1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For Quarter Ended: DECEMBER 31, 1996 Commission File Number: 0-19837
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND
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(Exact name of registrant as specified in its charter)
DELAWARE 52-1700036
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
118 BALTIMORE STREET, CUMBERLAND, MARYLAND 21502
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 724-3363
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X Yes No
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Number of shares outstanding of common stock as of February 4, 1997:
COMMON STOCK, $1.00 PAR VALUE 2,167,896 SHARES
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(Class) (Outstanding)
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of December 31, 1996 (Unaudited) and June 30, 1996 . . . . . . . . . . . . . . 1
Consolidated Statements of Operations (Unaudited) for the
three and six month periods ended December 31, 1996 and 1995 . . . . . . . . . . . 2
Consolidated Statements of Cash Flows (Unaudited) for the
six months ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 4-5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . 5-10
PART II - OTHER INFORMATION
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Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 5. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 10
Item 7. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 8. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 10
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1996 and June 30, 1996
(Dollar amounts in thousands)
December 31, June 30,
1996 1996
(Unaudited)
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ASSETS:
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Cash on hand and in banks $ 2,903 $ 2,953
Interest-earning deposits 3,838 5,623
Securities available for sale; cost of $0 and $50 - 75
Securities held to maturity; market value of $44,628 and $51,374 44,248 51,476
Loans receivable, net 291,487 243,113
Accrued interest receivable 2,276 2,076
Federal Home Loan Bank (FHLB) stock 2,097 2,097
Real estate acquired through foreclosure, net 593 655
Premises and equipment, net 10,531 10,921
Prepaid expenses and other assets 754 673
Deferred income taxes 2,122 2,332
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$ 360,849 $ 321,994
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LIABILITIES AND STOCKHOLDERS' EQUITY:
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LIABILITIES:
Deposits $ 276,795 $ 274,756
Advance payments by borrowers for taxes and insurance 1,789 1,704
FHLB advances 36,500 -
Employee Stock Ownership Plan (ESOP) debt 483 483
Accrued expenses and other liabilities 3,140 3,344
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Total liabilities 318,707 280,287
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STOCKHOLDERS' EQUITY:
Serial preferred stock, $1 par value, 2,000,000 shares
authorized; none issued - -
Common stock, $1 par value, 5,000,000 shares authorized;
issued and outstanding 2,251,744 and 2,188,184 2,252 2,188
Additional paid-in capital 12,968 11,559
Retained earnings, substantially restricted 29,319 28,602
Treasury stock, at cost; 83,848 and 11,445 shares (1,973) (233)
Unearned ESOP shares (424) (424)
Unrealized gain on securities available for sale, net 0 15
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Total stockholders' equity 42,142 41,707
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$ 360,849 $ 321,994
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See accompanying notes to consolidated financial statements.
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
Consolidated Statements of Operations
For three and six month periods ended December 31, 1996 and 1995
(Unaudited)
(Dollar amounts in thousands, except per share data)
Three months ended Six months ended
December 31, December 31,
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1996 1995 1996 1995
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INTEREST INCOME:
Loans receivable $ 6,281 $ 5,347 $ 12,366 $ 10,335
Securities 867 1,127 1,709 2,314
Other 67 103 140 272
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TOTAL INTEREST INCOME 7,215 6,577 14,215 12,921
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INTEREST EXPENSE:
Deposits 2,995 3,097 5,907 6,126
Borrowed funds 385 27 494 44
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TOTAL INTEREST EXPENSE 3,380 3,124 6,401 6,170
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 3,835 3,453 7,814 6,751
Provision for loan losses - 150 75 300
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,835 3,303 7,739 6,451
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OTHER OPERATING INCOME:
Loan fees and service charges 202 204 440 371
Other non-interest income 83 31 172 69
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TOTAL OTHER OPERATING INCOME 285 235 612 440
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OTHER OPERATING EXPENSES:
Compensation and employee benefits 1,168 1,102 2,334 2,142
Occupancy and equipment 315 344 628 631
Federal deposit insurance 34 162 2,085 326
Data processing 98 98 197 194
Professional fees 111 72 228 210
Other 477 474 875 788
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TOTAL OTHER OPERATING EXPENSES 2,203 2,252 6,347 4,291
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NET INCOME BEFORE INCOME TAXES 1,917 1,286 2,004 2,600
Provision for income taxes 732 475 775 987
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NET INCOME $ 1,185 $ 811 $ 1,229 $ 1,613
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NET INCOME PER SHARE $ 0.55 $ 0.37 $ 0.57 $ 0.74
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See accompanying notes to consolidated financial statements.
