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: MARCH 31, 1997 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 May 1, 1997:
COMMON STOCK, $1.00 PAR VALUE 2,175,659 SHARES
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(Class) (Outstanding)
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1997 (Unaudited) and June 30, 1996 . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations (Unaudited) for the
three and nine month periods ended March 31, 1997 and 1996 . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . 5-10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 10
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 6. 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
March 31, 1997 and June 30, 1996
(Dollar amounts in thousands)
March 31, June 30,
1997 1996
(Unaudited)
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ASSETS:
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Cash on hand and in banks $ 2,884 $ 2,953
Interest-earning deposits 4,610 5,623
Securities available for sale; cost of $0 and $50 - 75
Securities held to maturity; market value of $48,494 and $51,374 48,211 51,476
Loans receivable, net 290,785 243,113
Accrued interest receivable 2,264 2,076
Federal Home Loan Bank (FHLB) stock 2,275 2,097
Real estate acquired through foreclosure, net 587 655
Premises and equipment, net 10,253 10,921
Prepaid expenses and other assets 735 673
Deferred income taxes 2,122 2,332
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$ 364,726 $ 321,994
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
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LIABILITIES:
Deposits $ 280,953 $ 274,756
Advance payments by borrowers for taxes and insurance 2,091 1,704
FHLB advances 35,000 -
Employee Stock Ownership Plan (ESOP) debt 483 483
Accrued expenses and other liabilities 3,017 3,344
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Total liabilities 321,544 280,287
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STOCKHOLDERS' EQUITY:
Serial preferred stock, $1 par value, 2,000,000 shares
authorized; none issued - -
Common stock, $1 par value, 5,000,000 shares authorized;
issued and outstanding 2,259,507 and 2,188,184 2,260 2,188
Additional paid-in capital 13,012 11,559
Retained earnings, substantially restricted 30,307 28,602
Treasury stock, at cost; 83,848 and 11,445 shares (1,973) (233)
Unearned ESOP shares (424) (424)
Unrealized gain on securities available for sale, net - 15
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Total stockholders' equity 43,182 41,707
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$ 364,726 $ 321,994
========= =========
See accompanying notes to consolidated financial statements.
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
Consolidated Statements of Operations
For the three and nine month periods ended March 31, 1997 and 1996
(Unaudited)
(Dollar amounts in thousands, except per share data)
Three months ended Nine months ended
March 31, March 31,
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1997 1996 1997 1996
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INTEREST INCOME:
Loans receivable $ 6,460 $ 5,510 $18,826 $15,844
Securities 832 939 2,541 3,253
Other 85 382 225 655
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TOTAL INTEREST INCOME 7,377 6,831 21,592 19,752
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INTEREST EXPENSE:
Deposits 2,922 3,051 8,829 9,178
Borrowed funds 591 20 1,085 64
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TOTAL INTEREST EXPENSE 3,513 3,071 9,914 9,242
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 3,864 3,760 11,678 10,510
Provision for loan losses -- 150 75 450
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,864 3,610 11,603 10,060
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OTHER OPERATING INCOME:
Loan fees and service charges 180 204 621 575
Other non-interest income 171 228 343 297
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TOTAL OTHER OPERATING INCOME 351 432 964 872
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OTHER OPERATING EXPENSES:
Compensation and employee benefits 1,072 1,144 3,406 3,286
Occupancy and equipment 355 333 983 965
Federal deposit insurance 134 164 2,220 490
Data processing 101 99 298 292
Professional fees 119 248 347 458
Other 398 410 1,273 1,199
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TOTAL OTHER OPERATING EXPENSES 2,179 2,398 8,527 6,690
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NET INCOME BEFORE INCOME TAXES 2,036 1,644 4,040 4,242
Provision for income taxes 787 655 1,562 1,641
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NET INCOME $ 1,249 $ 989 $ 2,478 $ 2,601
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NET INCOME PER SHARE $ 0.58 $ 0.45 $ 1.15 $ 1.19
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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 nine month period ended March 31, 1997 and 1996
(Unaudited)
(Dollar amounts in thousands)
Nine months ended
March 31,
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1997 1996
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OPERATING ACTIVITIES:
Net income $ 2,478 $ 2,601
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Loans originated for sale (2,470) (13,504)
Sales of loans originated for sale 2,241 12,785
Gain on sales of securities available for sale (51) (179)
