<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] 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 5, 2000, the latest practicable date, 2,099,995 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............................................ 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk.................................. 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 22
Item 2. Changes in Securities and Use of Proceeds.................................................. 22
Item 3. Defaults Upon Senior Securities............................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders........................................ 22
Item 5. Other Information.......................................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................................... 22
SIGNATURES ........................................................................................... 23
</TABLE>
2.
<PAGE> 3
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 1,163,487 $ 3,138,920
Interest-bearing deposits in other financial institutions 953,719 403,342
------------ ------------
Total cash and cash equivalents 2,117,206 3,542,262
Securities available for sale 34,768,624 36,668,997
Securities held to maturity (Estimated fair value of $11,551,917
at March 31, 2000 and $12,199,160 at September 30, 1999) 11,667,959 12,317,173
Federal Home Loan Bank stock 3,477,000 3,131,700
Loans held for sale 20,000,000 2,626,923
Loans, net 180,552,887 192,115,024
Premises and equipment, net 2,524,875 2,629,439
Cash surrender value of life insurance 1,696,530 1,661,644
Accrued interest receivable 1,337,662 1,335,349
Real estate owned 221,099 201,015
Other assets 612,496 447,108
------------ ------------
Total assets $258,976,338 $256,676,634
============ ============
LIABILITIES
Deposits $164,353,649 $168,471,283
Borrowed funds 68,365,945 61,483,463
Advance payments by borrowers for taxes and insurance 419,378 551,027
Accrued interest payable 420,231 352,075
Other liabilities 429,335 790,896
------------ ------------
Total liabilities 233,988,538 231,648,744
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares authorized,
none outstanding -- --
Common stock, no par value, 9,000,000 shares authorized,
2,578,875 shares issued -- --
Additional paid-in capital 25,294,682 25,231,035
Retained earnings 8,773,338 8,529,714
Treasury stock, at cost, 478,880 shares at March 31, 2000
and September 30, 1999 (7,017,271) (7,017,271)
Unearned employee stock ownership plan shares (859,484) (969,101)
Unearned recognition and retention plan shares (538,383) (638,715)
Accumulated other comprehensive income (665,082) (107,772)
------------ ------------
Total shareholders' equity 24,987,800 25,027,890
------------ ------------
Total liabilities and shareholders' equity $258,976,338 $256,676,634
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
<PAGE> 4
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees $3,775,950 $3,540,373 $7,526,282 $6,942,392
Securities 761,098 778,194 1,493,776 1,516,353
Other, including dividend income 53,213 46,461 106,548 121,185
---------- ---------- ---------- ----------
4,590,261 4,365,028 9,126,606 8,579,930
INTEREST EXPENSE
Deposits 1,962,315 2,030,546 3,928,559 4,066,352
Borrowed funds 986,500 752,850 1,880,324 1,477,661
---------- ---------- ---------- ----------
2,948,815 2,783,396 5,808,883 5,544,013
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,641,446 1,581,632 3,317,723 3,035,917
Provision for loan losses 20,000 30,000 45,000 60,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,621,446 1,551,632 3,272,723 2,975,917
NONINTEREST INCOME
Service charges and other fees 97,883 67,603 200,876 129,304
Gain on sale of securities -- 28,837 2,003 28,837
Gain on sale of loans -- 21,298 -- 73,913
Gain on sale of REO -- -- 6,366 --
Other income 30,177 28,631 61,096 71,172
---------- ---------- ---------- ----------
128,060 146,369 270,341 303,226
NONINTEREST EXPENSE
Salaries and employee benefits 658,383 621,408 1,308,096 1,257,501
Occupancy expense 107,322 113,176 221,467 215,942
Data processing services 108,630 69,283 180,356 127,771
State franchise taxes 76,247 80,262 156,444 167,453
Federal deposit insurance premiums 8,826 23,644 33,602 45,776
Advertising 5,770 10,660 20,365 30,530
Other expenses 170,606 201,489 329,140 382,707
---------- ---------- ---------- ----------
1,135,784 1,119,922 2,249,470 2,227,680
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX 613,722 578,079 1,293,594 1,051,463
Income tax expense 213,000 197,000 444,200 359,000
---------- ---------- ---------- ----------
NET INCOME $ 400,722 $ 381,079 $ 849,394 $ 692,463
========== ========== ========== ==========
Earnings per common share - Basic $ .20 $ .19 $ .43 $ .34
========== ========== ========== ==========
Earnings per common share - Diluted $ .20 $ .19 $ .43 $ .34
========== ========== ========== ==========
Dividends per common share $ .16 $ .15 $ .31 $ .30
========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
<PAGE> 5
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $ 400,722 $381,079 $ 849,394 $692,463
Other comprehensive income (loss):
Unrealized holding gains (losses) on
available for sale securities
arising during the period (795,741) 81,091 (842,407) 82,284
Reclassification adjustment for (gains)
losses realized on securities
sales included in net income -- (28,837) (2,003) (28,837)
--------- -------- --------- --------
Net unrealized gain (loss) (795,741) 52,254 (844,410) 53,447
Tax effect 270,552 (17,778) 287,100 (18,173)
--------- -------- --------- --------
Total other comprehensive
Income (loss) (525,189) 34,476 (557,310) 35,274
--------- -------- --------- --------
COMPREHENSIVE INCOME (LOSS) $(124,467) $415,555 $ 292,084 $727,737
========= ======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5.
