<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, 1999
[ ] 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 of 1934 during
the preceding 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 1, 1999 the latest practicable date, 2,124,995 shares of the
registrant's common shares, no par value, were issued and outstanding.
<PAGE> 2
MILTON FEDERAL FINANCIAL CORPORATION
<TABLE>
INDEX
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets ............................................ 3
Consolidated Statements of Income ...................................... 4
Consolidated Statements of Comprehensive Income......................... 5
Condensed Consolidated Statements of Changes in Shareholders' Equity.... 6
Condensed Consolidated Statements of Cash Flows ........................ 7
Notes to Consolidated Financial Statements ............................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 23
Item 2. Changes in Securities and Use of Proceeds.......................... 23
Item 3. Defaults Upon Senior Securities.................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................ 23
Item 5. Other Information.................................................. 23
Item 6. Exhibits and Reports on Form 8-K................................... 23
SIGNATURES ................................................................. 24
</TABLE>
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2.
<PAGE> 3
<TABLE>
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- ----------------------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
<CAPTION>
March 31, September 30,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 787,596 $ 1,049,982
Overnight deposits in other financial institutions 500,000 2,200,000
Interest-bearing deposits in other financial
institutions 219,670 327,941
------------ ------------
Total cash and cash equivalents 1,507,266 3,577,923
Securities available for sale 39,088,948 36,912,196
Securities held to maturity (Estimated fair value of
$13,393,319 at March 31, 1999 and $14,528,202 at
September 30, 1998) 13,366,426 14,559,907
Federal Home Loan Bank stock available for sale 2,953,000 2,814,200
Loans, net 185,326,911 171,346,497
Premises and equipment, net 2,654,836 2,739,778
Cash surrender value of life insurance 1,627,566 1,593,383
Accrued interest receivable 1,234,159 1,225,037
Other assets 454,430 506,702
------------ ------------
Total assets $248,213,542 $235,275,623
============ ============
LIABILITIES
Deposits $167,940,730 $154,647,142
Borrowed funds 53,178,377 52,430,023
Advance payments by borrowers for taxes and insurance 341,974 258,357
Accrued interest payable 324,176 284,706
Other liabilities 1,151,544 1,372,169
------------ ------------
Total liabilities 222,936,801 208,992,397
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares
authorized, none outstanding
Common stock, no par value, 9,000,000 shares
authorized, 2,578,875 shares issued
Additional paid-in capital 25,211,152 25,143,563
Retained earnings 8,224,312 8,167,236
Treasury stock, at cost, 438,380 shares at March
31, 1999 and 342,039 shares at September 30, 1998 (6,487,396) (5,104,494)
Unearned employee stock ownership plan shares (1,082,849) (1,199,087)
Unearned recognition and retention plan shares (738,954) (839,194)
Accumulated other comprehensive income 150,476 115,202
------------ ------------
Total shareholders' equity 25,276,741 26,283,226
------------ ------------
Total liabilities and shareholders' equity $248,213,542 $235,275,623
============ ============
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3.
<PAGE> 4
<TABLE>
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees $3,540,373 $2,862,049 $6,942,392 $5,566,769
Securities 778,194 1,055,066 1,516,353 2,229,561
Other, including dividend income 46,461 62,086 121,185 109,040
---------- ---------- ---------- ----------
4,365,028 3,979,201 8,579,930 7,905,370
INTEREST EXPENSE
Deposits 2,030,546 1,855,675 4,066,352 3,698,117
Borrowed funds 752,850 664,602 1,477,661 1,292,385
---------- ---------- ---------- ----------
2,783,396 2,520,277 5,544,013 4,990,502
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,581,632 1,458,924 3,035,917 2,914,868
Provision for loan losses 30,000 60,000 60,000 84,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,551,632 1,398,924 2,975,917 2,830,868
NONINTEREST INCOME
Service charges and other fees 67,603 49,557 129,304 98,140
Gain on sales of securities 28,837 174,874 28,837 174,874
Gain on sale of loans 21,298 -- 73,913 --
Other income 28,631 29,688 71,172 59,788
---------- ---------- ---------- ----------
146,369 254,119 303,226 332,802
NONINTEREST EXPENSE
Salaries and employee benefits 621,408 600,065 1,257,501 1,229,879
Occupancy expense 113,176 88,861 215,942 181,593
Data processing services 69,283 58,629 127,771 106,004
State franchise taxes 80,262 87,282 167,453 175,790
Federal deposit insurance premiums 23,644 22,225 45,776 44,012
Advertising 10,660 13,831 30,530 28,693
Other expenses 201,489 149,318 382,707 319,255
---------- ---------- ---------- ----------
1,119,922 1,020,211 2,227,680 2,085,226
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX 578,079 632,832 1,051,463 1,078,444
Income tax expense 197,000 219,000 359,000 374,000
---------- ---------- ---------- ----------
NET INCOME $ 381,079 $ 413,832 $ 692,463 $ 704,444
========== ========== ========== ==========
Earnings per share - Basic $ .19 $ .20 $ .34 $ .34
========== ========== ========== ==========
Earnings per share - Diluted $ .19 $ .20 $ .34 $ .33
========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4.