Deferred loan fees and loan discounts (652) (143)
Depreciation and amortization 599 507
Non-cash compensation under stock-based benefit plans - 281
Provision for loan losses - 450
Deferred income taxes 220 1,083
Other (1,979) (1,095)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 386 2,786
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INVESTING ACTIVITIES:
Loan originations and purchases (105,175) (54,772)
Sales of loans 2,000 --
Repayments on loans 57,885 44,489
Repayments of securities available for sale - 2,849
Sales of securities available for sale 101 28,710
Purchases of securities held to maturity (15,993) (5)
Maturities of securities held to maturity 13,000 2,000
Repayments of securities held to maturity 6,204 6,459
Proceeds from sale of real estate acquired through foreclosure (REO) 142 559
Purchases of premises and equipment (228) (367)
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (42,064) 29,922
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FINANCING ACTIVITIES:
Dividends paid (773) (782)
Net change in deposits 6,584 (1,918)
Net change in FHLB advances 35,000 (3,000)
Exercise of stock options 1,525 386
Payments to acquire treasury stock (1,740) -
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 40,596 (5,314)
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(Decrease) increase in cash equivalents (1,082) 27,394
Cash equivalents at beginning of period 8,576 5,348
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Cash equivalents at end of period $ 7,494 $ 32,742
========= =========
SUPPLEMENTAL INFORMATION:
Interest paid $ 9,283 $ 9,261
Income taxes paid 1,090 625
NON-CASH TRANSACTIONS:
Transfers from loans receivable to REO 234 232
See accompanying notes to consolidated financial statements.
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FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 capital stock federal savings bank
subsidiary, First Federal Savings Bank of Western Maryland (the Bank) and the
Bank's subsidiaries. The accompanying unaudited consolidated financial
statements for the interim periods 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 nine months ended March 31, 1997
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 nine months ended March 31, 1997 was 2,174,135 and 2,150,485,
respectively. The average number of shares outstanding for the three and nine
months ended March 31, 1996 was 2,214,412 and 2,176,826, 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 March 31, 1997 and June 30, 1996 consist of the following:
March 31, 1997
(In thousands) (Unaudited) June 30, 1996
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Mortgage loans:
Residential - single family $157,610 $126,779
Residential - multi family 32,493 29,071
Commercial real estate 60,264 55,104
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250,367 210,954
Other loans:
Automobile 30,816 29,410
Other consumer 15,221 11,177
Commercial business 3,687 3,263
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300,091 254,804
Less:
Allowance for loan losses 6,588 7,795
Deferred loan fees and net discounts 708 1,360
Loans in process 2,010 2,536
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$290,785 $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 stockholder approval, is expected to be completed during
May or June 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
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting For
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", which will be effective in whole, on a prospective basis, for
fiscal years beginning after December 31, 1996. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities based on consistent application of a
financial-components approach and focuses on control. SFAS No. 125 extends the
"available for sale" and "trading" approach of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", to non-security financial
assets that can be contractually prepaid or otherwise settled in such a way
that the holder of the asset would not recover substantially all of its
recorded investment. In addition, SFAS No. 125 amends SFAS No. 115 to prevent
a security from being classified as held to maturity if the security can be
prepaid or settled in such a manner that the holder of the security would not
recover substantially all of its recorded investment. The extension of the
SFAS No. 115 approach to certain non-security financial assets and the
amendment of SFAS No. 115 are effective for financial assets held on or
acquired after January 1, 1997. In December 1996, the FASB issued SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125", which defers the effective date of SFAS No. 125 until January 1, 1998
for certain transactions including repurchase agreements, dollar-roll,
securities lending and similar transactions. Management has not yet determined
the effect, if any, SFAS Nos. 125 and 127 will have on the Corporation's
consolidated financial statements.
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share". SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 simplifies previous standards for computing EPS.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. SFAS No. 128 requires restatement of all prior period EPS data
presented. Management does not expect SFAS No. 128 to have a significant
impact on the Corporation's consolidated financial statements.
