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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 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 0-19837
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND
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(Exact name of registrant as specified in its charter)
Delaware 52-1700036
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
118 Baltimore Street, Cumberland, Maryland 21502
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 724-3363
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sales price of the registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
National Market System on September 19, 1996 was $61,074,660.
As of September 19, 1996, there were issued and outstanding 2,124,336 shares of
the registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Where Incorporated
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1. Portions of the 1996 Annual Report
to Stockholders. Parts I and II
2. Portions of Proxy Statement for the
1996 Annual Meeting of Stockholders. Part III
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND
TABLE OF CONTENTS
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 23
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . 24
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 24
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . 24
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 25
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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PART I
ITEM 1. BUSINESS
GENERAL
First Financial Corporation of Western Maryland (the Corporation) is a Delaware
corporation and thrift holding company that provides a full range of retail and
commercial financial products and services to customers in the Mid-Atlantic
Region of the United States through its wholly owned subsidiary bank, First
Federal Savings Bank of Western Maryland (the Bank), and the Bank's
subsidiaries.
The Bank is a federally chartered, Federal Deposit Insurance Corporation (FDIC)
insured stock savings bank which conducts its business through ten offices
located throughout Western Maryland. The Bank has two subsidiaries, Mid-
Atlantic Service Corporation (MASC) and Mid-Atlantic Underwriters Agency, Inc.
(MAUA). MASC owns certain premises of the Bank. MAUA provides insurance
products and services to customers of the Bank. The Bank was organized in 1928
and, in 1935, adopted a federal charter and obtained federal deposit insurance.
The Bank is a financial intermediary whose principal business consists of
attracting deposits from the general public and investing such deposits in real
estate loans secured by liens on residential and commercial property, consumer
loans, commercial business loans, investment and mortgage-backed securities and
interest-earning deposits.
The Corporation and the Bank are subject to examination and comprehensive
regulation by the Office of Thrift Supervision (OTS), which is the Bank's
chartering authority, and the FDIC, the administrator of the Savings Association
Insurance Fund (SAIF). The Bank is a member of the Federal Home Loan Bank
(FHLB) of Atlanta, which is one of the twelve regional banks comprising the FHLB
System.
COMPETITION
The Corporation and its subsidiaries face substantial competition for both loans
and deposits. Numerous financial institutions, several of which are similar in
size and resources to the Bank, are competitors of the Bank to varying degrees.
The Bank's competition for loans comes principally from commercial banks, credit
unions, mortgage-banking companies and savings banks. It competes for loans
principally through the interest rates and loan fees it charges and the
efficiency and quality of services it provides borrowers, sellers, real estate
brokers and attorneys. The Bank's most direct competition for deposits has
historically come from commercial banks, credit unions and other depository
institutions. The Bank faces additional competition for deposits from
securities brokers, money market and other mutual funds and insurance companies.
It competes for deposits through pricing, service, its branch network and by
offering a wide variety of deposit accounts. Competition may increase as a
result of reduced restrictions on the interstate operations of financial
institutions and recent legislation authorizing the acquisition of savings
institutions by bank holding companies.
LENDING ACTIVITIES
GENERAL. The Corporation's lending activities are conducted through the Bank.
The Corporation's loan origination activities within its local market area have
primarily involved the origination of single-family residential loans and to a
lesser extent, commercial real estate and multi-family residential mortgage
loans. The Corporation has also in recent years increased its involvement in
the origination of a variety of consumer loans. The loans originated locally,
both fixed-rate and adjustable-rate loans, are made primarily for retention in
the Corporation's own portfolio. Historically, the Corporation's operations
have provided funds substantially in excess of the amounts necessary to meet
loan demand existing in the Corporation's local market area. As a result, the
Corporation has been active in the secondary market purchasing whole and/or
participation interests in residential, multi-family and commercial real estate
mortgage loans originated by other financial institutions throughout the United
States. However, due to uncertainty in real estate markets in various areas of
the country, the Corporation has determined that it will substantially
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reduce or eliminate its reliance on purchased loans. In addition, to the
extent that the Corporation participates in purchased loans, it will continue
to utilize the same underwriting standards that it applies to internally
originated loans.
To compensate for the reduction in loan purchase activity, the Corporation has
implemented a system to originate residential mortgage loans through
correspondent lending networks established with mortgage banking and other
financial institutions in the Mid-Atlantic region; expand commercial lending
efforts in order to internally originate commercial real estate loans through
brokers in the Pittsburgh, Pennsylvania, Baltimore, Maryland and Washington, DC
metropolitan markets; continue efforts to originate automobile loans through
local dealerships; and continue the lending of all loan types through the Bank's
branch offices.
The following table sets forth the composition of the Corporation's portfolio of
loans receivable in dollar amounts and in percentages at the dates indicated:
<TABLE>
<CAPTION>
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(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- --------------
Dollar Dollar Dollar Dollar Dollar
Amount % Amount % Amount % Amount % Amount %
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential - single family $126,779 49.8% $138,217 58.4% $149,749 65.6% $163,460 69.9% $175,418 71.8%
Residential - multi family 29,071 11.4% 6,257 2.6% 7,054 3.1% 7,354 3.1% 7,748 3.2%
Commercial real estate 55,104 21.6% 51,604 21.8% 41,213 18.1% 41,056 17.6% 44,452 18.2%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
210,954 82.8% 196,078 82.8% 198,016 86.8% 211,870 90.6% 227,618 93.2%
Other loans:
Automobile 29,410 11.5% 30,471 12.9% 20,069 8.8% 10,433 4.5% 5,714 2.3%
Other consumer 11,177 4.4% 6,499 2.7% 4,118 1.8% 4,906 2.1% 5,724 2.3%
Commercial business 3,263 1.3% 3,869 1.6% 5,977 2.6% 6,634 2.8% 5,383 2.2%
-------- ----- ------- ----- ------- ----- ------ ----- -------- -----
254,804 100.0% 236,917 100.0% 228,180 100.0% 233,843 100.0% 244,439 100.0%
====== ====== ====== ====== ======
Less:
Allowance for loan losses 7,795 8,590 4,561 3,840 3,553
Deferred loan fees and
net discounts 1,360 1,752 2,709 2,803 3,258
Loans in process 2,536 3,509 1,406 3,544 4,708
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$243,113 $223,066 $219,504 $223,656 $232,920
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</TABLE>
The following table sets forth the maturity of the Corporation's loan portfolio
at June 30, 1996 based on contractual maturity:
<TABLE>
<CAPTION>
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(IN THOUSANDS) Due in one Due from one Due from five Due after
year or less to five years to ten years ten years Total
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<S> <C> <C> <C> <C> <C>
Real estate loans $10,540 $18,980 $23,090 $158,344 $210,954
Consumer loans 5,276 33,776 1,535 -- 40,587
Commercial business loans 175 3,088 -- -- 3,263
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$15,991 $55,844 $24,625 $158,344 $254,804
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</TABLE>
The following table sets forth the dollar amount of fixed and variable rate
loans due after one year:
<TABLE>
<CAPTION>
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(IN THOUSANDS) Fixed Adjustable
rates rates
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<S> <C> <C>
Real estate loans $34,358 $166,056
Consumer loans 32,851 2,460
Commercial business loans 140 2,948
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$67,349 $171,464
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</TABLE>
ORIGINATION, PURCHASE AND SALE OF LOANS. The Corporation originates loans
secured by residential and commercial real estate as well as consumer and
commercial business loans in its primary lending area, which includes the three
county area of Western Maryland as well as surrounding counties in West Virginia
and Pennsylvania, through Bank officers who evaluate applications received at
all of the Bank's
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locations. Such applications are primarily received through referrals by
real estate agents, attorneys, builders and local automobile dealers, as well
as through customer walk-ins. The Corporation also originates loans secured
by residential real estate outside of its primary market area through a
network of correspondent lenders who offer the Bank's loan products to a
variety of customers throughout the Mid-Atlantic region. Loans originated
through correspondents help to add geographic diversity to the residential
portfolios and are underwritten according to the same strict guidelines as
loans originated at Bank locations in the primary market area. All loans are
centrally serviced and underwritten.
In the past, funds generated by the Corporation's operations have exceeded the
amount of loan demand experienced in the Bank's primary market area. As a
result, the Corporation purchased whole and participation interests in
residential, multi-family and commercial real estate mortgage loans originated
by other financial institutions secured by properties throughout the United
States. Going forward, the Corporation intends to expand its primary market
area and correspondent lending network in order to increase the amount of loans
originated and simultaneously reduce the amount of loans purchased. At June 30,
1996, the Corporation's loan portfolio contained $74.1 million of residential
and commercial real estate mortgage which were purchased from third parties.
Historically, the Corporation's asset and liability management strategy
emphasized the origination and purchase of adjustable rate residential and
commercial mortgage loans. More recently, the Corporation has initiated
policies intended to increase the percentage of fixed rate mortgage and consumer
loans held in the loan portfolio. At June 30, 1996, the Corporation's total
gross first mortgage loans outstanding amounted to $211.0 million , of which
$174.8 million had adjustable rates and $36.2 million were fixed-rate.
During fiscal 1996, 1995 and 1994, the Corporation sold residential mortgage
loans totaling $16.6 million, $5.0 million and $5.6 million, respectively.
Virtually all of the Corporation's single-family residential loans are
originated under terms and conditions which permit their sale in the secondary
market. The Corporation retains the servicing on all such loans which do not
meet minimum return on investment goals and are sold in the secondary markets.
The following table sets forth the Corporation's loan originations, purchases,
sales, principal repayments, other changes and transfers to real estate
acquired through foreclosure (REO) for the periods indicated:
<TABLE>
<CAPTION>
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(IN THOUSANDS) 1996 1995 1994
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<S> <C> <C> <C>
Loan originations and purchases:
Residential mortgages $ 24,767 $ 28,507 $ 68,212
Commercial real estate mortgages 45,092 4,342 2,618
Construction 3,512 4,210 3,506
Consumer 22,454 22,534 18,733
Commercial business 2,621 4,511 3,633
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98,446 64,104 96,702
Repayments on loans (62,064) (48,895) (94,964)
Loans sold (16,642) (5,031) (5,614)
Transfers to real estate acquired through foreclosure (1,078) (431) (535)
Other changes (775) (1,010) (1,252)
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$ 17,887 $ 8,737 $ (5,663)
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</TABLE>
Under federal law, loans-to-one-borrower may not exceed 15% of unimpaired
capital and surplus. As of June 30, 1996, the Bank was permitted to lend
approximately $6.3 million to one borrower under this standard. Loans in an
amount equal to an additional 10% of unimpaired capital and surplus also may be
made to a borrower if the loans are fully secured by readily marketable
securities. Higher limits may be available in certain circumstances. As of
June 30, 1996, the Bank had no outstanding loans and commitments to one
individual borrower which exceeded the Bank's lending limit to one borrower at
the time made or committed.
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LOAN UNDERWRITING POLICIES. The Corporation's lending activities are subject to
written non-discriminatory underwriting standards and loan origination
procedures prescribed by the Board of Directors and management. Detailed loan
applications are obtained to determine the borrower's ability to repay, and the
more significant items on these applications are verified through the use of
credit reports, financial statements and confirmations. Property valuations are
performed by independent outside appraisers approved by the Board of Directors.
Loans must be approved by the Bank's loan committees and, depending on the
amount of the loan, the Board of Directors.
Secured and unsecured consumer loans may be approved by certain employees who
have lending authority in amounts ranging from $2,500 to $20,000. The Bank's
internal loan committee includes eight employees. Certain members of this
committee have the authority to approve commercial real estate, residential and
consumer loans up to $100,000 jointly with their respective department heads.
All loans in excess of $250,000 require the approval of the Directors' loan
committee which is comprised of seven members; the Chairman of the Board,
President and Chief Executive Officer and six outside Directors.
It is the Corporation's policy to have a mortgage creating a valid lien on real
estate and to obtain an attorney's title opinion letter or, with respect to all
originated and purchased loans, a title insurance policy, which ensures that the
property is free of prior encumbrances. Borrowers must also obtain hazard
insurance polices prior to closing and, when the property is in a flood plain as
designated by the Department of Housing and Urban Development, flood insurance
policies. Many borrowers are also required to advance funds on a monthly basis
together with each payment of principal and interest to a mortgage escrow
account from which disbursements for items such as real estate taxes and
insurance are made.
The Corporation is permitted to lend up to 100% of the appraised value of the
real property securing a mortgage loan. However, if the amount of a residential
loan (including a construction loan originated in connection with the making of
a permanent loan) originated or refinanced exceeds 90% of the appraised value,
private mortgage insurance must be obtained on that loan as required by federal
regulations. The Corporation will originate a 95% loan on the appraised value
or selling price, whichever is lower, provided private mortgage insurance is
obtained on the principal amount of the loan over 80% of the appraised value or
selling price, whichever is less. The Corporation will typically require the
maintenance of private mortgage insurance until the loan-to-value ratio reaches
70% of the original appraisal. The loan-to-value ratio on second mortgage loans
cannot exceed 80% including the amount of the first mortgage on the loan. With
respect to construction loans for owner-occupied properties originated in
connection with the providing of the permanent financing, the Corporation will
lend up to 90% of the appraised value of the property on an as-completed basis.
The Corporation generally limits the loan-to-value ratio on multi-family and
commercial real estate mortgage loans, including construction loans with respect
to such properties, to 75%.
RESIDENTIAL MORTGAGE AND CONSTRUCTION LENDING. The Corporation offers single-
family residential mortgage loans with fixed and adjustable rates of interest.
At June 30, 1996, $126.8 million or 49.8% of the total loan portfolio consisted
of single-family residential mortgage loans. Of this amount, approximately
$28.4 million or 11.1% consisted of loans with fixed rates of interest and $98.4
million or 38.6% consisted of loans with adjustable rates of interest. During
fiscal 1996 and 1995, the Corporation purchased $666,000 and $7.3 million,
respectively, of single-family mortgage loans or interests therein, which
constituted 2.4% and 22.3%, respectively, of total single-family loan
originations and purchases during the periods.
Fixed rate residential loans are generally originated by the Corporation with 15
to 30 year terms. Substantially all of the Corporation's long-term, fixed rate
residential mortgage loans originated include "due-on-sale" clauses, which are
provisions giving the Corporation the right to declare a loan immediately due
and payable in the event, among other things, that the borrower sells or
otherwise disposes of the real property subject to the mortgage when the loan is
not repaid. The Corporation enforces due-on-sale clauses.
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In addition to standard fixed rate mortgage loans, the Corporation offers
adjustable-rate mortgage loans (ARMs) with 15 to 30 year terms, on which the
interest rate adjusts based upon changes in various indices which generally
reflect market rates of interest. One-year ARMs presently originated by the
Corporation have an interest rate which adjusts annually according to changes
in an index that is based upon the weekly average yield on United States
Treasury securities adjusted to a constant maturity of one year, as made
available by the Federal Reserve Board, plus a margin. The amount of any
increase or decrease in the interest rate is limited to 2% per year, with a
limit of 6% over the life of the loan. The Corporation also offers three, five,
seven and ten-year ARM loan products with margins and caps similar to the one-
year ARM product whose interest rates are fixed for the first three, five, seven
or ten years after the origination date and then reprice annually based upon an
appropriate index. The ARMs offered by the Corporation, as well as many other
thrift institutions, provide for initial rates of interest below the rates which
would prevail were the index used for repricing applied initially. ARMs involve
certain risks because as interest rates increase, the underlying payments
required of the borrower increase, thus increasing the potential for default.
At the same time, the marketability of the underlying collateral may be
adversely affected by higher interest rates. However, these risks have not had
an adverse effect on the Corporation to date.
The Corporation also grants loans to borrowers for the construction of owner-
occupied, single family dwellings in the Corporation's primary market area. At
June 30, 1996 the Bank had $2.5 million outstanding in residential construction
loans. Generally, the loan-to-value ratio for construction loans does not
exceed 75%, provided that with respect to construction/permanent loans for
single-family properties, the Corporation will lend up to 90% with private
mortgage insurance. The interest rate on the permanent portion of the financing
is set upon conversion to the permanent loan, based upon terms agreed to in the
loan commitment, including the index to be used, the interest-rate margin and
the frequency of the adjustment. The Corporation has also on occasion financed
the construction of certain commercial real estate construction projects and may
do so in the future; however, at June 30, 1996 and 1995 the Corporation had no
commercial construction loans outstanding.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL MORTGAGE LENDING. The
Corporation originates and purchases commercial real estate and multi-family
residential mortgage loans and has in its portfolio both whole loans and
participation interests. At June 30, 1996, the Corporation had $84.2 million,
or 33.0% of the Bank's total loan portfolio, invested in mortgages secured by
commercial real estate and multi-family residential properties.
Commercial real estate and multi-family mortgage loans are generally priced at
prevailing market interest rates at the time of origination. Loans originated
and those purchased in the secondary market are typically adjustable-rate loans.
The commercial real estate loans in the Corporation's portfolio are generally
secured by apartment buildings, hotels, office buildings, small retail shopping
centers, health care facilities and other income-producing properties. The
substantial majority of the Corporation's commercial real estate and multi-
family mortgage loan portfolio consists of participation interests in loans
purchased primarily from a select number of financial institutions. At June 30,
1996, $35.2 million of the Corporation's $84.2 million commercial real estate
and multi-family mortgage loans represents loans purchased in secondary markets.
The Corporation generally will not originate or purchase a commercial real
estate or multi-family mortgage loan with a loan balance of greater than 75% of
the appraised value of the property. In addition, the Corporation will
generally not originate or purchase an interest in a commercial real estate loan
unless the lead lender maintains at least a 25% interest. The Corporation
generally will limit its maximum origination or purchase under any one loan to
approximately $6.3 million. The Corporation requires a positive cash flow at
least sufficient to cover the debt service on all commercial real estate loans
including loans purchased.
At June 30, 1996, the Corporation did not have any loans classified as an
investment in acquisition, development and construction loans as defined by the
OTS.
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Commercial real estate and multi-family residential mortgage lending entails
significant additional risks as compared with single-family residential mortgage
lending. These loans typically involve large loan balances concentrated in
single borrowers or groups of related borrowers. In addition, the payment
experience on loans secured by income producing properties is typically
dependent on the successful operation of the related real estate project and
thus may be subject to a greater extent to adverse conditions in the real estate
market or in the economy generally.
CONSUMER LENDING, HOME EQUITY AND SECOND MORTGAGE LENDING. Under federal law,
the Corporation may make secured and unsecured consumer loans in an aggregate
amount up to 35% of the institution's total assets. The 35% limitation does not
include home equity loans (loans secured by the equity in the borrower's
residence but not necessarily for the purpose of improvement), home improvement
loans, or loans secured by deposit accounts. The Corporation offers consumer
loans in order to provide a broader range of financial services to its customers
and because the shorter terms and normally higher interest rates on such loans
help the Corporation maintain a profitable spread between its average loan yield
and its cost of funds. The Corporation has increased its emphasis on the
origination of consumer loans within its primary market area during 1996 and
1995. The increase in consumer lending was accomplished through marketing
techniques, including the targeting of specific customer profiles as well as the
development of business relationships with various entities, primarily new and
used car dealerships, which had not previously been targeted by the Corporation.
The Corporation has adopted underwriting standards for such lending designed to
maintain asset quality. The Corporation offers a variety of consumer loans,
including loans secured by deposit accounts, student education loans, automobile
loans, home equity loans and personal unsecured loans. On all consumer loans
originated, the Corporation's underwriting standards include a determination of
the applicant's payment history on other debts and an assessment of the
borrower's ability to meet existing obligations and payment on the proposed
loan. At June 30, 1996, the Corporation's consumer loan portfolio totaled $40.6
million or 15.9% of its total loan portfolio. Substantially all such loans have
fixed interest rates.
The Corporation's automobile loans consist of loans originated directly as well
as on an indirect basis through the purchase of contracts from local automobile
dealers. The automobile loans are primarily secured by liens on new and used
vehicles and are written as installment contracts for terms generally ranging
from three to five years. All such loans have fixed interest rates. Automobile
loans totaled $29.4 million or 11.5% of the Corporation's total loan portfolio
at June 30, 1996.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. The Corporation believes that the generally higher
yields earned on consumer loans compensate for the increased credit risk
associated with such loans and that consumer loans are important in its efforts
to maintain diversity as well as to shorten the average maturity of its loan
portfolio.
The Corporation originates home equity and second mortgage loans for its
portfolio. Such loans are typically made to customers who have existing loans
with the Corporation. At June 30, 1996, home equity and second mortgage loans
amounted to $9.2 million or 3.6% of the total loan portfolio.
COMMERCIAL BUSINESS LENDING. Commercial business loans and lines of credit of
both a secured and unsecured nature are made by the Corporation for business
purposes to incorporated and unincorporated businesses. Typically, these loans
are made for the purchase of equipment, to finance accounts receivable and to
finance inventory, as well as other business purposes. At June 30, 1996,
commercial business loans amounted to $3.3 million or 1.3% of the Corporation's
total loan portfolio.
LOAN SERVICING. The Corporation services all the loans it has originated. In
addition, fees are received for servicing loans which were originated by the
Corporation and sold to third-party investors. At June 30, 1996, loans serviced
for others amounted to $53.0 million. Loans purchased are generally serviced by
the
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financial institution which originated the loans. Those financial
institutions collect a fee for servicing the loans.
