accrued interest receivable and other assets 288,292 (197,054)
Change in income taxes payable 77,483 334,000
Change in accrued expenses and other liabilities 1,296,990 (743,684)
----------- ----------
Net cash from operating activities 2,484,882 10,502,962
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases - (3,500,000)
Proceeds from maturities 4,500,000 6,000,000
Proceeds from sales - 2,000,000
Securities held to maturity
Purchases (1,000,000) (2,251,875)
Proceeds from maturities 2,250,000 -
Mortgage-backed and related securities available for sale
Purchases (8,942,189) (6,793,105)
Proceeds from principal payments 1,272,022 348,153
Proceeds from sales 8,615,431 4,756,462
Mortgage-backed and related securities held to maturity
Purchases (4,661,533) -
Proceeds from principal payments 943,388 917,025
Increase in loans, net (24,127,197) (7,677,029)
Premises and equipment expenditures (43,135) (438,736)
Purchase Federal Home Loan Bank stock (337,500) -
Proceeds from sale of real estate owned - 74,710
----------- ----------
Net cash from investing activities (21,530,713) (6,564,395)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
7.
<PAGE> 8
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts $ 8,858,434 $ 7,285,902
Net change in advance payments by borrowers for taxes
and insurance 58,881 (11,675)
Net change in short-term borrowings (600,000) (2,200,000)
Proceeds from long-term debt 26,600,000 1,500,000
Principal payments on long-term debt (18,906,158) (1,112,000)
Cash dividends paid (676,182) (6,290,530)
Purchase of treasury stock (1,056,064) (1,740,754)
------------ ------------
Net cash from financing activities 14,278,911 (2,569,057)
------------ ------------
Net change in cash and cash equivalents (4,766,920) 1,369,510
Cash and cash equivalents at beginning of period 5,633,119 1,301,009
------------ ------------
Cash and cash equivalents at end of period $ 866,199 $ 2,670,519
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 4,931,834 $ 3,760,293
Income taxes 558,815 -
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8.
<PAGE> 9
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of Milton Federal Financial Corporation (the
"Corporation") at March 31, 1998, and its results of operations and cash flows
for the periods presented. All such adjustments are normal and recurring in
nature. The accompanying financial statements have been prepared in accordance
with the instructions of Form 10-Q and, therefore, do not purport to contain all
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances, and should be
read in conjunction with financial statements, and notes thereto, of the
Corporation for the fiscal year ended September 30, 1997, included in its 1997
annual report. Refer to the accounting policies of the Corporation described in
the notes to financial statements contained in the Corporation's 1997 annual
report. The Corporation has consistently followed these policies in preparing
this Form 10-Q.
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, Milton Federal Savings Bank (the "Bank"). The
financial statements of the Bank include accounts of its wholly-owned
subsidiary, Milton Financial Service Corporation. Milton Financial Service
Corporation holds stock in Intrieve, Inc., the data processing center utilized
by the Bank. All significant intercompany accounts and transactions have been
eliminated.
The Corporation is a thrift holding company engaged in the business of
commercial and retail banking services with operations conducted through its
main office in West Milton, Ohio, and from its full-service branch offices
located in Englewood and Brookville, Ohio. The Corporation also operates a loan
production office in Tipp City, Ohio. Miami, Montgomery and Darke Counties
provide the source for substantially all the Corporation's deposit and lending
activities. The majority of the Corporation's income is derived from
residential, nonresidential and consumer lending activities, and investments.
To prepare financial statements in conformity with generally accepted accounting
principals, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The collectibility of loans, fair values of financial instruments and
status of contingencies are particularly subject to change.
Income tax expense is the sum of the current-year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
Securities are classified as held to maturity and carried at amortized cost when
management has the positive intent and ability to hold them to maturity.
Securities are classified as available for sale when they might be sold before
maturity. Securities available for sale are carried at fair value, with
unrealized holding gains and losses reported separately in shareholders' equity,
net of tax. Securities are classified as trading when held for short-term
periods in anticipation of market gains and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The allowance for loan losses is a valuation allowance, increased by the
provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the allowance balance required based on past loan loss
experience, known and inherent risks in the portfolio, information about
specific borrower situations and estimates collateral values, economic
conditions and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged off.
A loan is considered impaired when management believes full collection of
principal and interest is not probable. The carrying value of impaired loans is
reduced to the present value of expected future cash flows, or to the fair value
of collateral if the loan is collateral dependent, by allocating a portion of
the allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require an increase, such increase is reported as
bad debt expense.
Loan impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer and credit card loans, and on an
individual loan basis for other loans. In addition, loans held for sale are
excluded from consideration as impaired. Loans are evaluated for impairment when
payments are delayed, typically 90 days or more, or when the internal grading
system indicates a doubtful classification. The carrying values of impaired
loans are periodically adjusted to reflect cash payments, revised estimates of
future cash flows and increases in the present value of expected cash flows due
to passage of time. Cash payments representing interest income are reported as
such. Other cash payments are reported as reductions in carrying value, while
increases or decreases due to changes in future payments and due to passage of
time are reported as part of the provision for loan losses.
The Corporation has sold various loans to other financial intermediaries while
retaining servicing rights. Gains and losses on loan sales are recorded at the
time of the cash sale. Under a new accounting standard adopted in fiscal 1997,
mortgage servicing rights are recorded as assets when the related loan is sold.
These assets are amortized in proportion to, and over the period of, estimated
net servicing income and are evaluated periodically for impairment. Impairment
is evaluated based on the fair value of the rights using groupings of underlying
loans with similar characteristics. The adoption of this standard did not
materially affect the financial statements in the periods presented.
The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," on December 31, 1998. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share ("EPS") for entities with
complex capital structures. All prior EPS data has been restated to conform to
the new method. Basic EPS is based on net income divided by the weighted average
number of shares outstanding during the period. Diluted EPS shows the dilutive
effect of unearned recognition and retention plan ("RRP") shares and the
additional common shares issuable under stock options. The weighted average
number of shares outstanding for basic EPS was 2,069,291 and 2,080,462 for the
three and six months ended March 31, 1998. The weighted average number of shares
outstanding for basic EPS was 2,114,817 and 2,159,349 for the three and six
months ended March 31, 1997. The weighted average number of shares outstanding
for diluted EPS, which includes the effect of stock options granted and unearned
RRP shares using the treasury stock method, was 2,107,215 and 2,114,853 for the
three and six months ended March 31, 1998. Similarly, the weighted average
number of shares outstanding for diluted EPS was 2,121,444 and 2,165,319 for the
three and six months ended March 31, 1997. The dilutive effect of unearned RRP
shares was to increase weighted average shares outstanding for basic EPS by
8,608 and 9,163 for the three and six months ended March 31, 1998. Unearned RRP
shares did not have a dilutive effect on the weighted average shares outstanding
for the three and six months ended March 31, 1997. The dilutive effect of stock
options was to increase weighted average shares outstanding for basic EPS by
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
29,316 and 25,228 for the three and six months ended March 31, 1998 and 6,627
and 5,970 for the three and six months ended March 31, 1997. Unreleased employee
stock ownership plan shares are not considered to be outstanding for determining
the weighted average number of shares used in calculating both basic and diluted
EPS. Unearned RRP shares are not considered to be outstanding shares for
determining the weighted average number of shares used in calculating basic EPS.
SFAS No. 129, "Disclosures of Information about Capital Structure," became
effective for the Corporation as of December 31, 1997. SFAS No. 129 consolidated
existing accounting guidance relating to disclosure about a company's capital
structure. SFAS No. 129 did not affect the Corporation's disclosures.
In June 1997, the Financial Account Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. It does not require a specific format for that financial
statement, but requires an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 requires an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
public business enterprises report information about operating segments in
annual financial statements, and requires those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about an
enterprise's reportable operating segments which is based on reporting
information the way management organizes the segments within the enterprise for
making operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information be disclosed for
each reportable segment than is presently being reported in annual financial
statements and also requires selected information be reported in interim
financial statements. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997.