<PAGE> 5
<TABLE>
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $381,079 $ 413,832 $692,463 $ 704,444
Other comprehensive income:
Unrealized holding gains (losses) on
available-for-sale securities
arising during the period 81,091 298,103 82,284 297,452
Reclassification adjustment for (gains)
losses realized on securities
sales included in net income (28,837) (174,874) (28,837) (174,874)
-------- --------- -------- ---------
Net unrealized gain (loss) 52,254 123,229 53,447 122,578
Tax effect (17,778) (41,899) (18,173) (41,679)
-------- --------- -------- ---------
Total other comprehensive income 34,476 81,330 35,274 80,899
-------- --------- -------- ---------
COMPREHENSIVE INCOME $415,555 $ 495,162 $727,737 $ 785,343
======== ========= ======== =========
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5.
<PAGE> 6
<TABLE>
MILTON FEDERAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $25,983,031 $25,917,105 $26,283,226 $26,387,870
Net income 381,079 413,832 692,463 704,444
Cash dividends (314,893) (350,444) (635,387) (676,182)
Commitment to release employee
stock ownership plan shares 75,029 89,000 154,634 175,384
Shares earned under recognition and
retention plan, including tax benefit 46,394 53,846 129,433 107,691
Purchase of treasury stock (928,375) (480,627) (1,382,902) (1,056,064)
Change in fair value of securities
available for sale 34,476 81,330 35,274 80,899
----------- ----------- ----------- -----------
Balance at end of period $25,276,741 $25,724,042 $25,276,741 $25,724,042
=========== =========== =========== ===========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6.
<PAGE> 7
<TABLE>
MILTON FEDERAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
March 31,
---------
1999 1998
---- ----
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 614,013 $ 2,484,882
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (9,588,941) (8,942,189)
Proceeds from maturities and principal payments 4,483,159 5,772,022
Proceeds from sales 3,011,615 8,615,431
Securities held to maturity
Purchases (125,000) (5,661,533)
Proceeds from maturities and principal payments 1,290,205 3,193,388
Increase in loans, net (18,169,179) (24,127,197)
Proceeds from sale of loans 4,371,901 --
Premises and equipment expenditures (26,300) (43,135)
Purchase FHLB stock (39,400) (337,500)
------------ ------------
Net cash from investing activities (14,791,940) (21,530,713)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 13,293,588 8,858,434
Net change in advance payments by borrowers for taxes
and insurance 83,617 58,881
Net change in short-term borrowings 600,000 (600,000)
Long-term advances from FHLB 1,000,000 26,600,000
Principal payments on FHLB advances (851,646) (18,906,158)
Cash dividends paid (635,387) (676,182)
Purchase of treasury stock (1,382,902) (1,056,064)
------------ ------------
Net cash from financing activities 12,107,270 14,278,911
------------ ------------
Net change in cash and cash equivalents (2,070,657) (4,766,920)
Cash and cash equivalents at beginning of period 3,577,923 5,633,119
------------ ------------
Cash and cash equivalents at end of period $ 1,507,266 $ 866,199
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 5,504,543 $ 4,931,834
Income taxes 180,500 558,815
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7.
<PAGE> 8
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of Milton Federal Financial Corporation (the
"Corporation") at March 31, 1999, and its results of operations and cash flows
for the periods presented. All such adjustments are normal and recurring in
nature. The accompanying financial statements have been prepared in accordance
with the instructions of Form 10-Q and, therefore, do not purport to contain all
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances, and should be
read in conjunction with the consolidated financial statements, and notes
thereto, of the Corporation for the fiscal year ended September 30, 1998,
included in its 1998 annual report. The Corporation has consistently followed
the accounting policies described in the notes to financial statements contained
in the Corporation's 1998 annual report 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, Brookville and Tipp City, Ohio. Miami, Montgomery and
Darke Counties, Ohio provide the source for substantially all the Corporation's
deposit and lending activities.
To prepare financial statements in conformity with generally accepted accounting
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 allowance for loan losses, 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. Income tax expense is based on the
effective tax rate expected to be applicable for the entire year.
