EXHIBIT 13
CONTENTS
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . 1
Chairman's Letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Management's Discussion and Analysis . . . . . . . . . . . . . . . . . . . . 4
Report of Independent Certified Public Accountants . . . . . . . . . . . . 18
Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 23
Stock and Dividend Information . . . . . . . . . . . . . . . . . . . . . . 41
Corporate Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Board of Directors, Executive Officers and Managers. . . . . . . . . . . . 44
CONSOLIDATED FINANCIAL HIGHLIGHTS
AS OF JUNE 30, 1996:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $321,994,000
Total stockholders' equity . . . . . . . . . . . . . . . . . . . $41,707,000
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . $19.16
FOR THE YEAR ENDED JUNE 30, 1996:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,600,000
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . 1.09%
Return on average equity . . . . . . . . . . . . . . . . . . . . . . . 8.97%
CORPORATE PROFILE
First Financial Corporation of Western Maryland, a publicly traded Delaware
corporation and thrift holding company, provides a full range of retail and
commercial financial products and services to customers in the Mid-Atlantic
region of the United States through its wholly-owned subsidiary bank, First
Federal Savings Bank of Western Maryland, and the Bank's subsidiaries.
First Federal Savings Bank of Western Maryland is a federally chartered,
FDIC-insured stock savings bank which conducts its business through ten
offices located within the greater Cumberland area, Hagerstown, Oakland and
Westernport, Maryland.
CORPORATE MISSION STATEMENT
First Financial Corporation of Western Maryland is committed to market
leadership through excellence in customer service, the satisfaction of
customer needs through the development of superior and innovative products
and the delivery of services in a highly efficient and economic manner while
providing a professional environment for employees and enhancing the value of
the Corporation for its stockholders.
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
OPERATIONS DATA FOR YEARS ENDED JUNE 30:
Interest income $ 26,480 $ 24,809 $ 23,228 $ 25,050 $ 29,116
Interest expense 12,102 11,444 11,297 13,752 18,867
--------- --------- --------- --------- ---------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 14,378 13,365 11,931 11,298 10,249
Provision for loan losses 600 5,985 780 350 317
--------- --------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 13,778 7,380 11,151 10,948 9,932
Other operating income 1,472 1,269 915 1,149 2,004
Other operating expenses 9,379 10,633 8,237 8,717 6,604
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 5,871 (1,984) 3,829 3,380 5,332
Provision for (benefit from) income taxes 2,271 (765) 1,465 1,227 2,080
--------- --------- --------- --------- ---------
NET INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 3,600 (1,219) 2,364 2,153 3,252
Cumulative effect of change in
accounting for income taxes (1) - - 1,695 - -
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 3,600 $ (1,219) $ 4,059 $ 2,153 $ 3,252
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect
of accounting change $ 1.65 $ (0.56) $ 1.09 $ 1.02 $ 0.51(2)
Cumulative effect of change in accounting
for income taxes - - 0.78 - -
--------- --------- --------- --------- --------
NET INCOME (LOSS) PER SHARE $ 1.65 $ (0.56) $ 1.87 $ 1.02 $ 0.51
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
FINANCIAL CONDITION DATA AS OF JUNE 30:
Total assets $ 321,994 $ 329,375 $ 345,646 $ 343,557 $ 342,281
Loans receivable, net 243,113 223,066 219,504 223,656 232,920
Securities 51,551 81,163 79,883 74,187 61,432
Total liabilities 280,287 290,905 305,379 306,085 308,260
Deposits 274,756 283,360 301,208 301,820 304,962
Stockholders' equity 41,707 38,470 40,267 37,472 34,021
KEY RATIOS FOR YEARS ENDED JUNE 30:
Return on average assets 1.09% - 1.18% 0.62% 0.95%
Return on average equity 8.97% - 9.97% 6.02% 11.99%
Interest rate spread 4.08% 3.73% 3.31% 3.20% 3.02%
Net interest margin 4.52% 4.11% 3.63% 3.47% 3.19%
Equity to assets ratio 12.20% 11.66% 11.86% 10.38% 7.96%
Dividend payout ratio 29.09% - 19.63% 26.18% 13.14%
(1) Reflects the adoption of Financial Accounting Standard Board Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," on
July 1, 1993. See note 1 of notes to consolidated financial statements.
(2) For the period February 10, 1992 (effective date of stock conversion and
initial public offering) through June 30, 1992, the portion of the year in
which the common stock was outstanding.
1
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CHAIRMAN'S LETTER
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TO OUR STOCKHOLDERS:
As you may know from our recent announcement, the Corporation is in the
process of identifying potential acquirors in pursuit of a sale of the
Corporation. Although no assurance of sale can be given, we are proceeding
with this initiative for several reasons: (1) after the last year and
one-half, the Corporation's financial condition and core earnings have more
than improved enough to permit us to move forward with this process and
other internal programs to enhance shareholder value; (2) the consolidation
in the financial services industry is continuing at a rapid pace; and (3)
the Corporation is a desirable addition to potential purchasers. We are
proceeding expeditiously to complete this process and will keep you informed
as developments occur.
[PHOTO]
PATRICK J. COYNE
CHAIRMAN OF THE BOARD, PRESIDENT & CHIEF EXECUTIVE OFFICER
For the fiscal year ended June 30, 1996, we had consolidated net income of
$3.6 MILLION or $1.65 per share, as compared to a net loss of $1.2 million or
$0.56 per share for the prior fiscal year. The Corporation's return on
average assets and return on average equity were above industry averages at
1.09% and 8.97%, respectively, for the year ended June 30, 1996. Fiscal 1996
results represent record core earnings for the Corporation as net income
before income taxes and accounting changes was $5.9 million for fiscal 1996
compared to a loss of $2.0 million in fiscal 1995 and income of $3.8 million
in fiscal 1994.
For the fourth quarter ended June 30, 1996, the Corporation realized
consolidated net income of $999,000 or $0.46 per share, compared to a net
loss of $1.2 million or $0.54 per share for the same period in the prior
fiscal year. The prior year's quarterly and annual net losses were primarily
the result of the Corporation incurring $5.5 million in provisions for loan
losses in the third and fourth quarters of fiscal 1995.
Total stockholders' equity and book value per share increased to $41.7 million
and $19.16 per share, respectively, at June 30, 1996, as compared to $38.5
million and $18.06 per share, respectively, at June 30, 1995. Total assets
minimally decreased to $322.0 million at June 30, 1996 from $329.4 million at
June 30, 1995. This decrease in assets reflects management's ongoing efforts to
control the Corporation's cost of funds and enhance net interest margin by
planned decreases in higher costing certificates of deposit in order to position
the Corporation for the utilization of more favorable sources of funding for
future growth.
2
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CHAIRMAN'S LETTER, (CONTINUED)
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Improvements in core operating results for fiscal 1996 included an increase
of $1.0 million or 7.6% in net interest income to $14.4 million in fiscal
1996, from $13.4 million in fiscal 1995 and a reduction in operating expenses
of $1.3 million or 11.8% to $9.4 million in fiscal 1996, from $10.6 million
in fiscal 1995. Contributing to the increase in net interest income was an
improvement in the Corporation's net interest margin to 4.52% for fiscal
1996, up from 4.11% in fiscal 1995. This increase in net interest margin can
be attributed to a strategic realignment of the Corporation's securities
portfolio achieved during fiscal 1996 by reinvesting underperforming
securities and securities with significant pre-payment risk into higher
yielding government agency securities and loans, a planned reduction in
deposit costs and increased average loan balances from fiscal 1995 to fiscal
1996. New loan production for fiscal 1996 was $98.4 million, resulting in a
net increase in loans receivable of $20.0 million or 9.0% to $243.1 million
at June 30, 1996 from $223.1 million at June 30, 1995.
During the year, the Corporation continued its steady progress in reducing
the level of problem assets. Non-performing assets decreased $1.2 million or
16.0% to $6.4 million at June 30, 1996 from $7.6 million at June 30, 1995.
Total loan loss reserves represented 135.2% of non-performing loans at June
30, 1996.
The continued improvement in the Corporation's profitability can be directly
attributed to management's efforts to improve the asset/liability mix and all
aspects of operations. These efforts have been part of ongoing initiatives,
implemented during the second half of fiscal 1995, to enhance shareholder
value and improve customer service. The initiatives include: the previously
announced stock repurchase program; offering new and improved loan and
deposit products designed to meet the specific needs of customers in the
Bank's market areas; modernizing the Corporation's data processing
capabilities; streamlining internal processes and procedures in order to
improve the efficiency of operations; providing training to the
Corporation's staff; and maintaining continued involvement in community
organizations and activities.
I am pleased with the fiscal 1996 results and the overall improvement of the
Corporation's financial and operational performance. The continued balance
sheet strength, loan growth momentum, and improved operating activities
provide a solid base for growth and continued favorable performance trends.
On behalf of the Board of Directors, officers and employees, I thank you for
your continued support.
Sincerely,
Patrick J. Coyne
CHAIRMAN OF THE BOARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER September 9, 1996
3
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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CORPORATE OVERVIEW
First Financial Corporation of Western Maryland (the Corporation) is a Delaware
corporation and thrift holding company that provides a full range of retail and
commercial financial products and services to customers in the Mid-Atlantic
region of the United States through its wholly-owned subsidiary bank, First
Federal Savings Bank of Western Maryland (the Bank), and the Bank's
subsidiaries.
The Bank is a federally chartered, Federal Deposit Insurance Corporation (FDIC)
insured stock savings bank which conducts its business through ten offices
located throughout Western Maryland. The Bank has two subsidiaries, Mid-
Atlantic Service Corporation and Mid-Atlantic Underwriters Agency, Inc. Mid-
Atlantic Service Corporation owns certain premises of the Bank. Mid-Atlantic
Underwriters Agency, Inc. provides insurance products and services to customers
of the Bank. The Bank was organized in 1928 and, in 1935, adopted a federal
charter and obtained federal deposit insurance.
The Bank is a financial intermediary whose principal business consists of
attracting deposits from the general public and investing such deposits in real
estate loans secured by liens on residential and commercial properties, consumer
loans, commercial business loans, securities and interest-earning deposits.
The Corporation and the Bank are subject to examination and comprehensive
regulation by the Office of Thrift Supervision (OTS), the Bank's chartering
authority, and the FDIC, the administrator of the Savings Association Insurance
Fund (SAIF). The Bank is a member of the Federal Home Loan Bank (FHLB) of
Atlanta, which is one of the twelve regional banks comprising the FHLB System.
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Corporation's asset and liability management
function is to maximize the Corporation's net interest income while
simultaneously maintaining an acceptable level of interest rate risk given the
Corporation's operating environment, capital and liquidity requirements,
performance objectives and overall business focus. The Corporation's
Asset/Liability Management Committee is responsible for establishing prudent
policies and implementing programs which insulate the Corporation's earnings
from the impact of changes in the interest rate environment.
Historically, the Corporation emphasized the origination and purchase of one-to-
four family residential mortgage loans with adjustable interest rates and the
purchase of securities with adjustable or floating interest rates and shorter-
term maturities. In addition, past deposit product pricing policies established
rates that encouraged customers to select longer-term certificates of deposit.
The result of these prior asset/liability management strategies typically
resulted in one year cumulative interest rate sensitivity gaps of positive 30.0%
or higher. The one year interest rate sensitivity gap is defined as the
difference between the Corporation's interest-earning assets which are scheduled
to mature or reprice within one year and its interest-bearing liabilities which
are scheduled to mature or reprice within one year. A gap ratio (rate sensitive
assets divided by rate sensitive liabilities) of one indicates a statistically
perfect match. A gap ratio of greater than one suggests that a financial
institution's net interest income may be adversely affected in a
4
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
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declining interest rate environment as more interest-earning assets will be
repriced downward than will interest-bearing liabilities. A gap ratio of
less than one suggests the converse.
One of the goals established by the Corporation's new management during 1995 was
to move toward a more neutral interest rate risk position at the one year
horizon, with a target range of between positive 10% and negative 10%. In an
effort to achieve this goal, management implemented and pursued the following
strategies over the preceding six fiscal quarters:
1. Reduced the Corporation's emphasis on certificates of deposit with a
concurrent increased emphasis on demand deposits and borrowed funds as a
source of funds for investment in interest-earning assets. This strategy
emphasizes profitable net interest margin management rather than increased
deposit size and is intended to decrease interest rate risk while
simultaneously lowering the Corporation's overall cost of funds.