LOAN ORIGINATION FEES AND OTHER FEES. The Corporation receives income in the
form of loan origination and other fees on both loans originated and on loans
purchased in the secondary market. Such loan origination fees and certain
related direct loan origination costs are offset and the resulting net amount is
deferred and amortized over the life of the related loan as an adjustment of the
yield on the loan.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENT LOANS AND REO. A loan is considered delinquent and a late charge is
assessed when the borrower has not made a payment within seventeen days from the
payment due date. When a borrower fails to make a required payment on a loan,
the Corporation attempts to cure the deficiency by contacting the borrower. The
initial contact with the borrower is made shortly after the seventeenth day
following the due date for which a payment was not received. In most cases,
delinquencies are cured promptly.
If the delinquency exceeds 60 days, the Corporation works with the borrower to
set up a satisfactory repayment schedule. Loans are considered non-accruing
upon reaching 90 days delinquency, although the Corporation may be receiving
partial payments of interest and partial repayments of principal on such loans.
When a loan is placed in non-accrual status, previously accrued but unpaid
interest is deducted from interest income. The Corporation institutes
foreclosure action on secured loans only if all other remedies have been
exhausted. If an action to foreclose is instituted and the loan is not
reinstated or paid in full, the property is sold at a judicial or trustee's sale
at which the Corporation may be the buyer.
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations
and changes in the valuation allowance are included in loss on foreclosed real
estate. The Corporation generally attempts to sell its REO properties as soon
as practical upon receipt of clear title. The original lender typically handles
disposition of those REO properties resulting from loans purchased in the
secondary market.
At June 30, 1996, the Corporation's non-performing assets, which include non-
accrual loans, loans delinquent due to maturity, troubled debt restructuring and
REO, amounted to $6.4 million.
CLASSIFIED ASSETS. Regulations applicable to insured institutions require the
classification of problem assets as "substandard," "doubtful," or "loss"
depending upon the existence of certain characteristics as discussed below. A
category designated "special mention" must also be maintained for assets
currently not requiring the above classifications but having potential weakness
or risk characteristics that could result in future problems. An asset is
classified as substandard if not adequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any. A
substandard asset is characterized by the distinct possibility that the
Corporation will sustain some loss if the deficiencies are not corrected.
Assets classified as doubtful have all the weaknesses inherent in those
classified as substandard. In addition, these weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable and improbable. Assets classified as loss are
considered uncollectible and of such little value that their continuance as
assets is not warranted.
The Corporation's classification of assets policy requires the establishment of
valuation allowances for loan losses in an amount deemed prudent by management.
Valuation allowances represent loss allowances that have been established to
recognize the inherent risk associated with lending activities. When the
Corporation classifies a problem asset as a loss, the asset is charged off
within a reasonable period of time.
The Corporation regularly reviews the problem loans and other assets in its
portfolio to determine whether any require classification in accordance with the
Corporation's policy and applicable regulations. At June
7
<PAGE>
30, 1996, the Corporation's classified and criticized assets amounted to
$17.6 million with $5.8 million classified as substandard, $2.1 million
classified as doubtful, $747,000 classified as loss and $9.0 million
identified as special mention.
The following table sets forth information regarding the Corporation's non-
performing assets at the dates indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accruing loans delinquent more than 90 days:
Real estate loans $3,333 $2,756 $1,580 $3,873 $1,942
Consumer and commercial business 13 20 362 159 89
------ ------ ------ ------ ------
3,346 2,776 1,942 4,032 2,031
------ ------ ------ ------ ------
Total as a percentage of total assets 1.04% 0.84% 0.56% 1.17% 0.59%
------ ------ ------ ------ ------
Loans delinquent due to maturity:
Real estate loans 2,007 3,849 -- -- --
------ ------ ------ ------ ------
Total as a percentage of total assets 0.62% 1.17% -- -- --
------ ------ ------ ------ ------
Troubled debt restructuring 412 419 2,975 3,356 3,264
------ ------ ------ ------ ------
Total as a percentage of total assets 0.13% 0.13% 0.86% 0.98% 0.95%
------ ------ ------ ------ ------
REO 655 604 1,783 4,211 4,645
------ ------ ------ ------ ------
Total as a percentage of total assets 0.20% 0.18% 0.52% 1.23% 1.36%
------ ------ ------ ------ ------
Total non-performing assets $6,420 $7,648 $6,700 $11,599 $9,940
====== ====== ====== ======= ======
Total non-performing assets
as a percentage of total assets 1.99% 2.32% 1.94% 3.38% 2.90%
====== ====== ====== ======= ======
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The contractual amount of interest that would have been recorded on non-accrual
loans under their original terms during the year ended June 30, 1996 was
approximately $650,000. The amount of income actually recorded on such loans
was approximately $67,000 for the year ended June 30, 1996.
ALLOWANCE FOR LOAN LOSSES. Management establishes reserves for estimated losses
on loans based upon its evaluation of the pertinent factors underlying the types
and quality of loans; historical loss experience based on volume and types of
loans; trend in portfolio volume and composition; level and trend on non-
performing assets; detailed analysis of individual loans for which full
collectibility may not be assured; determination of the existence and
realizable value of the collateral and guarantees securing such loans; and the
current economic conditions affecting the collectibility of loans in the
portfolio. Loans are written off against the allowance for possible loan losses
when a property is disposed of and a loss is actually incurred.
The Corporation analyzes its loan portfolio and REO properties each month to
determine the adequacy of its allowance for losses. The allowances for loan and
REO losses are increased by provisions which are charged against income.
Management believes that the Corporation's allowance for losses at June 30, 1996
of $7.8 million is adequate to cover potential future losses on the portfolio.
8
<PAGE>
The following table sets forth an analysis of the allowance for losses on loans
receivable for the periods indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $8,590 $4,561 $3,841 $3,553 $4,050
Provision:
Real estate loans and
commercial business loans 480 5,435 300 320 292
Consumer loans 120 550 480 30 25
------ ------ ------ ------ ------
600 5,985 780 350 317
------ ------ ------ ------ ------
Charge-offs:
Real estate loans and
commercial business loans 1,529 1,950 7 39 1,118
Consumer loans 42 65 63 28 15
------ ------ ------ ------ ------
1,571 2,015 70 67 1,133
------ ------ ------ ------ ------
Recoveries:
Real estate loans and
commercial business loans 160 36 -- -- 319
Consumer loans 16 23 10 5 --
------ ------- ------ ------ ------
176 59 10 5 319
------ ------- ------ ------ ------
Balance at end of period $7,795 $8,590 $4,561 $3,841 $3,553
====== ====== ====== ====== ======
Ratio of net charge-offs
to average loans outstanding 0.57% 0.84% 0.03% 0.03% 0.32%
====== ======= ====== ====== ======
Balance at end of period
applicable to:
Real estate loans and
commercial business loans $6,574 $7,463 $3,942 $3,649 $3,368
Consumer loans 1,221 1,127 619 192 185
------ ------- ------ ------ ------
Balance at end of period $7,795 $8,590 $4,561 $3,841 $3,553
====== ====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures," effective July 1,
1995. Under SFAS No. 114, the allowance for loan losses related to "impaired
loans" is based on discounted cash flows using the impaired loan's initial
effective interest rate at the discount rate, or the fair value of the
collateral for collateral dependent loans. A loan is impaired when it meets the
criteria to be placed on non-accrual, is delinquent due to maturity, is a
renegotiated loan or management determines that a deficiency exists in the
collateral value of a collateral dependent loan. Loans which are evaluated for
impairment pursuant to SFAS No. 114 are assessed on a loan-by-loan basis, and
include only those loans that meet the definition of impairment. Large groups
of smaller balance homogeneous loans, such as credit cards, loans secured by
first and second liens on residential properties and other consumer loans are
evaluated collectively for impairment.
INTEREST-EARNING DEPOSITS
The Corporation maintains a daily investment account at the FHLB of Atlanta. The
account consists generally of excess funds which are available to meet loan
funding requirements, investment and mortgage-backed securities purchases and
withdrawal of deposit accounts. Such funds also satisfy, in part, the OTS
liquidity requirement. The account earns interest daily at a rate which
approximates the rate on federal funds. Such funds are withdrawable upon demand
and are not federally insured. Interest bearing deposits totaled $5.6 million,
$3.1 million and $24.9 million at June 30, 1996, 1995 and 1994, respectively.
9
<PAGE>
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following table summarizes the Corporation's investment and mortgage-backed
securities at June 30:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
1996:
Equity security $ 50 $ 25 $ -- $ 75
---------- ------ ------ ---------
$ 50 $ 25 $ -- $ 75
========== ====== ====== =========
1995:
U.S. government and agency securities $ 11,240 $ 159 $ 73 $ 11,326
---------- ------ ------ ---------
$ 11,240 $ 159 $ 73 $ 11,326
========== ====== ===== =========
HELD TO MATURITY:
1996:
U.S. government and agency securities $ 51,476 $ 204 $ 306 $ 51,374
--------- ------ ------ ---------
$ 51,476 $ 204 $ 306 $ 51,374
========= ====== ====== =========
1995:
U.S. government and agency securities $ 69,787 $ 483 $ 518 $ 69,752
State and municipal securities 50 1 -- $ 51
--------- ------ ------ ---------
$ 69,837 $ 484 $ 518 $ 69,803
========= ====== ====== =========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the maturities and the respective yields of the
Corporation's investment and mortgage-backed securities portfolio at June 30,
1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Available for sale Held to maturity
----------------------------------------- --------------------------------------
Amoritzed Fair Amortized Fair
cost value Yield cost value Yield
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 50 $ 75 3.00% $ 2,001 $ 2,002 5.97%
Due from one year to five years -- -- -- 6,330 6,315 6.89%
Due from five to ten years -- -- -- 1,958 1,955 6.41%
Due after ten years -- -- -- 41,187 41,102 7.01%
----- ----- --------- ---------
$ 50 $ 75 $ 51,476 $ 51,374
====== ===== ========= =========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As a member of the FHLB system, the Bank is required to meet certain minimum
levels of liquid assets which are subject to change from time to time. The
Corporation's liquidity fluctuates with deposit flows, funding requirements for
loans and other assets and the relative returns between liquid investments and
various loan products.
The Board of Directors has established an investment policy, which provides for
priorities for the Corporation's investments with respect to the safety of the
principal amount, liquidity, generation of income and capital appreciation. The
policy permits investment in various types of liquid assets including, among
others, U.S. Treasury and federal agency securities, municipal obligations,
investment grade corporate bonds, and federal funds.
SOURCES OF FUNDS
The Corporation's primary sources of funds for its lending and investment
activities are deposits, principal and interest payments on loans and mortgage-
backed securities and interest on securities and interest-bearing deposits.
Additionally, the Corporation occasionally uses advances from the FHLB of
Atlanta.
10
<PAGE>
DEPOSITS. The Corporation offers a wide variety of deposit accounts with a
range of interest rates and terms. The primary types of deposit accounts are
regular savings, checking and money market accounts and certificate accounts.
The primary source of these deposits is the market area in which the Bank's
offices are located. The Corporation does not use brokers to obtain deposits
but relies instead on customer service, advertising and existing relationships
with customers to attract and retain deposits. Deposit flows are significantly
influenced by the general state of the economy, general market interest rates
and the effects of competition.
The Corporation typically pays competitive interest rates within its market area
but does not seek to match the highest rates paid by competing institutions in
its primary market area. Due to the low levels of interest rates during the
past several years, many depositors have elected to maintain short-term
deposits. This shift in depositors preference has caused a decrease in the
Corporation's long-term certificates. The net decrease in deposits before
interest was credited during the last three fiscal years was not attributable to
any specific management strategy seeking to limit deposits, although management
has determined not to pay interest rates higher than those generally prevailing
in its primary market area solely to prevent the decrease in deposits it has
experienced.
The following table sets forth deposits by type as of June 30:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994
----------------------------- --------------------------- ----------------------------
Rate % Rate % Rate %
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Time deposits 5.29% $ 167,088 60.8% 5.31% $ 173,326 61.2% 4.71% $179,314 59.6%
Passbook and other 2.50% 50,597 18.4% 2.50% 55,281 19.5% 2.53% 63,625 21.1%
Checking and money market 2.37% 57,071 20.8% 2.28% 54,753 19.3% 2.06% 58,269 19.3%
--------- ----- --------- ----- -------- -----
$ 274,756 100.0% $ 283,360 100.0% $ 301,208 100.0%
========= ====== ========= ====== ========= ======
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth, by various rate categories, the amount of time
deposits outstanding as of June 30, 1996 which mature in the periods presented:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Less than 6-12 More than
Rate 6 months months 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0.00-2.99% $ 8 $ -- $ -- $ -- $ -- $ -- $ 48 $ 56
3.00-3.99 716 -- -- 2 -- -- -- 718
4.00-4.99 22,118 18,535 8,338 5,323 3,909 890 358 59,471
5.00-5.99 63 23,038 19,290 12,011 18,307 7,137 1,749 81,595
6.00-6.99 -- -- 754 1,517 8,859 6,080 2,944 20,154
7.00-7.99 -- -- 5 7 325 1,621 2,186 4,144
8.00-8.99 -- -- -- -- -- -- 950 950
--------- --------- --------- --------- --------- --------- -------- ----------
$ 22,905 $ 41,573 $ 28,387 $ 18,860 $ 31,400 $ 15,728 $ 8,235 $ 167,088
========= ========= ========= ========= ========= ========= ======== ==========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth, by various rate categories, the amount of
certificate of deposit accounts outstanding as of June 30:
- ----------------------------------------------------------------------------
(IN THOUSANDS)
Rate 1996 1995 1994
- -----------------------------------------------------------------------------
0.00-3.99% $ 774 $ 4,318 $ 69,896
4.00-4.99 59,471 65,528 48,411
5.00-5.99 81,595 66,486 30,047
6.00-6.99 20,154 25,581 13,585
7.00-7.99 4,144 9,432 12,193
8.00-8.99 950 1,981 5,080
9.00-12.99 -- -- 102
---------- ---------- ----------
$ 167,088 $ 173,326 $ 179,314
========== ========== ==========
- -----------------------------------------------------------------------------
11
<PAGE>
At June 30, 1996, the Corporation had certificates of deposit in amounts of
$100,000 or more maturing as follows:
- ----------------------------------------------------------------------------
(IN THOUSANDS) Amount
- ----------------------------------------------------------------------------
Three months or less $ --
More than three through six months 12,421
More than six through twelve months 5,898
More than twelve months 5,203
---------
$ 23,522
=========
- ----------------------------------------------------------------------------
BORROWINGS. While deposits are the primary source of funds for the
Corporation's lending and investment activities and general business purposes,
the Corporation may use advances from the FHLB of Atlanta to supplement its
supply of lendable funds and to meet deposit withdrawal requirements, if
necessary. Advances from the FHLB are secured by the Bank's stock in the FHLB
and a portion of its first mortgage loans. The FHLB has a variety of different
advance programs, each with different interest rates, provisions, maximum sizes
and maturities. As of June 30, 1996, the Bank had no outstanding FHLB advances.
SUBSIDIARIES
The Bank is permitted by current OTS regulations to invest an amount up to 2% of
its assets in stock, paid-in surplus and secured and unsecured loans in service
corporations. The Bank may invest an additional 1% of its assets when the
additional funds are utilized primarily for community, inner-city or community
development purposes. In addition, federally chartered savings institutions
under certain circumstances also may make conforming loans to service
corporations in which the lender owns or holds more than 10% of the capital
stock in an aggregate amount not to exceed 50% of regulatory capital. Savings
institutions meeting these requirements also may make, subject to the loans to
one borrower limitations, an unlimited amount of conforming loans to service
corporations meeting specified requirements in which the lender does not own or
hold more than 10% of the capital stock.
At June 30, 1996, the Bank was authorized under the current regulations to have
a maximum investment of $6.4 million in its service corporations, exclusive of
the additional 1% of assets investment permitted for community, inner-city
purposes or community development but inclusive of the ability to make
conforming loans to its subsidiaries.
At June 30, 1996, the Bank had an investment of $5.9 million in its one wholly-
owned subsidiary, MASC. MASC is engaged in the ownership and management of real
estate, in particular the First Federal Building in Cumberland. MASC's cost of
the office building and improvements was $6.8 million which is being depreciated
on a straight-line basis over ten to forty years. Furniture, fixtures and
equipment costs totaled $718,000 and were fully depreciated at June 30, 1996.
The Bank (which leases approximately 80% of the total space available) leases
its main office facilities in the First Federal Building from MASC. MASC leases
apartment units and additional office space in the First Federal Building to the
general public. At June 30, 1996, 97% of the total space was leased.
MASC has one wholly-owned subsidiary, MAUA, in which it had an investment of
$16,000 as of June 30, 1996. MAUA is engaged in general insurance and life
insurance agency activities related primarily to the extension of credit to the
Bank's customers.
REGULATION
Set forth below is a brief description of those laws and regulations which,
together with the descriptions of laws and regulations contained elsewhere
herein, are deemed material to an understanding of the extent to
12
<PAGE>
which the Corporation and the Bank are regulated. The description of the
laws and regulations hereunder, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and
is qualified in its entirety by reference to applicable laws and regulations.
THE CORPORATION
GENERAL. The Corporation, as a thrift holding company within the meaning of the
Home Owners Loan Act (HOLA), is required to register with the OTS and will be
subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a thrift holding company, the Bank is subject
to certain restrictions in its dealings with the Corporation and affiliates
thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the activities
of a thrift holding company which holds only one subsidiary savings institution.
However, if the Director of the OTS determines that there is reasonable cause to
believe that the continuation by a thrift holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, the Director may impose such restrictions as
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of thrift
holding companies, if the savings institution subsidiary of such a holding
company fails to meet the Qualified Thrift Lender (QTL) test, as discussed under
"-- The Bank -- Qualified Thrift Lender Test," then such holding company also
shall become subject to the activities restrictions applicable to multiple
thrift holding companies and, unless the savings institution requalifies as a
QTL within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "-- The
Bank -- Qualified Thrift Lender Test."
If the Corporation were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Corporation
would thereupon become a multiple thrift holding company. Except where such
acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
as set forth below, the activities of the Corporation and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple thrift holding company or subsidiary thereof which is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple thrift holding company or subsidiary thereof any business
activity, upon prior notice to, and no objection by the OTS, other than: (i)
furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987 to be engaged
in by multiple thrift holding companies; or (vii) unless the Director of OTS by
regulation prohibits or limits such activities for thrift holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. Those activities described in (vii) above also must be
approved by the Director of the OTS prior to being engaged in by a multiple
thrift holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (such as the Corporation) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such
13
<PAGE>
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and other similar transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institutions may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate
which engages only in activities which are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes
or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At June 30, 1996, the Bank was in compliance with the above
restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, thrift
holding companies are prohibited from acquiring, without prior approval of the
Director of the OTS, (i) control of any other savings institution or thrift
holding company or substantially all the assets thereof or (ii) more than 5% of
the voting shares of a savings institution or holding company thereof which is
not a subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a thrift holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other thrift holding company.
The Director of the OTS may only approve acquisitions resulting in the formation
of a multiple thrift holding company which controls savings institutions in more
than one state if (i) the multiple thrift holding company involved controls a
savings institution which operated a home or branch office located in the state
of the institution to be acquired as of March 5, 1987; (ii) the acquirer is
authorized to acquire control of the savings institution pursuant to the
emergency acquisition provisions of the Federal Deposit Insurance Act (FDIA);
or (iii) the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by the state-chartered
institutions or thrift holding companies located in the state where the
acquiring entity is located (or by a holding company that controls such state-
chartered savings institutions).
Under the Bank Holding Company Act of 1956, the Federal Reserve Bank (FRB) is
authorized to approve an application by a bank holding company to acquire
control of a savings institution. In addition, a bank holding company that
controls a savings institution may merge or consolidate the assets and
liabilities of the savings institution with, or transfer assets and liabilities
to, any subsidiary bank which is a member of the Bank Insurance Fund (BIF) with
the approval of the appropriate federal banking agency and the FRB. As a result
of these provisions, there have been a number of acquisitions of savings
institutions by bank holding companies in recent years.
THE BANK
GENERAL. The OTS has extensive authority over the operations of federally
chartered savings institutions. As part of this authority, savings institutions
are required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS and the FDIC. The investment and lending authority of
savings institutions are prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not permitted by
such laws and regulations. Those laws and regulations
14
<PAGE>
generally are applicable to all federally chartered savings institutions and
may also apply to state-chartered savings institutions. Such regulation and
supervision is primarily intended for the protection of depositors.
The OTS' enforcement authority over all savings institutions and their holding
companies includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
threat to the FDIC. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS an opportunity to
take such action.
Both SAIF and BIF are statutorily required to be capitalized to a ratio of 1.25%
of insured reserve deposits. While the BIF has reached the required reserve
ratio, the SAIF is not expected to be recapitalized until 2002 at the earliest.
Legislation has authorized $8 billion for the SAIF; however, such funds only
become available to the SAIF if the FDIC determines that the funds are needed to
cover losses of the SAIF and several other stringent criteria are met.