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and fair values of securities are as follows:
<TABLE>
<CAPTION>
------------------------------March 31, 1998---------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Securities
U.S. Government and
federal agency securities $ 1,000,000 $ - $ - $ 1,000,000
Equity securities 15,000 - - 15,000
----------------- ------------ ------------ -----------------
Total securities $ 1,015,000 $ - $ - $ 1,015,000
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 2,518,742 $ 39,401 $ - $ 2,558,143
GNMA certificates 2,945,752 3,535 (6,034) 2,943,253
FHLMC certificates 2,579,009 28,375 - 2,607,384
Collateralized mortgage
obligations and REMICs 39,128,551 201,851 (229,450) 39,100,952
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 47,172,054 $ 273,162 $ (235,484) $ 47,209,732
================= ============ ============ =================
SECURITIES HELD TO MATURITY
Securities
U.S. Government and
federal agency securities $ 2,003,574 $ - $ (1,854) $ 2,001,720
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 4,776,141 $ 15,835 $ (61,373) $ 4,730,603
GNMA certificates 697,821 36,251 - 734,072
FHLMC certificates 5,688,546 21,569 (65,533) 5,644,582
Collateralized mortgage
obligations and REMICs 4,659,027 20,445 (146) 4,679,326
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 15,821,535 $ 94,100 $ (127,052) $ 15,788,583
================= ============ ============ =================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 13
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
----------------------------September 30, 1997-------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Securities
U.S. Government and
federal agency securities $ 5,500,575 $ 6,319 $ (2,009) $ 5,504,885
Equity securities 15,000 - - 15,000
----------------- ------------ ------------ -----------------
Total securities $ 5,515,575 $ 6,319 $ (2,009) $ 5,519,885
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 2,819,302 $ 32,045 $ - $ 2,851,347
FHLMC certificates 2,821,791 41,355 - 2,863,146
Collateralized mortgage
obligations and REMICs 42,290,593 318,118 (480,728) 42,127,983
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 47,931,686 $ 391,518 $ (480,728) $ 47,842,476
================= ============ ============ =================
SECURITIES HELD TO MATURITY
Securities
U.S. Government and
federal agency security $ 3,254,385 $ 11,274 $ (5,572) $ 3,260,087
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 5,191,291 $ 41,591 $ (88,830) $ 5,144,052
GNMA certificates 810,348 41,570 - 851,918
FHLMC certificates 6,123,614 53,307 (117,643) 6,059,278
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 12,125,253 $ 136,468 $ (206,473) $ 12,055,248
================= ============ ============ =================
</TABLE>
Substantially all collateralized mortgage obligations and REMICs (real estate
mortgage investment conduits) are backed by pools of mortgages insured or
guaranteed by the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC").
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 14
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair value of securities at March 31, 1998, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at
a single maturity, primarily mortgage-backed and related securities, are shown
separately.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---- ----------
<S> <C> <C>
SECURITIES AVAILABLE FOR SALE
Due after one through five years $ 1,000,000 $ 1,000,000
Equity securities 15,000 15,000
--------------- ----------------
Total securities 1,015,000 1,015,000
Mortgage-backed and related securities 47,172,054 47,209,732
--------------- ----------------
Total $ 48,187,054 $ 48,224,732
=============== ================
SECURITIES HELD TO MATURITY
Due after one through five years $ 2,003,574 $ 2,001,720
Mortgage-backed and related securities 15,821,535 15,788,583
--------------- ----------------
Total $ 17,825,109 $ 17,790,303
=============== ================
</TABLE>
No securities available for sale were sold during the six months ended March 31,
1998. During the six months ended March 31, 1997, proceeds from the sales of
securities available for sale were $2,000,000 with gross realized gains of $119
included in earnings.
During the six months ended March 31, 1998, proceeds from the sales of
mortgage-backed and related securities available for sale were $8,615,431 with
gross realized gains of $174,874 included in earnings. During the six months
ended March 31, 1997, proceeds from the sales of mortgage-backed and related
securities available for sale were $4,756,462 with gross realized gains of
$44,566 included in earnings.
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE> 15
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
<TABLE>
<CAPTION>
Loans consisted of the following:
March 31, September 30,
1998 1997
---- ----
<S> <C> <C>
Residential real estate loans
1-4 family (first mortgage) $ 126,788,405 $ 108,941,460
Home equity (1-4 family second mortgage) 4,076,256 4,051,527
Multi-family 1,889,213 1,456,604
Nonresidential real estate loans 7,744,992 6,214,622
Construction loans 11,370,020 9,399,848
---------------- -----------------
Total real estate loans 151,868,886 130,064,061
Consumer loans
Automobile 2,759,219 2,305,331
Loans on deposits 348,904 280,542
Other consumer loans 273,194 246,543
---------------- -----------------
Total consumer loans 3,381,317 2,832,416
Commercial loans 1,662,532 574,819
---------------- -----------------
Total loans 156,912,735 133,471,296
Less:
Deferred loan fee income 599,074 536,713
Loans in process 4,265,611 4,976,840
Allowance for loan losses 540,807 562,202
---------------- -----------------
Net loans $ 151,507,243 $ 127,395,541
================ =================
</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 $8,647,160 at March 31, 1998 and $9,843,149 at September 30,
1997. Capitalized mortgage servicing rights at March 31, 1998 were $96,171 and
$109,473 at September 30, 1997. At March 31, 1998 the Corporation had $9.5
million of fixed-rate, 1-4 family first mortgage loans, included above, which
are classified as held for sale. These loans are recorded at the lower of cost
or market in the aggregate. There were no loans classified as held for sale at
September 30, 1997. The Corporation sold $10.3 million in fixed-rate, 1-4 family
first mortgage loans, realizing a net gain of $118,000, during the six months
ended March 31, 1997. No loans were sold during the three or six months ended
March 31, 1998 or the three months ended March 31, 1997.
Activity in the allowance for losses on loans for the three- and six-month
periods ended March 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31
--------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balance $ 485,431 $ 507,202 $ 562,202 $ 487,202
Provision for loan losses 60,000 21,000 84,000 41,000
Recoveries - - - -
Charge-offs (4,624) - (105,395) -
------------ ------------ ------------ ------------
Ending balance $ 540,807 $ 528,202 $ 540,807 $ 528,202
============ ============ ============ ============
</TABLE>
As of and for the three and six months ended March 31, 1998 and 1997, no loans
were considered impaired within the scope of SFAS No. 114.
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE> 16
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - BORROWED FUNDS
At March 31, 1998, the Bank had a cash management line of credit enabling it to
borrow up to $8,600,000 from the Federal Home Loan Bank (FHLB) of Cincinnati.
The line of credit must be renewed on an annual basis. The next renewal date is
April 18, 1998. Borrowings outstanding on this line of credit totaled
$1,000,000, with an interest rate of 5.92%, at March 31, 1998, and $1,600,000,
with an interest rate of 5.90%, at September 30, 1997. Additionally, as a member
of the FHLB system, the Bank has the ability to obtain additional borrowings up
to a total of $56,302,000, including the line of credit. Accordingly, the Bank
had variable-rate borrowings totaling $32,630,000 at March 31, 1998 and
$32,805,000 at September 30, 1997. The interest rates on the borrowings adjust
monthly. The interest rates on the borrowings ranged from 5.12% to 6.20% at
March 31, 1998 and 5.61% to 6.20% at September 30, 1997. The Bank also had
fixed-rate borrowings totaling $13,033,748 at March 31, 1998 and $5,164,906 at
September 30, 1997. The interest rates on these borrowings ranged 5.80% to 6.42%
at March 31, 1998 and September 30, 1997. Advances under the borrowing agreement
are collateralized by a blanket pledge of the Bank's residential mortgage loan
portfolio and FHLB stock.
At March 31, 1998, required annual principal payments are as follows:
<TABLE>
<CAPTION>
Period ending March 31:
<S> <C>
1999 $ 4,605,371
2000 7,242,433
2001 11,076,144
2002 1,831,278
2003 2,663,677
Thereafter 19,244,845
---------------
$ 46,663,748
===============
</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, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material effect
on financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet
financing needs of customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. These
involve, to varying degrees, credit risk more than the amount reported in the
financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on an extension of credit is based on
management's credit evaluation and generally consists of residential or
commercial real estate. Lines of credit are primarily home equity lines
collateralized by second mortgages on 1-4 family residential real estate and
commercial lines of credit collateralized by business assets.
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE> 17
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
(Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements.