Basic earnings per share ("EPS") is based on net income divided by the weighted
average number of shares outstanding during the period. Unreleased ESOP shares
are not considered to be outstanding shares for the purpose of determining the
weighted average number of shares used in the earnings per share calculations.
Recognition and Retention Plan ("RRP) shares are considered outstanding as they
become vested. Diluted EPS includes the dilutive effect of stock options granted
and nonvested RRP shares using the treasury stock method.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 9
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The weighted average number of common shares outstanding for basic and diluted
earnings per share computations were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares
outstanding - Basic 2,033,859 2,069,291 2,050,635 2,080,462
Effect of stock options 10,073 29,316 6,125 25,228
Effect of unearned RRP shares 2,198 8,608 2,909 9,163
--------- --------- --------- ---------
Weighted average shares
outstanding - Diluted 2,046,130 2,107,215 2,059,669 2,114,853
========= ========= ========= =========
</TABLE>
On October 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Comprehensive
income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities
available for sale that is also recognized as a separate component of equity.
SFAS No. 130 first applies for fiscal years beginning after December 15, 1997,
with prior information restated to be comparable.
NOTE 2 - SECURITIES
The amortized cost and fair values of securities are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
MARCH 31, 1999
- --------------
Available for sale
Equity $ 15,000 $ -- $ -- $ 15,000
Mortgage-backed 38,845,955 230,354 (2,361) 39,073,948
----------- -------- --------- -----------
Total $38,860,955 $230,354 $ (2,361) $39,088,948
=========== ======== ========= ===========
Held to maturity
Municipal obligations $ 125,000 $ -- $ (319) $ 124,681
Mortgage-backed 13,241,426 259,491 (232,279) 13,268,638
----------- -------- ---------- -----------
Total $13,366,426 $259,491 $(232,598) $13,393,319
=========== ======== ========= ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
- ------------------
Available for sale
Equity $ 15,000 $ -- $ -- $ 15,000
Mortgage-backed 36,722,650 304,109 (129,563) 36,897,196
----------- -------- --------- -----------
Total $36,737,650 $304,109 $(129,563) $36,912,196
=========== ======== ========= ===========
Held to maturity
Mortgage-backed $14,559,907 $ 85,137 $(116,842) $14,528,202
=========== ======== ========= ===========
</TABLE>
The Corporation maintains a significant portfolio of mortgage-backed securities
in the form of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA") participation certificates. Mortgage-backed securities
generally entitle the Corporation to receive a portion of the cash flows from an
identified pool of mortgages, and FHLMC, FNMA and GNMA securities are each
guaranteed by their respective agencies as to principal and interest. The
Corporation has also invested significant amounts in collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs")
which are included in mortgage-backed securities. Substantially all CMOs and
REMICs are backed by pools of mortgages insured or guaranteed by the FNMA and
FHLMC.
During the six months ended March 31, 1999, proceeds from sales of
mortgage-backed and related securities available for sale were $3,011,615 with
gross realized gains of $28,837 included in earnings. During the six months
ended March 31, 1998, proceeds from sales of mortgage-backed and related
securities available for sale were $8,615,431 with gross realized gains of
$174,874 included in earnings.
The municipal obligation classified as held to maturity at March 31, 1999
matures December, 2002.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans consisted of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
---- ----
<S> <C> <C>
Residential real estate loans
1-4 family (first mortgage) $155,479,473 $138,514,548
Home equity (1-4 family second mortgage) 4,283,562 4,244,314
Multi-family 2,697,921 2,670,477
Nonresidential real estate loans 11,050,437 8,804,909
Construction loans 9,055,079 16,412,903
------------ ------------
Total real estate loans 182,566,472 170,647,151
Consumer loans
Automobile 3,161,715 3,480,341
Loans on deposits 312,285 290,640
Other consumer loans 440,066 344,244
------------ ------------
Total consumer loans 3,914,066 4,115,225
Commercial loans 3,417,547 2,753,493
------------ ------------
Total loans 189,898,085 177,515,869
Less:
Net deferred loan fees (606,714) (605,224)
Loans in process (3,228,045) (4,887,733)
Allowance for loan losses (736,415) (676,415)
------------ ------------
Net loans $185,326,911 $171,346,497
============ ============
</TABLE>
The Corporation, through the Bank, 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 $16,795,524 at March 31, 1999 and $15,615,077 at
September 30, 1998. Capitalized mortgage-servicing rights totaled $204,000 at
March 31, 1999 and $189,000 at September 30, 1998. At March 31, 1999,
approximately $1,200,000 of 1-4 family residential real estate loans included
above have been designated as held for sale. At September 30, 1998, no loans
were held for sale. Proceeds from the sale of loans during the three and six
months ended March 31, 1999 were $2,156,791 and $4,371,901 with net realized
gains of $21,298 and $73,913 included in earnings. No loans were sold during the
three or six months ended March 31, 1998.