2. Increased the Corporation's percentage of fixed rate loans through the
origination of residential and commercial mortgage and consumer loans with
fixed rates of interest which meet management's return on investment
parameters. Virtually all of the Corporation's fixed rate, single-family
residential loans are originated under terms and conditions which permit
their sale in the secondary market. The Corporation retains the servicing on
all such loans which do not meet the minimum return on investment goals and
which are sold in secondary markets.
These initiatives, combined with other external factors such as demand for the
Corporation's products and economic and interest rate environments in general,
have resulted in reducing the Corporation's positive one year cumulative
repricing gap to $25.2 million or 7.8% at June 30, 1996 from $75.6 million or
23.0% at June 30, 1995 and $107.7 million or 31.2% at June 30, 1994.
The following table summarizes the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of June 30, 1996, which are expected
to mature, prepay or reprice in each of the future time periods shown:
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) DUE IN DUE WITHIN DUE WITHIN DUE WITHIN DUE IN
SIX MONTHS SIX MONTHS ONE TO THREE TO OVER
OR LESS TO ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 113,130 $ 56,034 $ 100,471 $ 19,684 $ 21,410 $ 310,729
Total interest-bearing liabilities 81,615 62,337 69,603 36,333 19,894 269,782
---------- ---------- ---------- ---------- ---------- ----------
Maturity or repricing gap during the period $ 31,515 $ (6,303) $ 30,868 $ (16,649) $ 1,516 $ 40,947
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Cumulative gap $ 31,515 $ 25,212 $ 56,080 $ 39,431 $ 40,947
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of gap during the period to total assets 9.79% (1.96%) 9.59% (5.17%) 0.47%
---------- ----------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ----------
Ratio of cumulative gap to total assets 9.79% 7.83% 17.42% 12.25% 12.72%
---------- ----------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ----------
Total assets $ 321,994
----------
----------
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The amount of assets or liabilities shown which mature or reprice during a
particular period were determined in accordance with the contractual terms of
the asset or liability. Adjustable rate assets are included in the period in
which interest rates are next scheduled to adjust. Fixed rate loans and
securities are included in the periods in which they are anticipated to be
repaid. Money market deposit accounts, which are generally subject to immediate
withdrawal, are
5
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
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included in the "Due in six months or less" period. Other demand deposit
accounts are spread in accordance with historical withdrawal experience and
management's belief that such deposits are generally non-interest rate
sensitive.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are deposits, advances from the FHLB,
loan and security repayments and funds provided by operations. While payments
of principal and interest on loans and other investments are relatively
predictable sources of funds, deposit flows are much less predictable since they
are greatly influenced by the level of interest rates, the state of the economy,
competition and industry conditions.
The Bank is required by the OTS to maintain minimum levels of liquidity to
ensure its ability to meet demands for customer withdrawals and the repayment of
short-term borrowings. The liquidity requirement is calculated as a percentage
of deposits and short-term borrowings, as defined by the OTS, and currently must
be maintained at amounts not less than 5.0%. The Bank's liquidity ratios
fluctuate depending primarily upon deposit flows but have been consistently
maintained at levels in excess of the required percentage. At June 30, 1996,
1995 and 1994, the Bank's liquidity ratio was approximately 6.93%, 6.31% and
13.8%, respectively. The sources of liquidity and capital resources discussed
above are believed by management to be sufficient to fund outstanding loan
commitments and meet other obligations.
Current regulatory requirements specify that the Bank and similar institutions
must maintain tangible capital equal to 1.5% of adjusted totals assets, core
capital equal to 3% of adjusted total assets and risk-based capital equal to 8%
of risk-weighted assets. The Office of the Comptroller of the Currency and the
FDIC have adopted more stringent core capital requirements which require that
the most highly rated banks have a minimum core capital ratio of 3%, with an
additional 100 to 200 basis point cushion required for all other banks as
established by the regulator on a case-by-case basis. Both the FDIC and the OTS
reserve the right to apply this higher standard to any insured financial
institution when considering an institution's capital adequacy.
At June 30, 1996, the Bank was in compliance with all regulatory capital
requirements with tangible, core and risk-based capital ratios of 12.36%, 12.36%
and 21.60%, respectively.
CHANGES IN FINANCIAL CONDITION
GENERAL. The Corporation's total assets decreased by $7.4 million or 2.2% to
$322.0 million at June 30, 1996 from $329.4 million at June 30, 1995. This
decrease was primarily due to a $29.6 million or 36.4% reduction in the amount
of securities held at June 30, 1996, as compared to June 30, 1995. The decrease
in securities was used to fund increases in loans receivable and cash and
interest-earning deposits of $20.0 million and $3.2 million, respectively, and
also to fund $8.6 million of net deposit outflows and the repayment of $3.0
million of FHLB advances. The decrease in securities and deposits and the
increase in loans can be attributed to the application of the previously
discussed asset/liability management policies which emphasize increasing the
Corporation's net interest margin rather than increasing deposit size.
CASH AND INTEREST-EARNING DEPOSITS. Cash and interest-earning deposits
increased by $3.2 million or 60.4% to $8.6 million at June 30, 1996 from $5.3
million at June 30, 1995. This
6
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
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increase was due primarily to an increase of $2.5 million in the amount of
FHLB deposits held at June 30, 1996 as compared to June 30, 1995. FHLB
deposits were increased by security sales, loan and security repayments and
inflows of new customer deposits and were reduced by new loan fundings,
security purchases and customer withdrawals from deposit accounts. The
remaining $731,000 increase was attributable to higher levels of cash on hand
and in banks resulting from fluctuations in daily operational and liquidity
requirements.
SECURITIES. Securities decreased by $29.6 million or 36.5% to $51.6 million at
June 30, 1996 from $81.2 million at June 30, 1995. Included in this decrease
was a net decrease of $18.4 million in securities held to maturity (HTM) and a
net decrease of $11.3 million in securities available for sale (AFS). The
combined decrease in HTM and AFS securities was attributable to the sale and
scheduled maturities of securities with an aggregate book value of $30.4
million, principal repayments of $11.9 million and net amortization of premiums
of $272,000, partially offset by new security purchases of $13.0 million.
During January 1996, the Corporation sold securities with a carrying amount of
$28.5 million and a weighted average yield of 6.5%. The net gain realized on
this transaction was $179,000. The decision to sell these securities was based
on (1) a recent restructuring of the Corporation's investment portfolio designed
to eliminate underperforming securities with significant prepayment risk in the
current and anticipated interest rate environments, as explained below, (2) the
opportunity to increase the Corporation's interest rate spread by replacing
these securities with higher yielding loans, (3) the Corporation's anticipated
loan growth over the next several months and management's evaluation of the
alternatives available to fund these new loans, and (4) the potential to improve
the Corporation's interest rate risk position.
The restructuring of the Corporation's securities portfolio was aided by the
release of a Special Report entitled "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities" from the
Financial Accounting Standards Board (FASB) on November 15, 1995. This report
most notably permitted a one-time opportunity between November 15, 1995 and
December 31, 1995 to reclassify securities between HTM and AFS. FASB Statement
No. 115 requires the Corporation to classify all debt securities and certain
equity securities as either HTM, AFS or trading. The Corporation classifies a
security as HTM if there is the positive intent and ability to hold the security
to maturity. HTM securities are accounted for at amortized cost. The
Corporation classifies a security as trading if the security is bought or held
principally for the purpose of selling it in the near term. The Corporation
accounts for a trading security at fair or market value, including unrealized
gains and losses in current operating results. A security not classified as
either trading or HTM is classified as AFS. The Corporation accounts for a
security with this classification at fair value, including unrealized gains and
losses as a separate component of stockholders' equity. FASB Statement 115
stipulated that transfers from the HTM category should be "rare" and if
transfers from the HTM category were to occur more often than rarely, then all
securities in that category could be presumptively reclassified as AFS, with
immediate impact on stockholders' equity. The November 15, 1995 release of the
Special Report permitted a one-time opportunity to reclassify securities between
HTM and AFS that would not call into question the Corporation's future intent to
hold other securities to maturity. Accordingly, on December 31, 1995, the
Corporation reclassified $25.2 million of securities from the HTM classification
to AFS.
7
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
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Transfers from AFS to HTM are not restricted by FASB Statement No. 115,
and in addition, the Bank also reclassified $5.0 million of securities from AFS
to HTM on December 31, 1995.
LOANS RECEIVABLE. Loans receivable increased by a net $20.0 million or 9.0% to
$243.1 million at June 30, 1996 from $223.1 million at June 30, 1995.
Contributing to this increase were net increases of $26.3 million or 45.5% in
commercial real estate and multi-family mortgage loans, and a $4.7 million or
72.0% increase in other consumer loans. Offsetting these increases were net
decreases of $11.4 million or 8.3% in single-family residential mortgage loans,
a $1.1 million or 3.5% decrease in auto loans, a $606,000 or 15.7% decrease in
commercial business loans, a $795,000 or 9.25% decrease in the allowance for
loan losses and a net decrease in deferred fees and loans in process of $1.4
million or 25.9%. These changes in the composition of the Corporation's loan
portfolio reflect management's decision to emphasize the origination of fixed
rate mortgage and consumer loans while concurrently reducing the percentage of
adjustable rate loans held in the portfolio.
NON-PERFORMING ASSETS. Non-performing assets, which include non-accrual loans,
loans delinquent due to maturity, troubled debt restructurings and real estate
acquired through foreclosure (REO) decreased by $1.2 million or 16.0% to $6.4
million at June 30, 1996 from $7.6 million at June 30, 1995. The overall
decrease in non-performing assets from June 30, 1995, was primarily attributable
to a decrease of $1.8 million in the amount of loans classified as delinquent
due to maturity, partially offset by increases of $570,000 in non-accrual loans
and $51,000 in REO.
The $1.8 million decrease in loans classified as delinquent due to maturity was
the net result of additions of $1.6 million less payoffs, transfers to
performing and transfers to non-accrual of $1.4 million, $1.7 million and
$300,000, respectively. Non-accrual loans increased by $570,000, the net result
of additions and transfers from delinquent due to maturity of $1.5 million less
payoffs, write-downs and transfers to performing of $314,000, $426,000 and
$190,000, respectively.
The following table presents the Corporation's non-performing assets and the
ratio of non-performing assets to total assets at June 30:
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(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------------------------------
Non-accrual loans $ 3,346 $ 2,776 $ 1,942
Loans delinquent due to maturity 2,007 3,849 -
Troubled debt restructuring 412 419 2,975
Real estate acquired through foreclosure 655 604 1,783
-------- -------- --------
$ 6,420 $ 7,648 $ 6,700
-------- -------- --------
-------- -------- --------
Ratio of non-performing assets to total 1.99% 2.32% 1.94%
assets -------- -------- --------
-------- -------- --------
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
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In addition to the decrease in non-performing assets set forth in the table
above, the allowance for loan losses decreased by $795,000 or 9.3% to $7.8
million at June 30, 1996 from $8.6 million at June 30, 1995. This decrease was
attributable to charge-offs of $1.6 million recorded on certain commercial real
estate loans during the year offset by provisions for loan losses of $600,000
and recoveries of $176,000.
Management believes that, based on its regular comprehensive reviews of the loan
portfolios and evaluation of known economic and specific loan factors, the
Corporation's allowance for loan losses at June 30, 1996 is adequate to cover
potential future losses in the loan portfolio. The allowance for loan losses is
subjective and may be adjusted in the future depending on economic conditions
and other factors.
DEPOSITS. Total deposits decreased by $8.6 million or 3.0% to $274.8 million at
June 30, 1996 from $283.4 million at June 30, 1995. Included in this reduction
in total deposits were reductions of $6.2 million or 3.6% in time deposits and a
$4.7 million or 8.5% decrease in passbook and other savings accounts offset by a
$2.3 million or 4.2% increase in checking and money market accounts. The
decrease in total deposits reflects a planned reduction in certain types of
longer term, higher costing time deposits while concurrently increasing low or
non-interest checking and money market accounts in an effort to increase the
Corporation's overall net interest income. The success of this planned deposit
outflow in increasing net interest income was evidenced by the growth in the
Corporation's net interest margin which increased to 4.52% at June 30, 1996 from
4.11% at June 30, 1995.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $3.2 million or 8.4% to
$41.7 million at June 30, 1996 from $38.5 million at June 30, 1995. This net
growth was comprised of increases of $3.6 million in net income for 1996, an
$848,000 increase realized upon the exercise of outstanding stock options during
the year and $103,000 resulting from the release of shares from the
Corporation's Employee Stock Ownership Plan (ESOP). Partially offsetting these
increases were decreases from dividends paid of $1.0 million, a $233,000
decrease related to the repurchase of treasury stock and a $38,000 decrease
recorded to recognize the net change in unrealized gains/losses on AFS
securities.