The FDIC has established a new assessment rate schedule of 4-31 basis points for
BIF members which begins on September 30, 1995. Under the schedule,
approximately 91% of BIF members are now paying the lowest assessment rate of 4
basis points. With respect to SAIF member institutions, the existing assessment
rate of 23-31 basis points applicable to SAIF member institutions, described
below, has been retained.
Under current FDIC regulations, SAIF member institutions are assigned to one of
three capital groups which are based solely on the level of an institution's
capital -- "well capitalized," "adequately capitalized," and "undercapitalized."
These three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy to
those which are considered to be of substantial supervisory concern. The matrix
so created results in nine assessment risk classifications, with rates ranging
from .23% for well capitalized, healthy institutions to .31% for
undercapitalized institutions with substantial supervisory concerns. The
insurance premiums for the Bank for the first semi-annual period in 1995 was
.23% (per annum) of insured deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result
in termination of the Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions are
required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a case-
by-case basis.
15
<PAGE>
Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions
must maintain "tangible" capital equal to at least 1.5% of adjusted total
assets, "core" capital equal to at least 3.0% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8.0% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings institution's intangible assets, with only a limited exception
for purchased mortgage servicing rights. The Bank had no goodwill or other
intangible assets at June 30, 1996. Both core and tangible capital are further
reduced by an amount equal to a savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). These adjustments do not materially
affect the Bank's regulatory capital.
In determining compliance with the risk-based capital requirement, a savings
institution is allowed to include both core capital and supplementary capital in
its total capital, provided that the amount of supplementary capital included
does not exceed the savings institution's core capital. Supplementary capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as core capital; subordinated debt and
intermediate-term preferred stock; and general allowances for loan losses up to
a maximum of 1.25% of risk-weighted assets. In determining the required amount
of risk-based capital, total assets, including certain off-balance sheet items,
are multiplied by a risk weight based on the risks inherent in the type of
assets. The risk weights assigned by the OTS for principal categories of assets
are (i) 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the U.S. Government;
(ii) 20% for securities (other than equity securities) issued by U.S.
Government-sponsored agencies and mortgage-backed securities issued by, or fully
guaranteed as to principal and interest by, the FNMA or the FHLMC, except for
those classes with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent one- to four-family
first lien mortgage loans not more that 90 days delinquent and having a loan-to-
value ratio of not more than 80% at origination unless insured to such ratio by
an insurer approved by the FNMA or the FHLMC, qualifying residential bridge
loans made directly for the construction of one- to four-family residences and
qualifying multi-family residential loans; and (iv) 100% for all other loans
and investments, including consumer loans, commercial loans, and one- to four-
family residential real estate loans more than 90 days delinquent, and for
repossessed assets.
In August 1993, the OTS adopted a final rule incorporating an interest-rate risk
component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating its risk-based capital. As a result, such an
institution will be required to maintain additional capital in order to comply
with the risk-based capital requirement. An institution with a greater than
"normal" interest rate risk is defined as an institution that would suffer a
loss of net portfolio value exceeding 2.0% of the estimated economic value of
its assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component will be
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2.0% multiplied by the economic
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject however to a two quarter "lag" time between the reporting date of
the data used to calculate an institution's interest rate risk and the effective
date of each quarter's interest rate risk component. However, in October 1994
the Director of the OTS indicated that it would waive the capital deductions for
institutions with a greater than "normal" risk until the OTS publishes an
appeals process. On August 21, 1995, the OTS released Thrift Bulletin 67 which
established (i) an appeals process to handle "requests for adjustments" to the
interest rate risk component and (ii) a process by which "well-capitalized"
institutions may obtain authorization to use their own
16
<PAGE>
interest rate risk model to determine their interest rate risk component.
The Director of the OTS indicated, concurrent with the release of Thrift
Bulletin 67, that the OTS will continue to delay the implementation of the
capital deduction for interest rate risk pending the testing of the appeals
process set forth in Thrift Bulletin 67.
Any savings institution that fails any of the capital requirements is subject to
possible enforcement actions by the OTS or the FDIC. Such actions could include
a capital directive, a cease and desist order, civil money penalties, the
establishment of restrictions on the institution's operations, termination of
federal deposit insurance and the appointment of a conservator or receiver. The
OTS' capital regulation provides that such actions, through enforcement
proceedings or otherwise, could require one or more of a variety of corrective
actions.
LIQUIDITY REQUIREMENTS. All savings institutions are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings institutions. At the present time, the required minimum liquid
asset ratio is 5%. At June 30, 1996, the Bank's liquidity ratio was 6.93%.
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by savings
institutions, which include cash dividends, stock redemptions or repurchases,
cash-out mergers, interest payments on certain convertible debt and other
transactions charged to the capital account of savings institution to make
capital distributions. Generally, the regulation creates a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed distribution
meets or exceeds its fully phased-in capital requirements (Tier 1 institutions)
may make capital distributions during any calendar year equal to the higher of
(i) 100% of net income for the calendar year-to-date plus 50% of its "surplus
capital ratio" at the beginning of the calendar year or (ii) 75% of net income
over the most recent four-quarter period. The "surplus capital ratio" is
defined to mean the percentage by which the institution's ratio of total capital
to assets exceeds the ratio of its fully phased-in capital requirement to
assets. "Fully phased-in capital requirement" is defined to mean an
institution's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the institution. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions, including possible prohibition without
explicit OTS approval. See "Regulatory Capital Requirements."
Tier 2 institutions, which are institutions that before and after the proposed
distribution meet or exceed their minimum capital requirements, may make capital
distributions up to a specified percentage of their net income during the most
recent four quarter period, depending on how close the institution is to meeting
its fully phased-in capital requirements. Tier 3 institutions, which are
institutions that do not meet current minimum capital requirements, or which
have been otherwise notified by the OTS that it will be treated as a Tier 3
institution because they are in need of more than normal supervision, cannot
make any capital distribution without obtaining OTS approval prior to making
such distributions.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit 30 days written notice to the OTS prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. At June 30, 1996, the Bank was a Tier 1
institution for purposes of this regulation.
17
<PAGE>
In December 1994, the OTS published a notice of proposed rulemaking to amend its
capital distribution regulation. Under the proposal, institutions would be
permitted to only make capital distributions that would not result in their
capital being reduced below the level required to remain "adequately
capitalized." Because the Bank is a subsidiary of a holding company, the
proposal would require the Bank to provide notice to the OTS of its intent to
make a capital distribution. The Bank does not believe that the proposal will
adversely affect its ability to make capital distributions if it is adopted
substantially as proposed.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets, with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. As
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another category
designated "special mention" also must be established and maintained for assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as substandard, doubtful or loss. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge-off such amount. General loss allowances established
to cover possible losses related to assets classified substandard or doubtful
may be included in determining an institution's regulatory capital up to certain
amounts, while specific valuation allowances for loan losses do not qualify as
regulatory capital. Federal examiners may disagree with an insured
institution's classifications and amounts reserved.
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. OTS policy permits interstate
branching to the full extent permitted by statute (which is essentially
unlimited). Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its home office unless the institution meets the IRS'
domestic building and loan test (generally, 60% of a thrift's assets must be
housing-related) (IRS Test). The IRS Test requirement does not apply if, among
other things, the law of the state where the branch would be located would
permit the branch to be established if the federal savings institution were
chartered by the state in which its home office is located. Furthermore, the
OTS will evaluate a branching applicant's record of compliance with the
Community Reinvestment ACT of 1977 (CRA). An unsatisfactory CRA record may be
the basis for denial of a branching application.
QUALIFIED THRIFT LENDER TEST. All savings institutions are required to meet a
QTL test to avoid certain restrictions on their operations. A savings
institution that does not meet the QTL test must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the savings
institution ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
Currently, the QTL test requires that 65% of an institution's "portfolio assets"
(as defined) consist of certain housing and consumer-related assets on a monthly
average basis in 9 out of every 12 months. Assets that qualify without limit
for inclusion as part of the 65% requirement are loans made to purchase,
refinance, construct, improve or repair domestic residential housing and
manufactured housing; home
18
<PAGE>
equity loans; mortgage-backed securities (where the mortgages are secured by
domestic residential housing or manufactured housing); stock issued by the
FHLB of Atlanta; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and sold
within 90 days of origination; 100% of consumer and educational loans
(limited to 10% of total portfolio assets); and stock issued by the FHLMC or
the FNMA. Portfolio assets consist of total assets minus the sum of (i)
goodwill and other intangible assets, (ii) property used by the savings
institution to conduct its business, and (iii) liquid assets up to 20% of
the institution's total assets. At June 30, 1996, the qualified thrift
investments of the Bank were approximately 71.1% of its portfolio assets.
ACCOUNTING REQUIREMENTS. Applicable OTS accounting regulations and reporting
requirements apply the following standards: (i) regulatory reports will
incorporate Generally Accepted Accounting Principles (GAAP) when GAAP is used
by federal banking agencies; (ii) savings institution transactions,
financial condition and regulatory capital must be reported and disclosed in
accordance with OTS regulatory reporting requirements that will be at least
as stringent as for national banks; and (iii) the Director of the OTS may
prescribe regulatory reporting requirements more stringent that GAAP whenever
the Director determines that such requirements are necessary to ensure the
safe and sound reporting and operation of savings institutions.
The accounting principles for depository institutions are currently
undergoing review to determine whether the historical cost model or
market-based measure of valuation is the appropriate measure for reporting
the assets of such institutions in their financial statements. Such proposal
is controversial because any change in applicable accounting principles which
requires the depository institutions to carry mortgage-backed securities and
mortgage loans at fair market value could result in substantial losses to
such institutions and increased volatility in their liquidity and operations.
Currently, it cannot be predicted whether there may be any changes in the
accounting principles for depository institutions in this regard beyond those
imposed by SFAS No. 115 or when any such changes might become effective.
FHLB SYSTEM. The Bank is a member of the FHLB of Atlanta, which is one of 12
regional FHLBs that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans
to members (i.e., advances) in accordance with policies and procedures
established by the Board of Directors of the FHLB. At June 30, 1996, the
Bank had no FHLB advances. See "Business -- Sources of Funds -- Borrowings."
As a member, the Bank is required to purchase and maintain stock in the FHLB
of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At June 30, 1996, the Bank had $2.1 million in
FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid in the
past and could continue to do so in the future. These contributions also
could have an adverse effect on the value of FHLB stock in the future.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. As of June 30, 1996,
no reserves were required to be maintained on the first $4.2 million of
transaction accounts, reserves of 3% were required to be maintained against
the next $54.0 million of net transaction accounts (with such dollar amounts
subject to adjustment by the FRB), and a reserve of 10% (which is subject to
adjustment by the FRB to a level between 8% and 14%) against all remaining
net transaction accounts. Because required reserves must be maintained in
the form of vault cash or a noninterest-bearing
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<PAGE>
account at a Federal Reserve Bank, the effect of this reserve
requirement is to reduce an institution's earning assets.
FEDERAL AND STATE TAXATION
FEDERAL INCOME TAXATION. The Corporation, the Bank and its subsidiaries file
a consolidated federal income tax return. Consolidated returns have the
effect of eliminating intercompany distributions, including dividends, from
the computation of consolidated taxable income for the taxable year in which
the distributions occur.
As a thrift institution, the Bank has been permitted to deduct from its gross
income each year an amount equal to the reasonable addition to its reserve
for bad debts. Under current law, this deduction, referred to as the "bad
debt reserve deduction," may be calculated under the "experience" method or
under the "percentage of taxable income" method.
Pursuant to the percentage of taxable income method, the bad debt reserve
deduction is equal to a statutory percentage of taxable income. The
statutory percentage is equal to 8%, so long as 60% of the Bank's assets are
"qualified assets." In addition, the amount of the annual bad debt reserve
deduction may not exceed:
(i) an amount which would cause the accumulated bad debt reserve to
exceed 6% of qualifying real property loans; or
(ii) an amount which would cause the annual addition to the
accumulated bad debt reserve to exceed the amount by which 12%
of savings accounts at year-end exceeds the sum of surplus,
undivided profits and reserves at the beginning of the year.
For purposes of calculating the bad debt reserve deduction under the
"percentage of taxable income" method, a thrift institution is required to
make certain adjustments to its taxable income, including (i) to reduce its
taxable income by its allocable share of taxable loss generated by other
members of the consolidated group which are thrift institutions or
functionally related activities of members which are not thrift institutions
and (ii) to increase its taxable income by its allocable share of income
generated by thrift institution members and by functionally related
activities of nonthrift institution members to the extent taxable income has
been previously reduced by such income.
Pursuant to the "experience" method, the bad debt deduction is allowed for
the amount necessary to increase the accumulated bad debt reserve to the
balance of the reserve at December 31, 1987 or, if greater, a reserve
determined on the basis of actual net charge-offs during the most recent six
year period.
The Bank must establish a reserve equal to the bad debt reserve deductions
which it has taken. If the Bank were to distribute cash or property to the
Corporation having a total fair market value in excess of its accumulated
earnings and profits, the Bank would be required to recognize as income an
amount, net of the tax which would be incurred with respect to such
recognition of income, equal to the lesser of: (i) the extent to which the
fair market value of such distribution exceeds the earnings and profits of
the Bank, or (ii) the amount of the accumulated bad debt reserve of the Bank
in excess of what would have been allowed on the basis of actual experience.
As of June 30, 1996, the Bank had retained income of $10.5 million with
respect to which a reserve for federal income taxes has not been established.
Legislation adopted in August 1996 (i) repeals the provision of the Internal
Revenue Code of 1986 (Code) which authorizes use of the percentage of taxable
income method by qualifying savings institutions to determine deductions for
bad debts, effective for taxable years beginning after 1995, and (ii)
requires that a savings institution recapture for tax purposes (i.e. take
into income) over a six-year period it applicable excess reserves, which for
savings institution such as the Bank which is a "small bank," as defined in
the Code, generally is the excess of the balance of its bad debt reserves as
of the close of its last taxable year beginning before January 1, 1996 over
the balance of such reserves as of the close of its last taxable year
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<PAGE>
beginning before January 1, 1988, which recapture would be suspended for any
tax year that begins after December 31, 1995 and before January 1, 1998 (thus
a maximum of two years) in which a savings institution originates an amount
of residential loans which is not less than the average of the principal
amount of such loans made by a savings institution during its six most recent
taxable years beginning before January 1, 1996. As an institution with less
than $500.0 million is assets, the Bank can elect to either use the
experience method available to commercial banks of this size or it can adopt
the specific charge-off method applicable to "large banks" (banks with total
assets in excess of $500.0 million).
The above-referenced legislation also repeals certain provisions of the Code
that only apply to thrift institutions to which Section 593 applies: (i) the
denial of a portion of certain tax credits to a thrift institution; (ii) the
special rules with respect to the foreclosure of property securing loans of a
thrift institution; (iii) the reduction in the dividends received deduction
of a thrift institution; and (iv) the ability of a thrift institution to use
a net operating loss to offset its income from a residual interest in a real
estate mortgage investment conduit.
The Corporation is subject to an alternative minimum tax which is imposed to
the extent it exceeds the Corporation's regular income tax for the year. The
alternative minimum tax is imposed at the rate of 20% of a specially computed
tax base. Included in this base is a number of preference items, including
the following: (i) 100% of the excess of a savings institution's bad debt
deduction over the amount that would have been allowable on the basis of
actual experience, and (ii) interest on certain tax-exempt bonds issued after
August 7, 1986.
MARYLAND STATE TAXATION. The State of Maryland generally imposes a franchise
tax computed at a rate of 7% of net earnings upon thrift institutions. For
the purpose of the 7% franchise tax, net earnings are defined as the net
income of the thrift institution as determined for federal corporate income
tax purposes, plus (i) interest income from obligations of the United States,
of any state, including Maryland, and of any county, municipal or public
corporation authority, special district or political subdivision of any
state, including Maryland, and (ii) any profit realized from the sale or
exchange of bonds issued by the state of Maryland or any of its political
subdivisions.
PERSONNEL
At June 30, 1996, the Bank had 114 full-time employees and 33 part-time
employees. The employees are not represented by a collective bargaining
unit, and the Bank considers its relationship with its employees to be good.
Reference is made to Part III of this report for information on officers and
directors and for a description of certain compensation and benefit programs
offered to employees.
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ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
offices and real property of the Corporation as of June 30, 1996.
- ------------------------------------------------------------------------------
Lease Annual
Owned or expiration rent or net
Location leased date book value
- ------------------------------------------------------------------------------
Main Office:
118 Baltimore Street Owned -- $5,271,000
Cumberland, MD 21502
Branch Offices:
Braddock Square Leased August 31, 1998 $ 23,000
Winchester and Vocke Roads
LaVale, MD 21502
Tri-Towns Owned -- $ 158,000
Tri-Towns Plaza
Westernport, MD 21562
Industrial Boulevard Owned -- $ 265,000
1200 Industrial Boulevard
Cumberland, MD 21502
Frostburg Owned -- $1,241,000
10600 New Georges Creek Road, S.W.
Frostburg, MD 21532
Oakland Owned -- $ 911,000
305 East Oak Street
Oakland, MD 21550
Country Club Mall Leased December 31, 2001 $ 22,000
Country Club Mall
LaVale, MD 21502
Center City Motor Bank Owned -- $ 260,000
122 Union Street
Cumberland, MD 21502
Motor Bank at Country Club Mall Owned -- $ 784,000
Country Club Mall
LaVale, MD 21502
Hagerstown Owned -- $ 431,000
32 North Potomac Street
Hagerstown, MD 21740
- ------------------------------------------------------------------------------
22
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Corporation is subject to a number of asserted and unasserted potential
legal claims encountered in the normal course of business. In the opinion of
both management and counsel, there is no present basis to conclude that the
resolution of these claims will have a material adverse impact on the
consolidated financial condition or results of operations of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Corporation to its stockholders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from the section
captioned "Stock and Dividend Information" on pages 41 to 42 of the
Corporation's 1996 Annual Report to Stockholders (Annual Report).
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from the section
captioned "Selected Consolidated Financial Data" on page 1 of the
Corporation's 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required herein is incorporated by reference from the section
captioned "Management's Discussion and Analysis" on pages 4 to 17 of the
Corporation's 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is incorporated by reference from pages 18 to
40 of the Corporation's 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information required herein is incorporated by reference from the
subsection captioned "Election of Directors" on pages 6 to 7 of the
Corporation's Proxy Statement for the 1996 Annual Meeting of Stockholders
(Proxy Statement).
EXECUTIVE OFFICERS
The following sets forth certain information with respect to the executive
officers of the Corporation and the Bank who are not directors, including
their business experience for at least the past five years.
Kenneth W. Andres, age 54, has been the Executive Vice President and Chief
Lending Officer of the Corporation and the Bank since January 1995.
Previously, Mr. Andres was Senior Vice President and Chief Lending Officer of
Johnstown Savings Bank, Johnstown, Pennsylvania, until July 1994.
William C. Marsh, age 30, has been the Executive Vice President and Chief
Financial Officer of the Corporation and the Bank since February 1995.
Previously, Mr. Marsh, who is a certified public accountant, was a manager
with KPMG Peat Marwick LLP, Pittsburgh, Pennsylvania, until February 1995.
R. Craig Pugh, age 46, has been the Executive Vice President and Chief of
Operations of the Corporation and the Bank since January 1995. Previously
Mr. Pugh was Senior Vice President -- Operations of Johnstown Savings Bank,
Johnstown, Pennsylvania, until July 1994.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the section
captioned "Executive Compensation" on pages 12 to 14 of the Corporation's
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein in incorporated by reference from the section
captioned "Beneficial Ownership of Common Stock by Certain Beneficial Owners
and Management" on pages 9 to 11 of the Corporation's Proxy Statement.
Management of the Corporation knows of no arrangements, including any pledge
by any person of securities of the Corporation, the operation of which may at
a subsequent date result in a change of control of the registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the
subsection captioned "Indebtedness of Management" on page 17 of the Proxy
Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS FILED
The consolidated financial statements listed below are from the 1996 Annual
Report and Part II -- Item 8. Page references are to said Annual Report.
CONSOLIDATED FINANCIAL STATEMENTS
First Financial Corporation of Western Maryland and Subsidiaries:
Report of Independent Certified Public Accountants, page 18
Consolidated Statements of Financial Condition, page 19
Consolidated Statements of Operations, page 20
Consolidated Statements of Stockholders' Equity, page 21
Consolidated Statements of Cash Flows, page 22
Notes to Consolidated Financial Statements, page 23
REPORTS ON FORM 8-K
The Corporation filed a Form 8-K dated April 17, 1996 to report consolidated
net income for the quarter ended March 31, 1996 of $989,000 or $0.45 per
share.
The Corporation filed a Form 8-K dated May 15, 1996 to declare a cash
dividend of $0.12 per share payable on June 28, 1996 to stockholders of
record on June 14, 1996 and to report management's authorization of the
repurchase of up to 5%, approximately 110,000 shares, of the Corporation's
outstanding common stock to be held as treasury stock.
