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 June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number 0-24834
---------
MILTON FEDERAL FINANCIAL CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1412064
- ---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
25 Lowry Drive, West Milton, Ohio 45383
----------------------------------------
(Address of principal executive offices) (zip code)
(937) 698-4168
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
As of July 31, 1998 the latest practicable date, 2,236,836 shares of the
registrant's common shares, no par value, were issued and outstanding.
2
MILTON FEDERAL FINANCIAL CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets ..................................... 3
Consolidated Statements of Income ............................... 4
Consolidated Statements of Changes in Shareholders' Equity....... 5
Consolidated Statements of Cash Flows ........................... 7
Notes to Consolidated Financial Statements ...................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 26
PART II - OTHER INFORMATION............................................ 28
SIGNATURES ............................................................ 29
2.
3
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
--------------------
June 30, September 30,
1998 1997
---- ----
ASSETS
Cash and amounts due from depository institutions $ 363,627 $ 696,629
Overnight deposits in other financial institutions 3,000,000 3,500,000
Interest-bearing deposits in other financial institutions 2,308,777 1,436,490
----------------- -----------------
Total cash and cash equivalents 5,672,404 5,633,119
Securities available for sale 15,000 5,519,885
Securities held to maturity (Fair value of
$3,260,087 at September 30, 1997) - 3,254,385
Mortgage-backed and related securities available for sale 45,175,809 47,842,476
Mortgage-backed and related securities held to maturity
(Fair value of $15,276,749 at June 30, 1998 and
$12,055,248 at September 30, 1997) 15,309,501 12,125,253
Federal Home Loan Bank stock 2,763,700 2,013,200
Loans, net 160,138,552 127,395,541
Premises and equipment, net 2,681,986 2,734,708
Cash surrender value of life insurance 1,574,238 1,524,502
Accrued interest receivable 1,202,966 1,184,122
Other assets 571,257 730,547
----------------- -----------------
Total assets $ 235,105,413 $ 209,957,738
================= =================
LIABILITIES
Deposits $ 152,983,223 $ 142,831,783
Borrowed funds 54,332,465 39,569,906
Advance payments by borrowers for taxes and insurance 477,131 165,805
Accrued interest payable 284,924 192,195
Other liabilities 998,740 810,179
----------------- -----------------
Total liabilities 209,076,483 183,569,868
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares
authorized, none outstanding
Common stock, no par value, 9,000,000 shares authorized,
2,578,875 shares issued
Additional paid-in capital 25,097,111 25,017,419
Retained earnings 8,135,862 7,975,535
Treasury stock, at cost, 342,039 shares at June 30,
1998 and 274,039 shares at September 30, 1997 (5,106,371) (4,050,307)
Unearned employee stock ownership plan shares (1,260,350) (1,444,169)
Unearned recognition and retention plan shares (893,039) (1,054,575)
Unrealized gain/(loss) on securities available for sale, net of tax 55,717 (56,033)
----------------- -----------------
Total shareholders' equity 26,028,930 26,387,870
----------------- -----------------
Total liabilities and shareholders' equity $ 235,105,413 $ 209,957,738
================= =================
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
4
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Three months ended Nine months ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 3,141,362 $ 2,387,435 $ 8,708,131 $ 7,028,568
Mortgage-backed and
related securities 946,565 959,136 2,955,762 2,518,249
Securities 9,630 139,613 229,994 367,001
Other, including dividend income 59,262 30,309 168,302 127,070
--------------- -------------- -------------- ---------------
4,156,819 3,516,493 12,062,189 10,040,888
INTEREST EXPENSE
Deposits 1,931,747 1,687,231 5,629,864 4,951,612
Borrowed funds 725,384 398,492 2,017,769 888,053
--------------- -------------- -------------- ---------------
2,657,131 2,085,723 7,647,633 5,839,665
--------------- -------------- -------------- ---------------
NET INTEREST INCOME 1,499,688 1,430,770 4,414,556 4,201,223
Provision for loan losses 110,000 32,000 194,000 73,000
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,389,688 1,398,770 4,220,556 4,128,223
NONINTEREST INCOME
Service charges and other fees 50,608 38,554 148,748 100,889
Net realized gain on sale of
available for sale securities - 33,718 174,874 78,403
Gain on sale of loans 225,312 - 225,312 118,281
Other income 35,444 30,273 95,232 82,336
--------------- -------------- -------------- ---------------
311,364 102,545 644,166 379,909
NONINTEREST EXPENSE
Salaries and employee benefits 601,604 581,827 1,831,483 1,692,547
Occupancy expense 100,070 74,782 281,663 216,520
Data processing services 55,575 43,031 161,579 127,718
Federal deposit insurance
premiums 22,549 21,410 66,561 99,827
State franchise taxes 87,192 88,242 262,982 283,078
Advertising 13,486 11,416 42,179 38,981
Other expenses 133,112 141,457 452,367 484,814
--------------- -------------- -------------- ---------------
1,013,588 962,165 3,098,814 2,943,485
--------------- -------------- -------------- ---------------
INCOME BEFORE INCOME TAX 687,464 539,150 1,765,908 1,564,647
Income tax expense 238,000 183,000 612,000 531,000
--------------- -------------- -------------- ---------------
NET INCOME $ 449,464 $ 356,150 $ 1,153,908 $ 1,033,647
=============== ============== ============== ===============
Earnings per common share - Basic $ 0.22 $ .17 $ 0.56 $ .49
============== ============== ============== ==============
Earnings per common share - Diluted $ 0.21 $ .17 $ 0.55 $ .48
============== ============= ============== ==============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
5
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended June 30, 1998 and 1997
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Unearned Gain/(Loss)
Additional Employee on Securities
Paid-In Retained Treasury Benefit Plan Available
Capital Earnings Stock Shares for Sale Total
------- -------- ----- ------ -------- -----
Balance at October 1, 1996 $ 24,951,691 $ 13,535,280 $ (1,997,640) $ (2,920,436) $ (89,492) $ 33,479,403
Net income for the period -- 1,033,647 -- -- -- 1,033,647
Cash dividends -
$2.94 per share -- (6,615,407) -- -- -- (6,615,407)
Commitment to release 14,346
employee stock ownership
plan shares 46,217 -- -- 154,728 -- 200,945
11,218 shares earned under
recognition and retention plan -- -- -- 161,536 -- 161,536
Purchase of treasury stock,
140,096 shares at cost -- -- (1,983,292) -- -- (1,983,292)
Change in unrealized gain/(loss)
on securities available for sale -- -- -- -- (13,058) (13,058)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 $ 24,997,908 $ 7,953,520 $ (3,980,932) $ (2,604,172) $ (102,550) $ 26,263,774
============ ============ ============ ============ ============ ============
- ------------------------------------------------------------------------------------------------------------------------------------
(Continued)
5.