As of March 31, 1998 and September 30, 1997, the Corporation had commitments to
make fixed-rate, 1-4 family residential real estate loans at current market
rates totaling $6,495,000 and $1,780,000. Loan commitments are generally for 30
days. The interest rate on commitments ranged from 5.88% to 8.75% at March 31,
1998, and 6.25% to 9.25% at September 30, 1997. The Corporation had commitments
to make variable-rate, 1-4 family residential loans totaling $828,000 at March
31, 1998 and $75,000 at September 30, 1997. As of March 31, 1998 and September
30, 1997, the Corporation had $4,473,000 and $3,617,000 in unused variable-rate
home equity lines of credit. During fiscal 1997, the Corporation began offering
commercial-purpose line-of-credit loans. At March 31, 1998 and September 30,
1997, unused commercial lines of credit totaled $586,000 and $239,000.
Standby letters of credit are conditional commitments to guarantee a customer's
performance to a third party. At March 31, 1998 and September 30, 1997, the
Corporation had standby letter-of-credit commitments totaling $86,000 and
$301,000.
The Corporation has committed to participate with another financial institution
in a 15-year, balloon $300,000 loan secured by multifamily residential real
estate. The Corporation's 90% interest in the loan will be $270,000. Under the
agreement, the other institution will be funding the loan with FHLB advances,
and the Corporation will be required to disburse cash only if the FHLB requires
the other financial institution to prepay the advance.
At March 31, 1998 and September 30, 1997, compensating balances of $498,000 and
$352,000 were required as deposits with the FHLB. The balances do not earn
interest.
The Corporation and the Bank have entered employment agreements with certain
officers of the Corporation and the Bank. Each of the agreements provide for a
term of three years and a salary and performance review by the Board of
Directors not less often than annually, as well as inclusion of the employee in
any formally-established employee benefit, bonus, pension and profit-sharing
plans for which management personnel are eligible. The employment agreements
also provide for vacation and sick leave.
NOTE 6 - STOCK OPTION PLAN
On March 20, 1995, the Stock Option Committee of the Board of Directors granted
options to purchase 238,545 shares of common stock, at an exercise price of
$13.69 to certain officers and directors of the Bank and the Corporation.
One-fifth of the options awarded become exercisable on each of the first five
anniversaries of the date of grant. The option period expires 10 years from the
date of grant. At March 31, 1998 and September 30, 1997, options to purchase
143,127 shares were exercisable. No options were exercised during the three- and
six-month periods ended March 31, 1998 and 1997. In addition, there are 19,342
shares of authorized but unissued common stock reserved for which no options
have been granted.
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE> 18
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - STOCK OPTION PLAN (Continued)
On October 1, 1997, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 encourages, but does not require,
entities to use a "fair value based method" to account for stock-based
compensation plans. If the fair value accounting encouraged by SFAS No. 123 is
not adopted, entities must still disclose the pro forma effect on net income and
earnings per share had the accounting method been adopted. Fair value of a stock
option is to be estimated using an option-pricing model considering exercise
price, expected life of the option, current price of the stock, expected price
volatility, expected dividends on the stock and the risk-free interest rate.
Once estimated, the fair value of an option is not changed. Currently, the
Corporation does not have any options subject to the new accounting and
disclosure requirements.
NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation offers an employee stock ownership plan ("ESOP") for the benefit
of substantially all employees of the Corporation and the Bank. The ESOP has
received a favorable determination letter from the Internal Revenue Service on
the qualified status of the ESOP under applicable provisions of the Internal
Revenue Code.
The ESOP borrowed funds from the Corporation to acquire common shares of the
Corporation. The loan is secured by the shares purchased with the loan proceeds,
and will be repaid by the ESOP with funds from the Bank's discretionary
contributions to the ESOP and earnings on ESOP assets. All dividends received on
unallocated shares by the ESOP are used to pay debt service. The shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is repaid. As payments are made and shares are
released from the suspense account, such shares will be validly issued, fully
paid and nonassessable.
The Corporation accounts for its ESOP in accordance with Statement of Position
("SOP") 93-6. Accordingly, shares pledged as collateral are reported as unearned
ESOP shares in the consolidated balance sheets. As shares are released from
collateral, the Corporation reports compensation expense equal to the current
market price of the shares, and shares become outstanding for earnings-per-share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt and accrued interest. ESOP compensation expense was $89,000
and $175,384 for the three and six months ended March 31, 1998. ESOP
compensation expense was $66,351 and $134,395 for the three and six months ended
March 31, 1997. The ESOP shares as of March 31, 1998 and September 30, 1997 were
as follows:
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
---- ----
<S> <C> <C>
Allocated shares 69,991 38,248
Shares released for allocation 10,466 19,124
Unreleased shares 110,783 133,868
----------- ------------
Total ESOP shares 191,240 191,240
=========== ============
Fair value of unreleased shares $ 1,758,680 $ 2,041,487
=========== ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE> 19
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - RECOGNITION AND RETENTION PLAN
The Corporation maintains a recognition and retention plan ("RRP") for the
benefit of directors and certain key employees of the Bank and Corporation. The
RRP is used to provide such individuals ownership interest in the Corporation in
a manner designed to compensate such directors and key employees for services to
the Bank. The Bank contributed sufficient funds to enable the RRP to purchase a
number of common shares in the open market was equal to 4% of the common shares
sold in connection with the Bank's conversion from a mutual savings and loan
association to a stock savings bank.
In October 1995, the RRP Committee of the Board of Directors awarded 74,784
shares to certain directors and officers of the Bank and the Corporation. No
shares had been previously awarded. One-fifth of such shares will be earned and
nonforfeitable on each of the first five anniversaries of the date of the
awards. In case of the death or disability of a participant, however, the
participant's shares will be deemed earned and nonforfeitable upon such date. As
of March 31, 1998 and September 30, 1997, 29,914 and 14,957 shares, have been
earned and distributed. There were 28,371 shares at March 31, 1998 and September
30, 1997, reserved for future awards. Compensation expense, which is based on
the cost of the shares, totaled $53,845 and $107,691 for the three- and
six-month periods ended March 31, 1998 and 1997.
- --------------------------------------------------------------------------------
19.
<PAGE> 20
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
The following discusses the financial condition of the Corporation as of March
31, 1998, as compared to September 30, 1997, and the results of operations for
the three- and six-month periods ended March 31, 1998, compared with the same
periods in 1997. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein.
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein, the following
discussion contains forward-looking statements involving risks and
uncertainties. Economic circumstances, the Corporation's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some factors that could cause or contribute to such differences are
discussed herein, but also include changes in the economy and interest rates in
the nation and in the Corporation's general market area.
Some of the forward-looking statements included herein are statements regarding:
1. Management's determination of the amount of loan loss allowance and of
the loan loss provision;
2. The Corporation's intention to borrow additional funds as
opportunities to leverage excess capital arise;
3. Changes in the amount of deposit insurance assessments;
4. The sufficiency of the Corporation's liquidity and capital reserves;
and,
5. The effect on the Corporation of amendments to core capital
requirement regulations.
See Exhibit 99, Safe Harbor Under the Private Securities Litigation Reform Act
of 1995, included in this document.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $226.7 million at March 31, 1998, an increase
of $16.7 million, or 8.0%, from $210.0 million at September 30, 1997. The growth
in assets was primarily in mortgage-backed and related securities and loans.
Such growth was funded by the use of overnight deposits and interest-bearing
deposits in other financial institutions, increased deposits and borrowed funds.
Total securities and FHLB stock decreased $2.3 million from $70.8 million at
September 30, 1997 to $68.5 million at March 31, 1998. The decrease was due to
$9.0 million in maturities and principal repayments combined with $8.4 million
in sales of mortgage-backed and related securities available for sale. The sales
were primarily made for interest rate risk strategy purposes. The decline was
partly offset by $15.3 million in purchases as the majority of the proceeds from
the aforementioned maturities, principal repayments and sales were reinvested in
mortgage-backed and related securities while the remaining proceeds provided
additional funds for loan growth. Mortgage-backed and related securities include
Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage
- --------------------------------------------------------------------------------
20.
<PAGE> 21
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Association ("GNMA") and Federal National Mortgage Association ("FNMA")
participation certificates and collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits ("REMICs"). The majority of securities
are classified as available for sale to provide the Corporation with the
flexibility to move funds into loans as demand warrants. The mortgage-backed and
related securities also provide the Corporation with a constant cash flow stream
from principal repayments.