<PAGE> 6
MILTON FEDERAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $25,288,717 $25,983,031 $25,027,890 $26,283,226
Net income 400,722 381,079 849,394 692,463
Cash dividends (302,881) (314,893) (605,770) (635,387)
Commitment to release employee
stock ownership plan shares 76,219 75,029 141,062 154,634
Shares earned under recognition and
retention plan, including tax benefit 50,212 46,394 132,534 129,433
Purchase of treasury stock -- (928,375) -- (1,382,902)
Other comprehensive income (loss) (525,189) 34,476 (557,310) 35,274
----------- ----------- ----------- -----------
Balance at end of period $24,987,800 $25,276,741 $24,987,800 $25,276,741
=========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6.
<PAGE> 7
MILTON FEDERAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 946,685 $ 614,013
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (850,965) (9,588,941)
Proceeds from maturities and principal payments 1,125,452 4,483,159
Proceeds from sales 798,312 3,011,615
Securities held to maturity
Purchases -- (125,000)
Proceeds from maturities and principal payments 632,415 1,290,205
Net increase in loans (5,927,153) (18,169,179)
Proceeds from sale of loans -- 4,371,901
Premises and equipment expenditures (4,526) (26,300)
Purchase FHLB stock (230,200) (39,400)
Proceeds from sale of real estate owned 57,495 --
----------- ------------
Net cash from investing activities (4,399,170) (14,791,940)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (4,117,634) 13,293,588
Net change in advance payments by borrowers for taxes
and insurance (131,649) 83,617
Net change in short-term borrowings (6,190,000) 600,000
Long-term advances from FHLB 13,800,000 1,000,000
Principal payments on FHLB advances (727,518) (851,646)
Cash dividends paid (605,770) (635,387)
Purchase of treasury stock -- (1,382,902)
----------- ------------
Net cash from financing activities 2,027,429 12,107,270
----------- ------------
Net change in cash and cash equivalents (1,425,056) (2,070,657)
Cash and cash equivalents at beginning of period 3,542,262 3,577,923
----------- ------------
Cash and cash equivalents at end of period $ 2,117,206 $ 1,507,266
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 5,740,727 $ 5,504,543
Income taxes 504,000 180,500
Noncash activities
Transfer of loans from portfolio to held for sale $17,373,077 --
Transfer of loans to real estate owned 71,213 --
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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 ("MFFC") at March
31, 2000, and its results of operations and cash flows for the periods
presented. All such adjustments are normal and recurring in nature. The
accompanying financial statements have been prepared in accordance with the
instructions of Form 10-Q and, therefore, do not purport to contain all
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances, and should be
read in conjunction with the consolidated financial statements, and notes
thereto, of MFFC for the fiscal year ended September 30, 1999, included in its
1999 annual report. MFFC has consistently followed the accounting policies
described in the notes to financial statements contained in MFFC's 1999 annual
report in preparing this Form 10-Q.
The consolidated financial statements include the accounts of MFFC and its
wholly-owned subsidiary, Milton Federal Savings Bank (the "Bank"), together
referred to as the Corporation. The financial statements of the Bank include the
accounts of its wholly-owned subsidiary, Milton Financial Service Corporation.
Milton Financial Service Corporation holds stock in Intrieve, Inc., the data
processing center utilized by the Bank. All significant intercompany accounts
and transactions have been eliminated.
MFFC is a thrift holding company and, through the Bank, is engaged in the
business of commercial and retail banking services with operations conducted
through its main office in West Milton, Ohio, and from its full service branch
offices located in Englewood, Brookville and Tipp City, Ohio. The Corporation is
primarily organized to operate in the financial institution industry.