6
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Nine months ended June 30, 1998 and 1997
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Unearned Gain/(Loss)
Additional Employee on Securities
Paid-In Retained Treasury Benefit Plan Available
Capital Earnings Stock Shares for Sale Total
------- -------- ----- ------ -------- -----
Balance at October 1, 1997 $ 25,017,419 $ 7,975,535 $ (4,050,307) $ (2,498,744) $ (56,033) $ 26,387,870
Net income for the period -- 1,153,908 -- -- -- 1,153,908
Cash dividends -
$0.45 per share -- (993,581) -- -- -- (993,581)
Commitment to release 15,699
employee stock ownership
plan shares 79,692 -- -- 183,819 -- 263,511
11,218 shares earned under
recognition and retention
plan -- -- -- 161,536 -- 161,536
Purchase of treasury stock,
68,000 shares at cost -- -- (1,056,064) -- -- (1,056,064)
Change in unrealized gain/(loss)
on securities available for sale -- -- -- -- 111,750 111,750
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998 $ 25,097,111 $ 8,135,862 $ (5,106,371) $ (2,153,389) $ 55,717 $ 26,028,930
============ ============ ============ ============ ============ ============
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6.
7
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Nine Months Ended
June 30,
--------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,153,908 $ 1,033,647
Adjustments to reconcile net income to net cash from
operating activities
Amortization of deferred loan origination fees (115,097) (73,156)
Amortization of premiums, accretion of discounts, net 26,920 17,834
Provision for loan losses 194,000 73,000
Depreciation 161,050 110,117
Increase in cash value of life insurance (49,736) (51,628)
Net realized gain on sale of available for sale securities (174,874) (78,403)
Net gain on sale of loans (225,312) (118,281)
Deferred gain on sale of real estate owned - (42,056)
Federal Home Loan Bank stock dividends (129,100) (68,600)
Compensation expense on ESOP shares 263,511 200,945
Compensation expense on RRP shares 161,536 161,536
Deferred tax expense (35,001) 22,000
Change in accrued interest receivable and other assets 140,446 (348,925)
Change in income taxes payable 73,683 347,000
Change in accrued expenses and other liabilities 185,039 (207,123)
--------------- -----------------
Net cash from operating activities 1,630,973 977,907
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases - (4,500,000)
Proceeds from maturities 5,500,000 6,000,000
Proceeds from sales - 2,000,000
Securities held to maturity
Purchases (1,000,000) (3,256,975)
Proceeds from maturities 4,250,000 -
Mortgage-backed and related securities available for sale
Purchases (8,942,189) (27,199,828)
Proceeds from principal payments 3,353,882 576,912
Proceeds from sales 8,615,431 10,126,019
Mortgage-backed and related securities held to maturity
Purchases (4,661,533) -
Proceeds from principal payments 1,443,371 1,325,808
Increase in loans, net (41,030,740) (13,875,407)
Proceeds from sale of loans 8,434,138 10,377,554
Premises and equipment expenditures (108,328) (809,171)
Purchase Federal Home Loan Bank stock (621,400) (480,000)
Proceeds from sale of real estate owned - 74,710
--------------- ----------------
Net cash from investing activities (24,767,368) (19,640,378)
- -------------------------------------------------------------------------------------------------------------------
(Continued)
7.
8
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
Nine Months Ended
March 31,
---------
1998 1997
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts $ 10,151,440 $ 10,128,994
Net change in advance payments by borrowers for taxes
and insurance 311,326 201,698
Net change in short-term borrowings (1,600,000) (500,000)
Proceeds from long-term debt 52,320,000 17,875,000
Principal payments on long-term debt (35,957,441) (1,237,638)
Cash dividends paid (993,581) (6,615,407)
Purchase of treasury stock (1,056,064) (1,983,292)
---------------- ----------------
Net cash from financing activities 23,175,680 17,869,335
--------------- ----------------
Net change in cash and cash equivalents 39,285 (793,116)
Cash and cash equivalents at beginning of period 5,633,119 1,301,009
--------------- ----------------
Cash and cash equivalents at end of period $ 5,672,404 $ 507,893
=============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 7,554,904 $ 5,776,633
Income taxes 825,615 162,000
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8.
9
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of Milton Federal Financial Corporation (the
"Corporation") at June 30, 1998, and its results of operations and cash flows
for the periods presented. All such adjustments are normal and recurring in
nature. The accompanying financial statements have been prepared in accordance
with the instructions of Form 10-Q and, therefore, do not purport to contain all
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances, and should be
read in conjunction with financial statements, and notes thereto, of the
Corporation for the fiscal year ended September 30, 1997, included in its 1997
annual report. Refer to the accounting policies of the Corporation described in
the notes to financial statements contained in the Corporation's 1997 annual
report. The Corporation has consistently followed these policies in preparing
this Form 10-Q.
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, Milton Federal Savings Bank (the "Bank"). The
financial statements of the Bank include accounts of its wholly-owned
subsidiary, Milton Financial Service Corporation. Milton Financial Service
Corporation holds stock in Intrieve, Inc., the data processing center utilized
by the Bank. All significant intercompany accounts and transactions have been
eliminated.
The Corporation is a thrift holding company engaged in the business of
commercial and retail banking services with operations conducted through its
main office in West Milton, Ohio, and from its full-service branch offices
located in Englewood and Brookville, Ohio. The Corporation also operates a loan
production office in Tipp City, Ohio. Miami, Montgomery and Darke Counties
provide the source for substantially all the Corporation's deposit and lending
activities. The majority of the Corporation's income is derived from
residential, nonresidential and consumer lending activities, and investments.
To prepare financial statements in conformity with generally accepted accounting
principals, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The collectibility of loans, fair values of financial instruments and
status of contingencies are particularly subject to change.
Income tax expense is the sum of the current-year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," on December 31, 1997. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share ("EPS") for entities with
complex capital structures. All prior EPS data has been restated to conform to
the new method. Basic EPS is based on net income divided by the weighted average
number of shares outstanding during the period. Diluted EPS shows the dilutive
effect of unearned recognition and retention plan ("RRP") shares and the
additional common shares issuable under stock options.
- --------------------------------------------------------------------------------
(Continued)
9.
10
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The weighted average number of shares outstanding for basic EPS was 2,063,372
and 2,074,763 for the three and nine months ended June 30, 1998. The weighted
average number of shares outstanding for basic EPS was 2,098,374 and 2,126,935
for the three and nine months ended June 30, 1997. The weighted average number
of shares outstanding for diluted EPS, which includes the effect of stock
options granted and unearned RRP shares using the treasury stock method, was
2,101,843 and 2,112,862 for the three and nine months ended June 30, 1998.
Similarly, the weighted average number of shares outstanding for diluted EPS was
2,099,448 and 2,135,182 for the three and nine months ended June 30, 1997. The
dilutive effect of unearned RRP shares was to increase weighted average shares
outstanding for basic EPS by 8,471 and 11,253 for the three and nine months
ended June 30, 1998 and 3,884 for the nine months ended June 30, 1997. Unearned
RRP shares did not have a dilutive effect on the weighted average shares
outstanding for the three months ended June 30, 1997. The dilutive effect of
stock options was to increase weighted average shares outstanding for basic EPS
by 30,001 and 26,846 for the three and nine months ended June 30, 1998 and 1,074
and 4,363 for the three and nine months ended June 30, 1997. Unreleased employee
stock ownership plan shares are not considered to be outstanding for determining
the weighted average number of shares used in calculating both basic and diluted
EPS. Unearned RRP shares are not considered to be outstanding shares for
determining the weighted average number of shares used in calculating basic EPS.
