<PAGE> 1
FORM 10-Q/A
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 December 31, 1996
/ / 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)
(513) 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 January 31, 1997, the latest practicable date, 2,361,832 shares of the
registrant's common shares, no par value, were issued and outstanding.
<PAGE> 2
<TABLE>
<CAPTION>
MILTON FEDERAL FINANCIAL CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION (UNAUDITED)
<S> <C>
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
Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................. 20
PART II - OTHER INFORMATION........................................................................... 28
SIGNATURES ........................................................................................... 29
</TABLE>
2.
<PAGE> 3
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 922,237 $ 491,866
Interest-bearing deposits in other financial institutions 3,299,354 809,143
------------- -------------
Total cash and cash equivalents 4,221,591 1,301,009
Investment securities available for sale (Note 2) 6,012,630 8,521,559
Investment securities held to maturity (Estimated
fair value of $490,545 at December 31, 1996 and
$484,375 at September 30, 1996) (Note 2) 500,000 500,000
Mortgage-backed and related securities available for sale
(Note 2) 35,597,130 34,009,393
Mortgage-backed and related securities held to maturity
(Estimated market value of $13,238,364 at December 31, 1996
and $13,807,113 at September 30, 1996) (Note 2) 13,378,099 14,002,137
Federal Home Loan Bank stock 1,202,200 1,181,500
Loans receivable - net (Note 3) 110,227,516 116,748,891
Premises and equipment - net 1,640,383 1,541,676
Real estate owned - net 32,654
Cash surrender value of life insurance 1,472,332 1,455,493
Accrued interest receivable 902,113 1,057,428
Other assets 552,230 479,077
------------- -------------
Total assets $ 175,706,224 $ 180,830,817
============= =============
LIABILITIES
Deposits $ 131,909,574 $ 128,554,107
Borrowed funds (Note 4) 15,733,624 17,489,203
Advance payments by borrowers for taxes and insurance 398,370 182,810
Accrued interest payable 81,450 104,818
Other liabilities 490,833 1,020,476
------------- -------------
Total liabilities 148,613,851 147,351,414
Commitments and contingencies (Note 5)
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 24,968,159 24,951,691
Retained earnings 7,971,900 13,535,280
Treasury stock, at cost, 197,443 shares at December 31, 1996 and
128,943 shares at September 30, 1996 (2,955,452) (1,997,640)
Unearned employee stock ownership plan shares (Note 7) (1,598,903) (1,650,479)
Unearned recognition and retention plan shares (Note 8) (1,216,111) (1,269,957)
Unrealized loss on securities available for sale, net of tax (77,220) (89,492)
------------- -------------
Total shareholders' equity 27,092,373 33,479,403
------------- -------------
Total liabilities and shareholders' equity $ 175,706,224 $ 180,830,817
============= =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
3.
<PAGE> 4
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31,
------------
1996 1995
---------- ----------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $2,368,933 $2,138,849
Interest on mortgage-backed
and related securities 771,101 709,203
Interest on investments 116,559 152,472
Other interest and dividend
income 44,532 74,731
---------- ----------
3,301,125 3,075,255
INTEREST EXPENSE
Interest on deposits 1,618,056 1,524,961
Interest on borrowed funds 264,952 69,698
---------- ----------
1,883,008 1,594,659
---------- ----------
NET INTEREST INCOME 1,418,117 1,480,596
Provision for loan losses (Note 3) 20,000 15,100
---------- ----------
Net interest income after
provision for loan losses 1,398,117 1,465,496
NONINTEREST INCOME
Service charges and other fees 35,070 33,561
Net realized gain on sale of investment and
mortgage-backed and related securities 32,691 92,407
Gain on sale of loans 118,281
Other income 24,947 24,611
---------- ----------
210,989 150,579
NONINTEREST EXPENSE
Salaries and employee benefits 540,424 493,311
Occupancy expense 66,786 77,287
Data processing services 37,834 36,473
Federal deposit insurance premiums 72,996 65,726
State franchise taxes 105,961 55,006
Advertising 17,462 15,061
Other expenses 168,705 162,904
---------- ----------
1,010,168 905,768
---------- ----------
Income before income tax 598,938 710,307
Income tax expense 204,000 245,000
---------- ----------
NET INCOME $ 394,938 $ 465,307
========== ==========
Earnings per common share $ 0.18 $ 0.20
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
4.
<PAGE> 5
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Additional Unearned Unearned
Paid-In Retained Treasury ESOP RRP
Capital Earnings Stock Shares Shares
------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1995 $ 24,880,297 $ 15,787,634 $ (1,855,736) $ (1,485,339)
Net income for the period 465,307
Cash dividends -
$1.08 per share (2,588,944)
Commitment to release 4,782
employee stock ownership
plan shares (Note 7) 22,944 51,576
3,739 shares earned under
recognition and retention plan
(Note 8) 53,846
Change in unrealized gain on
securities available for sale
--------------- ---------------- ------------- -------------- ---------------
Balance at December 31, 1995 $ 24,903,241 $ 13,663,997 $ -- $ (1,804,160) $ (1,431,493)
=============== ================ ============= ============== ===============
Unrealized
Gain on
Securities
Available
for Sale Total
-------- -----
<S> <C> <C>
Balance at October 1, 1995 $ 175,601 $ 37,502,457
Net income for the period 465,307
Cash dividends -
$1.08 per share (2,588,944)
Commitment to release 4,782
employee stock ownership
plan shares (Note 7) 74,520
3,739 shares earned under
recognition and retention plan
(Note 8) 53,846
Change in unrealized gain on
securities available for sale 62,227 62,227
------------ ----------------
Balance at December 31, 1995 $ 237,828 $ 35,569,413
============ ================
</TABLE>
(Continued)
5.