Activity in the allowance for losses on loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balance $706,415 $ 485,431 $676,415 $ 562,202
Provision for loan losses 30,000 60,000 60,000 84,000
Recoveries -- -- -- --
Charge-offs -- (4,624) -- (105,395)
-------- --------- -------- ---------
Ending balance $736,415 $ 540,807 $736,415 $ 540,807
======== ========= ======== =========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Loans considered impaired within the scope of SFAS No. 114 were not significant
at March 31, 1999 and September 30, 1998 and during the three and six months
ended March 31, 1999 and 1998.
NOTE 4 - BORROWED FUNDS
At March 31, 1999, the Bank had a cash-management line-of-credit enabling it to
borrow up to $10,800,000 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 16, 1999. Variable rate borrowings of $600,000 were outstanding related to
this cash-management line-of-credit at March 31, 1999. There were no borrowings
outstanding on this line of credit at September 30, 1998.
Additionally, as a member of the FHLB system, the Bank has the ability to obtain
additional borrowings up to a total of 50% of Bank assets subject to the level
of qualified, pledgable 1-4 family residential real estate loans. The Bank had
variable rate borrowings totaling $5,000,000, with interest rates ranging from
4.89% to 4.94%, at March 31, 1999 and $4,000,000, with an interest rate of
5.54%, at September 30, 1998. The Bank had fixed rate borrowings totaling
$11,578,377 at March 31, 1999 and $12,430,023 at September 30, 1998. The
interest rates on these borrowings ranged from 5.80% to 6.42% at March 31, 1999
and September 30, 1998. The Bank also had $36,000,000 in convertible advances at
March 31, 1999 and September 30, 1998 whereby the interest rates are fixed for a
specified period of time and then change to variable for the remaining term of
the advance. The interest rates on these advances ranged from 4.66% to 5.65%.
Advances under the borrowing agreements are collateralized by a blanket pledge
of the Bank's residential mortgage loan portfolio and FHLB stock.
At March 31, 1999, required annual principal payments are as follows:
<TABLE>
<S> <C>
Period ending March 31:
2000 $ 1,622,433
2001 8,316,144
2002 1,831,278
2003 2,663,677
2004 710,044
Thereafter 38,034,801
-----------
$53,178,377
===========
</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 of the Corporation.
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 13
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE -SHEET RISK AND CONTINGENCIES (Continued)
Some financial instruments are used in the normal course of business to meet
financing needs of customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. These
involve, to varying degrees, credit risk more than the amount reported in the
financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based on
management's credit evaluation and generally consists of residential or
commercial real estate. Lines of credit are primarily home equity lines
collateralized by second mortgages on 1-4 family residential real estate and
commercial lines of credit collateralized by business assets.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements.
As of March 31, 1999 and September 30, 1998, the Corporation had commitments to
make fixed rate, 1-4 family residential real estate loans at current market
rates totaling $3,413,000 and $1,516,000. Loan commitments are generally for 30
days. The interest rate on these commitments ranged from 6.38% to 8.75% at March
31, 1999 and 6.38% to 8.50% at September 30, 1998. The Corporation had
commitments to make variable rate, 1-4 family residential loans totaling
$862,000 at March 31, 1999, at interest rates ranging from 6.00% to 7.88%, while
there were no such commitments at September 30, 1998. As of March 31, 1999 and
September 30, 1998, the Corporation had $4,660,000 and $4,711,000 in unused
variable rate home equity lines of credit and $1,830,000 and $820,000 in unused
commercial lines of credit.
Standby letters of credit are conditional commitments to guarantee a customer's
performance to a third party. At March 31, 1999 and September 30, 1998, the
Corporation had standby letter-of-credit commitments totaling $465,000 and
$150,000.
At March 31, 1999 and September 30, 1998, compensating balances of $637,000 and
$518,000 were required as deposits with the FHLB. The balances do not earn
interest.
The Corporation and the Bank have entered employment agreements with certain
officers of the Corporation and the Bank. Each of the agreements provide for a
term of three years and a salary and performance review by the Board of
Directors not less than annually, as well as inclusion of the employee in any
formally established employee benefit, bonus, pension and profit-sharing plans
for which management personnel are eligible.