NOTE 2 - SECURITIES
The amortized cost and fair values of securities are as follows:
-------------------------------June 30, 1998---------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
SECURITIES AVAILABLE FOR SALE
Equity securities $ 15,000 $ - $ - $ 15,000
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 2,274,724 $ 24,274 $ - $ 2,298,998
GNMA certificates 2,851,936 8,561 (1,115) 2,859,382
FHLMC certificates 2,446,129 28,273 - 2,474,402
Collateralized mortgage
obligations and REMICs 37,518,601 203,439 (179,013) 37,543,027
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 45,091,390 $ 264,547 $ (180,128) $ 45,175,809
================= ============ ============ =================
SECURITIES HELD TO MATURITY
Mortgage-backed and related
securities
FNMA certificates $ 4,577,801 $ 31,312 $ (72,608) $ 4,536,505
GNMA certificates 642,404 35,151 - 677,555
FHLMC certificates 5,431,861 36,823 (76,499) 5,392,185
Collateralized mortgage
obligations and REMICs 4,657,435 13,069 - 4,670,504
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 15,309,501 $ 116,355 $ (149,107) $ 15,276,749
================= ============ ============ =================
- -------------------------------------------------------------------------------------------------------------------
(Continued)
10.
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MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
----------------------------September 30, 1997-------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE
Securities
U.S. Government and
federal agency securities $ 5,500,575 $ 6,319 $ (2,009) $ 5,504,885
Equity securities 15,000 - - 15,000
----------------- ------------ ------------ -----------------
Total securities $ 5,515,575 $ 6,319 $ (2,009) $ 5,519,885
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 2,819,302 $ 32,045 $ - $ 2,851,347
FHLMC certificates 2,821,791 41,355 - 2,863,146
Collateralized mortgage
obligations and REMICs 42,290,593 318,118 (480,728) 42,127,983
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 47,931,686 $ 391,518 $ (480,728) $ 47,842,476
================= ============ ============ =================
SECURITIES HELD TO MATURITY
Securities
U.S. Government and
federal agency security $ 3,254,385 $ 11,274 $ (5,572) $ 3,260,087
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 5,191,291 $ 41,591 $ (88,830) $ 5,144,052
GNMA certificates 810,348 41,570 - 851,918
FHLMC certificates 6,123,614 53,307 (117,643) 6,059,278
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 12,125,253 $ 136,468 $ (206,473) $ 12,055,248
================= ============ ============ =================
Substantially all collateralized mortgage obligations and REMICs (real estate
mortgage investment conduits) are backed by pools of mortgages insured or
guaranteed by the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC").
No securities available for sale were sold during the nine months ended June 30,
1998. During the nine months ended June 30, 1997, proceeds from the sales of
securities available for sale were $2,000,000 with gross realized gains of $119
included in earnings.
During the nine months ended June 30, 1998, proceeds from the sales of
mortgage-backed and related securities available for sale were $8,615,431 with
gross realized gains of $174,874 included in earnings. During the nine months
ended June 30, 1997, proceeds from the sales of mortgage-backed and related
securities available for sale were $10,126,019 with gross realized gains of
$78,284 included in earnings.
- --------------------------------------------------------------------------------
(Continued)
11.
12
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans consisted of the following:
June 30, September 30,
1998 1997
---- ----
Residential real estate loans
1-4 family (first mortgage) $ 130,632,830 $ 108,941,460
Home equity (1-4 family second mortgage) 4,049,460 4,051,527
Multi-family 2,269,201 1,456,604
Nonresidential real estate loans 8,109,042 6,214,622
Construction loans 14,266,834 9,399,848
---------------- -----------------
Total real estate loans 159,327,367 130,064,061
Consumer loans
Automobile 3,388,879 2,305,331
Loans on deposits 280,427 280,542
Other consumer loans 309,701 246,543
---------------- -----------------
Total consumer loans 3,979,007 2,832,416
Commercial loans 2,224,222 574,819
---------------- -----------------
Total loans 165,530,596 133,471,296
Less:
Deferred loan fee income 601,266 536,713
Loans in process 4,139,668 4,976,840
Allowance for loan losses 651,110 562,202
---------------- -----------------
Net loans $ 160,138,552 $ 127,395,541
================ =================
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 $16,126,722 at June 30, 1998 and $9,843,149 at September 30,
1997. Capitalized mortgage servicing rights at June 30, 1998 were $195,605 and
$109,473 at September 30, 1997. At June 30, 1998 the Corporation had
approximately $2.3 million of fixed-rate, 1-4 family first mortgage loans,
included above, which are classified as held for sale. These loans are recorded
at the lower of cost or market in the aggregate. There were no loans classified
as held for sale at September 30, 1997. Proceeds from the sale of loans during
the nine months ended June 30, 1998 and 1997 were $8,434,138 and $10,377,554
with net realized gains of $118,281 and $225,312 included in earnings.
Activity in the allowance for losses on loans for the three- and nine-month
periods ended June 30, 1998 and 1997 is as follows:
Three months ended Nine months ended
June 30, June 30
-------- -------
1998 1997 1998 1997
---- ---- ---- ----
Beginning balance $ 540,807 $ 528,202 $ 562,202 $ 487,202
Provision for loan losses 110,000 32,000 194,000 73,000
Recoveries 303 - 303 -
Charge-offs - - (105,395) -
------------ ------------ ------------- ------------
Ending balance $ 651,110 $ 560,202 $ 651,110 $ 560,202
============ ============ ============ ============
As of and for the three and nine months ended June 30, 1998 and 1997, no loans
were considered impaired within the scope of SFAS No. 114.
- --------------------------------------------------------------------------------
(Contined)
12.
13
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - BORROWED FUNDS
At June 30, 1998, 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. No borrowings were outstanding on this line of credit at June
30, 1998. Borrowings outstanding on this line of credit totaled $1,600,000, with
an interest rate of 5.90%, at September 30, 1997. Additionally, as a member of
the FHLB system, the Bank has the ability to obtain additional borrowings up to
a total of $58,438,000, including the line of credit. Accordingly, the Bank had
variable-rate borrowings totaling $41,480,000 at June 30, 1998 and $32,805,000
at September 30, 1997. The interest rates on the borrowings adjust monthly. The
interest rates on the borrowings ranged from 5.12% to 5.65% at June 30, 1998 and
5.61% to 6.20% at September 30, 1997. The Bank also had fixed-rate borrowings
totaling $12,852,465 at June 30, 1998 and $5,164,906 at September 30, 1997. The
interest rates on these borrowings ranged 5.80% to 6.42% at June 30, 1998 and
September 30, 1997. Advances under the borrowing agreement are collateralized by
a blanket pledge of the Bank's residential mortgage loan portfolio and FHLB
stock.
At June 30, 1998, required annual principal payments are as follows:
Period ending June 30:
1999 $ 2,926,588
2000 1,014,545
2001 9,309,083
2002 2,824,984
2003 1,658,098
Thereafter 36,599,167
---------------
$ 54,332,465
===============
NOTE 5 - COMMITMENTS, OFF-BALANCE -SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material effect
on financial condition or results of operations.
