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
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
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:
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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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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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The following table sets forth the maturity of the Corporation's loan portfolio
at June 30, 1996 based on contractual maturity:
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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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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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The following table sets forth the dollar amount of fixed and variable rate
loans due after one year:
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(IN THOUSANDS) Fixed Adjustable
rates rates
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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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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:
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(IN THOUSANDS) 1996 1995 1994
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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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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.
4
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
6
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
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:
- ------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
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%
====== ====== ====== ======= ======
- ------------------------------------------------------------------------------------------------------------------
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
The following table sets forth an analysis of the allowance for losses on loans
receivable for the periods indicated:
- -------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
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
====== ====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
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
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following table summarizes the Corporation's investment and mortgage-backed
securities at June 30:
- -------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------------------------------------------
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
========= ====== ====== =========
- --------------------------------------------------------------------------------------------------------------------------------
The following table shows the maturities and the respective yields of the
Corporation's investment and mortgage-backed securities portfolio at June 30,
1996.
- -------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Available for sale Held to maturity
----------------------------------------- --------------------------------------
Amoritzed Fair Amortized Fair
cost value Yield cost value Yield
- -------------------------------------------------------------------------------------------------------------------------------
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
====== ===== ========= =========
- -------------------------------------------------------------------------------------------------------------------------------
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
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:
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994
----------------------------- --------------------------- ----------------------------
Rate % Rate % Rate %
- ---------------------------------------------------------------------------------------------------------------------------------
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%
========= ====== ========= ====== ========= ======
- ---------------------------------------------------------------------------------------------------------------------------------
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:
- -----------------------------------------------------------------------------------------------------------------------------
(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
- -----------------------------------------------------------------------------------------------------------------------------
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
========= ========= ========= ========= ========= ========= ======== ==========
- -----------------------------------------------------------------------------------------------------------------------------
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
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
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
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
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
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
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
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
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
19
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
20
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.
21
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
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.
23
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
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.
25
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.
26
EXHIBITS
The exhibits outlined in the following table are filed herewith or
incorporated by reference to previous filings:
- -----------------------------------------------------------------------------------------------------------
Exhibit Description Prior Filing or Page Number
- -----------------------------------------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------------------------------------
27
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
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