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six month period ended December 31, 1996 and 1995
(Unaudited)
(Dollar amounts in thousands)
Six months ended
December 31,
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1996 1995
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OPERATING ACTIVITIES:
NET INCOME $ 1,229 $ 1,613
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Loans originated for sale (1,437) (8,093)
Sales of loans originated for sale 1,118 8,085
Gain on sales of securities available for sale (51) -
Deferred loan fees and loan discounts (566) -
Depreciation and amortization 354 376
Provision for loan losses 75 300
Deferred income taxes 220 302
Other (107) (69)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 835 2,514
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INVESTING ACTIVITIES:
Loan originations and purchases (88,370) (43,882)
Sales of loans 2,000 -
Repayments on loans 38,668 30,691
Repayments of securities available for sale - 636
Sales of securities available for sale 101 -
Purchases of securities held to maturity (9,993) -
Maturities of securities held to maturity 13,000 2,000
Repayments of securities held to maturity 4,183 4,862
Proceeds from sale of real estate acquired through foreclosure (REO) 123 431
Purchases of premises and equipment (227) (314)
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NET CASH USED IN INVESTING ACTIVITIES (40,515) (5,576)
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FINANCING ACTIVITIES:
Dividends paid (512) (520)
Net increase in deposits 2,124 3,041
Net change in FHLB advances 36,500 4,500
Exercise of stock options 1,473 267
Payments to acquire treasury stock (1,740) -
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NET CASH PROVIDED BY FINANCING ACTIVITIES 37,845 7,288
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(Decrease) increase in cash equivalents (1,835) 4,226
Cash equivalents at beginning of period 8,576 5,348
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Cash equivalents at end of period $ 6,741 $ 9,574
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SUPPLEMENTAL INFORMATION:
Interest paid $ 5,921 $ 6,197
Income taxes paid 350 624
NON-CASH TRANSACTIONS:
Transfers from loans receivable to REO 162 93
See accompanying notes to consolidated financial statements.
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of and for the three and six month periods ended December 31, 1996 and 1995
(Unaudited)
1. BASIS OF PRESENTATION
First Financial Corporation of Western Maryland (the Corporation) is a unitary
thrift holding company. The Corporation's consolidated financial statements
include the accounts of its wholly-owned federal capital stock savings bank
subsidiary, First Federal Savings Bank of Western Maryland (the Bank) and the
Bank's subsidiaries. The accompanying unaudited consolidated financial
statements include all adjustments, consisting only of normal recurring
accruals, which are necessary, in the opinion of management, to fairly reflect
the Corporation's financial position and results of operations.
The results of operations for the three and six months ended December 31, 1996
are not necessarily indicative of the results that may be expected for the
entire fiscal year.
Certain amounts in the fiscal 1996 financial statements have been reclassified
to conform to the presentation for fiscal 1997.
2. NET INCOME PER SHARE OF COMMON STOCK
Net income per common share is calculated by dividing net income 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 certain shares owned by the Corporation's
Employee Stock Ownership Plan (ESOP). The average number of shares outstanding
for the three and six months ended December 31, 1996 was 2,145,295 and
2,145,331, respectively. The average number of shares outstanding for the
three and six months ended December 31, 1995 was 2,196,681 and 2,182,254,
respectively. The Corporation has not separately reported fully diluted
earnings per share as it is not different than primary earnings per share.
3. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and June 30, 1996 consist of the
following:
December 31, 1996
(In thousands) (Unaudited) June 30, 1996
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Mortgage loans:
Residential - single family $ 155,258 $ 126,779
Residential - multi family 33,450 29,071
Commercial real estate 63,088 55,104
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251,796 210,954
Other loans:
Automobile 32,096 29,410
Other consumer 15,486 11,177
Commercial business 3,838 3,263
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303,216 254,804
Less:
Allowance for loan losses 7,846 7,795
Deferred loan fees and net discounts 794 1,360
Loans in process 3,089 2,536
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$ 291,487 $ 243,113
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4. PROPOSED MERGER
On November 26, 1996, the Corporation and Keystone Financial, Inc. (Keystone)
entered into a definitive agreement whereby Keystone will acquire the
Corporation and its subsidiaries, including the Bank. The merger transaction,
which is subject to regulatory and stockholder approval, is expected to be
completed during the second quarter of calendar 1997.
Under terms of the agreement, the Corporation's banking operations will be
combined with and into those of American Trust Bank, N.A.(American Trust),
Keystone's subsidiary bank currently providing financial services in the
markets served by the Corporation, with American Trust being the surviving
company. Pursuant to the acquisition agreement, upon the effective date of the
merger, and subject to certain limitations, outstanding shares of common stock
of the Corporation will be converted into Keystone common stock at a fixed
exchange ratio of 1.29 shares of Keystone for each First Financial share, or an
equivalent amount of cash as specified in the agreement. The issuance of
Keystone shares will amount to 55% to 60% of the total consideration. In
connection with the agreement, the Corporation granted Keystone an option to
purchase up to 19.9% of its outstanding common stock under certain
circumstances.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT ACCOUNTING AND REGULATORY MATTERS
The deposits of the Bank are currently insured by the Savings Association
Insurance Fund (SAIF) which is administered by the Federal Deposit Insurance
Corporation (FDIC). The FDIC also administers the Bank Insurance Fund (BIF)
which generally provides insurance for commercial bank deposits. Both the SAIF
and the BIF are required by law to attain and maintain a reserve ratio of 1.25%
of insured deposits. As the result of the BIF achieving a fully funded status,
the FDIC promulgated a regulation in November 1995, which reduced deposit
premiums paid by BIF-insured banks in the lowest risk category from 27 basis
points to zero (subject to an annual minimum of $2,000).
On September 30, 1996, legislation was enacted into law to recapitalize the
SAIF through a one-time assessment on SAIF-insured deposits as of March 31,
91995. The special assessment amounted to approximately $4.5 billion or
approximately $0.65 for every $100 of assessable deposits. The Bank's
assessment amounted to $1.9 million ($1.2 million, net of income tax benefit).
As a result of the special assessment, the Bank's deposit insurance premiums
were decreased from $0.23 per $100 of deposits to approximately $0.06 per $100
of deposits beginning October 1, 1997.
CHANGES IN FINANCIAL CONDITION
GENERAL. The Corporation's total assets increased by $38.9 million or 12.1% to
$360.8 million at December 31, 1996 from $322.0 million at June 30, 1996. This
increase was primarily due to an increase of $48.4 million in loans receivable,
partially offset by decreases of $1.8 million in cash and interest-earning
deposits and $7.3 million in securities. The increase in total assets was
funded by an increase of $36.5 million increase in Federal Home Loan Bank
(FHLB) advances outstanding and a $2.0 million increase in total deposits.
CASH AND INTEREST-EARNING DEPOSITS. Cash and interest-earning deposits
decreased by $1.8 million or 21.4% to $6.7 million at December 31, 1996 from
$8.6 million at June 30, 1996. This decrease was due primarily to a decrease
of $1.8 million in the amount of FHLB deposits held at December 31, 1996 as
compared to June 30, 1996. The decrease in cash and interest-earning deposits
during the period was primarily due to cash being used to partially fund the
growth experienced in the Bank's loan portfolios.