Substantially all revenues are derived from the financial institution industry.
Miami, Montgomery and Darke Counties, Ohio provide the source for substantially
all the Corporation's deposit and lending activities.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses, fair values of financial instruments and
status of contingencies are particularly subject to change.
Income tax expense is the total of the current-year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax amounts for the temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized. Income tax expense is based on the
effective rate expected to be applicable for the entire year.
Some items in prior financial statements have been reclassified to conform to
the current presentation.
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Employee Stock Option
Plan ("ESOP") shares are considered outstanding for this calculation unless
unearned. Recognition and Retention Plan ("RRP") shares are considered
outstanding as they become vested. Diluted earnings per common share include the
dilutive effect of RRP shares and the additional potential common shares
issuable under stock options.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 9
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The factors used in the earnings per share computation are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Net income $ 400,722 $ 381,079 $ 849,394 $ 692,463
========== ========== ========== ==========
Weighted average common
shares outstanding 2,099,995 2,181,112 2,099,995 2,210,873
Less: Average unallocated
ESOP shares (74,558) (93,639) (76,868) (101,258)
Less: Average nonvested
RRP shares (39,687) (53,614) (41,439) (58,980)
---------- ---------- ---------- ----------
Average Shares 1,985,750 2,033,859 1,981,688 2,050,635
========== ========== ========== ==========
Basic earnings per common share $ .20 $ .19 $ .43 $ .34
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE
Net income $ 400,722 $ 381,079 $ 849,394 $ 692,463
========== ========== ========== ==========
Weighted average common
shares outstanding 1,985,750 2,033,859 1,981,688 2,050,635
Less: Dilutive effects of
stock options 12,103 10,073 -- 6,125
Less: Dilutive effects of average
nonvested RRP shares 2,604 2,198 -- 2,909
---------- ---------- ---------- ----------
Average shares and dilutive
potential common shares 2,000,457 2,046,130 1,981,688 2,059,669
========== ========== ========== ==========
Diluted earnings per common share $ .20 $ .19 $ .43 $ .34
========== ========== ========== ==========
</TABLE>
Stock options and nonvested RRP shares did not have a dilutive effect on the
weighted average shares outstanding for the six months ended March 31, 2000, due
to the exercise price for the stock options and the fair value at the date of
grant for the RRP shares exceeding the average stock price of the Corporation
for the six months ended March 31, 2000.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and fair values of securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
MARCH 31, 2000
- --------------
Available for sale
Equity $ 15,000 $ -- $ -- $ 15,000
Mortgage-backed 35,761,324 53,610 (1,061,310) 34,753,624
----------- -------- ----------- -----------
Total $35,776,324 $ 53,610 $(1,061,310) $34,768,624
=========== ======== =========== ===========
Held to maturity
Municipal obligations $ 125,000 $ -- $ (2,478) $ 122,522
Mortgage-backed 11,542,959 143,267 (256,831) 11,429,395
----------- -------- ----------- -----------
Total $11,667,959 $143,267 $ (259,309) $11,551,917
=========== ======== =========== ===========
SEPTEMBER 30, 1999
- ------------------
Available for sale
Equity $ 15,000 $ -- $ -- $ 15,000
Mortgage-backed 36,817,287 254,886 (418,176) 36,653,997
----------- -------- ----------- -----------
Total $36,832,287 $254,886 $ (418,176) $36,668,997
=========== ======== =========== ===========
Held to maturity
Municipal obligations $ 125,000 $ -- $ (1,820) $ 123,180
Mortgage-backed 12,192,173 136,856 (253,049) 12,075,980
----------- -------- ----------- -----------
Total $12,317,173 $136,856 $ (254,869) $12,199,160
=========== ======== =========== ===========
</TABLE>
The municipal obligation classified as held to maturity at March 31, 2000
matures December 2002.
The Corporation maintains a significant portfolio of mortgage-backed securities
in the form of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA") participation certificates. Mortgage-backed securities
generally entitle the Corporation to receive a portion of the cash flows from an
identified pool of mortgages, and FHLMC, FNMA and GNMA securities are each
guaranteed by their respective agencies as to principal and interest. The
Corporation has also invested significant amounts in collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs")
which are included in mortgage-backed securities. Substantially all CMOs and
REMICs are backed by pools of mortgages insured or guaranteed by the FNMA and
FHLMC.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
During the six months ended March 31, 2000, proceeds from sales of securities
available for sale were $798,312 with gross realized gains of $2,003 included in
earnings. No sales occurred during the three months ended March 31, 2000. During
the three and six months ended March 31, 1999, proceeds from sales of securities
available for sale were $3,011,615 with gross realized gains of $28,837 included
in earnings.