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<PAGE>
EXHIBITS
The exhibits outlined in the following table are filed herewith or
incorporated by reference to previous filings:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Exhibit Description Prior Filing or Page Number
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation Exhibit 3.1 to Form S-1
File No. 33-38182
3.2 By-Laws Exhibit 3.2 to Form S-1
File No. 33-38182
10.1 First Financial Corporation of Western Maryland Employee Exhibit 10.1 to Form S-1
Stock Ownership Plan (ESOP) and Trust Agreement File No. 33-38182
10.2 ESOP Loan and Security Agreement and Non-Recourse Exhibit 10.2 to Form 10-K
Promissory Note between First Financial Corporation of Western File No. 0-19837
Maryland Employee Stock Ownership Trust and Loyola Federal
Savings and Loan Associated dated as of February 10, 1992
10.3 Guaranty relating to the ESOP loan between First Financial Exhibit 10.2 to Form 10-K
Corporation of Western Maryland and Loyola Federal Savings File No. 0-19837
Savings Bank dated as of February 16, 1993
10.4 First Financial Corporation of Western Maryland Directors and Exhibit 10.3 to Amendment
Management Recognition Plan and Trust Agreement * No. 1 to Form S-1
File No. 33-38182
10.7 First Financial Corporation of Western Maryland Stock Option Exhibit 10.6 to Amendment
Incentive Plan * No. 1 to Form S-1
File No. 33-38182
10.8 First Financial Corporation of Western Maryland Nonqualified Exhibit 10.7 to Amendment
Stock Option Agreement * No. 1 to Form S-1
File No. 33-38182
10.9 Agreement dated December 15, 1994 between First Financial Exhibit 10.9 to Form 10-K
Corporation of Western Maryland, First Federal Savings Bank of for year ended June 30, 1995
Western Maryland and Patrick J. Coyne and Amendment No. 1
dated August 16, 1995*
11 Statement RE: Computation of Per Share Earnings E-1
13 Annual Report to Stockholders for fiscal 1996 E-2
21 Subsidiaries of the Registrant E-3
23 Consent of KPMG Peat Marwick LLP E-4
- -----------------------------------------------------------------------------------------------------------
* Document constitutes a management contract or compensatory plan or arrangement.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND
Date: September 25, 1996 By: /s/ Patrick J. Coyne
----------------------------------------
Patrick J. Coyne, Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ William C. Marsh Date:
----------------------------------------- September 25, 1996
William C. Marsh
Executive Vice President and
Chief Financial Officer
By: /s/ Patrick J. Coyne Date:
----------------------------------------- September 25, 1996
Patrick J. Coyne
Chairman of the Board, President and
Chief Executive Officer
By: /s/ William M. Thompson Date:
----------------------------------------- September 25, 1996
William M. Thompson
Vice Chairman of the Board of Directors
By: /s/ Gordon L. Bowie Date:
----------------------------------------- September 25, 1996
Gordon L. Bowie
Director
By: /s/ Cheston H. Browning, III Date:
----------------------------------------- September 25, 1996
Cheston H. Browning, III
Director
By: /s/ L. Fred Dean Date:
----------------------------------------- September 25, 1996
L. Fred Dean
Director
By: /s/ W. Lee Fleming Date:
----------------------------------------- September 25, 1996
W. Lee Fleming
Director
By: /s/ Walter C. Growden Date:
----------------------------------------- September 25, 1996
Walter C. Growden
Director
<PAGE>
By: /s/ Morton W. Peskin, Jr. Date:
----------------------------------------- September 25, 1996
Morton W. Peskin, Jr.
Director
By: /s/ R. Thomas Thayer, Jr. Date:
----------------------------------------- September 25, 1996
R. Thomas Thayer, Jr.
Director
By: /s/ Marc E. Zanger Date:
----------------------------------------- September 25, 1996
Marc E. Zanger
Director
<PAGE>
EXHIBIT 11
Statement Re: Computation of Net Income per Share of Common Stock
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) before cumulative effect
of accounting change $3,600,341 $(1,218,549) $ 2,364,170
Cumulative effect of change in accounting
for income taxes - - 1,695,000
---------- ----------- -----------
Net income (loss) $3,600,341 $(1,218,549) $ 4,059,170
---------- ----------- -----------
---------- ----------- -----------
Primary:
Weighted average number of shares
outstanding during the period 2,167,801 2,110,846 2,098,236
Dilutive impact of unexercised
common stock options 12,468 63,979 71,102
---------- ----------- -----------
Weighted average number of shares
outstanding for the period 2,180,269 2,174,825 2,169,338
---------- ----------- -----------
---------- ----------- -----------
Primary net income (loss) per share:
Impact (loss) before cumulative effect
of accounting change $ 1.65 $ (0.56) $ 1.09
Cumulative effect of change in
accounting for income taxes - - 0.78
---------- ----------- -----------
Net income (loss) $ 1.65 $ (0.56) $ 1.87
---------- ----------- -----------
---------- ----------- -----------
Fully diluted:
Weighted average number of shares
outstanding during the period 2,167,801 2,110,846 $ 2,098,236
Dilutive impact of unexercised
common stock options 12,532 63,979 73,663
---------- ----------- -----------
Weighted average number of shares
outstanding for the period 2,180,333 2,174,825 2,171,899
---------- ----------- -----------
---------- ----------- -----------
Primary net income (loss) per share:
Income (loss) before cumulative effect
of accounting change $ 1.65 $ (0.56) $ 1.09
Cumulative effect of change in
accounting for income taxes - - 0.78
---------- ----------- -----------
Net income (loss) $ 1.65 $ (0.56) $ 1.87
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
<PAGE>
EXHIBIT 13
CONTENTS
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . 1
Chairman's Letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Management's Discussion and Analysis . . . . . . . . . . . . . . . . . . . . 4
Report of Independent Certified Public Accountants . . . . . . . . . . . . 18
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 23
Stock and Dividend Information . . . . . . . . . . . . . . . . . . . . . . 41
Corporate Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Board of Directors, Executive Officers and Managers. . . . . . . . . . . . 44
CONSOLIDATED FINANCIAL HIGHLIGHTS
AS OF JUNE 30, 1996:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $321,994,000
Total stockholders' equity . . . . . . . . . . . . . . . . . . . $41,707,000
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . $19.16
FOR THE YEAR ENDED JUNE 30, 1996:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,600,000
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . 1.09%
Return on average equity . . . . . . . . . . . . . . . . . . . . . . . 8.97%
CORPORATE PROFILE
First Financial Corporation of Western Maryland, a publicly traded Delaware
corporation and thrift holding company, provides a full range of retail and
commercial financial products and services to customers in the Mid-Atlantic
region of the United States through its wholly-owned subsidiary bank, First
Federal Savings Bank of Western Maryland, and the Bank's subsidiaries.
First Federal Savings Bank of Western Maryland is a federally chartered,
FDIC-insured stock savings bank which conducts its business through ten
offices located within the greater Cumberland area, Hagerstown, Oakland and
Westernport, Maryland.
CORPORATE MISSION STATEMENT
First Financial Corporation of Western Maryland is committed to market
leadership through excellence in customer service, the satisfaction of
customer needs through the development of superior and innovative products
and the delivery of services in a highly efficient and economic manner while
providing a professional environment for employees and enhancing the value of
the Corporation for its stockholders.
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA FOR YEARS ENDED JUNE 30:
Interest income $ 26,480 $ 24,809 $ 23,228 $ 25,050 $ 29,116
Interest expense 12,102 11,444 11,297 13,752 18,867
--------- --------- --------- --------- ---------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 14,378 13,365 11,931 11,298 10,249
Provision for loan losses 600 5,985 780 350 317
--------- --------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 13,778 7,380 11,151 10,948 9,932
Other operating income 1,472 1,269 915 1,149 2,004
Other operating expenses 9,379 10,633 8,237 8,717 6,604
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 5,871 (1,984) 3,829 3,380 5,332
Provision for (benefit from) income taxes 2,271 (765) 1,465 1,227 2,080
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 3,600 (1,219) 2,364 2,153 3,252
Cumulative effect of change in
accounting for income taxes (1) - - 1,695 - -
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 3,600 $ (1,219) $ 4,059 $ 2,153 $ 3,252
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect
of accounting change $ 1.65 $ (0.56) $ 1.09 $ 1.02 $ 0.51(2)
Cumulative effect of change in accounting
for income taxes - - 0.78 - -
--------- --------- --------- --------- --------
NET INCOME (LOSS) PER SHARE $ 1.65 $ (0.56) $ 1.87 $ 1.02 $ 0.51
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
FINANCIAL CONDITION DATA AS OF JUNE 30:
Total assets $ 321,994 $ 329,375 $ 345,646 $ 343,557 $ 342,281
Loans receivable, net 243,113 223,066 219,504 223,656 232,920
Securities 51,551 81,163 79,883 74,187 61,432
Total liabilities 280,287 290,905 305,379 306,085 308,260
Deposits 274,756 283,360 301,208 301,820 304,962
Stockholders' equity 41,707 38,470 40,267 37,472 34,021
KEY RATIOS FOR YEARS ENDED JUNE 30:
Return on average assets 1.09% - 1.18% 0.62% 0.95%
Return on average equity 8.97% - 9.97% 6.02% 11.99%
Interest rate spread 4.08% 3.73% 3.31% 3.20% 3.02%
Net interest margin 4.52% 4.11% 3.63% 3.47% 3.19%
Equity to assets ratio 12.20% 11.66% 11.86% 10.38% 7.96%
Dividend payout ratio 29.09% - 19.63% 26.18% 13.14%
</TABLE>
(1) Reflects the adoption of Financial Accounting Standard Board Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," on
July 1, 1993. See note 1 of notes to consolidated financial statements.
(2) For the period February 10, 1992 (effective date of stock conversion and
initial public offering) through June 30, 1992, the portion of the year in
which the common stock was outstanding.
1
<PAGE>
- -------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CHAIRMAN'S LETTER
- -------------------------------------------------------------------------------
TO OUR STOCKHOLDERS:
As you may know from our recent announcement, the Corporation is in the
process of identifying potential acquirors in pursuit of a sale of the
Corporation. Although no assurance of sale can be given, we are proceeding
with this initiative for several reasons: (1) after the last year and
one-half, the Corporation's financial condition and core earnings have more
than improved enough to permit us to move forward with this process and
other internal programs to enhance shareholder value; (2) the consolidation
in the financial services industry is continuing at a rapid pace; and (3)
the Corporation is a desirable addition to potential purchasers. We are
proceeding expeditiously to complete this process and will keep you informed
as developments occur.
[PHOTO]
PATRICK J. COYNE
CHAIRMAN OF THE BOARD, PRESIDENT & CHIEF EXECUTIVE OFFICER
For the fiscal year ended June 30, 1996, we had consolidated net income of
$3.6 MILLION or $1.65 per share, as compared to a net loss of $1.2 million or
$0.56 per share for the prior fiscal year. The Corporation's return on
average assets and return on average equity were above industry averages at
1.09% and 8.97%, respectively, for the year ended June 30, 1996. Fiscal 1996
results represent record core earnings for the Corporation as net income
before income taxes and accounting changes was $5.9 million for fiscal 1996
compared to a loss of $2.0 million in fiscal 1995 and income of $3.8 million
in fiscal 1994.
For the fourth quarter ended June 30, 1996, the Corporation realized
consolidated net income of $999,000 or $0.46 per share, compared to a net
loss of $1.2 million or $0.54 per share for the same period in the prior
fiscal year. The prior year's quarterly and annual net losses were primarily
the result of the Corporation incurring $5.5 million in provisions for loan
losses in the third and fourth quarters of fiscal 1995.
Total stockholders' equity and book value per share increased to $41.7 million
and $19.16 per share, respectively, at June 30, 1996, as compared to $38.5
million and $18.06 per share, respectively, at June 30, 1995. Total assets
minimally decreased to $322.0 million at June 30, 1996 from $329.4 million at
June 30, 1995. This decrease in assets reflects management's ongoing efforts to
control the Corporation's cost of funds and enhance net interest margin by
planned decreases in higher costing certificates of deposit in order to position
the Corporation for the utilization of more favorable sources of funding for
future growth.
2
<PAGE>
- -------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CHAIRMAN'S LETTER, (CONTINUED)
- -------------------------------------------------------------------------------
Improvements in core operating results for fiscal 1996 included an increase
of $1.0 million or 7.6% in net interest income to $14.4 million in fiscal
1996, from $13.4 million in fiscal 1995 and a reduction in operating expenses
of $1.3 million or 11.8% to $9.4 million in fiscal 1996, from $10.6 million
in fiscal 1995. Contributing to the increase in net interest income was an
improvement in the Corporation's net interest margin to 4.52% for fiscal
1996, up from 4.11% in fiscal 1995. This increase in net interest margin can
be attributed to a strategic realignment of the Corporation's securities
portfolio achieved during fiscal 1996 by reinvesting underperforming
securities and securities with significant pre-payment risk into higher
yielding government agency securities and loans, a planned reduction in
deposit costs and increased average loan balances from fiscal 1995 to fiscal
1996. New loan production for fiscal 1996 was $98.4 million, resulting in a
net increase in loans receivable of $20.0 million or 9.0% to $243.1 million
at June 30, 1996 from $223.1 million at June 30, 1995.
During the year, the Corporation continued its steady progress in reducing
the level of problem assets. Non-performing assets decreased $1.2 million or
16.0% to $6.4 million at June 30, 1996 from $7.6 million at June 30, 1995.
Total loan loss reserves represented 135.2% of non-performing loans at June
30, 1996.
The continued improvement in the Corporation's profitability can be directly
attributed to management's efforts to improve the asset/liability mix and all
aspects of operations. These efforts have been part of ongoing initiatives,
implemented during the second half of fiscal 1995, to enhance shareholder
value and improve customer service. The initiatives include: the previously
announced stock repurchase program; offering new and improved loan and
deposit products designed to meet the specific needs of customers in the
Bank's market areas; modernizing the Corporation's data processing
capabilities; streamlining internal processes and procedures in order to
improve the efficiency of operations; providing training to the
Corporation's staff; and maintaining continued involvement in community
organizations and activities.
I am pleased with the fiscal 1996 results and the overall improvement of the
Corporation's financial and operational performance. The continued balance
sheet strength, loan growth momentum, and improved operating activities
provide a solid base for growth and continued favorable performance trends.
On behalf of the Board of Directors, officers and employees, I thank you for
your continued support.
Sincerely,
Patrick J. Coyne
CHAIRMAN OF THE BOARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER September 9, 1996
3
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CORPORATE OVERVIEW
First Financial Corporation of Western Maryland (the Corporation) is a Delaware
corporation and thrift holding company that provides a full range of retail and
commercial financial products and services to customers in the Mid-Atlantic
region of the United States through its wholly-owned subsidiary bank, First
Federal Savings Bank of Western Maryland (the Bank), and the Bank's
subsidiaries.
The Bank is a federally chartered, Federal Deposit Insurance Corporation (FDIC)
insured stock savings bank which conducts its business through ten offices
located throughout Western Maryland. The Bank has two subsidiaries, Mid-
Atlantic Service Corporation and Mid-Atlantic Underwriters Agency, Inc. Mid-
Atlantic Service Corporation owns certain premises of the Bank. Mid-Atlantic
Underwriters Agency, Inc. provides insurance products and services to customers
of the Bank. The Bank was organized in 1928 and, in 1935, adopted a federal
charter and obtained federal deposit insurance.
The Bank is a financial intermediary whose principal business consists of
attracting deposits from the general public and investing such deposits in real
estate loans secured by liens on residential and commercial properties, consumer
loans, commercial business loans, securities and interest-earning deposits.
The Corporation and the Bank are subject to examination and comprehensive
regulation by the Office of Thrift Supervision (OTS), the Bank's chartering
authority, and the FDIC, the administrator of the Savings Association Insurance
Fund (SAIF). The Bank is a member of the Federal Home Loan Bank (FHLB) of
Atlanta, which is one of the twelve regional banks comprising the FHLB System.
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Corporation's asset and liability management
function is to maximize the Corporation's net interest income while
simultaneously maintaining an acceptable level of interest rate risk given the
Corporation's operating environment, capital and liquidity requirements,
performance objectives and overall business focus. The Corporation's
Asset/Liability Management Committee is responsible for establishing prudent
policies and implementing programs which insulate the Corporation's earnings
from the impact of changes in the interest rate environment.
Historically, the Corporation emphasized the origination and purchase of one-to-
four family residential mortgage loans with adjustable interest rates and the
purchase of securities with adjustable or floating interest rates and shorter-
term maturities. In addition, past deposit product pricing policies established
rates that encouraged customers to select longer-term certificates of deposit.
The result of these prior asset/liability management strategies typically
resulted in one year cumulative interest rate sensitivity gaps of positive 30.0%
or higher. The one year interest rate sensitivity gap is defined as the
difference between the Corporation's interest-earning assets which are scheduled
to mature or reprice within one year and its interest-bearing liabilities which
are scheduled to mature or reprice within one year. A gap ratio (rate sensitive
assets divided by rate sensitive liabilities) of one indicates a statistically
perfect match. A gap ratio of greater than one suggests that a financial
institution's net interest income may be adversely affected in a
4
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
declining interest rate environment as more interest-earning assets will be
repriced downward than will interest-bearing liabilities. A gap ratio of
less than one suggests the converse.
One of the goals established by the Corporation's new management during 1995 was
to move toward a more neutral interest rate risk position at the one year
horizon, with a target range of between positive 10% and negative 10%. In an
effort to achieve this goal, management implemented and pursued the following
strategies over the preceding six fiscal quarters:
1. Reduced the Corporation's emphasis on certificates of deposit with a
concurrent increased emphasis on demand deposits and borrowed funds as a
source of funds for investment in interest-earning assets. This strategy
emphasizes profitable net interest margin management rather than increased
deposit size and is intended to decrease interest rate risk while
simultaneously lowering the Corporation's overall cost of funds.
2. Increased the Corporation's percentage of fixed rate loans through the
origination of residential and commercial mortgage and consumer loans with
fixed rates of interest which meet management's return on investment
parameters. Virtually all of the Corporation's fixed rate, single-family
residential loans are originated under terms and conditions which permit
their sale in the secondary market. The Corporation retains the servicing on
all such loans which do not meet the minimum return on investment goals and
which are sold in secondary markets.
These initiatives, combined with other external factors such as demand for the
Corporation's products and economic and interest rate environments in general,
have resulted in reducing the Corporation's positive one year cumulative
repricing gap to $25.2 million or 7.8% at June 30, 1996 from $75.6 million or
23.0% at June 30, 1995 and $107.7 million or 31.2% at June 30, 1994.
The following table summarizes the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of June 30, 1996, which are expected
to mature, prepay or reprice in each of the future time periods shown:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) DUE IN DUE WITHIN DUE WITHIN DUE WITHIN DUE IN
SIX MONTHS SIX MONTHS ONE TO THREE TO OVER
OR LESS TO ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest-earning assets $ 113,130 $ 56,034 $ 100,471 $ 19,684 $ 21,410 $ 310,729
Total interest-bearing liabilities 81,615 62,337 69,603 36,333 19,894 269,782
---------- ---------- ---------- ---------- ---------- ----------
Maturity or repricing gap during the period $ 31,515 $ (6,303) $ 30,868 $ (16,649) $ 1,516 $ 40,947
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Cumulative gap $ 31,515 $ 25,212 $ 56,080 $ 39,431 $ 40,947
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of gap during the period to total assets 9.79% (1.96%) 9.59% (5.17%) 0.47%
---------- ----------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ----------
Ratio of cumulative gap to total assets 9.79% 7.83% 17.42% 12.25% 12.72%
---------- ----------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ----------
Total assets $ 321,994
----------
----------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of assets or liabilities shown which mature or reprice during a
particular period were determined in accordance with the contractual terms of
the asset or liability. Adjustable rate assets are included in the period in
which interest rates are next scheduled to adjust. Fixed rate loans and
securities are included in the periods in which they are anticipated to be
repaid. Money market deposit accounts, which are generally subject to immediate
withdrawal, are
5
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
included in the "Due in six months or less" period. Other demand deposit
accounts are spread in accordance with historical withdrawal experience and
management's belief that such deposits are generally non-interest rate
sensitive.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits, advances from the FHLB,
loan and security repayments and funds provided by operations. While payments
of principal and interest on loans and other investments are relatively
predictable sources of funds, deposit flows are much less predictable since they
are greatly influenced by the level of interest rates, the state of the economy,
competition and industry conditions.
The Bank is required by the OTS to maintain minimum levels of liquidity to
ensure its ability to meet demands for customer withdrawals and the repayment of
short-term borrowings. The liquidity requirement is calculated as a percentage
of deposits and short-term borrowings, as defined by the OTS, and currently must
be maintained at amounts not less than 5.0%. The Bank's liquidity ratios
fluctuate depending primarily upon deposit flows but have been consistently
maintained at levels in excess of the required percentage. At June 30, 1996,
1995 and 1994, the Bank's liquidity ratio was approximately 6.93%, 6.31% and
13.8%, respectively. The sources of liquidity and capital resources discussed
above are believed by management to be sufficient to fund outstanding loan
commitments and meet other obligations.