SECURITIES. Securities decreased by $7.3 million or 14.2% to $44.2 million at
December 31, 1996 from $51.6 million at June 30, 1996. Included in this
decrease was a net decrease of $7.2 million in securities held to maturity
(HTM) and a net decrease of $75,000 in securities available for sale (AFS).
The decrease
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in HTM securities was primarily attributable to $6.0 million of federal agency
bonds being called prior to final maturity and to repayments of principal
received during the period. The decrease in AFS securities was attributable to
the sale of $75,000 of other bond investments during the first quarter of
fiscal 1997.
LOANS RECEIVABLE. Loans receivable increased by a net $48.4 million or 19.9%
to $291.5 million at December 31, 1996 from $243.1 million at June 30, 1996.
Included in this increase were net increases of $28.5 million in single-family
residential mortgage loans, $12.4 million in commercial real estate and
multi-family residential mortgage loans, $2.7 million in automobile loans and
$4.9 million in commercial business and other consumer loans.
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), net of related reserves, decreased by $2.6
million or 41.0% to $3.8 million at December 31, 1996 from $6.4 million at June
30, 1996. The overall decrease in non-performing assets from June 30, 1996,
was attributable to reductions in non-accrual loans and loans delinquent due to
maturity and to the sale of certain REO properties.
PREMISES AND EQUIPMENT / PREPAID EXPENSES AND OTHER ASSETS. Premises and
equipment / prepaid expenses and other assets decreased by $519,000 or 3.7% to
$13.4 million at December 31, 1996 from $13.9 million at June 30, 1996.
Included in this decrease was a $390,000 decrease in premises and equipment
resulting primarily from the sale of a parcel of land at one of the Bank's
branch locations and the write-off of certain obsolete equipment. Also
contributing to this decrease was a net decrease of $210,000 in deferred income
taxes and taxes payable, partially offset by an $81,000 increase in prepaid
expenses and other assets.
DEPOSITS. Total deposits increased by $2.0 million or 0.7% to $276.8 million
at December 31, 1996 from $274.8 million at June 30, 1996. This increase was
primarily attributable to an increase of $10.2 million in time deposits which
reflects the Bank's recent efforts to increase its amount of certificates of
deposits outstanding through advertising and premium promotion campaigns.
Offsetting this increase were reductions of $4.4 million in savings and
passbook accounts and $3.8 million in checking and money market accounts.
FHLB ADVANCES. FHLB advances totaled $36.5 million at December 31, 1996
compared to $0 at June 30, 1996. The proceeds from these new advances were
used to fund the loan growth experienced by the Corporation during the period
and to reduce the Corporation's previously high short-term asset/liability
repricing GAP which exposed the Bank to shrinking net interest margins should
market interest rates in general decline.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $435,000 or 1.0% to
$42.1 million at December 31, 1996 from $41.7 million at June 30, 1996. This
increase was the result of the $1.2 million net income for the first six months
of fiscal 1997, and a $1.5 million increase recorded upon the exercise of stock
options during the period. Partially offsetting these increases were decreases
of $1.7 million recorded in connection with the acquisition of treasury shares,
$15,000 recorded to recognize the net change in unrealized gains on securities
AFS and $512,000 in dividends paid during the period.