Some financial instruments are used in the normal course of business to meet
financing needs of customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. These
involve, to varying degrees, credit risk more than the amount reported in the
financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on an extension of credit is based on
management's credit evaluation and generally consists of residential or
commercial real estate. Lines of credit are primarily home equity lines
collateralized by second mortgages on 1-4 family residential real estate and
commercial lines of credit collateralized by business assets.
- --------------------------------------------------------------------------------
(Continued)
13.
14
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements.
As of June 30, 1998 and September 30, 1997, the Corporation had commitments to
make fixed-rate loans at current market rates totaling $4,021,000 and $1,780,000
while commitments to make variable-rate loans at current market rates were
$401,000 and $75,000. Loan commitments are generally for 30 days. The interest
rate on fixed-rate commitments ranged from 6.50% to 9.00% at June 30, 1998 and
from 6.25% to 9.25% at September 30, 1997. As of June 30, 1998 and September 30,
1997, the Corporation had $5,134,000 and $3,617,000 in unused variable-rate home
equity lines of credit. During fiscal 1997, the Corporation began offering
commercial-purpose line-of-credit loans. At June 30, 1998 and September 30,
1997, unused commercial lines of credit totaled $803,000 and $239,000.
Standby letters of credit are conditional commitments to guarantee a customer's
performance to a third party. At June 30, 1998 and September 30, 1997, the
Corporation had standby letter-of-credit commitments totaling $86,000 and
$301,000.
The Corporation is committed to participate with another financial institution
in a 15-year, balloon $300,000 loan secured by multifamily residential real
estate. The Corporation's maintains a 90% interest in the loan. Under the
agreement, the other institution funded the loan with FHLB advances, and the
Corporation will be required to disburse cash only if the FHLB requires the
other financial institution to prepay the advance.
At June 30, 1998 and September 30, 1997, compensating balances of $542,000 and
$352,000 were required as deposits with the FHLB. The balances do not earn
interest.
The Corporation and the Bank have entered employment agreements with certain
officers of the Corporation and the Bank. Each of the agreements provide for a
term of three years and a salary and performance review by the Board of
Directors not less often than annually, as well as inclusion of the employee in
any formally-established employee benefit, bonus, pension and profit-sharing
plans for which management personnel are eligible. The employment agreements
also provide for vacation and sick leave.
NOTE 6 - STOCK OPTION PLAN
On March 20, 1995, the Stock Option Committee of the Board of Directors granted
options to purchase 238,545 shares of common stock, at an exercise price of
$13.69 to certain officers and directors of the Bank and the Corporation.
One-fifth of the options awarded become exercisable on each of the first five
anniversaries of the date of grant. The option period expires 10 years from the
date of grant. At June 30, 1998 and September 30, 1997, options to purchase
143,127 and 95,418 shares were exercisable. No options were exercised during the
three- and nine-month periods ended June 30, 1998 and 1997. In addition, there
are 19,342 shares of authorized but unissued common stock reserved for which no
options have been granted.
- --------------------------------------------------------------------------------
(Continued)
14.
15
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - STOCK OPTION PLAN (Continued)
On October 1, 1997, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 encourages, but does not require,
entities to use a "fair value based method" to account for stock-based
compensation plans. If the fair value accounting encouraged by SFAS No. 123 is
not adopted, entities must still disclose the pro forma effect on net income and
earnings per share had the accounting method been adopted. Fair value of a stock
option is to be estimated using an option-pricing model considering exercise
price, expected life of the option, current price of the stock, expected price
volatility, expected dividends on the stock and the risk-free interest rate.
Once estimated, the fair value of an option is not changed. Currently, the
Corporation does not have any options subject to the new accounting and
disclosure requirements.
NOTE 7 - EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation offers an employee stock ownership plan ("ESOP") for the benefit
of substantially all employees of the Corporation and the Bank. The ESOP has
received a favorable determination letter from the Internal Revenue Service on
the qualified status of the ESOP under applicable provisions of the Internal
Revenue Code.
The ESOP borrowed funds from the Corporation to acquire common shares of the
Corporation. The loan is secured by the shares purchased with the loan proceeds,
and will be repaid by the ESOP with funds from the Bank's discretionary
contributions to the ESOP and earnings on ESOP assets. All dividends received on
unallocated shares by the ESOP are used to pay debt service. The shares
purchased with the loan proceeds are held in a suspense account for allocation
among participants as the loan is repaid. As payments are made and shares are
released from the suspense account, such shares will be validly issued, fully
paid and nonassessable.
The Corporation accounts for its ESOP in accordance with Statement of Position
("SOP") 93-6. Accordingly, shares pledged as collateral are reported as unearned
ESOP shares in the consolidated balance sheets. As shares are released from
collateral, the Corporation reports compensation expense equal to the current
market price of the shares, and shares become outstanding for earnings-per-share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt and accrued interest. ESOP compensation expense was $88,127
and $263,511 for the three and nine months ended June 30, 1998. ESOP
compensation expense was $66,550 and $200,945 for the three and nine months
ended June 30, 1997. The ESOP shares as of June 30, 1998 and September 30, 1997
were as follows:
June 30, September 30,
1998 1997
---- ----
Allocated shares 69,991 38,248
Shares released for allocation 15,699 19,124
Unreleased shares 105,550 133,868
-------------- --------------
Total ESOP shares 191,240 191,240
============== ==============
Fair value of unreleased shares $ 1,583,250 $ 2,041,487
============== ==============
- --------------------------------------------------------------------------------
(Continued)
15.
16
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - RECOGNITION AND RETENTION PLAN
The Corporation maintains a recognition and retention plan ("RRP") for the
benefit of directors and certain key employees of the Bank and Corporation. The
RRP is used to provide such individuals ownership interest in the Corporation in
a manner designed to compensate such directors and key employees for services to
the Bank. The Bank contributed sufficient funds to enable the RRP to purchase a
number of common shares in the open market was equal to 4% of the common shares
sold in connection with the Bank's conversion from a mutual savings and loan
association to a stock savings bank.
In October 1995, the RRP Committee of the Board of Directors awarded 74,784
shares to certain directors and officers of the Bank and the Corporation. No
shares had been previously awarded. One-fifth of such shares will be earned and
nonforfeitable on each of the first five anniversaries of the date of the
awards. In case of the death or disability of a participant, however, the
participant's shares will be deemed earned and nonforfeitable upon such date. As
of June 30, 1998 and September 30, 1997, 29,914 and 14,957 shares, have been
earned and distributed. There were 28,371 shares at June 30, 1998 and September
30, 1997, reserved for future awards. Compensation expense, which is based on
the cost of the shares, totaled $53,845 and $161,536 for the three- and
nine-month periods ended June 30, 1998 and 1997.
- --------------------------------------------------------------------------------
16.
17
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
The following discusses the financial condition of the Corporation as of June
30, 1998, as compared to September 30, 1997, and the results of operations for
the three- and nine-month periods ended June 30, 1998, compared with the same
periods in 1997. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein.
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein, the following
discussion contains forward-looking statements involving risks and
uncertainties. Economic circumstances, the Corporation's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some factors that could cause or contribute to such differences are
discussed herein, but also include changes in the economy and interest rates in
the nation and in the Corporation's general market area.