- --------------------------------------------------------------------------------
13.
<PAGE> 14
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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, 1999, compared to September 30, 1998, and the results of operations for the
three and six month periods ended March 31, 1999, compared with the same periods
in 1998. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein.
FORWARD-LOOKING STATEMENTS
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimated," "projected" or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Bank's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Bank's market
area and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Factors listed
above could affect the Corporation's financial performance and could cause the
Corporation's actual results for future periods to differ materially from any
statements expressed with respect to future periods.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $248.2 million at March 31, 1999, an increase
of $12.9 million, or 5.5%, from $235.3 million at September 30, 1998. The growth
in assets was primarily in securities and loans. Such growth was funded by the
use of overnight deposits in other financial institutions and increased deposits
and borrowed funds.
Total securities increased $1.0 million from $51.5 million at September 30, 1998
to $52.5 million at March 31, 1999. The increase was due to $9.7 million in
purchases of mortgage-backed securities partly offset by sales, maturities and
principal repayments of $8.8 million. The purchases were funded by growth in
deposits and borrowings.
Net loans increased from $171.3 million at September 30, 1998 to $185.3 million
at March 31, 1999. The growth in loans was primarily in one- to four-family
first mortgage loans and nonresidential real estate loans, which increased $17.0
million and $2.2 million. As interest rates have decreased slightly since
September 30, 1998, much of the growth in one- to four-family first mortgages is
the result of customers refinancing their higher rate loans from the
Corporation's competitors. Despite the high volume of originations, overall
growth was partly constrained by the sale of two pools of one- to four-family
first mortgage loans with a carrying value of $4.4 million. The loans were sold
as a means to manage interest rate risk by reducing the Corporation's investment
in various lower yielding or longer term, fixed rate loans. The Corporation
retained the right to service the loans for a fixed spread to provide an
additional source of fee income. In addition to growth spurred by refinancings,
the continued growth in total real
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE> 15
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. Construction loans decreased $7.4 million as loans
were converted to more permanent financing upon completion of construction.
Changes in other types of loans were not significant.
Total deposits increased $13.3 million, or 8.6%, from $154.6 million at
September 30, 1998 to $167.9 million at March 31, 1999. The Corporation
experienced an increase of $3.7 million in certificates of deposit while money
market accounts increased $9.6 million, or 91.4%, and had the largest increase
of all types of deposits. The increase in money market accounts is the result of
a new tiered pricing system which was implemented late in fiscal 1998, increased
advertising for the product and the customers' desire for liquidity.
Borrowed funds totaled $52.4 million at September 30, 1998 and $53.2 million at
March 31, 1999. The majority of borrowed funds are invested in mortgage-backed
and related securities to leverage the Corporation's excess capital and to
provide liquidity for future loan growth.
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 the interest rates at
which such loans are made, general economic conditions and availability of funds
for lending activities.
The Corporation's net income is primarily dependent on its net interest income
(the difference between interest income generated on interest-earning assets and
interest expense incurred on interest-bearing liabilities). Net income is also
affected by provisions for loan losses, service charges, gains on sale of assets
and other income, noninterest expense and income taxes.
The Corporation's net income of $381,000 and $692,000 for the three and six
months ended March 31, 1999 represented decreases of $33,000 and $12,000 in net
income compared to the three and six months ended March 31, 1998. The decrease
in net income resulted from the Corporation realizing less gains on the sale of
available for sale securities and experiencing increases in noninterest expense
during the three and six months ended March 31, 1999, compared to the same
periods in the prior year. Partly offsetting the decrease in realized security
gains and increases in noninterest expense were gains realized on the sale of
loans and improved net interest income during the three and six months ended
March 31, 1999.
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. Net interest income
totaled $1,582,000 and $3,036,000 for the three and six months ended March 31,
1999, compared to $1,459,000 and $2,915,000 for the same periods in 1998. The
Corporation remains liability sensitive, whereby its interest-bearing
liabilities will generally reprice more quickly than its interest-earning
assets. Therefore, the Corporation's net interest margin will generally increase
in periods of falling interest rates in the market and will decrease in periods
of increasing interest rates. Accordingly, in a rising rate environment, the
Corporation may need to increase rates to attract and retain deposits. Due to
the negative gap position, such a rise in interest rates may not have such an
immediate affect on
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE> 16
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
interest-earning assets. This lag could negatively affect net interest income.
During the first quarter of fiscal 1999, the Board of Governors of the Federal
Reserve System decreased the discount rate by 50 basis points, which has lead to
a general decrease in deposit and loan rates offered by many financial
institutions.