RESULTS OF OPERATIONS
GENERAL. The Corporation recorded net income of $3.6 million for the year ended
June 30, 1996 as compared to a net loss of $1.2 million for the year ended June
30, 1995 and net income of $4.1 million for the year ended June 30, 1994.
The $4.8 million increase in net operating results for 1996, as compared to
1995, was attributable to an increase in net interest income of $1.0 million, a
decrease in provision for loan losses of $5.4 million, an increase in other
operating income of $203,000 and a reduction in operating expenses of $1.3
million. Offsetting these increases in net operating results was an increase of
$3.0 million in income taxes recorded during the year.
The $5.3 million or 130.0% decrease in net operating results for 1995, as
compared to 1994, was attributable to an increase of $5.2 million in the
provision for loan losses and an increase in other
9
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
operating expenses of $2.4 million. Offsetting these decreases in net operating
results were increases of $1.4 million in net interest income, a $354,000
increase in other operating income and a net reduction of $2.2 million in the
amount of provision for/benefit from income taxes recorded during the year. The
results of operations for 1994 were also benefited by a non-recurring cumulative
effect of a change in the method of accounting for income taxes of $1.7 million.
NET INTEREST INCOME. Net interest income is determined by the Corporation's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts, or volumes, of interest-earning assets and interest-
bearing liabilities. Net interest income was $14.4 million for 1996 as compared
to $13.4 million for 1995 and $11.9 million for 1994. The $1.0 million or 7.6%
increase in net interest income for 1996, as compared to 1995, was attributable
to a $1.7 million or 6.7% increase in interest income, offset by an increase of
$658,000 or 5.7% in interest expense. The $1.4 million or 12.0% increase in net
interest income for 1995, as compared to 1994, was attributable to a $1.6
million or 6.8% increase in interest income, offset by an increase of $147,000
or 1.3% in interest expense.
The following table analyzes changes in interest income and interest expense in
terms of: (1) changes in the volume of interest-earning assets and interest-
bearing liabilities and (2) changes in yields and rates. The table reflects the
extent to which changes in the Corporation's interest income and interest
expense are attributable to changes in volume (change in volume multiplied by
prior year rate), changes in rate (change in rate multiplied by prior year
volume) and changes attributable to the combined impact of volume/rate (change
in rate multiplied by change in volume). The volume/rate variance is allocated
on a consistent basis between the volume and rate variances.
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------- ---------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- -----------------------------------------------------------------------------------------------
Interest income:
Securities $ (1,527) $ 848 $ (679) $ 588 $ 917 $ 1,505
Loans 917 984 1,901 441 212 653
Deposits and other 399 50 449 (1,000) 423 (577)
-------- ------- ------- ------- ------ -------
Total interest-earning assets (211) 1,882 1,671 29 1,552 1,581
-------- ------- ------- ------- ------ -------
Interest expense:
Deposits (381) 1,080 699 (249) 349 100
Other borrowings 28 (69) (41) 35 12 47
-------- ------- ------- ------- ------ -------
Total interest-bearing liabilities (353) 1,011 658 (214) 361 147
-------- ------- ------- ------- ------ -------
Net interest income $ 142 $ 871 $ 1,013 $ 243 $1,191 $ 1,434
-------- ------- ------- ------- ------ -------
-------- ------- ------- ------- ------ -------
- ----------------------------------------------------------------------------------------------
10
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
The following table sets forth, for the periods indicated, information
concerning the total dollar amounts of interest income from interest-earning
assets and the resultant average yields, the total dollar amounts of interest
expense on interest-bearing liabilities and the resultant average costs, net
interest income, interest rate spread and the net interest margin earned on
average interest-earning assets. For purposes of this table, loan balances
include non-accrual loans and interest income includes accretion of net deferred
loan fees.
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) Year Ended June 30, 1996 Year Ended June 30, 1995 Year Ended June 30, 1994
----------------------------- --------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Yield On:
Investment securities $ 11,305 $ 728 6.44% $ 15,969 $ 985 6.17% $ 10,052 $ 398 3.96%
Mortgage-backed securities 50,108 3,364 6.71% 70,076 3,786 5.40% 63,885 2,868 4.49%
--------- -------- ------- -------- -------- ------ -------- -------- -------
61,413 4,092 6.66% 86,045 4,771 5.54% 73,937 3,266 4.42%
--------- -------- ------- -------- -------- ------ -------- -------- -------
First mortgage loans 198,844 17,858 8.98% 195,162 16,616 8.51% 196,490 16,708 8.50%
Consumer and other 41,879 3,576 8.54% 35,000 2,917 8.33% 27,391 2,172 7.93%
--------- -------- ------- -------- -------- ------ -------- -------- -------
240,723 21,434 8.90% 230,162 19,533 8.49% 223,881 18,880 8.43%
--------- -------- ------- -------- -------- ------ -------- -------- -------
Interest-bearing deposits 13,753 795 5.78% 7,046 354 5.02% 28,717 975 3.40%
Other interest-earning assets 2,097 159 7.58% 2,113 151 7.15% 2,110 107 5.07%
--------- -------- ------- -------- -------- ------ -------- -------- -------
15,850 954 6.02% 9,159 505 5.51% 30,827 1,082 3.51%
--------- -------- ------- -------- -------- ------ -------- -------- -------
Total interest-earning assets 317,986 26,480 8.33% 325,366 24,809 7.62% 328,645 23,228 7.07%
Allowance for loan losses (8,372) - - (5,390) - - (4,201) - -
Other non-interest-earning assets 19,481 - - 17,801 - - 18,792 - -
--------- -------- ------- -------- -------- ------ -------- -------- -------
Total assets $ 329,095 $ 26,480 8.05% $337,777 $ 24,809 7.34% $343,236 $ 23,228 6.77%
--------- -------- ------- -------- -------- ------ -------- -------- -------
--------- -------- ------- -------- -------- ------ -------- -------- -------
Weighted Average Rate Paid On:
Deposits:
Time deposits $ 175,762 $ 9,544 5.43% $ 175,589 $ 8,594 4.89% $ 178,391 $ 8,409 4.71%
Checking and money market 55,322 1,165 2.11% 58,134 1,241 2.13% 58,340 1,244 2.13%
Passbook and other 52,293 1,316 2.52% 59,280 1,492 2.52% 62,826 1,574 2.51%
--------- -------- ------- -------- -------- ------ -------- -------- -------
283,377 12,025 4.24% 293,003 11,327 3.87% 299,557 11,227 3.75%
FHLB advances & other borrowings 1,456 77 5.29% 1,125 117 10.40% 772 70 9.07%
--------- -------- ------- -------- -------- ------ -------- -------- -------
Total interest-bearing liabilities 284,833 12,102 4.25% 294,128 11,444 3.89% 300,329 11,297 3.76%
Non-interest-bearing liabilities 4,116 - - 4,280 - - 2,204 - -
--------- -------- ------- -------- -------- ------ -------- -------- -------
Total liabilities 288,949 12,102 4.19% 298,408 11,444 3.84% 302,533 11,297 3.73%
Stockholders' equity 40,146 - - 39,369 - - 40,703 - -
--------- -------- ------- -------- -------- ------ -------- -------- -------
Total liabilities and equity $ 329,095 $ 12,102 3.68% $337,777 $ 11,444 3.39% $343,236 $ 11,297 3.29%
--------- -------- ------- -------- -------- ------ -------- -------- -------
--------- -------- ------- -------- -------- ------ -------- -------- -------
Net interest income $ 14,378 $ 13,365 $ 11,931
-------- -------- --------
-------- -------- --------
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 4.08% 3.73% 3.31%
------- ------ -------
------- ------ -------
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 4.52% 4.11% 3.63%
------- ------ -------
------- ------ -------
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME. Interest income was $26.5 million for 1996 as compared to
$24.8 million for 1995 and $23.2 million for 1994. The $1.7 million or 6.7%
increase in interest income for 1996, as compared to 1995, was attributable to
increases in income recorded on loans, interest-earning deposits and other
interest-earning assets, offset by a decrease in income from securities.
Interest income from loans receivable increased by $1.9 million during 1996 due
to an increase of $1.5 million in income recorded on first mortgage loans and a
$369,000 increase in income from consumer and other loans. The increase in
interest income realized on first mortgage loans was the result of higher
yields, which increased to 8.98% for 1996 from 8.51% for 1995, and an
11
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
increase in the average outstanding loan balance, which increased by $3.7
million during the year. Mortgage loan yields and outstanding balances
increased during 1996 due primarily to a refocused emphasis on commercial
real estate and multi-family loans. The Bank aggressively focused on this
market segment during fiscal 1996 while continuing to maintain its strict
loan underwriting, documentation, credit analysis and loan review standards.
Such loans typically earn higher yields than single-family residential
mortgages and their addition helped to contribute to an asset/liability mix
which improved the Corporation's overall interest rate risk position.
The increase in income from consumer and other loans was due to both an increase
in the yield realized on these types of loans, which increased to 8.54% for 1996
from 8.33% for 1995, and to an increase in the average outstanding loan balance,
which increased by $6.9 million during the year. The increase in consumer loan
yields reflects a shift in the portfolio mix away from lower yielding loans on
deposits and toward higher yielding automobile and home equity loans.
Interest income from securities decreased by $679,000 during 1996 as a result of
decreases in the average balance of funds invested, offset by an increase in the
yields earned on the overall securities portfolio. The average balance of
securities decreased by $24.6 million to $61.4 million for 1996 from $86.0
million during 1995 and reflects a portfolio restructuring and planned
downsizing which provided the Corporation with a source of funding for the new
loan growth described above. The yield earned on securities increased to 6.66%
for 1996 from 5.54% for 1995. This significant increase was achieved through
the previously described portfolio restructuring which de-emphasized short term
adjustable rate securities in favor of longer term fixed rate investment
vehicles.
The $1.6 million or 6.8% increase in interest income for 1995, as compared to
1994, was attributable to increases in income recorded on loans, securities and
other interest-earning assets, offset by a decrease in income from interest-
earning deposits. Interest income from loans receivable increased by $653,000
during 1995 due to an increase of $745,000 in income from consumer and other
loans offset by a decrease of $92,000 in income recorded on first mortgage
loans. The increase in income from loans was due primarily to an increase in
average outstanding loan balances, which increased by $6.3 million during the
year.
Interest income from securities increased by $1.5 million during 1995, as
compared to 1994 as a result of increases in both the average balance of funds
invested and the yield earned on the securities portfolio. The average balance
of securities increased by $12.1 million during 1995 from $73.9 million at June
30, 1994 to $86.0 million at June 30, 1995. The yield on the securities
portfolio also increased to 5.54% during 1995 from 4.42% for 1994 despite the
general decline in interest rates during the second half of fiscal year due to
the upward repricing of several new issue adjustable rate mortgage-backed
securities for which the underlying mortgages were originated at (teaser) rates
below their contractual spread over the appropriate indices and were not yet
fully indexed.
INTEREST EXPENSE. Interest expense was $12.1 million for 1996 as compared to
$11.4 million for 1995 and $11.3 million for 1994. The $658,000 or 5.8%
increase in interest expense for 1996, as compared to 1995, was attributable to
increases of $698,000 in deposit costs offset by a $40,000 decrease in the cost
of other borrowed funds.
12
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
The Corporation's cost of deposits increased for 1996, as compared to 1995, due
to an increase in the interest paid on certificates of deposit, offset by a
decrease in interest paid on passbook and savings accounts. Interest expense on
certificates of deposit increased by $950,000 due primarily to an increase in
the average interest rate paid, which increased to 5.43% during 1996 from 4.89%
for 1995. This increase occurred due to a significant amount of longer term
certificates of deposit maturing during the year that were originally issued at
rates below the 1996 levels for similar term products.
Interest paid on passbook and other similar accounts decreased by $176,000
during 1996, as compared to 1995, due primarily to a reduction in the average
balance of such accounts, which declined by $7.0 million to $52.3 million for
1996 from $59.3 million for 1995. Interest paid on checking and money market
accounts decreased by $76,000 during 1996, as compared to 1995, due primarily to
a reduction in the average balance of such accounts, which declined by $2.8
million to $55.3 million for 1996 from $58.1 million for 1995.