Current regulatory requirements specify that the Bank and similar institutions
must maintain tangible capital equal to 1.5% of adjusted totals assets, core
capital equal to 3% of adjusted total assets and risk-based capital equal to 8%
of risk-weighted assets. The Office of the Comptroller of the Currency and the
FDIC have adopted more stringent core capital requirements which require that
the most highly rated banks have a minimum core capital ratio of 3%, with an
additional 100 to 200 basis point cushion required for all other banks as
established by the regulator on a case-by-case basis. Both the FDIC and the OTS
reserve the right to apply this higher standard to any insured financial
institution when considering an institution's capital adequacy.
At June 30, 1996, the Bank was in compliance with all regulatory capital
requirements with tangible, core and risk-based capital ratios of 12.36%, 12.36%
and 21.60%, respectively.
CHANGES IN FINANCIAL CONDITION
GENERAL. The Corporation's total assets decreased by $7.4 million or 2.2% to
$322.0 million at June 30, 1996 from $329.4 million at June 30, 1995. This
decrease was primarily due to a $29.6 million or 36.4% reduction in the amount
of securities held at June 30, 1996, as compared to June 30, 1995. The decrease
in securities was used to fund increases in loans receivable and cash and
interest-earning deposits of $20.0 million and $3.2 million, respectively, and
also to fund $8.6 million of net deposit outflows and the repayment of $3.0
million of FHLB advances. The decrease in securities and deposits and the
increase in loans can be attributed to the application of the previously
discussed asset/liability management policies which emphasize increasing the
Corporation's net interest margin rather than increasing deposit size.
CASH AND INTEREST-EARNING DEPOSITS. Cash and interest-earning deposits
increased by $3.2 million or 60.4% to $8.6 million at June 30, 1996 from $5.3
million at June 30, 1995. This
6
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
increase was due primarily to an increase of $2.5 million in the amount of
FHLB deposits held at June 30, 1996 as compared to June 30, 1995. FHLB
deposits were increased by security sales, loan and security repayments and
inflows of new customer deposits and were reduced by new loan fundings,
security purchases and customer withdrawals from deposit accounts. The
remaining $731,000 increase was attributable to higher levels of cash on hand
and in banks resulting from fluctuations in daily operational and liquidity
requirements.
SECURITIES. Securities decreased by $29.6 million or 36.5% to $51.6 million at
June 30, 1996 from $81.2 million at June 30, 1995. Included in this decrease
was a net decrease of $18.4 million in securities held to maturity (HTM) and a
net decrease of $11.3 million in securities available for sale (AFS). The
combined decrease in HTM and AFS securities was attributable to the sale and
scheduled maturities of securities with an aggregate book value of $30.4
million, principal repayments of $11.9 million and net amortization of premiums
of $272,000, partially offset by new security purchases of $13.0 million.
During January 1996, the Corporation sold securities with a carrying amount of
$28.5 million and a weighted average yield of 6.5%. The net gain realized on
this transaction was $179,000. The decision to sell these securities was based
on (1) a recent restructuring of the Corporation's investment portfolio designed
to eliminate underperforming securities with significant prepayment risk in the
current and anticipated interest rate environments, as explained below, (2) the
opportunity to increase the Corporation's interest rate spread by replacing
these securities with higher yielding loans, (3) the Corporation's anticipated
loan growth over the next several months and management's evaluation of the
alternatives available to fund these new loans, and (4) the potential to improve
the Corporation's interest rate risk position.
The restructuring of the Corporation's securities portfolio was aided by the
release of a Special Report entitled "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities" from the
Financial Accounting Standards Board (FASB) on November 15, 1995. This report
most notably permitted a one-time opportunity between November 15, 1995 and
December 31, 1995 to reclassify securities between HTM and AFS. FASB Statement
No. 115 requires the Corporation to classify all debt securities and certain
equity securities as either HTM, AFS or trading. The Corporation classifies a
security as HTM if there is the positive intent and ability to hold the security
to maturity. HTM securities are accounted for at amortized cost. The
Corporation classifies a security as trading if the security is bought or held
principally for the purpose of selling it in the near term. The Corporation
accounts for a trading security at fair or market value, including unrealized
gains and losses in current operating results. A security not classified as
either trading or HTM is classified as AFS. The Corporation accounts for a
security with this classification at fair value, including unrealized gains and
losses as a separate component of stockholders' equity. FASB Statement 115
stipulated that transfers from the HTM category should be "rare" and if
transfers from the HTM category were to occur more often than rarely, then all
securities in that category could be presumptively reclassified as AFS, with
immediate impact on stockholders' equity. The November 15, 1995 release of the
Special Report permitted a one-time opportunity to reclassify securities between
HTM and AFS that would not call into question the Corporation's future intent to
hold other securities to maturity. Accordingly, on December 31, 1995, the
Corporation reclassified $25.2 million of securities from the HTM classification
to AFS.
7
<PAGE>
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
Transfers from AFS to HTM are not restricted by FASB Statement No. 115,
and in addition, the Bank also reclassified $5.0 million of securities from AFS
to HTM on December 31, 1995.
LOANS RECEIVABLE. Loans receivable increased by a net $20.0 million or 9.0% to
$243.1 million at June 30, 1996 from $223.1 million at June 30, 1995.
Contributing to this increase were net increases of $26.3 million or 45.5% in
commercial real estate and multi-family mortgage loans, and a $4.7 million or
72.0% increase in other consumer loans. Offsetting these increases were net
decreases of $11.4 million or 8.3% in single-family residential mortgage loans,
a $1.1 million or 3.5% decrease in auto loans, a $606,000 or 15.7% decrease in
commercial business loans, a $795,000 or 9.25% decrease in the allowance for
loan losses and a net decrease in deferred fees and loans in process of $1.4
million or 25.9%. These changes in the composition of the Corporation's loan
portfolio reflect management's decision to emphasize the origination of fixed
rate mortgage and consumer loans while concurrently reducing the percentage of
adjustable rate loans held in the portfolio.
NON-PERFORMING ASSETS. Non-performing assets, which include non-accrual loans,
loans delinquent due to maturity, troubled debt restructurings and real estate
acquired through foreclosure (REO) decreased by $1.2 million or 16.0% to $6.4
million at June 30, 1996 from $7.6 million at June 30, 1995. The overall
decrease in non-performing assets from June 30, 1995, was primarily attributable
to a decrease of $1.8 million in the amount of loans classified as delinquent
due to maturity, partially offset by increases of $570,000 in non-accrual loans
and $51,000 in REO.
The $1.8 million decrease in loans classified as delinquent due to maturity was
the net result of additions of $1.6 million less payoffs, transfers to
performing and transfers to non-accrual of $1.4 million, $1.7 million and
$300,000, respectively. Non-accrual loans increased by $570,000, the net result
of additions and transfers from delinquent due to maturity of $1.5 million less
payoffs, write-downs and transfers to performing of $314,000, $426,000 and
$190,000, respectively.
The following table presents the Corporation's non-performing assets and the
ratio of non-performing assets to total assets at June 30:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $ 3,346 $ 2,776 $ 1,942
Loans delinquent due to maturity 2,007 3,849 -
Troubled debt restructuring 412 419 2,975
Real estate acquired through foreclosure 655 604 1,783
-------- -------- --------
$ 6,420 $ 7,648 $ 6,700
-------- -------- --------
-------- -------- --------
Ratio of non-performing assets to total 1.99% 2.32% 1.94%
assets -------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
In addition to the decrease in non-performing assets set forth in the table
above, the allowance for loan losses decreased by $795,000 or 9.3% to $7.8
million at June 30, 1996 from $8.6 million at June 30, 1995. This decrease was
attributable to charge-offs of $1.6 million recorded on certain commercial real
estate loans during the year offset by provisions for loan losses of $600,000
and recoveries of $176,000.
Management believes that, based on its regular comprehensive reviews of the loan
portfolios and evaluation of known economic and specific loan factors, the
Corporation's allowance for loan losses at June 30, 1996 is adequate to cover
potential future losses in the loan portfolio. The allowance for loan losses is
subjective and may be adjusted in the future depending on economic conditions
and other factors.
DEPOSITS. Total deposits decreased by $8.6 million or 3.0% to $274.8 million at
June 30, 1996 from $283.4 million at June 30, 1995. Included in this reduction
in total deposits were reductions of $6.2 million or 3.6% in time deposits and a
$4.7 million or 8.5% decrease in passbook and other savings accounts offset by a
$2.3 million or 4.2% increase in checking and money market accounts. The
decrease in total deposits reflects a planned reduction in certain types of
longer term, higher costing time deposits while concurrently increasing low or
non-interest checking and money market accounts in an effort to increase the
Corporation's overall net interest income. The success of this planned deposit
outflow in increasing net interest income was evidenced by the growth in the
Corporation's net interest margin which increased to 4.52% at June 30, 1996 from
4.11% at June 30, 1995.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $3.2 million or 8.4% to
$41.7 million at June 30, 1996 from $38.5 million at June 30, 1995. This net
growth was comprised of increases of $3.6 million in net income for 1996, an
$848,000 increase realized upon the exercise of outstanding stock options during
the year and $103,000 resulting from the release of shares from the
Corporation's Employee Stock Ownership Plan (ESOP). Partially offsetting these
increases were decreases from dividends paid of $1.0 million, a $233,000
decrease related to the repurchase of treasury stock and a $38,000 decrease
recorded to recognize the net change in unrealized gains/losses on AFS
securities.
RESULTS OF OPERATIONS
GENERAL. The Corporation recorded net income of $3.6 million for the year ended
June 30, 1996 as compared to a net loss of $1.2 million for the year ended June
30, 1995 and net income of $4.1 million for the year ended June 30, 1994.
The $4.8 million increase in net operating results for 1996, as compared to
1995, was attributable to an increase in net interest income of $1.0 million, a
decrease in provision for loan losses of $5.4 million, an increase in other
operating income of $203,000 and a reduction in operating expenses of $1.3
million. Offsetting these increases in net operating results was an increase of
$3.0 million in income taxes recorded during the year.
The $5.3 million or 130.0% decrease in net operating results for 1995, as
compared to 1994, was attributable to an increase of $5.2 million in the
provision for loan losses and an increase in other
9
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
operating expenses of $2.4 million. Offsetting these decreases in net operating
results were increases of $1.4 million in net interest income, a $354,000
increase in other operating income and a net reduction of $2.2 million in the
amount of provision for/benefit from income taxes recorded during the year. The
results of operations for 1994 were also benefited by a non-recurring cumulative
effect of a change in the method of accounting for income taxes of $1.7 million.
NET INTEREST INCOME. Net interest income is determined by the Corporation's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts, or volumes, of interest-earning assets and interest-
bearing liabilities. Net interest income was $14.4 million for 1996 as compared
to $13.4 million for 1995 and $11.9 million for 1994. The $1.0 million or 7.6%
increase in net interest income for 1996, as compared to 1995, was attributable
to a $1.7 million or 6.7% increase in interest income, offset by an increase of
$658,000 or 5.7% in interest expense. The $1.4 million or 12.0% increase in net
interest income for 1995, as compared to 1994, was attributable to a $1.6
million or 6.8% increase in interest income, offset by an increase of $147,000
or 1.3% in interest expense.
The following table analyzes changes in interest income and interest expense in
terms of: (1) changes in the volume of interest-earning assets and interest-
bearing liabilities and (2) changes in yields and rates. The table reflects the
extent to which changes in the Corporation's interest income and interest
expense are attributable to changes in volume (change in volume multiplied by
prior year rate), changes in rate (change in rate multiplied by prior year
volume) and changes attributable to the combined impact of volume/rate (change
in rate multiplied by change in volume). The volume/rate variance is allocated
on a consistent basis between the volume and rate variances.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------- ---------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Securities $ (1,527) $ 848 $ (679) $ 588 $ 917 $ 1,505
Loans 917 984 1,901 441 212 653
Deposits and other 399 50 449 (1,000) 423 (577)
-------- ------- ------- ------- ------ -------
Total interest-earning assets (211) 1,882 1,671 29 1,552 1,581
-------- ------- ------- ------- ------ -------
Interest expense:
Deposits (381) 1,080 699 (249) 349 100
Other borrowings 28 (69) (41) 35 12 47
-------- ------- ------- ------- ------ -------
Total interest-bearing liabilities (353) 1,011 658 (214) 361 147
-------- ------- ------- ------- ------ -------
Net interest income $ 142 $ 871 $ 1,013 $ 243 $1,191 $ 1,434
-------- ------- ------- ------- ------ -------
-------- ------- ------- ------- ------ -------
- ----------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
The following table sets forth, for the periods indicated, information
concerning the total dollar amounts of interest income from interest-earning
assets and the resultant average yields, the total dollar amounts of interest
expense on interest-bearing liabilities and the resultant average costs, net
interest income, interest rate spread and the net interest margin earned on
average interest-earning assets. For purposes of this table, loan balances
include non-accrual loans and interest income includes accretion of net deferred
loan fees.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) Year Ended June 30, 1996 Year Ended June 30, 1995 Year Ended June 30, 1994
----------------------------- --------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average Yield On:
Investment securities $ 11,305 $ 728 6.44% $ 15,969 $ 985 6.17% $ 10,052 $ 398 3.96%
Mortgage-backed securities 50,108 3,364 6.71% 70,076 3,786 5.40% 63,885 2,868 4.49%
--------- -------- ------- -------- -------- ------ -------- -------- -------
61,413 4,092 6.66% 86,045 4,771 5.54% 73,937 3,266 4.42%
--------- -------- ------- -------- -------- ------ -------- -------- -------
First mortgage loans 198,844 17,858 8.98% 195,162 16,616 8.51% 196,490 16,708 8.50%
Consumer and other 41,879 3,576 8.54% 35,000 2,917 8.33% 27,391 2,172 7.93%
--------- -------- ------- -------- -------- ------ -------- -------- -------
240,723 21,434 8.90% 230,162 19,533 8.49% 223,881 18,880 8.43%
--------- -------- ------- -------- -------- ------ -------- -------- -------
Interest-bearing deposits 13,753 795 5.78% 7,046 354 5.02% 28,717 975 3.40%
Other interest-earning assets 2,097 159 7.58% 2,113 151 7.15% 2,110 107 5.07%
--------- -------- ------- -------- -------- ------ -------- -------- -------
15,850 954 6.02% 9,159 505 5.51% 30,827 1,082 3.51%
--------- -------- ------- -------- -------- ------ -------- -------- -------
Total interest-earning assets 317,986 26,480 8.33% 325,366 24,809 7.62% 328,645 23,228 7.07%
Allowance for loan losses (8,372) - - (5,390) - - (4,201) - -
Other non-interest-earning assets 19,481 - - 17,801 - - 18,792 - -
--------- -------- ------- -------- -------- ------ -------- -------- -------
Total assets $ 329,095 $ 26,480 8.05% $337,777 $ 24,809 7.34% $343,236 $ 23,228 6.77%
--------- -------- ------- -------- -------- ------ -------- -------- -------
--------- -------- ------- -------- -------- ------ -------- -------- -------
Weighted Average Rate Paid On:
Deposits:
Time deposits $ 175,762 $ 9,544 5.43% $ 175,589 $ 8,594 4.89% $ 178,391 $ 8,409 4.71%
Checking and money market 55,322 1,165 2.11% 58,134 1,241 2.13% 58,340 1,244 2.13%
Passbook and other 52,293 1,316 2.52% 59,280 1,492 2.52% 62,826 1,574 2.51%
--------- -------- ------- -------- -------- ------ -------- -------- -------
283,377 12,025 4.24% 293,003 11,327 3.87% 299,557 11,227 3.75%
FHLB advances & other borrowings 1,456 77 5.29% 1,125 117 10.40% 772 70 9.07%
--------- -------- ------- -------- -------- ------ -------- -------- -------
Total interest-bearing liabilities 284,833 12,102 4.25% 294,128 11,444 3.89% 300,329 11,297 3.76%
Non-interest-bearing liabilities 4,116 - - 4,280 - - 2,204 - -
--------- -------- ------- -------- -------- ------ -------- -------- -------
Total liabilities 288,949 12,102 4.19% 298,408 11,444 3.84% 302,533 11,297 3.73%
Stockholders' equity 40,146 - - 39,369 - - 40,703 - -
--------- -------- ------- -------- -------- ------ -------- -------- -------
Total liabilities and equity $ 329,095 $ 12,102 3.68% $337,777 $ 11,444 3.39% $343,236 $ 11,297 3.29%
--------- -------- ------- -------- -------- ------ -------- -------- -------
--------- -------- ------- -------- -------- ------ -------- -------- -------
Net interest income $ 14,378 $ 13,365 $ 11,931
-------- -------- --------
-------- -------- --------
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 4.08% 3.73% 3.31%
------- ------ -------
------- ------ -------
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 4.52% 4.11% 3.63%
------- ------ -------
------- ------ -------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
INTEREST INCOME. Interest income was $26.5 million for 1996 as compared to
$24.8 million for 1995 and $23.2 million for 1994. The $1.7 million or 6.7%
increase in interest income for 1996, as compared to 1995, was attributable to
increases in income recorded on loans, interest-earning deposits and other
interest-earning assets, offset by a decrease in income from securities.
Interest income from loans receivable increased by $1.9 million during 1996 due
to an increase of $1.5 million in income recorded on first mortgage loans and a
$369,000 increase in income from consumer and other loans. The increase in
interest income realized on first mortgage loans was the result of higher
yields, which increased to 8.98% for 1996 from 8.51% for 1995, and an
11
<PAGE>
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
increase in the average outstanding loan balance, which increased by $3.7
million during the year. Mortgage loan yields and outstanding balances
increased during 1996 due primarily to a refocused emphasis on commercial
real estate and multi-family loans. The Bank aggressively focused on this
market segment during fiscal 1996 while continuing to maintain its strict
loan underwriting, documentation, credit analysis and loan review standards.
Such loans typically earn higher yields than single-family residential
mortgages and their addition helped to contribute to an asset/liability mix
which improved the Corporation's overall interest rate risk position.
The increase in income from consumer and other loans was due to both an increase
in the yield realized on these types of loans, which increased to 8.54% for 1996
from 8.33% for 1995, and to an increase in the average outstanding loan balance,
which increased by $6.9 million during the year. The increase in consumer loan
yields reflects a shift in the portfolio mix away from lower yielding loans on
deposits and toward higher yielding automobile and home equity loans.
Interest income from securities decreased by $679,000 during 1996 as a result of
decreases in the average balance of funds invested, offset by an increase in the
yields earned on the overall securities portfolio. The average balance of
securities decreased by $24.6 million to $61.4 million for 1996 from $86.0
million during 1995 and reflects a portfolio restructuring and planned
downsizing which provided the Corporation with a source of funding for the new
loan growth described above. The yield earned on securities increased to 6.66%
for 1996 from 5.54% for 1995. This significant increase was achieved through
the previously described portfolio restructuring which de-emphasized short term
adjustable rate securities in favor of longer term fixed rate investment
vehicles.
The $1.6 million or 6.8% increase in interest income for 1995, as compared to
1994, was attributable to increases in income recorded on loans, securities and
other interest-earning assets, offset by a decrease in income from interest-
earning deposits. Interest income from loans receivable increased by $653,000
during 1995 due to an increase of $745,000 in income from consumer and other
loans offset by a decrease of $92,000 in income recorded on first mortgage
loans. The increase in income from loans was due primarily to an increase in
average outstanding loan balances, which increased by $6.3 million during the
year.
Interest income from securities increased by $1.5 million during 1995, as
compared to 1994 as a result of increases in both the average balance of funds
invested and the yield earned on the securities portfolio. The average balance
of securities increased by $12.1 million during 1995 from $73.9 million at June
30, 1994 to $86.0 million at June 30, 1995. The yield on the securities
portfolio also increased to 5.54% during 1995 from 4.42% for 1994 despite the
general decline in interest rates during the second half of fiscal year due to
the upward repricing of several new issue adjustable rate mortgage-backed
securities for which the underlying mortgages were originated at (teaser) rates
below their contractual spread over the appropriate indices and were not yet
fully indexed.
INTEREST EXPENSE. Interest expense was $12.1 million for 1996 as compared to
$11.4 million for 1995 and $11.3 million for 1994. The $658,000 or 5.8%
increase in interest expense for 1996, as compared to 1995, was attributable to
increases of $698,000 in deposit costs offset by a $40,000 decrease in the cost
of other borrowed funds.
12
<PAGE>
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
The Corporation's cost of deposits increased for 1996, as compared to 1995, due
to an increase in the interest paid on certificates of deposit, offset by a
decrease in interest paid on passbook and savings accounts. Interest expense on
certificates of deposit increased by $950,000 due primarily to an increase in
the average interest rate paid, which increased to 5.43% during 1996 from 4.89%
for 1995. This increase occurred due to a significant amount of longer term
certificates of deposit maturing during the year that were originally issued at
rates below the 1996 levels for similar term products.
Interest paid on passbook and other similar accounts decreased by $176,000
during 1996, as compared to 1995, due primarily to a reduction in the average
balance of such accounts, which declined by $7.0 million to $52.3 million for
1996 from $59.3 million for 1995. Interest paid on checking and money market
accounts decreased by $76,000 during 1996, as compared to 1995, due primarily to
a reduction in the average balance of such accounts, which declined by $2.8
million to $55.3 million for 1996 from $58.1 million for 1995.