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,
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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,
1995. 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 $42.7 million or 13.3% to
$364.7 million at March 31, 1997 from $322.0 million at June 30, 1996. This
increase was primarily due to an increase of $47.7 million in loans receivable,
partially offset by decreases of $1.0 million in interest earning cash and $3.3
million in securities. The increase in total assets reflects a corresponding
increase in total liabilities of $41.3 million or 14.7% and an increase in
stockholders' equity of $1.5 million or 3.5%. The increase in total
liabilities includes a $35.0 million increase in Federal Home Loan Bank (FHLB)
advances outstanding and a $6.2 million or 2.3% increase in total deposits.
CASH AND INTEREST-EARNING DEPOSITS. Cash and interest-earning deposits
decreased by $1.1 million or 12.6% to $7.5 million at March 31, 1997 from $8.6
million at June 30, 1996. This decrease was due primarily to the net cash
needed to fund the loan portfolio growth during the period, as explained below.
SECURITIES. Investment and mortgage-backed securities decreased by $3.3
million or 6.5% to $48.2 million at March 31, 1997 from $51.6 million at June
30, 1996. Included in this decrease was a net decrease of $3.3 million in
securities held to maturity (HTM) and a net decrease of $75,000 in securities
available for sale (AFS). The decrease in HTM securities was attributable to
$13.0 million of federal agency bonds being called prior to final maturity and
$6.2 million of repayments of principal received during the period which were
partially offset by the purchase of $16.0 million of new securities. 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 $47.7 million or 19.6%
to $290.8 million at March 31, 1997 from $243.1 million at June 30, 1996.
Included in this increase were net increase of $30.8 or 24.3% in single family
residential mortgage loans, $3.4 million or 11.8% in multi-family residential
mortgage loans, $5.2 million or 9.4% in commercial real estate loans and $5.9
million or 13.4% in automobile 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 $1.2
million or 14.9% to $6.9 million at March 31, 1997 from $8.1 million at June
30, 1996. The overall decrease in non-performing assets from June 30, 1996,
was primarily attributable to reductions in 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 $816,000 or 5.9% to
$13.1 million at March 31, 1997 from $13.9 million at June 30, 1996. This
decrease was primarily attributable to a $668,000 decrease in property and
equipment relating to normal depreciation.
DEPOSITS. Total deposits increased by $6.2 million or 2.3% to $281.0 million
at March 31, 1997 from $274.8 million at June 30, 1996. This increase was
attributable to an increase of $16.2 million in time deposits, partially offset
by decreases of $5.8 million and $4.2 million in and savings accounts and
checking accounts, respectively.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $1.5 million or 3.5%
to $43.2 million at March 31, 1997 from $41.7 million at June 30, 1996. This
increase was primarily the result of the $2.5 million
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net income for the first nine months of fiscal 1997 and the $1.5 million
increase recorded due to the exercise of stock options rights during the
period. Partially offsetting these increases were decreases of $1.7 million
recorded in connection with the acquisition of treasury shares, $16,000
recorded to recognize the net change in unrealized gains on securities AFS and
$773,000 in dividends paid during the period.
RESULTS OF OPERATIONS
GENERAL. The Corporation recorded net income of $1.2 million and $2.5 million
for the three and nine months ended March 31, 1997, respectively, as compared
to net income of $989,000 and $2.6 million for the same periods last fiscal
year. The $260,000 or 26.3% increase in net income for the three-month period
ended March 31, 1997, as compared to the three months ended March 31, 1996, was
attributable an increase of $104,000 or 2.8% in net interest income and to
decreases of $150,000 or 100.0% in provision for loan losses and $219,000 or
9.1% in other operating expenses. Partially offsetting these increases in net
income was a $81,000 or 18.8% decrease in other operating income and a $132,000
or 20.2% increase in the provision for income taxes. The $123,000 decrease in
net income for the nine month period ended March 31, 1997, as compared to the
same period last fiscal year was attributable to an increase of $1.8 million or
27.5% in other operating expenses resulting from the $1.9 million one-time SAIF
insurance fund recapitalization charge, partially offset by an increase of $1.2
million or 11.1% in net interest income, a decrease of $375,000 or 83.3% in
provision for loan losses, a $92,000 or 10.6% increase in other operating
income and a $79,000 or 4.8% decrease in the provision for income taxes.