<PAGE> 6
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
Three months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Additional Unearned Unearned
Paid-In Retained Treasury ESOP RRP
Capital Earnings Stock Shares Shares
------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1996 $ 24,951,691 $ 13,535,280 $ (1,997,640) $ (1,650,479) $ (1,269,957)
Net income for the period 394,938
Cash dividends -
$2.64 per share (5,958,318)
Commitment to release 4,782
employee stock ownership
plan shares (Note 7) 16,468 51,576
3,739 shares earned under
recognition and retention
plan (Note 8) 53,846
Purchase of treasury stock,
68,500 shares at cost (957,812)
Change in unrealized
loss on securities
available for sale
--------------- ---------------- -------------- -------------- ---------------
Balance at December 31, 1996 $ 24,968,159 $ 7,971,900 $ (2,955,452) $ (1,598,903) $ (1,216,111)
=============== ================ ============== ============== ===============
Unrealized
Loss on
Securities
Available
for Sale Total
-------- -----
<S> <C> <C>
Balance at October 1, 1996 $ (89,492) $ 33,479,403
Net income for the period 394,938
Cash dividends -
$2.64 per share (5,958,318)
Commitment to release 4,782
employee stock ownership
plan shares (Note 7) 68,044
3,739 shares earned under
recognition and retention
plan (Note 8) 53,846
Purchase of treasury stock,
68,500 shares at cost (957,812)
Change in unrealized
loss on securities
available for sale 12,272 12,272
------------ ----------------
Balance at December 31, 1996 $ (77,220) $ 27,092,373
============ ================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
6.
<PAGE> 7
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 394,938 $ 465,307
Adjustments to reconcile net income to net cash from
operating activities
Amortization of deferred loan origination fees (26,023) (38,071)
Amortization of premiums, accretion of discounts, net 10,117 9,058
Provision for loan losses 20,000 15,100
Depreciation 34,914 39,331
Increase in cash value of life insurance (16,839) (16,208)
Net gain on sale of investment and
mortgage-backed and related securities (32,691) (92,407)
Proceeds from sale of loans 10,377,554
Net gain on sale of loans (118,281)
Deferred gain on sale of real estate owned (42,056)
Federal Home Loan Bank stock dividend (20,700) (19,300)
Compensation expense on ESOP shares 68,044 74,520
Compensation expense on RRP shares 53,846 53,846
Deferred tax (benefit)/expense 8,000 (8,128)
Change in accrued interest receivable and other assets 82,162 (20,176)
Change in income taxes payable 196,000 173,128
Change in accrued expenses and other liabilities (763,334) (48,194)
------------ -----------
Net cash from operating activities 10,225,651 587,806
CASH FLOWS FROM INVESTING ACTIVITIES
Investment securities available for sale
Purchases (3,500,000)
Proceeds from maturities 4,000,000 2,000,000
Proceeds from sales 2,000,000
Investment securities held to maturity
Purchases (500,000)
Mortgage-backed securities available for sale
Purchases (3,966,775) (2,250,625)
Proceeds from principal payments 205,609 513,786
Proceeds from sales 2,236,119 2,843,199
Mortgage-backed securities held to maturity
Purchases
Proceeds from principal payments 611,446 953,976
</TABLE>
(Continued)
7.
<PAGE> 8
MILTON FEDERAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------
1996 1995
---- ----
----------- -----------
<S> <C> <C>
Increase in loans, net (3,731,875) (1,720,784)
Premises and equipment expenditures (133,621)
Proceeds from sale of real estate owned 74,710
----------- -----------
Net cash from investing activities (2,204,387) 1,839,552
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 3,355,467 5,004,981
Net increase in advance payments by borrowers for
taxes and insurance 215,560 102,028
Net change in short-term borrowings (2,200,000) (500,000)
Long-term advances from Federal Home Loan Bank 500,000
Principal payments on Federal Home Loan Bank advances (55,579)
Cash dividends paid (5,958,318) (2,588,944)
Purchase of treasury stock (957,812)
----------- -----------
Net cash from financing activities (5,100,682) 2,018,065
----------- -----------
Net change in cash and cash equivalents 2,920,582 4,445,423
Cash and cash equivalents at beginning of period 1,301,009 1,700,740
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,221,591 $ 6,146,163
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 1,906,376 $ 1,604,628
Income taxes -- 80,000
Noncash activities
Transfers of mortgage-backed and related securities
from held to maturity to available for sale as allowed
by the SFAS No. 115 implementation guide 9,090,701
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
8.
<PAGE> 9
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of Milton Federal Financial Corporation (the
"Corporation") at December 31, 1996, 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 the 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 financial statements and notes thereto of
the Corporation for the fiscal year ended September 30, 1996 included in its
1996 annual report. Reference is made to the accounting policies of the
Corporation described in the notes to financial statements contained in the
Corporation's 1996 annual report. The Corporation has consistently followed
these policies in preparing this form 10-Q.