Net loans increased from $127.4 million at September 30, 1997 to $151.5 million
at March 31, 1998. The growth in loans was primarily in 1-4 family first
mortgage loans which increased 16.4% from $108.9 million at September 30, 1997
to $126.8 million at March 31, 1998. Construction loans and nonresidential real
estate loans increased from $9.4 million and $6.2 million at September 30, 1997
to $11.4 million and $7.7 million at March 31, 1998. Changes in other types of
real estate loans were not significant. As interest rates have decreased
slightly since September 30, 1997, the growth in 1-4 family first mortgages is
primarily the result of customers refinancing their higher-rate loans from the
Corporation's competitors. In addition to growth spurred by refinancings, the
continued growth in total real estate loans is also related to growth in the
Corporation's market area, as the Corporation has not changed its philosophy
regarding pricing or underwriting standards during the period.
At March 31, 1998, the Corporation had $9.5 million in loans classified as held
for sale. There were no loans classified as held for sale at September 30, 1997.
Held for sale loans at March 31, 1998 are included in the total for 1-4 family
first mortgage loans discussed above.
The Corporation's consumer loan portfolio increased $549,000 between September
30, 1997 and March 31, 1998. Despite the increase, consumer loans remain a small
portion of the entire loan portfolio and represented 2.2% and 2.1% of total
loans at March 31, 1998 and September 30, 1997.
During the third quarter of fiscal 1997, the Corporation began originating
commercial-purpose business loans secured by collateral other than real estate.
Commercial loans totaled $1.7 million at March 31, 1998 and $575,000 at
September 30, 1997, and were not a significant part of the overall loan
portfolio.
Total deposits increased $8.9 million, or 6.2%, from $142.8 million at September
30, 1997 to $151.7 million at March 31, 1998. The Corporation experienced
slight, offsetting changes in passbook savings and money market accounts, while
negotiable order of withdrawal ("NOW") accounts increased $2.1 million, or
24.3%. Certificates of deposit increased $6.6 million, or 6.0%, and were the
primary reason for the overall deposit growth. This growth was due to normal
operating procedures as the Corporation has not used special promotions to
attract increased volume. Despite the increase in volume, the certificate of
deposit portfolio, as a percent of total deposits, decreased slightly from 77.4%
at September 30, 1997 to 77.2% at March 31, 1998. All certificates of deposit
held at the Bank mature in less than five years.
Borrowed funds increased $7.1 million from $39.6 million at September 30, 1997
to $46.7 million at March 31, 1998. The net increase in new, long-term advances
of $26.6 million was partly offset by principal repayments of $18.9 million and
a net decrease of $600,000 in short-term advances under the Bank's cash
management line of credit. The majority of borrowed funds are invested in
mortgage-backed and related securities to leverage the Bank's excess capital and
to provide liquidity for future loan growth.
Other liabilities increased from $810,000 at September 30, 1997 to $2.2 million
at March 31, 1998. At March 31, 1997, other liabilities included an
interest-bearing deposit in another financial institution which had an overdraft
balance of $1.2 million. Although the Corporation's accounting records reflected
an overdraft due to various items in the process of clearing, the deposit
account balance recorded by the other financial institution did not reflect an
overdraft.
- --------------------------------------------------------------------------------
21.
<PAGE> 22
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS
Operating results of the Corporation are affected by general economic
conditions, monetary and fiscal policies of federal agencies and policies of
agencies regulating financial institutions. The Corporation's cost of funds is
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are influenced by demand for real estate loans
and other types of loans which, in turn, is affected by interest rates at which
such loans are made, general economic conditions and availability of funds for
lending activities.
The Corporation's net income is primarily dependent on its net interest income.
Net interest income is the difference between interest income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net income is also affected by provisions for loan losses, service
charges, gains on sale of assets and other income, noninterest expense and
income taxes.
The Corporation's net income of $414,000 and $704,000 for the three and six
months ended March 31, 1998 represented a $131,000 and $27,000 increase from
$283,000 and $677,000 in net income for the three and six months ended March 31,
1997. Similarly, both basic and diluted earnings per common share increased by
$0.07 for the three months ended March 31, 1998, compared to the same period in
1997. Basic and diluted earnings per common share increased by $0.03 and $0.02
for the six months ended March 31, 1998, compared to the same period in 1997.
The increase in net income for the comparable three month periods was primarily
the result of increased gains realized on sales of available-for-sale
securities. The increase in net income for the comparable six month periods was
not as great as the increase in net income for the comparable three month
periods as gains realized on sales of loans during the six months ended March
31, 1997 were not realized during the six months ended March 31, 1998.
Net interest income is the largest component of the Corporation's income and is
affected by the interest rate environment and volume and composition of
interest-earning assets and interest-bearing liabilities.
Historically, the Corporation had only fixed-rate loans in its loan portfolio.
Consequently, in periods of rising interest rates, the Corporation's net
interest spread is negatively affected because the interest rate paid on
deposits increases faster than the rates earned on loans. As a part of an
overall strategy to manage interest rate risk, management began to originate
variable-rate mortgage loans in the latter quarters of fiscal 1995. As of March
31, 1998, the Corporation had approximately $14.2 million in variable-rate
mortgage loans, compared to $7.3 million at September 30, 1997. Additionally,
most of the Corporation's mortgage-backed and related securities portfolio is
scheduled to reprice on at least an annual basis.
Net interest income of the Corporation increased by $107,000 and $144,000 for
the three and six months ended March 31, 1998, compared to the same periods in
1997, despite minimal change in the ratio of average interest-earning assets to
average interest-bearing liabilities over the comparable periods. The increase
resulted as the Corporation had a larger proportion of funds invested in
higher-yielding loans and securities, as opposed to overnight deposits and
interest-bearing deposits in other financial institutions, during the three and
six months ended March 31, 1998, compared to the three and six months ended
March 31, 1997. The increase in interest income from the redistribution of
investments was partly offset by the increased interest expense resulting from a
higher cost of funds. The cost of funds increased due to an increase in the
average level of borrowings and a higher percentage of the deposit portfolio
being in certificates of deposit.
- --------------------------------------------------------------------------------
22.
<PAGE> 23
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Interest and fees on loans totaled $2.9 million and $5.6 million for the three
and six months ended March 31, 1998, compared to $2.3 million and $4.6 million
for the three and six months ended March 31, 1997. Such increase in interest
income was due to higher average loan balances related to the origination of new
1-4 family first mortgage, construction, nonresidential real estate and
commercial loans.
Interest on mortgage-backed and related securities totaled $979,000 and
$2,009,000 for the three and six months ended March 31, 1998, compared to
$788,000 and $1,559,000 for the three and six months ended March 31, 1997. The
increase was primarily due to an increase in the volume of mortgage-backed and
related securities, combined with a slight increase in yield on mortgage-backed
and related securities, compared to the prior periods. Several mortgage-backed
and related securities have repriced to higher yield levels as compared to the
prior year. The adjustable-rate feature of these securities helps mitigate the
Corporation's exposure to upward interest rate movement due to its primarily
fixed-rate loan portfolio.
Interest on securities totaled $76,000 and $220,000 for the three and six months
ended March 31, 1998, compared to $111,000 and $227,000 for the comparable
periods in 1997. This decline from 1997 levels is the result of lower average
balances of securities due to maturities. Other interest income, including
dividend income, totaled $62,000 and $109,000 for the three six months ended
March 31, 1998, compared to $52,000 and $97,000 for the comparable periods in
1997. The increase was the result of higher average balances on FHLB stock.
Interest on deposits totaled $1,856,000 and $3,698,000 for the three and six
months ended March 31, 1998, and $1,646,000 and $3,264,000 for the three and six
months ended March 31, 1997. This increase resulted from increased average
deposit balances combined with an overall increase in the average cost of
deposits over the comparable periods.
Interest on borrowed funds totaled $665,000 and $1,292,000 for the three and six
months ended March 31, 1998, compared to $225,000 and $490,000 for the
comparable periods in 1997. The increase is the result of higher average
balances of borrowed funds during the three and six months ended March 31, 1998.
Since the fourth quarter of fiscal 1995, the Corporation has incorporated a
strategy to leverage excess capital by borrowing long-term, variable-rate funds
from the FHLB to purchase similar-maturity, variable-rate mortgage-backed
securities to capitalize on the yield spread. From time to time, the Corporation
has borrowed additional variable-rate funds for similar purposes as well as to
provide funding for loan growth. The Corporation has also borrowed fixed-rate
funds to provide for long-term liquidity needs. As opportunities arise to
leverage the Corporation's excess capital, the Corporation may make additional
borrowings to fund loan demand and mortgage-backed and related security
purchases.