Interest expense on borrowed funds, which includes interest paid on FHLB
advances, the Corporation's ESOP debt expense and other miscellaneous interest
expenses, decreased by $40,000 during 1996, as compared to 1995, due primarily
to lower rates paid on FHLB advances utilized during the year.
The $147,000 or 1.3% increase in interest expense for 1995, as compared to 1994,
was attributable to increases of $100,000 in deposit costs and a $47,000
increase in the cost of other borrowed funds and other interest expense.
The Corporation's cost of deposits increased for 1995, as compared to 1994, due
to an increase in the interest paid on certificates of deposit, offset by a
decrease in interest paid on passbook and savings accounts. Interest expense on
certificates of deposit increased by $185,000 due primarily to an increase in
the average interest rate paid, which increased to 4.89% during 1995 from 4.71%
for 1994. This increase in cost was partially offset by a reduction in the
average balance of certificates of deposits outstanding during the year, which
declined to $175.6 million for 1995 from $178.4 million for 1994. Interest paid
on passbook and other similar accounts decreased during 1995, as compared to
1994, due primarily to a reduction in the average balance of such accounts,
which declined by $3.5 million to $59.3 million for 1995 from $62.8 million for
1994. Interest expense on borrowed funds, increased during 1995, as compared to
1994, due to an increase in the average amount of FHLB advances utilized during
the year and to a non-recurring interest expense charge related to the
settlement of prior years' tax return audits conducted by the Internal Revenue
Service.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $600,000 for 1996
as compared to $6.0 million for 1995 and $780,000 for 1994. The Corporation
records provisions for loan losses to bring the total allowance for loan losses
to a level deemed adequate to cover potential losses in the loan portfolio. In
determining the appropriate level of allowance for loan losses, management
considers historical loss experience, the present and prospective financial
condition of borrowers, current and prospective economic conditions
(particularly as they relate to markets where the Corporation originates loans),
the status of non-performing assets, the estimated underlying value of the
collateral and other factors related to the collectability of the loan
portfolio.
13
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
The $5.4 million or 90.0% decrease in provision for loan losses for 1996, as
compared to 1995, reflects the improvement in asset quality realized during 1996
and the adequacy of the allowance for loan losses during the respective years.
The $5.2 million increase in provision for loan losses for 1995, as compared to
1994, was primarily attributable to an extensive review of the loan portfolios
conducted by the Corporation's new management, to cover potential losses that
existed in the loan portfolio as of June 30, 1995.
OTHER OPERATING INCOME. Other operating income was $1.5 million for 1996 as
compared to $1.3 million for 1995 and $915,000 for 1994. The $203,000 or 16.0%
increase in total other income for 1996, as compared to 1995, was comprised of a
$283,000 increase in loan origination fees and deposit service charges due
primarily to increased mortgage loan originations and an increase in the volume
of transactions in commercial deposit accounts and a $179,000 gain realized upon
the sale of securities, partially offset by a $196,000 decrease in income
realized from the operation of REO properties and a $63,000 decrease in other
operating income.
The $354,000 or 38.7% increase in total other income for 1995, as compared to
1994, was comprised of increases in loan origination fees and deposit service
charges due primarily to increased volumes of loan originations and transactions
processed through customers deposit accounts, an increase in the amount of gains
on REO sales and the recognition of the cash surrender value of an officer's
life insurance policy.
OTHER OPERATING EXPENSES. Total other operating expenses decreased by $1.3
million or 11.8% to $9.4 million in 1996 from $10.6 million in 1995 and
increased by $2.4 million or 29.1% in 1995 from $8.2 million in 1994.
Compensation and employee benefits were $4.5 million for 1996 as compared to
$4.4 million for 1995 and $4.2 million for 1994. The $59,000 or 1.3% increase
for 1996, as compared to 1995, was due primarily to normal inflationary factors,
partially offset by a decrease in a non-recurring expense related to deferred
compensation agreements with a former officer recorded in 1995. The $279,000 or
6.7% increase for 1995, as compared to 1994, was also due to the non-recurring
deferred compensation expense recorded in 1995 and to small increases in
staffing levels and normal inflationary factors, particularly in the area of
employee benefits.
Occupancy and equipment expenses were $1.3 million for 1996 as compared to $1.7
million for 1995 and $1.3 million for 1994. The $387,000 or 22.6% decrease for
1996, as compared to 1995, resulted primarily from the write-off of obsolete
data processing equipment and related intangible assets during 1995. Occupancy
and equipment expenses for 1995, as compared to 1994, were substantially at the
same levels, excluding this write-off of assets.
Federal deposit insurance premiums were $654,000 for 1996 as compared to
$681,000 for 1995 and $688,000 for 1994. The FDIC insurance assessment rate in
effect for the Corporation was the same for each of these periods. The
variances in the deposit insurance expense are due to differences in the deposit
base on which the assessment was calculated.
Data processing expenses were $391,000 for 1996 as compared to $481,000 for 1995
and $358,000 for 1994. During 1996, data processing costs decreased by $90,000
or 18.7%, as
14
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
compared to 1995, due primarily to costs associated with a data processing
systems reorganization project undertaken during the fourth quarter of 1995.
The $123,000 or 34.4% increase for 1995, as compared to 1994, was also primarily
attributable to the reorganization costs incurred in 1995.
Professional fees were $576,000 for 1996 as compared to $1.6 million for 1995
and $507,000 for 1994. The $1.0 million or 64.5% decrease for 1996 as compared
to 1995 and the $1.1 million increase for 1995 as compared to 1994 were
attributable to the following non-recurring expenses incurred during 1995: a
$620,000 charge to operations for legal fees and other costs associated with the
settlement of the previously disclosed U.S. Equal Employment Opportunity
Commission charges and related civil complaint filed against the Corporation by
five employees; a one-time $438,000 increase in consulting services relating to
the Corporation's management succession and fees incurred in connection with
human resources and revenue enhancement projects; and a $56,000 increase in
miscellaneous other professional fees.
Other expenses were $1.9 million for 1996 as compared to $1.7 million for 1995
and $1.2 million for 1994. The $236,000 or 13.9% increase for 1996, as compared
to 1995 was due to increases in miscellaneous insurance and loan processing
costs and a non-recurring write-off of certain fixed assets. Partially
offsetting these increases were decreases in advertising, printing and supplies
expenses. The $505,000 or 42.2% increase for 1995, as compared to 1994, was due
to increases in regulatory filing and exam assessments, an increase in office
supplies and printing costs and increases in loan processing costs. Partially
offsetting these increases was a reduction in advertising expenses during 1995
as compared to 1994.
INCOME TAXES. For the year ended June 30, 1996 the Corporation recorded a
provision for income taxes of $2.3 million as compared to a benefit from income
taxes of $765,000 for 1995 and a provision for income taxes of $1.5 million for
1994. These provisions for/benefits from income taxes reflect the Corporation's
effective tax rates of 38.7% for 1996, 38.6% for 1995 and 38.3% for 1994.
The $3.0 million increase in provision for/benefit from income taxes for 1996,
as compared to 1995, was due primarily to the $7.9 million increase in pre-tax
income during the year. The $2.2 million or 152.2% decrease for 1995 as
compared to 1994 was attributable to $5.8 million in lower pre-tax income.
Effective July 1, 1993, the Corporation adopted FASB Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
required, among other things, a change from the deferred method to the asset and
liability method of accounting for income taxes. The cumulative effect of this
change in accounting principle was to increase net income for 1994 by $1.7
million.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Corporation and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial condition and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
15
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services since such prices are affected by inflation to a
larger degree than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Corporation's assets and liabilities
are critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING AND REGULATORY MATTERS
In October 1995, the FASB released SFAS No. 123, "Accounting for Stock-Based
Compensation." Effective for fiscal years beginning after December 15, 1995,
SFAS No. 123 outlines preferable accounting treatment and reporting guidelines
for employee stock compensation plans. The Corporation is currently analyzing
the impact of the adoption of the standard on the consolidated financial
statements; however, the adoption and concurrent application is not expected to
have a material impact.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities and distinguishes transfers
of financial assets that are sales from transfers that are secured borrowings.
Under SFAS No. 125, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it no
longer controls and liabilities that have been extinguished. This financial-
components approach focuses on the assets and liabilities that exist after the
transfer. SFAS No. 125 also extends the AFS or trading approach in SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," to non-
security financial assets that can contractually be prepaid or otherwise settled
in such a way that the holder of the asset would not recover substantially all
of its recorded investment. Thus, non-security financial assets that are
subject to prepayment risk that could prevent recovery of substantially all of
the recorded amount are to be reported at fair value with the change in fair
value accounted for, depending on the asset's classification, as AFS or trading.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Also, the extension of SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 is effective for
financial assets held on or acquired after January 1, 1997. The adoption and
application of SFAS No. 125 is not expected to be material to the consolidated
financial statements of the Corporation.
The deposits of the Bank are currently insured by the SAIF of the FDIC. Both
the SAIF and the Bank Insurance Fund (BIF), the federal deposit insurance fund
that covers commercial bank deposits, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF has
achieved a fully funded status in contrast to the SAIF and, therefore the FDIC
recently reduced the average deposit insurance premium paid by BIF-insured
commercial banks to a level substantially below the average premium paid by
SAIF-insured institutions. In late 1995, the FDIC approved a final rule
regarding deposit insurance premiums which, effective with the semiannual
premium assessment on January 1, 1996, reduced deposit insurance premiums for
BIF member institutions to zero (subject to an annual minimum of $2,000) for
16
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, (CONTINUED)
- --------------------------------------------------------------------------------
institutions in the lowest risk category. Deposit insurance premiums for SAIF
members were maintained at their existing levels (23 basis points for
institutions like the Bank which are in the lowest risk category). Accordingly,
in the absence of further legislative action, until the SAIF attains a reserve
ratio of 1.25% on insured deposits, SAIF members such as the Bank will be
competitively disadvantaged as compared to commercial banks due to this premium
differential. It is anticipated that, under present conditions, it will be at
least several years before the SAIF reaches a reserve ratio of 1.25% of insured
deposits.
The U.S. House of Representatives and Senate had actively considered legislation
which would have eliminated the premium differential between SAIF-insured and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The proposed legislation would have provided that all SAIF member
institutions pay a special one-time assessment to recapitalize the SAIF, which
in the aggregate would have been sufficient to bring the reserve ratio in the
SAIF to 1.25% of insured deposits. Based on the current level of reserves
maintained by the SAIF it was anticipated that the amount of the special
assessment required to recapitalize the SAIF would have been approximately 80 to
85 basis points of the SAIF-assessable deposits. It was anticipated that after
the recapitalization of the SAIF, premiums paid by SAIF-insured institutions
would be reduced to match those currently being assessed BIF-insured commercial
banks. The legislation also provided for the merger of the BIF and the SAIF,
with such merger being conditioned upon the prior elimination of the thrift
charter. No assurance can be given as to the final form of such legislation or
even whether any legislation will be enacted.
17
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND:
We have audited the accompanying consolidated statements of financial
condition of First Financial Corporation of Western Maryland and subsidiaries
as of June 30, 1996 and 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended June 30, 1996. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Financial Corporation of Western Maryland and subsidiaries as of June 30,
1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended June 30, 1996, in conformity
with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the
Corporation adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," and the provisions of SFAS No. 122,
"Accounting for Mortgage Servicing Rights," during 1996. The Corporation
adopted the provisions of SFAS No. 109, "Accounting for Income Taxes," in
1994.