The consolidated financial statements include the accounts of Milton Federal
Financial Corporation and its wholly-owned subsidiary, Milton Federal Savings
Bank (the "Bank"). The financial statements of Milton Federal Savings Bank
include the accounts of its wholly-owned subsidiary, Milton Financial Service
Corporation. Milton Financial Service Corporation holds stock in Intrieve, Inc.,
which is the data processing center utilized by the Bank. All significant
intercompany accounts and transactions have been eliminated.
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 office
located in Englewood, Ohio. Miami, Montgomery and Darke Counties provide the
source for substantially all of the Corporation's deposit and lending
activities. The majority of the Corporation's income is derived from
residential, nonresidential and consumer lending activities.
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions in
preparing the consolidated financial statements that effect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year. The Corporation follows the liability method
of accounting for income taxes. The liability method provides that deferred tax
assets and liabilities are recorded based on the difference between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes, using enacted tax rates.
9.
<PAGE> 10
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per common share were computed by dividing net income by the weighted
average number of shares outstanding for the three months ended December 31,
1996 and 1995. The weighted average number of shares outstanding for the three
months ended December 31, 1996 and 1995 were 2,253,950 and 2,367,841. Stock
options outstanding do not presently have a dilutive effect of greater than 3%
on earnings per common share and are therefore not considered for purposes of
the per share disclosure. Unreleased ESOP shares are not considered to be
outstanding shares for the purpose of determining the weighted average number of
shares used in the earnings per common share calculation.
The Corporation classifies investment and mortgage-backed and related securities
into held-to-maturity and available-for-sale categories. Held-to-maturity
securities are those which the Corporation has the positive intent to hold to
maturity and are reported at amortized cost. Available-for-sale securities are
those which the Corporation could sell for liquidity, asset-liability management
or other reasons even though the Corporation does not intend selling those
securities at the present time. Available-for-sale securities are reported at
fair value, with unrealized gains or losses included as a separate component of
equity, net of tax.
Realized gains and losses on investment and mortgage-backed and related
securities are determined on the specific security sold. Interest and dividend
income, adjusted by amortization of purchase premium or discount, is included in
earnings.
The Financial Accounting Standards Board ("FASB") issued a Question and Answer
Implementation Guide to SFAS No. 115 in November 1995. Based upon the reading
thereof and in accordance with the provisions of this implementation guidance,
the Corporation conducted a one-time reassessment of the appropriateness of its
securities classifications and transferred $9,090,701 of investment securities
classified as held-to-maturity to available-for-sale. The unrealized gain at the
time securities were transferred was approximately $179,000.
Statement of Financial Accounting Standards ("SFAS") No. 114, as amended by SFAS
No. 118, was adopted at October 1, 1995. Under these standards, loans considered
to be impaired are reduced to the present value of expected future cash flows or
to the fair value of collateral, by allocating a portion of the allowance for
loan losses to such loans. If these allocations cause the allowance for loan
losses to require increase, such increase is reported as bad debt expense. The
effect of adopting these standards did not materially affect the allowance for
loan losses at October 1, 1995 or the provision for loan losses for the three
month periods ending December 31, 1996 and 1995.
10.
<PAGE> 11
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Management analyzes commercial and commercial real estate loans on an individual
basis and classifies a loan as impaired when an analysis of the borrower's
operating results and financial condition indicates that underlying cash flows
are not adequate to meet its debt service requirements. Often this is associated
with a delay or shortfall in payments of 30 days or more. Smaller-balance
homogeneous loans are evaluated for impairment in total. Such loans include
residential first-mortgage loans secured by one- to four-family residences,
residential construction loans, consumer automobile, boat and home equity loans
with balances less than $300,000. Loans are generally moved to nonaccrual status
when 90 days or more past due. These loans are often also considered impaired.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The nature of disclosures for impaired loans is considered generally comparable
to prior nonaccrual loans and nonperforming and past due asset disclosures.
Interest on loans is accrued over the term of the loans based upon the principal
outstanding. Management reviews loans delinquent 90 days or more to determine if
the interest accrual should be discontinued. Under SFAS No. 114, as amended by
SFAS No. 118, the carrying value of impaired loans is periodically adjusted to
reflect cash payments, revised estimates of future cash flows and increases in
the present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash payments
are reported as reductions in carrying value. Increases or decreases in carrying
value due to changes in estimates of future payments or the passage of time are
reported as reductions or increases in bad debt expense.
The Corporation adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights," on October 1, 1996. Mortgage servicing rights represent the allocated
value of servicing rights retained on loans sold. Mortgage servicing rights are
expensed in proportion to, and over the period of, estimated servicing revenues.
Impairment is evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
SFAS No. 122 was superseded by SFAS No 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which extends
the accounting and disclosure rules for mortgage servicing rights to all
servicing rights including mortgage, consumer and commercial loans. Mortgage
servicing rights totaled $116,367 at December 31, 1996, and are included in
"Other assets," on the accompanying balance sheet. SFAS 125 will be effective on
October 1, 1997 and is not expected to have a material impact on the
Corporation's financial statements.
11.