The Corporation maintains an allowance for loan losses in an amount, which, in
management's judgment, is adequate to absorb reasonable, foreseeable losses
inherent in the loan portfolio. While management utilizes its best judgment and
information available, ultimate adequacy of the allowance is dependent on a
variety of factors, including performance of the Corporation's loan portfolio,
the economy, changes in real estate values and interest rates and the view of
the regulatory authorities toward loan classifications. The provision for loan
losses is determined by management as the amount to be added to the allowance
for loan losses after net charge-offs have been deducted to bring the allowance
to a level considered adequate to absorb losses inherent in the loan portfolio.
The amount of the provision is based on management's regular review of the loan
portfolio and consideration of such factors as historical loss experience,
general prevailing economic conditions, changes in size and composition of the
loan portfolio
- --------------------------------------------------------------------------------
23.
<PAGE> 24
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
and specific borrower considerations, including ability of the borrower to repay
the loan and the estimated value of the underlying collateral.
Other than $5,000 and $106,000 in charge-offs during the three and six months
ended March 31, 1998, the Corporation has not experienced any significant
charge-offs for the past several years. The majority of these charge-offs was
related to a single loan relationship for which the Corporation maintained a one
hundred percent specific valuation allowance. The Corporation's low historical
charge-off history is the product of a variety of factors, including the
Corporation's underwriting guidelines, which generally require a down payment of
20% of the lower of sales price or appraised value of 1-4 family residential
real estate loans, established income information and defined ratios of debt to
income. Loans secured by real estate make up 96.8% of the Corporation's loan
portfolio, and loans secured by first mortgages on 1-4 family residential real
estate constituted 80.8% of total loans at March 31, 1998. Notwithstanding the
historically low level of charge-offs, management believes it is prudent to
continue increasing the allowance for loan losses as total loans increase.
Accordingly, management anticipates it will continue its provisions to the
allowance for loan losses at current levels for the near future, providing
volume of nonperforming loans remains insignificant.
Noninterest income totaled $254,000 and $333,000 for the three and six months
ended March 31, 1998 and $66,000 and $277,000 for the three and six months ended
March 31, 1997. The increase in noninterest income for the comparable three
month periods was the result of increased gains realized on sales of
available-for-sale securities combined with an increase in service charges and
other fees. The increase in noninterest income for the comparable six month
periods was due to similar reasons, however, the increase was not as great as
gains realized on sales of loans during the six months ended March 31, 1997 were
not realized during the six months ended March 31, 1998. The loan and securities
sales during the three and six months ended March 31, 1998 and 1997 were
primarily made for interest rate risk strategy purposes. Other changes in
noninterest income for the three- and six-month periods were insignificant.
Noninterest expense totaled $1,020,000 and $2,085,000 for the three and six
months ended March 31, 1998, compared to $971,000 and $1,981,000 for the three
and six months ended March 31, 1997. The increases were primarily the result of
increases in occupancy expense and salaries and employee benefits. Occupancy
expense increased $14,000 and $40,000 over the comparable periods as a result of
the new branch office in Brookville, Ohio, which opened during the latter part
of fiscal 1997. Salaries and employee benefits increased $30,000 and $119,000
over the comparable periods due to annual merit increases and increased staffing
for the new branch office. Federal deposit insurance premiums decreased $34,000
for the comparable six month periods due to a reduction of assessed premiums
which began in January 1997 as a result of legislation which fully capitalized
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The SAIF was below the level required by law because a
significant portion of assessments paid into the SAIF by thrifts, like the Bank,
were used to pay the cost of prior thrift failures. The legislation called for a
one-time assessment of $.657 per $100 of SAIF insured deposits held as of March
31, 1995. Because of the recapitalization of the SAIF, the disparity between
bank and thrift insurance assessments was reduced. Thrifts had been paying
assessments of $.23 per $100 of deposits, which, for most thrifts, was reduced
to $.064 per $100 in deposits in January 1997 and is expected to be $.024 per
$100 in deposits no later than January 2000. Other changes in noninterest
expense were insignificant.
The legislation discussed above also provides for the merger of the SAIF and the
Bank Insurance Fund ("BIF") effective January 1, 1999, assuming there are no
savings associations under federal law. Under separate proposed legislation,
Congress is considering eliminating the federal thrift charter and separate
- --------------------------------------------------------------------------------
24.
<PAGE> 25
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
federal regulation of thrifts. Therefore, the Bank would be required to convert
to a different financial institution charter, and the Bank and the Corporation
might become subject to more restrictive activity limits. The Corporation cannot
predict the impact of any such legislation until it is enacted.
Prior to the enactment of legislation discussed below, thrifts meeting certain
tests related to the composition of assets had been permitted to establish
reserves for bad debts, and to make annual additions thereto which could, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve deduction
for "nonqualifying loans" was computed under the experience method. The amount
of the bad debt reserve deduction for "qualifying real property loans" could be
computed under either the experience or the percentage of taxable income method,
based on an annual election.
In August 1996, legislation was enacted repealing the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. Therefore, small thrifts such as the Bank must recapture
the portion of reserve exceeding the amount that could have been taken under the
experience method for tax years beginning after December 31, 1987. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1998, provided the institution meets certain residential
lending requirements. At March 31, 1998, the Bank had approximately $1.1 million
in bad debt reserves subject to recapture for federal income tax purposes. The
deferred tax liability related to the recapture has been previously established.
As such, the recapture will not impact the Bank's or the Corporation's net
income.
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. Income tax expense totaled $219,000 and
$374,000, or an effective rate of 34.6% and 34.7%, for the three and six months
ended March 31, 1998, compared to $144,000 and $348,000, or an effective rate of
33.8% and 33.9%, for the three and six months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, primarily represented by cash equivalents, is a
result of operating, investing and financing activities. These activities are
summarized below for the six months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Six months ended
March 31,
---------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Net income $ 704 $ 677
Adjustments to reconcile net income to net cash from
operating activities 1,781 9,826
---------- -----------
Net cash from operating activities 2,485 10,503
Net cash from investing activities (21,531) (6,564)
Net cash from financing activities 14,279 (2,569)
---------- -----------
Net change in cash and cash equivalents (4,767) 1,370
Cash and cash equivalents at beginning of period 5,633 1,301
---------- -----------
Cash and cash equivalents at end of period $ 866 $ 2,671
========== ===========
</TABLE>
- --------------------------------------------------------------------------------
25.
<PAGE> 26
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Corporation's principal sources of funds are deposits, loan and security
repayments, securities available for sale and other funds provided by
operations. The Corporation also has the ability to borrow from the FHLB of
Cincinnati. While scheduled loan repayments and maturing securities are
relatively predictable, deposit flows and early loan and mortgage-backed
security repayments are more influenced by interest rates, general economic
conditions and competition. The Corporation maintains investments in liquid
assets based on management's assessments of (1) the need for funds, (2) expected
deposit flows, (3) the yields available on short-term liquid assets and (4) the
objectives of the asset/liability management program.
Office of Thrift Supervision ("OTS") regulations presently require the
Corporation to maintain an average daily balance of investments in United States
Treasury, federal agency obligations and other investments in an amount equal to
4% of the sum of the Corporation's average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. The liquidity
requirement, which may be changed from time to time by the OTS to reflect
changing economic conditions, is intended to provide a source of relatively
liquid funds on which the Corporation may rely, if necessary, to fund deposit
withdrawals or other short-term funding needs. At March 31, 1998, the
Corporation's regulatory liquidity was 43.9%. At such date, the Corporation had
commitments to originate fixed-rate loans totaling $6,495,000 and variable-rate
loans totaling $828,000. Although $9.5 million in loans were held for sale at
March 31, 1998, the Corporation had no commitments to purchase or sell loans.
The Corporation considers its liquidity and capital reserves sufficient to meet
its outstanding short- and long-term needs. See Note 5 of the Notes to
Consolidated Financial Statements.
The Bank is subject to various regulatory capital requirements administered by
federal regulatory agencies. Failure to meet minimum capital requirements can
initiate certain mandatory actions that, if undertaken, could have a direct
material affect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving 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 regulators about
the Bank's components, risk weightings and other factors. At March 31, 1998 and
September 30, 1997, management believes the Bank complies with all regulatory
capital requirements. Based on the Bank's computed regulatory capital ratios,
the Bank is considered well capitalized under the Federal Deposit Insurance Act
at March 31, 1998 and September 30, 1997. Management is not aware of any matters
subsequent to March 31, 1998 that would cause the Bank's capital category to
change.