NOTE 3 - LOANS
Loans were as follows:
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
<S> <C> <C>
Residential real estate loans
1-4 family (first mortgage) $145,375,495 $159,291,522
Home equity (1-4 family second mortgage) 6,502,098 5,347,292
Multi-family 4,767,157 4,220,538
Nonresidential real estate loans 13,676,171 12,755,574
Construction loans 6,989,269 11,872,585
------------ ------------
Total real estate loans 177,310,190 193,487,511
Consumer loans
Automobile 3,016,732 3,034,752
Loans on deposits 294,096 317,653
Other consumer loans 334,086 378,095
------------ ------------
Total consumer loans 3,644,914 3,730,500
Commercial loans 4,044,037 3,466,079
------------ ------------
Total loans 184,999,141 200,684,090
Less:
Net deferred loan fees (586,918) (609,131)
Loans in process (3,086,999) (7,194,703)
Allowance for loan losses (772,337) (765,232)
------------ ------------
Net loans $180,552,887 $192,115,024
============ ============
</TABLE>
The Corporation has sold various loans to other financial intermediaries while
retaining the servicing rights. Gains and losses on loan sales are recorded at
the time of the sale. Loans sold for which the Corporation has retained
servicing totaled $14,791,383 at March 31, 2000 and $15,428,430 at September 30,
1999. Capitalized mortgage servicing rights totaled $189,000 at March 31, 2000
and September 30, 1999. At September 30, 1999, $2,626,923 of one- to four-family
residential real estate loans were held for sale. As part of management's plan
to improve the Corporation's interest-rate risk position, $17,373,077 of one- to
four-family residential fixed-rate real estate loans were transferred from the
portfolio to held for sale effective March 31, 2000. Proceeds from the sale of
loans during the three and six months ended March 31, 1999 were $2,156,791 and
$4,371,901 with net realized gains of $21,298 and $73,913 included in earnings.
No loans were sold during the three or six months ended March 31, 2000.
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 12
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Activity in the allowance for losses on loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balance $790,707 $706,415 $765,232 $676,415
Provision for loan losses 20,000 30,000 45,000 60,000
Recoveries 6,459 -- 7,006 --
Charge-offs (44,829) -- (44,901) --
-------- -------- -------- --------
Ending balance $772,337 $736,415 $772,337 $736,415
======== ======== ======== ========
</TABLE>
Loans considered impaired within the scope of SFAS No. 114 were not significant
at March 31, 2000 and September 30, 1999 and during the three and six months
ended March 31, 2000 and 1999.
Nonperforming loans were as follows.
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
<S> <C> <C>
Loans past due over 90 days still on accrual $ 10,000 $225,000
Nonaccrual loans 265,000 231,000
</TABLE>
NOTE 4 - BORROWED FUNDS
At March 31, 2000, the Bank had a cash management line of credit enabling it to
borrow up to $12,413,550 from the Federal Home Loan Bank ("FHLB") of Cincinnati.
The line of credit must be renewed on an annual basis. The next renewal date is
April 16, 2000. Variable rate borrowings of $3,010,000 and $9,200,000 were
outstanding related to this cash management line of credit at March 31, 2000 and
September 30, 1999.
As a member of the FHLB system, the Bank has the ability to obtain additional
borrowings up to a total of 50% of Bank assets subject to the level of
qualified, pledgable one- to four-family residential real estate loans. The Bank
had variable rate borrowings totaling $32,800,000, with interest rates ranging
from 6.04% to 6.50%, at March 31, 2000 and $7,000,000, with interest rates
ranging from 5.33% to 5.51%, at September 30, 1999. The Bank had fixed rate
borrowings totaling $10,555,945 at March 31, 2000 and $11,283,463 at September
30, 1999. The interest rates on these borrowings ranged from 5.80% to 6.42% at
March 31, 2000 and September 30, 1999. The Bank also had $22,000,000 and
$34,000,000 in convertible advances at March 31, 2000 and September 30, 1999,
whereby the interest rates are fixed for a specified period of time and then
change to variable for the remaining term of the advance. The interest rates on
these advances ranged from 5.39% to 6.85% at March 31, 2000 and 5.12% to 5.65%
at September 30, 1999. During the six months ended March 31, 2000, $24,000,000
of these advances converted to variable rate and are included in the variable
rate total above.