Some of the forward-looking statements included herein are statements regarding:
1. Management's determination of the amount of loan loss allowance and of
the loan loss provision;
2. The Corporation's intention to borrow additional funds as opportunities
to leverage excess capital arise;
3. Changes in the amount of deposit insurance assessments;
4. The sufficiency of the Corporation's liquidity and capital reserves;
and,
5. The effect on the Corporation of amendments to core capital requirement
regulations.
See Exhibit 99, Safe Harbor Under the Private Securities Litigation Reform Act
of 1995, included in this document.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $235.1 million at June 30, 1998, an increase of
$25.1 million, or 12.0%, from $210.0 million at September 30, 1997. The growth
in assets was primarily in loans. Such growth was funded by the use of proceeds
provided from maturities of securities and mortgage-backed and related
securities, increased deposits and borrowed funds.
Total securities and FHLB stock decreased $7.5 million from $70.8 million at
September 30, 1997 to $63.3 million at June 30, 1998. The decrease was due to
$14.5 million in maturities and principal repayments combined with $8.4 million
in sales of mortgage-backed and related securities available for sale. The sales
were primarily made for interest rate risk strategy purposes. The decline was
partly offset by $15.2 million in purchases as the majority of the proceeds from
the aforementioned maturities, principal repayments and sales were reinvested in
mortgage-backed and related securities while the remaining proceeds provided
additional funds for loan growth. Mortgage-backed and related securities include
Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage
Association ("GNMA") and Federal National Mortgage Association ("FNMA")
participation certificates
- --------------------------------------------------------------------------------
17.
18
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
and collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). The majority of securities are classified as
available for sale to provide the Corporation with the flexibility to move funds
into loans as demand warrants. The mortgage-backed and related securities also
provide the Corporation with a constant cash flow stream from principal
repayments.
Net loans increased from $127.4 million at September 30, 1997 to $160.1 million
at June 30, 1998. The growth in loans was primarily in 1-4 family first mortgage
loans despite the sale of $8.2 million of such loans during the period. 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. Despite the sale, 1-4
family first mortgage loans increased $21.7 million, or19.9%, from $108.9
million at September 30, 1997 to $130.6 million at June 30, 1998. Construction
loans and nonresidential real estate loans increased from $9.4 million and $6.2
million at September 30, 1997 to $14.3 million and $8.1 million at June 30,
1998. Changes in other types of real estate loans were not significant. As
interest rates have decreased slightly since September 30, 1997, the growth in
1-4 family first mortgages is primarily the result of customers refinancing
their higher-rate loans from the Corporation's competitors. In addition to
growth spurred by refinancings, the continued growth in total real estate loans
is also related to growth in the Corporation's market area, as the Corporation
has not changed its philosophy regarding pricing or underwriting standards
during the period.
At June 30, 1998, the Corporation had $2.3 million in loans classified as held
for sale. There were no loans classified as held for sale at September 30, 1997.
Held for sale loans at June 30, 1998 are included in the total for 1-4 family
first mortgage loans discussed above.
The Corporation's consumer loan portfolio increased $1.1 million between
September 30, 1997 and June 30, 1998. Despite the increase, consumer loans
remain a small portion of the entire loan portfolio and represented 2.4% and
2.1% of total loans at June 30, 1998 and September 30, 1997.
During the third quarter of fiscal 1997, the Corporation began originating
commercial-purpose business loans secured by collateral other than real estate.
Commercial loans totaled $2.2 million at June 30, 1998 and $575,000 at September
30, 1997, and were not a significant part of the overall loan portfolio.
Total deposits increased $10.2 million, or 7.1%, from $142.8 million at
September 30, 1997 to $153.0 million at June 30, 1998. The Corporation
experienced slight changes in passbook savings and money market accounts, while
negotiable order of withdrawal ("NOW") accounts increased $2.2 million, or
25.1%. Certificates of deposit increased $7.2 million, or 6.6%, and were the
primary reason for the overall deposit growth. This growth was due to normal
operating procedures as the Corporation has not used special promotions to
attract increased volume. Despite the increase in volume, the certificate of
deposit portfolio, as a percent of total deposits, decreased slightly from 77.4%
at September 30, 1997 to 77.0% at June 30, 1998. All certificates of deposit
held at the Bank mature in less than five years.
Borrowed funds increased $14.7 million from $39.6 million at September 30, 1997
to $54.3 million at June 30, 1998. The net increase in new, long-term advances
of $52.3 million was partly offset by principal repayments of $36.0 million and
a net decrease of $1,600,000 in short-term advances under the Bank's cash
management line of credit. The majority of borrowed funds are invested in
mortgage-backed and related securities to leverage the Bank's excess capital and
to provide liquidity for future loan growth.
- --------------------------------------------------------------------------------
18.
19
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS
Operating results of the Corporation are affected by general economic
conditions, monetary and fiscal policies of federal agencies and policies of
agencies regulating financial institutions. The Corporation's cost of funds is
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are influenced by demand for real estate loans
and other types of loans which, in turn, is affected by interest rates at which
such loans are made, general economic conditions and availability of funds for
lending activities.
The Corporation's net income is primarily dependent on its net interest income.
Net interest income is the difference between interest income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net income is also affected by provisions for loan losses, service
charges, gains on sale of assets and other income, noninterest expense and
income taxes.
The Corporation's net income of $449,000 and $1,154,000 for the three and nine
months ended June 30, 1998 represented a $93,000 and $120,000 increase from
$356,000 and $1,034,000 in net income for the three and nine months ended June
30, 1997. Similarly, basic and diluted earnings per common share increased by
$.05 and $.04 for the three months ended June 30, 1998, compared to the same
period in 1997. Both basic and diluted earnings per common share increased by
$.07 for the nine months ended June 30, 1998, compared to the same period in
1997. The increase in net income for the comparable three month periods was due
to the gain on the sale of loans realized during the three months ended June 30,
1998. The increase in net income for the comparable nine month periods was due
to an increase in net interest income combined with increased gains on the sale
of securities and loans partly offset by an increase in noninterest expense.
Net interest income is the largest component of the Corporation's income and is
affected by the interest rate environment and volume and composition of
interest-earning assets and interest-bearing liabilities.
Historically, the Corporation had only fixed-rate loans in its loan portfolio.
Consequently, in periods of rising interest rates, the Corporation's net
interest spread is negatively affected because the interest rate paid on
deposits increases faster than the rates earned on loans. As a part of an
overall strategy to manage interest rate risk, management began to originate
variable-rate mortgage loans in the latter quarters of fiscal 1995. As of June
30, 1998, the Corporation had approximately $20.2 million in variable-rate
mortgage loans, compared to $7.3 million at September 30, 1997. Additionally,
most of the Corporation's mortgage-backed and related securities portfolio is
scheduled to reprice on at least an annual basis.
Net interest income of the Corporation increased by $69,000 and $213,000 for the
three and nine months ended June 30, 1998, compared to the same periods in 1997,
despite minimal change in the ratio of average interest-earning assets to
average interest-bearing liabilities over the comparable periods. The increase
resulted as the Corporation had a larger proportion of funds invested in
higher-yielding loans opposed to securities, overnight deposits and
interest-bearing deposits in other financial institutions, during the three and
nine months ended June 30, 1998, compared to the three and nine months ended
June 30, 1997. The increase in interest income from the redistribution of
investments was partly offset by the increased interest expense resulting from a
higher cost of funds. The cost of funds increased due to an increase in the
average level of borrowings and certificates of deposit.