RESULTS OF OPERATIONS
GENERAL. The Corporation recorded net income of $1.2 million and $1.2 million
for the three and six months ended December 31, 1996, respectively, as compared
to net income of $811,000 and $1.6 million for the same periods last fiscal
year. The $374,000 or 46.1% increase in net income for the three-month period
ended December 31, 1996, as compared to the three months ended December 31,
1995, was attributable to an increase in net interest income of $382,000 or
11.1%, an increase in other operating income of $50,000 or 21.3%, a decrease in
in provisions for loan losses of $150,000 or 100.0%, a reduction in other
operating expenses of $49,000 or 2.2%, which were partially offset by an
increase in the provision for income taxes of $257,000 or 54.1%. The $384,000
or 23.8% decrease in net income for the six-month period ended December 31,
1996 as compared to the same period last fiscal year was
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attributable an increase in other operating expenses of $2.1 million or 47.9%
resulting primarily from the $1.9 million one-time SAIF insurance fund
recapitalization charge, partially offset by an increase in net interest income
of $1.1 million or 15.8%, a decrease in provisions for loan losses of $225,000
or 75.0% and a reduction in the provision for income taxes of $212,000 or 21.5%
NET INTEREST INCOME. Net interest income is determined by the Corporation's
interest rate spread (i.e., the difference between the yields earned on
interest-earning assets and the rates paid on interest-bearing liabilities) and
the relative amounts, or volumes, of interest-earning assets and
interest-bearing liabilities. Net interest income was $3.8 million and $7.8
million for the three and six months ended December 31, 1996, respectively, as
compared to $3.5 million and $6.8 million for the same periods last fiscal
year. The $382,000 or 11.1% increase in net interest income for the three-month
period ended December 31, 1996, as compared to the three months ended December
31, 1995, was attributable to an increase in interest income of $638,000 or
9.7%, partially offset by a $256,000 or 8.2% increase in interest expense. The
$1.1 million or 15.8% increase in net interest income for the six-month period
ended December 31, 1996, as compared to the same period last fiscal year, was
attributable to an increase in interest income of $1.3 million or 10.0%,
partially offset by a $231,000 or 3.7% increase in interest expense.
INTEREST INCOME. Interest income was $7.2 million and $14.2 million for the
three and six months ended December 31, 1996, respectively, as compared to $6.6
million and $12.9 million for the same periods last fiscal year. The $638,000
or 9.7% and $1.3 million or 10.0% increases in interest income for the three
and six month periods ended December 31, 1996, as compared to the three and six
months ended December 31, 1995, were attributable to increases in income
recorded on loans, partially offset by a decrease in income from securities
and interest-earning deposits.
Interest income from loans receivable increased by $934,000 or 17.5% and $2.0
million or 19.7% for the three and six months ended December 31, 1996,
respectively, as compared to the same periods last fiscal year due primarily to
increases in loans outstanding during the respective periods. Average loans
outstanding increased $49.7 million or 20.8% to $289.3 million for the quarter
ended December 31, 1996 from $239.6 million for the same quarter last fiscal
year and by $41.5 million or 17.6% to $277.4 million for the six months ended
December 31, 1996 from $235.9 million for the same six month period last fiscal
year.
Interest income from securities was $867,000 and $1.7 million for the
three and six months ended December 31, 1996, respectively, as compared to $1.1
million and $2.3 million for the three and six months ended December 31, 1995.
The $260,000 or 23.1% and $605,000 or 26.2% decreases in interest income from
securities for the three and six month periods ended December 31, 1996, as
compared to the three and six months ended December 31, 1995, were primarily
attributable to decreases in the average balance of securities outstanding
during the respective periods. The average balances of securities decreased
$25.4 million or 33.8% to $49.8 million for the quarter ended December 31, 1996
from $75.2 million for the same quarter last fiscal year and by $27.5 million
or 35.8% to $49.4 million for the six months ended December 31, 1996 from $76.9
million for the same six month period last fiscal year.
Other interest income decreased by $36,000 or 35.0% and $132,000 or 48.5% for
the three and six months ended December 31, 1996, respectively, as compared to
the same periods last fiscal year due primarily to a reduction in the amount of
income recorded on interest-earning deposits. This decline in income resulted
primarily from reductions in the average balance of funds invested in overnight
deposits at the FHLB during the first and second quarter of fiscal 1997 as
compared to the same periods last fiscal year.
INTEREST EXPENSE. Interest expense was $3.4 million and $6.4 million for the
three and six months ended December 31, 1996, respectively, as compared to $3.1
million and $6.2 million for the same periods last fiscal year. The $256,000
or 8.2% and $231,000 or 3.7% increases in interest expense for the three and
six month periods ended December 31, 1996, as compared to the three and six
months ended December 31, 1995, were attributable to increases in interest paid
on other borrowed funds partially offset by decreases in interest paid on
deposits.