Advances under the borrowing agreements are collateralized by a blanket pledge
of the Bank's residential mortgage loan portfolio and FHLB stock.
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 13
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - BORROWED FUNDS (Continued)
At March 31, 2000, required annual principal payments were as follows:
<TABLE>
<CAPTION>
Period ending March 31:
<S> <C>
2001 $12,126,144
2002 2,831,278
2003 2,663,677
2004 710,044
2005 667,760
Thereafter 49,367,042
-----------
$68,365,945
===========
</TABLE>
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters is not
expected to have a material effect on financial condition or results of
operations of the Corporation.
Some financial instruments are used in the normal course of business to meet
financing needs of customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. These
involve, to varying degrees, credit and interest rate risk in excess of the
amount reported in the financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and written financial guarantees. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based on
management's credit evaluation and generally consists of residential or
commercial real estate. Lines of credit are primarily home equity lines
collateralized by second mortgages on one- to four-family residential real
estate and commercial lines of credit collateralized by business assets.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements.
As of March 31, 2000 and September 30, 1999, the Corporation had commitments to
make fixed rate, one- to four-family residential real estate loans at current
market rates totaling $225,000 and $1,040,000. Loan commitments are generally
for thirty days. The interest rate on the fixed rate commitments ranged from
7.50% to 9.75% at March 31, 2000 and 7.00% to 10.25% at September 30, 1999. The
Corporation had commitments to make variable rate, one- to four-family
residential real estate loans totaling $223,000, with interest rates ranging
from 7.13% to 7.63% at September 30, 1999. No variable rate loan commitments
were outstanding at March 31, 2000. As of March 31, 2000 and September 30, 1999,
the Corporation had $4,233,000 and $4,540,000 in unused variable rate home
equity lines of credit and $1,387,000 and $2,034,000 in unused variable rate
commercial lines of credit.
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 14
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
At March 31, 2000 and September 30, 1999, the Corporation had standby letter of
credit commitments totaling $465,000.
At March 31, 2000 and September 30, 1999, compensating balances of $1,552,000
and $1,693,000 were required as deposits with the FHLB and Federal Reserve.
These balances do not earn interest.
The Corporation has entered employment agreements with certain officers of the
Corporation. Each of the agreements provide for a term of three years and a
salary and performance review by the Board of Directors not less than annually,
as well as inclusion of the employee in any formally established employee
benefit, bonus, pension and profit sharing plans for which management personnel
are eligible.
NOTE 6 - PROPOSED MERGER
On January 13, 2000, an Agreement and Plan and Reorganization by and between
BancFirst Ohio Corp. ("BFOH"), The First National Bank of Zanesville ("FNBZ"),
the Corporation and the Bank was signed. The Agreement provides for the merger
of the Bank with and into FNBZ. Under the terms of the Agreement, BFOH will
exchange .444 shares of its common stock and $6.80 in cash for each of the
outstanding shares of the Corporation. The Corporation's unexercised stock
options will be redeemed for cash equal to the consideration to be received by
BFOH shareholders, less $13.69, the exercise price of the option. Based on
BFOH's closing price of $20.375 on January 12, 2000, and the 2,099,995
outstanding shares of the Corporation as of May 5, 2000, the transaction would
be valued at $33.3 million.
The merger is expected to be consummated in the second quarter of 2000, pending
approval by the Corporation's shareholders, regulatory approval and other
customary conditions of closing. The Corporation has granted to BFOC an option
to purchase up to 19.9% of the Corporation's outstanding shares upon the
occurrence of certain events.
NOTE 7 - REGULATORY MATTERS
Because the Bank's sensitivity to interest rate risk, as computed in accordance
with regulatory requirements, exceeds limitations established by the
Corporation's Board of Directors, the Bank has submitted to the Office of Thrift
Supervision ("OTS") an interest rate risk compliance plan, which includes
several initiatives to be taken to decrease the Bank's interest rate risk. Those
initiatives include decreasing the terms to maturity or repricing of the Bank's
assets by refraining from originating fixed-rate mortgage loans (unless they
have already been committed to be sold), selling some fixed-rate loans already
held in the Bank's portfolio, originating and purchasing adjustable-rate loans,
and selling mortgage derivative investments and reinvesting the proceeds in
short-term bonds and notes. The initiatives also include lengthening the terms
to maturity of the Bank's liabilities by emphasizing certificates of deposit
with terms of two years or longer, and shifting borrowings toward fixed-rate
advances with longer terms to maturity. In the current interest rate
environment, these initiatives could negatively affect the earnings of the
Corporation due to incurring losses on the sale of assets and a reduction in net
interest margin. If the plan is not approved or the Bank does not comply with
the plan, the OTS could initiate a process that could result in limitations
being placed on the Bank's activities, growth or earnings.