- --------------------------------------------------------------------------------
19.
20
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Interest and fees on loans totaled $3,141,000 and $8,708,000 for the three and
nine months ended June 30, 1998, compared to $2,387,000 and $7,029,000 for the
three and nine months ended June 30, 1997. Such increase in interest income was
due to higher average loan balances related to the origination of new 1-4 family
first mortgage, construction, nonresidential real estate and commercial loans.
Interest on mortgage-backed and related securities totaled $947,000 and
$2,956,000 for the three and nine months ended June 30, 1998, compared to
$959,000 and $7,029,000 for the three and nine months ended June 30, 1997. The
increase over the nine month period was primarily due to an increase in the
volume of mortgage-backed and related securities, combined with a slight
increase in yield on mortgage-backed and related securities, compared to the
prior period. Several mortgage-backed and related securities have repriced to
higher yield levels as compared to the prior year. The adjustable-rate feature
of these securities helps mitigate the Corporation's exposure to upward interest
rate movement due to its mostly fixed-rate loan portfolio.
Interest on securities totaled $10,000 and $230,000 for the three and nine
months ended June 30, 1998, compared to $140,000 and $367,000 for the comparable
periods in 1997. This decline from 1997 levels is the result of lower average
balances of securities as proceeds from maturities were reinvested in other
types of investments. Other interest income, including dividend income, totaled
$59,000 and $168,000 for the three and nine months ended June 30, 1998, compared
to $30,000 and $127,000 for the comparable periods in 1997. The increase was the
result of higher average balances on FHLB stock.
Interest on deposits totaled $1,932,000 and $5,630,000 for the three and nine
months ended June 30, 1998, and $1,687,000 and $4,952,000 for the three and nine
months ended June 30, 1997. This increase resulted from increased average
deposit balances combined with an overall increase in the average cost of
deposits over the comparable periods.
Interest on borrowed funds totaled $725,000 and $2,018,000 for the three and
nine months ended June 30, 1998, compared to $398,000 and $888,000 for the
comparable periods in 1997. The increase is the result of higher average
balances of borrowed funds during the three and nine months ended June 30, 1998.
The Corporation has incorporated a strategy to leverage excess capital by
borrowing long-term, variable-rate funds from the FHLB to purchase
similar-maturity, variable-rate mortgage-backed securities to capitalize on the
yield spread. From time to time, the Corporation has borrowed additional
variable-rate funds for similar purposes as well as to provide funding for loan
growth. The Corporation has also borrowed fixed-rate funds to provide for
long-term liquidity needs. As opportunities arise to leverage the Corporation's
excess capital, the Corporation may make additional borrowings to fund loan
demand and mortgage-backed and related security purchases.
The Corporation maintains an allowance for loan losses in an amount, which, in
management's judgment, is adequate to absorb reasonable, foreseeable losses
inherent in the loan portfolio. While management utilizes its best judgment and
information available, ultimate adequacy of the allowance is dependent on a
variety of factors, including performance of the Corporation's loan portfolio,
the economy, changes in real estate values and interest rates and the view of
the regulatory authorities toward loan classifications. The provision for loan
losses is determined by management as the amount to be added to the allowance
for loan losses after net charge-offs have been deducted to bring the allowance
to a level considered adequate to absorb losses inherent in the loan portfolio.
The amount of the provision is based on management's regular review of the loan
portfolio and consideration of such factors as historical loss experience,
general prevailing economic conditions, changes in size and composition of the
loan portfolio and specific borrower considerations, including ability of the
borrower to repay the loan and the estimated value of the underlying collateral.
- --------------------------------------------------------------------------------
20.
21
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Other than $106,000 in charge-offs during the nine months ended June 30, 1998,
the Corporation has not experienced any significant charge-offs for the past
several years. The majority of these charge-offs was related to a single loan
relationship for which the Corporation maintained a one hundred percent specific
valuation allowance. The Corporation's low historical charge-off history is the
product of a variety of factors, including the Corporation's underwriting
guidelines, which generally require a down payment of 20% of the lower of sales
price or appraised value of 1-4 family residential real estate loans,
established income information and defined ratios of debt to income. Loans
secured by real estate make up 96.3% of the Corporation's loan portfolio, and
loans secured by first mortgages on 1-4 family residential real estate
constituted 79.0% of total loans at June 30, 1998. Notwithstanding the
historically low level of charge-offs, management believes it is prudent to
continue increasing the allowance for loan losses as total loans increase.
Accordingly, management anticipates it will continue its provisions to the
allowance for loan losses at current levels for the near future, providing
volume of nonperforming loans remains insignificant.
Noninterest income totaled $311,000 and $644,000 for the three and nine months
ended June 30, 1998 and $103,000 and $380,000 for the three and nine months
ended June 30, 1997. The increase in noninterest income for the comparable three
month periods was due to the gain on the sale of loans realized during the three
months ended June 30, 1998. The increase in noninterest income for the
comparable nine month periods was due to increased gains realized on sales of
available-for-sale securities, increased gains realized on sales of loans, and
an increase in service charges and other fees. The loan and securities sales
during the three and nine months ended June 30, 1998 and 1997 were primarily
made for interest rate risk strategy purposes. The increase in service charges
and other fees is due to growth in the Corporation's customer and deposit base.
Other changes in noninterest income for the three- and nine-month periods were
insignificant.
Noninterest expense totaled $1,014,000 and $3,099,000 for the three and nine
months ended June 30, 1998, compared to $962,000 and $2,943,000 for the three
and nine months ended June 30, 1997. The increases were primarily the result of
increases in occupancy expense and salaries and employee benefits. Occupancy
expense increased $25,000 and $65,000 over the comparable periods as a result of
the new branch office in Brookville, Ohio, which opened during the latter part
of fiscal 1997. Salaries and employee benefits increased $20,000 and $139,000
over the comparable periods due to annual merit increases and increased staffing
for the new branch office. Federal deposit insurance premiums decreased $33,000
for the comparable nine month periods due to a reduction of assessed premiums
which began in January 1997 as a result of legislation which fully capitalized
the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The SAIF was below the level required by law because a
significant portion of assessments paid into the SAIF by thrifts, like the Bank,
were used to pay the cost of prior thrift failures. The legislation called for a
one-time assessment of $.657 per $100 of SAIF insured deposits held as of March
31, 1995. Because of the recapitalization of the SAIF, the disparity between
bank and thrift insurance assessments was reduced. Thrifts had been paying
assessments of $.23 per $100 of deposits, which, for most thrifts, was reduced
to $.064 per $100 in deposits in January 1997 and is expected to be $.024 per
$100 in deposits no later than January 2000. Other changes in noninterest
expense were insignificant.