Interest and fees on loans totaled $3,540,000 and $6,942,000 for the three and
six months ended March 31, 1999 compared to $2,862,000 and $5,567,000 for the
three and six months ended March 31, 1998. Such increase in interest income was
due to higher average loan balances related to the origination of new one- to
four-family first mortgage loans.
Interest on securities totaled $778,000 and $1,516,000 for the three and six
months ended March 31, 1999 compared to $1,055,000 and $2,230,000 for the three
and six months ended March 31, 1998. The decrease was primarily due to a
decrease in the average balance of securities compared to the prior periods as
the majority of proceeds from sales and principal repayments have been
reinvested in higher yielding loans.
Interest on deposits totaled $2,031,000 and $4,066,000 for the three and six
months ended March 31, 1999 and $1,856,000 and $3,698,000 for the three and six
months ended March 31, 1998. The increase resulted from higher average deposit
balances partly offset by a decrease in the average cost of funds from the prior
period.
Interest on borrowed funds increased $88,000 and $186,000 over the comparable
periods. The increase was the result of higher average balances of borrowed
funds during the three and six months ended March 31, 1999. Beginning in the
fourth quarter of fiscal 1995, the Corporation borrowed funds and invested a
portion of these funds in mortgage-backed securities to leverage excess capital,
as discussed previously. From time to time, the Corporation has borrowed
additional adjustable-rate funds for similar purposes as well as to provide
funding for loan growth. The Corporation has also borrowed fixed-rate funds to
provide for long-term liquidity needs. As opportunities arise, 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 probable losses 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 probable losses in the loan portfolio. The
amount of the provision is based on management's regular review of the loan
portfolio and consideration of such factors as historical loss experience,
general prevailing economic conditions, changes in size and composition of the
loan portfolio and specific borrower considerations, including ability of the
borrower to repay the loan and the estimated value of the underlying collateral.
Other than $115,000 in charge-offs during fiscal 1998, the Corporation has not
experienced any significant charge-offs for the past several years. The majority
of these charge-offs occurred during the three-months ended December 31, 1997
and were related to a single loan relationship for which the Corporation
maintained a 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 one- to four-family
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE> 17
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
residential real estate loans, established income information and defined ratios
of debt to income. Loans secured by real estate make up 96.1% of the
Corporation's loan portfolio, and loans secured by first mortgages on one- to
four-family residential real estate constituted 81.9% of total loans at March
31, 1999. 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. The
provision for loan losses totaled $30,000 and $60,000 during the three and six
months ended March 31, 1999, compared to $60,000 and $84,000 for the same
periods in 1998. The primary reason for the decrease in the provision for loan
losses for the comparative periods relates to the $115,000 charge-off which
occurred during fiscal 1998.
Noninterest income totaled $146,000 and $303,000 for the three and six months
ended March 31, 1999 and $254,000 and $333,000 for the three and six months
ended December 31, 1998. The decrease was primarily the result of gains realized
on available for sale securities during the three months ended March 31, 1998,
which was partly offset by gains realized on sales of loans during the three and
six months ended March 31, 1999. The securities and loan sales were primarily
made for interest rate risk strategy purposes. The increase in service charges
and other fees was the result of a change in pricing for overdraft, stop payment
and ATM surcharge fees.
Noninterest expense totaled $1,120,000 and $2,228,000 for the three and six
months ended March 31, 1999, compared to $1,020,000 and $2,085,000 for the three
and six months ended March 31, 1998. The Corporation experienced increases in
most of the components of noninterest expense. The increase in other expense
related to legal and consulting services.
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. Income tax expense totaled $197,000 and
$359,000, or an effective rate of 34.1%, for the three and six months ended
March 31, 1999, compared to $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.
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, 1999 and 1998.
<TABLE>
<CAPTION>
Six Months Ended
March 31,
---------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Net income $ 692 $ 704
Adjustments to reconcile net income to net cash
from operating activities (78) 1,781
-------- --------
Net cash from operating activities 614 2,485
Net cash from investing activities (14,792) (21,531)
Net cash from financing activities 12,107 14,279
-------- --------
Net change in cash and cash equivalents (2,071) (4,767)
Cash and cash equivalents at beginning of period 3,578 5,633
-------- --------
Cash and cash equivalents at end of period $ 1,507 $ 866
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE> 18
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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 additional funds 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 U.S.