Interest expense on deposits decreased by $102,000 or 3.3% and $219,000 or 3.6%
for the three and six months ended December 31, 1996, respectively, as compared
to the same periods last fiscal year. These
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decreases were primarily attributable to decreases in the average balance of
deposits outstanding during the periods. Average deposits outstanding for the
three months ended December 31, 1996 and 1995 were $279.5 million and $287.1
million, respectively, which represents a decrease of $7.6 million or 2.6%.
Average deposits outstanding for the six months ended December 31, 1996 and
1995 were $278.3 million and $286.4 million, respectively, which represents a
decrease of $8.1 million or 2.8%. Also contributing to the decrease in deposit
interest expense was a slight reduction in the Corporation's cost of deposits.
The Corporation's cost of deposits fell to 4.18% for the six months ended
December 31, 1996 from 4.22% for the same period last fiscal year. This
decrease in the cost of deposits occurred despite a change in the composition
of the Corporation's deposit mix toward a higher percentage of time deposits
and reduced levels of lower costing checking and savings accounts due to a
significant amount of longer term certificates of deposit maturing and/or
repricing during the period which were originally issued at rates higher than
current market levels for similar term products.
Interest expense on borrowed funds increased by $358,000 and $450,000 for the
three and six months ended December 31, 1996, respectively, as compared to the
same periods last fiscal year. Interest expense on borrowed funds, which
includes interest paid on FHLB advances, the Corporation's ESOP debt expense
and other miscellaneous interest expenses, increased during the periods due
primarily to an increase in the average amount of FHLB advances utilized during
the period.
PROVISION FOR LOAN LOSSES. Provision for loan losses was $0 and $75,000 for
the three and six months ended December 31, 1996, respectively, as compared to
$150,000 and $300,000 for the same periods last fiscal year. These
decreases reflect the Corporation's policy of recording provisions for loan
losses in amounts necessary 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.
OTHER OPERATING INCOME. Other operating income was $285,000 and $612,000 for
the three and six months ended December 31, 1996, respectively, as compared to
$235,000 and $440,000 for the same periods last fiscal year. Included in other
operating income for the three months ended December 31, 1996 was a $49,000
gain recorded on the sale of a parcel of land adjacent to one of the Bank's
branch offices. This gain and a $51,000 gain on security sales is included in
other income for the six months ended December 31, 1996. Other operating
income for all periods also includes loan origination fees and deposit service
charges. Such income is recognized in proportion to the volume of customer
transactions processed and the amount of loans originated. Accordingly, other
operating income varies somewhat between periods due to fluctuations in the
volumes of these activities.
OTHER OPERATING EXPENSES. Total other operating expenses were $2.2 million and
$6.3 million for the three and six months ended December 31, 1996,
respectively, as compared to $2.3 million and $4.3 million for the same periods
last fiscal year. The $49,000 or 2.2% decrease for the three months ended
December 31, 1996 as compared to the same period last fiscal year is the result
of reductions in occupancy and equipment expenses and FDIC insurance premiums,
partially offset by increases in compensation and employee benefits and
professional fees and related costs. The $2.1 million or 47.9% increase for
the six months ended December 31, 1996 as compared to the same period last
fiscal year is primarily the result of the $1.9 million one-time SAIF
recapitalization assessment. Also contributing to this increase were increases
in compensation and employee benefits, professional fees and other operating
costs.
Compensation and employee benefits increased by $66,000 or 6.0% and $192,000 or
9.0% for the three and six months ended December 31, 1996, respectively, as
compared to the same periods last fiscal year due primarily to slight increases
in staffing levels, normal inflationary factors and the impact in the prior
fiscal year of higher stock prices on stock appreciation rights issued to
former members of management pursuant to stock based incentive plans.
Partially offsetting these increases were reductions in expenses realized upon
the restructuring of employee hospitalization and other employee benefits.