<PAGE> 12
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED AND RELATED SECURITIES
The amortized cost and estimated market values of investment and mortgage-backed
and related securities are as follows:
<TABLE>
<CAPTION>
---------------------------December 31, 1996---------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Investment securities
U.S. Government and
federal agency securities $ 6,001,439 $ 4,011 $ (7,820) $ 5,997,630
Equity securities 15,000 15,000
----------------- ------------ ------------ -----------------
Total investment
securities $ 6,016,439 $ 4,011 $ (7,820) $ 6,012,630
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 1,825,319 $ 17,813 $ (14,778) $ 1,828,354
FHLMC certificates 1,739,751 43,156 1,782,907
Collateralized mortgage
obligations and REMICs 32,145,248 171,745 (331,124) 31,985,869
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 35,710,318 $ 232,714 $ (345,902) $ 35,597,130
================= ============ ============ =================
SECURITIES HELD TO MATURITY
Investment Securities
U.S. Government and
federal agency securities $ 500,000 $ -- $ (9,455) $ 490,545
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 5,711,970 $ 27,699 $ (123,241) $ 5,616,428
GNMA certificates 896,867 33,515 930,382
FHLMC certificates 6,769,262 60,351 (138,059) 6,691,554
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 13,378,099 $ 121,565 $ (261,300) $ 13,238,364
================= ============ ============ =================
</TABLE>
12.
<PAGE> 13
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED AND RELATED SECURITIES
(Continued)
<TABLE>
<CAPTION>
----------------------------September 30, 1996-------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Investment securities
U.S. Treasury securities $ 2,999,645 $ 7,230 $ 3,006,875
U.S. Government and
federal agency securities 5,503,769 620 $ (4,705) 5,499,684
Equity securities 15,000 15,000
----------------- ------------ ------------ -----------------
Total investment
securities $ 8,518,414 $ 7,850 $ (4,705) $ 8,521,559
================= ============ ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 510,095 $ 13,526 $ 523,621
FHLMC certificates 2,596,117 63,413 2,659,530
Collateralized mortgage
obligations and REMICs 31,041,919 175,155 $ (390,832) 30,826,242
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 34,148,131 $ 252,094 $ (390,832) $ 34,009,393
================= ============ ============ =================
SECURITIES HELD TO MATURITY
Investment securities
U.S. Government and
federal agency security $ 500,000 $ (15,625) $ 484,375
================= ============ =================
Mortgage-backed and related
securities
FNMA certificates $ 5,904,260 $ 30,425 $ (139,212) $ 5,795,473
GNMA certificates 917,818 20,166 937,984
FHLMC certificates 7,180,059 54,173 (160,576) 7,073,656
----------------- ------------ ------------ -----------------
Total mortgage-backed
and related securities $ 14,002,137 $ 104,764 $ (299,788) $ 13,807,113
================= ============ ============ =================
</TABLE>
13.
<PAGE> 14
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED AND RELATED SECURITIES
(Continued)
Substantially all collateralized mortgage obligations and REMICs (real estate
mortgage investment conduits) are backed by pools of mortgages that are insured
or guaranteed by the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC").
The amortized cost and estimated market value of investment and mortgage-backed
and related securities at December 31, 1996, by contractual maturity, are shown
below. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
---- ------------
<S> <C> <C>
SECURITIES AVAILABLE FOR SALE
Due in one year or less $ 2,000,000 $ 2,000,930
Due after one through five years 4,001,439 3,996,700
Equity securities 15,000 15,000
-------------- --------------
Total investment securities 6,016,439 6,012,630
Mortgage-backed and related securities 35,710,318 35,597,130
-------------- --------------
Total investment and mortgage-backed
and related securities $ 41,726,757 $ 41,609,760
============== ==============
SECURITIES HELD TO MATURITY
Due after five through ten years $ 500,000 $ 490,545
Mortgage-backed and related securities 13,378,099 13,238,364
-------------- --------------
Total investment and mortgage-backed
and related securities $ 13,878,099 $ 13,728,909
============== ==============
</TABLE>
Realized gains or losses are determined based on the amortized cost of the
specific security sold. Interest and dividend income, adjusted by amortization
of purchase premium or discount, is included in earnings.
During the three months ended December 31, 1996, proceeds from the sales of
investment securities available for sale were $2,000,000. Gross gains of $119
were included in earnings. No investment securities were sold during the three
months ended December 31, 1995.
During the three months ended December 31, 1996 and 1995, proceeds from the
sales of mortgage-backed and related securities available for sale were
$2,236,119 and $2,843,199, respectively, with gross realized gains of $32,572
and $92,407, respectively.
14.
<PAGE> 15
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
---- ----
<S> <C> <C>
Residential real estate loans
1-4 family (first mortgage) $ 94,869,637 $ 102,392,912
Home equity (1-4 family second mortgage) 3,525,425 2,928,693
Multi-family 1,896,406 2,248,970
Nonresidential real estate loans 4,190,912 4,425,522
Construction loans 9,600,793 9,083,082
----------------- -----------------
Total real estate loans 114,083,173 121,079,179
Consumer loans
Automobile 1,933,285 1,928,376
Loans on deposits 204,997 199,313
Other consumer loans 148,631 129,877
----------------- -----------------
Total consumer loans 2,286,913 2,257,566
----------------- -----------------
Total loans 116,370,086 123,336,745
----------------- -----------------
Less
Unearned and deferred income 523,239 627,079
Loans in process 5,112,129 5,473,573
Allowance for loan losses 507,202 487,202
----------------- -----------------
Net loans $ 110,227,516 $ 116,748,891
================ =================
</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 $10,457,372 at December 31, 1996. Capitalized mortgage
servicing rights at December 31, 1996 were $116,367. There were no loans
serviced for others at September 30, 1996. At September 30, 1996, loans held for
sale totaled $10,463,058 while there were no loans held for sale at December 31,
1996.