The OTS has proposed to amend the core capital requirement so those associations
that do not have the highest examination rating and an acceptable level of risk
will be required to maintain core capital of from 4% to 5%, depending on the
association's examination rating and overall risk. The Bank does not anticipate
it will be adversely affected if the core capital requirement regulations are
amended as proposed.
- --------------------------------------------------------------------------------
26.
<PAGE> 27
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
At March 31, 1998 and September 30, 1997, the Bank's actual capital levels (in
thousands) and minimum required levels were:
<TABLE>
<CAPTION>
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998
Total capital (to risk
weighted assets) $ 22,858 21.0% $ 8,723 8.0% $ 10,903 10.0%
Tier 1 (core) capital to
risk-weighted assets) 22,318 20.5 4,361 4.0 6,542 6.0
Tier 1 (core) capital to
adjusted total assets) 22,318 9.9 9,006 4.0 11,257 5.0
Tangible capital (to
adjusted total assets) 22,318 9.9 3,377 1.5 N/A
September 30, 1997
Total capital (to risk
weighted assets) $ 21,799 22.8% $ 7,637 8.0% $ 9,547 10.0%
Tier 1 (core) capital to
risk-weighted assets) 21,385 22.4 3,819 4.0 5,728 6.0
Tier 1 (core) capital to
adjusted total 21,385 10.3 6,206 3.0 10,344 5.0
Tangible capital (to
adjusted total assets) 21,385 10.3 3,103 1.5 N/A
</TABLE>
In addition to certain federal income tax considerations, the OTS regulations
impose limitations on payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, the Bank is not permitted to pay a cash dividend on its common
shares if its regulatory capital would, as a result of payment of such
dividends, be reduced below the amount required for the Liquidation Account, or
below applicable regulatory capital requirements prescribed by the OTS.
OTS regulations applicable to all savings and loan associations provide that a
savings association which, immediately prior to and on a pro forma basis after
giving effect to a proposed capital distribution (including a dividend), has
total capital (as defined by OTS regulations) equal to or greater than the
amount of its capital requirements is generally permitted without OTS approval
(but subsequent to 30 days prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half that which its total capital to assets
ratio exceeded its required capital to assets ratio at the beginning of the
calendar year, or (2) 75% of its net earnings for the most recent four-quarter
period. Savings associations with total capital more than the capital
requirements that have been notified by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends. A savings
association failing to meet current minimum capital requirements is prohibited
from making any capital distributions without the prior approval of the OTS.
- --------------------------------------------------------------------------------
27.
<PAGE> 28
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Bank currently meets all capital requirements and, unless the OTS determines
that the Bank is an institution requiring more than normal supervision, the Bank
may pay dividends in accordance with the foregoing provisions of OTS
regulations.
In April 1997, the Board of Directors of the Corporation authorized the purchase
of up to 5% of the Corporation's outstanding common shares over a six-month
period. The repurchase program was extended for an additional six-month period
in October 1997. The shares will be purchased in the over-the-counter market.
The number of shares to be purchased and the price to be paid will depend upon
the availability of shares, the prevailing market prices and any other
considerations which may, in the opinion of the Corporation's Board of Directors
or management, affect the advisability of purchasing shares.
YEAR 2000 ISSUE
Many computer programs use only two digits to identify a year in the date field
and were apparently designed and developed without considering the impact of the
upcoming change in the century. Such programs could erroneously read entries for
the Year 2000 as the Year 1900, which could result in major systems failures and
miscalculations. Rapid and accurate data processing is essential to the
operations of financial institutions, such as the Corporation. The Corporation
has formed a Year 2000 committee to assess the extent to which it and its
outside vendors may be adversely affected by Year 2000 problems. Management has
determined that most programs are or will be capable of identifying the turn of
the century. The issue is closely monitored by management and full compliance is
expected by the end of 1998. While the Corporation does not anticipate that any
Year 2000 computer problems or expenses required to correct such problems will
materially affect its financial condition and results of operations, no
assurance can be given in this regard.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The principal market risk affecting the Corporation is interest-rate risk. The
Bank does not maintain a trading account for any class of financial instrument
and the Corporation is not affected by foreign currency exchange rate risk or
commodity price risk. Because the Corporation does not hold any equity
securities other than stock in the FHLB of Cincinnati and an insignificant
investment in its data processing servicer, Intrieve, Inc., the Corporation is
not subject to equity price risk.
The Corporation, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. One of the Corporation's principal financial
objectives is to achieve long-term profitability while reducing its exposure to
fluctuations in interest rates. The Corporation has sought to reduce exposure of
its earnings to changes in market interest rates by managing asset and liability
maturities and interest rates primarily through structuring the mortgage-backed
and related securities portfolio so that substantially all of the
mortgage-backed and related securities reprice on at least an annual basis. The
variable-rate feature of these securities helps mitigate the Corporation's
exposure to upward interest rate movement due to its primarily fixed-rate loan
portfolio. Some mortgage-backed securities have been purchased with funds
provided by similar maturity, long-term borrowings from the FHLB to capitalized
on the yield differential. The Corporation also invests in U.S. Government and
federal agency securities with
- --------------------------------------------------------------------------------
28.
<PAGE> 29
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
maturities of five years or less. The majority of the Corporation's securities
are classified as available for sale to allow management the flexibility to move
these funds into higher-yielding loans as demand warrants. The mortgage-backed
and related securities also provide the Corporation with a constant cash flow
stream from principal repayments.
As the Corporation's loan portfolio is primarily made up of fixed-rate loans,
the Corporation is particularly sensitive to periods of rising interest rates In
such periods, the Corporation's net interest spread is negatively affected
because the interest rate paid on deposits increases faster than the rates
earned on loans. Management is continuing to originate variable-rate mortgage
loans as the primary means to manage this risk. Variable-rate loans increased
from $7.3 million at September 30, 1997 to $14.2 million at March 31, 1998. In
addition, management has increased consumer lending although it still remains a
small percentage of the overall loan portfolio. Consumer loans typically have a
significantly shorter weighted average maturity and offer less exposure to
interest rate risk. During fiscal 1997, the Corporation sold a pool of
fixed-rate mortgage loans and invested the funds in shorter-term fixed-rate
loans, adjustable-rate loans and adjustable-rate mortgage-backed and related
securities which have less exposure to interest rate risk. As the Corporation,
through the Bank, is an authorized seller/servicer for the FHLMC, all of its
loans are originated in accordance with secondary market guidelines. As such,
the Corporation has the ability to sell additional pools of fixed-rate loans in
the future should the need exist. At March 31, 1998, $9.5 million of 1-4 family,
fixed-rate loans were classified as held for sale, however, the Corporation had
no commitments to sell such loans.
Lastly, as part of its effort to monitor and manage interest rate risk, the Bank
uses the "net portfolio value" ("NPV") methodology adopted by the OTS as part of
its capital regulations. Presented in the Corporation's 1997 annual report, as
of September 30, 1997, is an analysis of the Bank's interest rate risk as
measured by changes in NPV for instantaneous and sustained parallel shifts of
100 basis points in market interest rates. Also presented are policy limits set
by the Board of Directors of the Bank as to the maximum change in NPV that the
Board of Directors deems advisable in the event of various changes in interest
rates. Such limits are established with consideration of the dollar impact of
various rate changes and the Bank's strong capital position. Management believes
that no events have occurred since September 30, 1997 which would significantly
change the Bank's NPV at March 31, 1998 under each of the assumed shifts of 100
basis points in market interest rates.
The Bank's NPV is more sensitive to rising rates than declining rates. Such
difference in sensitivity occurs principally because, as rates rise, borrowers
do not prepay fixed-rate loans as quickly as they do when interest rates are
declining. Thus, in a rising interest rate environment, because the Bank has
predominantly fixed-rate loans in its loan portfolio, the amount of interest the
Bank would receive on its loans would increase relatively slowly as loans are
slowly prepaid and new loans at higher rates are made. Moreover, the interest
the Bank would pay on its deposits would increase rapidly because the Bank's
deposits generally have shorter periods to repricing.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit, would likely deviate
significantly from those assumed in making risk calculations.
- --------------------------------------------------------------------------------
29.