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 $3.9 million and $11.7
million for the three and nine months ended March 31, 1997, respectively, as
compared to $3.8 million and $10.5 million for the same periods last fiscal
year. The $104,000 or 2.8% increase in net interest income for the three-month
period ended March 31, 1997, as compared to the three months ended March 31,
1996, was attributable to an increase in interest income of $546,000 or 8.0%,
partially offset by a $442,000 or 14.4% increase in interest expense. The $1.2
million or 11.1% increase in net interest income for the nine month period
ended March 31, 1997, as compared to the same period last fiscal year was
attributable to an increase in interest income of $1.8 million or 9.3%,
partially offset by a $672,000 or 7.3% increase in interest expense.
INTEREST INCOME. Interest income was $7.4 million and $21.6 million for the
three and nine months ended March 31, 1997, respectively, as compared to $6.8
million and $19.8 million for the same periods last fiscal year. The $546,000
or 8.0% increase in interest income for the three months ended March 31, 1997,
as compared to the three months ended March 31, 1996 was attributable to
increases in income recorded on loans, partially offset by a decrease in income
from securities and interest earning deposits. The $1.8 million or 9.3%
increase in interest income for the nine months ended March 31, 1997, as
compared to the nine months ended March 31, 1996 was attributable to an
increase 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 $950,000 or 17.2% and $3.0
million or 18.8% for the three and nine months ended March 31, 1997,
respectively, as compared to the same periods last fiscal year due primarily to
a higher average balance of loans outstanding during the respective periods.
Average loans outstanding increased $55.7 million or 23.7% to $290.9 million
for the quarter ended March 31, 1997 from $235.2 million for the same quarter
last fiscal year and by $49.3 million or 21.4% to $279.6 million for the nine
months ended March 31, 1997 from $230.4 million for the same nine month period
last fiscal year.
Interest income from securities was $832,000 and $2.5 million for the three and
nine months ended March 31, 1997, respectively, as compared to $939,000 and
$3.3 million for the three and nine months ended March 31, 1996. The $107,000
or 11.4% decreases in interest income recorded on securities for the three
months ended March 31, 1997, as compared to the three months ended March 31,
1996 was attributable to a $160,000 prior period adjustment recorded during the
quarter ended March 31, 1996, partially offset by
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the effect of a higher average balance of funds invested during the current
quarter. The $712,000 or 21.9% decrease in interest income recorded on
securities for the nine months ended March 31, 1997, as compared to the nine
months ended March 31, 1996 was primarily attributable lower average balance of
securities outstanding during the period. The average balances of securities
decreased $13.8 million or 21.9% to $49.1 million for the nine months ended
March 31, 1997 from $62.9 million for the nine month period last fiscal year.
Other interest income, which consists primarily of income from interest-earning
deposits, decreased by $297,000 or 77.8% and by $430,000 or 65.7% for the three
and nine months ended March 31, 1997, respectively, as compared to the same
periods last fiscal year. The decreases in other interest income for the three
and nine month periods were primarily attributable to reductions in the average
balance of interest-earning deposits.
INTEREST EXPENSE. Interest expense was $3.5 million and $9.9 million for the
three and nine months ended March 31, 1997, respectively, as compared to $3.1
million and $9.2 million for the same periods last fiscal year. The $442,000
or 14.4% and $672,000 or 7.3% increases in interest expense for the respective
three and nine month periods 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 $129,000 or 4.2% and $349,000 or 3.8%
for the three and nine months ended March 31, 1997, respectively, as compared
to the same periods last fiscal year. These decreases were primarily
attributable to decreases in the average balance of deposits outstanding during
the periods. Average deposits outstanding for the three months ended March 31,
1997 and 1996 were $276.2 million and $283.9 million, respectively, which
represents a decrease of $7.8 million or 2.7%. Average deposits outstanding
for the nine months ended March, 1997 and 1996 were $277.9 million and $285.9
million, respectively, which represents a decrease of $7.9 million or 2.8%.
Interest expense on borrowed funds increased by $571,000 and $1.0 million for
the three and nine months ended March 31, 1997, 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 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 nine months ended March 31, 1997, respectively, as compared to
$150,000 and $450,000 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 $351,000 and $964,000 for
the three and nine months ended March 31, 1997, respectively, as compared to
$432,000 and $872,000 for the same periods last fiscal year. Other operating
income includes loan origination fees and deposit service charges. Such income
is recognized in proportion to the amount of loans originated and the volume of
customer transactions processed. Accordingly, other operating income varies
between periods due to fluctuations in the volumes of these activities.