- --------------------------------------------------------------------------------
14.
<PAGE> 15
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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, 2000, as compared to September 30, 1999, and the results of operations for
the three and six month periods ended March 31, 2000, compared with the same
periods in 1999. 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 $259.0 million at March 31, 2000, an increase
of $2.3 million, or .9%, from $256.7 million at September 30, 1999. The growth
in assets was primarily in loans. Such growth was funded by Federal Home Loan
Bank advances.
Net loans decreased from $192.1 million at September 30, 1999 to $180.6 million
at March 31, 2000. However, loans held for sale, which are one- to four-family
fixed-rate first mortgage real estate loans, increased from $2.6 million at
September 30, 1999 to $20.0 million at March 31, 2000. Thus, the combination of
portfolio loans and loans held for sale increased by $5.8 million from $194.7
million at September 30, 1999 to $200.5 million at March 31, 2000. As part of
management's plan to improve the Corporation's interest-rate risk position,
$17,373,077 of one- to four-family residential fixed-rate real estate loans were
transferred from the portfolio to held for sale effective March 31, 2000. Growth
in total real estate loans is primarily 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 $4.9
million as loans were converted to more permanent financing upon completion of
construction. Changes in other types of loans were not significant.
The Corporation began originating one- to four-family first mortgage loans with
the intent of selling them in the secondary market in fiscal 1999. The loans
were sold as a means to manage interest rate risk by reducing the Corporation's
investment in longer term, fixed-rate loans. The Corporation retained the right
to service the loans for a fee to provide an additional source of fee income. As
a result, $2.6 million in loans at September 30, 1999 were originated with the
intent of selling them on the secondary market. Prior to fiscal 1999, the
Corporation sold pools of portfolio loans from time to time to manage interest
rate
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE> 16
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
risk. As a result of increases in the interest rate environment recently being
experienced and the Corporation's susceptibility to rising interest rates,
management elected to transfer loans from the portfolio to held for sale as of
March 31, 2000. See further discussion included in "Quantitative and Qualitative
Disclosure About Market Risk."
Securities available for sale and securities held to maturity declined from
$49.0 million at September 30, 1999 to $46.4 million at March 31, 2000. The
decline was due to principal repayments on mortgage-backed securities and a
market value decline of $844,000 from an increase in interest rates since
September 30, 2000. Maturities were used to fund loan growth.
Total deposits decreased $4.1 million, or 2.4%, from $168.5 million at September
30, 1999 to $164.4 million at March 31, 2000. The Corporation experienced
decreases in all deposit types. However, money market accounts represented the
largest portion of the decrease at $3.3 million.
Borrowed funds totaled $61.5 million at September 30, 1999 and $68.4 million at
March 31, 2000. The majority of borrowed funds are invested in securities to
leverage the Corporation's excess capital and to provide liquidity for future
loan growth. The increase from September 30, 1999 offset the decline in deposits
and provided funding for loan growth.
COMPARISON OF RESULTS OF OPERATIONS
The 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 upon 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 the sale of
assets and other income, noninterest expense and income taxes. The Corporation's
net income of $401,000 and $849,000 for the three and six months ended March 31,
2000 represented increases of $20,000 and $157,000 in net income compared to the
same periods in 1999. Basic and diluted earnings per share increased $.01 and
$.09 per share from $.19 and $.34 per share for 1999 to $.20 and $.43 per share
for 2000.
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 $1,641,000 and $3,318,000 for the three and six months ended March 31,
2000, compared to $1,582,000 and $3,036,000 for the same periods in 1999. The
increase resulted from the Corporation's overall growth in assets. Additionally,
the Corporation had a larger proportion of funds invested in higher yielding
loans as opposed to securities. 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 rising interest rates. Accordingly, in a
rising interest rate environment such as what has occurred, the Corporation may
need to increase rates to attract and retain deposits. Due to the negative gap
position, a rise in interest rates may not have an immediate impact on
interest-earning assets. This lag could negatively affect net interest income.