The legislation discussed above also provides for the merger of the SAIF and the
Bank Insurance Fund ("BIF") effective January 1, 1999, assuming there are no
savings associations under federal law. Under separate proposed legislation,
Congress is considering eliminating the federal thrift charter and separate
federal regulation of thrifts. Therefore, the Bank would be required to convert
to a different financial institution charter, and the Bank and the Corporation
might become subject to more restrictive activity limits. The Corporation cannot
predict the impact of any such legislation until it is enacted.
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21.
22
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Prior to the enactment of legislation discussed below, thrifts meeting certain
tests related to the composition of assets had been permitted to establish
reserves for bad debts, and to make annual additions thereto which could, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve deduction
for "nonqualifying loans" was computed under the experience method. The amount
of the bad debt reserve deduction for "qualifying real property loans" could be
computed under either the experience or the percentage of taxable income method,
based on an annual election.
In August 1996, legislation was enacted repealing the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. Therefore, small thrifts such as the Bank must recapture
the portion of reserve exceeding the amount that could have been taken under the
experience method for tax years beginning after December 31, 1987. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. At June 30, 1998, the Bank had approximately $1.1 million
in bad debt reserves subject to recapture for federal income tax purposes. The
deferred tax liability related to the recapture has been previously established.
As such, the recapture will not impact the Bank's or the Corporation's net
income.
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. Income tax expense totaled $238,000 and
$612,000, or an effective rate of 34.6% and 34.7%, for the three and nine months
ended June 30, 1998, compared to $183,000 and $531,000, or an effective rate of
33.9% for both periods in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, primarily represented by cash equivalents, is a
result of operating, investing and financing activities. These activities are
summarized below for the nine months ended June 30, 1998 and 1997.
Nine months ended
June 30,
--------
1998 1997
---- ----
(In thousands)
Net income $ 1,154 $ 1,034
Adjustments to reconcile net income to net cash from
operating activities 477 (56)
---------- -----------
Net cash from operating activities 1,631 978
Net cash from investing activities (24,767) (19,640)
Net cash from financing activities 23,175 17,869
---------- -----------
Net change in cash and cash equivalents 39 (793)
Cash and cash equivalents at beginning of period 5,633 1,301
---------- -----------
Cash and cash equivalents at end of period $ 5,672 $ 508
========== ===========
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22.
23
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Corporation's principal sources of funds are deposits, loan and security
repayments, securities available for sale and other funds provided by
operations. The Corporation also has the ability to borrow from the FHLB of
Cincinnati. While scheduled loan repayments and maturing securities are
relatively predictable, deposit flows and early loan and mortgage-backed
security repayments are more influenced by interest rates, general economic
conditions and competition. The Corporation maintains investments in liquid
assets based on management's assessments of (1) the need for funds, (2) expected
deposit flows, (3) the yields available on short-term liquid assets and (4) the
objectives of the asset/liability management program.
Office of Thrift Supervision ("OTS") regulations presently require the
Corporation to maintain an average daily balance of investments in United States
Treasury, federal agency obligations and other investments in an amount equal to
4% of the sum of the Corporation's average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. The liquidity
requirement, which may be changed from time to time by the OTS to reflect
changing economic conditions, is intended to provide a source of relatively
liquid funds on which the Corporation may rely, if necessary, to fund deposit
withdrawals or other short-term funding needs. At June 30, 1998, the
Corporation's regulatory liquidity was 39.9%. At such date, the Corporation had
commitments to originate fixed-rate loans totaling $4.0 million and variable
rate loans totaling $401,000. Although $2.3 million in loans were held for sale
at June 30, 1998, the Corporation had no commitments to purchase or sell loans.
The Corporation considers its liquidity and capital reserves sufficient to meet
its outstanding short- and long-term needs. See Note 5 of the Notes to
Consolidated Financial Statements.
The Bank is subject to various regulatory capital requirements administered by
federal regulatory agencies. Failure to meet minimum capital requirements can
initiate certain mandatory actions that, if undertaken, could have a direct
material affect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by regulators about
the Bank's components, risk weightings and other factors. At June 30, 1998 and
September 30, 1997, management believes the Bank complies with all regulatory
capital requirements. Based on the Bank's computed regulatory capital ratios,
the Bank is considered well capitalized under the Federal Deposit Insurance Act
at June 30, 1998 and September 30, 1997. Management is not aware of any matters
subsequent to June 30, 1998 that would cause the Bank's capital category to
change.
The OTS has proposed to amend the core capital requirement so those associations
that do not have the highest examination rating and an acceptable level of risk
will be required to maintain core capital of from 4% to 5%, depending on the
association's examination rating and overall risk. The Bank does not anticipate
it will be adversely affected if the core capital requirement regulations are
amended as proposed.
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23.
24
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
At June 30, 1998 and September 30, 1997, the Bank's actual capital levels (in
thousands) and minimum required levels were:
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
June 30, 1998
Total capital (to risk
weighted assets) $ 23,516 20.3% $ 9,257 8.0% $ 11,572 10.0%
Tier 1 (core) capital to
risk-weighted assets) 22,908 19.8 4,629 4.0 6,943 6.0
Tier 1 (core) capital to
adjusted total assets) 22,908 9.8 9,348 4.0 11,686 5.0
Tangible capital (to
adjusted total assets) 22,908 9.8 3,506 1.5 N/A
September 30, 1997
Total capital (to risk
weighted assets) $ 21,799 22.8% $ 7,637 8.0% $ 9,547 10.0%
Tier 1 (core) capital to
risk-weighted assets) 21,385 22.4 3,819 4.0 5,728 6.0
Tier 1 (core) capital to
adjusted total 21,385 10.3 6,206 3.0 10,344 5.0
Tangible capital (to
adjusted total assets) 21,385 10.3 3,103 1.5 N/A
In addition to certain federal income tax considerations, the OTS regulations
impose limitations on payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, the Bank is not permitted to pay a cash dividend on its common
shares if its regulatory capital would, as a result of payment of such
dividends, be reduced below the amount required for the Liquidation Account, or
below applicable regulatory capital requirements prescribed by the OTS.
OTS regulations applicable to all savings and loan associations provide that a
savings association which, immediately prior to and on a pro forma basis after
giving effect to a proposed capital distribution (including a dividend), has
total capital (as defined by OTS regulations) equal to or greater than the
amount of its capital requirements is generally permitted without OTS approval
(but subsequent to 30 days prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half that which its total capital to assets
ratio exceeded its required capital to assets ratio at the beginning of the
calendar year, or (2) 75% of its net earnings for the most recent four-quarter
period. Savings associations with total capital more than the capital
requirements that have been notified by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends. A savings
association failing to meet current minimum capital requirements is prohibited
from making any capital distributions without the prior approval of the OTS.
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24.
25
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Bank currently meets all capital requirements and, unless the OTS determines
that the Bank is an institution requiring more than normal supervision, the Bank
may pay dividends in accordance with the foregoing provisions of OTS
regulations.
IMPACT OF NEW ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 130, "REPORTING
COMPREHENSIVE INCOME" - SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and loses)
in a full set of general-purpose financial statements. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS 130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS 130 will be effective in fiscal 1999 and is not expected to have
a significant impact on the Corporation's financial statements.