15.
<PAGE> 16
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS RECEIVABLE (Continued)
Activity in the allowance for losses on loans for the three month periods ended
December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Three months ended
December 31,
1996 1995
<S> <C> <C>
Balance at beginning of period $ 487,202 $ 332,902
Provision for loan losses 20,000 15,100
Recoveries
Charge-offs
------------ ------------
Balance at end of period $ 507,202 $ 348,002
============ ============
</TABLE>
As of and for the three months ended December 31, 1996, there were no loans for
which impairment was required to be evaluated on an individual loan by loan
basis.
NOTE 4 - BORROWINGS
At December 31, 1996, the Bank had a cash management line of credit enabling it
to borrow up to $8,200,000 with the Federal Home Loan Bank (FHLB) of Cincinnati.
The line of credit must be renewed on an annual basis. Borrowings outstanding on
this line of credit totaled $1,000,000 at December 31, 1996 and $3,200,000 at
September 30, 1996 with interest rates ranging from 5.95% to 6.15% and 5.45% to
6.15% at such dates. Additionally, as a member of the Federal Home Loan Bank
system, the Bank has the ability to obtain up to approximately $43,031,000 of
advances from the FHLB. As a result of this membership, the Bank had
adjustable-rate borrowings totaling $10,430,000 at December 31, 1996 and
$9,930,000 at September 30, 1996. The interest rates on the borrowings adjust
monthly. The interest rates on the borrowings ranged from 5.55% to 5.95% at
December 31, 1996 and 5.44% to 5.95% at September 30, 1996. The Bank also had
fixed-rate borrowings totaling $4,303,624 at December 31, 1996 and $4,359,203 at
September 30, 1996. The interest rates on these borrowings ranged from 5.80% to
6.40% at December 31, 1996 and September 30, 1996. Advances under the borrowing
agreement are collateralized by a blanket pledge of the Bank's residential
mortgage loan portfolio and Federal Home Loan Bank stock.
At December 31, 1996, required annual principal payments are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 2,796,691
1998 3,945,469
1999 1,315,113
2000 4,555,616
2001 1,296,987
Thereafter 1,823,748
---------------
$ 15,733,624
===============
</TABLE>
16.
<PAGE> 17
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to make loans and the unfunded
portion of approved lines of credit. The Corporation's exposure to credit loss
in the event of nonperformance by the other party to the financial instrument
for commitments to make loans is represented by the contractual amount of those
instruments. The Corporation follows the same credit policy to make such
commitments as is followed for those loans recorded in the financial statements.
As of December 31, 1996 and September 30, 1996, the Corporation had commitments
to make fixed-rate 1-4 family residential real estate loans at current market
rates totaling $2,756,000 and $2,417,000. Loan commitments are generally for
thirty days. The interest rates on the commitments ranged from 6.50% to 10.00%
at December 31, 1996 and at September 30, 1996. The Corporation had one
commitment to make a adjustable-rate 1-4 family residential real estate loan
totaling $54,000, with an interest rate of 8.13%, at December 31, 1996. There
were no commitments to make adjustable-rate 1-4 family residential real estate
loans at September 30, 1996.
As of December 31, 1996 and September 30, 1996, the Corporation had $2,628,000
and $2,552,000 in unused adjustable-rate home equity lines of credit.
Since commitments to make loans and lines of credit may expire without being
used, the amounts do not necessarily represent future cash commitments.
Collateral obtained upon exercise of the commitment is determined using
management's credit evaluation of the borrower, 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.
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 Corporation. One-fifth
of the options awarded become first exercisable on each of the first five
anniversaries of the date of grant. The option period expires 10 years from the
date of grant. At December 31, 1996 and September 30, 1996, options to purchase
47,709 shares were exercisable. No options were exercised during the three-month
periods ended December 31, 1996 and 1995. In addition, there are 19,342 shares
of authorized but unissued common stock reserved for which no options have been
granted.
17.
<PAGE> 18
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCK OPTION PLAN (Continued)
On October 1, 1996, 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
on earnings per share had the accounting been adopted. Fair value of a stock
option is to be estimated using an option-pricing model that considers 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 later 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
borrowed funds from the Corporation with which to acquire common shares of the
Corporation. The loan is secured by the shares purchased with the loan proceeds
and will be repaid by the ESOP with funds from the Bank's discretionary
contributions to the ESOP and earnings on ESOP assets. All dividends 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 the 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
93-6. Accordingly, the 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 the 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 $68,044 for the three months ended December 31, 1996 and $74,520 for the
three months ended December 31, 1995. The ESOP shares as of December 31, 1996
and September 30, 1996 were as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
---- ----
<S> <C> <C>
Allocated shares 38,248 9,536
Shares released for allocation 4,782 28,712
Unreleased shares 148,210 152,992
--------------- ---------------
Total ESOP shares 191,240 191,240
=============== ===============
Fair value of unreleased shares $ 2,149,045 $ 2,065,392
=============== ===============
</TABLE>
18.