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Occupancy and equipment expenses decreased by $29,000 or 8.4% and $3,000 or
0.5% for the three and six months ended December 31, 1996, respectively, as
compared to the same periods last fiscal year as a result of decreases in the
levels of equipment repairs and maintenance costs and utility expenses incurred
during the respective periods. These reductions were partially offset by
increases in depreciation expense resulting from changes made during fiscal
1996 to the estimated remaining useful lives of certain computer equipment
purchased in prior periods.
Federal deposit insurance premiums decreased by $128,000 for the three months
ended December 31, 1996, and increased by $1.8 million for the six months ended
December 31, 1996. The decrease for the three months ended December 31, 1996,
as compared to the same period last fiscal year, is the result of a reduction
in the Bank's deposit insurance premiums which became effective in connection
with the recapitalization of the SAIF. The increase for the six months ended
December 31, 1996, as compared to the same period last fiscal year is the
result of the Bank's SAIF recapitalization assessment which amounted to $1.9
million ($1.2 million, net of income tax benefit) and was incurred during the
three months ended September 30, 1996.
Data processing expenses were unchanged for the three months ended December 31,
1996 and increased by $3,000 or 1.6% for the six months ended December 31,
1996, respectively, as compared to the same periods last fiscal year. Data
processing expenses for all periods vary in direct proportion to the volume of
transactions processed during the respective periods.
Professional fees increased by $39,000 or 54.2% and $18,000 or 8.6% for the
three and six months ended December 31, 1996, respectively, as compared to the
same periods last fiscal year primarily as a result of expenses incurred
relating to the proposed merger with Keystone Financial, Inc., as discussed
above.
Other expenses increased by $3,000 or 0.6% and $87,000 or 11.0% for the three
and six months ended December 31, 1996, respectively, as compared to the same
periods last fiscal year. The three and six month periods for the current
fiscal year include gains of $29,000 and $32,000, respectively, realized from
the operation of REO properties compared to gains of $22,000 and $14,000 for
the same periods in the prior fiscal year. The six months ended December 31,
1996 also includes a non-recurring expense of $26,000 relating to the write-off
of certain unrecoverable deferred loan costs.
INCOME TAXES. For the three and six months ended December 31, 1996 the
Corporation recorded provisions for income taxes of $732,000 and $775,000 as
compared to provisions of $475,000 and $987,000 for the same periods last
fiscal year. These variances are due to different pre-tax income amounts
recorded during the respective periods. The provisions for income taxes
reflect the Corporation's effective tax rate, which is approximately 38.0% for
all periods.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related notes of the Corporation
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required by the Office of Thrift Supervision (OTS) to maintain
minimum levels of liquidity to assure its ability to meet demands for customers
withdrawals and the repayment of short term borrowings.
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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 December 31, 1996 the Bank's liquidity
ratio was approximately 5.63%. 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
Federal Deposit Insurance Corporation (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 December 31, 1996, the Bank was in
compliance with all regulatory capital requirements with tangible, core and
risk-based capital ratios of 10.93%, 10.93% and 19.08%, respectively.
PART II - OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are involved in various legal proceedings
occurring in the ordinary course of business. It is the opinion of management,
after consultation with legal counsel, that these matters will not materially
effect the Corporation's consolidated financial position or results of
operations.
ITEM 4. CHANGES IN SECURITIES
None.
ITEM 5. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 6. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 7. OTHER INFORMATION
None.
ITEM 8. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 11 - Statement re Computation of Net Income per Share of Common
Stock.
b. Exhibit 27 - Financial Data Schedule.
c. Form 8-K - The Corporation filed a Form 8-K dated November 26, 1996 to
report an "Agreement and Plan of Merger" which sets forth the terms and
conditions under which the Corporation will merge with and into Keystone
Financial, Inc..
d. Form 8-K - The Corporation filed a Form 8-K dated October 18, 1996 to
report earnings for the quarter ended September 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND
Date: 02/04/97 By: /s/ Patrick J. Coyne
-----------------------------------------
Patrick J. Coyne
Chairman of the Board
President and Chief Executive Officer
Date: 02/04/97 By: /s/ William C. Marsh
-----------------------------------------
William C. Marsh
Executive Vice President
Chief Financial Officer
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