Interest expense on borrowed funds, which includes interest paid on FHLB
advances, the Corporation's ESOP debt expense and other miscellaneous interest
expenses, decreased by $40,000 during 1996, as compared to 1995, due primarily
to lower rates paid on FHLB advances utilized during the year.
The $147,000 or 1.3% increase in interest expense for 1995, as compared to 1994,
was attributable to increases of $100,000 in deposit costs and a $47,000
increase in the cost of other borrowed funds and other interest expense.
The Corporation's cost of deposits increased for 1995, as compared to 1994, due
to an increase in the interest paid on certificates of deposit, offset by a
decrease in interest paid on passbook and savings accounts. Interest expense on
certificates of deposit increased by $185,000 due primarily to an increase in
the average interest rate paid, which increased to 4.89% during 1995 from 4.71%
for 1994. This increase in cost was partially offset by a reduction in the
average balance of certificates of deposits outstanding during the year, which
declined to $175.6 million for 1995 from $178.4 million for 1994. Interest paid
on passbook and other similar accounts decreased during 1995, as compared to
1994, due primarily to a reduction in the average balance of such accounts,
which declined by $3.5 million to $59.3 million for 1995 from $62.8 million for
1994. Interest expense on borrowed funds, increased during 1995, as compared to
1994, due to an increase in the average amount of FHLB advances utilized during
the year and to a non-recurring interest expense charge related to the
settlement of prior years' tax return audits conducted by the Internal Revenue
Service.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $600,000 for 1996
as compared to $6.0 million for 1995 and $780,000 for 1994. The Corporation
records provisions for loan losses to bring the total allowance for loan losses
to a level deemed adequate to cover potential losses in the loan portfolio. In
determining the appropriate level of allowance for loan losses, management
considers historical loss experience, the present and prospective financial
condition of borrowers, current and prospective economic conditions
(particularly as they relate to markets where the Corporation originates loans),
the status of non-performing assets, the estimated underlying value of the
collateral and other factors related to the collectability of the loan
portfolio.
13
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
The $5.4 million or 90.0% decrease in provision for loan losses for 1996, as
compared to 1995, reflects the improvement in asset quality realized during 1996
and the adequacy of the allowance for loan losses during the respective years.
The $5.2 million increase in provision for loan losses for 1995, as compared to
1994, was primarily attributable to an extensive review of the loan portfolios
conducted by the Corporation's new management, to cover potential losses that
existed in the loan portfolio as of June 30, 1995.
OTHER OPERATING INCOME. Other operating income was $1.5 million for 1996 as
compared to $1.3 million for 1995 and $915,000 for 1994. The $203,000 or 16.0%
increase in total other income for 1996, as compared to 1995, was comprised of a
$283,000 increase in loan origination fees and deposit service charges due
primarily to increased mortgage loan originations and an increase in the volume
of transactions in commercial deposit accounts and a $179,000 gain realized upon
the sale of securities, partially offset by a $196,000 decrease in income
realized from the operation of REO properties and a $63,000 decrease in other
operating income.
The $354,000 or 38.7% increase in total other income for 1995, as compared to
1994, was comprised of increases in loan origination fees and deposit service
charges due primarily to increased volumes of loan originations and transactions
processed through customers deposit accounts, an increase in the amount of gains
on REO sales and the recognition of the cash surrender value of an officer's
life insurance policy.
OTHER OPERATING EXPENSES. Total other operating expenses decreased by $1.3
million or 11.8% to $9.4 million in 1996 from $10.6 million in 1995 and
increased by $2.4 million or 29.1% in 1995 from $8.2 million in 1994.
Compensation and employee benefits were $4.5 million for 1996 as compared to
$4.4 million for 1995 and $4.2 million for 1994. The $59,000 or 1.3% increase
for 1996, as compared to 1995, was due primarily to normal inflationary factors,
partially offset by a decrease in a non-recurring expense related to deferred
compensation agreements with a former officer recorded in 1995. The $279,000 or
6.7% increase for 1995, as compared to 1994, was also due to the non-recurring
deferred compensation expense recorded in 1995 and to small increases in
staffing levels and normal inflationary factors, particularly in the area of
employee benefits.
Occupancy and equipment expenses were $1.3 million for 1996 as compared to $1.7
million for 1995 and $1.3 million for 1994. The $387,000 or 22.6% decrease for
1996, as compared to 1995, resulted primarily from the write-off of obsolete
data processing equipment and related intangible assets during 1995. Occupancy
and equipment expenses for 1995, as compared to 1994, were substantially at the
same levels, excluding this write-off of assets.
Federal deposit insurance premiums were $654,000 for 1996 as compared to
$681,000 for 1995 and $688,000 for 1994. The FDIC insurance assessment rate in
effect for the Corporation was the same for each of these periods. The
variances in the deposit insurance expense are due to differences in the deposit
base on which the assessment was calculated.
Data processing expenses were $391,000 for 1996 as compared to $481,000 for 1995
and $358,000 for 1994. During 1996, data processing costs decreased by $90,000
or 18.7%, as
14
<PAGE>
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
compared to 1995, due primarily to costs associated with a data processing
systems reorganization project undertaken during the fourth quarter of 1995.
The $123,000 or 34.4% increase for 1995, as compared to 1994, was also primarily
attributable to the reorganization costs incurred in 1995.
Professional fees were $576,000 for 1996 as compared to $1.6 million for 1995
and $507,000 for 1994. The $1.0 million or 64.5% decrease for 1996 as compared
to 1995 and the $1.1 million increase for 1995 as compared to 1994 were
attributable to the following non-recurring expenses incurred during 1995: a
$620,000 charge to operations for legal fees and other costs associated with the
settlement of the previously disclosed U.S. Equal Employment Opportunity
Commission charges and related civil complaint filed against the Corporation by
five employees; a one-time $438,000 increase in consulting services relating to
the Corporation's management succession and fees incurred in connection with
human resources and revenue enhancement projects; and a $56,000 increase in
miscellaneous other professional fees.
Other expenses were $1.9 million for 1996 as compared to $1.7 million for 1995
and $1.2 million for 1994. The $236,000 or 13.9% increase for 1996, as compared
to 1995 was due to increases in miscellaneous insurance and loan processing
costs and a non-recurring write-off of certain fixed assets. Partially
offsetting these increases were decreases in advertising, printing and supplies
expenses. The $505,000 or 42.2% increase for 1995, as compared to 1994, was due
to increases in regulatory filing and exam assessments, an increase in office
supplies and printing costs and increases in loan processing costs. Partially
offsetting these increases was a reduction in advertising expenses during 1995
as compared to 1994.
INCOME TAXES. For the year ended June 30, 1996 the Corporation recorded a
provision for income taxes of $2.3 million as compared to a benefit from income
taxes of $765,000 for 1995 and a provision for income taxes of $1.5 million for
1994. These provisions for/benefits from income taxes reflect the Corporation's
effective tax rates of 38.7% for 1996, 38.6% for 1995 and 38.3% for 1994.
The $3.0 million increase in provision for/benefit from income taxes for 1996,
as compared to 1995, was due primarily to the $7.9 million increase in pre-tax
income during the year. The $2.2 million or 152.2% decrease for 1995 as
compared to 1994 was attributable to $5.8 million in lower pre-tax income.
Effective July 1, 1993, the Corporation adopted FASB Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
required, among other things, a change from the deferred method to the asset and
liability method of accounting for income taxes. The cumulative effect of this
change in accounting principle was to increase net income for 1994 by $1.7
million.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Corporation and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial condition and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
15
<PAGE>
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services since such prices are affected by inflation to a
larger degree than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Corporation's assets and liabilities
are critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING AND REGULATORY MATTERS
In October 1995, the FASB released SFAS No. 123, "Accounting for Stock-Based
Compensation." Effective for fiscal years beginning after December 15, 1995,
SFAS No. 123 outlines preferable accounting treatment and reporting guidelines
for employee stock compensation plans. The Corporation is currently analyzing
the impact of the adoption of the standard on the consolidated financial
statements; however, the adoption and concurrent application is not expected to
have a material impact.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities and distinguishes transfers
of financial assets that are sales from transfers that are secured borrowings.
Under SFAS No. 125, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it no
longer controls and liabilities that have been extinguished. This financial-
components approach focuses on the assets and liabilities that exist after the
transfer. SFAS No. 125 also extends the AFS or trading approach in SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," to non-
security financial assets that can contractually be prepaid or otherwise settled
in such a way that the holder of the asset would not recover substantially all
of its recorded investment. Thus, non-security financial assets that are
subject to prepayment risk that could prevent recovery of substantially all of
the recorded amount are to be reported at fair value with the change in fair
value accounted for, depending on the asset's classification, as AFS or trading.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Also, the extension of SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 is effective for
financial assets held on or acquired after January 1, 1997. The adoption and
application of SFAS No. 125 is not expected to be material to the consolidated
financial statements of the Corporation.
The deposits of the Bank are currently insured by the SAIF of the FDIC. Both
the SAIF and the Bank Insurance Fund (BIF), the federal deposit insurance fund
that covers commercial bank deposits, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF has
achieved a fully funded status in contrast to the SAIF and, therefore the FDIC
recently reduced the average deposit insurance premium paid by BIF-insured
commercial banks to a level substantially below the average premium paid by
SAIF-insured institutions. In late 1995, the FDIC approved a final rule
regarding deposit insurance premiums which, effective with the semiannual
premium assessment on January 1, 1996, reduced deposit insurance premiums for
BIF member institutions to zero (subject to an annual minimum of $2,000) for
16
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
institutions in the lowest risk category. Deposit insurance premiums for SAIF
members were maintained at their existing levels (23 basis points for
institutions like the Bank which are in the lowest risk category). Accordingly,
in the absence of further legislative action, until the SAIF attains a reserve
ratio of 1.25% on insured deposits, SAIF members such as the Bank will be
competitively disadvantaged as compared to commercial banks due to this premium
differential. It is anticipated that, under present conditions, it will be at
least several years before the SAIF reaches a reserve ratio of 1.25% of insured
deposits.
The U.S. House of Representatives and Senate had actively considered legislation
which would have eliminated the premium differential between SAIF-insured and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The proposed legislation would have provided that all SAIF member
institutions pay a special one-time assessment to recapitalize the SAIF, which
in the aggregate would have been sufficient to bring the reserve ratio in the
SAIF to 1.25% of insured deposits. Based on the current level of reserves
maintained by the SAIF it was anticipated that the amount of the special
assessment required to recapitalize the SAIF would have been approximately 80 to
85 basis points of the SAIF-assessable deposits. It was anticipated that after
the recapitalization of the SAIF, premiums paid by SAIF-insured institutions
would be reduced to match those currently being assessed BIF-insured commercial
banks. The legislation also provided for the merger of the BIF and the SAIF,
with such merger being conditioned upon the prior elimination of the thrift
charter. No assurance can be given as to the final form of such legislation or
even whether any legislation will be enacted.
17
<PAGE>
- -------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND:
We have audited the accompanying consolidated statements of financial
condition of First Financial Corporation of Western Maryland and subsidiaries
as of June 30, 1996 and 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended June 30, 1996. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Financial Corporation of Western Maryland and subsidiaries as of June 30,
1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended June 30, 1996, in conformity
with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the
Corporation adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," and the provisions of SFAS No. 122,
"Accounting for Mortgage Servicing Rights," during 1996. The Corporation
adopted the provisions of SFAS No. 109, "Accounting for Income Taxes," in
1994.
Pittsburgh, Pennsylvania
August 1, 1996
18
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 2,953 $ 2,222
Interest-earning deposits 5,623 3,126
Securities available for sale; cost of $50 and $11,240 75 11,326
Securities held to maturity; market value of $51,374 and $69,803 51,476 69,837
Loans receivable, net 243,113 223,066
Accrued interest receivable 2,076 2,228
Federal Home Loan Bank (FHLB) stock 2,097 2,097
Real estate acquired through foreclosure, net 655 604
Premises and equipment, net 10,921 11,146
Prepaid expenses and other assets 673 587
Deferred income taxes 2,332 3,136
-------- --------
TOTAL ASSETS $321,994 $329,375
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $274,756 $283,360
Advance payments by borrowers for taxes and insurance 1,704 871
FHLB advances - 3,000
Employee Stock Ownership Plan (ESOP) debt 483 580
Accrued expenses and other liabilities 3,344 3,094
-------- --------
TOTAL LIABILITIES 280,287 290,905
-------- --------
STOCKHOLDERS' EQUITY:
Serial preferred stock, $1 par value, 2,000,000 shares
authorized; none issued - -
Common stock, $1 par value, 5,000,000 shares authorized;
issued and outstanding 2,188,184 and 2,130,212 2,188 2,130
Additional paid-in capital 11,559 10,769
Treasury stock, at cost; 11,445 shares at June 30, 1996 (233) -
Unearned ESOP shares (424) (527)
Retained earnings, substantially restricted 28,602 26,045
Unrealized gains on securities available for sale, net 15 53
-------- --------
TOTAL STOCKHOLDERS' EQUITY 41,707 38,470
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $321,994 $329,375
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 21,434 $ 19,533 $ 18,880
Securities 4,092 4,771 3,266
Interest-earning deposits 795 354 975
Other 159 151 107
--------- --------- ---------
TOTAL INTEREST INCOME 26,480 24,809 23,228
--------- --------- ---------
INTEREST EXPENSE:
Deposits 12,025 11,327 11,227
Borrowed funds 77 117 70
--------- --------- ---------
TOTAL INTEREST EXPENSE 12,102 11,444 11,297
--------- --------- ---------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 14,378 13,365 11,931
Provision for loan losses 600 5,985 780
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,778 7,380 11,151
--------- --------- ---------
OTHER OPERATING INCOME:
Loan fees and service charges 958 675 630
Net gain on sale of securities 179 - 6
Income on real estate activities 115 311 120
Other 220 283 159
--------- --------- ---------
TOTAL OTHER OPERATING INCOME 1,472 1,269 915
--------- --------- ---------
OTHER OPERATING EXPENSES:
Compensation and employee benefits 4,496 4,437 4,158
Occupancy and equipment 1,325 1,712 1,330
Federal deposit insurance 654 681 688
Data processing 391 481 358
Professional fees and related costs 576 1,621 507
Other 1,937 1,701 1,196
--------- --------- ---------
TOTAL OTHER OPERATING EXPENSES 9,379 10,633 8,237
--------- --------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 5,871 (1,984) 3,829
Provision for (benefit from) income taxes 2,271 (765) 1,465
--------- --------- ---------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 3,600 (1,219) 2,364
Cumulative effect of change in accounting for income taxes - - 1,695
--------- --------- ---------
NET INCOME (LOSS) $ 3,600 $ (1,219) $ 4,059
--------- --------- ---------
--------- --------- ---------
NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of accounting change $ 1.65 $ (0.56) $ 1.09
Cumulative effect of change in accounting for income taxes - - 0.78
--------- --------- ---------
NET INCOME (LOSS) PER SHARE $ 1.65 $ (0.56) $ 1.87
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
- -------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common paid-in Treasury Unearned
stock capital stock ESOP shares
---------- --------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1993 $ 1,392 $ 11,227 $ - $ (753)
Net income for 1994
Dividends paid
Exercise of stock awards, net 14 101
Release of ESOP shares 117
Net change in unrealized
gains (losses) on
securities available
for sale, net
3-for-2 stock split 700 (700)
---------- -------- ------- --------
BALANCE AT JUNE 30, 1994 2,106 10,628 - (636)
Net loss for 1995
Dividends paid
Exercise of stock awards, net 24 141
Release of ESOP shares 109
Net change in unrealized
gains (losses) on
securities available
for sale, net
---------- -------- ------- --------
BALANCE AT JUNE 30, 1995 2,130 10,769 - (527)
Net income for 1996
Dividends paid
Exercise of stock awards, net 58 790
Release of ESOP shares 103
Acquisition of treasury stock (233)
Net change in unrealized
gains (losses) on
securities available
for sale, net
----------- --------- ---------- ---------
BALANCE AT JUNE 30, 1996 $ 2,188 $ 11,559 $ (233) $ (424)
----------- --------- ---------- --------
----------- --------- --------- ---------
<CAPTION>
Unrealized
gains (losses)
on securities Total
Retained available stockholders'
earnings for sale,net equity
---------- ------------- ------------
<S> <C> <C> <C>
BALANCE AT JUNE 30, 1993 $ 24,947 $ 659 $ 37,472
Net income for 1994 4,059 4,059
Dividends paid (769) (769)
Exercise of stock awards, net 115
Release of ESOP shares 117
Net change in unrealized
gains (losses) on
securities available
for sale, net (727) (727)
3-for-2 stock split -
----------- --------- ----------
BALANCE AT JUNE 30, 1994 28,237 (68) 40,267
Net loss for 1995 (1,219) (1,219)
Dividends paid (973) (973)
Exercise of stock awards, net 165
Release of ESOP shares 109
Net change in unrealized
gains (losses) on
securities available
for sale, net 121 121
----------- --------- ----------
BALANCE AT JUNE 30, 1995 26,045 53 38,470
Net income for 1996 3,600 3,600
Dividends paid (1,043) (1,043)
Exercise of stock awards, net 848
Release of ESOP shares 103
Acquisition of treasury stock (233)
Net change in unrealized
gains (losses) on
securities available
for sale, net (38) (38)
----------- --------- ----------
BALANCE AT JUNE 30, 1996 $ 28,602 $ 15 $ 41,707
----------- --------- ----------
----------- --------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,600 $ (1,219) $ 4,059
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Loans originated for sale (16,310) (3,689) (7,671)
Sales of loans originated for sale 16,642 5,031 5,614
Net gain on sale of securities available for sale (179) - (6)
Deferred loan fees and loan discounts (392) (959) (92)
Depreciation and amortization 942 676 901
Non-cash compensation under stock-based benefit plans 103 109 676
Provision for loan losses 600 5,985 780
Deferred income taxes 709 (2,088) (1,614)
Other (933) 1,166 486
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,782 5,012 3,133
-------- -------- --------
INVESTING ACTIVITIES:
Loan originations and purchases (82,136) (60,415) (89,031)
Repayments on loans 62,064 48,895 94,964
Purchases of securities available for sale - - (5,999)
Maturities of securities available for sale - 948 -
Proceeds from sales of securities available for sale 28,532 - 9,547
Repayments of securities available for sale 2,849 1,184 1,787
Purchases of securities held to maturity (12,980) (12,789) (33,656)
Maturities of securities held to maturity 2,000 2,000 -
Repayments of securities held to maturity 9,057 7,543 20,666
Proceeds from sale of real estate acquired through foreclosure 1,082 1,327 2,273
Purchases of premises and equipment (445) (1,192) (346)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 10,023 (12,499) 205
-------- -------- --------
FINANCING ACTIVITIES:
Dividends paid (1,043) (973) (769)
Net decrease in deposits (7,771) (17,819) (344)
Net change in FHLB advances and ESOP debt (3,097) 2,904 (97)
Exercise of stock options 567 165 115
Payments to acquire treasury stock (233) - -
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (11,577) (15,723) (1,095)
-------- -------- --------
Increase (decrease) in cash equivalents 3,228 (23,210) 2,243
Cash equivalents at beginning of period 5,348 28,558 26,315
-------- -------- --------
Cash equivalents at end of period $ 8,576 $ 5,348 $ 28,558
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL INFORMATION:
Interest paid $ 12,129 $ 11,426 $ 11,320
Income taxes paid 855 1,055 1,180
NON-CASH TRANSACTIONS:
Transfers from loans receivable to real estate acquired
through foreclosure 1,078 431 535
Loan to facilitate the sale of real estate acquired
through foreclosure - - 770
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First
Financial Corporation of Western Maryland (the Corporation), the
Corporation's wholly-owned subsidiary bank, First Federal Savings Bank of
Western Maryland (the Bank), and the Bank's subsidiaries. All
intercompany transactions and balances have been eliminated in
consolidation.
CASH EQUIVALENTS
Cash equivalents include cash on hand and in banks as well as
interest-earning deposits.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Securities include investments primarily in bonds and notes and are
classified as either available for sale or held to maturity at the time of
purchase based on management's intent. Such intent includes consideration
of the interest rate environment, prepayment risk, credit risk, maturity
and repricing characteristics, liquidity considerations, investment and
asset/liability management policies and other pertinent factors. The
appropriateness of the classification is reassessed at each reporting date.
Securities for which the Corporation has the positive intent and ability to
hold to maturity are classified as held to maturity and are reported at
cost, adjusted for premiums and discounts.
Available for sale securities consist of securities that are not
classified as held to maturity. Unrealized holding gains and losses, net
of applicable income taxes, on available for sale securities are reported
as a separate component of stockholders' equity until realized. Gains and
losses on the sale of securities are determined using the specific
identification method and are included in operations in the period sold.
Declines in the fair value of securities below their cost that are other
than temporary result in the security being written down to fair value on
an individual basis. Any related write-downs are included in operations
as realized losses. Yields and carrying values for certain mortgage-backed
securities are subject to normal interest rate and prepayment risks.
Premiums and discounts on securities are recognized in interest income
using the interest method over the period to maturity.