OTHER OPERATING EXPENSES. Total other operating expenses were $2.2 million and
$8.5 million for the three and nine months ended March 31, 1997, respectively,
as compared to $2.4 million and $6.7 million for the same periods last fiscal
year. The $219,000 or 9.1% reduction for the three months ended March 31,
1997, as compared to the same period last year is the result of reductions in
compensation and employee benefits, professional fees and FDIC insurance
premiums partially offset by increases in occupancy and equipment expenses data
processing costs. The $1.8 million or 27.4% increase for the nine months ended
March 31, 1997, as compared to the same period last fiscal year is primarily
the result of the
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$1.9 million one-time SAIF recapitalization assessment. Also contributing to
this increase were increases in compensation and employee benefits, occupancy
and equipment expenses and other operating costs, partially offset by
reductions in professional fees.
Compensation and employee benefits decreased by $72,000 or 6.3% and for the
three months ended March 31, 1997, as compared to the same period last fiscal
year due primarily to reductions in staffing levels resulting from the
Corporation choosing not to replace employees lost to normal attrition during
the past few months due to the pending merger with Keystone Financial. For the
nine months ended March 31, 1997, compensation and employee benefits increased
by $120,000 or 3.7%, as compared to the same period last fiscal year, due
primarily to the impact of higher stock prices on stock appreciation rights
issued to former members of management pursuant to stock based incentive plans.
Occupancy and equipment expenses increased by $22,000 or 6.6% and $18,000 or
1.9% for the three and nine months ended March 31, 1997, respectively, as
compared to the same periods last fiscal year as a result of 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 $30,000 for the three months
ended March 31, 1997, and increased by $1.7 million for the nine months ended
March 31, 1997. The decrease for the three months ended March 31, 1997, 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 nine months ended March
31, 1997, 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 increased by $2,000 or 2.0% and $6,000 or 2.0% for the
three and nine months ended March 31, 1997, respectively, as compared to the
same periods last fiscal year. These increases are primarily attributable to
differences in the volume of transactions processed during the respective
periods.
Professional fees decreased by $129,000 or 52.0% and $111,000 or 24.2% for the
three and nine months ended March 31, 1997, respectively, as compared to the
same periods last fiscal year as a result of lower levels of expenditures
relating to a reduction in auditing, accounting and consulting expenses
resulting from recent departmental reorganizations and systems conversions
which reduced the Bank's utilization of outside sources for financial
consulting.
Other expenses decreased by $12,000 or 2.9% for the three months ended March
31, 1997 as compared to the same periods last fiscal year due primarily to
reductions in advertising and supplies expenses, partially offset by an
increase in REO operating expenses. Other expenses increased by $74,000 or
6.2% for the nine months ended March 31, 1997, as compared to the same period
last fiscal year due primarily to increases in REO operating expenses.
INCOME TAXES. For the three and nine months ended March 31, 1997 the
Corporation recorded provisions for income taxes of $787,000 and $1.6 million
as compared to $655,000 and $1.6 million for the same periods last fiscal year.
These changes were due to different levels of pre-tax income recorded during
the periods as compared to the corresponding periods last fiscal year. These
provisions for income taxes reflect the Corporation's effective tax rate, which
was 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
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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. 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 March 31, 1997, the Bank's liquidity ratio was
approximately 6.49%. 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 March 31, 1997, the Bank was in compliance
with all regulatory capital requirements with tangible, core and risk-based
capital ratios of 11.2%, 11.2% and 19.7%, respectively.
PART II - OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 11 - Statement re Computation of Net Income per Share of Common
Stock.
b. Form 8-K - The Corporation filed a Form 8-K dated January 15, 1997 to
report earnings for the second quarter of fiscal 1997.
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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: May 1, 1997 By: /s/ Patrick J. Coyne
-------------------------------------
Patrick J. Coyne
Chairman of the Board
President and Chief Executive Officer
Date: May 1, 1997 By: /s/ William C. Marsh
-------------------------------------
William C. Marsh
Executive Vice President
Chief Financial Officer
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