Pittsburgh, Pennsylvania
August 1, 1996
18
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
1996 1995
-------- --------
ASSETS
Cash on hand and in banks $ 2,953 $ 2,222
Interest-earning deposits 5,623 3,126
Securities available for sale; cost of $50 and $11,240 75 11,326
Securities held to maturity; market value of $51,374 and $69,803 51,476 69,837
Loans receivable, net 243,113 223,066
Accrued interest receivable 2,076 2,228
Federal Home Loan Bank (FHLB) stock 2,097 2,097
Real estate acquired through foreclosure, net 655 604
Premises and equipment, net 10,921 11,146
Prepaid expenses and other assets 673 587
Deferred income taxes 2,332 3,136
-------- --------
TOTAL ASSETS $321,994 $329,375
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $274,756 $283,360
Advance payments by borrowers for taxes and insurance 1,704 871
FHLB advances - 3,000
Employee Stock Ownership Plan (ESOP) debt 483 580
Accrued expenses and other liabilities 3,344 3,094
-------- --------
TOTAL LIABILITIES 280,287 290,905
-------- --------
STOCKHOLDERS' EQUITY:
Serial preferred stock, $1 par value, 2,000,000 shares
authorized; none issued - -
Common stock, $1 par value, 5,000,000 shares authorized;
issued and outstanding 2,188,184 and 2,130,212 2,188 2,130
Additional paid-in capital 11,559 10,769
Treasury stock, at cost; 11,445 shares at June 30, 1996 (233) -
Unearned ESOP shares (424) (527)
Retained earnings, substantially restricted 28,602 26,045
Unrealized gains on securities available for sale, net 15 53
-------- --------
TOTAL STOCKHOLDERS' EQUITY 41,707 38,470
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $321,994 $329,375
-------- --------
-------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------
1996 1995 1994
--------- --------- ---------
INTEREST INCOME:
Loans receivable $ 21,434 $ 19,533 $ 18,880
Securities 4,092 4,771 3,266
Interest-earning deposits 795 354 975
Other 159 151 107
--------- --------- ---------
TOTAL INTEREST INCOME 26,480 24,809 23,228
--------- --------- ---------
INTEREST EXPENSE:
Deposits 12,025 11,327 11,227
Borrowed funds 77 117 70
--------- --------- ---------
TOTAL INTEREST EXPENSE 12,102 11,444 11,297
--------- --------- ---------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 14,378 13,365 11,931
Provision for loan losses 600 5,985 780
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,778 7,380 11,151
--------- --------- ---------
OTHER OPERATING INCOME:
Loan fees and service charges 958 675 630
Net gain on sale of securities 179 - 6
Income on real estate activities 115 311 120
Other 220 283 159
--------- --------- ---------
TOTAL OTHER OPERATING INCOME 1,472 1,269 915
--------- --------- ---------
OTHER OPERATING EXPENSES:
Compensation and employee benefits 4,496 4,437 4,158
Occupancy and equipment 1,325 1,712 1,330
Federal deposit insurance 654 681 688
Data processing 391 481 358
Professional fees and related costs 576 1,621 507
Other 1,937 1,701 1,196
--------- --------- ---------
TOTAL OTHER OPERATING EXPENSES 9,379 10,633 8,237
--------- --------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 5,871 (1,984) 3,829
Provision for (benefit from) income taxes 2,271 (765) 1,465
--------- --------- ---------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 3,600 (1,219) 2,364
Cumulative effect of change in accounting for income taxes - - 1,695
--------- --------- ---------
NET INCOME (LOSS) $ 3,600 $ (1,219) $ 4,059
--------- --------- ---------
--------- --------- ---------
NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of accounting change $ 1.65 $ (0.56) $ 1.09
Cumulative effect of change in accounting for income taxes - - 0.78
--------- --------- ---------
NET INCOME (LOSS) PER SHARE $ 1.65 $ (0.56) $ 1.87
--------- --------- ---------
--------- --------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
- -------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------
Additional
Common paid-in Treasury Unearned
stock capital stock ESOP shares
---------- --------- ---------- ------------
BALANCE AT JUNE 30, 1993 $ 1,392 $ 11,227 $ - $ (753)
Net income for 1994
Dividends paid
Exercise of stock awards, net 14 101
Release of ESOP shares 117
Net change in unrealized
gains (losses) on
securities available
for sale, net
3-for-2 stock split 700 (700)
---------- -------- ------- --------
BALANCE AT JUNE 30, 1994 2,106 10,628 - (636)
Net loss for 1995
Dividends paid
Exercise of stock awards, net 24 141
Release of ESOP shares 109
Net change in unrealized
gains (losses) on
securities available
for sale, net
---------- -------- ------- --------
BALANCE AT JUNE 30, 1995 2,130 10,769 - (527)
Net income for 1996
Dividends paid
Exercise of stock awards, net 58 790
Release of ESOP shares 103
Acquisition of treasury stock (233)
Net change in unrealized
gains (losses) on
securities available
for sale, net
----------- --------- ---------- ---------
BALANCE AT JUNE 30, 1996 $ 2,188 $ 11,559 $ (233) $ (424)
----------- --------- ---------- --------
----------- --------- --------- ---------
Unrealized
gains (losses)
on securities Total
Retained available stockholders'
earnings for sale,net equity
---------- ------------- ------------
BALANCE AT JUNE 30, 1993 $ 24,947 $ 659 $ 37,472
Net income for 1994 4,059 4,059
Dividends paid (769) (769)
Exercise of stock awards, net 115
Release of ESOP shares 117
Net change in unrealized
gains (losses) on
securities available
for sale, net (727) (727)
3-for-2 stock split -
----------- --------- ----------
BALANCE AT JUNE 30, 1994 28,237 (68) 40,267
Net loss for 1995 (1,219) (1,219)
Dividends paid (973) (973)
Exercise of stock awards, net 165
Release of ESOP shares 109
Net change in unrealized
gains (losses) on
securities available
for sale, net 121 121
----------- --------- ----------
BALANCE AT JUNE 30, 1995 26,045 53 38,470
Net income for 1996 3,600 3,600
Dividends paid (1,043) (1,043)
Exercise of stock awards, net 848
Release of ESOP shares 103
Acquisition of treasury stock (233)
Net change in unrealized
gains (losses) on
securities available
for sale, net (38) (38)
----------- --------- ----------
BALANCE AT JUNE 30, 1996 $ 28,602 $ 15 $ 41,707
----------- --------- ----------
----------- --------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 3,600 $ (1,219) $ 4,059
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Loans originated for sale (16,310) (3,689) (7,671)
Sales of loans originated for sale 16,642 5,031 5,614
Net gain on sale of securities available for sale (179) - (6)
Deferred loan fees and loan discounts (392) (959) (92)
Depreciation and amortization 942 676 901
Non-cash compensation under stock-based benefit plans 103 109 676
Provision for loan losses 600 5,985 780
Deferred income taxes 709 (2,088) (1,614)
Other (933) 1,166 486
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,782 5,012 3,133
-------- -------- --------
INVESTING ACTIVITIES:
Loan originations and purchases (82,136) (60,415) (89,031)
Repayments on loans 62,064 48,895 94,964
Purchases of securities available for sale - - (5,999)
Maturities of securities available for sale - 948 -
Proceeds from sales of securities available for sale 28,532 - 9,547
Repayments of securities available for sale 2,849 1,184 1,787
Purchases of securities held to maturity (12,980) (12,789) (33,656)
Maturities of securities held to maturity 2,000 2,000 -
Repayments of securities held to maturity 9,057 7,543 20,666
Proceeds from sale of real estate acquired through foreclosure 1,082 1,327 2,273
Purchases of premises and equipment (445) (1,192) (346)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 10,023 (12,499) 205
-------- -------- --------
FINANCING ACTIVITIES:
Dividends paid (1,043) (973) (769)
Net decrease in deposits (7,771) (17,819) (344)
Net change in FHLB advances and ESOP debt (3,097) 2,904 (97)
Exercise of stock options 567 165 115
Payments to acquire treasury stock (233) - -
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (11,577) (15,723) (1,095)
-------- -------- --------
Increase (decrease) in cash equivalents 3,228 (23,210) 2,243
Cash equivalents at beginning of period 5,348 28,558 26,315
-------- -------- --------
Cash equivalents at end of period $ 8,576 $ 5,348 $ 28,558
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL INFORMATION:
Interest paid $ 12,129 $ 11,426 $ 11,320
Income taxes paid 855 1,055 1,180
NON-CASH TRANSACTIONS:
Transfers from loans receivable to real estate acquired
through foreclosure 1,078 431 535
Loan to facilitate the sale of real estate acquired
through foreclosure - - 770
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First
Financial Corporation of Western Maryland (the Corporation), the
Corporation's wholly-owned subsidiary bank, First Federal Savings Bank of
Western Maryland (the Bank), and the Bank's subsidiaries. All
intercompany transactions and balances have been eliminated in
consolidation.
CASH EQUIVALENTS
Cash equivalents include cash on hand and in banks as well as
interest-earning deposits.
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Securities include investments primarily in bonds and notes and are
classified as either available for sale or held to maturity at the time of
purchase based on management's intent. Such intent includes consideration
of the interest rate environment, prepayment risk, credit risk, maturity
and repricing characteristics, liquidity considerations, investment and
asset/liability management policies and other pertinent factors. The
appropriateness of the classification is reassessed at each reporting date.
Securities for which the Corporation has the positive intent and ability to
hold to maturity are classified as held to maturity and are reported at
cost, adjusted for premiums and discounts.
Available for sale securities consist of securities that are not
classified as held to maturity. Unrealized holding gains and losses, net
of applicable income taxes, on available for sale securities are reported
as a separate component of stockholders' equity until realized. Gains and
losses on the sale of securities are determined using the specific
identification method and are included in operations in the period sold.
Declines in the fair value of securities below their cost that are other
than temporary result in the security being written down to fair value on
an individual basis. Any related write-downs are included in operations
as realized losses. Yields and carrying values for certain mortgage-backed
securities are subject to normal interest rate and prepayment risks.
Premiums and discounts on securities are recognized in interest income
using the interest method over the period to maturity.
LOANS RECEIVABLE
Loans receivable for which management has the intent and the Corporation
has the ability to hold for the foreseeable future or until maturity or
payoff are reported at their outstanding unpaid principal balances reduced
by any charge-offs and net of any deferred fees or costs on loans
originated, or unamortized premiums or discounts on loans purchased and
the allowance for loan losses.
Interest income on loans is accrued and credited to operations as earned.
Interest income is not accrued for loans delinquent 90 days or greater.
23
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
LOANS RECEIVABLE, (CONTINUED)
Discounts and premiums on purchased loans are recognized in interest
income using the interest method over the remaining period to contractual
maturity, adjusted for prepayments. Loan origination fees and certain
direct origination costs are capitalized and recognized as an adjustment
to the yield of the related loan over the loan's period to maturity.
Loans originated and intended for sale are carried at the lower of cost or
estimated market value in the aggregate.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by charges to operations through
the provision for loan losses and decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, current economic conditions and other factors as deemed
appropriate.
The allowance for loan losses is subjective and may be adjusted in the
future depending on economic conditions and other factors. The regulatory
examiners may require the Corporation to recognize adjustments to the
allowance based upon their judgements about information available to them
at the time of their examinations.
The Corporation adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," effective July 1, 1995. Under SFAS No. 114, the allowance
for loan losses related to "impaired loans" is based on discounted cash
flows using the impaired loan's initial effective interest rate at the
discount rate, or the fair value of the collateral for collateral
dependent loans. A loan is impaired when it meets the criteria to be
placed on non-accrual, is delinquent due to maturity, is a renegotiated
loan or management determines that a deficiency exists in the collateral
value of a collateral dependent loan. Loans which are evaluated for
impairment pursuant to SFAS No. 114 are assessed on a loan-by-loan basis,
and include only those loans that meet the definition of impairment.
Large groups of smaller balance homogeneous loans, such as credit cards,
loans secured by first and second liens on residential properties and
other consumer loans are evaluated collectively for impairment.
Loans are charged off when there has been permanent impairment of the
related carrying values.
24
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
LOAN SERVICING
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on
current market interest rates.
In May 1995 the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights and Excess Servicing Receivables and for Securitization
of Mortgage Loans." The Corporation adopted this standard effective July
1, 1995. The adoption of SFAS No. 122 resulted in the Corporation
realizing $208,000 in servicing rights assets, net of amortization, on
$16.6 million of loans sold, for which the servicing rights were retained
during 1996.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate properties acquired through foreclosure are initially recorded
at the lower of cost or fair value at the date of foreclosure establishing
a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of
cost or fair value less estimated costs to sell. Revenue and expenses
from operations of the properties, gains and losses on sales and additions
to the valuation allowance are included in operations as income or loss on
real estate activities.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises, furniture and equipment, and leasehold
improvements are carried at cost less accumulated depreciation or
amortization. Depreciation is calculated on a straight-line basis over the
estimated useful lives of the related assets, which are twenty-five to
fifty years for buildings and three to ten years for furniture and
equipment. Amortization of leasehold improvements is computed using the
straight-line method over the term of the related lease.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for/benefit from income taxes.
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes," which requires, among other things, a change from the deferred
method to the asset and liability method of accounting for deferred taxes.