LOANS RECEIVABLE
Loans receivable for which management has the intent and the Corporation
has the ability to hold for the foreseeable future or until maturity or
payoff are reported at their outstanding unpaid principal balances reduced
by any charge-offs and net of any deferred fees or costs on loans
originated, or unamortized premiums or discounts on loans purchased and
the allowance for loan losses.
Interest income on loans is accrued and credited to operations as earned.
Interest income is not accrued for loans delinquent 90 days or greater.
23
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
LOANS RECEIVABLE, (CONTINUED)
Discounts and premiums on purchased loans are recognized in interest
income using the interest method over the remaining period to contractual
maturity, adjusted for prepayments. Loan origination fees and certain
direct origination costs are capitalized and recognized as an adjustment
to the yield of the related loan over the loan's period to maturity.
Loans originated and intended for sale are carried at the lower of cost or
estimated market value in the aggregate.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by charges to operations through
the provision for loan losses and decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, current economic conditions and other factors as deemed
appropriate.
The allowance for loan losses is subjective and may be adjusted in the
future depending on economic conditions and other factors. The regulatory
examiners may require the Corporation to recognize adjustments to the
allowance based upon their judgements about information available to them
at the time of their examinations.
The Corporation adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," effective July 1, 1995. Under SFAS No. 114, the allowance
for loan losses related to "impaired loans" is based on discounted cash
flows using the impaired loan's initial effective interest rate at the
discount rate, or the fair value of the collateral for collateral
dependent loans. A loan is impaired when it meets the criteria to be
placed on non-accrual, is delinquent due to maturity, is a renegotiated
loan or management determines that a deficiency exists in the collateral
value of a collateral dependent loan. Loans which are evaluated for
impairment pursuant to SFAS No. 114 are assessed on a loan-by-loan basis,
and include only those loans that meet the definition of impairment.
Large groups of smaller balance homogeneous loans, such as credit cards,
loans secured by first and second liens on residential properties and
other consumer loans are evaluated collectively for impairment.
Loans are charged off when there has been permanent impairment of the
related carrying values.
24
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
LOAN SERVICING
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on
current market interest rates.
In May 1995 the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights and Excess Servicing Receivables and for Securitization
of Mortgage Loans." The Corporation adopted this standard effective July
1, 1995. The adoption of SFAS No. 122 resulted in the Corporation
realizing $208,000 in servicing rights assets, net of amortization, on
$16.6 million of loans sold, for which the servicing rights were retained
during 1996.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate properties acquired through foreclosure are initially recorded
at the lower of cost or fair value at the date of foreclosure establishing
a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of
cost or fair value less estimated costs to sell. Revenue and expenses
from operations of the properties, gains and losses on sales and additions
to the valuation allowance are included in operations as income or loss on
real estate activities.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises, furniture and equipment, and leasehold
improvements are carried at cost less accumulated depreciation or
amortization. Depreciation is calculated on a straight-line basis over the
estimated useful lives of the related assets, which are twenty-five to
fifty years for buildings and three to ten years for furniture and
equipment. Amortization of leasehold improvements is computed using the
straight-line method over the term of the related lease.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for/benefit from income taxes.
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes," which requires, among other things, a change from the deferred
method to the asset and liability method of accounting for deferred taxes.
The Corporation adopted SFAS No. 109 effective July 1, 1993. The
cumulative effect of this change in accounting for income taxes was a
benefit to operations of $1.7 million during 1994.
25
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
OPERATING RESULTS PER COMMON SHARE
Net income or loss per common share is calculated by dividing net income
or loss by the weighted average number of common shares outstanding during
the period. Outstanding shares include common stock equivalents, which
consist of certain outstanding stock options, and shares owned by the
Corporation's Employee Stock Ownership Plan (ESOP). The average number of
shares outstanding for 1996, 1995 and 1994 were 2,180,000, 2,175,000 and
2,169,000, respectively. The Corporation has not separately reported
fully diluted earnings per share as it is not materially different than
primary earnings per share.
RECLASSIFICATIONS AND USE OF ESTIMATES
Certain amounts previously reported for 1995 and 1994 have been
reclassified to conform with the consolidated financial statement
presentation for 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. SECURITIES
The following table summarizes the Corporation's securities as of June 30:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
------------------
1996:
Equity security $ 50 $ 25 $ - $ 75
------------ ------------ --------- ---------------
$ 50 $ 25 $ - $ 75
------------ ------------ --------- ---------------
------------ ------------ --------- ---------------
1995:
U.S. government and agency securities $ 11,240 $ 159 $ 73 $ 11,326
------------ ------------ --------- ---------------
$ 11,240 $ 159 $ 73 $ 11,326
------------ ------------ --------- ---------------
------------ ------------ --------- ---------------
HELD TO MATURITY
----------------
1996:
U.S. government and agency securities $ 51,476 $ 204 $ 306 $ 51,374
------------ ------------ --------- ---------------
$ 51,476 $ 204 $ 306 $ 51,374
------------ ------------ --------- ---------------
------------ ------------ --------- ---------------
1995:
U.S. government and agency securities $ 69,787 $ 483 $ 518 $ 69,752
State and municipal securities 50 1 - 51
------------ ------------ --------- ---------------
$ 69,837 $ 484 $ 518 $ 69,803
------------ ------------ --------- ---------------
------------ ------------ --------- ---------------
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the years ended June 30, 1996 and 1994, the Corporation sold
securities for proceeds of $28.5 million and $9.5 million, respectively.
The net gains associated with the sales of these securities in 1996 and
1994 were $179,000 and $6,000, respectively.
26
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
2. SECURITIES, (CONTINUED)
The scheduled maturities of securities available for sale and held to
maturity at June 30, 1996, were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
(IN THOUSANDS) Available for sale Held to maturity
------------------------- -----------------------
Amortized Fair Amortized Fair
cost value cost value
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 50 $ 75 $ 2,001 $ 2,002
Due from one year to five years - - 6,330 6,315
Due from five to ten years - - 1,958 1,955
Due after ten years - - 41,187 41,102
---------- --------- --------- --------
$ 50 $ 75 $ 51,476 $ 51,374
---------- --------- --------- --------
---------- --------- --------- --------
--------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1996 and 1995, the Corporation had pledged securities with a
carrying amount of $7.7 million and $6.2 million, respectively, to secure
certain public deposits and for other purposes required by law.
3. LOANS RECEIVABLE
Loans receivable are summarized as follows at June 30:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
Residential - single family $ 126,779 $ 138,217
Residential - multi family 29,071 6,257
Commercial real estate 55,104 51,604
----------- -----------
210,954 196,078
Other loans:
Automobile 29,410 30,471
Other consumer 11,177 6,499
Commercial business 3,263 3,869
----------- -----------
254,804 236,917
Less:
Allowance for loan losses 7,795 8,590
Deferred loan fees and net discounts 1,360 1,752
Loans in process 2,536 3,509
----------- -----------
$ 243,113 $ 223,066
----------- -----------
----------- -----------
------------------------------------------------------------------------------
</TABLE>
Following is a summary of non-performing loans at June 30:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $ 3,346 $ 2,776
Loans delinquent due to maturity 2,007 3,849
Troubled debt restructurings 412 419
----------- -----------
$ 5,765 $ 7,044
----------- -----------
----------- -----------
------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE, (CONTINUED)
For non-performing loans, the interest income that would have been recorded
under the original terms of such loans and the interest income actually
recognized for the years ended June 30 are summarized below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recorded $ 650 $ 410 $ 195
Interest income recognized 67 43 46
------- --------- --------
Interest income foregone $ 583 $ 367 $ 149
-------- --------- --------
-------- --------- --------
----------------------------------------------------------------------------------------------------------------
</TABLE>
Following is a summary of the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Residential Commercial Commercial
mortgage mortgage business Consumer Totals
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993 $ 298 $ 3,205 $ 146 $ 192 $ 3,841
Provision for losses 27 261 12 480 780
Charge-offs (6) (1) - (63) (70)
Recoveries - - - 10 10
-------- ----------- ----------- ---------- ----------
Balance, June 30, 1994 319 3,465 158 619 4,561
Provision for losses 776 4,648 11 550 5,985
Charge-offs (339) (1,611) - (65) (2,015)
Recoveries 36 - - 23 59
-------- ----------- ----------- ---------- ----------
Balance, June 30, 1995 792 6,502 169 1,127 8,590
Provision for losses 60 360 60 120 600
Charge-offs (67) (1,443) (19) (42) (1,571)
Recoveries 153 7 - 16 176
-------- ----------- ----------- ---------- ----------
Balance, June 30, 1996 $ 938 $ 5,426 $ 210 $ 1,221 $ 7,795
-------- ----------- ----------- ---------- ----------
-------- ----------- ----------- ---------- ----------
---------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation conducts its business through ten offices in Allegany,
Garrett and Washington Counties located in Western Maryland and primarily
lends in this geographical area. Management does not believe it has
significant concentrations of credit risk to any one group of borrowers
given its underwriting and collateral requirements.
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business. These financial instruments include
mortgage loan commitments, undisbursed lines of credit and standby letters
of credit. These instruments involve, to various degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition.
28
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE, (CONTINUED)
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument is represented by the
contract or notional amount of the financial instrument. The Corporation
uses the same credit policies in making commitments for off-balance sheet
financial instruments as it does for on-balance sheet financial
instruments. Financial instruments with off-balance sheet risk are as
follows at June 30:
--------------------------------------------------------------------------
(IN THOUSANDS) Contract amount
1996 1995
--------------------------------------------------------------------------
Mortgage loan commitments $ 9,870 $ 3,194
Undisbursed lines of credit
(including home equity lines and credit cards) 5,120 5,711
Secured standby letters of credit 16 52
Unsecured standby letters of credit 8 33
--------- ---------
$ 15,014 $ 8,990
--------- ---------
--------- ---------
---------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Corporation upon extension
of credit is based on management's credit evaluation of the counterparty.
Collateral held varies but generally may include cash, marketable
securities and property.
Outstanding mortgage loan commitments in the amount of $1.3 million and
$2.7 million at June 30, 1996, were for fixed and adjustable rate loans,
respectively, at interest rates ranging from 6.90% to 9.25% and 5.75% to
8.50%, respectively.
At June 30, 1996, the recorded investment in loans that was considered to
be impaired under SFAS No. 114 was $8.8 million, against which $3.6
million of the allowance for loan losses was allocated. During the year
ended June 30, 1996, impaired loans averaged approximately $9.3 million,
and the Corporation recognized interest income of approximately $583,000
on impaired loans.
4. LOAN SERVICING
The Corporation was servicing loans with unpaid principal balances of
$53.0 million and $29.5 million at June 30, 1996 and 1995, respectively,
for third party investors which are not reflected in the consolidated
statements of financial condition. Such servicing operations result in
the generation of annual fee income of between 0.250% and 0.375% of the
unpaid principal balances of such loans.
29
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
4. LOAN SERVICING, (CONTINUED)
Advance payments by borrowers for taxes and insurance includes $677,000
and $507,000 at June 30, 1996 and 1995, respectively, held in custodial
accounts in connection with the foregoing loans.
Mortgage servicing rights of $273,000 were capitalized during the year
ended June 30, 1996. At June 30, 1996 the fair value of mortgage
servicing rights was $258,000.
5. INVESTMENT REQUIRED BY LAW
The Bank is a member of the Federal Home Loan Bank (FHLB) System. As a
member, the Bank maintains an investment in the capital stock of the FHLB
of Atlanta, at cost, in an amount not less than 1.0% of the unpaid
principal balances of residential mortgage loans, 0.3% of total assets or
5.0% of outstanding advances, if any, due to the FHLB, whichever is
greater, as calculated at June 30 of each year. Purchases and sales of
stock are made directly with the FHLB at par value.
6. PREMISES AND EQUIPMENT
Premises and equipment at June 30 are summarized by major classification as
follows:
--------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
------------------------------------------------------------------------
Land $ 1,131 $ 1,131
Buildings and improvements 10,749 10,724
Leasehold improvements 576 576
Furniture, fixtures and equipment 3,896 3,524
---------- --------
16,352 15,955
Less accumulated depreciation and amortization 5,431 4,809
---------- ---------
$ 10,921 $ 11,146
---------- ---------
---------- ---------
---------------------------------------------------------------------------
The Bank is obligated under non-cancelable, long term operating leases for
certain branch offices. These leases, each having renewal options, have
approximate aggregate annual rentals of $43,000, $43,000, $26,000, $23,000,
$23,000 and $10,000 for the years ended June 30, 1997, 1998, 1999, 2000,
2001 and thereafter, respectively.
Rent expense for the years ended June 30, 1996, 1995 and 1994 were $69,000,
$78,000 and $78,000, respectively. Depreciation and leasehold improvement
amortization expense included in occupancy and equipment expense was
$616,000, $646,000 and $667,000 for the years ended June 30, 1996, 1995 and
1994, respectively.
30
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
7. INCOME TAXES
The provision for/(benefit from) income taxes for the years ended June 30
is comprised of the following:
--------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
---------------------------------------------------------------------------
Current:
Federal $ 1,279 $ 1,088 $ 623
State 283 235 235
-------- -------- -------
1,562 1,323 858
Deferred:
Federal 581 (1,710) 500
State 128 (378) 107
-------- -------- -------
709 (2,088) 607
-------- -------- -------
$ 2,271 $ (765) $ 1,465
-------- -------- -------
-------- -------- -------
-------------------------------------------------------------------------
In addition to income taxes applicable to income before taxes in the
consolidated statements of operations, the following income tax
benefits/(expenses) were recorded to stockholders' equity during the years
ended June 30:
-------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
------------------------------------------------------------------------
Net loss (gain) on securities
available for sale $ 23 $ (75) $ 457
Compensation expense for tax purposes
in excess of amounts recognized for
financial statement purposes 175 - -
Expiration of stock appreciation rights (118) - -
------- --------- -------
$ 80 $ (75) $ 457
------ -------- -------
------ -------- -------
--------------------------------------------------------------------------
The tax effects of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities that are included in
the net deferred tax asset at June 30 relate to the following:
-------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
-------------------------------------------------------------------------
Allowances for losses on loans and real
estate acquired through foreclosure $ 2,727 $ 3,151
Interest and fees on loans 593 775
Stock-based benefit plans 63 286
Depreciation and amortization (819) (808)
Stock dividends on FHLB stock (329) (325)
Other, net 97 57
------- ---------
$ 2,332 $ 3,136
------- ---------
------- ----------
- ------------------------------------------------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
7. INCOME TAXES, (CONTINUED)
The Corporation determined that it was not required to establish a
valuation allowance for deferred tax assets in accordance with SFAS No.
109 since it is more likely than not that the deferred tax asset will be
realized through carryback to taxable income in prior years, future
reversals of existing taxable temporary differences, and, to a lesser
extent, future taxable income.
A reconciliation between the provision for (benefit from) income taxes and
the amount computed by multiplying operating results before income taxes by
the statutory Federal income tax rate of 34% for the years ended June 30 is
as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $ 1,996 $ (675) $ 1,302
Increase (decrease) resulting from:
State income taxes, net of Federal income tax benefit 271 (95) 173
Non-taxable interest income (22) (1) (27)
Other, net 26 6 17
------- ------- ---------
$ 2,271 $ (765) $ 1,465
------- ------- ---------
------- ------- ---------
------------------------------------------------------------------------------------------------
</TABLE>
Under certain provisions of the Internal Revenue Code (the Code),
qualified thrift institutions are permitted to deduct from taxable income
a provision for bad debts based on either actual bad debt experience or a
percentage of taxable income before such deduction. The deduction
percentage, subject to certain minimum tax provisions and other
limitations, is 8%. The provision for bad debts deducted from taxable
income is based on the percentage method in 1996 and 1995.
The Corporation and its subsidiaries file a consolidated federal income tax
return on a June 30 fiscal year end basis. The Bank is permitted under the
Code to deduct an annual addition to a reserve for bad debts in determining
taxable income, subject to certain limitations. Bad debt deductions for
income tax purposes are included in taxable income of later years only if
the bad debt reserve is used subsequently for purposes other than to absorb
bad debt losses. Because the Bank does not intend to use the reserve for
purposes other than to absorb losses, no deferred income taxes have been
provided prior to 1987. Retained earnings at June 30, 1996 include
approximately $10.5 million representing such bad debt deductions for which
no deferred income taxes have been provided.
On August 20, 1996, President Clinton signed legislation which will
eliminate the percentage of taxable income bad debt deduction for thrift
institutions for tax years beginning after December 31, 1995. This new
legislation also requires thrifts, like the Bank, to generally recapture
the excess of its current tax reserves over its 1987 base year reserves.
As the Bank has previously provided deferred taxes on this amount, no
additional financial statement tax expense should result from this new
legislation.
32
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Corporation has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the
Corporation is involved in certain claims and legal actions arising in the
ordinary course of business. The outcome of these claims and actions are
not presently determinable; however, in the opinion of the Corporation's
management, after consulting legal counsel, the ultimate disposition of
these matters will not have a material adverse effect on the consolidated
financial statements.
9. DEPOSITS
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995
---------------------------------------- ------------------------------------
Weighted Weighted
Type of accounts average rate Amount % average rate Amount %
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Time deposits 5.29% $ 167,088 60.8% 5.31% $ 173,326 61.2%
Passbook and other 2.50% 50,597 18.4% 2.50% 55,281 19.5%
Checking and money market 2.37% 57,071 20.8% 2.28% 54,753 19.3%
---------- ------- ---------- -------
4.17% $ 274,756 100.0% 4.18% $ 283,360 100.0%
---------- ------- ---------- -------
---------- ------- ---------- -------
Time deposits mature as follows:
Under 6 months $ 22,905 13.7% $ 60,371 34.8%
6 to 12 months 41,573 24.9% 44,887 25.9%
12 to 24 months 28,387 17.0% 37,114 21.4%
24 to 36 months 18,860 11.3% 14,305 8.3%
36 to 48 months 31,399 18.8% 9,762 5.6%
48 to 60 months 15,728 9.4% 3,197 1.9%
Over 60 months 8,236 4.9% 3,690 2.1%
---------- ------- ---------- -------
$ 167,088 100.0% $ 173,326 100.0%
---------- ------- ---------- -------
---------- ------- ---------- -------
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on deposits is composed of the following for the years
ended June 30:
----------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
-----------------------------------------------------------------
Time deposits $ 9,544 $ 8,594 $ 8,410
Passbook and other 1,316 1,492 1,574
Checking and money market 1,165 1,241 1,243
------- ------- -------
$12,025 $11,327 $11,227
------- ------- -------
------- ------- -------
----------------------------------------------------------------
At June 30, 1996 and 1995, the Corporation had outstanding $23.5 million
and $24.2 million, respectively, in certificate accounts with a minimum
denomination of $100,000.
33
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
10. FHLB ADVANCES
The Bank has an ongoing agreement with the FHLB whereby the Bank may
borrow funds through various credit facilities from the FHLB not to exceed
75% of the total residential mortgage loan portfolio. There are no
commitment fees associated with the advance agreement and the FHLB may
reduce or terminate amounts available to be borrowed at any time.
11. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation has a tax qualified ESOP for the benefit of its employees.
All employees who attain the age of 21 and complete one year of service are
eligible to participate in the ESOP. Participants become 100% vested in
their accounts in the ESOP after five years of service or, if earlier, upon
death, disability or attainment of normal retirement age.
At the time of formation, the ESOP borrowed funds from an unrelated third
party lender to acquire 144,900 of the Corporation's common stock. The
loan has an interest rate of 7.99% per annum and has a ten year term which
matures on June 30, 2002. The ESOP holds the common stock in a trust for
allocation among participating employees. Shares are allocated to
participants based on participants' salaries and as the ESOP repays the
loan. The loan is secured by the unallocated shares held by the ESOP.
The ESOP's sources of repayment of the loan can include dividends, if any,
on the common stock held by the ESOP, either held in the trust or allocated
to participants' accounts, and discretionary contributions from the
Corporation to the ESOP and earnings thereon. For the years ended June 30,
1996, 1995 and 1994, the Corporation made contributions to the ESOP of
$148,000, $157,000 and $166,000, respectively.
The Corporation recognizes the cost of the ESOP under the shares allocated
method which is applied by recognizing interest expense as incurred each
period and recognizing compensation expense related to the principal
portion of the ESOP debt based on the cost of shares allocated for the
period. For the years ended June 30, 1996, 1995 and 1994 the Corporation
recognized interest expense of $51,000, $61,000 and $70,000, and
compensation expense of $103,000, $109,000 and $117,000, respectively,
related to the ESOP.
At June 30, 1996 and 1995 there were 64,000 and 79,000 unallocated shares
in the ESOP with an aggregate market value of $1.3 million and $1.7
million, respectively.
PENSION PLANS
On July 1, 1995, the Corporation adopted a defined contribution employee
retirement plan for the benefit of substantially all full-time employees.
The plan provides for regular employer payments that match each
participating employee's contribution to their individual tax-deferred
retirement account. Employees can contribute up to 12% of their
compensation to the plan, and the employer matching rate is 100% of the
employee's contribution, limited to 6% of the employee's compensation. The
Corporation contributed $147,000 to the plan during the year ended June 30,
1996.