<PAGE> 19
MILTON FEDERAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - RECOGNITION AND RETENTION PLAN
On October 16, 1995, the Recognition and Retention Plan 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 the event of the death or disability of a
participant, however, the participant's shares will be deemed to be earned and
nonforfeitable upon such date. There were 28,371 shares at December 31, 1996 and
September 30, 1996 reserved for future awards. Compensation expense, which is
based upon the cost of the shares, totaled $53,846 for the three-month periods
ended December 31, 1996 and 1995.
19.
<PAGE> 20
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following discusses the financial condition of Milton Federal Financial
Corporation (the "Corporation") as of December 31, 1996, as compared to
September 30, 1996, and the results of operations for the three months ended
December 31, 1996, compared with the same period in 1995. 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 that involve risks and
uncertainties. Economic circumstances, the Corporation's operations, and the
Corporation's actual results could differ significantly from those discussed in
the forward-looking statements. Some of the 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 the statements
regarding the following:
1. Management's determination of the amount of loan loss allowance and
the amount of the loan loss provision;
2. Changes in the amount deposit insurance assessments;
3. The sufficiency of the Corporation's liquidity and capital reserves;
and
4. The effect on the Corporation of amendments to the core capital
requirement regulations.
See Exhibit 99, which is incorporated herein by reference.
ANALYSIS OF FINANCIAL CONDITION
The Corporation's assets totaled $175.7 million at December 31, 1996, a decrease
of $5.1 million, or 2.8%, from $180.8 million at September 30, 1996.
Investment securities, mortgage-backed and related securities and FHLB stock
decreased from $58.2 million at September 30, 1996, to $56.7 million at December
31, 1996. The decrease was primarily the result of $4.2 million of sales of
investment and mortgage-backed and related securities available for sale
combined with maturities and principal repayments of $4.8 million. The decrease
from sales, maturities and principal repayments was somewhat offset by $7.5
million of purchases. The sales were primarily made for interest rate risk
strategy purposes. 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 and collateralized mortgage
20.
<PAGE> 21
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs").
Investment securities are comprised of United States Treasury and government
agency securities.
Net loans receivable decreased from $116.7 million at September 30, 1996 to
$110.2 million at December 31, 1996. The decline was primarily the result of the
sale of 1-4 family first mortgage loans with a carrying value of $10.4 million.
The loans were sold as a means to manage interest rate risk by reducing the
Corporation's investment in various lower-yielding or longer-term fixed-rate
loans and to provide additional liquidity for a special $2.50 per share
dividend. The Corporation retained the right to service the loans for a fixed
spread to provide an additional source of fee income. The loans sold were
classified as held for sale at September 30, 1996. At December 31, 1996, there
were no loans classified as held for sale as the Corporation does not intend to
sell additional loans in the near future. The decline in 1-4 family first
mortgage loans resulting from the sale was partially offset by $2.9 million in
net new originations. Slight increases were also noted in construction loans
which increased from $9.1 million at September 30, 1996 to $9.6 million at
December 31, 1996 and home equity loans which increased from $2.9 million at
September 30, 1996 to $3.5 million at December 31, 1996. The increase in
mortgage loans was 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.
The Corporation's consumer loan portfolio remained relatively unchanged between
September 30, 1996 and December 31, 1996. Consumer loans are a small portion of
the entire loan portfolio and represented 2.0% and 1.8% of total loans at
December 31, 1996 and September 30, 1996, respectively.
Total deposits increased $3.3 million, or 2.6%, from $128.6 million at September
30, 1996 to $131.9 million at December 31, 1996. The Corporation experienced
little change in passbook savings accounts, negotiable order of withdrawal
("NOW") accounts and money market accounts. Certificates of deposit increased
$3.1 million, or 3.2%, and were the primary reason for the overall deposit
growth. Certificates of deposit growth has been due to normal operating
procedures as the Corporation has not used special promotions to attract
increased volume. The portfolio as a percent of total deposits increased
slightly from 74.6% at September 30, 1996 to 75.0% December 31, 1996. All
certificates of deposit held at the Bank mature in less than five years.
Borrowed funds decreased $1.8 million from $17.5 million at September 30, 1996
to $15.7 million at December 31, 1996. The decrease was primarily the result of
repayments of short-term advances from the Bank's cash management line of credit
at the FHLB of Cincinnati. The majority of the borrowed funds are invested in
mortgage-backed and related securities to leverage the Bank's excess capital
provided from the conversion from a mutual savings and loan association to a
stock savings bank (the "Conversion"), and to provide liquidity for future loan
growth.
Other liabilities totaled $490,000 at December 31, 1996 as compared to $1.0
million at September 30, 1996. The Bank accrued an additional expense of
approximately $728,000 in
21.
<PAGE> 22
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
September 1996 as a result of legislation passed to recapitalize the Savings
Association Insurance Fund ("SAIF") of the FDIC. The SAIF was below the level
required by law because a significant portion of the 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. As a result of the
recapitalization of the SAIF, the current disparity between bank and thrift
insurance assessments will be reduced. Thrifts had been paying assessments of
$.23 per $100 of deposits, which, for most thrifts, is expected to be reduced to
$.064 per $100 in deposits in January 1997 and to $.024 per $100 in deposits no
later than January 2000.
The legislation also provides for the merger of the SAIF and the BIF effective
January 1, 1999, assuming there are no savings associations under federal law.