Interest and fees on loans totaled $3,776,000 and $7,526,000 for the three and
six months ended March 31, 2000 compared to $3,540,000 and $6,942,000 for the
three and six months ended March 31, 1999. The
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE> 17
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
increase in interest and fees on loans was due to an overall rise in the
interest rate environment and higher average loan balances primarily related to
the origination of one- to four-family first mortgage loans. Interest on
securities and other dividend income have remained fairly stable.
Interest on deposits totaled $1,962,000 and $3,929,000 for the three and six
months ended March 31, 2000 and $2,031,000 and $4,066,000 for the three and six
months ended March 31, 1999. The decrease resulted from a lower average cost of
deposits for the period. However, this may not continue for long due to the
general increase in interest rates.
Interest on borrowed funds totaled $986,000 and $1,880,000 for the three and six
months ended March 31, 2000 compared to $753,000 and $1,478,000 for the same
periods in 1999. The increase was the result of higher average balances of
borrowed funds and a higher cost of borrowings during the periods. 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.
Since that 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.
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.
The Corporation has had very few charge-offs during the past several years. 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 residential real estate loans, established income
information and defined ratios of debt to income. Loans secured by real estate
make up 95.8% of the Corporation's loan portfolio, and loans secured by first
mortgages on one- to four-family residential real estate constituted 78.6% of
total loans at March 31, 2000. Providing the volume of nonperforming loans
remains insignificant and growth levels remain approximately the same,
management anticipates provisions for loan losses to remain similar to past
periods. The provision for loan losses totaled $20,000 and $45,000 during the
three and six months ended March 31, 2000, compared to $30,000 and $60,000 for
the same periods in 1999.
Noninterest income totaled $128,000 and $270,000 for the three and six months
ended March 31, 2000 compared to $146,000 and $303,000 for the three and six
months ended March 31, 2000. The decrease was primarily the result of gains
realized on sales of loans and securities during the three and six months ended
March 31, 1999. The loan sales were made for interest rate risk strategy
purposes. The decrease was partly offset by an increase in service charges and
other fees during the three and six months ended March 31, 2000. The increase in
service charges and other fees was the result of a change in pricing for
overdraft, stop payment and ATM surcharge fees.
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE> 18
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Noninterest expense totaled $1,136,000 and $2,249,000 for the three and six
months ended March 31, 2000 compared to $1,120,000 and $2,228,000 for the three
and six months ended March 31, 1999. The Corporation experienced modest
increases in most of the components of noninterest expense. The increase in
occupancy and data processing services resulted from the expanded account base
and services associated with the growth experienced in the two offices opened
over the past few years.
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. Income tax expense totaled $213,000 and
$444,000, or an effective rate of 34.7% and 34.3%, for the three and six months
ended March 31, 2000, compared to $197,000 and $359,000, or an effective rate of
34.1%, for the three and six months ended March 31, 1999.
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, 2000 and 1999.
<TABLE>
<CAPTION>
Six Months Ended
March 31,
---------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Net income $ 849 $ 692
Adjustments to reconcile net income to net cash from
operating activities 98 (78)
------- --------
Net cash from operating activities 947 614
Net cash from investing activities (4,399) (14,792)
Net cash from financing activities 2,027 12,107
------- --------
Net change in cash and cash equivalents (1,425) (2,071)
Cash and cash equivalents at beginning of period 3,542 3,578
------- --------
Cash and cash equivalents at end of period $ 2,117 $ 1,507
======= ========
</TABLE>
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.
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE> 19
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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, 2000, the Corporation's regulatory liquidity was 26.5%. At
such date, the Corporation had commitments to originate fixed rate loans
totaling $225,000. 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. 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 4.0% of adjusted total assets, except for institutions with
the highest examination rating and acceptable levels of risk, 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 summarizes the Bank's regulatory capital requirements and
actual capital at March 31, 2000.
<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 $23,926 9.2% $ 3,897 1.5% $20,029 7.7% $259,796
Core capital 23,926 9.2 10,392 4.0 13,534 5.2 259,796
Risk-based capital 24,665 18.1 10,905 8.0 13,760 10.1 136,310
</TABLE>
In April 1999, 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. Through March 31, 2000, 25,000 shares were purchased.
- --------------------------------------------------------------------------------
19.
<PAGE> 20
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 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 $41.5 million at September 30, 1999 to $51.7 million at March 31, 2000. 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.
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 1999 annual report, as of
September 30, 1999, 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, 1999 that would significantly change
the Bank's NPV at March 31, 2000 under each of the assumed shifts of 100 basis
points in market interest rates.