34
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
11. EMPLOYEE BENEFIT PLANS, (CONTINUED)
PENSION PLANS, (CONTINUED)
Effective June 30, 1995, and concurrent with the adoption of the defined
contribution plan, the Corporation terminated its qualified
non-contributory defined benefit plan which previously covered all
full-time employees who had attained minimum age and service period
requirements.
During 1996, the Corporation received permission from the Pension Benefit
Guarantee Corporation and the Internal Revenue Service to satisfy the
plan's liabilities through qualified distributions of the plan's assets.
Defined benefit periodic pension costs for the years ended June 30, 1996,
1995 and 1994 were $78,000, $80,000 and $68,000, respectively.
STOCK OPTION PLAN
The Corporation has a Stock Option Plan (Option Plan) which provides for
the grant of stock options, stock appreciation rights (SARs) and, under
certain circumstances, limited stock appreciation rights (LSARs) to key
employees and directors.
The Option Plan provides for the grant of both incentive stock options and
compensatory stock options. SARs are granted in connection with shares
covered by a stock option. Upon exercise of SARs, the holder receives the
difference between: (1) the fair market value of the shares of stock
subject to the SAR at the time the SAR is exercised; and (2) the fair
market value of such shares at the time the SAR was granted to be paid in
common stock, cash, or a combination thereof. LSARs may be granted with
respect to all or some of the shares covered by a stock option, and are
exercisable only in connection with a change in control of the
Corporation, as defined by the Option Plan.
A summary of changes in shares under option, SARs and options exercisable
for the years ended June 30, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
1996 1995
------------------------- --------------------------
Options SARs Options SARs
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 146,564 53,043 119,126 56,924
Granted ($20.25 - $21.75 per share) 6,648 - 52,000 -
Exercised ($6.67 - $11.50 per share) (57,972) (11,000) (24,562) -
Expired (17,506) (34,281) - (3,881)
----------- ----------- ----------- -----------
Outstanding at end of year
($6.67 - $21.75 per share) 77,734 7,762 146,564 53,043
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Exercisable at end of year 77,734 7,762 139,442 53,043
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
-------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Corporation in
estimating fair values of financial instruments.
CASH AND EQUIVALENTS -- The carrying amounts of cash and equivalents
approximate their fair values.
SECURITIES -- Fair values for securities are based on quoted market prices.
LOANS RECEIVABLE -- For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain residential mortgage and
consumer loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. Fair values of commercial real estate and
commercial business loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values of
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
FHLB STOCK -- FHLB stock is restricted for trading purposes, and thus, the
carrying value approximates fair value.
DEPOSITS -- The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date.
Fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies current market interest rates to a
schedule of aggregated expected monthly maturities.
FHLB ADVANCES AND ESOP DEBT -- Given the nature and terms of these
instruments, fair value approximates book value.
LOAN COMMITMENTS -- The fair value of loan commitments at June 30, 1996 and
1995 approximated the carrying value of those commitments at those dates.
The following table sets forth the carrying amount and fair value of the
Corporation's financial instruments at June 30:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
------------------------ -------------------------
Carrying Fair Carrying Fair
amount value amount amount
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and equivalents $ 8,576 $ 8,576 $ 5,348 $ 5,348
Securities available for sale 75 75 11,326 11,326
Securities held to maturity 51,476 51,374 69,837 69,803
Loans receivable 243,113 251,706 223,066 226,205
FHLB stock 2,097 2,097 2,097 2,097
Financial liabilities:
Deposits 274,756 273,478 283,360 282,676
FHLB advances and ESOP debt 483 483 3,580 3,580
-------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
13. INSURANCE OF ACCOUNTS AND REGULATORY MATTERS
The Federal Deposit Insurance Corporation through the Savings Association
Insurance Fund insures deposits of account holders up to $100,000 per
insured depositor. To provide for this insurance, the Bank must pay an
annual premium.
In connection with the insurance of deposits, the Bank is required to
maintain certain minimum levels of regulatory capital. The federal
regulatory capital regulations require the Bank and similar institutions
to have a minimum tangible capital ratio equal to 1.5% of adjusted total
assets and a minimum core capital ratio equal to 3% of adjusted total
assets. Additionally, institutions are required to meet a risk-based
capital requirement of 8% based on the credit risk represented by certain
assets, commitments and obligations, as defined by the federal regulations.
At June 30, 1996, the Bank was in compliance with current regulatory
capital requirements. Set forth below is a summary of the Bank's
regulatory capital position at June 30:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995
------------------------------- -------------------------------
Amount % of Assets (1) Amount % of Assets (1)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tangible Capital: Actual $ 39,719 12.36% $ 36,071 10.98%
Required 4,823 1.50% 4,930 1.50%
----------- ------- ----------- -------
Excess $ 34,896 10.86% $ 31,141 9.48%
----------- ------- ----------- -------
----------- ------- ----------- -------
Core Capital: Actual $ 39,719 12.36% $ 36,071 10.98%
Required 9,645 3.00% 9,859 3.00%
----------- ------- ----------- -------
Excess $ 30,074 9.36% $ 26,212 7.98%
----------- ------- ----------- -------
----------- ------- ----------- -------
Risk-based Capital: Actual $ 42,139 21.60% $ 38,363 20.60%
Required 15,610 8.00% 14,900 8.00%
----------- ------- ----------- -------
Excess $ 26,529 13.60% $ 23,463 12.60%
----------- ------- ----------- -------
----------- ------- ----------- -------
---------------------------------------------------------------------------------------------------------
(1) Tangible and core capital levels are shown as a percentage of total
adjusted assets; risk-based capital levels are shown as a percentage
of risk-weighted assets.
---------------------------------------------------------------------------------------------------------
</TABLE>
Retained earnings are substantially restricted in connection with
regulations related to the insurance of deposit accounts, which require the
Corporation to maintain statutory reserves in retained earnings.
Additionally, these regulations limit the amount of cash dividends the Bank
may pay to the Corporation pursuant to the Bank's maintenance of regulatory
capital levels.
37
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
14. SELECTED QUARTERLY FINANCIAL DATA
Following is a summary of selected quarterly financial data for the years
ended June 30:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, First Second Third Fourth
EXCEPT SHARE DATA) Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
----
Interest income $ 6,344 $ 6,577 $ 6,831 $ 6,728
Interest expense 3,047 3,124 3,071 2,860
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 3,297 3,453 3,760 3,868
Provision for loan losses 150 150 150 150
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,147 3,303 3,610 3,718
Other operating income 213 213 522 524
Other operating expenses 2,047 2,230 2,488 2,614
---------- ---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES 1,313 1,286 1,644 1,628
Provision for income taxes 512 475 655 629
---------- ---------- ---------- ----------
NET INCOME $ 801 $ 811 $ 989 $ 999
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER SHARE $ 0.37 $ 0.37 $ 0.45 $ 0.46
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1995:
----
Interest income $ 6,027 $ 6,115 $ 6,015 $ 6,652
Interest expense 2,847 2,840 2,820 2,937
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 3,180 3,275 3,195 3,715
Provision for loan losses 225 225 2,763 2,772
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,955 3,050 432 943
Other operating income 200 294 138 637
Other operating expenses 2,163 1,922 3,031 3,517
---------- ---------- ---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES 992 1,422 (2,461) (1,937)
Provision for (benefit from) income taxes 372 537 (927) (747)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 620 $ 885 $ (1,534) $ (1,190)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME (LOSS) PER SHARE $ 0.28 $ 0.40 $ (0.70) $ (0.54)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
-----------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
15. FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND -- CONDENSED FINANCIAL
STATEMENTS (PARENT COMPANY ONLY)
Following are condensed financial statements for the parent company as of
and for the years ended June 30:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
--------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash $ 836 $ 538
Securities held to maturity - 1,505
Receivable from the Bank 967 384
Equity in net assets of the Bank 39,719 36,071
Other assets 190 35
----------- -----------
TOTAL ASSETS $ 41,712 $ 38,533
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued expenses and other liabilities $ 5 $ 63
Stockholders' equity 41,707 38,470
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,712 $ 38,533
----------- -----------
----------- -----------
<CAPTION>
--------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME $ 34 $ 87 $ 68
OTHER INCOME 30 - -
OTHER OPERATING EXPENSES:
Professional fees - - 324
Other expenses 61 92 94
----------- ----------- -----------
TOTAL OTHER OPERATING EXPENSES 61 92 418
INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF
THE BANK AND INCOME TAX EXPENSE (BENEFIT) 3 (5) (350)
Equity in net income (loss) of the Bank 3,598 (1,214) 4,274
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 3,601 (1,219) 3,924
Income tax expense (benefit) 1 - (135)
----------- ----------- -----------
NET INCOME (LOSS) $ 3,600 $ (1,219) $ 4,059
----------- ----------- -----------
----------- ----------- -----------
--------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
15. FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND -- CONDENSED FINANCIAL
STATEMENTS (PARENT COMPANY ONLY), (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,600 $ (1,219) $ 4,059
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Non-cash compensation under
stock-based benefit plans 103 109 676
Equity in net (income) loss of the Bank (3,598) 1,214 (4,274)
(Increase) decrease in due to the Bank (583) 791 (715)
Other, net (20) 157 626
---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITES (498) 1,052 372
---------- ---------- ----------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 1,505 - -
---------- ---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,505 - -
---------- ---------- ----------
FINANCING ACTIVITIES:
Payment of dividends (1,043) (973) (769)
Exercise of stock options 567 165 115
Acquisition of treasury stock (233) - -
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (709) (808) (654)
---------- ---------- ----------
Increase (decrease) in cash equivalents 298 244 (282)
Cash equivalents at beginning of period 538 294 576
---------- ---------- ----------
Cash equivalents at end of period $ 836 $ 538 $ 294
---------- ---------- ----------
---------- ---------- ----------
-----------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
STOCK AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------------
STOCK LISTING AND MARKETS
The Corporation's common stock is traded over-the-counter and is quoted in The
Nasdaq Stock Market. The Nasdaq symbol is "FFWM." The listed market makers for
the stock include:
FERRIS BAKER WATTS, INC. LEGG, MASON, WOOD, WALKER, INC.
12 North Liberty Street 130 Green Street
Cumberland, MD 21502 Cumberland, MD 21502
Telephone: (301) 724-7161 Telephone: (301) 722-1200
FRIEDMAN BILLINGS RAMSEY & CO., INC. HERZOG, HEINE, GEDULD, INC.
1001 19th North - 18th Floor 525 Washington Boulevard
Arlington, VA 22209 Jersey City, NJ 07310
Telephone: (703) 312-9500 Telephone: (212) 962-0300
KEEFE, BRUYETTE & WOODS, INC. WHEAT FIRST BUTCHER SINGER
Two World Trade Center 29 North Liberty Street
New York, NY 10048 Cumberland, MD 21502
Telephone: (212) 323-8300 Telephone: (301) 724-2660
STOCK PRICE AND DIVIDENDS
The following table sets forth the high and low prices of the Corporation's
common stock at the respective quarter-end dates as quoted by Nasdaq and cash
dividends declared per share for the related quarterly periods:
- --------------------------------------------------------------------------------
Market Price Cash
High Low Dividends
- --------------------------------------------------------------------------------
FISCAL 1996 QUARTER ENDED:
First quarter, September 30 $ 22.50 $ 19.75 $ 0.12
Second quarter, December 31 23.75 19.63 0.12
Third quarter, March 31 20.50 18.00 0.12
Fourth quarter, June 30 20.75 17.75 0.12
FISCAL 1995 QUARTER ENDED:
First quarter, September 30 $ 25.75 $ 22.50 $ 0.10
Second quarter, December 31 27.50 18.50 0.12
Third quarter, March 31 22.50 19.75 0.12
Fourth quarter, June 30 22.00 18.75 0.12
- --------------------------------------------------------------------------------
The bid and ask price of the Corporation's common stock were $24.25 and $25.00,
respectively, on September 9, 1996.
41
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
STOCK AND DIVIDEND INFORMATION, (CONTINUED)
- --------------------------------------------------------------------------------
NUMBER OF STOCKHOLDERS AND SHARES OUTSTANDING
As of June 30, 1996 there were approximately 933 stockholders of record and
2,176,739 shares of common stock entitled to vote and receive dividends and were
considered outstanding for financial reporting purposes. The number of
stockholders of record does not reflect the number of persons or entities who
hold their stock in nominee or "street" name.
DIVIDEND REINVESTMENT PLAN
The Corporation offers its stockholders a convenient and economical plan to
increase their investment in the Corporation. Holders of stock may have their
quarterly dividends automatically invested in additional common shares of the
Corporation's common stock. Stockholders participating in the plan may also
make voluntary cash contributions not to exceed $3,000 per quarter.
Stockholders not yet enrolled in the plan may receive a brochure describing the
plan by contacting the Corporation or ChaseMellon Shareholder Services.
42
<PAGE>
- -------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CORPORATE INFORMATION
- -------------------------------------------------------------------------------
CORPORATE HEADQUARTERS
First Financial Corporation of Western Maryland
118 Baltimore Street
Cumberland, MD 21502
Phone: (301) 724-3363
SUBSIDIARY COMPANIES
First Federal Savings Bank of Western Maryland
Mid-Atlantic Service Corporation
Mid-Atlantic Underwriters Agency, Inc.
ANNUAL MEETING
The annual meeting of the Corporation's stockholders will be held at 10:00
a.m., on Thursday, October 24, 1996, at the Holiday Inn, South George Street,
Cumberland, Maryland. Stockholders are encouraged to attend.
STOCKHOLDER AND INVESTOR INFORMATION
Copies of annual reports, quarterly reports and related stockholder
literature are available upon written request without charge to stockholders.
Requests should be addressed to H. Louise Smyth, Marketing Coordinator of
the Bank, at the Corporation's headquarters.
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Corporation's transfer agent, ChaseMellon
Shareholder Services, directly at (800) 756-3353.
Security analysts, retail brokers and individual investors may contact
Patrick J. Coyne, Chairman of the Board, President and Chief Executive
Officer, or William C. Marsh, Executive Vice President and Chief Financial
Officer, for information about the Corporation.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP
One Mellon Bank Center
Pittsburgh, PA 15219
SPECIAL COUNSEL
Elias, Matz, Tiernan & Herrick LLP
734 15th Street, NW
Washington, DC 20005
REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services
85 Challenger Road, Overpeck Centre
Ridgefield Park, NJ 07600
43
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
BOARD OF DIRECTORS, EXECUTIVE OFFICERS AND MANAGERS
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF
WESTERN MARYLAND
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
GORDON L. BOWIE
Retired, Former Part-Owner, Treasurer & Secretary,
Tri-State Paper
CHESTON H. BROWNING, III
Retired, President, Mark/Scott, Inc.
PATRICK J. COYNE
Chairman of the Board
President & Chief Executive Officer
L. FRED DEAN
Retired, Former Owner, Dean's Jewelry Store
W. LEE FLEMING
President, Fleming Oil Company
WALTER C. GROWDEN
Retired, Builder & Real Estate Appraiser
MORTON W. PESKIN, JR.
Retired, Former President, Peskins
R. THOMAS THAYER, JR.
President & Chief Executive Officer, Garrettland, Inc.
WILLIAM M. THOMPSON
VICE CHAIRMAN
Retired, Former National Accounts Manager, Westvaco
MARC E. ZANGER
Chairman of the Board & Chief Executive Officer,
BGS & G Companies
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
PATRICK J. COYNE
Chairman of the Board
President & Chief Executive Officer
KENNETH W. ANDRES
Executive Vice President
Chief Lending Officer
WILLIAM C. MARSH
Executive Vice President
Chief Financial Officer
R. CRAIG PUGH
Executive Vice President
Chief of Operations
- --------------------------------------------------------------------------------
44
<PAGE>
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
BOARD OF DIRECTORS, EXECUTIVE OFFICERS AND MANAGERS
- --------------------------------------------------------------------------------
FIRST FEDERAL SAVINGS BANK OF
WESTERN MARYLAND AND SUBSIDIARIES
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
GORDON L. BOWIE
Retired, Former Part-Owner, Treasurer & Secretary,
Tri-State Paper
CHESTON H. BROWNING, III
Retired, President, Mark/Scott, Inc.
PATRICK J. COYNE
Chairman of the Board
President & Chief Executive Officer
L. FRED DEAN
Retired, Former Owner, Dean's Jewelry Store
W. LEE FLEMING
President, Fleming Oil Company
WALTER C. GROWDEN
Retired, Builder & Real Estate Appraiser
MORTON W. PESKIN, JR.
Retired, Former President, Peskins
R. THOMAS THAYER, JR.
President & Chief Executive Officer, Garrettland, Inc.
WILLIAM M. THOMPSON
Vice Chairman
Retired, Former National Accounts Manager, Westvaco
MARC E. ZANGER
Chairman of the Board & Chief Executive Officer,
BGS & G Companies
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
PATRICK J. COYNE
Chairman of the Board
President & Chief Executive Officer
KENNETH W. ANDRES
Executive Vice President
Chief Lending Officer
WILLIAM C. MARSH
Executive Vice President
Chief Financial Officer
R. CRAIG PUGH
Executive Vice President
Chief of Operations
- --------------------------------------------------------------------------------
BANK DEPARTMENT MANAGERS
- --------------------------------------------------------------------------------
BRENDA ANDREWS
Collections
TIMOTHY A. BRACKEN
Treasurer
H. EUGENE BROADWATER
Residential Lending
VICKI L. DELLIGATTI
Human Resources
BRENT A. FILAK
Internal Audit
TERRY D. FROST
Controller
JUNE M. HARDY
Customer Service
SUE ANN MCMAHON
Loan Servicing
DAVID C. MATHEWS
Correspondent Lending
CHERYL L. SHERMAN
Branch Operations
H. LOUISE SMYTH
Marketing
JAMES A. STEMPLE, JR.
Operations & Compliance
DAVID M. WAUGERMAN
New Accounts, Insurance & IRAs
JOHN M. ZIMOWSKI
Consumer Lending
- --------------------------------------------------------------------------------
BANK BRANCH MANAGERS
- --------------------------------------------------------------------------------
CONNIE J. BASELER
Main Office
KATHY A. BEVERAGE
Tri-Towns
JOHN W. GOLDEN
Frostburg
SCOTT A. HOSTETLER
Country Club Mall
WILLIAM H. JOHNSON
Industrial Boulevard
RONNIE S. LEASE
Braddock Square
J. TODD STREETT
Hagerstown
DAVID W. SWEITZER
Oakland
J. RICHARD WHEELER
Country Club Mall
- --------------------------------------------------------------------------------
45
<PAGE>
- -------------------------------------------------------------------------------
NOTES
- -------------------------------------------------------------------------------
46
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant (1)
Percentage State of
Name Owned Incorporation
---- ----- -------------
First Federal Savings Bank 100% United States
of Western Maryland
Mid-Atlantic Service 100% Maryland
Corporation(2)
Mid-Atlantic Underwriters 100% Maryland
Agency (3)
_______________
(1) The operations of the Corporation's subsidiaries are included in the
Corporation's consolidated financial statements.
(2) Wholly-owned subsidiary of First Federal Savings Bank of Western Maryland
(3) Wholly-owned subsidiary of Mid-Atlantic Service Corporation
<PAGE>
EX. 23
[LETTER HEAD]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
First Financial Corporation of Western Maryland:
We consent to incorporation by reference in the Registration Statement (Form
S-8, No. 33-62034) of First Financial Corporation of Western Maryland of our
report dated August 1, 1996, with respect to the consolidated financial
statements of First Financial Corporation of Western Maryland and
subsidiaries as of June 30, 1996 and 1995 and for each of the years in the
three-year period ended June 30, 1996, which report is incorporated by
reference in the June 30, 1996 Annual Report on Form 10-K filed by First
Financial Corporation of Western Maryland.
Our report refers to a change in the method of accounting for income taxes in
1994 and for loans and mortgage servicing rights during 1996.
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
September 25, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 2,953
<INT-BEARING-DEPOSITS> 5,623
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75
<INVESTMENTS-CARRYING> 51,476
<INVESTMENTS-MARKET> 51,374
<LOANS> 243,113
<ALLOWANCE> 7,795
<TOTAL-ASSETS> 321,994
<DEPOSITS> 274,756
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,048
<LONG-TERM> 483
0
0
<COMMON> 2,188
<OTHER-SE> 39,519
<TOTAL-LIABILITIES-AND-EQUITY> 321,994
<INTEREST-LOAN> 21,434
<INTEREST-INVEST> 4,092
<INTEREST-OTHER> 954
<INTEREST-TOTAL> 26,480
<INTEREST-DEPOSIT> 12,025
<INTEREST-EXPENSE> 12,102
<INTEREST-INCOME-NET> 14,378
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 179
<EXPENSE-OTHER> 9,379
<INCOME-PRETAX> 5,871
<INCOME-PRE-EXTRAORDINARY> 3,600
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,600
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
<YIELD-ACTUAL> 8.33
<LOANS-NON> 3,346
<LOANS-PAST> 0
<LOANS-TROUBLED> 412
<LOANS-PROBLEM> 2,007
<ALLOWANCE-OPEN> 8,590
<CHARGE-OFFS> 1,571
<RECOVERIES> 176
<ALLOWANCE-CLOSE> 7,795
<ALLOWANCE-DOMESTIC> 1,494
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,301
</TABLE>