Under separate proposed legislation, Congress is considering the elimination of
the federal thrift charter and the separate federal regulation of thrifts. As a
result, 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.
COMPARISON OF RESULTS OF OPERATIONS
The operating results of the Corporation are affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate 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 the 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 the availability of funds for lending activities.
The Corporation's net income is primarily dependent upon its net interest
income, which 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 the sale of assets and other income, noninterest expense and
income taxes.
The Corporation's net income of $395,000 for the three months ended December 31,
1996 represented a $70,000 decrease from the $465,000 in net income for the
three months ended December 31, 1995. Similarly, earnings per common share
decreased by $.02 for the three-month period ended December 31, 1996 as compared
to the same period in 1995. The decline in net income is the combined result of
decreases in net interest income and increased noninterest expense partially
offset by gains from the sales of loans and investment and mortgage-backed and
related securities.
Net interest income is the largest component of the Corporation's income and is
affected by the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities.
22.
<PAGE> 23
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
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 at a faster pace than the rates earned on loans. Interest
rate levels have remained relatively stable over the comparable three-month
periods ended December 31, 1996 and 1995. As a part of management's overall
strategy to manage interest rate risk, management began to originate
adjustable-rate mortgage loans in the latter quarters of fiscal 1995. As of
December 31, 1996, the Corporation had approximately $4.7 million in
adjustable-rate mortgage loans as compared to $3.1 million at September 30,
1996. Additionally, almost all of the Corporation's mortgage-backed and related
securities portfolio are scheduled to reprice on at least an annual basis.
The net interest income of the Corporation decreased by $62,000 for the three
months ended December 31, 1996 compared to the same period in 1995. The change
in net interest income is attributable to increases in interest-earning asset
balances being entirely offset by an overall increase in the cost of funds for
deposits, with a larger portion of the deposit base being in higher cost
certificates of deposit, and an increased level of borrowed funds.
Interest and fees on loans totaled $2.4 million for the three months ended
December 31, 1996, compared to $2.1 million for the three months ended December
31, 1995. Such increase in interest income was due to higher average loans
receivable balances, despite the loan sale, related to the origination of new
1-4 family first mortgages, home equity and construction loans.
Interest on mortgage-backed and related securities totaled $771,000 for the
three months ended December 31, 1996, compared to $709,000 for the three months
ended December 31, 1995. The increase was due to a larger percentage of higher
yielding mortgage-backed and related securities as compared to the prior period
combined with an overall increase in the level of mortgage-backed and related
securities. Most of the mortgage-backed and related securities have repriced to
higher yield levels over the past year. The adjustable-rate feature of these
securities helps mitigate the Corporation's exposure to upward interest rate
movement due to its primarily fixed-rate loan portfolio.
Interest on investment securities totaled $117,000 for the three months ended
December 31, 1996, compared to $152,000 for the comparable period in 1995. Other
interest and dividend income totaled $45,000 for the three months ended December
31, 1996, compared to $75,000 for the comparable period in 1995. The decreases
from 1995 levels are the result of lower average balances of investment
securities and overnight funds partially offset by an increase in the overall
portfolio yield.
Interest on deposits totaled $1.6 million for the three months ended December
31, 1996, and $1.5 million for the three months ended December 31, 1995. This
increase resulted from an overall increase in the average cost of funds during
the comparable periods combined with higher average deposit balances over the
prior periods.
23.
<PAGE> 24
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Interest on borrowed funds totaled $265,000 for the three months ended December
31, 1996, as compared to $70,000 during the comparable period in 1995. The
increase is the result of higher average balances of borrowed funds during the
three months ended December 31, 1996. In the fourth quarter of fiscal 1995, the
Corporation borrowed funds and invested a portion of these funds in
mortgage-backed and related securities to leverage the Corporation's excess
capital, as discussed previously. The Corporation borrowed additional
adjustable-rate funds for the same purpose in subsequent quarters. The
Corporation 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 reasonable foreseeable losses
inherent in the loan portfolio. While management utilizes its best judgment and
information available, the ultimate adequacy of the allowance is dependent upon
a variety of factors, including the 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 which is 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 the size and
composition of the loan portfolio and specific borrower considerations,
including the ability of the borrower to repay the loan and the estimated value
of the underlying collateral.
The Corporation has not experienced net charge-offs in either of the periods
presented. 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 the 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 98.0% of the Corporation's loan portfolio, and loans secured by first
mortgages on 1-4 family residential real estate constituted 81.5% of total loans
at December 31, 1996. Notwithstanding the historical charge-off history,
however, management believes that it is prudent to continue to increase the
allowance for loan losses as total loans increase. Accordingly, management
anticipates that it will continue its provisions to the allowance for loan
losses at current levels for the foreseeable future, providing the volume of
nonperforming loans remains insignificant.
Noninterest income totaled $211,000 for the three months ended December 31,
1996, and $151,000 for the three months ended December 31, 1995. The primary
source of the increase was from a gain of $118,000 on the sale of 1-4 family
first mortgage loans discussed previously. Offsetting the increase from the gain
on the sale of loans was a $60,000 decrease in gains realized on the sales of
investment and mortgage-backed and related securities held in the
available-for-sale portfolio. The sales in each period were primarily made for
interest rate risk strategy purposes. Other changes in noninterest income were
insignificant.
24.