Treasury, federal agency obligations and other investments having maturities of
five years or less in an amount equal to 4% of the sum of the Corporation's
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement, which may be changed
from time to time by the OTS to reflect changing economic conditions, is
intended to provide a source of relatively liquid funds on which the Corporation
may rely, if necessary, to fund deposit withdrawals or other short-term funding
needs. At March 31, 1999, the Corporation's regulatory liquidity was 32.6%. At
such date, the Corporation had commitments to originate fixed rate loans
totaling $3,413,000 and variable rate loans totaling $862,000. The Corporation
had no commitments to purchase or sell loans. The Corporation considers its
liquidity and capital reserves sufficient to meet its outstanding short and long
term needs. See Note 5 of the Notes to Consolidated Financial Statements.
The Bank is required by regulations to meet certain minimum capital
requirements, which must be generally as stringent as standards established for
commercial banks. 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. Current capital requirements call for
tangible capital of 1.5% of adjusted total assets, core capital (which for the
Bank consists solely of tangible capital) of 3.0% of adjusted total assets and
risk-based capital (which, for the Bank, consists of core capital and general
valuation allowances) of 8.0% of risk-weighted assets (assets are weighted at
percentage levels ranging from 0% to 100% depending on their relative risk). The
following table indicates that the requirement for core capital is 4.0% because
that is the level that the OTS prompt corrective-action regulations require to
be considered adequately capitalized. At March 31, 1999, 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 applicable
requirements at March 31, 1999. Management is not aware of any matters after the
latest regulatory exam that would cause the Bank's capital category to change.
The following table summarizes the Bank's regulatory capital requirements and
actual capital at March 31, 1999.
<TABLE>
<CAPTION>
Excess of
actual capital
over current
Actual capital Current requirement requirement
--------------- ------------------- --------------- Applicable
(Dollars in thousands) Amount Percent Amount Percent Amount Percent Asset Total
------ ------- ------ ------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $22,664 9.2% $ 3,707 1.5% $18,957 7.7% $247,150
Core capital 22,664 9.2 9,886 4.0 12,778 5.2 247,150
Tier 1 risk-based capital 22,664 17.9 5,073 4.0 17,591 13.9 126,829
Total risk-based capital 23,367 18.4 10,146 8.0 13,221 10.4 126,829
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE> 19
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
In October 1998, the Board of Directors of the Corporation authorized the
purchase of up to 5% of the Corporation's outstanding common shares over a
twelve-month period. The shares will be purchased in the over-the-counter
market. The number of shares to be purchased and the price to be paid will
depend upon the availability of shares, the prevailing market prices and any
other considerations which may, in the opinion of the Corporation's Board of
Directors or management, affect the advisability of purchasing shares. Through
March 31, 1999, the Corporation purchased 96,341 shares related to the 5% stock
purchase. In April 1999, the Corporation completed the October 1998 5% stock
repurchase and announced another 5% stock repurchase.
YEAR 2000 ISSUE
The Bank's lending and deposit activities are almost entirely dependent on
computer systems which process and record transactions, although the Bank can
effectively operate with manual systems for brief periods when its electronic
systems malfunction or cannot be accessed. The Bank uses the services of a
nationally-recognized data processing service bureau specializing in data
processing for financial institutions. In addition to its basic operating
activities, the Bank's facilities and infrastructure, such as security systems
and communications equipment, are dependent, to varying degrees, on computer
systems.
The Bank is aware of the potential Year 2000 related problems that may affect
the computers that control or operate Bank's operating systems, facilities and
infrastructure. In 1997, the Bank began a process of identifying any Year 2000
related problems that may be experienced by its computer-operated or
computer-dependent systems. The Bank has contacted the companies that supply or
service the Bank's computer-operated or computer-dependent systems to obtain
confirmation that each system that is material to the operations of the Bank is
either currently Year 2000 compliant or is expected to be Year 2000 compliant.
With respect to systems that cannot presently be confirmed as Year 2000
compliant, the Bank will continue to work with the appropriate supplier or
servicer to ensure all such systems will be rendered compliant in a timely
manner, with minimal expense or disruption of the Bank's operations. All of the
identified computer systems affected by the Year 2000 issue are currently in the
renovation, validation or implementation phase of the process of becoming Year
2000 compliant. The Bank has identified various companies whose services are
deemed critical to the mission of the Bank and received assurances that such
companies will be Year 2000 compliant.
As a contingency plan, the Bank has determined that, if such service providers
were to have their systems fail, the Bank would implement manual systems until
such systems could be re-established. The Bank does not anticipate that such
short-term manual systems would have a material adverse effect on the Bank's
operations. The expense of any change in suppliers or servicers is not expected
to be material to the Bank. The Bank has examined its computer hardware and
software and determined it will cost approximately $70,000 to make such systems
Year 2000 compliant. Of that amount, the Bank has already spent $25,000. At this
time, however, any additional expense that may be incurred by the Bank in
connection with Year 2000 issues cannot be determined. Additionally, testing has
been performed on all internal hardware and software systems. The Bank has also
completed two proxy tests with its main data service provider. One final proxy
test will be performed in June or July of 1999. All Year 2000 related problems
noted from the testing have been corrected.