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE> 21
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.
Because the reduction in NPV was in excess of the Board of Directors'
limitations, particularly with the increased risk due to rising interest rates,
the Bank has submitted to the OTS an interest rate risk compliance plan, which
includes several initiatives to be taken to decrease the Bank's interest rate
risk. Those initiatives include decreasing the terms to maturity or repricing of
the Bank's assets by refraining from originating fixed-rate mortgage loans
(unless they have already been committed to be sold), selling some fixed-rate
loans already held in the Bank's portfolio, originating and purchasing
adjustable-rate loans, and selling mortgage derivative investments and
reinvesting the proceeds in short-term bonds and notes. The initiatives also
include lengthening the terms to maturity of the Bank's liabilities by
emphasizing certificates of deposit with terms of two years or longer, and
shifting borrowings toward fixed-rate advances with longer terms to maturity. In
the current interest rate environment, these initiatives could negatively affect
the earnings of the Corporation due to incurring losses on the sale of assets
and a reduction in net interest margin. If the plan is not approved or the Bank
does not comply with the plan, the OTS could initiate a process that could
result in limitations being placed on the Bank's activities, growth or earnings.
- --------------------------------------------------------------------------------
21.
<PAGE> 22
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 26, 2000 in West
Milton, Ohio. Two items were presented to shareholders for
consideration and action:
1. The re-election of three directors of the Corporation for
terms expiring in 2002. All three directors were re-elected
with E. Lynn App receiving 1,441,925 votes, Robert E. Hine
receiving 1,435,625 votes and Christopher S. Long receiving
1,440,525 votes for re-election. Additionally, Thomas L.
Ratliff was elected as a director of the Corporation with a
term expiring in 2002. 1,422,112 votes were cast for his
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,
2000. The appointment of auditors was ratified with 1,503,395
votes cast for, 9,278 votes cast against and 7,234
abstentions.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. 11: Statement re Computation of Per Share Earnings
Refer to Note 1 to the Consolidated Financial Statements.
(b) Exhibit No. 27: Financial Data Schedule.
(c) On January 21, 2000, the Registrant filed a current report on
Form 8-K to report the execution of the Agreement and Plan of
Reorganization by and among BancFirst Ohio Corp. ("BFOH"), The
First National Bank of Zanesville ("FNBZ"), The Registrant and
Milton Federal Savings Bank ("MFSB") on January 13, 2000 (the
"Agreement"). The Agreement provides for the merger of the
Registrant with and into BFOH and the immediate subsequent
merger of MFSB with and into FNBZ.
- --------------------------------------------------------------------------------
22.
<PAGE> 23
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 12, 2000 /s/ Glenn E. Aidt
------------------------ -----------------------------------
Glenn E. Aidt
President
Date May 12, 2000 /s/ Thomas P. Eyer
------------------------ -----------------------------------
Thomas P. Eyer
Treasurer (Chief Financial Officer)
- --------------------------------------------------------------------------------
23.
<PAGE> 24
MILTON FEDERAL FINANCIAL CORPORATION
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
27 Financial Data Schedule 25
- --------------------------------------------------------------------------------
24.
<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> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 1,163
<INT-BEARING-DEPOSITS> 954
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,246
<INVESTMENTS-CARRYING> 11,668
<INVESTMENTS-MARKET> 11,552
<LOANS> 200,553
<ALLOWANCE> 772
<TOTAL-ASSETS> 258,976
<DEPOSITS> 164,354
<SHORT-TERM> 3,010
<LIABILITIES-OTHER> 1,269
<LONG-TERM> 65,356
0
0
<COMMON> 0
<OTHER-SE> 24,988
<TOTAL-LIABILITIES-AND-EQUITY> 258,976
<INTEREST-LOAN> 7,526
<INTEREST-INVEST> 1,494
<INTEREST-OTHER> 107
<INTEREST-TOTAL> 9,127
<INTEREST-DEPOSIT> 3,929
<INTEREST-EXPENSE> 5,809
<INTEREST-INCOME-NET> 3,318
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 2,249
<INCOME-PRETAX> 1,294
<INCOME-PRE-EXTRAORDINARY> 849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 849
<EPS-BASIC> .43
<EPS-DILUTED> .43
<YIELD-ACTUAL> 2.64
<LOANS-NON> 265
<LOANS-PAST> 10
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 765
<CHARGE-OFFS> 45
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 772
<ALLOWANCE-DOMESTIC> 509
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 263
</TABLE>