SFAS NO. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION" - SFAS 131 significantly changes the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
reportable segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 uses a "management approach"
to disclose financial and descriptive information about an enterprise's
reportable operating segments which is based on reporting information the way
that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS 131 requires significantly more information to be disclosed for
each reportable segment than is presently being reported in annual financial
statements. SFAS 131 also requires selected information to be reported in
interim financial statements. SFAS 131 will be effective in fiscal 1999 and is
not expected to have a significant impact on the Corporation's financial
statements.
SFAS NO. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS" - SFAS 132 amends the disclosure requirements of previous pension and
other postretirement benefit accounting standards by requiring additional
disclosures about such plans as well as eliminating some disclosures no longer
considered useful. SFAS 132 also allows greater aggregation of disclosures for
employers with multiple defined benefit plans. Non-public companies are subject
to reduced disclosure requirements, however, such entities may elect to follow
the full disclosure requirements of SFAS 132. SFAS 132 will be effective in
fiscal 1999 and is not expected to have a significant impact on the
Corporation's financial statements.
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25.
26
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" -
SFAS 133 requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving off-setting changes in fair value or cash flows. SFAS 133
does not allow hedging of a security which is classified as held to maturity,
accordingly, upon adoption of SFAS 133, companies may reclassify any security
from held to maturity to available for sale if they wish to be able to hedge the
security in the future. SFAS 133 is effective for fiscal years beginning after
June 15, 1999 with early adoption encouraged for any fiscal quarter beginning
July 1, 1998 or later, with no retroactive application. Management does not
expect the adoption SFAS 133 to have a significant impact on the Corporation's
financial statements.
YEAR 2000 ISSUE
Many computer programs use only two digits to identify a year in the date field
and were apparently designed and developed without considering the impact of the
upcoming change in the century. Such programs could erroneously read entries for
the Year 2000 as the Year 1900, which could result in major systems failures and
miscalculations. Rapid and accurate data processing is essential to the
operations of financial institutions, such as the Corporation. The Corporation
has formed a Year 2000 committee to assess the extent to which it and its
outside vendors may be adversely affected by Year 2000 problems. Management has
determined that most programs are or will be capable of identifying the turn of
the century. The issue is closely monitored by management and full compliance is
expected by the end of 1998. While the Corporation does not anticipate that any
Year 2000 computer problems or expenses required to correct such problems will
materially affect its financial condition and results of operations, no
assurance can be given in this regard.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The principal market risk affecting the Corporation is interest-rate risk. The
Bank does not maintain a trading account for any class of financial instrument
and the Corporation is not affected by foreign currency exchange rate risk or
commodity price risk. Because the Corporation does not hold any equity
securities other than stock in the FHLB of Cincinnati and an insignificant
investment in its data processing servicer, Intrieve, Inc., the Corporation is
not subject to equity price risk.
The Corporation, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. One of the Corporation's principal financial
objectives is to achieve long-term profitability while reducing its exposure to
fluctuations in interest rates. The Corporation has sought to reduce exposure of
its earnings to changes in market interest rates by managing asset and liability
maturities and interest rates primarily through structuring the mortgage-backed
and related securities portfolio so that substantially all of the
mortgage-backed and related securities reprice on at least an annual basis. The
variable-rate feature of these securities helps mitigate the Corporation's
exposure to upward interest rate movement due to its primarily fixed-rate loan
portfolio. Some mortgage-backed securities have been purchased with funds
provided by similar maturity, long-term borrowings from the FHLB to capitalized
on the yield differential. The Corporation also invests in U.S. Government and
federal agency securities with
- --------------------------------------------------------------------------------
26.
27
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
maturities of five years or less. The majority of the Corporation's securities
are classified as available for sale to allow management the flexibility to move
these funds into higher-yielding loans as demand warrants. The mortgage-backed
and related securities also provide the Corporation with a constant cash flow
stream from principal repayments.
As the Corporation's loan portfolio is primarily made up of fixed-rate loans,
the Corporation is particularly sensitive to periods of rising interest rates In
such periods, the Corporation's net interest spread is negatively affected
because the interest rate paid on deposits increases faster than the rates
earned on loans. Management is continuing to originate variable-rate mortgage
loans as the primary means to manage this risk. Variable-rate loans increased
from $7.3 million at September 30, 1997 to $20.2 million at June 30, 1998. In
addition, management has increased consumer lending although it still remains a
small percentage of the overall loan portfolio. Consumer loans typically have a
significantly shorter weighted average maturity and offer less exposure to
interest rate risk. During fiscal 1997, the Corporation sold a pool of
fixed-rate mortgage loans and invested the funds in shorter-term fixed-rate
loans, adjustable-rate loans and adjustable-rate mortgage-backed and related
securities which have less exposure to interest rate risk. As the Corporation,
through the Bank, is an authorized seller/servicer for the FHLMC, all of its
loans are originated in accordance with secondary market guidelines. As such,
the Corporation has the ability to sell additional pools of fixed-rate loans in
the future should the need exist. At June 30, 1998, $2.3 million of 1-4 family,
fixed-rate loans were classified as held for sale, however, the Corporation had
no commitments to sell such loans.
Lastly, as part of its effort to monitor and manage interest rate risk, the Bank
uses the "net portfolio value" ("NPV") methodology adopted by the OTS as part of
its capital regulations. Presented in the Corporation's 1997 annual report, as
of September 30, 1997, is an analysis of the Bank's interest rate risk as
measured by changes in NPV for instantaneous and sustained parallel shifts of
100 basis points in market interest rates. Also presented are policy limits set
by the Board of Directors of the Bank as to the maximum change in NPV that the
Board of Directors deems advisable in the event of various changes in interest
rates. Such limits are established with consideration of the dollar impact of
various rate changes and the Bank's strong capital position. Management believes
that no events have occurred since September 30, 1997 which would significantly
change the Bank's NPV at June 30, 1998 under each of the assumed shifts of 100
basis points in market interest rates.
The Bank's NPV is more sensitive to rising rates than declining rates. Such
difference in sensitivity occurs principally because, as rates rise, borrowers
do not prepay fixed-rate loans as quickly as they do when interest rates are
declining. Thus, in a rising interest rate environment, because the Bank has
predominantly fixed-rate loans in its loan portfolio, the amount of interest the
Bank would receive on its loans would increase relatively slowly as loans are
slowly prepaid and new loans at higher rates are made. Moreover, the interest
the Bank would pay on its deposits would increase rapidly because the Bank's
deposits generally have shorter periods to repricing.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit, would likely deviate
significantly from those assumed in making risk calculations.
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27.
28
MILTON FEDERAL FINANCIAL CORPORATION
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit No. 27: Financial Data Schedule.
(b) Exhibit No. 99: Safe Harbor Under the Private Securities
Litigation Reform Act of 1995.
(c) No current reports on Form 8-K were filed by the Registrant
during the quarter ended June 30, 1998.
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28.
29
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: August 7, 1998 /s/ Glenn E. Aidt
--------------------------------- -----------------------------
Glenn E. Aidt
President
Date: August 7, 1998 /s/ Thomas P. Eyer
--------------------------------- -----------------------------
Thomas P. Eyer
Chief Financial Officer
- --------------------------------------------------------------------------------
29.
30
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
27 Financial Data Schedule 31
99 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995 33
- --------------------------------------------------------------------------------
30.