The Corporation adopted SFAS No. 109 effective July 1, 1993. The
cumulative effect of this change in accounting for income taxes was a
benefit to operations of $1.7 million during 1994.
25
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
OPERATING RESULTS PER COMMON SHARE
Net income or loss per common share is calculated by dividing net income
or loss by the weighted average number of common shares outstanding during
the period. Outstanding shares include common stock equivalents, which
consist of certain outstanding stock options, and shares owned by the
Corporation's Employee Stock Ownership Plan (ESOP). The average number of
shares outstanding for 1996, 1995 and 1994 were 2,180,000, 2,175,000 and
2,169,000, respectively. The Corporation has not separately reported
fully diluted earnings per share as it is not materially different than
primary earnings per share.
RECLASSIFICATIONS AND USE OF ESTIMATES
Certain amounts previously reported for 1995 and 1994 have been
reclassified to conform with the consolidated financial statement
presentation for 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. SECURITIES
The following table summarizes the Corporation's securities as of June 30:
----------------------------------------------------------------------------------------------------------------------------
(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
------------ ------------ --------- ---------------
------------ ------------ --------- ---------------
----------------------------------------------------------------------------------------------------------------------------
During the years ended June 30, 1996 and 1994, the Corporation sold
securities for proceeds of $28.5 million and $9.5 million, respectively.
The net gains associated with the sales of these securities in 1996 and
1994 were $179,000 and $6,000, respectively.
26
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
2. SECURITIES, (CONTINUED)
The scheduled maturities of securities available for sale and held to
maturity at June 30, 1996, were as follows:
--------------------------------------------------------------------------------------------------
(IN THOUSANDS) Available for sale Held to maturity
------------------------- -----------------------
Amortized Fair Amortized Fair
cost value cost value
---------------------------------------------------------------------------------------------------
Due in one year or less $ 50 $ 75 $ 2,001 $ 2,002
Due from one year to five years - - 6,330 6,315
Due from five to ten years - - 1,958 1,955
Due after ten years - - 41,187 41,102
---------- --------- --------- --------
$ 50 $ 75 $ 51,476 $ 51,374
---------- --------- --------- --------
---------- --------- --------- --------
--------------------------------------------------------------------------------------------------
At June 30, 1996 and 1995, the Corporation had pledged securities with a
carrying amount of $7.7 million and $6.2 million, respectively, to secure
certain public deposits and for other purposes required by law.
3. LOANS RECEIVABLE
Loans receivable are summarized as follows at June 30:
-------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
-------------------------------------------------------------------------------
Mortgage loans:
Residential - single family $ 126,779 $ 138,217
Residential - multi family 29,071 6,257
Commercial real estate 55,104 51,604
----------- -----------
210,954 196,078
Other loans:
Automobile 29,410 30,471
Other consumer 11,177 6,499
Commercial business 3,263 3,869
----------- -----------
254,804 236,917
Less:
Allowance for loan losses 7,795 8,590
Deferred loan fees and net discounts 1,360 1,752
Loans in process 2,536 3,509
----------- -----------
$ 243,113 $ 223,066
----------- -----------
----------- -----------
------------------------------------------------------------------------------
Following is a summary of non-performing loans at June 30:
------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
------------------------------------------------------------------------------
Non-accrual loans $ 3,346 $ 2,776
Loans delinquent due to maturity 2,007 3,849
Troubled debt restructurings 412 419
----------- -----------
$ 5,765 $ 7,044
----------- -----------
----------- -----------
------------------------------------------------------------------------------
27
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE, (CONTINUED)
For non-performing loans, the interest income that would have been recorded
under the original terms of such loans and the interest income actually
recognized for the years ended June 30 are summarized below:
----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
----------------------------------------------------------------------------------------------------------------
Interest income that would have been recorded $ 650 $ 410 $ 195
Interest income recognized 67 43 46
------- --------- --------
Interest income foregone $ 583 $ 367 $ 149
-------- --------- --------
-------- --------- --------
----------------------------------------------------------------------------------------------------------------
Following is a summary of the changes in the allowance for loan losses:
----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Residential Commercial Commercial
mortgage mortgage business Consumer Totals
--------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993 $ 298 $ 3,205 $ 146 $ 192 $ 3,841
Provision for losses 27 261 12 480 780
Charge-offs (6) (1) - (63) (70)
Recoveries - - - 10 10
-------- ----------- ----------- ---------- ----------
Balance, June 30, 1994 319 3,465 158 619 4,561
Provision for losses 776 4,648 11 550 5,985
Charge-offs (339) (1,611) - (65) (2,015)
Recoveries 36 - - 23 59
-------- ----------- ----------- ---------- ----------
Balance, June 30, 1995 792 6,502 169 1,127 8,590
Provision for losses 60 360 60 120 600
Charge-offs (67) (1,443) (19) (42) (1,571)
Recoveries 153 7 - 16 176
-------- ----------- ----------- ---------- ----------
Balance, June 30, 1996 $ 938 $ 5,426 $ 210 $ 1,221 $ 7,795
-------- ----------- ----------- ---------- ----------
-------- ----------- ----------- ---------- ----------
---------------------------------------------------------------------------------------------------------------
The Corporation conducts its business through ten offices in Allegany,
Garrett and Washington Counties located in Western Maryland and primarily
lends in this geographical area. Management does not believe it has
significant concentrations of credit risk to any one group of borrowers
given its underwriting and collateral requirements.
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business. These financial instruments include
mortgage loan commitments, undisbursed lines of credit and standby letters
of credit. These instruments involve, to various degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statements of financial condition.
28
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE, (CONTINUED)
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument is represented by the
contract or notional amount of the financial instrument. The Corporation
uses the same credit policies in making commitments for off-balance sheet
financial instruments as it does for on-balance sheet financial
instruments. Financial instruments with off-balance sheet risk are as
follows at June 30:
--------------------------------------------------------------------------
(IN THOUSANDS) Contract amount
1996 1995
--------------------------------------------------------------------------
Mortgage loan commitments $ 9,870 $ 3,194
Undisbursed lines of credit
(including home equity lines and credit cards) 5,120 5,711
Secured standby letters of credit 16 52
Unsecured standby letters of credit 8 33
--------- ---------
$ 15,014 $ 8,990
--------- ---------
--------- ---------
---------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Corporation upon extension
of credit is based on management's credit evaluation of the counterparty.
Collateral held varies but generally may include cash, marketable
securities and property.
Outstanding mortgage loan commitments in the amount of $1.3 million and
$2.7 million at June 30, 1996, were for fixed and adjustable rate loans,
respectively, at interest rates ranging from 6.90% to 9.25% and 5.75% to
8.50%, respectively.
At June 30, 1996, the recorded investment in loans that was considered to
be impaired under SFAS No. 114 was $8.8 million, against which $3.6
million of the allowance for loan losses was allocated. During the year
ended June 30, 1996, impaired loans averaged approximately $9.3 million,
and the Corporation recognized interest income of approximately $583,000
on impaired loans.
4. LOAN SERVICING
The Corporation was servicing loans with unpaid principal balances of
$53.0 million and $29.5 million at June 30, 1996 and 1995, respectively,
for third party investors which are not reflected in the consolidated
statements of financial condition. Such servicing operations result in
the generation of annual fee income of between 0.250% and 0.375% of the
unpaid principal balances of such loans.
29
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
4. LOAN SERVICING, (CONTINUED)
Advance payments by borrowers for taxes and insurance includes $677,000
and $507,000 at June 30, 1996 and 1995, respectively, held in custodial
accounts in connection with the foregoing loans.
Mortgage servicing rights of $273,000 were capitalized during the year
ended June 30, 1996. At June 30, 1996 the fair value of mortgage
servicing rights was $258,000.
5. INVESTMENT REQUIRED BY LAW
The Bank is a member of the Federal Home Loan Bank (FHLB) System. As a
member, the Bank maintains an investment in the capital stock of the FHLB
of Atlanta, at cost, in an amount not less than 1.0% of the unpaid
principal balances of residential mortgage loans, 0.3% of total assets or
5.0% of outstanding advances, if any, due to the FHLB, whichever is
greater, as calculated at June 30 of each year. Purchases and sales of
stock are made directly with the FHLB at par value.
6. PREMISES AND EQUIPMENT
Premises and equipment at June 30 are summarized by major classification as
follows:
--------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
------------------------------------------------------------------------
Land $ 1,131 $ 1,131
Buildings and improvements 10,749 10,724
Leasehold improvements 576 576
Furniture, fixtures and equipment 3,896 3,524
---------- --------
16,352 15,955
Less accumulated depreciation and amortization 5,431 4,809
---------- ---------
$ 10,921 $ 11,146
---------- ---------
---------- ---------
---------------------------------------------------------------------------
The Bank is obligated under non-cancelable, long term operating leases for
certain branch offices. These leases, each having renewal options, have
approximate aggregate annual rentals of $43,000, $43,000, $26,000, $23,000,
$23,000 and $10,000 for the years ended June 30, 1997, 1998, 1999, 2000,
2001 and thereafter, respectively.
Rent expense for the years ended June 30, 1996, 1995 and 1994 were $69,000,
$78,000 and $78,000, respectively. Depreciation and leasehold improvement
amortization expense included in occupancy and equipment expense was
$616,000, $646,000 and $667,000 for the years ended June 30, 1996, 1995 and
1994, respectively.
30
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
7. INCOME TAXES
The provision for/(benefit from) income taxes for the years ended June 30
is comprised of the following:
--------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
---------------------------------------------------------------------------
Current:
Federal $ 1,279 $ 1,088 $ 623
State 283 235 235
-------- -------- -------
1,562 1,323 858
Deferred:
Federal 581 (1,710) 500
State 128 (378) 107
-------- -------- -------
709 (2,088) 607
-------- -------- -------
$ 2,271 $ (765) $ 1,465
-------- -------- -------
-------- -------- -------
-------------------------------------------------------------------------
In addition to income taxes applicable to income before taxes in the
consolidated statements of operations, the following income tax
benefits/(expenses) were recorded to stockholders' equity during the years
ended June 30:
-------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
------------------------------------------------------------------------
Net loss (gain) on securities
available for sale $ 23 $ (75) $ 457
Compensation expense for tax purposes
in excess of amounts recognized for
financial statement purposes 175 - -
Expiration of stock appreciation rights (118) - -
------- --------- -------
$ 80 $ (75) $ 457
------ -------- -------
------ -------- -------
--------------------------------------------------------------------------
The tax effects of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities that are included in
the net deferred tax asset at June 30 relate to the following:
-------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
-------------------------------------------------------------------------
Allowances for losses on loans and real
estate acquired through foreclosure $ 2,727 $ 3,151
Interest and fees on loans 593 775
Stock-based benefit plans 63 286
Depreciation and amortization (819) (808)
Stock dividends on FHLB stock (329) (325)
Other, net 97 57
------- ---------
$ 2,332 $ 3,136
------- ---------
------- ----------
- ------------------------------------------------------------------------------
31
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
7. INCOME TAXES, (CONTINUED)
The Corporation determined that it was not required to establish a
valuation allowance for deferred tax assets in accordance with SFAS No.
109 since it is more likely than not that the deferred tax asset will be
realized through carryback to taxable income in prior years, future
reversals of existing taxable temporary differences, and, to a lesser
extent, future taxable income.
A reconciliation between the provision for (benefit from) income taxes and
the amount computed by multiplying operating results before income taxes by
the statutory Federal income tax rate of 34% for the years ended June 30 is
as follows:
------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
------------------------------------------------------------------------------------------------
Tax at statutory rate $ 1,996 $ (675) $ 1,302
Increase (decrease) resulting from:
State income taxes, net of Federal income tax benefit 271 (95) 173
Non-taxable interest income (22) (1) (27)
Other, net 26 6 17
------- ------- ---------
$ 2,271 $ (765) $ 1,465
------- ------- ---------
------- ------- ---------
------------------------------------------------------------------------------------------------
Under certain provisions of the Internal Revenue Code (the Code),
qualified thrift institutions are permitted to deduct from taxable income
a provision for bad debts based on either actual bad debt experience or a
percentage of taxable income before such deduction. The deduction
percentage, subject to certain minimum tax provisions and other
limitations, is 8%. The provision for bad debts deducted from taxable
income is based on the percentage method in 1996 and 1995.