<PAGE> 30
MILTON FEDERAL FINANCIAL CORPORATION
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On January 21, 1998, the Annual Meeting of the Shareholders of the
Corporation was held. The following members of the Board of Directors
of the Corporation were reelected by the votes set forth below for
terms expiring in 2000:
E. Lynn App FOR: 1,665,427 WITHHELD: 17,087
Robert E. Hine FOR: 1,668,427 WITHHELD: 14,087
Christopher S. Long FOR: 1,667,527 WITHHELD: 14,987
Cletus G. Minnich FOR: 1,665,027 WITHHELD: 17,487
One other matter submitted to the Shareholders, for which the
following votes were cast:
Ratification of the selection of Crowe, Chizek and Company LLP as the
auditors of the Corporation for the current fiscal year.
FOR: 1,666,977 AGAINST: 10,626 ABSTAIN: 4,911 NON-VOTES: 0
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. 27: Financial Data Schedule.
(b) Exhibit No. 99: Safe Harbor Under the Private Securities
Litigation Reform Act of 1995.
(c) No current reports on Form 8-K were filed by the Registrant
during the quarter ended March 31, 1998.
- --------------------------------------------------------------------------------
30.
<PAGE> 31
MILTON FEDERAL FINANCIAL CORPORATION
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 8, 1998 /s/ Glenn E. Aidt
---------------------------- ------------------------------------
Glenn E. Aidt
President
Date: May 8, 1998 /s/ Thomas P. Eyer
---------------------------- ------------------------------------
Thomas P. Eyer
Treasurer (Chief Financial Officer)
- --------------------------------------------------------------------------------
31.
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
<S> <C> <C>
27 Financial Data Schedule 33
27.1 Financial Data Schedule (Restated September 30, 1997) 35
27.2 Financial Data Schedule (Restated June 30, 1997) 37
27.3 Financial Data Schedule (Restated March 31, 1997) 39
27.4 Financial Data Schedule (Restated December 31, 1996) 41
27.5 Financial Data Schedule (Restated September 30, 1996) 43
27.6 Financial Data Schedule (Restated June 30, 1996) 45
99 Safe Harbor Under the Private Securities Litigation Reform 47
Act of 1995
</TABLE>
- --------------------------------------------------------------------------------
32.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 665
<INT-BEARING-DEPOSITS> 201
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,225
<INVESTMENTS-CARRYING> 17,825
<INVESTMENTS-MARKET> 17,790
<LOANS> 151,507
<ALLOWANCE> 541
<TOTAL-ASSETS> 226,711
<DEPOSITS> 151,690
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 2,633
<LONG-TERM> 45,664
0
0
<COMMON> 0
<OTHER-SE> 25,724
<TOTAL-LIABILITIES-AND-EQUITY> 226,711
<INTEREST-LOAN> 5,567
<INTEREST-INVEST> 2,229
<INTEREST-OTHER> 109
<INTEREST-TOTAL> 7,905
<INTEREST-DEPOSIT> 3,698
<INTEREST-EXPENSE> 4,991
<INTEREST-INCOME-NET> 2,915
<LOAN-LOSSES> 84
<SECURITIES-GAINS> 175
<EXPENSE-OTHER> 2,085
<INCOME-PRETAX> 1,078
<INCOME-PRE-EXTRAORDINARY> 1,078
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 704
<EPS-PRIMARY> .34
<EPS-DILUTED> .33
<YIELD-ACTUAL> 2.76
<LOANS-NON> 200
<LOANS-PAST> 436
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 562
<CHARGE-OFFS> 105
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 541
<ALLOWANCE-DOMESTIC> 216
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 325
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 667
<INT-BEARING-DEPOSITS> 1,436
<FED-FUNDS-SOLD> 3,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,362
<INVESTMENTS-CARRYING> 15,380
<INVESTMENTS-MARKET> 15,315
<LOANS> 127,396
<ALLOWANCE> 562
<TOTAL-ASSETS> 209,958
<DEPOSITS> 142,832
<SHORT-TERM> 1,600
<LIABILITIES-OTHER> 1,171
<LONG-TERM> 37,970
0
0
<COMMON> 0
<OTHER-SE> 26,385
<TOTAL-LIABILITIES-AND-EQUITY> 209,958
<INTEREST-LOAN> 9,579
<INTEREST-INVEST> 4,135
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 13,773
<INTEREST-DEPOSIT> 6,749
<INTEREST-EXPENSE> 8,149
<INTEREST-INCOME-NET> 5,624
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 115
<EXPENSE-OTHER> 3,959
<INCOME-PRETAX> 2,087
<INCOME-PRE-EXTRAORDINARY> 2,087
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,378
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
<YIELD-ACTUAL> 3.08
<LOANS-NON> 348
<LOANS-PAST> 276
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 487
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 562
<ALLOWANCE-DOMESTIC> 347
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 215
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 508
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,598
<INVESTMENTS-CARRYING> 16,404
<INVESTMENTS-MARKET> 16,266
<LOANS> 120,365
<ALLOWANCE> 560
<TOTAL-ASSETS> 200,238
<DEPOSITS> 138,683
<SHORT-TERM> 2,700
<LIABILITIES-OTHER> 1,665
<LONG-TERM> 30,927
0
0
<COMMON> 0
<OTHER-SE> 26,264
<TOTAL-LIABILITIES-AND-EQUITY> 200,238
<INTEREST-LOAN> 7,029
<INTEREST-INVEST> 2,885
<INTEREST-OTHER> 127
<INTEREST-TOTAL> 10,041
<INTEREST-DEPOSIT> 4,952
<INTEREST-EXPENSE> 5,840
<INTEREST-INCOME-NET> 4,201
<LOAN-LOSSES> 73
<SECURITIES-GAINS> 78
<EXPENSE-OTHER> 2,943
<INCOME-PRETAX> 1,565
<INCOME-PRE-EXTRAORDINARY> 1,034
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,034
<EPS-PRIMARY> .49
<EPS-DILUTED> .48
<YIELD-ACTUAL> 3.16
<LOANS-NON> 306
<LOANS-PAST> 342
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 487
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 560
<ALLOWANCE-DOMESTIC> 325
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 235
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,111
<INT-BEARING-DEPOSITS> 1,559
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,742
<INVESTMENTS-CARRYING> 15,816
<INVESTMENTS-MARKET> 15,595
<LOANS> 114,174
<ALLOWANCE> 528
<TOTAL-ASSETS> 178,757
<DEPOSITS> 135,840
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 891
<LONG-TERM> 14,677
0
0
<COMMON> 0
<OTHER-SE> 26,349
<TOTAL-LIABILITIES-AND-EQUITY> 178,757
<INTEREST-LOAN> 4,641
<INTEREST-INVEST> 1,787
<INTEREST-OTHER> 97
<INTEREST-TOTAL> 6,524
<INTEREST-DEPOSIT> 3,264
<INTEREST-EXPENSE> 3,754
<INTEREST-INCOME-NET> 2,770
<LOAN-LOSSES> 41
<SECURITIES-GAINS> 45
<EXPENSE-OTHER> 1,981
<INCOME-PRETAX> 1,025
<INCOME-PRE-EXTRAORDINARY> 677
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 677
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
<YIELD-ACTUAL> 3.21
<LOANS-NON> 306
<LOANS-PAST> 269
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 487
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 528
<ALLOWANCE-DOMESTIC> 313
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 215
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 922
<INT-BEARING-DEPOSITS> 399
<FED-FUNDS-SOLD> 2,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,610
<INVESTMENTS-CARRYING> 13,878
<INVESTMENTS-MARKET> 13,729
<LOANS> 110,228
<ALLOWANCE> 507
<TOTAL-ASSETS> 175,706
<DEPOSITS> 131,910
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 491
<LONG-TERM> 14,734
0
0
<COMMON> 0
<OTHER-SE> 27,092
<TOTAL-LIABILITIES-AND-EQUITY> 175,706
<INTEREST-LOAN> 2,369
<INTEREST-INVEST> 908
<INTEREST-OTHER> 24
<INTEREST-TOTAL> 3,301
<INTEREST-DEPOSIT> 1,618
<INTEREST-EXPENSE> 1,883
<INTEREST-INCOME-NET> 1,418
<LOAN-LOSSES> 20
<SECURITIES-GAINS> 33
<EXPENSE-OTHER> 1,010
<INCOME-PRETAX> 599
<INCOME-PRE-EXTRAORDINARY> 395
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 395
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
<YIELD-ACTUAL> 3.24
<LOANS-NON> 306
<LOANS-PAST> 276
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 487
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 507
<ALLOWANCE-DOMESTIC> 312
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 195
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 492
<INT-BEARING-DEPOSITS> (191)
<FED-FUNDS-SOLD> 1,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,531
<INVESTMENTS-CARRYING> 14,502
<INVESTMENTS-MARKET> 14,291
<LOANS> 116,749
<ALLOWANCE> 487
<TOTAL-ASSETS> 180,831
<DEPOSITS> 128,554
<SHORT-TERM> 3,200
<LIABILITIES-OTHER> 1,020
<LONG-TERM> 14,289
0
0
<COMMON> 0
<OTHER-SE> 24,952
<TOTAL-LIABILITIES-AND-EQUITY> 180,831
<INTEREST-LOAN> 8,859
<INTEREST-INVEST> 3,624
<INTEREST-OTHER> 183
<INTEREST-TOTAL> 12,665
<INTEREST-DEPOSIT> 6,199
<INTEREST-EXPENSE> 6,819
<INTEREST-INCOME-NET> 5,847
<LOAN-LOSSES> 154
<SECURITIES-GAINS> 226
<EXPENSE-OTHER> 4,410
<INCOME-PRETAX> 1,739
<INCOME-PRE-EXTRAORDINARY> 1,144
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,144
<EPS-PRIMARY> .51
<EPS-DILUTED> .50
<YIELD-ACTUAL> 3.51
<LOANS-NON> 312
<LOANS-PAST> 285
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 333
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 487