<PAGE> 25
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Noninterest expense totaled $1.0 million for three months ended December 31,
1996, compared to $906,000 for the three months ended December 31, 1995.
Salaries and employee benefits and Ohio franchise taxes were the primary causes
of the increases. Salaries and employee benefits increased $47,000 for the three
months ended December 31, 1996, compared to the same period in 1995 primarily
due to annual merit increases. Ohio franchise taxes increased due to the change
in corporate structure during fiscal 1995 and the resulting tax impact of higher
capital levels at the Bank and earnings at the Corporation. The second quarter
of fiscal 1996 was the first period in which the franchise taxes were impacted
by the capital raised in the Conversion. Other changes in noninterest expense
were insignificant.
Prior to the enactment of legislation discussed below, thrifts which met certain
tests relating to the composition of assets had been permitted to establish
reserves for bad debts and to make annual additions thereto which could, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve deduction
for "nonqualifying loans" was computed under the experience method. The amount
of the bad debt reserve deduction for "qualifying real property loans" could be
computed under either the experience method or the percentage of taxable income
method, based on an annual election.
In August 1996, legislation was enacted that repeals the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. As a result, small thrifts such as the Bank must recapture
the portion of the reserve that exceeds the amount that could have been taken
under the experience method for tax years beginning after December 31, 1987. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. At December 31, 1996, 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 for the three months ended
December 31, 1996, of $204,000 represented an effective rate of 34.1%, compared
to $245,000, or an effective rate of 34.5%, for the three months ended December
31, 1995.
25.
<PAGE> 26
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity, primarily represented by cash equivalents, is a
result of its operating, investing and financing activities. These activities
are summarized below for the three months ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Three months ended
December 31,
------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Net income $ 395 $ 465
Adjustments to reconcile net income to
net cash from operating activities 9,831 123
---------- -----------
Net cash from operating activities 10,226 588
Net cash from investing activities (2,204) 1,839
Net cash from financing activities (5,101) 2,018
---------- -----------
Net change in cash and cash equivalents 2,921 4,445
Cash and cash equivalents at
beginning of period 1,301 1,701
---------- -----------
Cash and cash equivalents at
end of period $ 4,222 $ 6,146
========== ===========
</TABLE>
The Corporation's principal sources of funds are deposits; loan, investment and
mortgage-backed securities repayments; investment and mortgage-backed 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 investments 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 upon 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 having maturities of
five years or less in an amount equal to 5% 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 upon which the
Corporation may rely if necessary to fund deposit withdrawals or other
short-term funding needs. At December 31, 1996, the Corporation's regulatory
liquidity was 8.01%. At such date, the Corporation had commitments to originate
fixed-rate loans totaling $2,756,000 and commitments to originate
adjustable-rate
26.
<PAGE> 27
MILTON FEDERAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
loans totaling $54,000. There were 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 OTS regulations to meet certain minimum capital
requirements, which requirements must be generally as stringent as the
requirements established for 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 3.0% of adjusted total assets and
risk-based capital (which for the Bank consists of core capital and general
valuation allowances) of 8% of risk-weighted assets (assets are weighted at
percentage levels ranging from 0% to 100% depending on their relative risk). The
Bank exceeded all of its capital requirements at December 31, 1996 and September
30, 1996. The OTS has proposed to amend the core capital requirement so that
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 that it will be adversely affected if the core capital
requirements regulations are amended as proposed.
The following table summarizes the Bank's regulatory capital requirements and
actual capital at December 31, 1996.
<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 $ 21,083 12.24% $ 2,583 1.50% $ 18,500 10.74% 172,208
Core capital 21,083 12.24 5,166 3.00 15,917 9.24 172,208
Risk-based capital 21,442 25.74 6,663 8.00 14,779 17.74 83,289
</TABLE>
The Bank is in the process of constructing a new branch banking office in
Brookville, Ohio. The total projected cost of construction is expected to be
$1.2 million, of which, at December 31, 1996, the Bank has paid approximately
$130,000.
On October 21, 1996, the Corporation declared a special dividend of $2.50 per
share to all shareholders of record on November 4, 1996. The dividend was paid
on November 15, 1996. Additionally, in October, 1996, the Board of Directors of
the Corporation authorized the purchase of up to 5% of the Corporation's
outstanding common shares over a six-month period. The shares will be purchased
in the over-the-counter market. The number of shares to be purchased and the
price to be paid will depend upon the availability of shares, the prevailing
market prices and any other considerations which may, in the opinion of the
Corporation's Board of Directors or management, affect the advisability of
purchasing shares.
27.
<PAGE> 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 December 31, 1996.
28.
<PAGE> 29
MILTON FEDERAL FIANCIAL 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: February 4, 1997 /s/ Glenn E. Aidt
----------------- -----------------------------------
Glenn E. Aidt
President
Date: February 4, 1997 /s/ Thomas P. Eyer
----------------- -----------------------------------
Thomas P. Eyer
Treasurer (Chief Financial Officer)
29.
<PAGE> 30
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
<S> <C> <C>
27 Financial Data Schedule 31
99 Safe Harbor Under the Private Securities Incorporated by reference to Exhibit 99.2
Litigation Reform Act of 1995 to Annual Report on Form 10-K for the
Fiscal Year Ended September 30, 1996 filed
by the Registrant on December 20, 1996.
</TABLE>