The Corporation and its subsidiaries file a consolidated federal income tax
return on a June 30 fiscal year end basis. The Bank is permitted under the
Code to deduct an annual addition to a reserve for bad debts in determining
taxable income, subject to certain limitations. Bad debt deductions for
income tax purposes are included in taxable income of later years only if
the bad debt reserve is used subsequently for purposes other than to absorb
bad debt losses. Because the Bank does not intend to use the reserve for
purposes other than to absorb losses, no deferred income taxes have been
provided prior to 1987. Retained earnings at June 30, 1996 include
approximately $10.5 million representing such bad debt deductions for which
no deferred income taxes have been provided.
On August 20, 1996, President Clinton signed legislation which will
eliminate the percentage of taxable income bad debt deduction for thrift
institutions for tax years beginning after December 31, 1995. This new
legislation also requires thrifts, like the Bank, to generally recapture
the excess of its current tax reserves over its 1987 base year reserves.
As the Bank has previously provided deferred taxes on this amount, no
additional financial statement tax expense should result from this new
legislation.
32
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Corporation has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the
Corporation is involved in certain claims and legal actions arising in the
ordinary course of business. The outcome of these claims and actions are
not presently determinable; however, in the opinion of the Corporation's
management, after consulting legal counsel, the ultimate disposition of
these matters will not have a material adverse effect on the consolidated
financial statements.
9. DEPOSITS
Deposits at June 30 are summarized as follows:
-------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995
---------------------------------------- ------------------------------------
Weighted Weighted
Type of accounts average rate Amount % average rate Amount %
--------------------------------------------------------------------------------------------------------------------------
Time deposits 5.29% $ 167,088 60.8% 5.31% $ 173,326 61.2%
Passbook and other 2.50% 50,597 18.4% 2.50% 55,281 19.5%
Checking and money market 2.37% 57,071 20.8% 2.28% 54,753 19.3%
---------- ------- ---------- -------
4.17% $ 274,756 100.0% 4.18% $ 283,360 100.0%
---------- ------- ---------- -------
---------- ------- ---------- -------
Time deposits mature as follows:
Under 6 months $ 22,905 13.7% $ 60,371 34.8%
6 to 12 months 41,573 24.9% 44,887 25.9%
12 to 24 months 28,387 17.0% 37,114 21.4%
24 to 36 months 18,860 11.3% 14,305 8.3%
36 to 48 months 31,399 18.8% 9,762 5.6%
48 to 60 months 15,728 9.4% 3,197 1.9%
Over 60 months 8,236 4.9% 3,690 2.1%
---------- ------- ---------- -------
$ 167,088 100.0% $ 173,326 100.0%
---------- ------- ---------- -------
---------- ------- ---------- -------
--------------------------------------------------------------------------------------------------------------------------
Interest expense on deposits is composed of the following for the years
ended June 30:
----------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
-----------------------------------------------------------------
Time deposits $ 9,544 $ 8,594 $ 8,410
Passbook and other 1,316 1,492 1,574
Checking and money market 1,165 1,241 1,243
------- ------- -------
$12,025 $11,327 $11,227
------- ------- -------
------- ------- -------
----------------------------------------------------------------
At June 30, 1996 and 1995, the Corporation had outstanding $23.5 million
and $24.2 million, respectively, in certificate accounts with a minimum
denomination of $100,000.
33
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
10. FHLB ADVANCES
The Bank has an ongoing agreement with the FHLB whereby the Bank may
borrow funds through various credit facilities from the FHLB not to exceed
75% of the total residential mortgage loan portfolio. There are no
commitment fees associated with the advance agreement and the FHLB may
reduce or terminate amounts available to be borrowed at any time.
11. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation has a tax qualified ESOP for the benefit of its employees.
All employees who attain the age of 21 and complete one year of service are
eligible to participate in the ESOP. Participants become 100% vested in
their accounts in the ESOP after five years of service or, if earlier, upon
death, disability or attainment of normal retirement age.
At the time of formation, the ESOP borrowed funds from an unrelated third
party lender to acquire 144,900 of the Corporation's common stock. The
loan has an interest rate of 7.99% per annum and has a ten year term which
matures on June 30, 2002. The ESOP holds the common stock in a trust for
allocation among participating employees. Shares are allocated to
participants based on participants' salaries and as the ESOP repays the
loan. The loan is secured by the unallocated shares held by the ESOP.
The ESOP's sources of repayment of the loan can include dividends, if any,
on the common stock held by the ESOP, either held in the trust or allocated
to participants' accounts, and discretionary contributions from the
Corporation to the ESOP and earnings thereon. For the years ended June 30,
1996, 1995 and 1994, the Corporation made contributions to the ESOP of
$148,000, $157,000 and $166,000, respectively.
The Corporation recognizes the cost of the ESOP under the shares allocated
method which is applied by recognizing interest expense as incurred each
period and recognizing compensation expense related to the principal
portion of the ESOP debt based on the cost of shares allocated for the
period. For the years ended June 30, 1996, 1995 and 1994 the Corporation
recognized interest expense of $51,000, $61,000 and $70,000, and
compensation expense of $103,000, $109,000 and $117,000, respectively,
related to the ESOP.
At June 30, 1996 and 1995 there were 64,000 and 79,000 unallocated shares
in the ESOP with an aggregate market value of $1.3 million and $1.7
million, respectively.
PENSION PLANS
On July 1, 1995, the Corporation adopted a defined contribution employee
retirement plan for the benefit of substantially all full-time employees.
The plan provides for regular employer payments that match each
participating employee's contribution to their individual tax-deferred
retirement account. Employees can contribute up to 12% of their
compensation to the plan, and the employer matching rate is 100% of the
employee's contribution, limited to 6% of the employee's compensation. The
Corporation contributed $147,000 to the plan during the year ended June 30,
1996.
34
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
11. EMPLOYEE BENEFIT PLANS, (CONTINUED)
PENSION PLANS, (CONTINUED)
Effective June 30, 1995, and concurrent with the adoption of the defined
contribution plan, the Corporation terminated its qualified
non-contributory defined benefit plan which previously covered all
full-time employees who had attained minimum age and service period
requirements.
During 1996, the Corporation received permission from the Pension Benefit
Guarantee Corporation and the Internal Revenue Service to satisfy the
plan's liabilities through qualified distributions of the plan's assets.
Defined benefit periodic pension costs for the years ended June 30, 1996,
1995 and 1994 were $78,000, $80,000 and $68,000, respectively.
STOCK OPTION PLAN
The Corporation has a Stock Option Plan (Option Plan) which provides for
the grant of stock options, stock appreciation rights (SARs) and, under
certain circumstances, limited stock appreciation rights (LSARs) to key
employees and directors.
The Option Plan provides for the grant of both incentive stock options and
compensatory stock options. SARs are granted in connection with shares
covered by a stock option. Upon exercise of SARs, the holder receives the
difference between: (1) the fair market value of the shares of stock
subject to the SAR at the time the SAR is exercised; and (2) the fair
market value of such shares at the time the SAR was granted to be paid in
common stock, cash, or a combination thereof. LSARs may be granted with
respect to all or some of the shares covered by a stock option, and are
exercisable only in connection with a change in control of the
Corporation, as defined by the Option Plan.
A summary of changes in shares under option, SARs and options exercisable
for the years ended June 30, 1996 and 1995 is presented below:
-------------------------------------------------------------------------------------------------
1996 1995
------------------------- --------------------------
Options SARs Options SARs
-------------------------------------------------------------------------------------------------
Outstanding at beginning of year 146,564 53,043 119,126 56,924
Granted ($20.25 - $21.75 per share) 6,648 - 52,000 -
Exercised ($6.67 - $11.50 per share) (57,972) (11,000) (24,562) -
Expired (17,506) (34,281) - (3,881)
----------- ----------- ----------- -----------
Outstanding at end of year
($6.67 - $21.75 per share) 77,734 7,762 146,564 53,043
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Exercisable at end of year 77,734 7,762 139,442 53,043
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
-------------------------------------------------------------------------------------------------
35
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Corporation in
estimating fair values of financial instruments.
CASH AND EQUIVALENTS -- The carrying amounts of cash and equivalents
approximate their fair values.
SECURITIES -- Fair values for securities are based on quoted market prices.
LOANS RECEIVABLE -- For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain residential mortgage and
consumer loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. Fair values of commercial real estate and
commercial business loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values of
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
FHLB STOCK -- FHLB stock is restricted for trading purposes, and thus, the
carrying value approximates fair value.
DEPOSITS -- The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date.
Fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies current market interest rates to a
schedule of aggregated expected monthly maturities.
FHLB ADVANCES AND ESOP DEBT -- Given the nature and terms of these
instruments, fair value approximates book value.
LOAN COMMITMENTS -- The fair value of loan commitments at June 30, 1996 and
1995 approximated the carrying value of those commitments at those dates.
The following table sets forth the carrying amount and fair value of the
Corporation's financial instruments at June 30:
-------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
------------------------ -------------------------
Carrying Fair Carrying Fair
amount value amount amount
-------------------------------------------------------------------------------------------
Financial assets:
Cash and equivalents $ 8,576 $ 8,576 $ 5,348 $ 5,348
Securities available for sale 75 75 11,326 11,326
Securities held to maturity 51,476 51,374 69,837 69,803
Loans receivable 243,113 251,706 223,066 226,205
FHLB stock 2,097 2,097 2,097 2,097
Financial liabilities:
Deposits 274,756 273,478 283,360 282,676
FHLB advances and ESOP debt 483 483 3,580 3,580
-------------------------------------------------------------------------------------------
36
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
13. INSURANCE OF ACCOUNTS AND REGULATORY MATTERS
The Federal Deposit Insurance Corporation through the Savings Association
Insurance Fund insures deposits of account holders up to $100,000 per
insured depositor. To provide for this insurance, the Bank must pay an
annual premium.
In connection with the insurance of deposits, the Bank is required to
maintain certain minimum levels of regulatory capital. The federal
regulatory capital regulations require the Bank and similar institutions
to have a minimum tangible capital ratio equal to 1.5% of adjusted total
assets and a minimum core capital ratio equal to 3% of adjusted total
assets. Additionally, institutions are required to meet a risk-based
capital requirement of 8% based on the credit risk represented by certain
assets, commitments and obligations, as defined by the federal regulations.
At June 30, 1996, the Bank was in compliance with current regulatory
capital requirements. Set forth below is a summary of the Bank's
regulatory capital position at June 30:
---------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995
------------------------------- -------------------------------
Amount % of Assets (1) Amount % of Assets (1)
---------------------------------------------------------------------------------------------------------
Tangible Capital: Actual $ 39,719 12.36% $ 36,071 10.98%
Required 4,823 1.50% 4,930 1.50%
----------- ------- ----------- -------
Excess $ 34,896 10.86% $ 31,141 9.48%
----------- ------- ----------- -------
----------- ------- ----------- -------
Core Capital: Actual $ 39,719 12.36% $ 36,071 10.98%
Required 9,645 3.00% 9,859 3.00%
----------- ------- ----------- -------
Excess $ 30,074 9.36% $ 26,212 7.98%
----------- ------- ----------- -------
----------- ------- ----------- -------
Risk-based Capital: Actual $ 42,139 21.60% $ 38,363 20.60%
Required 15,610 8.00% 14,900 8.00%
----------- ------- ----------- -------
Excess $ 26,529 13.60% $ 23,463 12.60%
----------- ------- ----------- -------
----------- ------- ----------- -------
---------------------------------------------------------------------------------------------------------
(1) Tangible and core capital levels are shown as a percentage of total
adjusted assets; risk-based capital levels are shown as a percentage
of risk-weighted assets.
---------------------------------------------------------------------------------------------------------
Retained earnings are substantially restricted in connection with
regulations related to the insurance of deposit accounts, which require the
Corporation to maintain statutory reserves in retained earnings.
Additionally, these regulations limit the amount of cash dividends the Bank
may pay to the Corporation pursuant to the Bank's maintenance of regulatory
capital levels.