<ALLOWANCE-DOMESTIC> 323
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 164
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 506
<INT-BEARING-DEPOSITS> (138)
<FED-FUNDS-SOLD> 600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,114
<INVESTMENTS-CARRYING> 15,030
<INVESTMENTS-MARKET> 14,802
<LOANS> 112,468
<ALLOWANCE> 403
<TOTAL-ASSETS> 178,290
<DEPOSITS> 127,456
<SHORT-TERM> 1,700
<LIABILITIES-OTHER> 1,033
<LONG-TERM> 14,344
0
0
<COMMON> 0
<OTHER-SE> 33,757
<TOTAL-LIABILITIES-AND-EQUITY> 178,290
<INTEREST-LOAN> 6,502
<INTEREST-INVEST> 2,676
<INTEREST-OTHER> 160
<INTEREST-TOTAL> 9,338
<INTEREST-DEPOSIT> 4,619
<INTEREST-EXPENSE> 4,987
<INTEREST-INCOME-NET> 4,351
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 214
<EXPENSE-OTHER> 2,741
<INCOME-PRETAX> 1,926
<INCOME-PRE-EXTRAORDINARY> 1,266
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,266
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
<YIELD-ACTUAL> 3.58
<LOANS-NON> 306
<LOANS-PAST> 380
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 333
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 403
<ALLOWANCE-DOMESTIC> 149
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 254
</TABLE>
<PAGE> 1
MILTON FEDERAL FINANCIAL CORPORATION
EXHIBIT NO. 99
- --------------------------------------------------------------------------------
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking, and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. Milton Federal
Financial Corporation ("MFFC") desires to take advantage of the "safe harbor"
provisions of the Act. Certain information, particularly information regarding
future economic performance, finances, plans and objectives of management,
contained or incorporated by reference in MFFC's Form 10-Q for the period ended
December 31, 1998 is forward-looking. In some cases, information regarding
certain important factors that could cause actual results of operations or
outcomes of other events to differ materially from any such forward-looking
statement appear together with such statement. In addition, forward-looking
statements are subject to other risks and uncertainties affecting the financial
institution industry, including, but not limited to, the following:
INTEREST RATE RISK
MFFC's operating results are dependent to a significant degree on its net
interest income, which is the difference between interest income from loans,
investments and other interest-earning assets and interest expense on deposits,
borrowings and other interest-bearing liabilities. The interest income and
interest expense of MFFC change as the interest rates on interest-earning assets
and interest-bearing liabilities change. Interest rates may change because of
general economic conditions, policies of various regulatory authorities and
other factors beyond MFFC's control. In a rising interest rate environment,
loans tend to prepay slowly and new loans at higher rates increase slowly, while
interest paid on deposits increases rapidly because the terms to maturity of
deposits tend to be shorter than the terms to maturity or prepayment of loans.
Such differences in the adjustment of interest rates on assets and liabilities
may negatively affect MFFC's income.
POSSIBLE INADEQUACY OF THE ALLOWANCE FOR LOAN LOSSES
MFFC maintains an allowance for loan losses based on a number of relevant
factors, including, but not limited to, trends in the level of nonperforming
assets and classified loans, current and anticipated economic conditions in the
primary lending area, past loss experience, possible losses arising from
specific problem loans and changes in composition of the loan portfolio. While
the Board of Directors of MFFC believes it uses the best information available
to determine allowance for loan losses, unforeseen market conditions could
result in material adjustments, and net earnings could be significantly
adversely affected if circumstances differ substantially from the assumptions
used in making the final determination.
Loans not secured by 1-4 family residential real estate are generally considered
to involve greater risk of loss than loans secured by 1-4 family residential
real estate due, in part, to the effect of general economic conditions. The
repayment of multifamily residential and nonresidential real estate loans
generally depends on cash flow from the operation of the property, which may be
negatively affected by national and local economic conditions. Construction
loans may also be negatively affected by such economic conditions, particularly
loans made to developers who do not have a buyer for a property before the loan
is made. The risk of default on consumer loans increases during periods of
recession, high unemployment and other adverse economic conditions. When
consumers have trouble paying their bills, they are more likely to pay mortgage
loans than consumer loans. In addition, the collateral securing such loans, if
any, may decrease in value more rapidly than the outstanding balance of the
loan.
- --------------------------------------------------------------------------------
47.
<PAGE> 2
MILTON FEDERAL FINANCIAL CORPORATION
EXHIBIT NO. 99
- --------------------------------------------------------------------------------
COMPETITION
Milton Federal Savings Bank ("Milton Federal") competes for deposits with other
savings associations, commercial banks, credit unions and issuers of commercial
paper and other securities, such as shares in money market mutual funds. The
primary factors in competing for deposits are interest rates and convenience of
office location. In making loans, Milton Federal competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage companies and other lenders. Competition is affected
by, among other things, general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors, which
are not readily predictable. The size of financial institutions competing with
Milton Federal is likely to increase as a result of changes in statutes and
regulations eliminating various restrictions on interstate and inter-industry
branching and acquisitions. Such increased competition may have an adverse
effect upon MFFC.
LEGISLATION AND REGULATION THAT MAY ADVERSELY AFFECT MFFC'S EARNINGS
Milton Federal is subject to extensive regulation by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"), and
is periodically examined by such regulatory agencies to test compliance with
various requirements. As a savings and loan holding company, MFFC is also
subject to regulation and examination by the OTS. Such supervision and
regulation of Milton Federal and MFFC are intended primarily for the protection
of depositors and not for maximization of shareholder value, and may affect the
ability of the company to engage in various business activities. The
assessments, filing fees and other costs associated with reports, examinations
and other regulatory matters are significant and may have an adverse effect on
the Company's net earnings.
The FDIC is authorized to establish separate annual assessment rates for deposit
insurance of members of the Bank Insurance fund ("BIF") and the Savings
Association Insurance Fund ("SAIF"). The FDIC has established a risk-based
assessment system for both SAIF and BIF members. Under such system, assessments
may vary depending on the risk the institution poses to its deposit insurance
fund. Such risk level is determined by reference to the institution's capital
level and the FDIC's level of supervisory concern about the institution.
The SAIF recapitalization plan also provides for the merger of the SAIF and BIF
effective January 1, 1999, assuming there are no savings associations under
federal law. Under separate proposed legislation, Congress is considering
elimination of the federal thrift charter and separate federal regulation of
thrifts. Therefore, Milton Federal would have to convert to a different
financial institution charter. In addition, Milton Federal would be regulated
under federal law as a bank and would, therefore, become subject to the more
restrictive activity limitations imposed on national banks. Moreover, MFFC might
become subject to more restrictive holding company requirements, including
activity limits and capital requirements similar to those imposed on Milton
Federal. MFFC cannot predict the impact of the conversion of Milton Federal to,
or regulation of Milton Federal as, a bank until the legislation requiring such
change is enacted.
- --------------------------------------------------------------------------------
48.