- --------------------------------------------------------------------------------
19.
<PAGE> 20
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
In addition to the possible expense related to its own systems, the Bank could
incur losses if loan payments are delayed due to Year 2000 problems affecting
any of the Bank's significant borrowers or impairing the payroll systems of
large employers in the Bank's primary market area. Because the Bank's loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses and the Bank's primary market area is not significantly dependent on
one employer or industry, the Bank does not expect any significant or prolonged
Year 2000 related difficulties will affect net earnings or cash flow.
- --------------------------------------------------------------------------------
20.
<PAGE> 21
MILTON FEDERAL FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
- --------------------------------------------------------------------------------
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 securities
portfolio so that substantially all of the mortgage-backed 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 capitalize on the yield differential. 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 $26.2 million at September 30, 1998 to $34.6 million at March 31, 1999. In
addition, the Corporation also originates consumer and commercial loans;
however, such loans make up only 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 risks while commercial
loans generally carry variable interest rates. From time to time, the
Corporation has also sold pools of fixed rate mortgage loans and invested the
funds in shorter term fixed rate loans, adjustable rate loans and adjustable
rate mortgage-backed securities. Such investments have less exposure to interest
rate risk. The Corporation may sell additional pools of fixed rate loans in the
future should the need exist.
Lastly, as part of its effort to monitor and manage interest rate risk, the Bank
uses the "net portfolio value" ("NPV") methodology adopted by the OTS as part of
its capital regulations. Presented in the Corporation's 1998 annual report, as
of September 30, 1998, 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 case 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, 1998, that would significantly change
the Bank's NPV at March 31, 1999, under each of the assumed shifts of 100 basis
points in market interest rates.
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE> 22
MILTON FEDERAL FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
22.
<PAGE> 23
MILTON FEDERAL FINANCIAL CORPORATION
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The annual meeting of shareholders was held on January 20, 1999 in West
Milton, Ohio. Three items were presented to shareholders for
consideration and action:
1. The election of three directors of the Corporation. All three
directors were re-elected with Glenn E. Aidt receiving
1,778,634 votes, Kenneth J. Faze receiving 1,788,340 votes,
and David R. Hayes receiving 1,786,612 votes for re-election.
The remaining directors will continue under their existing
terms.
2. The ratification of Crowe, Chizek and Company LLP as auditors
for the Corporation for the fiscal year ending September 30,
1999. The appointment of auditors was ratified with 1,803,443
votes cast for, 20,882 votes cast against, 54,591 abstentions
and 334,639 broker nonvotes.
3. To consider the shareholder proposal regarding the sale or
merger of the Corporation. The consideration received 421,496
votes cast for, 859,371 votes cast against, 234,252
abstentions and 698,376 broker nonvotes.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. 27: Financial Data Schedule.
(b) No current reports on Form 8-K were filed by the Registrant during
the quarter ended March 31, 1999.
- --------------------------------------------------------------------------------
23.
<PAGE> 24
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 11, 1999 /s/ Glenn E. Aidt
------------------------------- ------------------------------------
Glenn E. Aidt
President
Date: May 11, 1999 /s/ Thomas P. Eyer
------------------------------- ------------------------------------
Thomas P. Eyer
Treasurer (Chief Financial Officer)
- --------------------------------------------------------------------------------
24.
<PAGE> 25
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
<S> <C> <C>
27 Financial Data Schedule 26
</TABLE>
- --------------------------------------------------------------------------------
25.
<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-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 788
<INT-BEARING-DEPOSITS> 220
<FED-FUNDS-SOLD> 500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,089
<INVESTMENTS-CARRYING> 13,366
<INVESTMENTS-MARKET> 13,393
<LOANS> 185,327
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0
0
<COMMON> 0
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<INTEREST-TOTAL> 8,580
<INTEREST-DEPOSIT> 4,066
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<SECURITIES-GAINS> 29
<EXPENSE-OTHER> 2,228
<INCOME-PRETAX> 1,051
<INCOME-PRE-EXTRAORDINARY> 692
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<EPS-PRIMARY> .34
<EPS-DILUTED> .34
<YIELD-ACTUAL> 2.53
<LOANS-NON> 427
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<ALLOWANCE-DOMESTIC> 736
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 314
</TABLE>