37
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
14. SELECTED QUARTERLY FINANCIAL DATA
Following is a summary of selected quarterly financial data for the years
ended June 30:
-----------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, First Second Third Fourth
EXCEPT SHARE DATA) Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------
1996:
----
Interest income $ 6,344 $ 6,577 $ 6,831 $ 6,728
Interest expense 3,047 3,124 3,071 2,860
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 3,297 3,453 3,760 3,868
Provision for loan losses 150 150 150 150
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,147 3,303 3,610 3,718
Other operating income 213 213 522 524
Other operating expenses 2,047 2,230 2,488 2,614
---------- ---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES 1,313 1,286 1,644 1,628
Provision for income taxes 512 475 655 629
---------- ---------- ---------- ----------
NET INCOME $ 801 $ 811 $ 989 $ 999
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER SHARE $ 0.37 $ 0.37 $ 0.45 $ 0.46
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1995:
----
Interest income $ 6,027 $ 6,115 $ 6,015 $ 6,652
Interest expense 2,847 2,840 2,820 2,937
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 3,180 3,275 3,195 3,715
Provision for loan losses 225 225 2,763 2,772
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,955 3,050 432 943
Other operating income 200 294 138 637
Other operating expenses 2,163 1,922 3,031 3,517
---------- ---------- ---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES 992 1,422 (2,461) (1,937)
Provision for (benefit from) income taxes 372 537 (927) (747)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 620 $ 885 $ (1,534) $ (1,190)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME (LOSS) PER SHARE $ 0.28 $ 0.40 $ (0.70) $ (0.54)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
-----------------------------------------------------------------------------------------------
38
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
15. FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND -- CONDENSED FINANCIAL
STATEMENTS (PARENT COMPANY ONLY)
Following are condensed financial statements for the parent company as of
and for the years ended June 30:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
--------------------------------------------------------------------------------------------
ASSETS:
Cash $ 836 $ 538
Securities held to maturity - 1,505
Receivable from the Bank 967 384
Equity in net assets of the Bank 39,719 36,071
Other assets 190 35
----------- -----------
TOTAL ASSETS $ 41,712 $ 38,533
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued expenses and other liabilities $ 5 $ 63
Stockholders' equity 41,707 38,470
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,712 $ 38,533
----------- -----------
----------- -----------
--------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
--------------------------------------------------------------------------------------------
INTEREST INCOME $ 34 $ 87 $ 68
OTHER INCOME 30 - -
OTHER OPERATING EXPENSES:
Professional fees - - 324
Other expenses 61 92 94
----------- ----------- -----------
TOTAL OTHER OPERATING EXPENSES 61 92 418
INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF
THE BANK AND INCOME TAX EXPENSE (BENEFIT) 3 (5) (350)
Equity in net income (loss) of the Bank 3,598 (1,214) 4,274
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 3,601 (1,219) 3,924
Income tax expense (benefit) 1 - (135)
----------- ----------- -----------
NET INCOME (LOSS) $ 3,600 $ (1,219) $ 4,059
----------- ----------- -----------
----------- ----------- -----------
--------------------------------------------------------------------------------------------
39
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
- --------------------------------------------------------------------------------
15. FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND -- CONDENSED FINANCIAL
STATEMENTS (PARENT COMPANY ONLY), (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
-----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 3,600 $ (1,219) $ 4,059
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Non-cash compensation under
stock-based benefit plans 103 109 676
Equity in net (income) loss of the Bank (3,598) 1,214 (4,274)
(Increase) decrease in due to the Bank (583) 791 (715)
Other, net (20) 157 626
---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITES (498) 1,052 372
---------- ---------- ----------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 1,505 - -
---------- ---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,505 - -
---------- ---------- ----------
FINANCING ACTIVITIES:
Payment of dividends (1,043) (973) (769)
Exercise of stock options 567 165 115
Acquisition of treasury stock (233) - -
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (709) (808) (654)
---------- ---------- ----------
Increase (decrease) in cash equivalents 298 244 (282)
Cash equivalents at beginning of period 538 294 576
---------- ---------- ----------
Cash equivalents at end of period $ 836 $ 538 $ 294
---------- ---------- ----------
---------- ---------- ----------
-----------------------------------------------------------------------------------------------------------
40
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
STOCK AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------------
STOCK LISTING AND MARKETS
The Corporation's common stock is traded over-the-counter and is quoted in The
Nasdaq Stock Market. The Nasdaq symbol is "FFWM." The listed market makers for
the stock include:
FERRIS BAKER WATTS, INC. LEGG, MASON, WOOD, WALKER, INC.
12 North Liberty Street 130 Green Street
Cumberland, MD 21502 Cumberland, MD 21502
Telephone: (301) 724-7161 Telephone: (301) 722-1200
FRIEDMAN BILLINGS RAMSEY & CO., INC. HERZOG, HEINE, GEDULD, INC.
1001 19th North - 18th Floor 525 Washington Boulevard
Arlington, VA 22209 Jersey City, NJ 07310
Telephone: (703) 312-9500 Telephone: (212) 962-0300
KEEFE, BRUYETTE & WOODS, INC. WHEAT FIRST BUTCHER SINGER
Two World Trade Center 29 North Liberty Street
New York, NY 10048 Cumberland, MD 21502
Telephone: (212) 323-8300 Telephone: (301) 724-2660
STOCK PRICE AND DIVIDENDS
The following table sets forth the high and low prices of the Corporation's
common stock at the respective quarter-end dates as quoted by Nasdaq and cash
dividends declared per share for the related quarterly periods:
- --------------------------------------------------------------------------------
Market Price Cash
High Low Dividends
- --------------------------------------------------------------------------------
FISCAL 1996 QUARTER ENDED:
First quarter, September 30 $ 22.50 $ 19.75 $ 0.12
Second quarter, December 31 23.75 19.63 0.12
Third quarter, March 31 20.50 18.00 0.12
Fourth quarter, June 30 20.75 17.75 0.12
FISCAL 1995 QUARTER ENDED:
First quarter, September 30 $ 25.75 $ 22.50 $ 0.10
Second quarter, December 31 27.50 18.50 0.12
Third quarter, March 31 22.50 19.75 0.12
Fourth quarter, June 30 22.00 18.75 0.12
- --------------------------------------------------------------------------------
The bid and ask price of the Corporation's common stock were $24.25 and $25.00,
respectively, on September 9, 1996.
41
- --------------------------------------------------------------------------------
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
STOCK AND DIVIDEND INFORMATION, (CONTINUED)
- --------------------------------------------------------------------------------
NUMBER OF STOCKHOLDERS AND SHARES OUTSTANDING
As of June 30, 1996 there were approximately 933 stockholders of record and
2,176,739 shares of common stock entitled to vote and receive dividends and were
considered outstanding for financial reporting purposes. The number of
stockholders of record does not reflect the number of persons or entities who
hold their stock in nominee or "street" name.
DIVIDEND REINVESTMENT PLAN
The Corporation offers its stockholders a convenient and economical plan to
increase their investment in the Corporation. Holders of stock may have their
quarterly dividends automatically invested in additional common shares of the
Corporation's common stock. Stockholders participating in the plan may also
make voluntary cash contributions not to exceed $3,000 per quarter.
Stockholders not yet enrolled in the plan may receive a brochure describing the
plan by contacting the Corporation or ChaseMellon Shareholder Services.
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
CORPORATE INFORMATION
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CORPORATE HEADQUARTERS
First Financial Corporation of Western Maryland
118 Baltimore Street
Cumberland, MD 21502
Phone: (301) 724-3363
SUBSIDIARY COMPANIES
First Federal Savings Bank of Western Maryland
Mid-Atlantic Service Corporation
Mid-Atlantic Underwriters Agency, Inc.
ANNUAL MEETING
The annual meeting of the Corporation's stockholders will be held at 10:00
a.m., on Thursday, October 24, 1996, at the Holiday Inn, South George Street,
Cumberland, Maryland. Stockholders are encouraged to attend.
STOCKHOLDER AND INVESTOR INFORMATION
Copies of annual reports, quarterly reports and related stockholder
literature are available upon written request without charge to stockholders.
Requests should be addressed to H. Louise Smyth, Marketing Coordinator of
the Bank, at the Corporation's headquarters.
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Corporation's transfer agent, ChaseMellon
Shareholder Services, directly at (800) 756-3353.
Security analysts, retail brokers and individual investors may contact
Patrick J. Coyne, Chairman of the Board, President and Chief Executive
Officer, or William C. Marsh, Executive Vice President and Chief Financial
Officer, for information about the Corporation.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP
One Mellon Bank Center
Pittsburgh, PA 15219
SPECIAL COUNSEL
Elias, Matz, Tiernan & Herrick LLP
734 15th Street, NW
Washington, DC 20005
REGISTRAR AND TRANSFER AGENT
ChaseMellon Shareholder Services
85 Challenger Road, Overpeck Centre
Ridgefield Park, NJ 07600
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
BOARD OF DIRECTORS, EXECUTIVE OFFICERS AND MANAGERS
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FIRST FINANCIAL CORPORATION OF
WESTERN MARYLAND
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BOARD OF DIRECTORS
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GORDON L. BOWIE
Retired, Former Part-Owner, Treasurer & Secretary,
Tri-State Paper
CHESTON H. BROWNING, III
Retired, President, Mark/Scott, Inc.
PATRICK J. COYNE
Chairman of the Board
President & Chief Executive Officer
L. FRED DEAN
Retired, Former Owner, Dean's Jewelry Store
W. LEE FLEMING
President, Fleming Oil Company
WALTER C. GROWDEN
Retired, Builder & Real Estate Appraiser
MORTON W. PESKIN, JR.
Retired, Former President, Peskins
R. THOMAS THAYER, JR.
President & Chief Executive Officer, Garrettland, Inc.
WILLIAM M. THOMPSON
VICE CHAIRMAN
Retired, Former National Accounts Manager, Westvaco
MARC E. ZANGER
Chairman of the Board & Chief Executive Officer,
BGS & G Companies
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EXECUTIVE OFFICERS
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PATRICK J. COYNE
Chairman of the Board
President & Chief Executive Officer
KENNETH W. ANDRES
Executive Vice President
Chief Lending Officer
WILLIAM C. MARSH
Executive Vice President
Chief Financial Officer
R. CRAIG PUGH
Executive Vice President
Chief of Operations
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44
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
BOARD OF DIRECTORS, EXECUTIVE OFFICERS AND MANAGERS
- --------------------------------------------------------------------------------
FIRST FEDERAL SAVINGS BANK OF
WESTERN MARYLAND AND SUBSIDIARIES
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
GORDON L. BOWIE
Retired, Former Part-Owner, Treasurer & Secretary,
Tri-State Paper
CHESTON H. BROWNING, III
Retired, President, Mark/Scott, Inc.
PATRICK J. COYNE
Chairman of the Board
President & Chief Executive Officer
L. FRED DEAN
Retired, Former Owner, Dean's Jewelry Store
W. LEE FLEMING
President, Fleming Oil Company
WALTER C. GROWDEN
Retired, Builder & Real Estate Appraiser
MORTON W. PESKIN, JR.
Retired, Former President, Peskins
R. THOMAS THAYER, JR.
President & Chief Executive Officer, Garrettland, Inc.
WILLIAM M. THOMPSON
Vice Chairman
Retired, Former National Accounts Manager, Westvaco
MARC E. ZANGER
Chairman of the Board & Chief Executive Officer,
BGS & G Companies
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EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
PATRICK J. COYNE
Chairman of the Board
President & Chief Executive Officer
KENNETH W. ANDRES
Executive Vice President
Chief Lending Officer
WILLIAM C. MARSH
Executive Vice President
Chief Financial Officer
R. CRAIG PUGH
Executive Vice President
Chief of Operations
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BANK DEPARTMENT MANAGERS
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BRENDA ANDREWS
Collections
TIMOTHY A. BRACKEN
Treasurer
H. EUGENE BROADWATER
Residential Lending
VICKI L. DELLIGATTI
Human Resources
BRENT A. FILAK
Internal Audit
TERRY D. FROST
Controller
JUNE M. HARDY
Customer Service
SUE ANN MCMAHON
Loan Servicing
DAVID C. MATHEWS
Correspondent Lending
CHERYL L. SHERMAN
Branch Operations
H. LOUISE SMYTH
Marketing
JAMES A. STEMPLE, JR.
Operations & Compliance
DAVID M. WAUGERMAN
New Accounts, Insurance & IRAs
JOHN M. ZIMOWSKI
Consumer Lending
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BANK BRANCH MANAGERS
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CONNIE J. BASELER
Main Office
KATHY A. BEVERAGE
Tri-Towns
JOHN W. GOLDEN
Frostburg
SCOTT A. HOSTETLER
Country Club Mall
WILLIAM H. JOHNSON
Industrial Boulevard
RONNIE S. LEASE
Braddock Square
J. TODD STREETT
Hagerstown
DAVID W. SWEITZER
Oakland
J. RICHARD WHEELER
Country Club Mall
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45
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NOTES
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46